Natural Gas Regulatory History

Early history
Natural Gas Act in 1938
Real government involvement in natural gas industry started in 1938 when Natural Gas Act (NGA) issued. NGA mandated Federal Power Commission (FPC) established in 1920 to rule interstate natural gas delivery due to heavily concentrated and market power in interstate pipelines. 

In 1954
In 1954 Supreme Court decided based on Phillips Petroleum vs. Wisconsin case that wellhead gas prices were regulated by FPC because there was evidence of excessive prices charged by producers. Therefore since 1954 interstate pipeline and wellhead prices were regulated but not intrastate pipeline. The FPC adopted national price ceilings for the sale of natural gas (wellhead) into interstate pipelines.

The regulation of natural gas prices created economic incentives for producers to divert interstate gas to the unregulated intrastate market where they could obtain higher prices. The regulated prices dampened the incentive to invest in the production of natural gas, which led to the gas shortages in the 1970's. the regulations that were supposed to protect interstate customers from high prices of gas forced them to consume the even higher priced alternative fuels.

In 1977 Federal Energy Regulatory Commission (FERC) replaced FPC and took over all FPC responsibilities. 

NGPA in 1978
To overcome the problem Natural Gas Policy Act (NGPA) was issued in 1978. NGPA while allowing higher prices for new gas wells it kept all old wells selling at the existing prices. In other words, all new gas was to be decontrolled from 1985 (price ceiling gradually increased/phase out) but gas from wells begun before 1977 was to remain controlled. 

Open access era
FERC Order 436 in 1985
The industry evolved further. FERC issued order 436 which separated gas transportation (pipelines) from bundled merchant services on voluntary basis. In other words, Pipelines did not require offering transportation only services but if they did, access rate must not be nondiscriminatory.  This order started open access era in natural gas industry.

NGDWA 1989
In 1989 Natural Gas Wellhead Decontrol Act eliminated all remaining wellhead ceiling by 1993. Thus, allowing the market to completely determine the price of natural gas at the wellhead.

FERC Order 636 in 1992
The FERC Order 636 in 1992 revised Order 436 by requiring (mandatory) pipelines to separate gas sales from transportation and allowing open access to pipeline transportation for gas producers and consumers. Order 636 also allowed firm holders of pipeline capacity to resell or release their capacity to other shippers and required pipelines to permit shippers to use flexible receipt and delivery points.

Regulatory transformation changed the industry dramatically from supply shortage in the 1970s to surplus in the 1980s. In 1987 natural gas provided 22% of total US primary energy sources and 45% of all delivered to residential.

Recent Industry
GCPP in 1999
In 1999 Illinois Commerce Commission (ICC) approved Nicor Gas proposal of alternative regulation for gas costs called Gas Cost Performance Program (GCPP). The performance based regulation (PBR) issued among others to respond FERC’s restructuring program particularly deregulation of wellhead gas prices and services as well as separation merchant function of interstate pipelines. This required local distribution company (LDC) to manage its own portfolio of wellhead gas supplies and transportation services. PBR works by comparing “a benchmark” with company actual gas costs and the surplus or deficit will be shared between company and customers. 

FERC Order 637 in 2000
Several problems had arisen after Order 636 issued. Therefore FERC Order 637 revised some orders among others (i) waived the price ceiling for short-term released capacity (less than one year) until September 2002; (ii) permitted pipelines to propose contracts for capacity with peak/off-peak an term differentiated rate structures.  

Today's natural gas market is again in the process of change, and is substantially different operationally and economically from away back in 1970s. Upstream and downstream wholesale markets are maturing as well as financial markets with a variety of options and futures contracts.