The Natural Gas Market: Sixty Years of Regulation and Deregulation.

• Author: Johnston, James L.

* The Natural Gas Market: Sixty Years of Regulation and Deregulation By Paul W. MacAvoy New Haven, Conn.: Yale University Press, 2000. Pp. 135. $35.00 cloth.

Paul MacAvoy's Natural Gas Market is a thin volume of just 135 pages. Despite its brevity, it is the book of record for more than a half century of regulation of the natural-gas industry. The economics discipline is fortunate that so talented an analyst as MacAvoy has devoted his attention for so many years to the study of the natural-gas industry and its regulation.

Any analysis of a regulated industry involves study of both economics and law. My own efforts at Amoco to understand regulations were helped greatly by the lawyers who over the years followed the changes in the law, studied the court decisions, and wrote the contracts under the regulations. My experience pales, however, in comparison to MacAvoy's. He had as his long-time collaborator Stephen Breyer, now a justice of the U.S. Supreme Court.

MacAvoy was able to study the regulation of natural gas as it metamorphosed several times over the years. The first stage began in 1938, just as the interstate pipeline system was being established. The ostensible purpose of that regulation was the achievement of stable prices. Specifically, the purpose stated in the Natural Gas Act (NGA) of 1938 was the Federal Power Commission's (FPC) establishment of "rates that are just and reasonable to protect the interests of utility customers, while at the same time safeguarding the rights of investors to the end that new capital will be attracted ... [for an] orderly expansion necessary to meet consumer needs." Although that wording seems reminiscent of the standard economic model of voluntary exchange, in which all parties benefit, under regulation the potential exists for some "investors" to draw economic rents away from other "investors." The 1938 law was the primary guidance until 1954, when a new regulatory regime was enacted.

In 1938, there was no network of pipelines to distribute the natural gas. Thus, the objective of promoting the construction of transmission infrastructure resembles the creation of a "real option." Robert Pindyck, an early collaborator of Paul MacAvoy, might have gotten the inspiration for his later work on "real options" from the study of natural-gas transmission (see Avinash K. Dixit and Robert S. Pindyck, Investment under Uncertainty [Princeton, N.J.: Princeton University Press, 1994]).

Although MacAvoy recognizes the public perception of the FPC as an agency seeking to "stabilize" the prices of natural gas delivered to utility customers, he also observes (in more...