What is Natural Gas Deregulation?

Barbara R. Cochran

Natural gas regulation had been in place, ostensibly to protect customers from high energy prices, during the initial years of that energy supply industry. The industry was primarily a monopoly at that time, so it had the power to charge consumers anything it wanted, including higher prices. The move towards natural gas deregulation in the United States started to take form in 1935 when the Federal Trade Commission (FTC) became concerned about the industry’s regulated monopolistic practices and its almost total control over energy prices to customers. Natural gas deregulation has offered American consumers more supplier choices, and as a result, lower natural gas prices from some companies.

Natural gas is in demand around the world as an energy source.
Natural gas is in demand around the world as an energy source.

With the passage of the Natural Gas Act of 1938, the US government was able to regulate the rates for interstate pipeline delivery of natural gas. This was another way the government sought to limit the natural gas monopolies’ market power. In other words, it was an attempt to keep costs competitive for consumers.

By the 1960s, the Federal Power Commission (FPC) regulated the cost of natural gas that was destined for interstate, but not intrastate delivery. Suppliers found that they could sell their natural gas for their immediate region at much higher rates. As a result, a natural gas shortage was created in outside consumer regions because the majority of the supply ended up in the intrastate delivery system. Therefore, regulation of the natural gas industry by the federal government actually ended up hurting consumers by the end of the 1970s.

To promote natural gas deregulation so that the shortage of interstate supplies could be counteracted, the Natural Gas Policy Act (NGPA), as part of the National Energy Act (NEA), was put into place in November of 1978. Deregulation and the resulting hikes in natural gas prices lead to an oversupply because of decreased demand. Purchasers of natural gas were forced to buy a bundled plan, which consisted of supply and delivery. With FERC Order No. 436, which was issued in 1985, interstate pipelines had the option to act solely as the transporters of natural gas supplies instead of also being the sellers of the same.

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During the 1990s, natural gas deregulation made many more supplier options available for residential and business customers. Natural gas services continued to be furnished, uninterrupted, through the original supplier, but at some savings to customers, once they had chosen a new supplier. This gave consumers a role in making the decision that was best for them, regarding their natural gas supply. With natural gas deregulation, competition between new supplier companies tended to keep prices to the consumer lower, and also in check.

As of the year 2000, many other countries besides the United States initiated natural gas deregulation proposals with the World trade Organization (WTO). Canada, Norway, and the South American countries of Venezuela and Chile all took steps in that direction. Britain now has one of the most liberalized natural gas supply industries in the world. As far as the European Union is concerned, by 2008, about 33% of total gas consumption was from deregulated supplies.

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