Direct Distribution of Natural Gas: a Regulatory and Legal Overview
| Publication year | 1985 |
| Pages | 1004 |
| Citation | Vol. 14 No. 6 Pg. 1004 |
1985, June, Pg. 1004. Direct Distribution of Natural Gas: A Regulatory and Legal Overview
The natural gas industry is experiencing rapid change after a history of regulation put into effect by the Phillip's Petroleum Co. decision(fn1) in 1954. Phased decontrol of wellhead prices under the Natural Gas Policy Act of 1978 ("NGPA")(fn2) and a downward spiral in prices over the last several years have left the industry in disarray. In the 1970s shortages and curtailments encouraged aggressive acquisition and production programs to lock in long-term supplies of natural gas. However, with the recession of the early 1980s, pipelines found these long-term, inflexible supplies a major liability.
As the price of oil dropped, many end-users in the high volume industrial sector switched from natural gas to number six fuel oil or converted permanently to coal. Natural gas consumption dropped appreciably, leaving pipelines with an oversupply of natural gas committed under long-term, high-priced contracts. Producers were impacted as to takes, and distribution companies experienced load loss, which adversely affected consumer rates.
The natural gas market has been formed largely by regulatory intervention, which has caused dislocation problems as the industry moves toward a freer market. Prior to 1978, natural gas was regulated under the Natural Gas Act of 1938 ("NGA").(fn3) Interstate transportation required authorization by a certificate of public convenience and necessity with rates weighted according to a just and reasonable standard.(fn4) Regulation entitled producers, with approval from the Federal Power Commission ("Commission") to use either the lower of the ceiling rates set by the Commission or the contract price. For the gas producer, this two-price system became a fixture, dividing gas by vintages into "old gas" and "new gas" by contract date.
The NGPA did not repeal the NGA, but did supercede it in certain respects. The 1978 law encompassed the interstate market and extended federal regulation into the intrastate market as well. The number and complexity of the pricing categories were expanded, and ceiling prices were fixed by statute instead of by the Commission.(fn5)
The natural gas marketer is for the first time experiencing a competitive gas market, which is exerting a downward pressure on price. Parties on both sides of the gas purchase agreement are making pricing concessions to save interruptible load on the system and to prevent further load loss to alternative fuels. Today's major contract considerations are price, volume and delivery point.
While regulatory restrictions on gas producers are easing, purchasers are still heavily regulated by the federal government and must file tariffs and rate schedules to purchase or transport the commodity. However, over the past two years, the Commission has developed new programs within the regulatory framework to enhance gas marketing. This article examines innovative regulatory programs that the Commission has authorized in an attempt to alleviate current gas marketing difficulties.
The Commission has attached the term "special marketing program" ("SMP") to proposals to market natural gas outside the traditional sale for resale system.(fn6) As authorized, these are short-term, interruptible sales made outside the traditional gas purchaser market area. They were originally conceived as a means of reducing pipeline take-or-pay exposure under long-term contracts.
Under the SMP, the pipeline's role of reseller is changed to broker/transporter. This improves its load factor and reduces take-or-pay exposure. The pipeline surrenders its traditional role as middleman between the producer and end-user; instead, it brokers the gas or simply transports it on its system for other pipeline purchasers. The SMP also allows the end-user to circumvent the red tape required to purchase rolled-in, system-wide gas, thus permitting spot purchases directly from producers and other nontraditional gas suppliers.
Conditions attached to SMP programs are exacting. Gas can be utilized to serve only new gas loads or six other specified eligible markets.(fn7) The gas must be contractually committed to the interstate pipeline and released by the producer for direct sale. Historically, producers could not release interstate gas...
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