Natural gas gathering is the collection of gas from the wellhead for delivery to the processing plant or transportation pipeline. Compared with transportation pipelines, gathering lines are generally smaller in diameter and shorter in length, and require relatively lower pressure to push the gas through the line. According to a recent report, over 2,100 companies perform gathering services in the states that produce natural gas. Natural gas storage involves the transfer of natural gas from the production field to a depleted underground reservoir or other holding facility for later use. Gas is generally injected into storage facilities during warmer months, when demand is lower, and withdrawn during winter months. Traditionally, pipeline companies use storage to manage and balance the movement of gas throughout their systems. Local distribution companies—the companies that deliver gas from the interstate pipeline to the ultimate end-user—have a critical need for storage because they must provide gas on demand to residential end-users and other customers who lack the ability to switch to another fuel when gas is not available. According to the Energy Information Administration, as of December 31, 1993, a total of 103 operators were providing storage service in the United States. These operators included pipeline companies, local distribution companies, and independent marketers. Market hubs are areas where several pipelines connect, generally near a production area, storage field, or major market area. A relatively new phenomenon in the industry, hubs create central points where many buyers and sellers can come together to obtain natural gas and a variety of services. These services can be physical, such as transportation, storage, or the transfer of gas from one pipeline to another, or they can be contractual, such as the trading of titles to gas supplies. In theory, market hubs can improve the efficiency and flexibility of the interstate gas market by increasing producers’ and end-users’ access to each other and by reducing transaction costs when they make deals. According to FERC, as of July 1994, there were 19 market centers operating in the United States, and another 11 are scheduled to be opened by the end of 1995. Each of these hubs has an administrator who oversees its operation and performs a variety of functions, such as tracking the exchange of titles to gas supplies, invoicing customers for services, and allocating pipeline capacity and services at the hub when they are in short supply. In May 1994, FERC announced its policy on interstate pipeline companies’ gathering affiliates. In a series of seven orders, the Commission concluded that it does not have the authority to regulate the rates charged by affiliates. However, FERC added that it could use its authority to regulate the rates charged by interstate pipeline companies for gathering, transportation, and other services to regulate a gathering affiliate if the affiliate and its parent pipeline company act together in a collusive and anticompetitive manner. This policy has generally been accepted by pipeline companies, local distribution companies, and end-users. While producers are generally reserving judgment on the new policy, several are concerned about its effect on their ability to negotiate fair agreements with gathering affiliates. FERC has traditionally included the costs of gathering services provided by interstate pipeline companies in the rates it approves for such companies. FERC does not regulate the rates for gathering services provided by other entities, such as producers. Most of these unregulated gatherers, who provide almost 70 percent of the gathering services in the United States, are free to negotiate with their customers on the rates, terms, and conditions of service. Since the early 1990s, several interstate pipeline companies have created affiliates to provide their gathering services. These pipeline companies asked FERC for permission to sell their gathering facilities to the new affiliates. The requests created a need for FERC to clarify its policy on gathering affiliates. On May 27, 1994, FERC issued a series of seven orders that, taken together, define its new policy on gathering. In these orders, FERC elaborating that it does not have the authority to regulate the rates, terms, and conditions of the gathering services provided by interstate pipeline companies’ affiliates. As a result, when pipeline companies sell their gathering facilities to their affiliates, the rates these affiliates charge will no longer be under FERC’s regulation. However, FERC also said it would do the following: Require pipeline companies, before they sell their gathering facilities to an affiliate or unregulated third party, to negotiate new contracts with existing customers. If the pipeline company is unable to reach agreement with a customer, it must offer a “default contract” that reflects the rates, terms, and conditions of service offered by the independent gatherers in the region. If the customer refuses the default contract, it loses its guarantee of continued service. FERC imposed this condition to protect existing customers that had entered into arrangements with pipeline companies for gathering services expecting that these services would be regulated by FERC. Assert jurisdiction over gathering affiliates if it finds, upon a customer’s complaint, that the affiliate and its parent pipeline company have acted together in a collusive and anticompetitive manner. For example, FERC could assert its jurisdiction, as part of its regulation of the pipeline company, if a gathering affiliate requires a customer to transport gas on the parent company’s pipeline. Under the new policy, FERC will regulate a gathering affiliate only if the affiliate acts with its parent company in an anticompetitive manner. In analyzing its jurisdiction, FERC asserted that sections 4 and 5 of the Natural Gas Act give it the authority to regulate gathering performed by natural gas companies (i.e., interstate pipeline companies) “in connection with” interstate transportation. Gathering affiliates, because they perform only a gathering function, are not natural gas companies as defined by the act. Thus, FERC reasoned that gathering affiliates are not under its jurisdiction. FERC determined, however, that it may assert jurisdiction when the pipeline company and its gathering affiliate act together to discriminate because they are then effectively acting as a single natural gas company involved in the interstate transportation of natural gas. The Interstate Natural Gas Association of America, the trade association that represents interstate pipeline companies, has stated that it is pleased with FERC’s new policy and believes the policy will promote competition and regulatory certainty. As a result of this policy, pipeline companies will be able to sell their gathering facilities to affiliates, which, in turn, can set rates that are competitive with those set by unregulated gatherers. According to an association official responsible for policy issues, many pipeline companies plan to sell their gathering facilities to either affiliates or independent third parties in response to the new policy. The representatives of local distribution companies and end-users we interviewed expressed little concern about FERC’s new policy on gathering. An official of the American Gas Association, which represents, among others, larger distribution companies, stated that the association has received no complaints from the local distribution companies among its members about the new policy. According to a representative of municipal distributors, smaller distribution companies have little interest in the issue of gathering. Distribution companies and the residential, commercial, and industrial end-users to whom they deliver gas are more concerned about the price of gas supplies, which is determined by the market. Because gathering rates affect the division of proceeds from gas sales, they concern only producers and gatherers. In contrast to other segments of the industry, producers generally believe that it is too early to determine the effects of FERC’s new policy. According to a representative of the Natural Gas Supply Association, the trade association representing major producers, several producers are concerned that they will not be able to get fair rates, terms, and conditions of service in their negotiations with pipeline companies or in default contracts. Although producers are generally pleased that FERC will review the sale of gathering facilities to affiliates on a case-by-case basis, several believe that unless FERC establishes clearer guidelines on the terms of the default contracts, the affiliates that have market power could impose significantly higher rates for gathering services for existing wells. In cases in which a producer and a gathering affiliate cannot reach a new agreement, producers would like to continue the rates, terms, and conditions of service that existed when they originally drilled the well. Some producers have asked FERC to reconsider its new gathering policy. A group of six major producers, known as the “Indicated Parties,” and the Independent Petroleum Association of America have filed motions with FERC objecting to the new policy and requesting a new hearing. In the grounds for rehearing, the Indicated Parties and the association contend, among other things, that (1) FERC should regulate gathering affiliates, (2) FERC erred in approving pipeline companies’ sale of gathering facilities to their affiliates without showing that the relevant gathering markets were competitive, and (3) the provision requiring default contracts needs reconsideration or clarification. In addition, the Indicated Parties provided FERC with an offer of settlement in one of the seven cases. In this offer, the Indicated Parties agree to accept the sale of gathering facilities by the pipeline company to its affiliates if, among other things, FERC retracts its determination that it lacks jurisdiction over gathering affiliates. On November 30, 1994, FERC denied the requests for rehearing, but it also amended the requirements of default contracts. According to the new guidelines, when a pipeline company sells its gathering facilities to an affiliate or independent gatherer, existing customers will be able to purchase gathering services from the new provider at the current cost-of-service rates for a period of up to 2 years. FERC’s jurisdiction over storage is limited to the storage of gas transported in the interstate market. As a result, FERC has regulatory authority primarily over storage facilities owned by interstate pipeline companies. According to the Energy Information Administration, these facilities hold about 61 percent of the total gas stored in the United States. As in the case of gathering and transportation, FERC has traditionally set the rates for storage according to a storage operator’s cost of providing service. Since 1992, however, FERC has approved the use of market-based rates for storage services in six orders.