Federal Gas Regulation and the Producing Segment of the Gas Industry
Authors: Timmerman E.H. 
Published: December 2007

The history of the regulation of the natural gas industry is traced from the passage of the Natural Gas Act of 1938. The original Federal Power Commission proceeding which started in 1948, the United States Supreme Court decision in 1954, the change in regulation techniques from company to area basis, the area guideline prices, the "in line" price basis, the Permian Basin hearing and Opinion 468 and the subsequent three area hearings are some of/he details reviewed. The long-term characteristics of the producing industry presented on figures show its rapid acceleration during the post-war period and the decline since about 1956. Data show that demand continues to increase, that potential reserves are available to be discovered and suggest that present downward trends in industry activity will eventually change.

History of Gas Regulation

In 1936 a commission investigated the gas utility industry and recommended federal laws to regulate transmission charges and wholesale city-gate rates of interstate lines.

In 1938 Congress passed the Natural Gas Act giving the Federal Power Commission authority to regulate interstate lines.

In 1940 the FPC ruled that it had no jurisdiction over field sales of gas by an independent producer and gatherer not affiliated with the purchasing pipeline. The FPC decided in 1946 that it had jurisdiction over field price of gas produced directly by Interstate Natural Gas Co. for its own interstate line.

In 1947 the Supreme Court affirmed findings in the Interstate Natural case, but in less sweeping language than the circuit court. Also, the FPC issued Order No. 139 asserting that it would not attempt to regulate sales to interstate pipelines by producers and gatherers independent of transmission companies.

In 1948 the FPC instituted an investigation into prices charged by Phillips Petroleum Co. for gathered and processed gas delivered to several interstate lines, chiefly at instigation of Wisconsin and Michigan cities served by Michigan-Wisconsin Pipe Line Co. for which Phillips was a big supplier and gatherer.

Congress passed the Kerr bill in 1950 specifically exempting production and gathering from FPC jurisdiction. FPC did not oppose this amendment to the Natural Gas Act. President Truman vetoed the bill and FPC rescinded Order No. 139. In 1951, in a 4-t0-1 decision, the FPC ruled it had no jurisdiction over gas sales of Phillips and the case was taken to the U. S. Court of Appeals for District of Columbia. The FPC opposed this action, as did Phillips and the states of New Mexico, Oklahoma and Texas. On May 22, 1953, the court of appeals reversed the FPC in a 2-to-l decision and said that Phillips' sales were not made during the course of production and gathering so that Phillips was subject to FPC rate-making powers.

On June 7, 1954, the Supreme Court's Phillips decision held that the commission had jurisdiction over the regulation of wellhead gas prices. Producers thereafter complied by making public filings to the FPC for all interstate contracts giving data such as rates, volumes and prices. Faced with the new problem of regulating thousands of gas producers, the commssion's first attempts at producer regulation were on an individual company basis. A few of the first rate increase filings were approved on the basis of cost evidence.

In 1956 President Eisenhower in effect said that he was forced to veto HR 6645 (Harris-Fullbright bill) which amended the Natural Gas Act, but that he regretted this action because he was in accord with the act's basic objectives. He also sent a message to Congress urging repeal of the regulation of independent producers of natural gas.

The years 1956 to 1960 were a period of evolution in gas regulation. The courts indicated that the commission need not require conventional rate base evidence if other cost evidence were available to insure that consumers were not paying more than a just and reasonable price, including cost of capital investment. The courts also ruled that the FPC need not fix separate rates for each producer if it found a uniform rate desirable.