Deregulation of Utilities: The Natural Gas Experience

By Dreyfus, Daniel A. | Business Economics, April 1989 | Go to article overview

Deregulation of Utilities: The Natural Gas Experience


Dreyfus, Daniel A., Business Economics


Deregulation of Utilities: The Natural Gas Experience

THE NATURAL GAS INDUSTRY in the United States is frequently described as having three major sectors: production, transmission, and distribution. Even this simple three sector model indicates the lack of organizational or economic integration of the industry. Gas delivered to an ultimate consumer may have been discovered and produced by a corporation that views itself primarily as an oil company; purchased and sold by an independent broker; transmitted thousands of miles by a pipeline company regulated by the Federal Energy Regulatory Commission (FERC); and delivered to an entirely separate distribution company that may be privately or municipally owned and regulated by state or local government.

But the situation is much more complex than the model suggests. Producers of natural gas vary widely and range from small, privately financed independent producers who are exclusively in the gas business to the larger major international oil companies. Pipeline companies are frequently subsidiaries of more diverse corporate giants that also might include production affiliates, distribution companies, other energy related companies, and totally unrelated enterprises. Distribution companies, similarly, may be large corporate enterprises or affiliates of corporations with a diversity of activities; or they may be small, municipally owned ventures with only a dozen employees. A number of gas distribution companies, including some of the largest, are combined utilities that also supply electricity, a major competitive energy form to gas. Recent regulatory initiatives have introduced a new participant group in the form of independent gas brokers who perform the merchant function that formerly was largely a pipeline company activity.

Generalizations about the effects of deregulation on the gas industry, therefore, might easily fall victim to the diversity of situations and industry viewpoints that this structure creates.

THE ROOTS OF REGULATION

Governmental involvement in the gas industry can be traced to the industry's inception. The current complexity of the regulatory system has evolved along with the industry itself. In the earliest ventures, the high investments required to construct a "town" gas plant to generate synthetic gas and to install a distribution system required some assurance of a market. Frequently, the city itself was the largest prospective customer. The city street lighting contract provided the assurance of a viable financial undertaking. Some municipalities chose to enter the gas business themselves as a public venture.

In any event, the gas company required powers of eminent domain and the right to lay pipe in city streets, so that a close involvement with the city government was assured. The charters and franchises granted to gas companies by cities were highly varied, but the charters soon began to recognize the public interest in exclusive service areas as well as the need for consumer protection from monopoly pricing. As early as the mid-1880s, some city charters to gas companies were setting ceiling prices for gas.

States also were involved early in regulation of the gas business. Because of the size of investment, early gas companies sought the protection of incorporation that, prior to general incorporation laws, was obtained in the form of a charter granted by the state legislature. The states also intervened in the gas industry with specific economic or safety statutes, and in 1907 the states of New York and Wisconsin established the first state commissions to regulate public utilities.

Interstate gas transmission pipelines began to be built in the 1920s to transport natural gas from the oil fields to industrial centers. As the result of gas utility mergers under holding companies, federal government attention began to focus on the gas industry. The initial impetus for federal regulation was accusations of discriminatory service and pricing. …

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Deregulation of Utilities: The Natural Gas Experience
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