|
Description
From 1938 to 1978, the Federal government regulated only the interstate natural gas market. The Natural Gas Policy Act of 1978 (NGPA) granted the Federal Energy Regulatory Commission (FERC) authority over intrastate as well as interstate natural gas production. The NGPA established price ceilings for wellhead first sales of gas that vary with the applicable gas category and gradually increase over time. Second, it established a three-stage elimination of price ceilings for certain categories: the price ceilings for certain "old" intrastate gas were eliminated in 1979, for certain "old" interstate gas and "new" gas in 1985, and for certain other "new" gas in 1987.
Title I of the NGPA set a complex system of wellhead price ceilings by category. The maximum price that producers could receive was based on the date a well was started, the depth of the well, its proximity to other wells, whether the gas was committed to the interstate market on or before November 8, 1978, the date the well began production, and the geology and geography of the deposit from which the gas was produced. The maximum prices were determined by initial ceiling values plus monthly inflation and escalation factors. Natural gas prices for production from old wells were set at a lower initial ceiling value plus an inflation adjustment factor tied to the GNP deflator. New natural gas, produced from new wells, was to receive a higher initial ceiling value adjusted for inflation, plus an escalator that was intended to move the price toward the market clearing level. Title I also provided a schedule for price decontrol of most categories of natural gas.
Title II provided a set of rules for allocating the costs of certain high-cost gas to industrial customers served by interstate pipeline companies. Title III provided authority in times of gas supply emergency to allocate gas to high priority users. Under Title IV similar high priority users (agricultural and industrial feedstock users) had limits put on curtailments of sales to their sectors. FERC, as the successor to the Federal Power Commission (FPC), was granted jurisdictional authority over virtually all natural gas production, both interstate and intrastate, by Title V.
Section 311 of the NGPA allows an interstate pipeline company to sell or transport gas on behalf of any intrastate pipeline or local distribution company without prior FERC approval. Transportation under Section 311 is subject to certain conditions, such as rates not being allowed to exceed a just and reasonable level. Additionally, an intrastate pipeline company may transport gas for an interstate pipeline company or any local distribution company served by an interstate pipeline without prior approval by FERC. The associated rates may not exceed a fair and equitable rate. FERC has exempted the construction of facilities used solely for Section 311 transportation from certificate requirements.
Impact
The NGPA was a significant shift from the previous system of bifurcated markets, in which natural gas was produced and sold in upstream markets (i.e., those close to the producing field) under markedly different regulations. Gas produced for interstate commerce was subject to price ceilings that arguably were becoming an increasingly strong constraint that prevented market clearing. Although intrastate markets that were without price ceilings experienced higher prices, their supplies appeared secure.
Contract prices for all categories of natural gas increased in the initial years after passage of the NGPA. However, as natural gas demand and petroleum prices declined, contract prices reversed this trend and generally were in decline by 1982. A key date in the NGPA was January 1, 1985, when price ceilings on most new gas were removed. At that point, the ongoing abundant supplies of natural gas resulted in a continuation of the downward price trend.
One critical issue resulting from the NGPA was the emergence of a substantial take-or-pay problem. Contracts of this era typically were multiple year contracts that included take-or-pay clauses, under which pipeline companies (or other purchasers) were obligated to pay for contract volumes, whether they took the gas or not. The take-or-pay percentages in contracts dating from the years prior to the NGPA exceeded 80 percent on average. Many contracts at the time of passage of the NGPA and for some years later also included price provisions that tied transaction prices to the maximum allowable rates, which did not necessarily reflect the prevailing market conditions. The increasing ceiling prices for new gas resulted in correspondingly higher prices actually paid for natural gas. As prices under such contracts rose, eventually they reached levels that made the gas unmarketable. This situation worsened through much of the 1980s until actions by FERC and various court decisions provided relief.
|
| |
|