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REPORTi THEUS.
General Accounting Office
N ‘turd Gas Price Increases:
A reliminary Analysis
Natural gas prices in many cities are expect- ed to increase substantially this winter.
This-preliminary analysis addresses
--how much prices have increased since 1 70 to residential, industrial, and other u ers nationwide and to residential users in s lected cities;
i
--w at factors have affected the prices paid by n tural gas pipelines, distributors, and end- uciers; and
--wihether^ there^ is a balance^ between^ natural
g $
s production and consumption.
llllllllIIIII 120093
GAOIRCED-83-
December 9,
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COSIGNERS OF REQUEST LETTER
FROM REPRESENTATIVE GEORGE MILLER
The Honorable Anthony Beilenson@- House of Representatives
The Honorable George E. Brown, Jr. House of Representatives
The Honorable Phillip Burton House of Representatives
The Honorable Ronald V. Dellums House of Representatives
The Honorable Mervyn Dymally House of Representatives
The Honorable Don Edwards House of Representatives
The Honorable Augustus Hawkins House of Representatives
The Honorable Edward J. Markey House of Representatives
The Honorable Matthew Martinez House of Representatives
The Honorable Robert T. Matsui House of Representatives
The Honorable Norman Mineta House of Representatives
The Honorable Toby Moffett House of Representatives
The Honorable John Seiberling House of Representatives
The Honorable Pete Stark House of Representative
REPORT OF THE GENERAL ACCOUNTING OFFICE
PRELIMINARY ANALYSIS OF NATURAL GAS PRICE INCREASES
------DIGEST
Reports that the price of natural gas will increase substantially this winter have received widespread attention. In response to congressional requests, GAO has prepared a preliminary analysis, which covers
--how fast prices have increased:
--why prices have increased: and
--whether there is an "excess supply," and if so, how it developed.
STRUCTURE AND REGULATION OF THE NATURAL GAS INDUSTRY
Natural gas --about^95 percent of it produced domestically --accounts for over 25 percent of the energy consumed in the United States. Industrial use accounts for 41 percent of all gas; residential, for 24 percent: electric generation, for^19 percent:^ commercial^ for 13 percent: and^ and^ other^ uses,^ for^3 percent.
The natural gas industry is comprised of three aectors-- production, transmission, and distribu- tion --which are physically interconnected by a network of pipeline and main throughout the United States. At one end of the network are thousands of companies which explore for, drill for, and produce gas. Since enactment of the Natural Gas Policy Act of 1978, all production has been subject to Federal price regulation. The act established various pricing categories based on such factors as where and when a well is drilled. . At the other end of the network are almost 1, distribution companies, usually local public utilities, serving their own market areas and under the juristdiction of State or local regu- latory bodies. The connecting transmission network includes 129 interstate pipeline companies operating under Federal jurisdiction, plus many intrastate pipelines which are gener- ally regulated under State laws. (See pp. 1 to
Tear Sheet GAO/RCED-83- DECEMBER 9,
---.-.-HOW MUCH HAVE GAS ---- ----
--PRICES INCREASED?-.-.-__-
Prices to all types of users increased at an annual average rate of 18 percent between 1970 and 1981 (not adjusted for inflation), according to data from the Energy Information Administra- tion. Residential prices increased less ( percent) than industrial prices (21 percent).
Nevertheless, residential prices today are higher than other prices. (^) Residential users paid an average of $4.29 per thousand cubic feet in 1981; commercial users, $4.02; industrial users, $3.14; and electric utility users, $2.89. (^) (See pp. 4 and 5.)
The average residential price in October 1982 was $6.08 per thousand cubic feet, compared to $2.83 in October 1978 and $0.91 in October 1970 (not adjusted for inflation), according to Bureau of Labor Statistics data for U.S. cities. The average price in selected major cities in October 1982 was as low as $4.94 and as high as $8.20. (See pp. 4 to 6.)
Prices paid by end-users flow back to the three industry segments as gross revenues. According to data from the American Gas Association, pro- ducers, pipelines, and distributors all received more revenue per thousand cubic feet in 1981 than in 1970. The producers' share of the total increased from 26 to 53 percent; the pipelines' share decreased from 29 to 25 percent; and the distributors' share decreased from 45 percent to 21 percent. (See pp. 6 and 8.)
The Energy Information Administration projects that the average residential price in the first quarter of 1983 will be about 20 percent higher than the year-earlier price. However, some cities are reportedly expecting increases of 40 percent or more. (^) (See p. 8.)
WHY HAVE_.~ .----NATURAL GAS- -
.--------PRICES^ INCREASED?
End-user prices for natural gas depend on the diverse factors affecting how gas is priced to pipelines, to distributors, and to end-users. Prices paid by pipelines depend on both the
Tepr Sheet
ii
IS THERE AN IMBALANCE BETWEEN
GAS PRODUCTION AND CONSUMPTION?
Reports of a current "excess supply" of natural gas are consistent with major interstate pipe- line estimates of supplies which will be availa- ble this winter. The duration of this imbalance is uncertain. (See pp. 26 and 27.)
This situation reflects the many factors which determine gas production and consumption. Pipe- lines eagerly sought new supplies during the 1970s when they could not provide as much gas as their customers desired. There is now an imbalance because pipelines are able to supply more gas than end-users want at current prices. (See pp. 26 to 30.)
Consumption has fallen due to more efficient use of gas, switching to alternative fuels, and eco- nomic conditions. Distribution^ company^ sales^ in the first 8 months of 1982 were 4 percent below year-earlier levels, according^ to^ the^ American^ Gas Association. .(See p. 30.)
Some companies are adjusting to the current situa- tion by renegotiating contracts and other means. (See pp. 30 to 32.)
GAO initiated its analysis in response to requests from Senator Thomas F. Eagleton, Congressman Michael D. Barnes, and Congressman George Miller and 14 others.
As agreed with the requesters' offices, this is a preliminary report. GAO is^ continuing^ its analysis of natural gas price increases. GAO did not seek agency comments on this report. .
iv
-------aContents
Page
CHAPTER
1
2
3
4
Bcf
EIA
FERC
GAO
MmBtu
Mcf
NGPA
Tcf
INTRODUCTION
Structure and regulation of the natural gas industry Objectives, scope, and methodology
HOW MUCH HAVE PRICES INCREASED? Prices paid by classes of end-users Residential prices paid in selected cities Components of end-user prices by industry sector Expected price increases to residential users Conclusions
WHY HAVE PRICES INCREASED? 10 Prices charged to pipelines 10 Prices charged to distributors 23 Prices charged to end-users 25 Conclusions 26
CURRENT MARKET CONDITIONS 27
Is there an "excess^ supply"^ of^ gas?^27 How did the current situation develop? 27 How is the market adjusting? 31 Conclusions 33
---I__-^ ABBREVIATIONS
billion cubic feet
Energy Information Administration
Federal Energy Regulatory Commission
General Accounting Office
million British thermal units
thousand cubic feet
Natural Gas Policy Act of 1978
trillion cubic feet
CHAPTER 1
--INTRODUCTION
Reports of substantial increases in retail natural gas prices--both recent and expected --have^ attracted^ widespread^ con- gressional and public attention. These^ increases^ may^ seem^ par- ticularly puzzling because of concurrent reports that there is a Wglut" of natural gas ,^ meaning^ that^ more^ gas^ could^ be^ produced and delivered than is being consumed. Ordinarily,^ such^ an^ im- balance between potential production and consumption would be ex- pected to lead to declining, rather^ than^ increasing,^ prices^ to consumers.
Natural gas accounts for over 25 percent of the energy con- sumed in the united States. In 1981, natural gas use totaled 19.3 trillion cubic feet (Tcf), l/^ nearly^ all^ of^ it^ produced domestically. It is used in about 55 percent of all residential and commercial establishments and provides 40 percent of the energy consumed by industry and agriculture. Overall, industrial use accounts for 41 percent of all gas use; residential, for 24 percent; commercial, for 13 percent; electric generation, for 19 percent; and other uses, for 3 percent.
STRUCTURE AND REGULATION OF THE NATURAL GAS INDUSTRY
Most natural gas passes through three sectors of the industry beFore it is consumed. These sectors are regulated variously by units of Federal, State, and local government.
The industry is comprised of three sectors--production, trans- mi sion, and distribution --which are physically interconnected by a etwork of over 1 million miles of pipeline and main throughout th United States. At one end of the network are thousands of la ge, medium, and small companies which explore for, drill for, and produce gas. Approximately two-thirds of their gas produc- tibn is sold in interstate commerce and has been subject to Federal price regulation since 1954, now administered by the Federal Energy Regulatory Commission (FERC). &' The remaining production is sold in intrastate commerce and has been subject
,p-----
i/buantities of natural gas are often measured on the basis of ivolume. Frequently used measures include thousand cubic feet (Mcf), billion cubic feet (Bcf), and trillion cubic feet (Tcf). Alternatively, gas may be measured on the basis of heat content, in terms of British thermal units (Btu’s). (^) A million Btu’s are approximately equivalent to an Mcf.
Z/Successor to the Federal Power Commission. Established by the Department of Energy Organization Act of 1977, 42 U.S.C. 7107.
to Federal price regulation only since the enactment of the Natural Gas Policy Act of 1978 (15 U.S.C. 3301) (NGPA). L/
At the other end of the network are almost 1,600 distribu- tion companies, usually local public utilities, serving their own market areas and under the jurisdiction of State or local regulatory bodies. (^) The connecting transmission network includes 129 interstate pipeline companies operating under the jurisdic- tion of FERC, plus many intrastate pipelines which are generally regulated under State laws.
Producers explore for new reserves of natural gas, develop them to determine their size, (^) and extract the gas from the re- serves. (^) Having determined that a reserve is large enough to war- rant marketing, (^) the producer will usually negotiate to sell the gas to a pipeline company. Pipeline companies generally purchase this gas-- (^) under negotiated contracts-- from producers in the field, transport it to market, (^) and sell it either to distribution con- panies or directly to large industrial and electric utility end- users. (^) 2/
Distributors purchase gas from pipeline companies and resell it to residential, commercial, or industrial customers. Prices paid by a distributor to a pipeline (known as wholesale or "city- gate" prices) depend on (1) field prices which are negotiated by tqhe pipelines within regulatory limits and passed through to the customer and (2) delivery charges for transportation of the gas
I
rom the wellhead to the distributor. 3/ Distributors then de- iver gas to the final consumer and charge a mark-up over their holesale purchase price for their delivery services. +/
Different end-users may pay a distribution company various prices for natural gas, depending^ on^ the^ type^ of^ end-use^ (for example, residential, commercial, industrial, or electric utility)
$/Production may also be subject to regulation at the State level, with respect to prices and levels of production.
?/Pipeline companies may produce some gas themselves and purchase gas from and resell to other pipelines. Some^ pipelines^ also transportation gas for customers which have their own gas supply.
j/Mark-up prices for interstate pipelines are generally determined by the historical average cost of transmission and by the trans- portation profit margins allowed under FERC regulation.
$/Neither pipelines nor distributors make a profit on the purchase and resale of gas. Mark-ups for both pipelines and distributors include operating and maintenance expenses, depreciation, inter- est, taxes, and net income. Thus, pipelines'^ and^ distributors' profits derive only from their investment in the transportation and delivery systems and not in the gas itself.
2
CHAPTER 2
HOW MUCH HAVE PRICES INCREASED?--
Although the magnitude of recent and expected price increases has attracted widespread attention, natural^ gas^ prices^ have^ been rising for many years. At^ the^ time^ of^ the^ landmark^ Supreme^ Court decision in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954) --which^ formed^ the^ baszs^ for^ Federal^ regulation^ of^ producer prices-- (^) the average wellhead price was $.lO per Mcf. In^ contrast, the price in 1981 was $2.06. lJ
This chapter treats price increases since 1970 from three perspectives: (1) nationwide average prices charged to various classes of end-users, (2) prices charged to residential customers in selected cities, (^) and (3) the breakdown of end-user prices by sector of the natural gas industry.
- PRICES^ PAID^ BY^ CLASSES^ OF^ END-USERS
First, we compiled Department of Energy data on prices paid by various classes of end-users between 1970 and 1981. There were differences in 1981 prices to various end-user classes and in the rates of incr,ease between 1970 and 1981. (See^ table^ 1.)
Residential and commercial users paid the highest average prices in 1981-- $4.29 and $4.02 an Mcf, respectively. Electric utility and industrial users paid the lowest average prices-- $2.89 and $3.14 an Mcf, respectively.
Rates of increase also varied. Compounded annual average rates (not adjusted for inflation) increased 11 percent a year between 1970 and 1973 and 22 percent a year between 1974 and 1981. However, in each of the 4-year periods for which we computed aver- age annual increases, residential prices increased by the smallest proportion, followed by commercial prices. Industrial^ and^ elec- tric utility prices increased by larger proportions in each 4-year iperiod.
'RESIDENTIAL RATES PAID IN SELECTED CITIES
Next, we compiled Bureau of Labor Statistics data on resi- dential prices between 1970 and 1982 for the Nation and for ten cities. These cities represent various regions of the country but do not necessarily reflect the full range of residential prices. (See table 2.) Furthermore, the^ data^ shown^ reflect^ average^ prices per Mcf of gas, not the quantity of gas used nor average customer bills.
A/Energy Information Administration, 1981 Annual Report to the Congress, Volume 2: Energy^ Statistics,^ DOE/EIA-0173(81)/2, May 1982, table 51.
4
---0Table^1
Prices (^) I_--Paid bLEnd-User-----.-.-I--..- Classes Selected ---Years, 1970-81,-- and^ Rates--- of^ Increase.--
---Year
Resi- (^) Commer- Indus- Electric Overall ---dential ---cial - trial -- utility^ average
- -..- - ---..- - .-._Averxe Price...---- --.--- --.--
---------------(price per Mcf)---------------
- Period-.-- Compounded^ Annual-~-^ Average^ Rates^ of^ --Increase
1970-74 --------------(percent)--------------------~~- 7 Y 16 15
1974-78 16 20 26 31 22
1978-81 19 22 23 25 22
1970-81 13 16 21 23 18
Fource:
Energy Information Administration, 1981 Annuak- RepoTL Report---- to Congress, Volume 2: Energy^ Statistics,^ May 1982 DOEfiIA-0173(81)/2, p. 117,^ and^ Natural^ ---..-..__IGas^ Annual, --1981,^ DOE/EIA-0131(81),^ Sept.^ 1982,^ tableT6.
Table 2
--.--Location
Residential-e-e Prices in Selected Cities, Selected (^) --Yegrs,mOxl?982 -._-m -.-
-Price per----_.-^ Mcf^ in^ October^ _ of^ Year^ (note--.-^ d)
U.S. average $0.
Atlanta 0.
Boston 1.
Chicago (^) 1.
Cleveland 0.
Dallas 0.
Los Angeles
Philadelphia
(al
n Francisco
S, attlek
--^1974
(a)
--(note^ c)
$2.
b/ 1.
1982 -_-
S’ urce: p
Bureau of Labor Statistics, (^) --Retail Prices (^) -----and Indexes of Fuels and Electricity, Nov. 1970, table 6; Nov. 1974, I table^ 7;^ and^ June^ 1978,^ table^ 7;^ and^ Enerqy_and^ Food-- , October^ 1982,^ Nov.^ 22,^ 1982,^ table^ l;xd^ unpublished data.
a' Not i/ available.
q/Earliest available data for Los Angeles are for November 1978.
$Consumer prices were not collected from JULY through October 1978, due to revision of the BLS Consumer Price Index. Data shown were interpolated from June and November 1978 figures.
q/Based on prices for 100 therms of gas in each city, converted to cubic feet at a rate of 1,021 Btu's per cubic foot.
Table 3
Components of End-User prices, -by Sector, for 1970and 1981
Sector
Pxe
Percent per Mcf of-- total
--‘--PercentPrice per Mcf of total
Producer (^) $0.17 26 $2.00 53
Pipeline (^) 0.19 29 0.94 25
Distributor (^) --0.29 (^45) 0.80 21
Total $0.65 (^100) X
$3.74 (^) g
Source: American Gas Association, Gas Facts, 1980, p. 122, and unpublished data.
EXPECTED PRICE INCREASES TO RESIDENTIAL USERS
Expected price increases in cities around the country have received widespread media coverage. Such estimates are usually based on pipeline filings at FERC and on other factors; actual kncreases may ultimately be different.
,
The Energy Information Administration projects that the verage price for residential users will be $5.97 per Mcf in the irst quarter of 1983, about 20 percent higher than the year- earlier price of $4.99. l/ Projected increases in individual tiities, however, (^) are expected to vary considerably. Distribution company representatives told us that some cities are expecting increases of 40 percent or more.
CONCLUSIONS
Prices paid by natural gas end-users vary considerably. Re- sidential and commercial users (both over $4.00 per Mcf) paid higher prices than industrial ($3.14) and electric utility ($2.89) users in 1981. HOWeVer, industrial and electric utility prices increased faster between 1970 and 1981.
---.-- -- -_ ___
J/Energy Information Administration, Short-Term Energy Outlook, DOE/EIA-0202 (82/3Q), Aug. 1982, p. 4. Thisestimate repre- sents the middle of three cases projected by EIA, based on dif- ferent assumptions of future world oil prices. (^) Prices are shown in current dollars.
