The Heritage Foundation

Executive Memorandum #49 on Energy and Environment

April 11, 1984

April 11, 1984 | Executive Memorandum on Energy and Environment

How Natural Gas Proposals Zap the Consumer


(Archived document, may contain errors)

4/11/84 49

HOW NATURAL GAS PROPOSALS...ZAP THE -CONSUMER

So-called perfecting amendments to the 1978 Natural Gas Policy Act (NGPA) have been introduced in the House Energy and Commerce Committee. 'Quick action is expected by the committee and the full House. If ap- proved, these measures would wreak havoc with the domestic natural gas industry, cause widespread shortages within a few years, and add bil- lions of dollars to consumers' gas bills. Moreover, the amendments would eliminate much of the incentive to explo r efor natural gas in the U.S., opening the door to an increased dependence.on foreign sources of supply. While the amendments are billed a "pro-consumer compromise, they ,,:are nothing of the sort. They will zap the consumer and.benefit a few, large inters t ate gas pipelines, and a handful of independent gas pro- ducers who own reserves of "deep gas" in wells drilled below 15,000 feet. Consumers, producers of conventional gas, and many gas utilities will be hurt by the move. The heart of the effort to extend controls is a proposal by Repre- sentative Philip Sharp (D-IN) to halt the decontrol of about half of America's natural gas supplies--now scheduled for next January--and instead impose a two-year price freeze. During the freeze, prices would be renegotiat e d. This renegotiation would be imposed unilaterally by gas purchasers, subject to binding arbitration if no agreement is reached within six months. At the same time, there would be a mandatory reduction in the amount of gas that pipelines are obligated to accept under "take or pay" contracts, effectively abrogating them. The harmful effects of the enactment can hardly be overstated. At present, there,is a surplus of natural gas. But under the proposed recontrol, the surplus would be exhausted quickly due t o the removal of incentives to find more gas. Some categories of gas included under NGPA limit producers to prices as low as 21 cents. As a result, much of the gas in wells covered by these severe price constraints is not worth extracting. Continuing the c o ntrols, as the Sharp plan would do, will only perpetuate this barrier to production. Moreover, the continuation of controls would reduce the amount of cash flow to gas producers, and thereby the amount of capital available to reinvest in search for new su pplies. The provisions in the amendments that would abrogate existing con- tracts create an especially dangerous precedent. If a producer cannot be assured that the contract he enters into with a pipeline will be

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h onored, then the risks associated with such transactions will increase enormously. At the very least, producers will limit severely the dura- tion of contracts, and many will simply choose to invest their money elsewhere. One area in which the changes proposed will have an immediate im- pact i s on the amount of natural gas the U.S. imports. Recently, im- ports began to decline, thanks to the increased availability of domestic reserves, and the refusal of exporting nations significantly to lower their prices. Should domestic production decline a t a result of the Sharp proposals, many utilities will have little recourse but to seek foreign gas supplies for their customers. Large industrial gas users will be able to switch to alternate fuels in most cases, but residential customers will not. There f ore, an enormous burden of increased costs will fall most heavily on residential consumers. Even if import prices remain stable, each 5 percent of domestic supplies they supplant will result in an additional $2 billion on consumer gas bills. If the cost o f imports goes up, or if expensive liquified natural gas takes on an increased role, the impact would be greater. The painful irony of the current move to extend controls is that the NGPA was enacted mainly because Congress recognized that controls do not w ork. The 1978 Act was an attempt to eliminate such controls while softening the price consequences to consumers. Although NGPA's mechan- ism for achieving decontrol was flawed, the concept behind its enactment was not. Controls simply do not work, and the best step Congress can take is to remove them. Most important, reimposition of controls would come at a time-when it is evident that a move in the opposite direction would soon lead to self-sufficiency in natural gas forthe U.S. Although there once was a w idespread fear that domestic natural gas supplies were in danger of exhaustion, mounting evidence proves that there is more than adequate natural gas to meet domestic needs. This is doubly important since natural gas is a ready substitute for oil in many a pplications. In short, the "perfecting amendments" under consideration in the House Energy and Commerce Committee are a giant step in the wrong direc- tion. Rather than helping the consumer, they would hurt him; rather than eliminating confusion in the ga s market they would add to it; and rather than improving America's energy security they would serve to undermine it.

Milton R. Copulos Senior Policy Analyst

For Further Information:

"Natural Gas Legislation," Research Bulletin (New York: Jenrette Corporat ion, 1984). "Is U.S. Pricing Legislation Set for Quick Passage," World Gas Report, April 2, 1984, p. 4. "Cooked Up Facts," Reason, August 1983. "Natural Gas Controls Are No Bargain," Consumer's Research, March 1993. Milton R. Copulos, "Natural Gas Deregul ation: Giving the Consumer a Choice," Heritage Foundation Backgrounder No. 250, March 1, 1983.

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