Incredible Gas Rate Ripoff
It was a routine, uneventful Senate Commerce Committee hearing last year on the successful confirmation of Richard L. Dunham (a Ford appointee and former associate of Nelson Rockefeller) as chairman of then Federal Power Commission.
But there was nothing routine or uneventful about what Dunham and two of his fellow FPC commissioners did in late July to the wellhead price of natural gas that heats 34 million homes. Their pricing decision, if not overturned by the courts, will cost consumers tens of billions of dollars in the next decade. It will spur more inflation, hike food and rent prices, and contribute to more unemployment just as the oil price rise has done in the past three years.
What the commission pulled off was a “domestic OPEC” price push for its friendly oil and gas moguls. “New gas,” defined as all gas newly discovered or newly sold in the interstate market after Dec. 31, 1974, is permitted to nearly triple — going from 52 cents per thousand cubic feet to a staggering $1.42 per thousand cubic feet. In addition, a one-cent increase is permitted every three months, unrelated to any inflation index.
For gas discovered or committed to the interstate market after Dec. 31, 1972, but before Jan. 1, 1975, the top price will be $1.01 per thousand cubic feet — a mere doubling of the price
The magnitude of this increase is more clearly recognized against a top FPC price of 18 cents per thousand cubic feet in 1970, 42 cents in 1974, and 52 cents in 1975. Under these old prices, the natural gas industry was making at least a return of 15 percent to 18 percent on equity after taxes. This rate of return is higher than most U.S industry’s return.
How could the commission justify a price increase that is so far greater than any cost increases in producing the gas? It couldn’t. So it resorted to a pricing formula that took into account vague “non-cost factors” and relied on the natural gas industry’s data, not own, concerning reserves.
Incredibly enough, Dunham and associates declared that their new price wasn’t too high because the cartel price of oil was even higher. They added that since Congress took away the oil and gas depletion allowance, the FPC had to make it up to the industry by charging the consumer arbitrarily at the equivalent top corporate tax rate of 48 percent, a -rate few if any gas producers pay.
The big oil companies, who control most of the domestic gas, paid a 1975 federal income tax of only 9.7 percent.
FPC Commissioner Don S. Smith, in his minority dissent, pointed out some of the weaknesses in the majority’s decision. Last year, moreover, the economists at the FPC were saying that a top price of around 65 cents would be sufficient to provide the 15 percent to 18 percent return on equity for new gas.
The commission majority admitted that they could not say that these higher prices would stimulate new production of gas over peak years, but they hoped their action would reduce the rate of decline in production.
Since congressional investigators and the Federal Trade Commission have shown how the oil companies have 1. underrepresented the amount of their gas reserves, 2. withheld gas contracted for by the pipelines, 3. failed to initiate drilling in high producing gas fields, and 4. sat on producible shut-in wells situated on many offshore leases (based on an FTC report), it is likely that more gas will flow. For the oil companies have been withholding production and sales because they were waiting for the very price increases that their friendly FPC has just announced. Why sell at a price that is about to be tripled?
Meanwhile, the widely acknowledged industrial, commercial and residential waste of natural gas continues. A glut of natural gas in such places as the northwest is reported by the Wall Street Journal. The lack of federal price regulation of intrastate gas sales has contributed to even more waste, such as using gas for boiler fuel or for decorative purposes. Yet the multinational oil industry’s strategy to push the price of natural gas to the equivalent price of OPEC oil is succeeding.
A coalition of consumer, labor and city groups filed suit in Washington right after the FPC announced its decision. They obtained a temporary delay of the rate increase pending the court’s further deliberation.
Consumers interested in keeping their natural gas bill from zooming sky high in the next few years may wish to write to the Energy Action Committee, 1523 L St. N.W., Washington, DC 20005, to obtain information on what they can do.