CHAPTER 2 FEDERAL REGULATION OF MARKETING AND TRANSPORTATION
| Jurisdiction | United States |
(Sep 1991)
FEDERAL REGULATION OF MARKETING AND TRANSPORTATION
Ross Marsh Foster Myers & Quiggle
Washington, D.C.
TABLE OF CONTENTS
Page
I. Introduction
II. Background
1. A Brief History of the Natural Gas Industry
2. Principles of Common Carriage
3. Regulation of Natural Gas Prior to 1938
4. Federal Regulation After 1938
III. The Transportation of Natural Gas (1985 and Beyond)
1. Order No. 436
2. AGD I
3. Order No. 500
4. Judicial Review of Order No. 500
5. AGD II
6. Unbundled Ratemaking
IV. FERC's NOPR on Comparability
V. National Energy Strategy
VI. Conclusion
Appendix A
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I. Introduction
The nomencluture of the natural gas industry for the Nineties has expanded. In addition to open access, unbundling, capacity brokering,1 such terms as comparability, a new National Energy Strategy, standby service, market based rates and bankruptcy2 have inserted themselves into our glossary. Clearly, these terms reflect a sea-change3 in a mature business that has as it objectives the production, transportation, and delivery of what has been called "nature's perfect fuel."4
To better understand the federal regulation of marketing and transportation of natural gas, this paper will examine the background leading up to recent events, with emphasis on the so called "Mega-NOPR" on comparability,5 and possibly the most far reaching attempt of the FERC to restructure the rules for the interstate transportation of natural gas. The paper will conclude with a brief look at the proposed National Energy Strategy currently being debated in Congress.
In sum, the natural gas industry is at a crossroad. On the one hand, the bankruptcy reorganization of a major natural
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gas company and depressed spot wellhead prices ($1.13 dth in August 1991).6 On the other side, there is unambiguous Congressional recognition of the importance of natural gas,7 coupled with FERC's attempt to makes supplies cheaply available to the marketplace. However, there may be a dark side. One of the fundamental hallmarks of the natural gas industry—the duty to serve—is being ignored. Cheap gas energy may have as its corollary that some producers, pipelines, and local distribution companies may fail. Stated simply, we may be on the edge of a new natural gas crisis.
II. Background
1. A Brief History of the Natural Gas Industry
The natural gas industry's beginnings have been described as being:
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
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not utilized significantly until the Industrial Revolution.8
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.9
At the beginning of the 19th Century, "the first and foremost" use of manufactured gas (usually made from coal) 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.10 By 1859, 297 gas companies were supplying manufactured gas to a population of approximately 4.8 million people.
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 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
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was used for industrial purposes); and Findley, Ohio, in 1872.11
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 1920s.
2. Principles of Common Carriage 12
Before turning to more current recent developments, it is helpful to quickly review the historical antecedents of common carriage. This is important because of its relationship to standby service. The common carrier doctrine developed under English common law during the Middle Ages. Although the exact date is not known, the term "common carrier" was first used sometime after 1300. Among the first professions to have the term applied to it were boatmen.13 An earlier reference to common carrier—aliis communibus cariatoribus—referred to "the old order of porters and creelmen."14
One of the most important contributions to the common carrier doctrine was made in the middle of the 17th Century by Sir Matthew Hale, Lord Chief Justice of the King's Bench.15 In De Portibus Maris, he summarized the law of businesses "affected with a public interest," as follows:
If the king or subject have a publick wharf unto which all persons that come to that port must come and unlade or lade their goods,
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because they are the wharfs only licensed by the queen,...or because there is no other wharf in that port,...in that case there cannot be taken arbitrary and excessive duties or cranage, wharfage, pesage, and so forth, neither can they be enhanced to an immoderate rate, but the duties must be reasonable and moderate though settled by the king's license or charter. For now the wharf and crane and other conveniences are affected with a publick interest, and they cease to be Juris privati only.16
English courts distinguished between "common callings," or "public employments," and "private employments." These "common" occupations included innkeepers, surgeons, smiths, victualers, ferrymen, carriers, bargemasters, wharfingers, teamsters, taverners, and sheriffs.17 The most striking characteristic of a "common calling" was that it was a profession to serve the public needs. A "holding out" to the general public had to exist for a calling to be common.18 A "common" or "public" business had to observe special duties that other businesses did not.19
The distinction between the private callings—the rule—and the public callings—the exception—is the most consequential division in the law governing our business relation. In private businesses, one may sell or not as
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one pleases, manufacture what qualities one chooses, demand any price that can be gotten and give any rebates that are advantageous. All this time in public business one must serve all that apply without exclusive conditions, provide adequate facilities to meet all the demands of the consumer, exact only reasonable changes for the services that are rendered, and between customers under similar circumstances make no discriminations.20
In 1710, an English court proclaimed that "any man undertaking for hire to carry the goods of all persons indifferently,...is...a common carrier."21 In sum, the essence of common carriage is the duty to serve all a reasonable rate22 and the strict liability for the care of goods entrusted to it.
Toward the end of the eighteenth century, many "common" callings in common law countries ceased to hold that status. However, the common carrier doctrine re-remerged in the United States after the Civil War.23 The expansion of the railroads across America led to practices that were abusive to shippers. Consequently, Congress regulated the railroads, making them common carriers, by passing the Act to Regulate Commerce of 1887,24 now known as the Interstate Commerce Act. For the
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first time, a Federal statute incorporated the common law obligations of common carriers.25
Ten years earlier, in 1877, the United States Supreme Court in Munn v. Illinois,26 upheld an Illinois statute that designated grain elevators as public warehouses. Munn arose when Illinois passed a law licensing warehouses and elevators and setting maximum rates for them. Two Chicago elevator owners refused to obtain a license and continued charging rates above the statutory maximum. The Supreme Court upheld the Illinois statute and concluded:
[W]e find that when private property is 'affected with a public interest, it ceases to be juris privati only.' This was said by Lord Chief Justice Hale more than two hundred years ago,...and been accepted without objection as an essential element in the law of property ever since. Property does become clothed with a public interest when used in a manner to make it of public consequence, and affect the community at large. When, therefore, one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good, to the extent of the interest he has thus created. He may withdraw his grant by discontinuing the use; but, so long as he maintains the use, he must submit to the control."27
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