The Reagan administration is seeking congressional support for a natural gas compromise that would remove most price controls by 1985 but would also pressure pipeline companies to find the cheapest gas available.
Energy Secretary Donald P. Hodel said that price controls would be removed immediately from new gas production and from renegotiated contracts for existing gas supplies. Remaining price controls on existing gas production would be phased out in approximately two years.
But the Federal Energy Regulatory Commission (FERC) would be given broader powers to prevent pipelines from passing higher gas prices on to customers, Hodel said in an interview.
FERC could reject price increases that exceeded the rate of inflation if it determined that a pipeline company could have purchased other gas supplies at a lower price, Hodel said.
Hodel, who was given White House clearance Wednesday to approach key members of Congress about the plan, said the response so far has been positive.
"I've run into no rejection," he said. The proposal to strengthen FERC's watchdog role is a "breakthrough" consumer-protection provision that he said he believes makes congressional approval possible.
In effect, the administration plan would remove price controls at one end of the delivery system, where gas is purchased from producers, while strengthening regulation at the other end, where it is delivered to consumers.
Under legislation enacted in 1978, about 90 percent of the nation's gas supply remains under federal regulation. About 65 percent will be deregulated by Jan. 1, 1985.
But gas prices have risen rapidly despite controls because the regulations give pipelines wide leeway to pass on to customers any higher prices paid to gas producers.
The long-term contracts that many pipelines have with producers permit producers to raise prices irrespective of supply-and-demand considerations and require pipelines to pay for high-prices gas even if they don't take it.
The General Accounting Office, in a new report to Congress, estimated that natural gas prices would increase 23 percent in the year ahead if no changes are made in the existing law.
If all controls were removed, prices could soar an additional 80 percent this year, the GAO said.
The prospect of escalating gas prices has created powerful opposition to decontrol in Congress.
In a memo to the Cabinet Council on Natural Resources and Environment outlining his proposal, Hodel said that any comprehensive natural gas bill "must contain some element of 'consumer protection' so that this proposal cannot be characterized as 'deregulation on the backs of the poor.' "
Under existing law, increases in the cost of gas paid by the pipelines has been passed on virtually automatically. To block increases, opponents had to prove to FERC that increases involved "fraud and abuse," a standard that FERC interpreted narrowly.
The change Hodel proposes would give FERC additional authority to oppose prices that were imprudent or excessive.
This would give pipelines a strong incentive to find the cheapest sources of new gas and to renegotiate high-priced contracts for existing supplies, administration strategists argue.
The White House has given Hodel until the beginning of March to win congressional support for his proposal. His meetings on Capitol Hill yesterday included one with House Energy and Commerce Committee Chairman John D. Dingell (D-Mich.). Dingell said he found the proposal innovative, but withheld final judgment.
FERC Chairman C.M. (Mike) Butler told a House Energy subcommittee yesterday that consumers face "very severe" increases in natural gas prices unless Congress deregulates natural gas and forces renegotiation of existing contracts, to deal with the current price escalation.
If Congress did take that action, gas prices would stablize or even decline, Butler predicted.
He said that FERC has done almost all it can under existing law to keep gas prices from rising.