The Natural Gas Market

The Natural Gas Market: Sixty Years of Regulation and Deregulation

Paul W. MacAvoy
Copyright Date: 2000
Published by: Yale University Press
Pages: 160
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  • Book Info
    The Natural Gas Market
    Book Description:

    Over the past six decades federal regulatory agencies have attempted different strategies to regulate the natural gas industry in the United States. All have been unsuccessful, resulting in nationwide gas shortages or massive gas surpluses and costing the nation scores of billions of dollars. In addition, partial deregulation has led the regulatory agency to become more involved in controlling individual transactions among gas producers, distributors, and consumers.In this important book, Paul MacAvoy demonstrates that no affected group has gained from these experiments in public control and that all participants would gain from complete deregulation. Although losses have declined with partial deregulation in recent years, current regulatory practices still limit the growth of supply through the transmission system. MacAvoy's history of the regulation of natural gas is a cautionary tale for other natural resource or network industries that are regulated or are about to be regulated.

    eISBN: 978-0-300-12932-8
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. List of Figures
    (pp. ix-x)
  4. List of Tables
    (pp. xi-xii)
  5. Preface
    (pp. xiii-xviii)
  6. Chapter 1 An Introduction to Regulation and the Performance of Gas Markets
    (pp. 1-17)

    The price and production behavior of gas markets has been strikingly different from that in markets for other natural resources. Gas prices in constant dollars began to increase in the mid-1970s, peaked in 1982–1983, and have declined almost every year since then. Production peaked in the mid-1970s, after some years in which new discoveries of in-ground reserves failed to replace the annual take from operating wells; by the early 1980s, production had stabilized at 80 percent of peak levels, while reserves continued to decline.

    Although this price spike characterized market behavior, it resulted not from supply-demand interactions but from...

  7. Chapter 2 A Model of Natural Gas Market Wellhead Prices and Quantities
    (pp. 18-37)

    The characteristic feature of markets for gas that goes into pipelines is that wellhead prices in contracts for dedicated reserves bring total production in line with total demand for that production. Certain operating practices make this process converge to equilibrium with neither shortage nor excess supply over some period of time. Because production takes place under reserves contracts, supply needs to adjust to demands in a multiyear process. Excess demands in times of extreme cold weather are dealt with by increasing take from reserves but also by expanding take from storage and from “line pack” in the pipelines. Excess demands...

  8. Chapter 3 The Regulation of Gas Field Contracts and the Resulting Gains and Losses from Market Performance
    (pp. 38-75)

    In the 1960s, the Federal Power Commission put in place a system of price controls on field gas purchase contracts. Having been required by the Supreme Court to set limits on these prices, the commission sought to make the new regulatory system operate so as to result in “reasonable” wellhead prices to industry and households throughout the country. “Reasonable” prices were to be defined as those in line with costs of gas reserve discovery and development and ultimately costs of production of gas to be injected into the pipeline transmission network.

    To accomplish this goal, the commission in the 1960s...

  9. Chapter 4 The Partial Deregulation of Transportation and the Creation of a Single North American Gas Market
    (pp. 76-99)

    Out of the morass of the 1980s wellhead price regulation there emerged a new network of product and transport markets, some regulated and others partially deregulated. The regulatory solutions to the gas shortages of the 1970s, which led to excess supply through the mid-1980s, made the case for restructuring wellhead and city gate merchant contracts. The emergence of spot markets for gas outside regulation made it possible for gas users to obtain production separate from transportation. FERC and the courts responded by easing access to separate transportation service for producers, dealers, distributors, and industrial consumers.

    In Orders 436 and 636,...

  10. Chapter 5 The Unbundling of Local Gas Retail Markets
    (pp. 100-111)

    Since the mid-1990s, a number of state regulatory initiatives have sought to bring “the benefits of competition” to retail customers in local gas markets. The retail gas-plus-distribution service of local utilities has been separated into two services, gas ownership and gas distribution, to allow residential and commercial customers to purchase gas from out-of-state suppliers and have that gas distributed separately by the local utility. Industrial customers buying at the wellhead have been able to separate gas from distribution since the late 1970s. But now many state regulatory agencies, by eliminating the local utility merchant function to create open access to...

  11. Chapter 6 Partial Deregulation and the Future Performance of Gas Markets
    (pp. 112-120)

    The regulatory moves to restructure and partially deregulate gas industry transactions over the past twenty years proceeded from the Natural Gas Policy Act of 1978 to FERC Order 636 to state agencies implementing retail unbundling. Gas ownership has been separated from transportation so that customers now buy transport and gas at the wellhead for delivery to the city gate. Local distribution is now at least partially separate from gas ownership, although still mostly provided to the consumer by the local gas utility. Gas prices have been decontrolled, but prices remain regulated for firm transportation services.

    Given that the status quo...

  12. Notes
    (pp. 121-130)
  13. References
    (pp. 131-136)
  14. Index
    (pp. 137-140)