Economic Report of the President

system resulted. Price controls, when effective, led to shortages inthe interstate market both because the interstate pipelines could notcompete effectively against intrastate pipelines for gas supplies, andbecause artificially low prices encouraged consumers to demandmore natural gas than they would have otherwise.Rising oil prices in the 1970s triggered occasional gas shortages ininterstate markets. Industrial use of gas was curtailed during periodsof shortages, and many potential users of gas, both at the industrialand residential level, were proscribed from using gas. The abnormallycold winter of 1977 produced a severe interstate gas shortage, resultingin numerous factory shutdowns, thousands of layoffs, andother serious problems. It was evident by the mid-1970s that the existingsystem of wellhead price controls produced serious inefficienciescausing the underproduction of gas for the interstate market andthe misallocation of gas between the interstate and intrastate marketsand among different users within the interstate markets.The Natural Gas Policy Act of 1978The natural gas regulatory environment was changed substantiallyby passage of the Natural Gas Policy Act (NGPA) in 1978. This actwas intended to encourage production by deregulating the prices ofnewly discovered gas while restraining the growth of average gasprices through permanent controls on the price of older gas. TheFederal Energy Regulatory Commission replaced the Federal PowerCommission, and price controls were extended to gas sold in intrastatemarkets. Over twenty regulated categories of gas were created,each with its own initial ceiling price and rules for price escalationover time.The NGPA provides for the phased deregulation of the wellheadprice of most gas discovered after 1977, which should account for 40to 60 percent of all gas in January 1985, while a smaller volume ofgas is scheduled for deregulation in July 1987. A small amount ofhigh-cost new gas was deregulated under the NGPA in 1979. Mostgas to be deregulated in 1985 or 1987 is fixed until those dates at aprice, in inflation-adjusted dollars, leading to the oil equivalent pricelevel existing in 1978. The NGPA also includes "incremental pricing"provisions intended to allocate high-priced gas to industrial users,thus preserving lower prices for other users. Along with the NGPA,the Congress passed the Powerplant and Industrial Fuel Use Act; thislaw authorizes nonprice rationing of gas to counter the problems inherentin continued price controls.As with many efforts to regulate prices, the NGPA has created numerousproblems. Instead of producing the lowest cost gas suppliesfirst and moving successively to higher cost sources, producers areinduced by the different price categories to produce high-cost gas103