The MacNeil/Lehrer Report; Natural Gas -- Heating or Eating?

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ROBERT MacNEIL [voice-over]: Soaring natural gas prices have rekindled inflation. Can there be relief for consumers?

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MacNEIL: Good evening. The Labor Department reported today that wholesale prices rose six tenths of a percent in November, due largely to the soaring cost of home heating oil and natural gas. On average, natural gas prices rose 5% in November, the biggest monthly increase in nearly three years, and in many areas the rise was much steeper. Yesterday the government said gas prices have more than doubled since 1978 when Congress began to remove price controls. Bombarded with complaints from frightened consumers, a congressional coalition has moved to freeze natural gas prices for two years. They also want to revise long-term supply contracts they see as the culprits behind higher prices. There was a move in the Senate today to attach these provisions to the gasoline tax increase bill, and the sponsors will pursue it next week. Tonight, why the natural gas price is rising so fast and what can be done to stop it. Jim?

JIM LEHRER: Robin, concern over the dramatic increases in natural gas prices has turned to panic for some, some like Ed Kimmel, vice president of a small, employee-owned sheet-glass manufacturing company in Jeannette, Pennsylvania. He says his company could be driven into bankruptcy if something is not done, and he has organized a Pennsylvania Manufacturers' Coalition on Energy to get somebody here in Washington or elsewhere to act and to act quickly. First, Mr. Kimmel, how much has the price increase been for natural gas that you're buying up there?

ED KIMMEL: The employees purchased our plant facility in 1979. At that time the price of natural gas was $2.92 an MCF. That's a thousand cubic feet. My projected 1983 cost is going to be in excess of $5 an MCF at the current rate the increases are going into effect.

LEHRER: In terms of dollars, that would mean what? How much do you spend now a year?

Mr. KIMMEL: I spend approximately $4 million; it could exceed $4.8 million to $5 million a year for my natural gas usage.

LEHRER: Give me a feel for how you use the natural gas. I mean, what's the process you go through on this?

Mr. KIMMEL: Our process -- the Jeannette Sheet Glass is the only domestic producer of sheet glass. We compete directly with Rumania, Switzerland, Germany -- foreign imports of sheet glass. We use it in the glass melting process. We produce about 100 million cubic -- or 100 million square feet of glass a year, and we consume the natural gas in that process.

LEHRER: So you say it's $4 million now; you anticipate 1983 it would be what?

Mr. KIMMEL: Approximately $5 million.

LEHRER: Can your company afford it?

Mr. KIMMEL: I cannot afford it. In today's economic conditions -- and one of the reasons I formed the Pennsylvania Manufacturers' Coalition on Energy was to make known the fact that both the industrial and residential consumer in the Northeast was being abused. My initial reaction --

LEHRER: Now -- go ahead.

Mr. KIMMEL: Let me explain that. In May, 1982, I received a notice from my gas distribution company that my gas was going to increase 35%. I went right to the horse's mouth and I set up a meeting with local industrial leaders, and met with People's Natural Gas.

LEHRER: That's the company that serves you.

Mr. KIMMEL: That's correct. That's the distribution company. We met with them and the sum and substance of the meeting was the fact that they had no control over the increases. The increases were coming through the Federal Energy Regulatory Commission. I then ventured to Harrisburg and met many times with Ms. Shainaman, our Pennsylvania chairman of the PUC --

LEHRER: That's the Public Utilities Commission, right?

Mr. KIMMEL: That's correct. And Ms. Shainaman and I made a venture down to see Chairman Butler of the Federal Energy Regulatory Commission in a private meeting. I wanted to learn exactly why the natural gas prices were increasing at such a rate and what could be done about it. The sum and substance of that meeting came down to the Natural Gas Policy Act. He said he was working with a blunt instrument, that that instrument could not be used to stop or to slow down the abuses that were occurring in the natural gas area.

LEHRER: In other words there's nothing that could be done about it? He said there's nothing the government could do to help you out.

Mr. KIMMEL: No, the act, in essence, allows the pass-through of the gas-purchase adjustment -- the cost of buying gas in the field. And what I learned through my investigations was a producing company and a transmission company were buying $8 gas instead of $2 gas, at the detriment of the end consumer.

LEHRER: Well, in a nutshell, what do you want done then?

Mr. KIMMEL: I would like the entire natural gas area reviewed by Congress. It's out of the Federal Energy Regulatory's hands as far as it was explained to me. The fact is that by these increases we're pushing our country back on a dependence on oil. I have some major corporations in Pennsylvania which are switching from natural gas back to oil, which is against national policy.

LEHRER: And the fact that your company could go bankrupt if it has to pay this additional cost is not something you're just throwing out. I mean, that's a real fear?

Mr. KIMMEL: That's a real fear in today's economic times. I've asked my employees to forego their 1982 pay raises to establish and put in capital projects that would save on natural gas, that would conserve on natural gas. I have projects in house at this current time that'll save approximately 10 to 15 percent of my natural gas bill.

LEHRER: How many employees do you have?

Mr. KIMMEL: I have 350; the coalition has approximately 6,000. We estimate in the state of Pennsylvania, with these increases going into effect, anywhere between 10 and 50 thousand jobs could be lost because of the increases.

LEHRER: Thank you. Robin?

MacNEIL: One of those leading the congressional effort to freeze gas prices and renegotiate pipeline supply contracts is Democratic Senator Thomas Eagleton of Missouri. Senator, you've just heard what an industrial user thinks. What are you hearing from your own constituents about gas prices?

Sen. THOMAS EAGLETON: Well, I think what Mr. Kimmel has just stated could be multiplied tens of thousands of times over from consumers around the nation, especially the consumers that I hear from in my home state of Missouri -- homeowners who have seen their utility bills this winter, in St. Louis, for instance, go up 25% over what they were last year, and in Kansas City, Missouri, 35% over what they were last winter.

MacNEIL: Why are prices rising so fast? Who is the culprit in your view?

Sen. EAGLETON: Well, I think the two principal culprits that I would identify would be the Natural Gas Policy Act of 1978 that built in a routine of price increases through the years, with not only the ones we've already had but price increases that will take effect in the next two and three years as well. And then the so-called take-or-pay contract, the contract negotiated between the pipeline and the gas producer. The essence of the take-or-pay contract is that the pipeline must take now the most expensive gas, whether it's $5 or $8, as described by Mr. Kimmel. The cheap old gas -- 50" gas, 80" gas -- is kept in the ground, and only the expensive gas is coming through, being passed on through the distributing company to Mr. Kimmel as a manufacturer or to tens of thousands of homeowners around the country.

MacNEIL: Now, your proposed legislation, one part of it, would permit the pipelines to revise or renegotiate those contracts. Could you briefly explain the purpose of that?

Sen. EAGLETON: Well, one part of our proposal -- and I'm joined in this, by the way, by senators Kassebaum and Danforth, two Republicans and myself -- would abrogate these take-or-pay contracts. We would say, just as the Natural Gas Policy Act of '78 abrogated certain contracts then in existence, we would abrogate these existing take-or-pay contracts as being against the public interest, and we have legal authority and a Supreme Court precedent to so do.

MacNEIL: How would you freeze gas prices, where would you freeze them, and what would you achieve by it?

Sen. EAGLETON: The second facet of our proposal, after taking care of the take-or-pay contracts, would say that no further increases already scheduled to take place under the Natural Gas Policy Act -- no further increases would take place for the next two years. We would cap the situation as it is now. We'd preserve the status quo. That would give Congress more than ample time to go into the various inequities and various inconsistencies in the Natural Gas Policy Act. What we're attempting to do in the short time that remains in this congressional session is to take care of the two most grievous ills, and then to give Congress ample time in the two years ahead to attend to the other problems that that act has generated.

MacNEIL: If you merely froze prices, that wouldn't in itself give any relief to consumers this winter?

Sen. EAGLETON: The freeze would relate back to August 31st so there would be some relief given by reason of the fact that we date it backwards to August 31st. And that would, for instance, help my consumers in my city of St. Louis. In Kansas City, where the take-or-pay contract is the most egregious culprit, the abrogation of that contract would give substantial immediate relief to the consumers in that area.

MacNEIL: I see. With the lame duck session with only a week scheduled to go, and many big items on the agenda, are they likely to listen to you? How hopeful are you?

Sen. EAGLETON: I think practically every member of the Senate, except those from gas-producing states, is being barraged with telegrams, phone calls, people such as Mr. Kimmel coming in to see us. So the momentum is with us in terms of there being a compelling urgency. Senators and congressmen tend to respond when that kind of momentum is around.

MacNEIL: Well, thank you. Jim?

LEHRER: Those who produce natural gas don't think very much of what Senator Eagleton and others in Congress want to do, and here to speak for them is Frank Pitts, head of the Pitts Oil Company of Dallas. He has been an independent oil and gas producer for 40 years; he is also chairman of the Texas Independent Producers and Royalty Organization and a member of the executive committee of the Independent Petroleum Association of America. He is with us tonight from public station KERA in Dallas. Mr. Pitts, what's wrong with what Senator Eagleton wants to do?

L. FRANK PITTS: Well, number one, the contracts -- take-or-pay contracts were entered into between two parties that knew what they were doing. There are some problems involved with them. There is no question about that. But they are in the process of being renegotiated. I, for example, was one --

LEHRER: Excuse me. What do you mean, they're being renegotiated?

Mr. PITTS: Between the seller -- between the seller and the purchaser. For example, I myself in the last two weeks have redetermined, revised contracts, not on the take-or-pay, but on a price; but back in '76, 30-odd of us -- over 30 corporations and individuals here in Texas, had a take-or-pay problem, so the purchaser came, sat down with us and said that 80% of take-or-pay of the deliverability of the wells was too high. And I asked him what he thought was reasonable that he could do, and he said 50%, and 30-odd corporations and individuals agreed to go along with that, and we've been operating under that agreement since '76. We're doing it in the industry today. It's being done -- I've talked to 10people in the last 24 hours who are currently -- have done it or are in the process of doing it. So leave it to the free-enterprise. We'll handle it.

LEHRER: So what would be the effect -- if you're willing to do it anyhow, then what would be the effect of what Senator Eagleton is proposing -- to abrogate all contracts and allow everybody to renegotiate all of them?

Mr. PITTS: Well, every time someone has some problem, if they run to Washington and ask Congress to pass a new law, Congress will perhaps never get anything done if everybody starts doing that. Let the free market work. And in my judgment it will work; it is working currently.

LEHRER: All right, what about his proposal to freeze the price where it is for two years?

Mr. PITTS: Well, number one, the Department of Energy, in their October report, discussing the increased price in the last year, from July, 1981 to July, 1982, to the residential consumer in this country: the price of natural gas per million BTU increased 95". Only 39" of that was producer revenue. The other 56" went for pipeline and distribution costs and LNG and imports --

LEHRER: That's liquid natural gas.

Mr. PITTS: Liquified natural gas. It mostly comes from the Middle East. And gas that comes by pipeline from Canada -- imported gas -- and Mexico. Now, if Senator Eagle's [sic] bill to freeze the price of gas had been in effect in this one-year period, from July, '81 until July, '82, the total amount that would have been affected would have been a minimum of 10" of the 95", or a maximum of 17" of the 95". The balance would have been untouched by his bill. And I can go into detail if we have time. But it's the Department of Energy report in October, page 89.

LEHRER: All right, Mr. Pitts, what do you say to Mr. Kimmel then? He and others who are going to suffer as a result of these price increases are just going to have to suffer?

Mr. PITTS: What I'm saying to Mr. Kimmel is that the pipelines that supply his area unfortunately have had and do have very little of the old, cheap gas to roll in, mix and reduce the price to him in his area, whereas in the Middle West, for example, the opposite is the case. So it is a difficult thing, but reducing the price or freezing the price of gas is not going to help him -- very little, as I've just expressed, under the Department of Energy report.

LEHRER: All right, thank you. Robin?

MacNEIL: Another view now from the man who administered the Natural Gas Policy Act which started decontrolling prices during the Carter administration. He is Charles Curtis, former chairman of the Federal Energy Regulatory Commission, now representing various energy interests as a private lawyer in Washington. Mr. Curtis, what effect would Senator Eagleton's legislation have on the industry?

CHARLES CURTIS: Well, let's deal with first the freeze.

MacNEIL: The freeze, yes.

Mr. CURTIS: The freeze would not have the effect that I believe is intended by the Senator in providing relief to ratepayers. This is for two reasons, essentially. What is heaving prices up and resulting in this very rapid increase in the delivery price of energy is a shift in the mix of supply available to pipelines. The older contracts, which are priced at reasonable low terms --

MacNEIL: Just so we understand this, the decontrol system permits producers and suppliers to charge more for new gas than they could for old gas that was discovered and in production before deregulation began. Is that essentially correct?

Mr. CURTIS: That's correct, and what's happening is theolder gas is playing out and the newer, high-priced gas is therefore a larger proportionate part of the delivered price of gas. So its increase will occur even if the price ceilings in the Natural Gas Policy Act were frozen as the old gas is replaced with some of the higher-price categories of gas in the pipeline mix.

MacNEIL: Now, what about permitting pipelines to renegotiate their contracts?

Mr. CURTIS: Well, let me make an important point about the Natural Gas Policy Act. We must remember that it was passed during a time shortly following on the shortages of natural gas in the winter of 1976 and 1977 when there were plant closings and school closings throughout the country. The Congress was in near deadlock for two years on what to do about that situation. And the Congress compromised. The compromise is extraordinarily complex; provides for detail in the legislation that is difficult to work with as an administrator of the act, and for the regulated entities to work under in working out their contractual terms. But the Natural Gas Policy Act merely set ceilings on prices; the parties can agree to lower prices and they are free to renegotiate contracts and provide for lower prices. Similarly, they can today renegotiate their contracts to limit the effect of take-or-pay or remove those requirements altogether.

MacNEIL: Are producers holding in the ground old gas and trying to sell as much new gas at the higher price as possible? Is old, cheap gas not being sold as much as it could be?

Mr. CURTIS: No, Robert, I don't think that's happening and I'm not aware of any evidence. What is happening is that the pipelines, who have in retrospect overshot their market and perhaps agreed to improvident terms in contracts with their producer-suppliers, are bound by take-or-pay penalties which require them to pay amounts whether they take the gas or not. Rather than accept those penalties, which would then be passed on to consumers, they are backing off of their older contracts which do not have similar take-or-pay requirements. As a consequence, therefore, they are taking higher-priced gas into the system and backing off lower-priced gas. But they are doing that to avoid paying that very substantial price penalty.

MacNEIL: If you don't think Senator Eagleton's proposals would work, what would you suggest for people like Mr. Kimmel and householders, who appear to be in a desperate situation this winter?

Mr. CURTIS: Well, let me qualify my reservation with respect to Senator Eagleton's proposal. I would agree with Mr. Pitts that enlightened producers and pipelines, now cognizant of the market circumstances of today, can sit down and renegotiate these terms and solve this problem. I have a substantial question whether that will occur. I am aware that there are considerable efforts underway around the country now. If this type of price renegotiation between the private parties with enlightened self-interest does not solve this problem and bring gas into rational economic terms, then I think the Congress will have to act, but when they act I believe they must act comprehensively to deal with a re-ordering of the natural gas marketplace, not simply to freeze one facet of the problem.

MacNEIL: Thank you. Jim?

LEHRER: Senator, do you think the producers and the pipelines will do it on their own?

Sen. EAGLETON: No, I don't, and I find no current evidence that they are. I know of no major contracts that have in fact been renegotiated. I also would dispute one fact of Mr. Curtis. He says he has no evidence that old, cheap gas is being shut it. The Huburton Field in Kansas, a very big field -- lots of gas is still there that's cheap, 50" gas -- and nothing's coming out of that field into the city service pipeline that supplies Kansas City, Missouri.Only the very expensive gas is coming through. So I think they're -- and the General Accounting Office, in the report that they issued just yesterday, pointed out fields in Appalachia and a whole host of fields around the country with old, cheap gas that has been consciously and pre-meditatedly shut in, and it's expensive gas that's coming through that's resulting in the gouging that Mr. Kimmel and the homeowners are experiencing.

LEHRER: Mr. Curtis?

Mr. CURTIS: Well, the question is whether it's shut in by the producer on his own volition in order to sell his higher-priced volumes, or whether it is shut in because the pipeline purchaser has backed off of that supply. I know there are circumstances where the pipelines have backed off --

LEHRER: Now, what would be in their --

Mr. CURTIS: -- the low-priced gas.

LEHRER: Why would they want to do that? Why would it be in their interest to do that?

Mr. CURTIS: It is because they are taking high-priced gas which had take-or-pay contract penalties.

LEHRER: In other words, if they didn't take the high price they'd have to pay for it anyhow, so they might as well take it. Well, Mr. Pitts, from the industry standpoint, are you and other producers keeping that cheap stuff in the ground, the old stuff in the ground?

Mr. PITTS: Certainly not.The pipeline company is the one that determines what gas they take anyway. And he mentioned -- the Senator mentioned the Huburton Field. That whole field, I believe, is old gas and old-priced cheap gas. I don't believe there's any new, top, high-priced gas in that area. So the producers there, unless they have high-priced gas elsewhere, frankly are not benefiting by this at all.

LEHRER: Well, what about the point --

Mr. PITTS: And they have nothing to do with shutting in their wells, I don't believe. I think the pipeline companies themselves do that. I beg your pardon?

LEHRER: But the point that both the Senator and Mr. Curtis just made is that these pipeline companies, faced with these take-or-pay contracts, they have to pay for the higher-priced gas so they might as well take it. But that's not the case with the old gas.

Mr. PITTS: Well, it is in the case of all the old gas that they do not have that. Yes, I agree on that, and it was brought about -- this distortion was brought about by the Natural Gas Policy Act of 1978, which I believe the Senator supported at the time. It was passed in '78. What it caused, actually, was this: the interstate pipelines in '78 had not been able to -- and prior thereto -- for a number of years had been unable to buy reserves of new natural gas found because the free market, intrastate market -- that means gas that's found, produced and consumed in the state -- the market price was going up and new wells drilled. Those reserves were dedicated to the intrastate market. So the Natural Gas Policy Act came around, and deregulated --

LEHRER: All right, Mr. Pitts, I've got to cut you off; I'm sorry.We've got a few minutes left and -- a few seconds left, and I want to go back to Mr. Kimmel. Have you heard anything tonight that makes you feel any better about your situation in Pennsylvania?

Mr. KIMMEL: Absolutely not. What I see is the fact that we have a gas abuse system and we have producers and pipeliners -- there are four parts to a transmission of natural gas. You have a producer, a transmission company, a distribution company and the end consumer. What's happening is you have producers and transmission companies buying their own gas or buying high-cost gas at the detriment of the end consumer. We have not seen anything to date -- I have a gas well four miles away from my plant that I can't buy the gas and transmit it to my plant for an inexpensive price. For instance, I have a well --

LEHRER: I haven't got time for your for instance; I'm sorry. But anyhow, you haven't heard anything tonight that makes you feel any better?

Mr. KIMMEL: Absolutely not.

LEHRER: All right, thank you.Robin?

MacNEIL: Mr. Pitts, in Dallas, thank you very much for joining us; Senator Eagleton, Mr. Kimmel, Mr. Curtis, in Washington. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That's all for tonight. We will be back on Monday night. I'm Robert MacNeil. Good night.