Since we started Citizens Energy Corporation, a non-profit oil company, in 1979, we have served 200,000 families in Massachusetts, providing over 20 million gallons of low-cost heating oil. We purchase crude oil at official market prices from producing nations, paying the same prices as Mobil or Exxon. Though our mission differs, we are in the same business.
Over the last year, we have tried to do the same thing with natural gas--unsuccessfully-- to help consumers in New York, Massachusetts and Michigan. We have been able to find less expensive gas in the field, which even after transporation would allow us to deliver cheaper gas to the poor and elderly who desperately need assistance. However, we have continually been blocked because our cheaper gas will replace more expensive gas that someone--a pipeline or distribution company --has already agreed to take.
In the legislative bramble surrounding natural gas, the basic fact is that pipelines and producers have contracted for gas that is priced too high. At present market prices, buyers don't want the amount of gas sellers have available.
In a competitive market, prices would have to fall, until markets would clear; even OPEC has had to cope with this basic lesson. In the natural gas market, however, new high-cost contracts spawned by the presence of regulated low-cost gas have kept prices up. Some producers are still being paid prices well above the level at which local gas companies can actually sell. No one knows for sure what the price would be in a competitive uncontrolled market--perhaps $3 per Mcf at the wellhead, perhaps more, perhaps less --but some contracts still require purchases at $8 or more, twice to three times estimates of the competitive market price.
Purchasing this gas at all has only been possible because pipelines have cushions of old gas that is still held below market prices. "Rolling in" this old gas with the high-priced new gas has allowed pipelines to continue selling at an average price below that at which the pipelines are purchasing new supplies. In essence, instead of the benefits of controlled gas going to consumers, the benefits of low-controlled prices have been captured by another group of producers--those with uncontrolled gas.
This last fall the natural gas industry finally began to learn the lesson of the oil industry-- that prices were not a one-way street favoring sellers only. The natural gas industry had priced itself out of the market. Consumer bills increased by 50 percent in some instances; and natural gas began to lose its markets to conservation and other fuels.
Since then the industry has taken all sorts of previously unthinkable actions to break or renegotiate the high-priced contracts that just a year ago it was still making. They have done this for one reason--market pressure.
One group of industrial customers has been particularly successful in getting their gas prices down. These users have alternative fuel capacity. Unless gas is competitive, they can switch immediately to residual fuel oil or other fuels. Recently, the pipelines have latched onto this and have begun offering incentive sales programs that provide these--but not other customers--with competitive market prices. Now gas offered by the pipeline has two prices--a lower price for switchers and a higher price for those customers who are still locked into gas, the residential and smaller commercial customer. The wellhead price for these industrial programs may be as low as $2.25 per Mcf, while consumers in some cases continue to pay average gas costs of $3.50 per Mcf or more. In a competitive natural gas market, this type of discrimination for gas could not continue. At the very least, those needing assistance--the poor and the elderly--should get the same gas price break given industry.
In the short run, not everyone can switch. If contracts are not modified to take account of the market, it is the consumer, locked into gas, who will lose. This is simply unfair. Consumers were the one group that never had a say in making these contracts. The contracts were entered into between pipelines and producers, and, absent "fraud and abuse," most were not even subject to regulatory review. To get to a competitive market price for gas, contracts must be reopened.
We should not ignore that the other side of renegotiating high-cost contracts is the renegotiation and decontrol of remaining low-cost contracts. If this happens, we should put a windfall profit tax on old gas, with the proceeds going to states to protect the poor and the elderly.
The wellhead price ought to be a market price fully competitive with oil. Any other approach will either lead to the continuing loss of sales, creating ever greater financial burdens on the consumers left to pay system costs, or it will lead to a two- price system, one for favored industrials and a much higher price for everyone else. If gas producers, pipelines, distributors, regulators and politicians really want to solve the natural gas problem, then the answer is easy: cut the price and be competitive--it's good politics and good business.