Soaring Gas Prices Another "Success" for Deregulation

Jan 22, 2001

In the last few weeks, heating gas bills have skyrocketed in many areas around the country. Workers with moderate sized homes in the Chicago area, for example, have received bills of $300, $500 or even higher–for one month’s heat. It has become a real question how they can pay their bill. Last March, Peoples Gas was charging 30 cents per therm, the measure of gas, but today 98 cents, more than three times as high.

The official reasons given for the sharply higher price of gas is that demand has grown faster than supply. The government’s Energy Information Administration says of the increased price for gas at the wellhead (140% higher than a year ago), "This increase reflects a competitive market reaction as supply has lagged in its response to a recent surge in demand."

The problem is the official figures don’t show a big surge in demand. The last month for which U.S. consumption is available is December 2000. In December 2.6 trillion cubic feet were consumed, up only a bare one and a half% from January 2000, the height of last winter. December’s consumption of gas is only 0.6% higher than the previous peak month of January 1999. Yet prices have tripled since then, so what’s up?

Deregulation

For a couple of decades now, the U.S. government has been deregulating the natural gas industry. In 1978, under Democratic President Jimmy Carter, caps were removed on the price the producers of gas could charge. In 1984, under President Reagan, the pipeline companies had to start selling to other customers than the ones they had exclusive agreements with. In 1992, under George Bush, the pipeline companies were given the right to charge simply to transmit the gas on their pipelines; they no longer had to buy and sell it. And in 2000, under President Clinton, all government restrictions setting a top price for short term sales through pipelines were removed.

Deregulation was presented as a way to introduce competition and so lower prices. Reality was quite a bit different. As The Wall Street Journal of January 3 said "Marketers emerged as a new breed of middlemen that took more profits without boosting gas production." A big part of their operations consisted in using the "futures" market at the New York Mercantile Exchange, where speculators bet on the future price of natural gas. For example, Apache Corp. recently locked in high prices for two years, getting a contract to deliver gas at $6 per thousand cubic feet, while at the same time buying up gas reserves in the southwest at $2 per thousand cubic feet. It’s not surprising that its profits have risen 353% over the last year.

At the consumers end, People’s Gas in Chicago is repeatedly telling its customers it has to pay higher gas prices to its suppliers. This is so, but it didn’t stop Peoples Gas from taking in 86 million dollars in profits last year, plus paying its top executives millions of dollars in salaries. The biggest supplier of Peoples Gas is Natural Gas Pipelines of America, which turns out to be owned by Occidental Petroleum, which just happens to own gas fields besides pipelines. When Chicago consumers prices went up by three times, Occidental took in 1.2 billion dollars in profits to make a rate of profit on its investment an incredibly high 41.1%, after taxes!

In the Chicago suburbs, Nicor Corp. is the gas company. Besides getting gas from Occidental Petroleum, it gets it from El Paso Natural Gas, which is owned by El Paso Energy Corp. This pipeline company had profits for the last nine months of 525 million, much of it coming directly from the checks of overwhelmed bill payers. Nicor also buys from Enron Corp., a new energy middleman, operating in both natural gas and electricity, with over 40 billion dollars in sales. Its profits for the last nine months were 919 million dollars, up a third over the same period the previous year.

Deregulation in the natural gas field, as in so many others, turned out to be a way to raise gas prices sky high, rather than to lower them. The robbery of the consumers of gas isn’t caused by an excess of demand for gas, but by excess profits going to all the companies along the gas distribution chain.