Natural Gas Price Regulation - Its Problems and Prospects

Abstract

The Natural Gas Policy Act of 1978 (NGPA), is frequently accorded the dubious distinction of being the most complex, ambiguous, and internally inconsistent piece of legislation ever passed by Congress. This paper will take a brief look at the history of natural gas pricing policy, analyze the ways in which the NGPA fits into this historical perspective, discuss the achievements and shortcomings of that statute and speculate about the future of natural gas regulation. Few would disagree that from a standpoint of economic efficiency and public policy decontrol of at least new natural gas is warranted. The simple fact is that if the price level for natural gas is kept artificially low, there will be less natural gas produced than the demand for it. Despite what is coming to be an increasing perception that deregulation would be generally beneficial, the NGPA fell far short of the ultimate goal of deregulation. In order to understand why political reality has not kept pace with economic reality it would be helpful to briefly consider the history of natural gas regulation. In 1954 the Supreme Court extended FPC regulation to the wellhead price of natural gas sold for resale in interstate commerce.1/ During the seven years following the Phillips decision there was little indication of a disequilibrium in the supply and demand of natural gas. Indeed, during the 1950's the supply of natural gas continued to increase as it had since World War II and increase dramatically. During this period, natural gas was still largely a by-product of the exploration for and production of oil, so that the relative availability of gas was not dramatically affected by federal price controls. Although economists and the gas industry at times raised dire forewarnings of the longterm adverse effects of price control, the immediate, practical effect did not appear particularly severe.