JurisdictionUnited States
Natural Gas Marketing II
(Apr 1988)


William A. Mogel
Ross, Marsh & Foster
Washington, D.C.

I. Introduction

The interstate natural gas industry currently is facing numerous and diverse problems, several of which had their origins decades ago. Foremost of today's problems are a $6.78 billion take-or-pay obligation facing interstate natural gas pipelines1 , a changed federal regulatory environment that has promulgated Order Nos. 3802 , 4363 and 4514 and activist state regulatory commissions, that are unwilling to "rubberstamp" FERC-approved purchased gas costs. As a consequence, these current issues—minimum bills, open access transportation, pricing of "old" gas and federal preemption—are discussed in context of their past, present and future significance to the natural gas industry.

II. Background

A Beginnings

The gas industry's beginnings have been described as being:

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difficult to discern....We do know that shallow deposits of natural gas do exist around the world which could have surfaced either on their own or with a minimal effort by man. Some records indicate that the Japanese drilled (or dug) for gas in the seventh century. The Chinese are said to have piped gas through bamboo as early as the tenth century. Earlier records of classical Greek civilization note that men breathed gas and became light-headed in the temple of the famed oracle at Delphi. The significance of natural gas to any of these civilizations is uncertain. What is certain is that gas was not utilized significantly until the Industrial Revolution.5

In the late sixteenth or early seventeenth century manufactured gas (the word gas is derived from "geist", the German word for spirit) was produced. In 1659, natural gas was discovered in England. Thereafter, in 1792, gas was successfully transported 70 feet through iron and copper tubes.6

At the beginning of the 19th Century, "the first and foremost" use of manufactured gas was for lighting. In 1816, Baltimore was the first U.S. city to light its streets. In 1847, the Capitol grounds in Washington, D.C. were lighted with manufactured gas. By 1859, 297 gas companies were supplying manufactured gas to a population of approximately 4.8 million people.

The invention by Bunsen, in 1855, of the blue flame burner, which was an efficient and cheap illuminent, made the industry's subsequent growth possible.7

With regard to the early use of natural gas, as distinguished from manufactured gas, it has been written:

As early as 1626, French missionaries visiting Indians in northwestern New York recorded that they could ignite gases rising from shallow waters. General George Washington was recorded as being fascinated by a burning spring near Charleston, West

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Virginia. In 1821, William A. Hart, a gunsmith in Fredonia, New York, tapped a pool of gas lying twenty or seventy feet (reports vary) below the surface and transported it to points of use through hollow logs. In 1825, it was reported that natural gas from Hart's well was being used to light two stores, two shops, and a grist mill.

Natural gas was discovered and utilized by the town of Centerville, Pennsylvania, in 1840; Erie, Pennsylvania, in 1860 (where it was used for industrial purposes); and Findley, Ohio, in 1872.8

Although natural gas was much less expensive than manufactured gas, its marketability was limited until the development of large diameter seamless steel pipe and the discovery of large oil and gas fields in the Southwest in the late 1920's.

B. Regulation Prior to 1938

Prior to 1938 when the Natural Gas Act9 was passed, the regulation of the gas industry, if at all, was at the local and state level. Generally, the regulation was through the issuance of franchises, which initially gave the gas companies monopoly power over a certain geographic area. Later, especially in large cities, competitive franchises were granted as a method of protecting the public interest. In other areas municipal operations were begun. In addition, states controlled as a conservation measure, the production of natural gas.10

In 1911, the Supreme Court held that state regulatory authorities lacked the power to regulate the transportation of natural gas in interstate commerce.11 In 1918, the Supreme Court also held that states lacked jurisdiction to affect the rates charged by interstate natural gas pipeline companies at the city gates.12 The Supreme Court in 1927 ruled that state commissions in producing states could not dictate the price at

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which the interstate pipeline could sell outside of the producing state.13

It has been written by a former Solicitor at the Federal Power Commission:

While the use of gas preceded the use of electricity in this country, the transportation of natural gas in interstate commerce to any great extent was only about ten years old in 1935, when Congress first had the Natural Gas Bill before it. A few short natural gas pipelines had been constructed prior to 1925, but there had been no extended construction of these pipelines until after the development of the seamless pipe in that year. Following the development of the seamless pipe, the natural gas business increased by leaps and bounds and pipelines were constructed from the Texas gas fields as far north as Detroit, Michigan, as far west at Denver, Colorado, and to many other places in the northeast and northwest. The investment in natural gas pipeline facilities in 1934 amounted to $3,700,000,000. By 1938 more than 50,000 miles of natural gas pipelines had been constructed and more than 400 billion cubic feet of natural gas moved annually across state lines or our international boundary lines.14

Occurring in the mid-1920's was a merger movement which began in the latter part of the 19th century. That movement resulted in the formation of large gas and electric utility holding companies by the 1920's.15 In reaction, the U.S. Senate in 1928 adopted Resolution 83, which directed the Federal Trade Commission to investigate and report on:

[T]he growth of the capital assets and capital liabilities of public utility corporations doing an interstate or international business supplying either

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electrical energy...or gas, natural or artificial.


Finally, it should be noted that the commission was not given control over the security issues of interstate pipelines, nor was it empowered to order interconnections of facilities.16

When the final report of the FTC was submitted to Congress at the end of 1935, it recommended federal regulation to complement state regulation emphasizing the regulatory gap and the monopoly conditions in the gas pipeline industry leading to excessive prices for service.17

C. The Natural Gas Act and Early Regulation (1938-1954)

As stated in both the House and Senate Committee Reports to Congress leading to the enactment of the Natural Gas Act in 1938, "this legislation is highly desirable to fill the gap in regulation that now exists by reason of the lack of authority of the State commissions."18

In 1938, the Congress passed the Natural Gas Act ("NGA"). With regard to the Congressional purpose behind the NGA, the Supreme court observed:

The primary aim of the legislation was to protect consumers against exploitation at the hands of natural gas companies. Due to the hiatus in regulation which resulted from the Kansas Natural Gas Co. case and related decisions state commissions found it difficult or impossible to discover what it cost interstate pipeline companies to deliver gas within the consuming states; and thus they were thwarted in local regulation...Moreover, the investigations of the Federal Trade Commission had disclosed that the majority of the pipeline mileage in the country used to transport natural gas, together with an increasing percentage of the natural gas

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supply for pipeline transportation, had been acquired by a handful of holding companies. State commissions, independent producers and communities having or seeking the service were growing quite helpless against these combinations. These were the types of problems with which those participating in the hearings were preoccupied. Congress addressed itself to those specific evils. The Federal Power Commission was given broad powers of regulation.19

The NGA established federal jurisdiction in three specific areas:

(1) the transportation of natural gas in interstate commerce;

(2) the sale in interstate commerce of natural gas for resale and

(3) natural gas companies engaged in such transportation or resale.20

The NGA made clear that federal jurisdiction did not attach to:

any other transportation or sale of natural gas or to the local distribution of natural gas or to the facilities used for such distribution or to the production or gathering of natural gas.21

The regulation mandated by the NGA was vested in the Federal Power Commission (now the Federal Energy Regulatory Commission), which already had jurisdiction, inter alia, over the wholesale sales of electricity under the Federal Power Act.22

The Natural Gas Act of 1938 broadened the jurisdiction of the Federal Power include the interstate transmission of natural gas and its sale for resale....

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It required pipeline companies to file, publish, and adhere to their rate schedules, and to give thirty days' notice of proposed changes. The commission was empowered to suspend changes, except on sales for resale to industrial users, for a period not to exceed five months, and it was directed to establish "just and reasonable" rates as well as to prevent any "undue preference or advantage" to any person or any "unreasonable difference" in rates, service, or facilities among localities and among classes or service. The act also authorized the commission to prescribe and enforce accounting methods and to ascertain the "actual legitimate cost"...

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