Not for the first time, America's biggest natural gas problem is in Washington, D.C.
For a change, we're not talking about Congress here; we're talking about the nutty tendency to regulate after the fact a tendency that threatens to create a problem once again for the more useful kind of natural gas.We're now in the third act of this long-running follies. First, we were treated, for a generation, to the sight of congressmen boasting of how their "compassionate" regulations were holding down the price of natural gas.
Second, these same legislative geniuses expressed outright amazement, mixed with sinister suspicion, when it became so uneconomical to produce the fuel that a shortage developed.
Third, now that deregulation has encouraged a surplus of natural gas, wacky regulators have stepped in to make it difficult, if not impossible, for the market to adjust. The inevitable outcome, if the latest outbreak of Washington-style "good intentions" is not checked, will ultimately be higher prices and renewed energy shortages.
The irony is that we're now swimming in the stuff; the country has a whopping 3 trillion cubic feet of surplus producing capacity. What the industry refers to as "the Gas Bubble" developed in the early 1980s after the discovery, under the stimulus of price deregulation, of massive reserves of natural gas.
The availability of this new gas occurred simultaneously with a plunge in demand caused by competition from falling oil prices, the impact of a recession, and higher (rather than lower) gas prices for consumers because of costly long-term purchase contracts signed by pipelines during the earlier sellers' market.
That's where the problem begins. Local gas utilities have been turning up their noses at the pipeline companies, not only failing to buy the gas the utilities had projected they would need but challenging the terms the pipelines had to accept to get the gas in the first place.
The pipeline companies thought they saw a way out when both the federal courts and the Federal Energy Regulatory Commission encouraged the pipelines to renegotiate their costly contracts with the gas producers, suggesting that all parties should share the costs of the renegotiation.
Acting on this suggestion, the first pipeline company to renegotiate its contracts was Columbia Gas System Inc., which paid producers $850 million to get a better deal that it had signed during the so-called energy crisis. Columbia says it was acting under assurances that it would be able to get back half this amount by temporarily increasing rates to utilities and other purchasers.
But then, says Columbia, the promise that all parties would share the costs evaporated. The FERC denied the company's request to pass on its renegotiation outlays over the next eight and a half years, arguing that regulators had already found Columbia's original high-cost contracts long after the fact to have been "imprudent" and "abusive."
Columbia claims that, as the first company to test the new policy, it is being singled out for unfair treatment. As John Daly, chairman of Columbia Gas Transmission, put it to me, "Our gas purchases on contracts that have been challenged closely resemble those signed by every other pipeline at the time. Our contracts just happened to be tested and judged first, before the industry-wide nature of the problem became evident."
The firm's position has considerable support from outside experts, who believe the regulators are frustrating their own announced policy and causing local gas distributors to sue every time the FERC tries to award any other pipeline the promised 50 percent of its contract reformation costs. Kidder Peabody analyst Ron Barone believes the decision could chill the efforts of other pipelines to renegotiate huge "take or pay" liabilities to producers.
What's more, the FERC's new notion of a price ceiling, or "cap," on the price that gas pipelines can charge local utilities runs directly counter to the dramatically successful Natural Gas Policy Act of 1978, which deregulated the price of newly discovered gas in order to encourage exploration by producers. Returning to price regulation now, even by the back door, shows how little our regulators have learned over the past decade. The next act eventual shortages and sustained higher prices is already in the pipeline.