Gasflation

A cold, costly winter ahead

For many years Americans who heat their homes with natural gas have been a privileged class. While families who use fuel oil have cursed OPEC and watched helplessly as their heating costs reached crushing levels. Government price controls have kept gas bills comparatively modest. Last winter, heating with gas was about 50% cheaper than burning oil. The gap between the two fuels has been so great that since 1980 more than a million households have switched their money-munching oil boilers or furnaces to gas, a process that costs anywhere from several hundred dollars to a few thousand.

But now the energy price outlook is changing rapidly and dramatically. While oil costs are expected to be relatively stable this winter, the U.S. Department of Energy forecasts that gas prices will rise an average of 20% across the U.S. In some areas, gas-price hikes may run as high as 40%. Mary Kurt, a home economics teacher in Toledo, is paying $77 a month for gas. That is 38% more than she was charged a year ago, even though she has stuffed the nooks and crannies of her home with insulation. Says she: "I can't think of much more to do except shut down the furnace."

What infuriates gas customers is that the price increases seem unjustified and arbitrary. The hikes come at a time when gas supplies are plentiful and demand from industrial users has been reduced sharply by the recession. According to the most basic principles found in any economics textbook, gas prices should be going down, not up.

In the real world, however, gas costs are determined not by market forces but by abstruse and sometimes counterproductive Government regulations and by complex contracts between gas producers and the pipeline companies that supply the gas to local utilities. The origins of the current price explosion go back to the cold winter of 1976-77, when gas shortages forced many schools and factories to shut down temporarily. After that disaster, Congress decided to spur new production by passing the Natural Gas Policy Act of 1978, which called for the gradual phaseout, through 1984, of price controls on gas produced from new wells. The law set guidelines on how much the cost of gas could go up each year. Pipeline companies, eager to ensure future gas supplies, signed numerous long-term contracts with producers, in which it was often agreed that prices would rise. Now, even though gas is abundant, the pipelines are locked into those contracts.

To make matters worse, the regulations that have evolved from the Natural Gas Policy Act have discouraged producers from holding down their costs. The rules identify some 28 categories of gas, as well as price ceilings that vary widely. In general, the newer a gas well is and the deeper it is, the more money a producer can charge. Naturally, producers have an incentive to drill new and expensive deep wells rather than sell cheaper gas from existing fields.

The system has become so complicated that no one can be certain what would happen if controls were lifted immediately instead of being phased out. The Reagan Administration supports quick decontrol, but has not pressed the issue because of strong opposition in Congress and criticism from consumer-protection groups. The Washington-based Consumer Energy Council of America contends that faster decontrol would add $400 a year to the average gas bill. But Charles M. Butler III, the Reagan-appointed chairman of the Federal Energy Regulatory Commission, argues that if controls were removed and pipelines were allowed to renegotiate their long-term contracts, gas prices might actually fall. He reasons that only the laws of supply and demand, rather than the laws of Congress, can bring about the most rational gas prices.

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