Our Industry :: Major Regulatory Acts

Natural Gas Major Regulatory Acts

The American natural gas industry was heavily regulated by the federal government from the late 1930’s until the late1970’s, when shortages forced a re-evaluation in the purchase and delivery of the commodity. Now, competition plays the biggest role in pricing and the industry overall. The cumulative effect of deregulation was to create an open access environment that we enjoy today. Natural gas commodity is now bought and sold in a free market which delivers it to consumers at the lowest possible cost. The key regulatory acts that shaped this market are summarized below.

Early Regulation

In the early days of the industry, local governments could, and did, oversee natural gas’ entire process from collection to processing to sale. However, as gas transportation methods improved, pipeline networks began to span larger and larger areas.

Natural gas was seen as a commodity that could be easily monopolized, and as the industry grew, so too did the level of government regulation until the federal government passed the Natural Gas Act (NGA) in 1938, which gave the Federal Power Commission (FPC) control of interstate gas transmission companies. The NGA, however, did not set specific regulations for prices other than that they be “just and reasonable” for the transmission or sale of natural gas in interstate commerce.

1954- Phillips Petroleum Co. v. Wisconsin

In 1954, the Supreme Court decision in Phillips Petroleum Co. vs. Wisconsin applied the regulations on interstate gas transmission companies to producers who sold gas for interstate commerce to those companies as well, thus extending price control to the wellhead.

Prices were controlled to cover the cost of production plus a “fair” profit, not regulated to the market value of the service.

Although the FPC had been able to control the relatively small number of interstate companies, the vastly greater numbers of the producers created significant administrative problems.

The FPC responded by regulating prices regionally in 1960, dividing the country into five producing regions. However, by 1970 only two of the regions had been priced, and for many producers prices remained frozen for the entire decade despite the differences in costs of production both between separate companies and from year to year.

1978- Natural Gas Policy Act (NGPA)

As natural gas shortages gripped the nation during the 1970’s, Congress passed the NGPA to increase supply and get more gas moving from the intrastate markets in producing states to interstate markets between states. The act both promoted the interstate and intrastate transportation of natural gas and began the process of de-regulating wellhead prices in general for the industry by decontrolling the price for gas from new wells.

1984- Order Nos. 380

Although gas supplies became cheaper and more readily available, the price of gas for local distribution companies remained high because of “minimum bill” obligations. Under these obligations, a local distribution company (LDC) could be charged the full cost for contract requirements whether they actually purchased all the gas or not.

Order Nos. 380, et seq., by the FERC allowed LDCs to abrogate such contracts with the pipeline companies thus eliminating the minimum take obligations.

1985- Order No. 436

After special marketing programs and selected transportation programs were declared illegal under the NGPA in Maryland Peoples Council vs. FERC, pipelines lost their main source of promoting use of their facilities to generate revenue.

In response, Order No. 436 by FERC began the transition of pipelines to merely provide transportation services, rather than gas sales, thus creating open access transportation. However, long term “take-or-pay” contracts with producers, which had already caused problems for pipelines, became an even greater issue.

1987- Order No. 500

In response to the problem of “take-or-pay” obligations, Order No. 500 allowed pipelines to buy-out their contracts and pass some of that cost on to their customers, apply third-party gas sales contracts towards its minimum purchase obligation, and recover some costs through a “fixed charge.”
It was also around this time that gas marketing experienced significant growth in the industry.

1989- Natural Gas Wellhead Decontrol Act of 1989 (NGWDA)

The NGWDA repealed all pricing regulations on wellhead sales and completely de-regulated all first sales of natural gas by 1993. First sales included sales to pipelines, LDC’s, and end users, or any other sale determined by FERC to be a first sale.

1992- Order No. 636

The commission determined most pipeline firm sales were of bundled, rather than stand-alone, transportation services, a trend they had tried to do away with using an order passed in 1988.

In light of the continuing high sales of bundled services and their non-competitive effect on the market, the commission declared them a violation of the Natural Gas Act and mandated the dismantling of bundled sales in Order No. 636.

The general purpose of Order No. 636 was to increase competition among pipeline grids and ensure reliable gas transportation.

One aspect prevented the inhibition of pipeline interconnections allowing customers to choose among many providers through many transportation routes. The order also mandated in Part 284 of Order 636 that pipelines are to accommodate the delivery and reception of gas at any point.

Current market

Today, competition, and not regulation, has the biggest effect on almost all aspects of the natural gas industry— only pipelines and local distribution companies are under direct government oversight. More details on the above orders and others are available at the FERC web site under the “Gas” tab at http://www.ferc.gov/legal/maj-ord-reg.asp.

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