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Description
The Natural Gas Wellhead Decontrol Act of 1989 (NGWDA) required the removal of all price ceilings dictated by the Natural Gas Policy Act of 1978 (NGPA) by January 1, 1993, rather than by the end of the century as called for in the NGPA. One of the immediate objectives of the NGWDA was to help mitigate the gas market imbalances that had developed during the 1980s as the pricing provisions of the NGPA brought about an increase in gas production while allowing only a slow (monthly) incremental price increase for many categories (vintages) of old gas. But the immediate impact of the legislation was expected to be minimal, as gas wellhead market prices at the time generally were below most remaining price ceilings. Under the influence of the NGWDA, however, it was expected that wellhead prices would better reflect market conditions.1 New and renegotiated contracts would eliminate restrictive pricing as well as take-or-pay clauses that became even more prevalent after passage of the NGPA and hampered industry adjustments to changing market conditions.
Impact
At the time the NGWDA of 1989 was enacted, more than 60 percent of the domestically produced gas was already price decontrolled, and another 33 percent had never been subject to NGPA price controls. Although the NGWDA's impact was limited mainly to shortening the period for removal of all remaining gas price controls, it did help eliminate lingering pricing distortions stemming from the NGPA. It also made possible the increased marketing of certain gas reserves, such as tight-sands gas, where contract prices tied to regulatory ceilings had once kept its price above market clearing levels. Under NGWDA decontrol (and subsequent FERC policy changes such as Order 490, which provided a mechanism allowing some gas supplies to be released from producer/pipeline contracts and sold at market prices), the natural gas spot market and transportation services market expanded, while the merchant role of natural gas pipeline companies steadily declined.
1 Between 1979 and 2000, the average annual wellhead price initially rose (reaching a high of $3.97 per thousand cubic feet (Mcf) in 1983-- in constant 2000 dollars) but fell to a low of $1.68 per Mcf in 1994. Thereafter, most wellhead prices were governed by spot market trading or contracts between buyers/sellers (no longer by pipeline merchants) indexed on spot market price fluctuations, with average prices rising and falling as gas market conditions varied through 2000. See Table 6.7 at http://www.eia.doe.gov/emeu/aer/pdf/pages/sec6.pdf for changes in average annual wellhead price levels between 1949 and 2003.
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