Appropriateness of Imposing Common Carrier Status on Interstate Natural Gas Pipelines*

By Mogel, William A.; Gregg, John P. | Energy Law Journal, January 1, 2004 | Go to article overview

Appropriateness of Imposing Common Carrier Status on Interstate Natural Gas Pipelines*


Mogel, William A., Gregg, John P., Energy Law Journal


I. INTRODUCTION

For every problem there is a simple solution . . . which is usually wrong.

H. L. Mencken1

Natural gas, which has been called a perfect fuel,2 currently is too expensive,3 priced too low,4 in excess supply, but will be in demand in the future.6 Although natural gas has enjoyed a price advantage over alternative fuels,7 natural gas now is more expensive than fuel oil in many parts of the United States8 This has caused a significant problem for interstate natural gas pipelines which find that their markets are eroding at the same time when they must take or pay for large volumes of unmarketable natural gas pursuant to contractual obligations incurred in the middle and late 1970's during the period of natural gas curtailments.9

As a partial solution, some10 have argued that the existing approximately 269,000 mile natural gas pipeline transportation system11 is a barrier to the sale, transportation, and use of natural gas unless that system is converted to one of common, or at least, contract carriage.12 As a result, the Reagan Administration and several members of Congress recently introduced legislation to impose common carrier obligations on interstate natural gas pipelines.13 If this occurred, large end-users of natural gas, such as petrochemical companies,14 as well as local distribution companies, could purchase natural gas directly from producers in the field, compel transportation of the gas to their plants or distribution facilities, and pay, presumably, a lower price than paid presently to their interstate pipeline supplier.15

This Article discusses the various proposals intended to make interstate natural gas pipelines subject to the principles of common carriage. As background, an overview is given of the existing regulatory structure of the natural gas pipeline industry. Second, the history of common carriage and contract carriage is discussed. Third, this Article analyzes past legislative attempts to impose common and/or contract carrier status on interstate natural gas pipelines. The final sections examine current attempts to subject natural gas pipelines to common or contract carriage principles. It is concluded here that imposing common carrier obligations on interstate natural gas pipelines may be appropriate in alleviating certain price distortions but would not be a great benefit to all natural gas consumers because of the established structure of the natural gas industry.

II. THE NATURAL GAS INDUSTRY

Are you gonna get any better, or is this it?

Earl Weaver16

A. The Past

There are three major segments of the natural gas industry: production, transmission, and distribution. Essentially, interstate natural gas pipeline companies act as middlemen, buying natural gas from producers at the wellhead, transporting it, and reselling it directly to large end-users or to local distribution companies,17 which in turn resell it for a variety of end users.18 In addition, several interstate natural gas pipelines also have established their own production affiliates for the purpose of developing their own natural gas reserves19 Interstate pipelines also perform, on a limited basis, contract carriage service, for which they receive the cost of transportation plus a profit20

The federal government's first significant involvement with the natural gas industry was in 1938 with the passage of the Natural Gas Act (NGA)21 The NGA granted the Federal Power Commission and its successor, the Federal Energy Regulatory Commission (Commission)22 the authority to regulate the transportation and sale of natural gas for resale in interstate commerce. The NGA further provided that natural gas pipeline facilities cannot be constructed or abandoned without prior approval of the Commission.23 Further, no rates for natural gas transported and sold for resale in interstate commerce can be charged unless first approved by the Commission.24

Until 1954, the Federal Power Commission essentially regulated only the interstate natural gas companies that resold gas to local distribution companies, i.

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Appropriateness of Imposing Common Carrier Status on Interstate Natural Gas Pipelines*
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