Deregulation Of Natural Gas Essay, Research Paper

The Deregulation of the Natural Gas Industry

The main objective of my paper is to discuss the key points surrounding the deregulation of the natural gas industry. I will lead into this discussion by explaining how the industry performed during a period of regulation and what transpired forcing a change to deregulate. By definition, deregulation is the de-emphasis of governmental oversight of activities in the private sector (Understanding Deregulation, p. 4). It was believed that regulation, which is where the government controls certain aspects of the private sector , led to a monopolistic state among businesses and it was no longer viewed as productive with the modern growth of the economy (Understanding Regulation, p. 4). Combine this economic growth with rising oil prices, a growing dependency on natural gas, and technological advancements within the industry, and it becomes clear why deregulation was a necessary move in the late 1970s.

In order to understand deregulation, we need to examine why the natural gas industry was regulated. Prior to 1938, there was a total absence of governmental oversight within the industry (The Regulation of Natural Gas, p. 139). Because of this, many natural gas companies could charge whatever price they wished for their product. This presented a major economic problem in that it gave the gas companies a monopolistic nature with carte blanche in the industry. Congress finally stepped in and passed The Natural Gas Act of 1938 citing that the activity in this industry was of a real public interest and changes needed to be made for the betterment of consumers (Regulatory Reform, p. 140). One of the key points of this legislation was that it did not affect the part of the industry that gathered the gas, only the pipeline side. It would take nearly sixteen years before the regulation procedures of 1938 were finally passed on to the remaining branches of the industry (The Regulation of Natural Gas, p. 140). The main reason for this delay was because the Federal Power Commission (FPC), based on a clause in the natural gas act of 1938, thought that they lacked jurisdiction over the price charged at the wellhead . Once the problem was sorted out in the early 1950s, regulation was now in full effect and the industry ran smoothly from 1954 until the early 1970s (The Regulation of Natural Gas, p. 140-143). It was in the early 1970s when the negative effects of regulation on the industry in whole started to show up. Supply was no longer able to keep up with demand due to the increased dependency of natural gas as a product (The Regulatory Transition, p. 144). The prices for oil were also beginning to rise rapidly. With the growing economy of the 1970s and the greater importance placed on natural gas, something had to change to remedy the situation.

The idea to deregulate the natural gas industry took action in the late 1970s and is still going on within our country today. The primary objective was to create a more competitive natural gas industry that was consumer-oriented (Regulatory Reform, p. 139). By expanding the size of the market and creating more competition and choices for the consumer, the industry would also have to become more efficient in its practices. Over the past 10 years or so, the gas industry has gone through a number of phases while trying to maneuver away from regulation. Before we can appreciate the most recent effects of deregulation in the natural gas industry, we first need to examine the process when it initially began in the late 1970s.

The first measure in the deregulation process came about as a result of the Natural Gas Policy Act of 1978 (Regulatory Reform, p. 137). This act did away with regulation on the price of gas at the wellhead. Since the industry is divided up into three parts: production, pipeline delivery, and local distribution, the deregulation process had to begin at the wellhead. This is because the whole procedure of transporting the natural gas from the ground to the marketplace begins at the point of origin where the resource is found. Besides, this is the first location that an actual price is put on the product. The Natural Gas Act of 1978 dealt with the price that the production company was charging the pipeline company for the resource (Regulatory Reform, p. 138). This act in 1978 wanted to somehow restructure the way in which the price of natural gas was determined within the industry. Basically, the production company assumes all of the costs of locating and drilling for the natural gas. Once discovered, the production company will pay a fee for the pipeline companies to transport the product to market. When a company is alone in a market, the tendency might be for them to bump up the price of their product because there is little outside threat to stop them. Though governmental oversight through regulation was a modest fix for preventing high prices, the fact was that allowing for competition seemed to be a better remedy for keeping the price level down, especially with the rising demand of natural gas. So, deregulating at the wellhead was a good start, however, the Natural Gas Policy Act of 1978 did not include a deregulation of all wellhead prices, but rather the majority of them (Natural Gas Deregulation, p. 2). It wasn t until January of 1993 that we would see the complete deregulation of all natural gas wellheads (Chapter 1, Understanding Deregulation).

Another step in the process to deregulate the natural gas industry came about in 1984 when the Federal Energy Regulatory Commission (FERC) brought about the movement toward Pipeline reform (Natural Gas Deregulation, p. 2). Pipelines are the essential way to transport the gas from the wellhead to either the storage fields or directly to market. The reform basically initiated a price that the pipeline company could charge the production company for transporting the natural gas to market. What resulted from deregulation was a price that could fluctuate based on the current market price of natural gas. Because of price competition brought about by deregulation, that price would vary but ultimately stay at a consumer friendly level. A network of pipeline usage was produced as a result of this reform because there were more and more pipeline companies being born due to the growing demand of transporting natural gas (Natural Gas Deregulation, p. 2). As we have already seen in the wellhead sector of the industry, these steps toward pipeline reform were another necessary way to allow competition into the natural gas industry.

Upon the completion of the first stages of deregulation measures came about a significant change in the industry. The percentages of increased productivity and performance indicate that the decision to deregulate has expanded the size of the natural gas industry significantly. Between the years of 1984 and 1993, the price of natural gas at the wellhead decreased by 24% (Natural Gas Deregulation, p. 3). In the retail market, the price for natural gas also declined by 16% (Natural Gas Deregulation, p. 3). The pipeline sector of the business has also benefited greatly as a result of the deregulation movement. Technological advancements have allowed for the transportation of natural gas to increase by 24% (Natural Gas Deregulation, p. 3). The most recognized of these advancements was the invention of the seamless pipe in the late 1970s (The Regulatory Transition, p. 140). The pipeline industry also saw a large decline in the amount of maintenance and operation expenses due to this invention. As one can see, based on the percentages, the results to date have been positive in favor of the move to deregulate the industry.

It seems that even with all of the changes that have taken place to date, there is still a good ways to go before the deregulation process in the gas industry is complete. The concept of allowing consumers to shop around for their gas is becoming more of a reality based on the changes that have already taken place. It is believed, according to the most recent figures, that nearly sixty percent of the population nationwide already possesses this capability (Natural Gas Deregulation, Omnichoice.com). But, many analysts consider the current state of the natural gas industry to be in a transition period (Perspectives of Deregulation, p. 4). It is a reality that the competition level in the retail sector of the industry has yet to reach a satisfactory level. What this means to consumers is that we will have to wait and let the state legislatures and regulators put policies into effect before a change can be seen (Natural Gas: The Regulatory Transition, p. 142). All in all, the majority of the changes that have occurred through the deregulation of the natural gas industry have placed an emphasis on the well being of the consumer, the need to be a competitive industry, and most important, a desire for economic efficiency (Ohio Oil and Gas Association Bulletin, October of 2000). I only hope that these positive trends continue on our own soil and our country s dependency on foreign energy lessens.