For Natural Gas, A Slow Escalator? Regulation of "escalator clauses" in natural gas contracts favored by House Commerce Committee #-T-!HE: tren-d toward higher prices that -** some natural gas producers have en joyed may be slowed down soon. Fed eral regulation of so-called "escalator clauses" i n gas contracts is gaining favor in Congress. This could mean more stable gas prices in the future for the cliemioal industry. Escalator clauses generally are part of contracts made between gas pro ducers ancl pipeline operators. Some contracts call for one price when the first gas is delivered, with automatic increases c o m i n g after fixed periods of time. Otlier contracts depend upon changing conditions. For example, if the pipeline operator gets an increase in his rates, t h e producer's rate also goes up. Alcin to this type of clause are other agreements known as "favored nation clauses." Despite their name, the clauses generally cover only a single gas field. If one producer in the field can -work out a better contract with the pipeline—or even another pipeline— otheE- producers in t h e field get the same rate. Thte House Commerce Committee has gone o n record favoring regulation of these contracts by· t h e Federal Power Commission. The committee, which is holding hearings on bills to exempt in dependent producers from over-all FPC regulations, felt that control over esca lator and similar clauses in gas con tracts needed close scrutiny. Basis for the ;proposed legislation is a Supreme Court decision last year which calls for F P C regulation at the well-head as well as i n the pipelines. The present hills would reverse this decision generally by amending the 1938 Natural G a s Act. O n e bill, introduced by Rep. Oren Hariris (D.-Ark.), would keep some in direct control over small producers' prices, even though i t goes along with the general idea of freedom from regu lation. I t provides that pipeline com panies, utnder FPC supervision, could write off as operating costs only the "reasonable market, price'* for the gas they buy from producers. I n practice, however, this could ef fectively determine what prices pro ducers would be paid for their gas. Pipelines would shy away from paying premium prices for gas if they knew that they could charge off only part of t h e cost a s the "reasonable market price." TTie producers, nevertheless, could get around this restriction by selling their gas on an intrastate, instead of VOLUME
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interstate, basis. Federal control of pipeline prices only covers gas shipped in interstate commerce. This program, if ever put into practice, could bank rupt pipeline companies. It would also deal a serious blow to parts of the chemical industry which depend on out of state gas as a raw material. Fortu nately, there is little likelihood that this economic upheaval will come about. The Harris proposals would apply only to new or renegotiated contracts. The bill's original wording, however, was modified to clarify the position of escalator clauses. A s revised, the bill says escalator clause price increases should not be considered to be new or revised contracts. Safety or Socialism? The proposals to regulate escalator clauses were greeted with both high praise and scathing denunciation. On one side, spokesmen for local gas distributors, who favor FPC regulation, feel that escalator clauses are a threat to the present gas price structure and should be regulated. The distributors, who buy from the pipeline operators, would like to see low gas prices maintained. Consumer groups also are fighting for regulation. On the other side of the fence, Robert B. Brown, counsel for the In dependent Petroleum Producers Associ ation, feels that regulation of escalator provisions is unsound. "This (proposal) would give the FPC authority to abrogate price pro visions of bona fide contracts. It would disregard the sanctity of contractual obligation and bring havoc on our sys tem of law. Such a proposal, if adopted, would go substantially all the way in bringing production and gather ing of natural gas under FPC juris diction." Supporters of federal regulation say that natural gas has a captive market and, therefore, should b e regulated. They urge that FPC be given control of existing gas contracts as well as new or renegotiated agreements. Oppo nents of regulation cry "creeping Social ism" and warn of the danger that federal regulation could b e extended to other fuels if Congress sets a precedent for natural gas. Federal regulation would cut down supplies of natural gas in areas wluch now use it most. While the hue and cry continues, the committee has temporarily adjourned to enable its staff to catch up with its work. New amendments can be ex pected when the lawmakers get back to work.
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