Long-term natural gas legislation : compilation of statements of witnesses before the Subcommittee on Energy and Power, ...

MISSING IMAGE

Material Information

Title:
Long-term natural gas legislation : compilation of statements of witnesses before the Subcommittee on Energy and Power, January 1976
Physical Description:
ii, 1, 860 p. : ill. ; 24 cm.
Language:
English
Creator:
United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce. -- Subcommittee on Energy and Power
Publisher:
U.S. Govt. Print. Off.
Place of Publication:
Washington
Publication Date:

Subjects

Subjects / Keywords:
Natural gas -- Law and legislation -- United States   ( lcsh )
Genre:
federal government publication   ( marcgt )
non-fiction   ( marcgt )

Notes

Bibliography:
Includes bibliographical references.
Additional Physical Form:
Also available in electronic format.
General Note:
At head of title: 94th Congress, 2d session, Committee print.
Statement of Responsibility:
compiled by the staff for the use of the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce, U.S. House of Representatives, February 1976.

Record Information

Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 025786435
oclc - 02225621
lccn - 76601054
Classification:
lcc - KF1870 .A25 1976
ddc - 346/.73/04682
System ID:
AA00025940:00001

Full Text











94th Congre~ oEsu 2d Session
LO J .. N TU A GAL.E..SL..I..














i j
COMPILATION OF STATEMENTS OF
WITNESSES BEFORE TE
SUBCOMMITTEE ON ENERGY AND POWER
JANUARY 1976




Compiled by the Staff for the Use of the SUBCOMMITTEE ON ENERGY AND POWERl
OF THRE

COMMITTEE ON INTERSTATE AND
FOREIGN COMMERCE

U.S*' HOUSE~ OF REPRESENTATIVES









FEBRUARY 1976
II I







U.S. GOVERNMENT PRINTING OFFICE !5w AHNTN 17









COMMITTEE ON- INTERSTATE AND FOREIGN COMMERCE
HARLEY 0. STAGGERS, West Virginia, C)k*vwk
TORBERT H. MACDONALD, Massachusetts SAM"L L% DEVINE, Ohio JOHN E. MOSS, California JAMES T. BROYHILL, NottYCirelffia
JOHN D. DINGELL, Michigan TIM LEE CARTER, Kentucky
PAUL G. ROGERS, Florida CLARENCE J. BROWN, Ohio
LIONEL VAN DEBRLIN, California JOB SKUBITZ, Kansas
FRED B. ROONEY, Pennsylvania JAMES M. COLLINS, Texas
JOHN M. MURPHY, New York LOUIS FREY, JR., Florida
DAVID E. SATTERFIELD III, Virginia JOHN Y. McCOLLISTER, Nebraska BROCK ADAMS, Washington NORMAN F. LENT, New York
W. S. (BILL) STUCKEY, JR., Georgia H. JOHN HEINZ III, Pennsylvania BOB ECKHARDT, Texas EDWARD R.-MAPIGAN, JUinode
RICHARDSON PREYER, North Carolina CARLOS: J. MOORHIMAD, California
JAMES W. SYMINGTON, MWouri MATTHEW J. RINALDO, New Jersey
CHARLES J. CARNEY, Ohio W. HENSON MOORE, Louisiana
RALPH H. METCALFE, Illinois GOODLOE E. BYRON, Maryland JAMES H. SCHEUER, New York RICHARD L. OTTINGER, New York HENRY A. WAXMAN, California ROBERT (BOB) KRUEGER, Texas TIMOTHY E. WIRTH, Colorado PHILIP R. SHARP, Indiana
WILLIAM M. BRODHEAD, Michigan W. G. (BILL) HEFNER, North Carolina JAMES J. FLORIO, New Jersey ANTHONY TOBY MOFFETT, Connecticut JIM SANTINI, Nevada
ANDREW MAGUIRE, New Jersey W. E. WILLIAMSON, CWk
KENNETH J. PAINTER, Aosiortant Olerk

Profenional Staff
CHARLES B. CURTIS WILLIAM:P. ADAMS
LEE S. HYDE ROBERT R. NORDHAUS
ELIZABETH HARRISON BRIAN R. MonL
JEFFREY IFL SCHWARTZ WILLIAM G. PHILLIPS
JAMES M. MXNGER, Jr. KAREN NXLSON..
MARGOT DINNEEN



SUBCOMMITTEE ON ENERGY AND POWER JOHN D. DINGELL, Michigan, Chairman
TIMOTHY E. WIRTH, Colorado CLARENCE J. BROWN, Ohio
PHILIP R. SHARP, Indiana CARLOS J. MOORHEAD, California
WILLIAM M. BRODHEAD, Michigan JAMES T. BROYHILL, North Carolina
JOHN M. MURPHY, New York H. JOHN HEINZ 111, Pennsylvania
BOB ECKHARDT, Texas SAMUEL L. DEVINE, Ohio
RICHARD L. OTTINGER, New York (ex officio)
ROBERT (BOB) KRUEGER, Texas ANTHONY TOBY MOFFETT, Connecticut ANDREW MAGUIRE, New Jersey HARLEY 0. STAGGERS, West Virginia
(ex officlo) FRANK M. POTTER, Staff Dirsotor and Coutwel

WILLIAM F. DEMAREST, Jr., 0ounsel














CONTENTS


January 21, 1976: Page
Statement of the Honorable Lloyd M. Bentsen ---------------------- 1
Statement of the Honorable Donald M. Fraser -------------------- 8
January 21, 1976:
Statement of the Honorable Ernest F. Hollings ------------------- 29
Statement of the Honorable Robert Krueger ---------------------- 31
January 22, 19T6:
Statement of the Honorable Adlai E. Stevenson ------------------- 41
Statement of the Honorable William J. Hughes ------------------- 44
Statement of Dr. Paul W. MacAvay ------------------------------ 51
January 23, 1976:
St2ftement of the Honorable Frank G. Zarb ------------------------ 59
Statement of Commissioner Lonard Ross -------------------------- 119
Statement of Commissioner David C. Sweet ---------------------- 123
Statement of Commissioner Ralph H. Wickberg -------------------- 138
January 26, 1976:
Statement of Commissioner Don S. Smith ------------------------- 141
Statement of Mr. Henry Esehwege -------------------------------- 175
Statement of Jack M. Allen -------------------------------------- 216
Statement of Kenneth C. Vaughan ------------------------------- 229
Statement of Richard L. O'Shields. -------------------------------- 252
January 27, 1976:
Statement of Dr. Paul Davidson ---------------------------------- 264
Statement of Gordon Zareski ------------------------------------ 295
Statement of Leonard W. Fish ----------------------------------- 373
Statement of Robert S. Pindyck ---------------------------------- 388
Statement of Robert A. Hefner III -------------------------------- 393
January 28, 1976:
Statement of James M. Hacking ---------------------------------- 407
Statement of Edwin Rothschild ---------------------------------- 432
Statement of Charles F. Wheatley, Jr ---------------------------- 527
Statement of Celia Star Gody ------------------------------------ 587
January 29, 1976:
Statement of James F. Flug ------------------------------------- 668
Statement of Leonard Woodcock --------------------------------- 671
January 30, 1976:
Statement of Eugene H. Luntey ---------------------------------- 679
Statement of Harry Thomas ------------------------------------- 692
Statement of Abbot A. Lane, Jr ---------------------------------- 701
Statement of Thomas J. Devine ---------------------------------- 712
Statement of Leonard H. Farmer -------------------------------- 738
Statement of Dr. David S. Schwartz ------------------------------ 751
Statement of Dr. John W. Wilson -------------------------------- 764
Statement of Edward W. Erickson ------------------------------- 806
February 2, 1976:
Statement of Chairman Richard L. Dunham ---------------------- 820














FORE THE ENERGY AkID PO)'E R S!J3CQ0Xh-ITTEE
ThRS I A Cr,11RE EC 4IMTTEE
IN FVO 0F DEREGUL.ATION OF NIEW NAT 11L GAS IJELLW EAD PRICE 20 January 1976


L e~AQre tdyto.s




















issue~ns cos eativ isu fe I splyan issuen tareid e h





sign ta t the enpuic wuel f nt b- deevedonby elet v eeaon. u

maneuerins andwillwelcoe a 1) ndwral ouint h








the- hard truth is tht.iar runn ou ofgs Asw d, iutie and utilitiswl befre tocnett ful poiggetr nv ot..ttal challenges. Temore gas vieprdcte lanrw lbeor i.

With a prcgra-n of continued regulatin ipeeooiswl itt that temr xesv a elf ntegon n h el apd



prdc eve conomcally feasil cubicfo 1ti neiu ul





Alltheexprt lagree that te atua gssiato mstb



padres the somein of 97 ct iled aill ta i he satsuoisun

acceptbe ofe pau a st two diecae of feea reuaino h el head onic nauale prouce Tan ecnmcnghas.Or etfe i eln



inrasngl ugnatlale Jobs are atsae 4


iatIn the sring of~ 197 1usttt fie ilt eeuaetewlha









natralgasbil, S 69. Tat medmiat was the beginning of the legislaton ha fialy pase the Seate on October 22 of last year as

S. 310 In the period that intervene betwen filing the Pearson-Bentsen amedmat adthe page of S. 2310, >the Senate engaged in many hours ofdiscusio and debate. The attention of the full Senate was focused onth atete choices for almost two moths. Thir~ty-five amendmnts wereacte onby the Senate durng flor debate. Judgements were made onl ate-_;,5_r~f~I onideaton---an smeof them in the end wee180

degresrom the in ia viewpoint. The vote on final passage is reflective



Alhoghthre are soerovisions in S. 2310 which I oppse becus

I elev temtobeunise, it i yal en a wokbepeeof leislaton hic shuldbeaceonbthHosinnefrornte.

I sronlyurg th Huse fo eampeto r etaypooa hc

woul ipsaprice ceiling on the intrastate natural gas wmaeets.

7edefniton f "ew as"in th Senate-pssed bill also should

be odiiedto ermt nw gs teatentfor in-fill drilling and for



fils uhas thWa Ja asi~n int NwMxco or the Yte Field in the

PerianBasn fr icresedproductioft. It also will encourage enhanced~ recoery The measure proposed by Congressma Krueger contains provisions whic woud remv this obstacle to increased production.










u r is f nt u l ta












Wses mutasbeioophsint te ueseeti oe ilpac h fa phaet i ySaewl emretl, Tdy bu 8pr c n @Uth elcrcpwrpoue nTxsi eeae yntrlgs uses ..... : i





Pearson-Sete-ra il








....5
have endkzsed it. Producers- both independent and major -- have endorsed it.: T inte~rstate pipelines have endorsed it, as have the gas distribjution~ystems.~ Add to this the large list of industrial users who suppprt it and you f ir4 what I descr ije as a consensus.

4 qewmut assure, that there eit market incentives for the full

deveLqpmnt of our domestk ~natural gas reserves, natural gas reserves Wt~ch are increasingly more expensive to find and develop. It is apparent tht thepresent regulatory scheme acts as a disincentive to the explorat for and development of these new higher cost natural gas reserves.

The wel4had price of natural gas must be permitted over a period of time to nearly reflect market conditions in order to attract the risk capital necessary o increase our natural- gas production and to redistribute among ot.energy sources, demands which can be fulfilled by other fuels. Becaueof the rapidly expanding curtailment rate and because of the time .la involved in obtaining actual production after investment decisions are

made~t Isesetial1 that our decision be made now. We have clung to oyt~atd plcies too long.

Phased deregulation can reduce the shortage of natural gas. More

,reviaion on the other hand, would only increase the shortage.

















t ranf er da


be at th~e~ i pes ofteAeia osmr ela h~rdc h

producer can get into some otebuies tthcoumrutsil

have fu'~el.Aniftafulithmoeeeniefr g-rdcdvso, rather thn natural gas, t victim of a cruel joke.61C

Because of the nature of our aua gas mres twl e

many years under deregulation befor t gas tc

will ever reach th btu equivalent of oil. n eeuaino e a

Is necessarily pha deregulaton because f n g

in the pipe under long rm antr Wt this m consumer who is able to get gas will have it for anadntgospie The savings to him because of not hve to ely oalente fes r trembes We h ould o this satng ava b t a m possible, and the way to do this is to increase proution thogde regulation.






















7L4





It' a aseof-impe eonoics M. CairanI uge ou nd ou Colleagues t folo t h good jugmn-o yCleausi teSnt




and pass th Pero-ensnKue il
















IS

eo oy








r J2 2
Mith 26 iran mebr fteSb-wItt ppeit




this opotnt oapa eoeyutdy














atte come wothet ct t n



I15U.S.C. 717, Noe3. 2h a ndi Af fotr gast cof ic i l






.9


2-2-2

inflation, our bill would remove the present inclination

to postponeand slow down new development,.

By establishing firm priorities of.end-use, our bill

would assure dependable suppliesof fuel to residential

consumers, to agriculture, to essential services, and

tq ndustries for which natural gas is an indispensable

element, either as fuel or raw material.

H.R. 8892 is similar to a bill introduced in the other body last February by the distinguished Senator from South Carolina (Mr. Hollings) and to S. 692, the bill ultimately reported out by the Senate Comerce Cx, ittee in June.

I plan to outline the specific provisions of our-bill and point out the differences from its Senate counterparts. But I would like to use my time mainly.to discuss the general nature of the natural gas supply problem-in order to makeclear why our proposal provides a solutiom, and deregulation does not.

THE NATURAL GAS PROBLEM:

There seem to me to be three major elements in the current natural gas supply situation:

FLrst: resource constraints, which will remain with us

no matter how .high the price of natural gas.

Sec2gA: the inadeguacy of the current rexulatoIX sXstem,,

which an the one hand permits the interstate market to

lose out to the unregulated intrastate market and on













11















of- re frnwgs ade takwih make 2/coniudrglto meaiei








4-4-4

gas price in 1985 would essentially not get the lower 48

States any more naturalgas than an 80C./mcf price would. 3

-A GAO report released lastweek concludes that there is

no likelihood that deregulation would bring.an increase in natural gas supplies. At best, the steady decline in production might be somewhat slowed. The GAO study confirms

that there are constraints on supply which price cannot

influence.4

(GAO admittedly failed to consider the impact onsupply

of our proposal to extend regulation to the intrastate

market.)

MpMUACY OF THE CURRENT REGULATORY SYSTEM:

-Disparity of Prices in Inter- and Intra-State Markets:
A firm and uniform pricing policy, as envisioned in

H.R. 8892, would remove one of the principal inadequacies of

the current regulatory system, namely the wide disparity

between inter- and intra-state new gas prices,, which keeps



3Federal Energy Administration, Project Independgnce, final
Natural Gas Task Force report, November 1974, p. xii.

4
Comptroller G ral
ene of the U.S., Report to the Cvylnittee on Gaver Operations,,House of Representatives, "Implications
of Deregulating the Price of Natural Gas," January 14, 1.076,'
p. 56: 'Vith deregulation natural gas supplies would fall
about 13,percent below 1975 supplies' to 19 tcf. The
probable maJor Impact of highprices on production in the
lower 48 States would be to 4low' but not to reverse, the downA.K.
trend of production." Deregulation "would have little or no
positive impact on natural gas from Alaska.





12

5-5-5

new onshore supplies within their state of okigin. Uhddr the OPEC stimulus, the orice of gas sold th intiastatemark.6ts has risen from 160/mcf in 1968 to more than'$2/nef today,

Under the existing regulatory sysfbm no new onshore gas is flowing into interstate pipelines. More than half the natural gas produced in the lower'48 States in:1975,was
6
consumed within the States in which it was produced.' Roughly one-third of all U.S. natural gas gets used up in three of our main producing States -- Texas, Louisiana, and'Oklahema, where most of that gas goes to industrial boiler use.

Regulation, therefore, to be effective, must be.complete

and must be extended to intrastatesupplies. ... .......

Uncertainty of Price:

As a corollary, price ceilings, to be meaningful, unstbe firm and uniform. -Since 1968 when the Nixon Ad6inistration began its push for deregulation, natural gas prices have had a speculative aura of impermanence which has encouraged producers to delay investment and development.



5The average price for interstate gas in 1974 was 35.50/mcf. The average for intrastate gas was $1.25/mcf, althotagh this is only "estimated . no one really knows for sure." Laurence.Kumins,, "Economic, Impact of S. 2310's Pricing Prov*isions,," December 31, 1975, Library of Congress, Congressional Research Service, PJ, 6Comptroller General, RE.-Cit. Figure IV$ p. 43. 10A tef out of a total 20.5 tot.









13t

6-ef,


It i onl natral hat as poducrs ae uederig al CA-1-ttnewgassuppiesto ntestat pielie cmpaider the arren reguatedwellead pice or ne gasof te,/c. Whentheycansellthatsam gasfora hih as$2 outi the poducng Sate.Nor s it nnatral hattially. o Federal ease ofshor, wich y dfiniioncomeundr Fee-a reguatin,, re elucantto spples~wichthL






7-7-7


rat of3....rsne h einigo tedc. .:Fao
saefveyasurl ae gas. prce. seroghy..01
I uy17, aua a rduesi h ot oiin prdcn ara-ih rnia rdcn rai h onr
delrdtesle aife iha2C/e eln rc, whc ........d~a inres of 305%oe tepeiu
celn.Tenwpie7hysi,$wudpoietesiuu-.
neddfradtoa rdcintruh:97 oa hs

saepouessyta,5,mf osntpoieakaeut






incntve an the sekurgltdprcso oeh






15

3-8-8

Evidence of WithholdLng of Supplies Under the Current

RMLatcry,_ System:In fact, published data show that while the number of

successful exploratory gas wells declined slightly from 1955 to 1972 and then picked up somewhat through 1974, the number' of developmental wells i.e. holes punched in the ground in areas where producers knew there was gas;:--- dr6pped sharply after 1960,

The inference is clear. It is only reasonable to assume

from these figures that producers have probably been acaumulating supplies which can be brought on tap once deregulation and a fourfold increase in prices are in the offing.

(Incidentally, it is worth noting that the decline in

oil-drilling aptivity over the same period-was almost entirely responsible for the drop in total drilling although oil went unregulated until 1972 and eventhough oil prices ha-0e, historically, always been several times the price of gas on a btu-equivalency-basis. Gas drilling at regulated prices
9
stayed about ev(m



,November.14, 1975, p.43. See AppeT dix B.

'9See Charts Me John W. Jimison "Deregulation of Natural
Gas the Pros and Cons," July 7, 1975,Congressional-Research Service-s Library 0 Congreds.








9-9-9

It is easy to find evidence. -of witWi*ng of zupv .., 4.0

expectation of bigger profits upon deregulation. Aftxw

that is merely good buadness pvictice. It is difficult

however, if not impossible, td eatitddte the extent.'.6f sudh

withholditig,

At an FPC heartng in July., 1973, for example.,the Okwar

Oil Company asked for a priceceiling twiceas, high an the

existing ceiling. In response to an FPC query ad'to what,

the company would do ifit were denied its request, a company

official replied:

The first thing we would do is look again at the intrastate markett because that is the obvious and quickest
move. The second alternative would be not to market
the gas at all...and take a certain risk that the
appreciation of the reserves in.the ground over 12 to 24 months, or howeverlong,, would more than compensate for whatever themalue of thecash flow which-we would
get from the sale of the reserves aver the term of
the tahort-term, contract'would.be. And then we have
a third alternative which is a matter of some discussion.
Uncommitted gas reservesnow are apparently amoug the
finest assets that a company canhave -- an independent
gas producing company -- and we.,are constantly, re-,' peatedly, not only with respect to this'propeirty but with respect to any reserves we have --.we are boing
contacted by other gas producing companies, independents
and majors, who are interested in buying the reservee, in situ. They have expressed their willingness-to bid
on the come, so to speak, to take the gamble that the-reserves would appreciate in the ground.

Again-in 1973, when'a company in the South Louisiana Aieift.

BelcoPetroleum Corporation,, soughtan ificrease from the.FPC.in the ceiling price, from 26#,%/mcf to 450/mcf, the'Cdij kny ...

President testified as follows:


















for ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ta gaua a he eepc tatbt usle and ~ ~ ~ ~ ~ ~ ~ ~ ~~~~: sh es fteidsrywl ee o ftet







Louisina wasdue tndustre
















118






of atigl omay

In17toe'b h o igtntua a rdcr maeupfo609%one otataetoitrae


ga10
pielns Evnmrsg fiatitefethtia. inutyithchpoutohereiwie, vr e. ;o ofer gas arl oiit ie ein Inadtoet-hpakrfescura optiinihret,,,






19


12-12-12

of consumer gas--bills.' Transportation costs in fact presently

come to about 807. of the price of gas at the "city-gate." So

it is in the interest ofthd-pipeline company to pay whatever

price is asked in order to get c,,litment of gas to its

system.

Ratural gas, then, is a resource whichl because*6f its

mode of delivery to consumers, because of the fixed niaturo- of

its assets, and because of the structure of the natural gas

industry itself, cannot be priced on a free market basis.

President Truman in vetoing natural gas der6gulation in

1950, put it extremely well:

I believe that authority to regulate such sales is
necessary in the public interest because of the inherent characteristics of the process of moving gas from the field to the consumer. Unlike purchasers of coal and oil, purchasers of natural gas cannot
easily move from one producer to another-in search
of lower prices. Natural gas is transported to consumers by pipe lines, and is distributed in a given consuming market by a single company. The
pipe line companies, and in turn the consumers of
natural gas, are bound to the producers and gatherers
in a given field by the physical location of their
pipe lines,-which represent large investments of
funds,, and cannot readily be moved to other fields
in search of a-better price.

These characteristics of the natural gas business
impose natural limitations upon effective-competition
among sellers.. Competition is further limited by
0 1 ,
the degree of concentration of ownership of.natural
gas reserves. While there are a large number of
producers and gatherers, a relatively small number
of thein own a substantial majority of the gas reserves.
-Furthermore, the demand for natural gas-has been growing phendmenally In reqeq years, and its natural advantages
as a fuel, coupled with its present price advantage,




























wi
th at prcmei onnf
A-Q17O TO THENATRA G&



w! ~~iiiith me tha iti is,~ thei ideal kin ofrguainstht.





bringfor aforth


lasttwnyyasbuithsbedonsoicmlty a dterefoe Inan

I spcuatv exettino mmnndeeuaio.(t
iis ot ingtatte rceo olha on nrglae
.... ost ftatsm pro,,adth hir lofoli


.... mores~ sriou thnta fnaua a. .......... Truman, Veto of Bill to Amendthe Naturiii~i : iiii~iaas : Act of 1933, April 15, 1950. iii~iii~i~ii~~iiii~ : :: :






21

14-14-14

We must also recognize the fact that demand will continue to outdistance supply no matter what we.do, and that therefore we need to apportion end-use. The free market system price rationing can't do the job of priority allocation. In intra-state Use of gas, the, largest part at present goes for boiler use.

Furthermore, we.need a mechanisM7'to end the ability

of the gas producing companies t6 withhold production in the short term from themarket.

COST OF DEREGULATION -'TO CONSUMERS:

Before examining H.R. 8892 as a possible legislative solution to the natural gasproblem, I would like to consider briefly what deregulation would mean to gad-users.

Deregulation would cost American condlin rs billions of dollars without assuring them any meaningful increase in supplies. The price of natural gas in the intrastate market has increased 1,,100 percentfrom 1968 to L975 andyet productionAn Louisiana and Texas has continued to decline each year.

Hip;h prices-dooot necessarily mean increased production, even without the constraint of limited resources. Increased production foLlows'on higher prices.-only in a wbrkably competitive market. High oil prices have. as a matter of fact, led to decreased.oil produetion by the OPEC nations








15-15-15




ulationcolmenainraei nrgcot o*.'




$13 billion.






of imported crude oil, a'a prict f$2a arl u








worst possible tie uta emgtohrieb civn


There iswiepedcnenaogcnuesoethe increaedcotdeptthmanfcnP..jboteoi use lessga easitwudcamoe Buthsadcts of deeuainiss loial htteadtAia~ cost wudb osih st eipretbe

















izzk peFessira t pnrkei cthoe reord t ghisp6na Resolution~~tio #12oftmbr9 95

Wheras, theFedralPowe Cmssin reommnde










reovn Feea rc otoso aua a








17417417






state ga rcs








60 cents prtosn ui et n h~xmto o gas...tprdcesi eiintd c in ohteSnt il ndorblueo aua gasisabienulwudb'banedwieatraiefe ust sfail.Tioa oudbcm fetvt h



axmmetnprcialwti10yasoencmn.














of~ c laeonFat sheet ounin tffhoe woevo rd prouce o thos. lebe an -inroducedh rqrementuy

I udLotn thiaturalase applvde obe aSoonattet

staf wthad work on the n Enegys srao and 8892 wolicy I elev yu aet tha wistoas imotna tha recrdat ares point asoit fort hoe oelievnte hajo plrovisatna o toe emhszetaielosdrlu.il on

realiadthtzeeanetlhp that the Subeammittee wudb osdrn og had~: cmltdwrafoth egislaionoexedi and pOvingolc




of~~> dearndata gas hankl yo




26

A P NIXi .. ......
LIST OFIE 1iiBUNUBRiNDCSOSOSOi.R 82 th aurlGsrdciona srio Act. Idnialbls
H.R. 919 50, 99i97 172-16 C06202016
Bella S.iz NwYr


Thomasi L.AheOi


Beke Beel Iowai
















327





LOS E88B








CHAR 12











DEVLOMETL



44 ..l.Li1.....L.A.1.. ..1..1 ..
.2s4o01 lii 0 t11

c..e 1lti .n iLpo t











U..XPLWL.ORALOAORTOOOAE(MlloRPe






NW,, r ye'V. YrV.* Vr. Vt.
Ua 14. D 22.7 65 21.2 70 3.2 75
56 176 02 20A. 8 72163.3 76
'M 20.1 63 20.3 1P6.0. 73 f6.8 77
SO 20.6 66 M 21.4 6 3A 74 32 78

As 5s 34 3sa a2 .7 75


Seumn $Ince 1969. Amerleast agnthou Isigilt J API), Qtuarterlp Mewfta of Drifa sttetics for the Unite state
.QPb~ WorldOil- Oat & m Amer an MOnCep41n mfssears sum sN0sie AAPes as Worle on1.
If 06rea drullng eat s thea dotwencep otween total new foot p as reported by World Oil and total
eassenory easek featege ail'perged grY APA ofp ANt.
NeW Serele W41it6 stratigrittM and apre tonts amr not inclucldenft eatbove @gth.





C3Q


APPENDIX C FACT SHM

The main provisions of tho_ Vatif&V4 froduction and Conservation Act of 1975 are.:

1. NATIONAL RATE CEILIM of from:40-50o per thowand cibie feet
(mcf) for new natural ea3:
a. Within130 days of enactment, the Federal Power Commission
(FPC) would establish a national Ceiling for new natural
gas, that gas which was not dedicated (by contraft) to
interstate or intrastate commerce as of January 1, 1975.
This ceiline price wmld be from 40 to 6ft per f.
b. Automatic'adjustments for inflation would be prorLded.0
The current historic-cost basis of rates would be chas ed
to a prospective-cost basis, plus sufficient profit to
attract new capital.
d. Higher ceiling prices would be permitted for high-cost
production.
e. Parity would be.established between Intrastate and
interstate new gas prices in order to prevent interstate
pipelines from running out of suppliqs.

2. ALLOCATIOR OR PRIOR M BASIS:
a. Priority would go to residential and other small users
(under 50 mcf/day).
b. Agricultural uses, including food-procumaing and feedstocks for fertilizer, would also have top priority.
c. Hospitals and other services and products nee essary to
Public health.and safety vould be granted priority
allocation.
d. Boiler-use of fuel would be banned where alternative
domestic -fuels are feasible. This bM wbuld-be effected,
to the ma imum extent practicable,, within 10 years of
enactment.
e. The FPC.would have authority to require linkage and
transfer of supplies among interstate pipeltnes to
alleviate curtailments to pricrifty.users, including
industries' which cannot substitute other fuels for nonboiler uses. This authority is carefully circumscribed.

3. W-UMMENTS TO ENSURE FLTTMTZ DEVMDPMMT Or VATURAL GAS OK
FEDERAL LANDS (which includes offshm):
a." A lessee tundertake and MOM complete explaralon and
development at the'earliest feasible date afte.X.leasing.
b. A federal lease would be forfeited if a producer did
not commit his natural gas reserves to an Interstate pipeline company within 2 years of discovery of such
natural gas.





















TATMT O U ,o--BXA EST F. HOLINS, BEFORE TH 8NM AND POWER.
SUBCMME dF-TH. BM IERSTATAND 08819 C0 6 C0111178E



-Chirarl~tw Kuebrpropossi would rwove r ca Cntralsrain most natwral gas ~ ~ ~ 5 %* I adstebseiueof whether condeb bare to be poeeted -against
runaay rice-fo A asi~el that is 9 nece ssity of lite*
The prponens of enbrol tried to 1in decontrol with the emiergency
legilaton n-te Snat. But the threat of serious disruption because of natural
gas hortges his- ie ha"disappeared. This provides the opportuhity for the Boue t cosidr ad san decoo'utretgproposals on their martes Webhau exainaion I elivewill expoise that the oce for decontrol has no foundation*
The patrol Inustr and thie Administration have cleverly tried to Saph y that skyhig pice wuldwian, ines nd to the natweal gas shortage. -Yet, whon inned dowp teyadoittha -he sharbagel of natural gas will'persist and.. indeed, get. wors-nomattr bw hgh tMe prie rises. The platn truth ise that the cling prie o $13D er ~kfas proptsped iM thtis simplified S. 692 wri11 bring forth essntillythesam ame of nature gas as the anawnwone price of $2, $3 or
higher.~~~ ~ ~ ~ Tedcnrlsm ma tt* aosemers wasl pay billions more frt the
Obvousy,41r Kregr doesn't believe tat-dseontrol is@ neessnary to brin fort mmnm suply eause is ameinlaent would delay decontrol in the offshore federal- ~Ga dmnutl16 eIfdentrol will endt the gse shortage, surely w shold ot ufer ix:moe years of cartailment.s
TheKrugeramedmet wede in ft.s -make the abortage ot natural ges'woree Prouces wuldhav evry iacentive to hold onto their attabore discoveries of new atual as nti l01,* when- tlag eoud charge sky-high prices. Rather than Bel thir~as ubjctto th uncertan standards for price combrols in the Krueger' amedmnt rouces oule p fiinst inte around whee it would greer in valuiefaste thnWnt's0 anks' -.
Actaly,-i i te rpreth ofdecont61l held out tdi Wesident and the
Sente ctin tat nemnribtin to the cuerent shortage or mnaul Csas o~nt the Huse vtes dw d t isMti-bilish dollar boaezs for-the petroleum iadostryp we annt lpe rudn ainssmd to mae as all-6ut proanote aftes 0mr sel no whn te Pesdent ofth n ited St uates ms you prious four times -as

fte pv~oftnts o deotro hive latchmd cnta-thie natuwal" ga abortage to
JustfY aPftiion b s bai been uaiuceehat pusehiag for thme last 20 jiialrew Th& r~beftforthe saton to that thf8 is 'ther warst time in al those years to decotro natralPs ries. The reasinithat if the U. S. government removes Prie cntrls.theTwce will: be fixed by the OPEC cartel. It is not a question Of gverent ric cotrols versus the free market, but rather which goverment 18 oin tonettheprce, the United States or the OPEC nations., The wrong Mr~w t tht osstonwill cost the American consumer ever $100 billion In the
Thos adeoatng entrol doort like to talk about inflation which is still & Bjarconernof beAdinistration, according to the President. And if the Krueer mendud s proved, inflation will increase -again next year. The dGM44d troetesdont talk about inflation because would mean a- massive incoe tawfe fr orgy consumers to energy producers. The disposable income .0fthsenegy onsme --individuals and businessmen alike-..-would be severely redued.Redued-pening on other goods and services combined with a highlevel
of nfltio,,- wold ee the nation'sa purchasing power and would contribute subsant&W o aresing the natido's @low econolmic recovery.
kveY mmbe oftheHomse in.# T'm sure, concerned aout gas supply as well'as infltion Lo ve tras that a vote for decontrol is not a vote for any larger v~lm OfMat~~l as or consumers than would be pr Ateed under the simplified Pisctrf f-.W he AAJ 4PF.HOU V4BECtaLwm V4.IBI.LtesWJ 'ol UrgU atesA.W% thet price
Of nturl ga hI enugh to bring forth all the natural, gas" that money will buys A3- tbt dconrolwoud mean is that the American consumer would pay many billions Of dolarsaweor-te 'ame volume of natural g9s
oatlda gos uprndrcheeeiin price approach of So 692, and
&MV~~~~~r anicesvtc ould. bring the price of new natural gas up from 2 cents %0 b~u $130 er efis enough. Under decontrol, the price would go up to $2 an
W-4he O equi aet and probably higher as the pipelines desperate for SUPAY~~ ~~ eolacdaais h other, average the price with their old gas and pass
It C tQthecau ws.All of these extra billions -ill not buy any significant






4M^
03U


quanti ties of additional gae',,
.The kW fallacy -in the decontrol, argument 1i beyond a certain 1019'al', bigber prices just wontt produce more natural gas. If the price covers wsts ahd a high enough profit to attract capital,, then the price is not a bottleneeke The Federal Xnergy Administration's Project Independence Blueprint Report indicated that a price of 80 cents per 1-Tef would produce substan ame volumes7-as Vobld $2 per
Hof. With ir4 at dpL en a I wuld propose p. price -of
and to err on the'gti=11te,
$1.30 Vo assurd ki)anm production, This could be esealtted'.at +,hit rate of' 'inflation it higher costs.&3 e showni. CeAa1n1y,,.th;-bi11ions of-dollars nore which would be charged *under decontrol woUd be' a, pure wipifall to; the oil Aridustry,
Thb.reas6n higher prices-won't cure the''natural.gas shcrt;agi ,Is thIt-there isn't
enough -ea:sy -to-find natural gas remalnit ;,In the gro.md -What randni i2i sma3 lir formations a more difficult.' and in sensitive areas -such Ow offshw% where undue hasto' indrilling can damage.,the coastal zones Therefords he existing
and'pft _-ntial demand,'for natural -gas in the 'years to.come is much'larger thaii the axipply tlii can be found and frodticed regardless' of the we lhead. pride ot.thi drilling effort 'undeftake)m by. producers.
Ify simpl4ied. ceiling 'price app rma4'ip t ar4 regulav)ry, ulieAii* and will do more to allev."latiathe gas. bhortage than would decontrolling prides-i "The'volmses of n6turai a vailable will- be substantially.,the sarms,, but. r4y.,proposal, win facilitate the upie'of coaland synthetio'gas made from coal t6'a*&d1uturQ' shortages.-.Thiq would be accomplishedby regg.lations-phasing-outthq use-o;,natural gas as a boilerf ;0l.. where coal. can' b6.used as a substitute.. -and by *aking tha- s fithetic g Ls ix3ants la..cartified I par ..pf the-pipajine systems In that WV3, financing can. be obtained and construction at- pniblie interest locations facilitated* It also aBsures that natural gas-fo d orr'the federal domain is aotua!4 pro4uced and that producers canno continue to withhold or 'gq slow in- d6veloping.the natural .gas regoureese
Thi Krueger a*ndment-would-,eoMldi6lkel*inate federal.-Jrice controls..on, %W natural gasp viobpt gn.thefedw-al offshbre.domkine First. of ali.." it -i v im', ortant .to understand J*ast. ftt is-meant by-ffniO natural gas. Nre Krueger uses Ae "fountain of youth'i aprToach under which old natural Zasbecomes-newaftdr the
expiration of existing cont racts, Ali3 o., oducers' can- drill now wells. in eXiiiing reservoirs to c,.ialify or..the.sky-high prkees,,%.,.Thus,,.dri3.ling-will--be encouraged
that produces ncr ie w, gas supply,1 but just morp. 14ith these
Polley L for the -producert
S -the, old natural g4a wi3l: soon become -now, tho pantities
giant loopholes-.most of q
won't change., but th6...prtoe w:Lll jump from-an average of 26 cents-p-er Ait toir'old.1%, gas to upw rds"ak -$2 i1nder decontrole It iBno wonder, pat, the inquatry a the Krueger amendment.,,
When 'I iiiggest hat dee. WV from the- 52,6646- the
ntrolled fiatural. gasi ill
FPO-now allows to upwardsof $2 per-Mef'.I-am being 9paseryative Actual4i theprospects'are very real for natural-'g, Lo-pr ces.to.escalate to wA3,*r'hig* if
controls--dre suddenly lifted. The reason is thai.the potential 'ehortap,18 Very large and that ne4 winter maybe coldo If the huge in erstate pipeline appet te for natural gis is unia'ashed- on the vqr iuch stialle r quWly*prospects.without controls;. ptices _% 1.1.go up aad:up. 1 TNs pipelineis can., and indeed are, pA*;LnS# $3 or evezi $4. -f or'i i p emeiial gas. They -can average it in with. ithe old gu'. anc still be competitivV-yitk. t he 7 slW-high pri6es of OPEC, oil The extra' bill- to the. conspmer- -kov' the 9'ame volumes of g4s; as under jW.- c0ling, price pr6posal- -is tiuli en ormous.,.Tfie,-extra*.expenss is-relativaly afmil.at fixets but builas -dp rapid3j. In 1980, W. Krueger is alternative.--would 'Cost L the ilationt a consumers approximately $15..billion MWG Thaj.18:'$290 for.sVer.Y -Amer"an In -1985., 'it could be abo t $25, billioh-,'more-'per year,, And all this Mow Would not prodube arW signifioa io ai nitural
ut.quantities of addit gaS4
AP;-1 prliviously *xie"fitioneds the- Krueger, proposal postpones dvrantroi4or ix
years. -A thus builds.pp. an-14centive forproducers to delay and has Mile of- he,. production requiremefits, intbo offshore: doiM4nqontiined in S. 692, It, w6uld thas.assure a natural gaq ehortagg is, the'1970's 'trid more runaway inflation in ihe 198028* There would- -be'inh tioni in -the .1.970"s a-Iso traim the decontrol onshore, and %6 uncerttin but unnecesearily hJ&-prices'tha% the criteriafor mgulaiiiii qffihwethe.-Krueger ai en"nt would prov:ida.,,-,,0ne criteria suggp sU -that rrid" i be high enough to upromotq. ijouno.conservation." 'This is,& seexingW laudable e0jective but-could be a basih 'for fixing prices higher than'the OM priced'-Wa t diaeburep the use of natural gag. r
4atuaU, yf -no -on's canqV wh t the pries offihoi i woul4.be under'. thq.MMG80
W"n4Ment It will ProbAbly take 1-he: FPC xkost' f tkie'i4i-yeaim VeAed they Ari iA effect "to determine theme, In. the. meantime ga prqdwor4,.v as prudent, businessmen will sit -ofi tb6 gidglinee'vaiiing'for that; glcriptka 4V of decontrol i0f 1981 The interim pric& Ceilin Cs"& tharity reducei but does not ellmduate the unowlAduw- I 'Urge.the House to reject the Krueger amendment because it W-1 retard the economde
recovery in the years ahead and do less to solve th4,ps.sharroage tkwA a Zformd Price ceiling approaahe Let's not use the- enera crisis as an axaum to rip a" the Americian conaumer.








31

TESTIMONY BY CONGRESSMAN ROBERT KRUEGER (D-Tex.)

January 21, 1976


MR. CHAIRMAN, Member's of the Subcommittee, I am pleased to appear before you today to discuss with you a bill which I have introduced jointly with many other Members of the House. It addresses the problem of securing adequate long term natural gas supplies. And that, gentlemen, is the question: How to gain adequate supplies of natural gas to meet our nation's long term needs.

Congress is a body ill-equipped to respond to every short-term

problem. Individual citizens can best do that on their own. Our task is to take a long-term overview and draw the parameters in which individuals can best make their own marketplace decisions.

We of the Subcommittee know that the question of long term natural gas supply has been with us for the past year, but the problem has been with the Nation a great deal longer. Not only the House, but the other body has been concerned with this question, and the bill introduced by Senators Pearson and 'Bentsen, after amendment, was passed 58-32 by the other body. I shall be h.tppy to discuss that legislation with you at the conclusion of the testimony, but at this time I wish to offer some perspective on our present situation.

Permit me, then, some history. Our Nation was once a woodburning country, then a coal, and later an oil-burning country (including whale oil), and currently, 78% of our energy comes from oil and gas. In fact, natural gas is our largest single domestic source of energy and its proportional use has grown consistently since the Second World War.

All economists, and most legislators, agree that interstate natural gas is currently under-priced. When we say that a product is under-







32

priced, we do not mean that we would not wish it, and all prices, to be lower. We would all like to see a nickel Coca-Cola and bread at 15, We mean simply that compared with other fueis natural gas is under-priced, whether this cost is based on its pollution-free characteristics or its BTU content. Under-pricing encourages use of this precious fuel that is not in the best

interests of all our citizens.

Further, we know that gas is a resource for which proven

reserves are evaporating. But we also know that it is almost the only commodity in our economy that has for several years been in consistently short supply. People simply cannot get all the natural gas that they want, even if they are willing to pay more for it. In that regard, it differs from other commodities, because with other commodities, higher prices are allowed and therefore can bring on additional supply.
4
That we have shortages in deliverable gas is unquestionable. The residential consumers in Washington, D. C. currently, are forced to have 11all electric" homes, not by their choice, but because there is insufficient supply for new residential users in the city. The Federal Power Commission has curtailment lists of pipelines, and has requests from many industries seeking additional quantities of gas. In order to be able to say that there was no shortage under the present system, we would have to find that the FPC has no requests to avoid curtailments. This simply is not the case. Further, our shortage is perilous because, as it worsens (and it will under continuation of the present policy) those users who have contracted for natural gas on "interruptible" contracts, may find that their service is increasingly interrupted.

























Andthecur et relloind afrom "iterrpil"cnlat ont

apper incurtilmnt satisics





Ths-epete~h hv otacsfr"ntrutbe


seric, anexectinth ftue o onyt e nerptdmr





ofte, bt-laerto ave he~xpene o chngin frm ga-bunin


eqipep t euimet ha cn s smeotermoe xpnsveful






34


finding natural gas for the future. I am an disappointed as other Members of this Committee that some energy companies have invested in circuses instead of energy. In a system, however,, in which it is considered to be good husbandry to invest in those things that return the largest profit, it is the legislation of Congress asit has been interpreted by the courts that has made circus'as more profitable than the search for new gas. It should not be surprising to us that corporations would seek to maximize their profit. Indeed, they would be subject to criticism and perhaps legal action if they did not. A greater riddle is that Congress should condone legislation that makes investments in circuses more attractive. Perhaps it is our values that have been distorted.

We cannot-force people to invest, we cannot regula.le effectively

the quantity of gas to be produced. All th&t.we-q jan regulate is price. And our present deleterious pricing policies have brought us into our problem of existing shortages, greater impending curtailments, and a bleaker future if we do not remedy this situation.

Congress has never been short of conspiratorial theories, and some people have sought for shut-in gas wells as ardently as Ponce de Leon once sought the Fountain of Youth and Coronado the Seven Cities of Gold. Alas, they have all been disappointed. The Department of Interior, the Federal Power Commission, and every group with substantialexpertise that has ever investigated this question has found that there is simply no evidence of substantial quantities of natural gas being withheld in anticipation of higher prices. Yet, even if there were such withholding, it should no more surprise us that some people choose to hold







35

gas than that some people choose to hold stocks on the stock market until they can sell them at a higher price. The real reason that there cannot be substantial withholding of gas is simply that the cost of tying up one s capital in holding such gas would prevent its being held over extensive periods. Our problem is not withheld gas, but withheld investment funds.

Currently, for example, we find that domestic oil sells at

approximately four times the price of natural gas. Since the cost of drilling oil wells is essentially the same as that of drilling gas wells, obviously the incentive will be greater to drill oil wells than gas wells. Thus, what the consumer gains by our current policy is a fuel that costs four times as much as natural gas, which is priced by the government that seeks to 'protect" hib.

We must question, then, how effectAre wediave been in protecting the consumer, and in asking how we find ourselves in this imbroglio, we may reflect that questions dealing with natural gas have always been difficult. In 1925 Justice Brandeis stated that in no other industry were the problems so complex and immense. Facing such problems, officeholders are ever tempted to postpone making a decision. Yet, clearly the time has come to cut our way out of this maze.

Although the Natural Gas Act of 1938 specifically exempted from regulation the "production or gathering" of natural gas, the Supreme Court in the Phillips decision of 1954 determined that not only transportation and distribution-costs but also costs paid to producers should be regulated. Justice Douglas dissented.

Following the Phillips decision, the price of natural gas in the 1950's was strongly depressed, and economists studying this period














goental concur tatd th ipelines hat ustnilooosn price the pipeiewsstopy

That stainhle ers h rc fgs n~otgs



Gas was notspcfclydildfr In15ony3%onaulgs onshore drilling is largeyfrgsi h nrsaemre.Mc









estimates of gsrsre rmtev ifrn ore.Tdyw know ta vr n ftoeetmtswstolw hs eore if weusamaktsseinwihmlinofcnuesmkter







transportation and distributiontfrpouto.Tepoue








37


receives about the same portion of the consumer s dollar as the farmer receives of the cost of a loaf of bread: about 20%.

The Federal Power Commission has fought valiantly since

the Phillips decision to determine what prices will be fair and reasonablebut after the 1954 decision, it soon received over 6,000 cases on appeal and its operations were hopelessly tied up'. Indeed, by 1960 the Federal Power Commission estimated that it had a sufficient case load to take it to the year 2043; enough work to delight any government employee seeking job security.'Since it proved impossible to handle pricing on a case-by-case basis, the Federal Power Commission then,-:perhaps recalling Coronado's search for the Seven Cities of Gold, divided the Nation into seven gas producing regions and priced gas according to-that policy. But this was also found to'4be unworkable and was abandoned in 1973. During the period lifwhich area rates were being established, however, rates were frozen at roughly their 1958 levels, where they remained until 1967. Since rates were effectively frozen, producers chose not to go into areas that would produce more expensive gas. The Federal Power Commission meanwhile stated that it was following policies in which it judged the appropriate price by "historical costs." It is clear, however, that to judge by the historical costs of a market in which price was-regulated and in which a market mechanism was not allowed to operate, is to find results that must necessarily be skewed. It should not therefore be surprising that since 1961 the ratio of reserves to production has been declining, and since 1968 we have been producing and consuming gas at a rate Increasingly faster than we are adding t.) our known reserves. Last year






00
00


we used three times as much gas as we found. Jhe number of gas wells drilled peaked in 1960. Since that time well-drilling has become more costly andthe fields more easily found have diminished.. Our future recovery of gas depends on proven technology aXid':th ability to remove these precious hydrocarbons from areas which have not been productive at current price., Since two-thirds of the world's surface is covered by water and there is no reason to suppose that the areas beneath the sea have fewer structures that could trap hydrocarbons than are to be found on land, it is reasonable to suppose that there are adequate supplies of natural gas, but not, certainly, if it MiAt be sold at a price based on "historical" costs of finding it on land...

The constraints upon supply have been increasingly evident for a number of years. Indeed, a signal of this shortage came in 1967
Jr
when the AGA, as the trade organization of the principal purchasing group, the pipelinesshifted from favoring wellhead regulation of prices to favoring deregulation. They did so in recognition of increasingly supply problems and of the fact that their vast capital investment in pipelines would be useless if the pipelines were empty. It is worthwhile to observe that despite occasional statements to.the contrary, less than ten percent of natural gas production is from producers affiliated with pipelines.

In 1970 we began to feel our first curtailments of natural gas

and we soon after experienced the so-called Arab oil embargo which led to the decline of the importation of petroleum. What many people did not realize was that the problems imposed by the oil embargo were exacerbated by our shortage of natural gas. The FEA required companies








39

to produce additional #2 fuel oil to make up for the shortage of xmitural-gas used in heating. Thus, the shortage of natural gas required more fuel oil to be made from oil, and with a shortage of oil, we had'a shortage of gasoline. What those lines at the gasoline stations reflected in part was years of faulty policy with regard to natural gas.

There'is much concern about the cost to consumers that would

.result from an increased cost for natural gas. That is an important question. Equally important, even if politically less sexy, are these: What are the costs of alternate fuels? What is the cost to the Nation of being unable to add new customers for natural gas? What is the cost of substitute fuels? What is the cost of plant expansion that is not undertaken because of insufficient natural gas? What is the cost of the jobs that are 16st though curtailments? What is the cost of using electricity for heat, instead of gas, when we know electricity to be more expensive and less efficient? What is the cost of uncertainty in supply for industries that wish to expand? What is the cost to an industry that receives gas now on "interruptible contracts" (costs not shown in our normal curtailment figures)? What would be the cost to the Nation if Congress refuses to act and says simply that the question must be studied longer?

If we are poor students of history spending more time studying the same time data and the failure of past policy, our chances of success will not improve. What is the cost of even longer delays on

this question?

I recall, Mr. Chairman, as we sat in an upstairs' room at the








<40







bil, since I beiv ht it wa h"etea rmNwYr h ad,"' to it wasadyt oeadIbleeta h os sraya el




-t1




questions





make clear ]




17 0 ;








41





_1] Stevenson ol Il- inoib







January 22, 1976


Statement by Senator Stevenson, Chairman of the Subcommittee
on Oil and Gas Production and Distribution, Senate Commerce Committee, at hearings on long-term natural gas regulation before the Subcommittee on Energy and Power, Interstate and Foreign Commerce Committee, House of Representatives:

Federal Power Commission cost-based regulation of interstate
natural gas prices has provided insufficient incentives and resources for the development of adequate gas supplies. Natural gas has been diverted into the unregulated intrastate market where much of it is used uneconomically. Serious shortages have developed in the interstate market, and they threaten to grow worse. Up to this point there is general agreement. Beyond it, the Administration, the oil industry, its captives and its representatives, agree that deregulation of newly discovered natural gas is the answer. The opponents of deregulation do not agree on what should be done, and at his late hour are in some danger of losing the fight for lack of a solution. I welcome this chance to propose one.

Deregulation of wellhead prices would add the pressure of demand for natural gas in some 46 consuming states to demand in the producingstates wbere already the unregulated intrastate price for new gas is averaging about $1.30 per MCF. Natural gas prices would rise to even higher levels. Early this winter, and despite mild weather, uncontrolled emergency natural gas sales in interstate commerce rose as high as $3 per MCF. That deregulated gas price is in excess of the OPEC equivalent for oil. The large and relatively inelastic demand for natural gas combined with the cartel price for oil lifts unregulated gas prices to arbitrary and dangerous levels levels even higher than the OPEC oil price.

The average price for all flowing natural gas is now about 35 cents per MCF. Since natural gas supplies about one-third of the nation's energy requirements, the quantum jump in a basic cost that would ripple out to inflate the cost of every commodity and service in the economy as a result of deregulation would probably bring back double-digit inflation, a resumption of the recession and raise the levels of unemployment. I have discovered in the Senate hearings that many authorities reported to support deregulation do not infect do so for these reasons. They oppose continued cost based FPC regulation. But economists in particular acknowledge that there must be some protection against arbitrary cartel pricing of this vital premium fuel in short supply. The real question is not whether but how to prevent cartel regulation of domestic natural-gas supplies.

Precisely how high the price would go if deregulated and with
precisely what effects in the economy no one can say with certainty. I am aware of industry claims that consumer bills would go up insignificantly because the new gas would be rolled into the price of old flowing gas. But I am also aware that old gas is depleting rapidly, that lines between old and new are difficult to draw, easy to evade, and that the fine print in many contracts for the sale of old gas may permit their renegotiation at far higher prices if new gas is deregulated.















e crias a o resutofdae pra re.b ~eix fCnrs, urf o catrut ea ci~f ad.SI ~ cnaepit' toate riheta advre ffe ct on177. t n Ao cnsyvt intiny a n alea y jumen ce esimte etd oP ol." rai

fotail reg, totk ino' ul g as. u*,h osbliyo eigta




cotat rfoignatural asur sE prcliceae


natural gP has ntecentlrsat c aket as saf reut of de e ainexceptas aceut e cl~p i nn inutilad grc trlatvty I can o ireyut srtnz lseytesl-erig ihu
ansimplistrice clista atrlgswlledpie cnb eeu lateid wiot anavreefcenteecnmreoersiga


cotsuce aitemr ul

indstyon is e a on at hi hch ene icesey prdc ncsar nenie yiel apprcialy or gs.











pingstt n-ata as i ce hom thcasenmxiu of 52etspe




100013mr43


As long as natural gas is priced below the BTU equivalent price
for oil, producers will seek to produce the more profitable oil. And
consumers will seek toconsume the lower priced premium fuel in shortest
supply. The supply of natural gas then declines while the demand
increases. If deregulated, natural gas would be priced at a far higher
level than domestic oil. Some producers might then seek gas at the
expense of oil. So, it seems to me, the industry is right in saying that
price should reflect an equivalency of energy values for these fuels.
They are, after all, often substituted for one another and produced in
association with one another. A pricing system should reduce the
disparity between oil and gas prices. Deregulation of one and not the
other or regulation of one without a related regulation of the other
could widen the price disparity.

The Joint Economic Committee urges that regulation of prices "make
allowance for substantial narrowing of the disparity between the high prices of oil and lower prices of federally regulated interstate
natural gas. Coordinated action on oil and gas could permit an adjustment in gas prices at less net cost (or no net cost),to energy consumers
on the average."

1 agree. To accomplish this purpose I suggest that the new natural
gas price be geared to the average price for oil established in the
Energy Policy and Conservation Act. In that Act the Congress established
a $7.66 per barrel initial domestic average oil price. Natural gas
should be priced on a BTU equivalency basis at the same level, rising in the future in harmony with oil. Such a formula would produce price

certainty. The complicated and time-consuming cost-based regulation
of the FPC would be superseded by a straightforward nationwide ceiling.
Under this formula the initial price for new natural gas wouad be
approximately $1.35 per MCF. The gap between domestic oil and natural
gas prices would be closed. A comprehensive national pricing policy
would be established for the nation's two most vital fuels.

This price would be close to the recent average in the unregulated
intrastate market, an increase from 52 cents per MCF in the regulated interstate market (except for short-term emergency sales). It would
pro-duce the necessary incentives according to studies of the Senate
Budget Committee and the Federal Energy Administration. It produces more incentives than are necessary according to a staff study of the
FPC. And it ought to be supported by the industry itself. It takes the
industry at its word.

The American Gas Association claims that deregulation is necessary
to increase natural gas supplies and that "a realistic figure for the
average price of deregulated new gas is $1.50 per MCF which is close to
arity with the expected average price of domestic oil at the end of
1976-11

This equivalency formula simply gives the industry what it says it
expects to get. It also protects the public against any miscalculations.

Such a proposal is formulated in an amendment which I offered on
the Senate floor to the Natural Gas Production and Conservation Act of 1975. It failed by a few votes before the oil pricing controversy was Y resolved. The Senate approved deregulation of natural gas by accepting
an amendment offered by Senators Pearson and Bentsen before it approved
regulation of oil. The Pearson -Bentsen amendment deregulates new natural gas onshore and continues for five years FPC ratemaking of
natural gas offshore. It gives' the country the worst of all worlds, FPC ratemaking and a multitude of natural gas prices all unrelated to prices
for oil now established under the Energy Policy and Conservation Act.

I urge you to reject that proposal and the all-or-nothing demands
Of the oil industry and continue the policy Congress-wisely adopted in
the Energy Policy and Conservation Act by establishing a new natural gas
ce.iling price equivalent to the nation's average domestic oil price.
I I
There is, really no such thing as "deregulation." It is a case of
U.S. regulation or OPEC regulation. As between the two, we should put
the responsibility for the national interest in our own government.


















AAI














fet ashin1gshtoC 2%1 be to tho mLO


(TheCntontlShl

















'9 LiRar ofES HRSAaury2,17



WAH.GTN D.C. F.4 pecnae~ a two praientices nntrlgssple throgh sai
p i c e o g e s a i l a ......... ...........................................................................e s i o n a






comtte "Adti sa osraie ait, h NwJre onrsmnsi
intsioybfr h os fRprsnaie'Itrtt oeg
CoN rc Sucomite onEeg&Pwr








A r.


1-he G.A.0. renort in forecasting economic impact makes the mistake.of
comparing deregulpted natural gas price's to the Btu (British Thermal Unit)
Pquivalent of crude-oil "rather, as did the Library of Congress, with its
actual refined ilval.8, propane and No. 2 fuel oil, Hughes -noted.

"Where tbe G.A.O. report errs fatally," Rurhes told the subcommittee,
"is in forecasting figures based upon the prepcsterous assumption that the OPEC oil cartel will not act to recoup any loss in revenues occasioned by
a drop in U.S. oil imports."

IA In its study, the G.A..O. asserts that deregulation within 10 years will
reduce oil Imports by 750,000 barrals .>er dav and imrrove U.S. balance of
payments by $3 bil-lion... "It is doubtful, ho-wever, that OPEC will cooperate
based on Its past performance," Hughes said.

As an altemative to deregulatioTi, Pughe. suggested the -following
remedies which forms the basis of legi3lati,,r! be will submit this session
of Congress:

"First and foremost, we miisT establLjh parity between the interstate
and intrastate markets by setting a fair single pricLftg system for all gas sold in the U.S.," Rughes said. TLis he woold accomoj1,,,h Dy expanding the
jurisdiction of the Federai Po ,jer Curviission to the -1-trastate mark ?t where'
prices are now InFluenced bv cArtel-induced iiicreases in the cost of oil
rather than to traditional patterns of supply and dend-td.

An allocation system that would insure fair allocation of existing
supplies throighout the COUZ11ty.yConser-vatian measures in--luding, where practiLal, a switch from
natural gas to substitute fuels.

An end to the use of natural gas as a boiler fuel, most commonly
in practice within producing staLes.

A requirement that gas producers develop or forfeit nonproducing
lease holdings bLbyond the urimary five-year erm. "More than 750 or 52
percent of the 1,407-1pases in tiIM Gulf of Mexico are in nonprodveing status.
Those surveyed according to testimony before the Senate Antitrust and
Monopoiy Subcommittee, are operatin.g at less than half capacity.
'PAccording to an F.P!C. studv, eighc ma, -.)r oil com'panies control between
62 and 99 pertent af the rew resorv.-,s dep,!n,-_'irkg f-.n tbe gas field cited TS
it really any wonder, then, given tlie level vf industry concentration in our
regulated offshore waters, that these aro-, oot. 6eing produced with all due haste?"
Hughes said.

.."To determine why these offshore ceserveq are not being produced, I sought
and vas granted the right to intervene In fircc.c.-,dings before the F.P.C. into
the status of nonpioJucing rezerves.

"It was a real education. ProdiAr!er witness after prodiucer witness claimed
equipment shcrtagi s. lack (if carital and rep,-iir delayi as excuses for
nonproduction. Yet while these producerg were shoutirg equipment ghortages to
the F.P.C across town, at the Fxport-lviport Bank, inreenationaL representatives
for the very same firms were whisvvring equinmum, 5urplus into thc-- ears of
officials to the-tune of $800 million in loan guarantees."

Hughes blared uncertainty as the principal cause for the continuing decline
In gas cip-dit-ated for sale to interstate commerce, "As long as producers believe there is a go*&,chance tluat they vkq enjoy deregulated prices tomorrow, they are
not likely to strive for maximum production today." 14
Rughes delivered his statement.to the Energy & Power Subc,9mmittee which is
Considering long-term solutlA's to t te natural gas shortages.














65-601 0 76 4















nQ 4

STATCM F aHE catORJL KLtA If o HUGES MENB FCMM A I







r. thosean di oestatgied Mebrthiss ucmiite

to ta dics olg-term inofte arl gas eegnyai hak



not dwelledsupon.swel

Fro alles, Krca1rm, tht theno arl ecin ofth cuttywl lisel rie otti itrssotg rgial oeatt ea ra



r Aer wamr itrsmesy


oarcnidrbleIpovd



Powe Cmisino aasa~ well


I suges, Mr Chirmn, tat hey re uily ofovestatng hei
tateocaan

I d nt out hatprdutin s dclnigtht i ovius Wa I doquetio istheindstrys asesmen athowe arive atwhee w ar
toda andwhee wego rom ere

Derguatin n te bsnceofgovrnentaces todae t te


reseve nd podutio dat avilale t th inustr an th autoriy t ore aiumpoutono oeeaergt o xsig eea"answud



















TheLibaryofongessfuter etiates thre foppl effet


$13 o $5 bllin a liely o podue a inlatonarycateo belute4e









Furher wehae n gurateetha ths ew oun wate old be




reivesed n eploatin t al. t culdjus aseailbeudtoprhs


deprtentstresora hre rng irus



A comonatin Isin rde atthispoit t th Charma an th

-majrityan his ubcomitee wo drw te lie ondergulaion ndinged








48



The prmWcers, the pipelines and th6 distributors coulAn't. MU
it fast enough. Tbey encered into 10* a and 20-year contracts. WscowAs were given to builders who agreed to pipe in gas to housing developmentse....,:,,

For many years after the Supreme Court ordered the F.P.C. to reguli" San prices at the wellhead In 1954, the industry continued to set a better price on the interstate market thanwithim-producing states.

This remained the ewe until late IWO when Interstate Sm was sold
at a goodprofit for an aver&V price of 29 cents per thousand cubic foffit in both markets.

Proven resezu in fact peaked at 292.9 trillUm cubic feet in,.,P68 but, despite oveiall price increases of 400 pierce; in recent yeaT*,.,tMt1&ues to decline.

Coinciding with a der-line and revision of reserve estimates was a
gradual shift to the unregulated intrastate market which became a stampede in the winter of 1973 where gas producers were obtaining cartel prices.

Since 1970, more than 90 percent of -reserve additions in the lower 48 states have been dedicated to the Intrastate market.

In the meantime on federal landswhere gas discoveries are by law dedicated to the interstate regulated system, discoveries and production continued a rapid der-line.

Which brings forth a second industry argument, that of industry concentration. It is said that there are some 30,000 producers; that the four major oil companies control but 24 percent of the market and that the
8 largest firm 42 percent, low when compared to the other industries.

Indu&ta C ncentration

Dr. David Schwartz, former Assistant Chief of the Office of Economics at the Federal Power Commission, draws an important diatirkr-tion between market holdings and new reserves. In the latter category, an FPC study found that the eight largest natural gas companies wbLich, not incidentally, are sums the largest oil producers, control between 62 percent-and 99 percent of new reserve& depending on the gas field involved.

And there are not 30,000 producers operating offshore where the
Interior Department through witless leasing policies has assisted Industry.. concentration to a handfull of major firm.

light major firms control 70 percent of the available known suppUes of natural gas onshore and offshore South Louisiana, four of which hold searly 50 percent; the eigbt largest firms in the Taxas Gulf Coast control 90 percent of available new gas not yet under contract there, the four largest just under 80 percent.

In the combined fields, eight majors control three-quarters of tbe.new
Ban finds with the concentration ratio around 50 percent for the four major firms. An eight firm concentration ratio of 50 percent or note is generally r*WdW as Indicative of non-competitive structure within a given industry,

It is really any wonder, then, given the level of industry concentration in our regulated offshore waters, that.these gre.not beftg produced with all due haste. The prospect of total deregulation by 1981 as contemplotad by the learsestBentsen bill and an initial price hike to $1.60 per thousand cubic feet would make it all worth waiting for.

Nor* than 750 or 32 percent of the 1,497 leasos in the GuU.of Mexico
are in souproducing status. Those that ars* accordUgto testUaW.Won Ww8404to Antitrust and Monopoly Oxomittea are operating at:J ws thsa Ulf cmp*Ado*

The mLaber of losses in extended term, at last count, was 74. By law.
Me Interior Dep4rtamt in empowered to yank tbmw leasse and resell then to aw%,her buyer who can cow across with a reliable production p1m.








AO
Xia

To determine why these offshore reserves are not being developed,
I sought and was granced the right to intervene in current proceedings before
the F.P.C. into the status of nonproduaing reserves.

It was a real education. Producer witness after producer witness
claimed equipment shortages, lack of capital and repair delays as excuses for
nonproduction.

Yet while these producers were shouting equipment shortages to the
F.P.C. across town, at the Export-Import Bank, international representatives
for the very same firms were whispering-equipment surplus into the ears of
those from whom they were seeking loan guarantees.

This, then, is the root of the suspicion of many in this country
who believe we'll get all thegas we need domestically at $2.50 or more per
thousand cubic feet, or whatever the escalating cost of Btu equivalent alternative
fuels is six months or a year from today.

I do not share the.belief that production will suddenly leap upon
deregulation, but I an dead certain that whatever we do get we'll pay cartel
prices for it.

AVtos and Energy

To the argument that the gas industry is no more concentrated then.
say, the automobile industry, the obvious reply is that you can take a bus, ride a bike, or keepthe repair shop h#ppy. There are alternatives which automobile
manufacturers must keep in mind in pricing their product, but there is only one commodity that can come out of the end of that j4pe to beat your home or
run our factories.

A constant supply of now energy, unlike a constant supply of new cars,
has become a necessity of life. During this period of extreme shortage,
thoughtful allocation of.this resource is essential..

Unlike the auto industry, gas producers don't offer rebates to stimulate
sales.

A final word on the implications of price fixing, especially as it
bears on now contra-eta suggested.bT the few producers of Alaskan natural gas.

An a member of the House Judiciary Subcommittee on Monopolies and
Commercial larwX was recently furnished a copy of a classic cartel contract
un"r negotiation between Axco and a California utility.

it m4d, simp.4, that in no cise.will gas be sold for less than the
SuLtmin price then beihg obWned by any supplier of Alaskan pipeline gas.
Ware I an antitrust 1wityer at the Justice Department, I would gladly volunteer
to prosecute that cmm.

N The", then, are several arguments and rebuttals to deregulation.
It be that what this nation needs is a restructuring of the oil
Industry-rathet than derwlation of natural gas prices.

As a usubor of the Judiciaxy Committee, I amcurrently reviewing the
le"labstacles tib'the timely, prosecu lou of ="titrust suits. There in no
TOSSOR why antitruft suits at the Federal Trade Commission and in the Justice
should drag on for years without resolutioa.

The Judiciary Committee's Subcommittee on Monopolies and Commercial Law
'a to hold hearings on legislation that would accomplish vertical and/or
itaktal divestiture of the oil industry.

Pending the outcome of these hearings, it is a serious mistake to
*h6maltously deregulate natural s" prices and further surrender the power of
t to keep any lid at all an prices.

The G&O Blunder

TA closing, permit ma to comment on the principal conclusion, and
tb*ftft the principal blunder, contain d in the January 14 General Accounting Office r"On entitled., "rnplications of Derigulating The Price on Natural Gas.




k








50

Total new gas discoveries under deregulation would swunt to
approximately 400 billion cubic feet more after three 'year's when cozqwred to continued regulation.

This, trumpets the report, could reduce our oil Imports by 750,000 barrels per day and improve our balance of payuents by up to $3 billion.

While 400 billion cubic feet of natural gas sounds Impressive in isolation it is, after all, only a two percent increase over the 19.4 trillion cubic feet of natural gas that the GAO estimates vill be available under continued regulation.

Where the GAO report errs, fatally, is in:::forcasting figures
based upon the preposterous assumption that the O'PRC oil cartel, now-in the driver's seat with deregulatim, will not act to recoup any loss in revenues occasioned by a drop in U. S. oil imports.

The GAO compounds its errnr by assuming in the ten-year life of
its study (1975-1985) that the international market will remain stable with no OPEC price hikes.

There are other serious deficiencies in the latest GAO report assumptions whielh, I am sure, many on this Subcow.ittee have already challenged.

The report is assessing consumer impact, for example, considers a rise in natural gas prices to the Btu equivalency ol"' crude oil (about le-'1.70 per Mcf) rather than to its actual rivals, propane and No. 2 fuel oil which have a Btu price equivalent of around $2.50 per Mcf. The latter estimate, again by the Library of Congress, is more reliable since it measures comparable fuels.

This accotmts for the first-year impact difference of $9 billion by the GAO and the $12 to $15 billion price tag affixed by the Library.

Finally, nowhere does the GAO report examine the option of regulating the intrastate marketas an alternative to the. status quo or deregulation.

A final argument could be made that even 400 billion cubic feet at an exhorbitant rate is better than no new gas at all. I disagree that we necessarily have to make such a choice.

Uncertainty is the real culprit. I am not convinced that this is'an either or situation. The establishment of parity between the interstate and intrastate system that provides for a good return on investment m",very-Vell be all that is required to again attract exploration investments."

In the final analysis, the central question is not as complex as the side issues.

What we must decide is whether we can afford to let an international oil cartel and the multinational oil corporations which owe allegiance to so nation determine our future energy policies. An Industry that can set the price for gas and oil will ultimately determine the price for alternative fuels as well. An industry that powerful will soon be telling the government how much tax it will pay and under what conditions it will continue to supply this nation with energy.

Clearly this we cannot permit.








51
EXECUTVE OFFICE OF THE PRESIDENT






pP P~~aul W. Macvoy, Mme
Cuncil of Eonoic Advisers


SUBOMMTTE ONENERGY A~NDPOE





414








thi prtonof tenatura g as industry cotinues along

a pth f ssteati delin inprouction and underutiizaionofpiplin an dstribu~tion capacity. While

othr nery ndutres ndcate substantial respnse to



indpenenc~coseqen upn te OEC mbrgo, natural





In te lst ive ear, te gs prducionanddistribution










o52






minute hav been foce upo e path af secla decline
han reere and prdcintoi wr o oh








existence ~ ~~>4 ofteucnrle ntatt akt hs

deales oolfnobelyhvenmchgetrsil


The conrastncosmtopatrsievnoe
-tikig atrlgsi th onynt al eouc
pioasro exerenig6yseatclxes7dmndOwt






53

process shifted their sales to intrastate buyers, at first because of the extra cost and uncertainties involved in regulation but finally because of higher intrastate prices. At the same time, since gas was held below its market value, there were significant incentives for the substitution of gas for other fuels in industrial use in the producing states.


The structure of existing Federal Power Commission regulation has also strongly affected the allocation of the natural gas that is available. Because regulation is confined to interstate transactions, significant supplies have, been reallocated from interstate to home state markets in order to avoid controls and to obtain the higher price that has been available at least since its early 1970's. P Except under special provisions exempting sales from the usual controls, only negligible-amounts of additional gas have been committed to interstate markets where the supplier had the option of selling within the state. Thus, regulation has operated to reduce the supplies available to those in whose name the Federal Power Commission operates the residential and industrial consumers in the more populated northern and central sections of the country. This means that some potential consumers of gas












as hntad buthentv fesa aytie h rc



I








Uhantortuwhoatly orsm h a a o t h

gasledo nlot ad tthsfor altematismtvaube while those reihaenav anfomecilcs~mrswohv 7aredbeen allaed to oth gas sytmar lowdt











fro an cosumtion whatsoeer. In effect, allocation conumes hs rsuledin significant departures fomt :..hegasshrtge ndthemialocai~ o ga undr tig









Thr sn la xporm htcudb













o~116




mndareye cotrl are as ec'e




the o tafan eadrhp l ecnepc smr





moin the directnof moe reguato anqa ale oeii
increased supplyof gas or a mor efficient disri butioni

oi fuel










Giliiiiiiii= the proper diriciol foriiii polcy i
q u e stiiiii ioiii siitii iii ii iiiiiiiii iiiiiiiiiliilii m u s b ei a sik edi iii ii iasii= it oiiiiii ... = i .... i i== p iiiiii.. ... .tie...iiofli
d e c o n t r o l......................... S h u l ................. p riie s ................................. a l o e t o..... .. a t t a inii ..... .........a n..............................
iei!iii iiiii ililiiii i u i i=ii i le veiiiiiii l =iiii i n s a t n o s y o r sh o u ld= = iiiic=iii= = =i=-iiii... q i ................................. b e,1
..................... o ut.......ii........................... o v e t h l o n g -r u n ? R a p i d p r i c e d e c o n t r o l ~~~iiiiiiii !iii l~~iiiil iiiiii iiiiiiii~iiiiii ~iiiiiii ~ iiiiii iiiiii iiiiiiiiiiiiiiii iiiiiiiii~~iiiiiiiiii
woul reallocate....vaila.bl..vo.l..e......g...to..u.......eeding
it the most. an.hotn...prodo...-frthle
consumers wh..ebenualet.ban .h a te e









woud aso avean pprcible positive effect upon
gassuplie dscoere an mde available to the interstae mrke. Bt iedite ffeats woul include subtanialprce ncrase fr those consumers who have bee obaiingthi brgan fe1 Their need for time
.,.q 4jus~tohiherprcesmut also be considered.


Withn tis ontxt emghdt consider the effect of

prie icresesfro deontolof new supplies of gas that coud b expect fom he easqon-eataen..Bill. With decntrl o al nw gs, hee would be higher average gaspries orthenewsuplis that would have been forhcoinc wihou deontol.But the additional gas suplie toinersatebuyrsas a result .of decontrol woul relacehiger pice o1 imports now used by curaild gs ustmer. Frrbasonable amounts of increase suply f gst hos tw efecs are roughly comparable but in o *tedire- ios., to least, the net .effect of ne 941'.,p~e ecotrl o. enegyprices as a whole will not bqrg~ustntil i te nxt ewyears. In the long run,

as ~ol: ~hiherga :priq wuld increase. exploration makig mre as aailbleforproduction in subsequent *years ,T4,-aditona ga wold akepressure off alternate energy








I58





Iwolaloprimoeproductivnu obntos lowerin th~e rqie ubro tl e olro upt Teseefcsreuesdorb-et nrycnsmto,










inces eea uptadthrb-d ogoshtoa







59


STATEMENT OF FRANK ZARB

ADMINISTRATOR

FEDERAL ENERGY ADMINISTRATION


-Before the


COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE

SUBCOMMITTEE ON ENERGY AND POWER

UNITED STATES HOUSE OF REPRESENTATIVES


Friday, January 23, 1976













M.CH CA N TH E M I

HAVEDBEE ASEFOCMMNONFURLGSAIVMRPSL
NATUR G


REPRSENTTV BRW OF OHIO.
BEFORE I DICS..EPOVSOSOFTEE.IL,. OL





LKTOSYAA N STEAMNSRTO A ADMN IE










IM-DECLIsoa ourE~lA OURDOESTI OI PODUCK40N1 S INCE
MEBU.SINESSES AND INDUSTRIES HAE BEEN C0N*SKIG.ORE.ATRA AEC ARTN OUR PODCERS 1AV
lt4.T.RESRVS.CURET ROVED RESERESA EXCLUDIG
ALASKA,~~~~~~ sp.STN.A-0 TRLINCBCET,.HE LOWEST

APEAE THE NATIONAL SCENE SIXYA AG4HV NOW GROWN JNT.A SEIQS ATINLENERGY POLEM, IN 1970, INESTATE 11PE.IE URAIMINT ERE.mjf 08 LESS THAN ONE PERCENT
',ONUMT O,., ND NRMLL CLDWITR THIS YEAR COUD
ll~,,, ,NCWULURTAIMT ,TO ASMUCH As 2.9 TFj OR 15 %RCI F DEIVERYT NUSR.,'_AsmEB4SOFTHS oFITEE ARE.A INTERSTATE
,E CURTIMN AE.ELY ROUG ETIMAE 0FTH


.A 5 MRTEIEW O HPROBLM THE FDEA EERY ADMINISTRA.01ECSTOES1












65-01 O 76 5







FEA's LATEST UPDATE'01F THIS SURVEYDATA SHOW'S"Cu
TAILMENTS BY DISTR113U'fORS IN -tH'O'SE,21 KEY stAttS AT TCF FOR THE CURRENT HEATING SEASONN THIS IS 140 BILLION CUSIC FEET GREATER THAN LASI WINTER, NATIONWIDE,* THE GAS SuppL*: OUTLOOK HAS IMPROVEI)'FROM EARLIER PROJECTIONSp LARGELY .6'tft"' TO THE WARMo DRY WEATHER T HE NAT ION EX PERIENCED IN'NOVEMBEV, AND EARLY DECEMBER WHICH:'REDUCED DEMAND FOR iiT'URAC' 'GAS'P" PROPANE AND FUEL OIL. EMERG''ENCI SXLE' OF NATURAL GAS PERMITTED UNDER FPC REGULATIONS HAVE ALSO HE LPED B Y:' R E q J, DISTRIBUTING GAS SUPPLIES F90M SURPLUS TO SHORTAGE AREASe
BUT EVEN WITH THIS IMPROVEMENTp THE LONG-RANGE T END'fS TOWARD INCREASING CURTAILMENTj WITH OUR ONLY-POTECTI-ON"FROM POTENTIAL ECONOMIC DISRUPTION THIS WINTER;AND NEXT 9EINGA CONTINUATION OF REDUCED DEMAND DUE TO WARM WEATHERS EiARL THIS MONTH, A SEVERE COLDSPELL IN SEVERAL STATESzRiltUL'TED IN TEMPOR ARY INDUSTRIAL SHUT-DOWNS AND-tCH60L CLOIINGSs AkD".wt ARE NOT THROUGH THE WINTER YET FURTHt0-COLD-WEA'fHER::'CiAI A
STILL CAUSE THE ADVERSE DISRUPTIONS FROM WHICH WE HAVE BEEN::': SPARED TO DATE. SUR'ELYj THIS NATION MUST NOT TOLERATE k4 SITUATION WHERE'THE CONTINUED AVAILABILITY OF SO VItAL A FUEL AS NATURAL GAS MUST DEPEND ON THE VAGARIES OF:'THE WEATHERS
PRODUCTION OF NATURAL GAS PEAKED IN 1973 AT 22.6 TCF
AND DECLINED BY APPROXIMATELY 5 PERCENT IN 1974 To 21.6 TCF. ACCORDING TO PRELIMINARY BUREAU OF MINES AND FEA ESTIMATES FOR 1975, PRODUCTION IS ESTIMATED TO HAVE DECLINED AT A RATE













OF LOETo7.PE TE F THUION SAGEONE YOL EARDOURI
ECEVEREGADUL TI ON I NA T AL ASAS
ITIO O U NATA SUPL P ROM. E2, BELIVE JO'ILLE. E IEE. TODAM TAEEEGLTO A 73 ~'RA GAS OUTLOOK IN 194,SEUV :TE SIGNIFICANT AYES:O 0,MPERAPDIG THELL ENMCPAL INCEIED FORPRODUCEST .1t ORP7 EIADITNAL FGARS.SPLE RO H UE

lN,.NFRMATO NS.HE CONDY BESGEOYECORAGING MREt



FT4$jr-Y.-PR LDIGA USG, S THE PRC IC E ISR ALLODOERT





64

4_T ISGIVE: YOV, AN, EXAMPLE OF THE BENEFITS OF JERIG
ULATION., IN PP. -NAM virsaw 'frR0K.A:'PRojEcir 'NosogNbNet 4PDAT:E-' MARKETED AODik-t1W1,0F
PROJECTSir ..FOR, l%%,,%r*R0SS.
17. 9 i Tq, POER, TUP RENT. )RUULATI ONfii AfM 22 3 TCF DERE64LATJOKo: ANEIXET. 14ARXETIED,73tODUCTION! Wl 1589 Mr 20 TCFrRE-SFECTIVELY i.), THATAUFFUMCE. JJS-,TME-. EQUIVALMV W &M 2 MILLION BARRELS OF OIL PER, DAY.A.. ADMITTEDLY;' THtR&,10 BE A-SLIGHTLY HIGHER,.F.UEL BILL-1-.TO:PRESENT DAY GAS"IJSERS UNDER DEREGU.LATIONBUT THAT WOULD,;BE MORE THAN-'.OFfStT-BY':
GREATLY INCREASED DOMESTIC GAS PRODUCT-ION' ANVItEZ)Utfl)":14Ei!l)'llOF IMPORTS&
ANOTHER EXAMPLE IS THE'EFFECT DEREGU.LATl0N:.wOuLDl.-HAV9J ON THE INTERSTATE MARKET. WITHOUT DEREGULATIONo.WE:PROJEC'tI FOR 1985-9..3.TCF IN THE INTRASTATE,.MARKET-AND-6i,6:TCFIN,2YO9 INTERSTATE-MARKET. HOWEVER.-1.,WITH,,.DEREGULATIONTHE SHLF't IS' DRAMATIC: 7. 9 TC;F,. INTHE INTRASTATE "AND 12. 1 TcF-i:NTHE, INTERSTATE MARKETim AN;INCREASEOF 5.,5.Tci;,,IN THE,4tNTERSTATE-'
MARKET
WHILE-AMAJO.R SYNTHETIC FUELS PROGRAM'CAN INCREASE:'O#. ,*LONG- TERM GAS SUPPLIES SOMEWHAT -THE DECRikASE, IN PRODUCTION. WE HAVE SEEN SINCE 1 S,- PROJ ECTED TO c0NT IME UN LESS
ACTION IS TAKEN BOTH FOR CONSERVATION AND TO PROVIDE NEVUEINCENTIVES FOR ADDITIONAL EXPLORATION, DEVELOPMENT AND PRODUCTION@










65A

THE pmr~STRAITNS OCkWTGRINNAULGS






TA ILME(TS:PROPTE. -PES DET -FRD:O ODER HE REAION F SECAL,]N .ERGENY-'AT-RAL I TAS FORCE UD E TH JW i ECT1014OF Tw fEA AE4$VASK AFRE I'S'T REPNIETFOR





cka

CLEARLY, THE SOLUTION TO THE PROBLEMIS THEEAAEbiATE DEREGULATION OF THE WELLHEAD PRICE OF NEW, NATUPAL, GAC LEGISLATION INTRODUCED BY SENATORS PEARSWANID BENTS'Elf AND REPRESENTATIVE KRUEGER'ILLUSTRIATE A.-NIABLE DEREGULATIbN PLAW WHICH WILL TURN THE TIDE OF INCREASING SHORTAGES AWD:A*t'", SUPPORTED BY THE ADMINISTRATION@
TITLE 11 OF S. 2310.AS PASSED BY THE;SENATE W0ULD" DEREGULATE THE WELLHEAD PRlCE'OF ONSHORE.NEW"NATURACUS. ON APRIL 4, 1976. NEW NATURAL GAS IS DEFTKM'AS GAS IFI'R'STA" DEDICATED TO INTERSTATE COMMERCE ON OR AFTER:,lAMARYllA975..o OR GAS PRODUCED FROM A RESERVOIR DISCOVERED OR IEXTENDEZVIONOR AFTER JANUARY 1975. OFFSHORE'GAS WOULD-BE:DEREGULATED' ON JANUARY 1, 1981. 'IN THE INTERIMp ITS PRlCE IS SEr -AT.K- : ROYALTY CRUDE OIL EQU.IVALENCY UNTIL THE FPC ESTABLISHES A-' NATIONAL CEILING RATE@
REGARDING GAS FROM EXPIRED INTERSTATE CONTRACTS THE FPC WOULD ESTABLISHi AND REVISE BIENNIALLYj'A-MAT10NAL CEILING RATE. THEREFORE, WHILE SUCH GAS WOULD N0,T::lE DEREdULATEDj IT WOULD BE TREATED:IN A SPECIALIMANNERS,
S. 2310 WOULD ALSO AMEND THE NATURAL GAS:ACT BY ADDIKS EIGHT NEW SECTIONS, INCLUDING SECTION 25 WHICH WOULD ESSENTIALLY ESTABLISH A CURTAILMENT ORDER OF PRIORITIES-WHICH









ND,-.'MALL USR-$AU PUBLIC HEALTH AND SAFETY, -USERS); PRIORITY ..-FOREA4N TALAGRICULTURAL USERSo AND PRIORITY THREE FOR $4ENT,,4.INUSTI. USERS.(I.E., PROCESSAND FEEDSTOCK. SIES) ii~-,_RIORITIES WOULD BE ESTABLISHED WITHOUT EGART~ijiEKERTHE UNDERLYING CONTRACT IS FIRM OR .INTERUNDE SECI -25(A) THE SECRETARY OF AGRICULTURE WOULD TERMM, M A03RCULTURAL PURPOSES FOR WHICH NATURAL GAS IS ESSNTI~s 10,CITIFY TO THE FEDERAL POWER COMMISSION THE AMOUT ONATRALGAS NECESSARY.TO MEET FULL FOOD AND FIBER,







SECT I ON 27- AAND Alts FPC: 'PROH I B*1 t I ON -&l tOi'Tttk;0dtL 08&
-11mil 9:4
OF NATuftAL GA! "NOT 'CON'TRACYED'O Ml PRIOW TO JANUXOy UNLESS ALTERNATIVE Fb LS OtHERTHM oi-L',OR--pRo0AW zAgt UNAVAILABLE---bR'CANN0T,'8E, LITILIZ-8i ATIMT tlHEO? -41r Rmo-ac TERMINATION OF BOILER PdtL., USE OF NATURAL GAS CONUACT-6 lFb*.:J BEFORt JANbAR* 1.0 11975,i: AT"THEINE-, OF+ 40N"ACT OR IN 12 YEARS, WHICHEVER IS EARLIERj SUBJECT TO THE SAME" LIMITATIONS STATED ABOVE THE ADMINISTRATION- STROKOLY7:: OPPOSES THESE LONG- TERm FPG. PRONIMT11OWAUTHOW ris FEAALREADY HAS-SIMILAR*AUTHORITIES UNDERTHt 'Emmy S AND ENVIRONMENTAL C60RDINATION ACT (ESECk.- -IT'SEEMS. INCONGRUOUS THAT FPC SMOULD-NOW BE G I VEN AUTMR ITY1 TO' PROHIBIT BOILER FUEL USE WIAEN FEA Ms'ALIREADYIEE W G4WN THAT AUTHORITY IN'OTHER LEGISLATtON1
ANOTHER PART OF I SECTION 27 WOULD Rf-QtjlRE-,tHg AmrN--:.
ISTRATOR OF FEAto ORO"IBIT RESlDf-NtIAL GAS vsAOE-,. WHICN: HE- 3 DETERMINES TO B + E SOLELY FOR OR(4AMENTAL-'OR DECORATNP-IfUOPOSESe WHILE TfitS TYPE OF CONSERVATION lACTIVrTY SHOULD BIE EMCOURAGtZo WE FEELIT IS'A MATTER'WHICH'SHOULD ONLY SE.,WWVAANDMRYi ,.
AT THE DISCRETION OF INDIVIDUAL STATES AND NoT nj3y:fEvEmxL.













FITABEEFI
S.,231--ADS T 28TO HE ATUAE THE BURDE OFIC



COMPANIEST~qRROVIDELOWER FUCD L AST EDNL OST
SMAL.,USRSOA RIORTY BSISIWHI REALIZE TATE AREIT THISINCEMETALPRICNG ROVSIOAP ERGY AOBNEVERON E IDENTIAL,,CONSUMERSUMIN I jITWLPACTHOEOWRDNER -F ...IGHR. OST FO GODSANDSERICE ONAR CONSUMERS T A

WHO DOUSE G~ WEMUS NERNIED THAT SUCHR


TO SNGLEOUT NE SCTOR G-CT UPN SNGEOINVERST



-MEN$AT-HISTIM~ AN-WOUDALO REOVEINCENTIVES FOR





70

FOR ALL FIELDS ON FEDERAL LANDS OTHER THAN NAVAL PETROLEOM RESERVES9 -SINCE'THIS PROVISION IS ALREAbY COVERED BY THE ENERGY POLICY AND CONSERVATION ACT, IT SEEMS UNNE MARY T6
INCLUDE IT IN THIS BILL AS WELLP
H.R. 11265, INTRODUCED BYREPRESENTATIVE KRUEGERo IS" SIMILAR TO S. 2310 IN THAT IT PROVIDES FOR IMMEDIATE:DEREGULATION OF ONSHORE GASo WITH OFFSkORE GAS TO BE DEREGULATED ON JANUARY li 1981. "NEW NATURAL GAS" IS ]DE-FINE'D IN THE BILL AS GAS FIRST DEDICATED TO INTERSTATE COMMERCE 6N OR AFTER JANUARY li 1975j PRODUCED FROM WELLS COMK"E'NCED AFTER THAT DATEj OR'CONTINUED IN INTERSTATE COMMERCE'"bPOgCONTRACT EXPIRATION. IN THAT REGARD, T KRUEGER BILL S INCLUSION OF GAS FROM EXPIRED CONTRACTS IN THE DEFINITION OF NEW GAS IS DIFFERENT FROM S. 23100
As IN S. 2310, THE KRUEGER BILL WOULD REQUI RE THE FPC, TO ESTABLISH A NATIONAL CEILING RATE FOR*NEW::OCS NATURALIAS THROUGH DECEMBER 311 1980. FROM ENACTMENT TO:THE ESTABLI S14MENT OF THAT CEILING PRICEj THE UNITED STATES GEOLOGICAL SURVEY CRUDE OIL EQUIVALENT VALUATION WOULD APPLYo AND ON JANUARY li 1981, THE CEILING WOULD BE LIFTED FOR ALL NEW OCS GASO





71

THE KRUEGER BILL IS ALSO SIMILAR TO S. 2310 REGARDING '..AGRICULTURAL PRIORITIES AND BOILER FUEL PROHIBITIONS WHICH .HAVE'ALREADY DISCUSSM I'BELIEVE THAT THE KRUEGER BILL W't'LL NOOOVt_ 'OUR NATURAL GAS SITUATION ANDi WITH THE EXCEPTION IOF THE BOMER FUECSECTIO'N, I URGE ITS ENACTMENT@ UNDERSIMD THAT'YOUR STAPP HAS CERTAIN TECHNICAL PROBLEMS WITH THE BILL AND MY'STAFF HAS MADE KNOWN ITS DESIRE TO-MEET WITH '4THEM TO DISCUSS THOSE PROBLEMS@
IN'REGARD To REPRESENTATIVE BROWN'S BILL, Us 11047 fwliltt WE BELIEVE'THE BILL WOULD BE AN IMPROVEMENT tOVER THE PRESENT'SITUATION,, THE ADMINISTRATION,, AND I BELIEVE:MRI BROWN WOULD AGREEo FEELS THAT H.R. 11265 IS THE MORE EFFECTIVE VEHICLE TO MEET THIS NATION S NATURAL GAS NEEDS# TH'E'BILL'WOULD REQUIRE THE FPC TO DESIGNATE DISTRESSED AND CURTAILED INTERSTATE PIPELINES. FROM ENACTMENT TH ROUGH 4.APRIL" 1% 1976, DISTRESSED PIPELINES WOULD BE EMPOWERED TO BUY NEW dkS'AT ONR REGULATE PRICES, FROM APRIL 16, 1976 TkOU64''APRIL 15, 107.# BOTH DISTRESSED AND CURTAILED PIPELI Nt WOULD BE ABLE TO PURCHASE UNREGULATED NEW NATURAL GAS; AND FRom APRIL 16.0 1977 THROUGH"THE END OF THE SUPPLY






















DEREGULAT! E U4GSPIE PEIN S R E TOUAL ITN NPE '1 .. IN'W TH E


CALL FO XTENSIQN.. F ,EGUATIO TO, TH, IT
I' 4i





NS T EA FIALL WIG THEEl WELLHEA P E OF NE BES DE REGULATED TH ES W LEA THEI CELL.Q R KNWRERNL ELIEVE THATTALE ANY SE PICELN j CAPWqp PRDERN T PRODUCT MOTION OVR THI P ART'
WOULD STYMIE ALLEXPORATION AND EELPENTE RS
SOPTE Y E CBE IN EXAISTING SUPPLIES. IN AD DEPENDOEN E N ON F REGOLUL INCREAE ITASTT A.EI1TO IMPORT OIL TO MAK UP FOR THE UNVALAL OF IMPORTED OI L TO REP LDCE NEURAL GAS IS Q








AND ANYCONSMER WIL BEIN WOSE POSITION WITH SO
CLED LOE A PIE HA HYWOULD BE UNDER DEREGULATION#

THEE AE MNY THE OBECTONALEPORTIONS OF THIS


PRODCTIO RQIENTS, MADTRY INTERPIPELINE CONNECTIONS DURNGEMEGECYPER!ODS, EP JRSDICTION OVER SNG, ADFPC
JURSDITIO OVR BILER FUEL CONVERSIONS. FEEL STRONGLY
THA TIS IL WOLDBESERIOUSLY COUNERPRODUTIVE TO
MEEIN TH NTIONS ENRY NEEDS ADWILL PROVIDE A MORE DETALEDANAYSI OF TS FFETS PONTHE REQUEST OF THE


LETME UMMRIZ TH ADINISTRATIONS POSITION ONTHE
PENINGLOG-TRMLEGISLATIO WICH I HAVE DISCUSSED. -THE
SENAE-PASEDBILL IS CERTAINLY A STEP IN THE RIGHT DIRECTION.


ITSENATMET. HE RUEERBILL IS SIMILAR TO THE SENATE




COUD RCOMEN TOTHEPRSIDENT. TH 7-YEAR BILL IS


INFEIORTO THE POSIBILITIES WE HAVE DISCUSSED























744



TEIA REPORT 76-1













Januay 22 197








FEDEAL EERGYADMIISTRTIO

OFIC OTE EPT ASITNTADIISRAO


















75.




ACNOLEGE M





Thi pae a-rpre ytefloin epei h Ofieo iladGs


AlBas























phis, cipotsow the prsuresn iq) s4m ofntrlga oue








A description of the sevra types of sales nt rgltdbythFera Power Comsinis asrvdd

















1.) Goss ithdawal 22,84,793 Ga withrw from oil and swells






-dt ip ic e lne'eorsl ietyt




) Ne ihrwl 24,269,0,3



prprte and1 resume lownotear



soldia fueleie o od ietl o


en-s utmr ypoues




Plust~
6.) Wihdrawls frm stoage 1700,56 Gaswithdawn fom strersrvi .

Plus










In 1974, 24.3 TCF of delivered for ed3ecnupin h eann 1pretwsub















ore wa eted as los an uncone o durn trnmison



Othe7 th. of i0 S as d e w









.01-ABL 223
authorities, stetlgintc


Figures 1 traces the flw of naturala from the sucsof supy toen-s deliveries.




are for terms of 15 to 20yas Tepie distribution of old itrtt otat






Prc2/C of Gas Prce____ f a

Over 31 5.3 17.0-91.

29.01-31 1.2 15.01-179.

27.01-29 4.7 13.01-15 4.7

25.01-27 10.0 11.01-13 2.7

23.01-25 3.7 9.01-11 .03

21.01-23 21.3 below9.0











Interstate ~ ~ ~ ~ ~ ~ ~ D ga3oue r lsiida l a rnw gae by the FPC for prdcrpierglto upss n17,teciigprices for

still on an area basis and ranged from li per Nef to 28e per Mef, the ceiling price for new gas sold for resale to interstate pipelines

wa 40 erMc ad average price for all gas4ucasdb interstate pe rom ic pro was 27 per Mcf. T avre ptice jo

intastte asnot subject to th P uisdiction is etmtdt.b



Mrkusto nd-ses are prsne inR Figure 2.






I I




!








4N 4





o~A







80





Overview U S. Natural Gas- System .1130


Sims lnje&_,


lionalFue
am Loafte 5,200

Total FM

Pipeline
Tranaleirs



Inlemlate wren
Pipeline$ Consumers 12.400

ults"la a of
4WA4"




ksoll
L Deliveries to
Consurmners Local
'111.100 tributon
11.400
ntarV 1.600
A 01;W
Supply
Ll
Pipeline


T! hoduettial
lknitrastat pipelines IL Produtere Direct Deliveries CORMHnOWS 61700 IL O"W


Local 1.300
Distributor I.'
coommmm
e- "MIeInAt ar C 00= Supply
Supply includes U.S. marketed production, withdrawals from storage,
and imports.

Gas for such purposes as lease and plant fuel, pipeline compressor
fuel, extraction loss, and transmission losses.

Source: Based primarily on data from "Natural Gas Production and Consumption: 1974" (Washington, DC: Bureau of Mines, Mineral Industry Surveys, 1975).

Note: Divisions between interstate and intrastate volumes are estimated.












4481

FIGM 1
194PIE F AUA A


TRANSPORTATION) AND DITIUINSSE











Wellhea&d
$.30(4O1



41k4 Average
Trnsorato


<4 Cost


4$.3
4 s(Estimated)



Natioal Aera Ciy at















*Noe. I 174 henaioalbase ceiling pice for naua .1 rglae




initil price, inclusive< of adjusmns, for ne intrastate contracts for the peid1-1-74 to 1--7 wa 92 erM







82


Description of MMes of Sales Not Regulated by FPC



There are several types of sales by producers where it is recognized that the Federal Power Commission has no jurisdiction. Such sales do not require FPC certification nor is the producer's price controlled, either directly or indirectly. These sales are:

1. Direct sales and delivery by a producer to an end-user or distributor for consumption within the state of origin.

2. Sales and delivery directly to an intrastate pipeline, i.e., a

pipeline which purchases and sells all of its gas within the state where the gas is produced.

3. Sales to a natural gas processing plant within the state of origin for redelivery to (1) or (2) above.

4. Sales to an interstate pipeline company but with delivery into

separate pipeline systems from which all gas is consumed within the state where the gas is produced i.e., an -intrastate system operated by an interstate pipeline.

In addition, there are sales by producers to interstate pipelines under certain conditions over which the Federal Power Commission has not in the past asserted jurisdiction, either directly or indirectly. The-Be sales are:

5. Sales to an interstate pipeline where the gas is delivered at a

point on a branch line within the state where the gas is produced and all of the gas downstream from the point of delivery is consumed w:Lthin the state.

6. Sales to an interstate pipeline where the interstate pipeline terminates in the state where the gas is produced and the gas picked up in the state Is consumed in the same state i.e., the pipeline downstream of the point where this gas is purchased does not cross the state line.














undr e vewbytheComisio i seerlndiidalpipeline cases. The

pipeline reelsc as udrthe trsof their FPC Tariffs, i~e., at full unrgulte prices paid hne 5 n 6 yeprhsssol e



purhaedga cot llwacefor raemkn upss ~. nremntal rates. pricesfosuhsl.





under~~o th olwn odtos throughan intestate ppeline



8. iret slesby rouces t en-usrsoutside of the state of origin.

Unerthsetrnsoratoncodiios the PC may consider the fi1e1d price



pubic nteestand wehra Certificate of Public Covnec and Necessity







9. Te sle s mde o a inersatepipeline and delivered into a



and oldoutsde.f the saeo rgn















as in 9aoe






Thauesvrigdge fcnrleetdbyte.Cuo rdcrgspie



is rughy r~leced n th sttisics ollcte by he PC.Pe Cmmisio does ntcletnrpbihdt etiigt h nrsaeslsb r



dues ht r cnidrdno-ursicina 1,2ad yp als ecptp,


limited ~ ~ ~ ~ ~ ~ A an nrqetcss ~. eot o nrsaecnrcsyitrtt












85- ~I


NAUA GA DEEULTO ANALS





FE 76-3







A NAY2,17








OFFICE~ ~ ~ ~ ~ OF POIYADAAYI FEDERAL ENRG ADIITRTO

















Defegnatinnaural gas ielat ion e coniac anhighrpie leiel foft hi.6 TC dutin turen leilaio than 18TF I t iar creuce to lesatae1 but iepnent maret ne-ntrags Wouti peroutionandsalestote ntersto aturlgswl biels adtheraoiated phreoucton bestne imf decfent outon affect peth oilaprtpstion o the unit oftat.aT extecn wui inae the iferente etweend dereglin and pecont il

Preultion coturl beas mroucts2iilonbarls dy Ifontua gaf weeltioegltoncnius tcrrn el rcs toal dometintura he shrtrndffctsion 1976d dinue hiro the 197 exle of es.6timtes thn1 Fb 1976. If regofathenPear cbed ta costoa $5 io t6eilion I, pouto ol j:FEA estima tes ta195pouin-ulriset 23TF oeat tonomi esidnti fuel slest h ntrtt arene svllegislative an eni s befre suonre i Figure 1. s Thes vaiu bland 985 assiatdntialcFuel eostimors il ofern ose to he cnnumesdetia ferot eina 195iales an thcPa aftthe ostcost t psino the Unte Stuts Tores the costent selctrasTo the xtethtenceatwe Iduatiaost ar coasined



tbro ahtotalotstbllons rsili. eote










Interstate adIntrastate Sales

The ariu egi ltie otion provide for makedl different long-ruwn
impctson he ntestae mrke. Te7,urrnt relations have contriute toa rdcion of interstate sales from ovor 13 TCF to 11.6 TGF in1974. Tis redue supply hs caused an increase in the estimates of gas curtailments and the extension of supply interruptions to highe priority >users. Continuation of current regulations would
reueintestate sles toless than 7 TCF in 1985 while increasing
intrastate sales fro 7.2 TGF to 9.3 TCF. The alternative deregulation propsas will mintain or increase sales to the interstate market
withut eduin th~e levels in intrastate sales.













4D


FIGUR I4A~f~4~A

















15 1.
13.

Interstate 1.
Sales


*.9.1




5









Pearson-Blents en Krueger
-Present Reogulation ..... $ National Ceiling

*Intrastate salcs are the difference between total
net. marketed production~and interstate sales.










NOW.o














C) IPI 41







i 4 14 rGo m'









Ln













ltd



z0











0 C) ) CD C) C) C) C 0)4)










m C~ 4 N 044

























2. Nangtua Gatsfa Supply ~





3. t~stimatetlCs o t ofeui o it aS 31 ie n 19at



4.3 Inter/Irntra. St e Supply Distribution













This per ws prepared with contributions from William ogn
Hillar Hutington, David Knipp, John Kraft, John Neri, David Nissen,
MarkRodkoh, ad JmesSweeney.




























a~a >F.1









MURA & ATIO ANAL5

1. Introduce io .l

This technical paper rsnts a quantitativeaalyis f issues
associated with natural gas deregulation. The major analytical topics addressed are the impact of prices on natural gas supply, estimates of the ipac of current proposed natural gas deregulation on the total residential fuel bill and the residential natural gas fuel bill, and estimates of the total cost of deregjulatip' n to the consumer in 1976. The impact estimates include only gas consumption from domestic sources, excluding liquified natural gas, synthetic fuels and imported natural gas. Thus, total gas consumption froalall sources will be above that reported in this paper.

This paper is the latest in a series of preliminary documents addressing this subject. The series of revisions have evolved with the improvements in the underlying data base and methodology. This is the first revision to fully incorporate the estimates developed in conjunction with the revision of the Project Independence studies.


2. Impact of prices on natural Gas Supply

Prior to the preparation of the first Project Independence s tudies, the major sources of information regarding the potential supply of naturi gas were found in the -orecasts of the Federal Power Commission, the estimates of the Natural Gas Potential Supply Committee, the TERA Modeling System of the Aerican Gas Association, the MacAvoy-Pindyck M.odel developed by researchers at MIT, and the oil and gas model of the National Petroleum Council. The Federal Power Comission forecasts and those of the Natural Gas Supply Co wnittco did not derive from formal models and the TERA and MacAvoyPindyck system did riot contain the necessary regional detail available in the National Petroleum Council Model. Therefore, the Federal Energy Administration began an effort to modify the Nati onal Petroleum Council model to permit integration into the overall Project Independence studies.

The revised supply model produces estimates of natural -gas production which recognize the difference in costs and, therefore, prices of producing from reserves of different size and quality. This price sensitivity is essential in evaluating the impacts of fuel competition or in assessing the potential supply results from gas price deregulation.

The revision of estimates for Project Independence is completed within FEA. This section presents estil sites of t1hse revised gas Supply figures, explains the rethodolgy of develop.ient, and c pares the FEA forecasts to other estimates ithat are available. These figures indica the importance of prices in deur:rninq potential gas supply and indicate the impacts of continu,7 ion of price regulatio- below market clearing Ievels. le effects of alternative regulatory structures are discus d in more detail in section 1.









Thepries iscssd i ths sct~n-efe tone gas,,rice at the
Irineff the costs






If ewatral gspices are deeuaed and realucotolei

t tionv will be 22.3 TCF in 1985 at a welhead price of
$3 ffl dere lation does not occur and new natural gas prices
a$1.OO/MCF at the wellhead, this supply e dop
to 15.8 F. The sensitivity of these aggregate e dipae bysprtigtedscsinitotecnriuino









The__a h a pd assci al

1966 4.6 12.9



1984.8 147

19704.2 17.1




1v7 3iyas of e74. VO
197 49.5 17.1LsAso:ato




iA
*Pe m nge pouto











reserves to proved reservesarreotdadpeninTbe2 Ths









1974p fas 170T, adtostoh ere s haebeFdciigsic 97 atn l pro d cto possiirites as a frtsult ofth P price artoswhc hl


innTablec3atNon-Asitdpouto ttelws rc





Te Amoe andi ssumpion poueetmtso aua a rdc
tin o 2 i tn gaa pou i rgons. Thiculpodcinfo
theetegion de tailupn nuect fcos incldn diad