ECONOMIC

usinesses and institutions have had to substitute more expensive energy fornatural gas in the past few years; and where natural gas is critical for someindustrial uses, work stoppages and unemployment have also resulted. Fewresidential customers already subscribing to gas service have encounteredproblems, but some new applications for gas service have been denied. Since1972, as an example, no new customers have been accepted by the ColumbiaGas System, which serves consumers from Virginia to Ohio and New York.Recent forecasts indicate a growing shortage of natural gas to meet thecontract requirements of pipelines for gas deliveries to local distributors andportend future problems even for residential customers.The economic costs of the natural gas shortage emerge in various forms.First, under the nonprice allocation system that has been devised by theFPC, distribution companies are allocated gas on the basis of a set of FPCapprovedpriorities. This allocation system does not directly consider therelative cost of switching to an alternative energy source or the relativeproductivity of natural gas in alternative uses. The gas that is available maytherefore not be going to its most productive uses. Second, natural gas isunderutilized as an energy source in favor of more costly alternatives becausegas producers, responding to the artificially low prices, undertake less explorationand development than would occur in an unconstrained market. Duringthe last decade total annual additions to natural gas reserves declinedslightly, while demand was increasing steadily. Third, because intrastate salesof gas are not controlled by the FPC, producers prefer to sell as much gas aspossible at the higher prices prevailing within the producing States. As thecontrolled price of natural gas has lagged behind the rising price of alternativefuels, this problem has become more serious. About two-thirds of thenatural gas reserves committed to markets went to interstate marketsin the late 1960s, but this fraction had declined to less than 20 percentby 1975. The unregulated price of natural gas in gas-producing States issometimes lower than the price of equivalent energy in nonproducing areas,where businesses occasionally cannot obtain gas at any price. Moreover, forsome industrial processes, natural gas is less costly to use than alternativefuel sources which could supply the equivalent energy. As a result firms mayfind it advantageous to move from regions served by regulated natural gasto regions where supplies are available. Instead of being based on truerelative locational advantages, this migration to gas-producing States isinduced because the regulated price of gas is held below the competitive level.Last year the FPC announced a threefold increase in the regulatedprice of "new gas" (gas coming from wells on which drilling commencedafter January 1, 1976). FPC efforts to raise the price ceilings can contributeto economic growth, but any long-term solution to the natural gas shortagenecessitates legislative action to eliminate price controls. Although increasedprices will undoubtedly affect residential consumers, one shouldnot ignore the current costs to consumers caused by regulation-induced misallocation:those which are now hidden in the prices of goods and services152