Federal Power Commission and Exploration for Natural Gas
Authors: Beebe B. W. 
Published: May 2021

The Natural Gas Act of 1938, subsequently amended, authorized the Federal Power Commission to regulate the movement of natural gas in interstate commerce. The regulation of interstate natural gas transmission rates began immediately. The Act was amended in 1942 and certificates of public convenience and necessity were required. Regulation of other facilities followed. Independent producers of natural gas appeared to be clearly excluded in Section 1 (a) and (b) of the original Act. The Supreme Court, however, ruled in the “Phillips Case” in 1954 that Congress had intended to regulate all gas sold in interstate commerce for resale for ultimate public consumption. Thus, regulation of the gas sold by independent producers in interstate commerce resulted from judicial interpretation, despite the apparent intent of Congress in the original Act and two subsequent bills, each of which was passed by Congress but was killed by presidential veto.

Attempts to regulate jurisdictional sales of the many independent gas producers on the traditional utility “cost-of-service” basis led to chaos and artificial shifts in the pattern of energy consumption.

The Commission then divided the United States into supposedly cohesive pricing areas, and set “guideline” prices for each area under which temporary certificates and approval for rate schedules would be issued. Hearings to determine “just and reasonable” prices were ordered, first for the Permian basin of West Texas and New Mexico, and subsequently for southern (and offshore) Louisiana, the Texas Gulf Coast (and offshore), and the Hugoton-Anadarko area. These areas are the major sources of natural gas in the contiguous United States.

A decision in the Permian basin hearing, almost 5 years after its commencement, was shocking to producers. The most unfortunate aspects of the decision are the reduction in some rates previously approved by the Commission, and a cumbersome multiple-pricing system for “old” and “new” gas, based on an artificially chosen date of contracts. It seems probable that the decision will set a pattern for those forthcoming in other area hearings. A protracted dispute in the courts, however, which will prolong the uncertainty and deter exploration and development of natural gas, is in prospect.

The Permian basin decision offered little inducement for accelerated exploration. Although there appears to be an ample undiscovered supply of natural gas, lagging exploration has reduced the rate of discovery during the past several years. Furthermore, by far the greatest percentage of the natural gas added to the working inventory of proved reserves during these years was found in southern (and offshore) Louisiana, where factors other than incentive to discover natural gas alone (e.g., high daily oil allowables) led to discovery and development. In two of the five most important areas of supply there has been a deficit in proved reserves for the 5-yr period 1960-1964, and in a third area little more gas has been added than has been produced.

It is estimated that yearly production in 1970 will exceed average additions to estimated proved reserves for the 1960-1964 period. Much of the natural gas found in the past has been discovered as a byproduct to the search for oil. There is little incentive to explore for domestic crude oil because of uncertain and inadequate prices as a result of availability of foreign crude oil and competition from natural gas and from accompanying NGL. Because of the condition of the domestic oil industry, vastly increased exploration costs, and the lack of incentive to find natural gas in all areas, exploration activity is at the lowest level in years, although requirements for natural gas and oil are burgeoning. An adequate incentive to search for and develop natural gas in all areas where it may be found is mandatory if estimated future requirements are to be met. If this challenge is to be met, the belligerent attitude of segments of the gas industry toward each other and between the industry and the FPC must be terminated, and mutual understanding and respect substituted. Otherwise the general public, in whose interests the Natural Gas Act was passed, will be the immediate sufferer and the entire gas and oil industry could be the ultimate victim. The major responsibility of the FPC is to assure the general public an adequate supply of this premium energy source—natural gas—at a fair price.