Deregulation Of Natural Gas Essay Research Paper

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