The Origins of Energy Choice
In the beginning, energy producers obtained natural gas from coal and only distributed it within their immediate municipalities. The local government, seeing the early traits of a monopoly and how it had the ability to severely affect the general population, decided to regulate prices.
Natural gas distribution quickly expanded, beyond local markets, to pipelines carrying gas between cities within state boundaries. This meant local municipalities could no longer oversee the entire natural gas distribution chain and so state governments stepped in. But when distribution grew beyond state lines the US Supreme Court ruled that interstate pipeline companies were out of the state government’s regulatory reach.
As a result, the Federal Government created the Natural Gas Act of 1938. It gave the Federal Power Commission (FPC) the ability to regulate rates and sole power to approve construction of any new pipelines in any market already being served by another company.
The FPC instituted regulations that extended from the pipelines to the wellhead. Production companies were now only allowed to charge enough to cover their operating costs plus a “fair” profit. These regulated prices were unique to each individual production company and their very specific operating costs. But there were far too many production companies for the FPC to manage and a massive backlog of rate increase requests took place.
To alleviate the backlog, in 1960 they decided to set rates based on geographic region and instituted an interim price until a set price for each region could be established. By 1970 only two region rates had been set which meant prices had remained the same since 1959. So, in 1974 the FPC set a national rate ceiling, unfortunately still lower than fair market value.
The regulations that were set in place to protect consumers backfired. Instead it made natural gas so cheap that it created severe shortages in the market. In an effort to rectify the situation congress passed the Natural Gas Policy Act (NPGA) in 1978. It regulated both interstate and intrastate natural gas production and transmission. It also gave the Federal Energy Regulatory Commission (FERC) overall authority. The NPGA created a single natural gas market and allowed it to establish wellhead prices up to a predetermined ceiling. This resulted in wellhead prices rising and natural gas producers investing in more wellheads to produce even more natural gas.
After the NPGA, natural gas prices rose drastically. And because consumers and large industrial companies felt like they were being gouged, they retaliated by lobbying congress in order to separate the sale of production and supply from transportation through interstate pipelines. In the early 1980’s they had their first real unintentional breakthrough.
Due to the high price of natural gas, industrial consumers began switching to other forms of energy. This led pipelines to create special marketing programs that allowed those large industrial customers the ability to buy natural gas directly from wellheads and then purchase transportation separately via the pipelines. But since only large industrial clients had the capacity to be able to purchase from the wellhead and other consumers did not, the programs were ruled discriminatory. But it was not a complete loss.
Enter FERC Order 436. It allowed pipelines to offer transportation only services with competitive pricing to all customers on a nondiscriminatory, first-come, first-served basis. The transportation was now separated from the purchase of natural gas and in 1992 complete participation by all pipelines was mandated through FERC order 636. This creating the open access pipelines that are still in effect today.
One final hurdle was left in order to achieve complete deregulation of the natural gas market and the ability to sell natural gas in an open market alongside utilities. This hurdle was overcome due to the Natural Gas Wellhead Decontrol Act in 1989 which completely deregulated prices at the wellhead and opened natural gas to consumers and distribution companies. And today, as a result of this long history, consumers are presented with a competitive market that gives way to affordability and choice. They have more control over their natural gas supply, giving them the ability to plan, budget and strategize ways to make their energy consumption more efficient.