at a higher level. 



"With growinix demand for natural gas, it 

 is important to encourage a greater rate of 

 exploration and development than presently 

 exist. Altliough conventional and perliaps 

 comiDletely new types of land sources will 

 provide some reserves, it appears that the 

 offshore areas will be of vital importance 

 for several decades. 



Two categories of FPC regulatory policy 

 should be modified to lielp encourage addi- 

 tional exploration and development of gas 

 reserves: pipeline construction and well- 

 head price. 



New Pipeline Construction 



Under current procedures, a gas transmis- 

 sion company will not receive permission to 

 construct a new pipeline unless it can prove 

 to the FPC that, among other things, suffi- 

 cient reserves will be available to satisfy the 

 consumers who will come to rely on the new 

 pipeline. However, transmission companies 

 sometimes find it difficult to furnish such 

 proof to the FPC because they are unwill- 

 ing to connnit themselves firmly to purchase 

 gas from undeveloped reserves, and produc- 

 ers are reluctant to make the consideral^le 

 expenditures necessary to develop the new 

 reserves unless they are assured of custom- 

 ers. Tliey camiot be assured of customers 

 until tlie FPC apjiroves construction of the 

 new pipeline. Further, producers are unwill- 

 ing to reveal tlieir proven reserves to the 

 FPC because public disclosure may hurt 

 tliem in bidding for offshore leases. 



Tliis problem does not lend itself to simple 

 resolution. Tlie Commi.ssion urges that the 

 FPC study every possible solution, including 

 the acceptance of contracts between gas pro- 

 ducers and gas transmission companies in 

 substitution for geological evidence of re- 

 serves. The FPC also should examine its 



policies to determine the extent to which ef- 

 forts to establish proven reserves result in 

 disclosure adverse to a company and devise 

 methods by which such impact, if any, can be 

 legitimately minimized. 



Wellhead Price Regulation 



The maximum price a transmission com- 

 pany can pay for gas at the wellhead is 

 regulated by the FPC. The FPC recognized 

 the importance of encouraging the search 

 for supplies by adopting a two-price system 

 in the Permian Basin rate case and a multi- 

 price system in southern Louisiana that fixes 

 higher prices for all new gas-well gas. Differ- 

 ences between offshore and onshore opera- 

 tions were mentioned in the case involving 

 south Louisiana, an area of great potential 

 for offshore reserves. But the rates fixed, ac- 

 cording to the petroleum companies, do not 

 reflect adequately the increased costs asso- 

 ciated with offshore operations. Con- 

 sequently, the petroleinn companies say that 

 they have little financial incentive to search 

 for offshore gas, except when they are certain 

 of finding large quantities. 



The Commission recommends that the 

 Federal Power Commission reexamine its 

 differential price policies for natural gas 

 and make such adjustments as it deems 

 advisable to reflect adequately the in- 

 creased cost of offshore production. 



Technology 



The increasing costs of natural gas should 

 furnish a strong incentive to the transmis- 

 sion companies to reduce pipeline costs 

 through improved technology. In spite of 

 this incentive, however, the transmission in- 

 dustry has had a very low level of research 

 and development expenditures. The gas 

 transmission companies have been discour- 



