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Administration Bill Wouldn’t Affect Existing Supply Contracts

April 1, 1986

WASHINGTON (AP) _ The Reagan administration’s long-awaited natural gas decontrol bill will not affect existing supply contracts, an Energy Department official said Tuesday.

The bill also will require interstate pipelines to transport gas for all shippers in certain circumstances.

″The general rule is, contracts continue in place,″ Ted Garrish, the department’s legislative liaison, told reporters after a speech by Secretary John S. Herrington.

Herrington outlined provisions of the bill to a luncheon forum organized by the American Gas Association, a trade group of local distribution companies and pipelines. Garrish said the bill would be introduced April 8, 9 or 10.

About 40 percent of the nation’s natural gas - gas discovered before 1978 - is still under price controls. Controls on the rest were removed on Jan. 1, 1985.

″The bill will suggest to decontrol upon enactment all gas subject to new and renegotiated contracts, and decontrol all gas by April 1, 1987,″ Herrington said.

Garrish said that under the 1987 decontrol deadline in the bill, the Federal Energy Regulatory Commission ″no longer sets maximum allowable prices.″

Reminded that many contracts between well owners and pipelines do not even contain a price figure, but simply refer to the federally permitted maximum for that field, Garrish said, ″I have heard every possible answer to that problem. I think a lot of those are going to be renegotiated.″

The industry grew up with interstate pipelines buying gas at one end of the line and selling it at the other to large industrial users and local distribution companies.

But falling prices in recent years led large customers to shop for cheap gas on the spot market. The regulatory commission, under court pressure, has ruled that pipelines must offer to carry customer-owned gas for all if they carry it for any. However, few pipelines have signed up for ″open access″ transportation, which has limited the benefits of spot-market gas.

Herrington said the Energy Department estimated that the bill could bring to market each year as much as an extra 3 trillion cubic feet of gas that would have stayed in the ground because of low prices. That is equal to about two months of current production.

Transportation provisions of the bill contain ″both a voluntary and a mandatory part,″ Garrish said. Pipelines may be able to refuse an initial request to transport someone else’s gas, but FERC would have power to order that gas transported in certain circumstances, he said.

The administration offered legislation to decontrol pre-1978 gas in 1982, but that measure did not go anywhere under fears of a drastic price boost. The fall in prices following the 1985 decontrol of ″new″ gas has encouraged some department officials to conclude that this time they have a chance, and backers of controls have been notably silent as the administration has advertised its intentions.

Herrington said Rep. John Dingell, D-Mich., chairman of the House Energy and Commerce Committee and a vigorous opponent of decontrol in the past, has assured him he would approach any bill ″with an open mind.″

Spot-market prices for gas on the Gulf Coast recently have been reported as low as $1.60 per thousand cubic feet. The most recent available overall average price from all wells in the country, reported by the Energy Department for December, was $2.34, and the average residential price was $5.72.

Pre-1978 gas comes in several price categories, depending on when it started to flow, and some is still moving under long-term contracts at a wellhead price of 50 cents.

The Energy Department has asked FERC to reclassify all ″old″ gas as eligible for the maximum controlled price, $2.54 per thousand cubic feet. About one-third of pre-1978 gas already sells for this price.

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