Reconstituting the Natural Gas Industry from Wellhead to Burnertip*

Article excerpt

The history of government intervention in the natural gas industry can provide a wealth of insights to students of government regulation. Over the past century, the industry has endured the entire regulatory cycle-limited intervention based on a well-documented market imperfection, broadened geographic scope of regulation necessitated by changes in technology, expansion of regulation beyond that required to respond to a market imperfection, mismatches between regulatory goals and forms of intervention, gross regulatory distortion of the gas market, and, during the past three years, implementation of a reconstitutive strategy' that has the potential to restore a healthy match between the imperfections of the gas market and the scope and form of government intervention in that market. In this article, I attempt to extract from this history lessons for students of law, economics, political science, and political economics.

In part I, I trace the history of the gas industry and its regulation from the industry's birth in London in 1802 to the apogee of inappropriate and excessive intervention in the U.S. gas market in 1978. In part II, I identify the imperfections that affect the gas market and the limited forms of intervention that can correct for those imperfections. In part III, I describe the complicated sequence of actions through which the legislative, executive, and judicial branches of government have combined to begin to replace pervasive and distortive command and control regulation with a reconstitutive strategy carefully crafted to achieve the goals of government intervention. Finally, in part IV, I identify the lessons embedded in the century of government intervention in the market for gas.

I. THE HISTORY OF NATURAL GAS REGULATION-1802-1978

The period from 1802 until 1978 saw the birth and growth of a new industry that held the promise of providing enormous improvements in quality of life to all. Early in the industry's development, scholars recognized imperfections in the structure of the market for the industry's product that suggested the need for some form of government intervention to insure that society realized the full benefits potentially available from the new industry. During the first half century of government intervention in the market, the industry thrived under regulatory regimes that were designed and modified in geographic scope to fit the evolving structure of the market. Over the four decades from 1938 through 1978, however, the three branches of the U.S. government made a series of public policy errors that harmed all segments of the industry-producers, consumers and market intermediaries.

A. Local Distribution of Manufactured Gas

When William Murdoch began installing lights fueled with gas manufactured from coal in London in 1802,2 he may have foreseen that he was pioneering a technology that would sweep the globe. Murdoch almost certainly did not anticipate, however, that his innovative action would give rise to a century of public policy debate, including several landmark decisions of the U.S. Supreme Court, two Presidential vetos of Acts passed by Congress, and one of the longest and most bitter debates in the history of Congress.3 Murdoch's modest beginning soon was followed by more substantial ventures that entered the business of manufacturing gas from coal and distributing the gas for lighting in the major cities of Europe and North America.4 Baltimore was the site of the first U.S. gas distribution company in 1816.5

In the early years, several gas distributors operated in each major city, at least putatively in competition with each other.6 In 1848, John Stuart Mill, the great proponent of vigorous competition unencumbered by government intervention, identified a flaw in this market structure.7 Mill used the gas distribution industry to illustrate an important exception to his laissez faire prescription for maximizing society's wealth. Mill observed that the economies of scale in distributing gas were so large that the function could be performed at the lowest cost by a single firm. …