The Case Against Federal Controls

NATURAL GAS PRICES

AS a fuel, natural gas heats 14 million U.S. homes and fires the stoves in 21 million kitchens. In politics, the booming young natural-gas industry, now seventh biggest in the U.S., sets fires from coast to coast, and especially in Washington. This week angry gasmen are fighting no less than seven bitter court battles against the U.S. Government; in Congress three separate bills have been introduced by Southern Democrats to remove federal price controls from gas at the wellhead. This issue--whether or not gas prices should be controlled in the field--has been burning hot ever since 1950, when the famed Kerr bill, which exempted gas producers from controls, was vetoed by President Truman.

The gasmen, who are against control, got some potent help last week from a special commission appointed by President Eisenhower to study U.S. resources and power policy. Said the commission: "We believe the Federal Government should not control the production, gathering, processing or sale of natural gas prior to its entry (into an interstate transmission line." The U.S. Supreme Court, on the other hand, ruled in favor of federal control the Phillips Petroleum case last June (TIME, June 21). The court's argument was that controls in the field reduce prices to consumers. Though the producers may operate only within state limits and own no interstate pipelines, the prices they charge affect the ultimate cost to consumers thousands of miles away. Thus, while the 1938 Natural Gas Act specifically stated that its restrictions "shall not apply . . . to the production and gathering of gas," the Supreme Court held that producers come within the spirit if not the letter of interstate commerce.

The Federal Power Commission itself has never interpreted the Gas Act to include producers; in fact, it has argued against it. But it was quick to obey the court. It froze gas rates at the wellhead as of June 1954, regardless of the provisions already written into existing long-term contracts with the pipelines. The overall effect has been to invalidate virtually every contract throughout the industry--long-term contracts (20 years or more) between producers and pipelines written at the behest of the FPC to bring about stability. To protect themselves against increased costs, producers wrote in "escalator" clauses permitting gas price increases. Now all such adjustments are illegal.

Gasmen scoff at the court position that FPC control will mean saving to consumers. They point out that more than 90% of the costs occur after the gas leaves the field. Phillips Petroleum Co., for example, now sells gas from the Texas Panhandle for 9.5-c- per 1,000 cu. ft. to Michigan-Wisconsin Pipe Line Co. which delivers it to Milwaukee for 35-c-. The Milwaukee Gas Light Co. then charges the housewife a whopping $2.13 the first 1,000 cu. ft.

Gasmen insist that FPC is simply not equipped to control gas production. Since June some 7,000 applications for rate increases have been filed, and FPC has not yet acted on most of them. The problem is not simply one of setting a gas rate for 5,000 producers. Each gas field is a distinct operation with separate problems; rates must be set for thousands of different wells. The industry is so closely bound up with oil that gas exploration, drilling, and production costs are inextricably mixed together. To regulate gas, FPC would also, indirectly, partially control oil prices. Moreover, costs of drilling wells are climbing so fast that even the current contracts lag behind the true expense of production.

Perhaps the strongest argument of all against FPC controls is that producers do not have a protected monopoly, like most public utilities, but are highly competitive. They compete not only among themselves but also with sellers of coal, electricity and oil. Said Magnolia Lawyer Ross Madole:

"If the FPC has to control gas production prices in order to control the price of gas as delivered to the customer, then why doesn't it control the price of coal in steam-generating electric plants and the price of copper in telephone wires?"

Some companies have threatened to shut down interstate gas operations rather than go under FPC control. American-Louisiana Pipe Line Co., Tennessee Gas Transmission Co. and Texas-Illinois Gas Co. have either slowed down their expansion or postponed plans for new pipelines since many of the big producers refuse to sign long-term contracts. In Texas, more and more producers are talking of selling to local markets exclusively to dodge federal controls, use their gas in Texas towns and the state's burgeoning petrochemical industry.

If Congress does not pass new legislation exempting producers from FPC regulation, the gasmen see no end to the troubles. But if Congress recognizes gas as a competitive commodity, gasmen think the laws of supply and demand will peg prices at a fair and competitive level.

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