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Page xix: The seventh sentence in the second full paragraph should read: "Gas imports would decline by 0.6 trillion cubic feet in 1990 in response to higher domestic gas supplies." No exportable surplus would occur.

Page xx; In the last sentence of the last paragraph, cumulative reserve additions under the Gephardt bill would be 10.4 trillion cubic feet lower than under the NGPA.  
 

The Congress is once again considering natural gas wellhead pricing policy. In previous considerations of this issue, the debate has centered on the issue of redistributing income from consumers to gas producers through decontrol. But since the passage of the Natural Gas Policy Act of 1978, the average price of gas appears to have risen to levels that it would reach in a competitive market. Thus, the issue inherent in the gas decontrol debate may now be how to restore competition to the gas market. At the request of the Fossil Fuels Subcommittee of the House Energy and Commerce Committee, this report examines the effects of two approaches to natural gas pricing policy on the natural gas market and the economy. In keeping with CBO's mandate to provide objective analysis, the report makes no recommendations.

This report was prepared within CBO's Natural Resources and Commerce Division, under the direction of David L. Bodde and Everett M. Ehrlich, the report's author. The estimates found in this report are based on an econometric model of the gas market and the economy developed by Timothy J. Considine, who, together with Mollie V. Quasebarth, prepared the computer simulations. Mark Prell developed the submodel estimating gas exploration and production, and Paul McCarthy provided research assistance. The author wishes to thank several reviewers for valuable comments, including Dr. Harry G. Broadman of Resources for the Future, various members of the Department of Energy's Office of Economic Analysis, Dr. Raymond Scheppach of the National Governors Association, Peter M. Taylor of CBO's Fiscal Analysis Division, and Kathleen Gramp of CBO's Budget Analysis Division. Responsibility for errors, however, remains with the author. Patricia H. Johnston edited the manuscript, which was typed and prepared for publication by Philip F. Willis.
 

Rudolph G. Penner
Director
November 1983
 
 

SUMMARY

CHAPTER I. INTRODUCTION AND BACKGROUND

• Recent Developments in the Natural Gas Markets
• Plan of the Paper

CHAPTER II. EFFECTS OF THE SENATE AND GEPHARDT BILLS

• Assumptions and Methodology
• Analysis of Wellhead Pricing Provisions
• Other Provisions

CHAPTER III. SENSITIVITY OF RESULTS TO OIL PRICE ASSUMPTIONS

• Oil Price Assumptions
• Simulation Results Under the High Oil Price Case
• Simulation Results Under the Low Oil Price Case

APPENDIX. NATURAL GAS REGULATORY HISTORY AND CONTRACT PROVISIONS
 

TABLES
1.	AVERAGE WELLHEAD AND CITY-GATE PRICES OF NATURAL GAS UNDER THE NATURAL GAS POLICY ACT AND BASE OIL PRICE ASSUMPTIONS, CALENDAR YEARS 1983-1990
2.	U.S. NATURAL GAS CONSUMPTION, BY SECTOR, UNDER THE NATURAL GAS POLICY ACT AND BASE OIL PRICE ASSUMPTIONS, CALENDAR YEARS 1983-1990
3.	NATURAL GAS RESERVE AND PRODUCTION PROJECTIONS UNDER THE NATURAL GAS POLICY ACT AND BASE OIL PRICE ASSUMPTIONS, CALENDAR YEARS 1983-1990
4.	AVERAGE WELLHEAD AND CITY-GATE PRICES OF NATURAL GAS UNDER THE SENATE ENERGY COMMITTEE PROPOSAL AND BASE OIL PRICE ASSUMPTIONS, CALENDAR YEARS 1983-1990
5.	EFFECTS OF THE SENATE ENERGY COMMITTEE PROPOSAL ON THE NATURAL CASE MARKET AND THE ECONOMY, ASSUMING BASE OIL ASSUMPTIONS, CALENDAR YEARS 1983-1990
6.	AVERAGE WELLHEAD AND CITY-GATE PRICES OF NATURAL GAS UNDER THE GEPHARDT PROPOSAL AND BASE OIL PRICE ASSUMPTIONS, CALENDAR YEARS 1983-1990
7.	EFFECTS OF THE GEPHARDT PROPOSAL ON THE NATURAL GAS MARKET AND THE ECONOMY, ASSUMING BASE OIL PRICE ASSUMPTIONS, CALENDAR YEARS 1983-1990
8.	ALTERNATIVE OIL PRICE ASSUMPTIONS, BASED ON REFINER'S ACQUISITION COST OF CRUDE OIL
9.	AVERAGE WELLHEAD AND CITY-GATE NATURAL GAS PRICES UNDER THE NGPA, THE SENATE BILL, AND THE GEPHARDT BILL, USING HIGH OIL PRICE ASSUMPTIONS
10.	NATURAL GAS MARKET FACTORS UNDER THE NGPA, THE SENATE BILL, AND THE GEPHARDT BILL, USING HIGH OIL PRICE ASSUMPTIONS
11.	MACROECONOMIC EFFECTS OF THE NGPA, THE SENATE BILL, AND THE GEPHARDT BILL, USING HIGH OIL PRICE ASSUMPTIONS
12.	AVERAGE WELLHEAD AND CITY-GATE NATURAL GAS PRICES UNDER THE NGPA, THE SENATE BILL, AND THE GEPHARDT BILL, USING LOW OIL PRICE ASSUMPTIONS
13.	NATURAL GAS MARKET FACTORS UNDER THE NGPA, THE SENATE BILL, AND THE GEPHARDT BILL, USING LOW OIL PRICE ASSUMPTIONS
14.	MACROECONOMIC EFFECTS OF THE NGPA, THE SENATE BILL, AND THE GEPHARDT BILL, USING LOW OIL PRICE ASSUMPTIONS
A-1.	OVERVIEW OF THE NATURAL GAS POLICY ACT OF 1978

 

As the Natural Gas Policy Act of 1978 approaches its 1985 partial deregulation date, the Congress is once again considering natural gas pricing policy. In the past, the debate over gas pricing has focused on the question of whether consumers should bear the burden associated with a rise in gas prices to the "free-market" level. But today, substantial evidence exists that the average price of gas has already risen to the level it would reach if gas competed freely with oil. Thus, the major issue in gas pricing policy today may be how to improve the efficiency and competitiveness of the gas market, rather than the redistribution of income from consumers to gas producers.

This report examines two approaches to gas pricing policy, the decontrol provisions found in S. 1715, as reported by the Senate Energy and Natural Resources Committee, and the extended controls found in legislation proposed by Congressman Gephardt (H.R. 2154). These bills are compared to the existing provisions of the Natural Gas Policy Act of 1978 (NGPA), which serves as the base case. The NGPA allows much of the nation's gas to reach a competitive price in 1985, but preserves controls on some gas, notably low-cost gas from older fields sold in interstate markets.

The results of this analysis indicate that, by 1990, the gas price differences resulting from these three measures are slight, and that the effects of the two new proposals on the natural gas market and on the economy, are often negligible when compared to the NGPA. Using the base oil assumptions found in this report, the average current dollar price of gas delivered to local distribution companies (the "city-gate" price) in 1990 would rise to $6.00 per thousand cubic feet under the NGPA, $6.01 under the Senate bill, and $5.98 under the Gephardt proposal. Both the Senate and Gephardt proposals would result in slightly higher economic output (as measured by the Gross Domestic Product) in the mid-1980s when compared to the NGPA, but by 1990, these differences would be negligible.¹

The differences between the two proposals are somewhat more pronounced with regard to gas markets. By encouraging domestic production--and particularly by promoting the extended development of older, larger gas fields--the Senate bill would result in higher levels of domestic gas reserves and lower gas imports. The effects of the Gephardt proposal would be the reverse--production and reserves would drop while imports would rise. Since gas imports are assumed to remain more expensive than domestic supplies in this analysis, the rise in imports under price controls and their fall under decontrol contribute to the converging trend in average prices under these two approaches. An overview of the results of this paper is present in Summary Table 1.

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1. Gross Domestic Product (GDP) is a national income concept based on production within the geographic borders of a country. Gross National Product (GNP) covers production by and incomes to citizens of a country no matter where they live. GDP is used in this report because changes in gas prices would not appreciably affect income earned from foreign sources.