Natural Gas Industry - Overview

Natural gas industry can be divided into three main functions/services: production/wellhead, transportation/pipeline, and distribution.

Productions/wellheads
In this segment natural gas is produced through exploration and exploitation gas fields.  From well heads gas is collected to processing facilities and formed into suitable gas for transportation. US natural gas reserves is about 4% of total reserve in the world. In 1981 about 12000 field producers existed and all markets were not concentrated.

Natural gas price (wellhead) was regulated from the 1950s to the 1970s. Wellhead prices that were sold interstate were regulated since 1954 by Federal Power Commission (FPC). Therefore there were two types of gas prices: regulated interstate and unregulated intrastate (much higher price). The result was an allocative distortion in natural gas market.

Since 1970s Congress gradually repealed price regulation on the premise that the market for production was competitive. By the end of 1993 wellhead gas was totally unregulated.
For an example price of natural gas delivered to residential customers in Illinois increased by 18.7% from period 1998-1999 to period 1999-2000.

Pipelines
Interstate pipelines transport natural gas from the gas fields to the market areas. The Federal Energy Regulatory Commission (FERC) has jurisdiction over these pipelines particularly the rates and terms and conditions. 

Unlike electricity transmission pipelines control their own operations without any formal coordination in the network.  25 pipelines accounted for 90% volume in 1987. Most LDCs served by 3 or fewer pipelines. In 1938 Federal Power Commission (FPC) controlled interstate pipelines. The rates were set under rate of return regulation (costs of services plus ‘profit’) on long term contracts usually for 20 years.

In 1985 pipelines could offer unbundled services in nondiscriminatory basis to all shippers. Furthermore FERC Order 636 required pipelines to separate gas sales from transportation.
In addition intrastate pipelines transport gas within a state’s boundaries and therefore they are regulated by state commissions. About 30 percent of the total pipeline miles in the U.S. represent intrastate pipelines. In some cases pipelines although receiving gas from interstate pipelines is exempt from FERC jurisdiction because the delivered gas is consumed only within state.

Distribution
Local distribution company (LDC) delivers natural gas the city gate (point at which the LDC receives natural gas from pipelines) to the end users.  LDC is a natural monopoly service and has exclusive rights to distribute gas and regulated by state public utility commission. Compared with interstate and intrastate pipelines, local distributors serve a much larger number of customers at a much lower throughput per customer.

LDC may provide both bundled sales services and unbundled services. In bundled service, the LDC buys and resells to retail customers both the gas commodity and interstate transportation. Several states also have opened competition in retail market which allows customers to purchase their gas from alternative suppliers. 

Prior to FERC Order 636 (1992), retail gas utilities procured much of their city-gate supplies from the interstate pipelines under long-term contracts for the gas commodity, transportation, and off-system storage services. Order 636 caused gas utilities to procure more of their gas supplies separately from transportation service. Consequently, since 1992, gas utilities have played a greater role in managing their gas procurement practices.

State commissions regulate retail prices charged by LDC, generally on the basis of cost of service (including a return on investment and depreciation). Gas price is pass-through subject to purchased gas adjustment (PGA). Illinois Commerce Commission has approved alternative regulation for gas costs based on company’s performance in 1999.

There were 11 investor-owned gas public utilities in Illinois in 2009. The largest is Nicor with about 2.17 million customers followed by People Gas, Ameren IP, and North Shore with 830 thousand, 421 thousand, and 158 thousand customers respectively. The most expensive in People Gas with 128.5 cents/therm followed by AmerenIP with 125.02 cents/therm, North Shore with 118.71 cents/therm, and Nicor with 101.23cents/therm.