Opinion ID: 721438
Heading Depth: 2
Heading Rank: 1

Heading: Background: Natural Gas Industry Structure

Text: 4 The natural gas industry is functionally separated into production, transportation, and distribution. Traditionally, before the move to open-access transportation, a producer extracted the gas and sold it at the wellhead to a pipeline company. The pipeline company then transported the gas through high-pressure pipelines and re-sold it to a local distribution company (LDC). The LDC in turn distributed the gas through its local mains to residential and industrial users. See generally EDWARD C. GALLICK, COMPETITION IN THE NATURAL GAS INDUSTRY 9-12 (1993). 5 The Natural Gas Act (NGA), ch. 556, 52 Stat. 821 (1938) (codified as amended at 15 U.S.C. §§ 717-717w (1994)), enacted in 1938, gave the Commission jurisdiction over sales for resale in interstate commerce and over the interstate transportation of gas, but left the regulation of local distribution to the states. 2 NGA § 1(b), 15 U.S.C. § 717(b). The NGA was intended to fill the regulatory gap left by a series of Supreme Court decisions that interpreted the dormant Commerce Clause to preclude state regulation of interstate transportation and of wholesale gas sales. See Arkansas Elec. Coop. Corp. v. Arkansas Pub. Serv. Comm'n, 461 U.S. 375, 377-80, 103 S.Ct. 1905, 1908-10, 76 L.Ed.2d 1 (1983). The overriding purpose of the NGA is  'to protect consumers against exploitation at the hands of natural gas companies.'  FPC v. Louisiana Power & Light Co., 406 U.S. 621, 631, 92 S.Ct. 1827, 1833, 32 L.Ed.2d 369 (1972) (quoting FPC v. Hope Natural Gas Co., 320 U.S. 591, 610, 64 S.Ct. 281, 291, 88 L.Ed. 333 (1944)). Federal regulation of the natural gas industry is thus designed to curb pipelines' potential monopoly power over gas transportation. 3 The enormous economies of scale involved in the construction of natural gas pipelines tend to make the transportation of gas a natural monopoly. 4 Indeed, even with the expansion of the national pipeline grid, or network, in recent decades, many captive customers 5 remain served by a single pipeline. 6 Order No. 436, p 30,665, at 31,473. 7 6 [319 U.S.App.D.C. 60] Even though the market function potentially subject to monopoly power is the transportation of gas, for many years the Commission also regulated the price and terms of sales by producers to interstate pipelines. See Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 677-84, 74 S.Ct. 794, 796-800, 98 L.Ed. 1035 (1954). Producer price regulation was widely regarded as a failure, introducing severe distortions into what otherwise would have been a well-functioning producer sales market. See STEPHEN G. BREYER & PAUL W. MACAVOY, ENERGY REGULATION BY THE FEDERAL POWER COMMISSION 56-88 (1974). When a severe gas shortage developed in the 1970s, Congress enacted the Natural Gas Policy Act of 1978 (NGPA), Pub.L. No. 95-621, 92 Stat. 3351 (codified as amended at 15 U.S.C. §§ 3301-3432 (1994)), which gradually phased out producer price regulation. Under the NGPA's partially regulated producer-price system, many pipelines entered into long-term contractual obligations, in what were known as take-or-pay provisions, to purchase minimum quantities of gas from producers at costs that proved to be well above current market prices of gas. See Richard J. Pierce, Jr., Reconstituting the Natural Gas Industry from Wellhead to Burnertip, 9 ENERGY L.J. 1, 11-16 (1988). 7 The problem of pipelines' take-or-pay settlement costs has plagued the industry and the Commission over the last fifteen years. The Commission's initial response to escalating pipeline take-or-pay liabilities was to authorize pipelines to offer less expensive sales of third-party (non-pipeline-owned) gas to non-captive customers while still offering only higher-priced pipeline gas to captive customers. 8 The court struck down these measures because the Commission ha[d] not adequately attended to the agency's prime constituency, captive customers vulnerable to pipelines' market power. Maryland People's Counsel v. FERC, 761 F.2d 780, 781 (D.C.Cir.1985) (MPC II); see also Maryland People's Counsel v. FERC, 761 F.2d 768, 776 (D.C.Cir.1985) (MPC I). In response to the court's decisions in MPC I and MPC II, the Commission embarked on its landmark Order No. 436 rulemaking. See Order No. 436, p 30,665, at 31,467. 8