Regulation And Deregulation Of Electric And Gas Industries

• Pages: 11-36

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CHAPTER II

REGULATION AND DEREGULATION OF

ELECTRIC AND GAS INDUSTRIES

Over the last twenty years, both the gas and electric industries have

moved from a heavily regulated environment, dominated by monopoly

providers delivering a bundled product,11 to a more competitive

paradigm in which multiple suppliers compete to sell unbundled, or

partially unbundled, commodities and services. Beginning in the 1970s

with federal legislative efforts designed to encourage new suppliers, the

supply side of the gas industry has now been almost entirely deregulated,

and while electric supply has been substantially deregulated.

Deregulation has not taken hold as readily in the transmission and

distribution sectors of the industries, however, because these functions

still retain the characteristics of a natural monopoly. Indeed, ensuring

nondiscriminatory access to essential, monopoly facilities has been

critical toward allowing the competitive market to displace regulation of

energy supply. Accordingly, energy suppliers and customers will be

closely scrutinizing the activities of transmission owners, pipelines, and

their affiliates in the newly competitive markets and might seek recourse

under the antitrust laws if abusive practices occur.

This handbook focuses on the increasingly fertile ground for antitrust

actions as the electric and gas industries restructure.12 In order to

understand more fully the current state of those industries, this chapter

provides additional historical background on the advent of current

deregulation policies, the perceived regulatory failures underlying these

policies, and preliminary attempts to address those failures.

11. “Bundled products” or “bundled services” refer to the provision of gas or

electricity as a commodity, combined with the transportation and other

services necessary to support delivery of the commodity.

12 This discussion will necessarily touch only on the highlights of antitrust

law that are most relevant to energy issues. For a more comprehensive

discussion of the fundamental principles of antitrust law, see ABA

ANTITRUST SECTION, ANTITRUST LAW DEVELOPMENTS (5th ed. 2002)

(ALD V).

12 Energy Antitrust Handbook

A. Restructuring the Gas Industry

For much of the century, gas service was provided as a bundled

product, with monopoly pipelines purchasing gas from producers, then

transporting the gas for delivery as a bundled product to LDCs. Prior to

1938, when Congress passed the Natural Gas Act (NGA),13 interstate

pipelines generally were not subject to regulation. The NGA was

designed to fill this “regulatory gap” by providing for federal agency

oversight of interstate wholesale gas sales and interstate transportation.14

Under this regulatory structure, the Federal Power Commission (FPC)

(and later FERC) would set pipeline rates that were just and reasonable

and nondiscriminatory.15 In practice, rates generally were designed to

allow recovery of the pipeline’s cost of providing service, including a

return of and on invested capital.16

While the FPC was intended to protect consumers from unreasonable

prices charged by monopoly pipelines, finding an alternative regulated

pricing structure for gas supply also proved to be fraught with problems.

Initially, the FPC undertook regulation of gas production only for gas

produced by a pipeline or pipeline affiliate, leaving independent

producers unregulated.17 In 1954, however, the Supreme Court rejected

this approach, finding that the PFC was required to exert jurisdiction

over gas sales made by independent producers as well.18 The FPC first

attempted to regulate those producers as it had pipelines, using

13. 15 U.S.C. §§ 717-717w (1997 & Supp. 2002).

14. See, e.g., United Distrib. Cos. v. FERC, 88 F.3d 1105, 1122 (D.C. Cir.

1996) (noting the so-called “regulatory gap” derived from Supreme Court

decisions interpreting the Commerce Clause as precluding state

regulation of interstate transportation and wholesale sales) (citing

Arkansas Elec. Cooperative Corp. v. Arkansas Public Serv. Comm’n,

461 U.S. 375, 377-80 (1983)). This regulatory gap is fundamentally the

same as that described for the electric industry in Public Utilities

Comm’n v. Attleboro Steam & Elec. Co., 273 U.S. 83 (1927), see also

CHARLES F. PHILLIPS, THE REGULATION OF PUBLIC UTILITIES: THEORY

AND PRACTICE 697-98 (1993).

15. NGA § 4(a), 15 U.S.C. § 717c(a) (1997 & Supp. 2002)..

16. See Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591, 596,

605 (1944) (upholding FPC’s use of original cost basis for setting rates,

in that end result was a just and reasonable rate).

17. See Public Serv. Comm’n v. Mid-Louisiana Gas Co., 463 U.S. 319, 328

(1983).

18. Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954).