Gas Deregulation Valuable After 30 Year Transformation

Thirty years ago, with the passage of the Natural Gas Policy Act of 1978 (NGPA) as part of the much bigger National Energy Act, the long journey to deregulate natural gas sales in interstate commerce started!

Driven by the necessity to increase the U.S. natural gas supply, legislation was passed freeing gas from wellhead price controls for gas going into interstate markets and sales. Intrastate gas sales were essentially free-market priced and initial sellers could get what the market would bear. The government changes made natural gas a commodity to be freely traded in energy markets and opened up supplies of the much-needed fuel.

The history of natural gas regulation is long and strewn with political games. In 1938 when natural gas was just beginning to enter interstate markets with the development of seamless steel pipe for transporting the fuel from producing to consuming areas, Congress passed the Natural Gas Act giving federal jurisdiction to interstate transportation and wholesale gas sales. The next big regulatory ruling was the Supreme Court decision in 1954 (Phillips case) that gave the Federal Power Commission (FPC) jurisdiction to set wellhead gas prices for interstate sales.

The result was not only to control prices and make natural gas prices unresponsive to market forces but also to control who could make gas purchases from the wellhead. For interstate commerce, gas sales could only be made to individual pipelines and all contracts were for the life of the lease. This greatly controlled the ability of natural gas to find and secure larger markets. This was not a real problem until energy supplies became an important factor in commodity markets in the early 1970s when OPEC raised the prices significantly for crude oil.

While natural gas in intrastate markets could change prices to meet market conditions caused by the multifold increases in crude oil and crude oil products prices, natural gas in interstate markets could not similarly adjust. The FPC was slow to make price changes because of its workload and the politics involved. With interstate prices slow to respond, natural gas supplies in the early 1970s in the interstate markets were affected significantly and shortages occurred. Gas reserves in the U.S. were plentiful but because of the low prices no one wanted to produce and sell at below-market values.

Finally, in 1978 with the NGPA, Congress and the president made the bold move. Steps were put in place to decontrol natural gas in interstate markets. The Federal Energy Regulatory Commission took over from the FPC and during a 25-year period various rules and orders were made to complete the decontrol of interstate natural gas commerce. The last major orders were released in the early 1990s. All these orders had the effect of changing the natural gas industry from the wellhead to the consumer’s inlet, whether it was a commercial user or a city gate where sales were made to local distribution companies.

The original plan for the “open access” of natural gas was to go all the way from the interstate transportation to individual states and even to the distribution companies that deliver gas to individual homes, commercial and some industrial users. In the restructuring programs, sometimes referred to as “Residential Choice Programs”, individual states would decide whether they wanted to maintain the “system” approach to gas sales or open the market completely. The Energy Information Administration has tracked the progress in each state regarding these programs.