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SUMMARY

The National Council feels that emergency natural gas legislation can be useful only over the short term. As short term legislation, S. 2330 appears to offer the greatest chance of improving interstate natural gas supplies during the 1975– 76 winter curtailment period. However, S. 2330 is seriously deficient and should be amended by adding Section 5, "Availability of Gas for Agricultural Users," of S. 2310, with the deletion already noted.

It is important to again emphasize that this legislation is only a short term, partial solution to a long term problem. The Senate should instead immediately consider S. 692 and amendments thereto. By adopting the Pearson-Bentsen Substitute to S. 692, the Senate will have provided a reasonable long term solution as well by encouraging the maximum development of our domestic natural gas supplies.

STATEMENT OF PAUL E. REICHARDT, CHAIRMAN OF THE BOARD, WASHINGTON GAS LIGHT COMPANY AND FIRST VICE CHAIRMAN, AMERICAN GAS ASSOCIATION

Mr Chairman, my name is Paul E. Reichardt, Chairman of the Board of Washington Gas Light Company, and First Vice Chairman of the American Gas Association. Today, I am appearing on behalf of the Association and its over 300 member companies representing the transmission and distribution segments of the natural gas industry.

For more than six years the American Gas Association has sought to alert the Congress to the impending natural gas crisis. We share your concern about the potential disruption of our economy and the denial of basic human needs which could arise should consumers be deprived of adequate gas supplies this winter. The shortage is real, and is deepening. The current annual shortage of natural gas is about 2.5 quads (A grad equals 10 Btu). Without remedial action the supply deficit for 1975-76 will be 2.9 trillion cubic feet or 3 quads and by 1980 could reach 6.1 quads. This is just about as much energy as the nation's present total electric generation (6.3 quads). The direct economic impact of such a shortage would be devastating. A recent study shows that if the major gas-consuming manufacturing industries had their gas supply reduced just 20%, more than 2,000,000 manufacturing industry workers could be unemployed. This, of course, does not include the cascading affect on employment in other industries and businesses.

In order to better understand the nature of the current crisis, Congress must consider the trends in natural gas production and consumption Since World War II the use of natural gas has increased annually at a rate twice that of total primary U.S. energy. Today, it provides over 30% of our annual energy requirements and more than 40% of domestically produced energy. Meanwhile, gas reserves additions have been declining. Primarily, this is because of the inhibiting affect that Federal Power Commission regulation has had on exploratory drilling. Current annual consumption is nearly three times as great as addition to reserves. Further, this same FPC regulation has severely limited sales of new gas to the regulated interstate pipelines. As a result, total production has leveled off. Low regulated prices, however, have stimulated demand and as a consequence, a severe shortage has developed. Aggravating this shortage has been the fact that the nation's total energy requirements have been growing rapidly. Curtailments of firm contract gas in excess of two trillion cubic feet have occurred in the past 12 months, and the present total unmet demand has been estimated to be greater than five trillion cubic feet.

Demand for natural gas, as a primary fuel, will continue to increase due to the inherent qualities of this energy source. Natural gas is our premium fuel, because of its basic efficiency and the fact that it does not pollute the air or water. For many years, almost anywhere that gas has been reasonably available, it has been the preferred fuel. In order to avoid air pollution problems, many communities have mandated the use of natural gas where feasible. On a delivered Btu basis, and when used for those purposes which require a premium fuel, it represents the most efficient possible use of natural resources. These uses include: residential and commercial space heating; petrochemical feedstock; industrial processing; and water heating and cooking.

But, in order to solve this deepening crisis, the Congress must address itself now, not just to this winter's shortage, but to the long term shortage as well. Unfortunately, the proposals introduced by Senators Hollings, Glenn, and

Talmadge will not in our opinion alleviate the forthcoming crisis. S. 2310 addresses only this coming winter-and does so b ymeans of a complicated regulatory program, when already there is too little time to accommodate the administrative preparation and surveillance for whic hthe legislatio ncalls. The proposal would extend Federal controls t othe intrastate market; achieve price parity by establishing prices by producing areas, based on the general level of intrastate prices during the month of August 1975; require setting up regulations for and reviewing the validity of priority requests for gas; grant to the Federal Power Commission the authority to compel interconnections between pipelines; and grant the Secretary of the Interior the authority to force operation of natural gas production at levels which could very well severely impair future production capability.

The extension of F.P.C. controls over the intrastate market as designated in Section 4, would only broaden th ecurrent regulatory policy which is largely responsible for the current natural gas shortage. Further, the establishment of area ceiling prices as called for in the bill, would be difficult to accomplish in time for winter weather much less in the required fifteen days specified by the bill, since such prices would have to be based upon complicated pricing information which in some instances is not available. The time consuming burden thrust on The Federal Power Commission with a respect to setting up priorities and then, apparently on a case by case basis, validating those priorities, appears to present an almost insuperable task in the time allotted.

The authorization of mandatory pipeline interconnections by the F.P.C. as it appears on Section 8 of the bill is, i our opinion, both unwise and unnecessary. Currently our member companies accomplish this objective on a voluntary basis. This provision would compel a well managed pipeline to share its gas supply with another pipeline which has been less successful or aggressive in its gas procurement efforts. Even though compensation may be paid to the pipeline from which the gas is taken, there is no adequate provision for the customers of that pipeline in terms of future availability of gas.

The mandating of production rates for designated natural gas fields as stated in Section 7 would encourage non-efficient production. By mandating maximum production rates or worse yet, temporary emergency production rates, the ultimate effect on the production, and resulting effect on the consumer, will be to ultimately recover less gas from the reservoirs. Thus, due to this nonefficient rate of production, the loss of gas to our pipelines and their consumers will represent a supply which can never be recovered. This is an inefficient method which attempts to solve the short-term problem at the expense of long-term supplies. The drafters of the bill recognized this by providing that the ultimate consumer of gas so released indemnify the federal government against liability.

Further, Section 5 of S. 2310, places under the Secretary of Agriculture the authorization to direct gas for agricultural use. Such priorities for agricultural uses are currently set by the F.P.C. This proposal would transfer such authority to another executive agency which is not in a position to evaluate all of the high priority needs of the nation. Such establishment of priorities should be placed under the F.P.C. which possesses such information.

The other proposal which was presented to the Congress, is the Federal Energy Administration's proposal, S. 2330, introduced by Senator Pearson, entitled the Natural Gas Emergency Standby Act of 1975. S. 2330 contains proposals which will be helpful in dealing with the shortages of natural gas which will arise in the interstate market this winter. Section 204 of the bill grants statutory confirmation of the F.P.C.'s 180 day emergency purchase authority. Such a provision is sorely needed in light of potential judicial contests. A similar emergency sales provision is contained in S. 2244 that you Mr. Chairman, introduced at the request of the F.P.C. The bill also protects in Title III the rights of high priority consumers experiencing curtailments to purchase gas at market prices from intrastate sources and to arrange for its transportation through interstate pipelines. While we commend the Administration for recognizing this need, we regret the Administration's failure to extend this privilege to natural gas distribution companies.

Title V of S. 2330 grants the President the authority to allocate and establish reasonable prices for propane in order to assure an equitable distribution of propane among historic users and consumers experiencing natural gas curtailments. We view this proposal as too indefinite to permit a meaningful analysis of what the Administration has in mind in dealing with any shortage of propane that might arise. It is vitally important that by statute, gas utilities be assured of access to adequate supplies of propane to insure the continuity of

service to their high priority customers during the severest winter weather and to insure adequate feedstocks for their existing peak shaving and synthetic natural gas plants where facility design precludes the use of substitute fuels. We would urge the Administration to define what it has in mind in dealing with any propane shortage, and to include the gas utilities at a high priority level in any allocation system.

Mr. Chairman, The American Gas Association supports S. 2330 with modification and clarification as previously noted. But we urge that the Committee, and the Congress, not become preoccupied with so-called emergency legislation dealing only with the present and the immediate future. This is not to say that these policies are not needed and will not be helpful. They will. But they will not produce one additional cubic foot of new supply.

Alleviation of the natural gas shortage depends on development of new supplies and the latter, in turn, depend on creation of an economic climate which will foster such development over the long pull. The only meaningful solution is to deregulate the price of new gas. The application of band-aids is no substitute for necessary surgery. I urge this Committee and the Congress to proceed now with both short-term and long-term legislation which will meet the problems of allocation this winter and next-and, crucially, will get us started now to expand our inventory of new gas. Deregulation of new gas will automatically trigger many of the meaningful short-term solutions that have been suggested for this winter. We have already wasted precious time.

I remind you again that we are dealing here with the keystone of the nation's energy supply. The discovery of new domestic gas supply is essential to our energy independence. The longer we wait to "bite the bullet" the deeper becomes the curtailments of gas to our homes and our industries and the more likely we expose our citizens to grave physical and economic sicknesses.

A.G.A. member companies have nothing to gain financially from increased field prices, but strongly reiterate that substantial increases in gas supply require without further delay a climate permitting interstate pipelines to compete freely in the market place.

Mr. Chairman, I thank you for giving us the opportunity again to present our views.

To: Members of the United States Senate.

From: The Interstate Natural Gas Association of America.

SEPTEMBER 17, 1975.

DEAR SENATOR: This letter is being written to you in this form for the simple reason that we do not have time to separately address each Member of the Senate. We wanted to get this information to you at the quickest possible time, which explains the fact that it is being "hand delivered."

Attached hereto is a copy of our statement filed with the Senate Commerce Committee on September 16, 1975. The statement was filed, although we would have preferred to testify. The only oral presentation of testimony before the Committee was from the Federal Energy Administration and the Federal Power Commission.

The first indication we had of hearings on the two measures concerned was on Friday, the 12th, when we were advised that there would be hearings on Monday, September 15. We were also advised that the appearance of witnesses would be confined to government agencies.

You will note from our statement that the two measures referred to involve some rather complicated issues, and that the passage of either bill in its present form, or substantially in its present form, will not accomplish the purposes for which it was intended.

You will also note that the bills referred to were introduced on the 9th and 10th of September.

Under the circumstances, we feel that hearings would be justified in order to permit testimony from other than government witnesses.

We feel that the industry can make a substantial contribution toward lessening the effect of the natural gas shortage for the winter of 1975-1976. A review of our statement will provide you with further information on the subject.

Sincerely yours,

WALTER E. ROGERS,

Interstate Natural Gas Association of America.

Enclosure.

STATEMENT OF WALTER E. ROGERS, PRESIDENT, INTERSTATE NATURAL GAS

ASSOCIATION OF AMERICA

The Interstate Natural Gas Association of America (INGAA), which is an association composed of virtually all of the major interstate natural gas transmission companies in the United States accounting for over 90% of all gas transported and sold in interstate commerce, appreciates this opportunity to submit its comments on S. 2310 and S. 2330. Consideration of legislation to meet the critical and rapidly worsening natural gas shortage facing this country is certainly timely; in fact it is long overdue.

THE MOST IMPORTANT SOLUTION TO THIS PROBLEM IS DEREGULATION OF THE PRICE OF SALES OF NEW NATURAL GAS

The problems of the natural gas shortage can only be solved by striking at the source of the problem. This requires that new supplies of natural gas be made available to meet the needs of American consumers. This will only take place if long-term incentives are provided for producers to search for and develop new supplies of natural gas. An approach which seeks to only allocate the supplies of natural gas which already are available to the market is no more than a bandaid applied to a hemorrhaging wound and should be recognized for what it is-allocation of the shortage. The only possible solution to the nation's natural gas shortage is through legislation which will increase the supplies of natural gas available. This will only occur when the natural gas producing industry is provided with sufficient incentives and with the elimination of uncertainties which will permit the investment required for the development of new natural gas supplies.

EMERGENCY LEGISLATION IS REQUIRED IF

SUBSTANTIAL DISLOCATIONS ARE TO BE AVOIDED FOR THIS WINTER

While it should be recognized that emergency regulation is no substitute for the long-term remedies which are required to increase future supplies of natural gas, the significant problems which certain pipelines and their customers will be facing during the coming winter require that emergency legislation be passed immediately. In this regard, INGAA supports, with certain modifications discussed hereafter, Sec. 204 of S. 2330. Under this provision interstate pipelines would be permitted to obtain supplies, on a short-term emergency basis, to meet the high priority needs of their customers. At least two other bills (S. 504 by Senator Helms and S. 2244 by Senator Magnuson) have been introduced which would also propose similar temporary emergency relief.

There are three modifications that INGAA would urge be made if this bill is to truly be effective. First, in order to assure pipelines that purchase emergency gas under the provisions of this Act that they will be entitled to recover the costs which they have incurred in order to obtain gas supplies for their customers, it is imperative that the legislation specifically provide for automatic flow through of all costs of such emergency purchasers. To that end INGAA would suggest that the following language be inserted before the last sentence in the Section 204 proviso of S. 2330:

*** *; and the Commission shall have no power to deny, in whole or in part, that portion of the rates and charges made, demanded or received by any natural gas company for or in connection with the purchase of gas under any exemption granted hereunder.

Second, in order to assure that the FPC acts promptly in establishing the procedures which are required to implement this legislation, INGAA urges that the provisions of Section 204 of Title II be modified by changing the word "may" in the first sentence to "shall."

Third, INGAA believes that the most substantial volumes of gas supplies which may be made available on a short-term, emergency basis are those which are presently committed to intrastate pipeline companies but which may be surplus to the immediate needs of those pipelines and their customers. However, a considerable amount of the gas committed to those intrastate pipelines is sold under contracts which preclude that gas from being transported or sold outside the state of production, or commingled with volumes of gas which are transported or sold beyond the boundaries of that state. In order to make this gas available to the interstate market for the limited period covered by the bill and to eliminate possible barriers to its sale in interstate commerce, INGAA urges that the

following language be added to Section 204 of Title II immediately following the above "flow through" language:

* * *; any provision of any gas supply or sales contracts or other contractual arrangement which would prohibit or interfere with sales in interstate commerce or terminate any other obligations of any such contract as a result of the making of such sale or sales pursuant to such regulation, is hereby declared to constitute an undue burden on interstate commerce for the purposes and duration of this act and shall be suspended and unenforceable insofar as such provisions or other contractual arrangements would prohibit or interfere with any sale or delivery of natural gas in interstate commerce under this proviso.

S. 2310 WILL DO NOTHING TO RELIEVE THIS WINTER'S PROBLEMS AND WILL BE COUNTERPRODUCTIVE TO LONG-TERM SOLUTIONS

While S. 2310 seeks to assist in meeting the natural gas shortage for the winter of 1975-76, it should initially be recognized that the many additional uncertainties which are created in the natural gas market place will considerably add to the problems facing producers, pipelines and consumers and result in a further dampening of the massive effort needed for the development of new supplies. There is nothing in the bill which provides any incentive to search for new supplies of natural gas. Indeed, the potential reduction in onshore prices which have served as an incentive for increased development; the prospect of freezing those prices at arbitrary past levels and the uncertainties created as to possible future federal preemption of the intrastate market are certain to delay if not substantially reduce the investment which would otherwise be made toward the development of any natural gas supplies.

Although the bill is designed to provide relief for the winter heating season of 1975-76, it would be administratively impossible to implement the complex procedures which are required prior to the commencement of that heating season within the next six weeks. It is not realistic, therefore, to expect the administrative actions which this bill would require to be taken within the time available before the commencement of winter. The FPC is required to establish area rates before implementation can commence and is given fifteen days to accomplish that which has required years to fulfill in the past. Furthermore, the FPC is required to base those rates upon an examination of contracts entered during the month of August 1975, few of which are yet available to the Commission and many of which may not be available during 1975, if ever. Further, the FPC is required to establish a category of "essential user" and to then apply those rules to the existing and prospective requirements of each pipeline. It is optimistic to believe that this could be accomplished within fifteen months, and yet the bill would require the Commission to complete its responsibilities within fifteen days. As a further difficulty the bill requires concerted actions by the FPC, the Federal Energy Administration, the Secretary of the Interior, the Secretary of Agriculture and the Environmental Protection Agency. Disagreements among these agencies could result in protracted delays. Additionally, the provision permitting civil suits by private litigants would assure such uncertainty that no action would be likely this winter.

While the apparent concept of S. 2310 is to attract supplies of natural gas for interstate pipelines, this is not achieved by the bill.

The most serious deficiency in the plan as far as emergency purchases are concerned is that it permits pipelines to buy only "new natural gas" which is defined essentially as gas that has not been committed by contract to interstate or intrastate commerce. This means that presently commited intrastate gas which may be surplus to the purchaser's current needs would not qualify for purchase under this plan. It is INGAA's understanding that most, if not all, of the available emergency gas is presently committed intrastate gas. Therefore, the emergency gas purchase would be essentially meaningless since there would be little if any "new natural gas" supplies.

In addition, the establishment of a ceiling price based upon an average for a single month may not be workable. How much gas was contracted for intrastate in each of the many FPC pricing areas during the month of August, 1975, is unknown and much of the information the FPC would need to make such a determination for each area is not available to FPC and beyond its authority to obtain. Further, even if the price is at or near the highest level of sales in the area during the recent past, it is doubtful that the ceiling price would

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