Wayne P. Olson

Wayne P. Olson

Today, the price of natural gas is robustly competitive in the United States, and the regulated natural gas sector is focused on reliably and efficiently providing the pipeline and local distribution services needed to bring natural gas from the wellhead to the burner tip.

The International Energy Agency has pointed out that the United States may now be entering a new golden age of natural gas — and numerous proposals promise to bring the fuel to more and more Maine homes and businesses.

Maine homeowners already have benefited from regulatory reform of the natural gas industry that began in the 1980s.

Case in point: When my condo association announced the oil-togas conversion of the building, I asked about the cost-benefit analysis. As it turns out, the conversion paid for itself in just a month or two.

Natural gas has, in recent years, become a particularly good bargain for consumers.

Decontrol of the wellhead price of natural gas in the 1980s led to the use of competition as the way to set the price of gas. The fear had been that the price of natural gas would “fly up,” but it soon became clear that the shortages of the 1970s were artificial in nature.

Once the price of natural gas was allowed to move up and down to balance supply and demand, a natural gas “bubble” — an oversupply of natural gas — emerged, which lasted for about 15 years.

Wellhead price decontrol led to the need to reform regulation of gas transportation, as well.

Regulated pipeline tariffs had traditionally “bundled” the sale of natural gas with the transportation of that gas. Long story short, bundling the sale and transport of natural gas together into one product allowed pipelines to leverage their market power in gas pipeline transport to the merchant sale of natural gas. Gas local distribution companies were held “captive” to the pipeline through longterm take-or-pay contracts, where the gas distributor had to pay for the gas, even if it didn’t need the gas.

Beginning in the 1980s, the Federal Energy Regulatory Commission reformed natural gas pipeline regulation to support competition. FERC — and the courts — found that it had the statutory authority to ask gas pipeline operators to voluntarily agree to provide open and nondiscriminatory service, with the “carrot” being that the pipelines would be able to recover 50 percent of their uneconomic take-or-pay costs. This became a deal that pipeline operators could not refuse.

Later FERC rules revised the way that gas pipelines were regulated. Public utility regulation of gas transportation now uses a combination of traditional public utility ratemaking for gas pipelines and local distribution companies, along with a heavy reliance on market-based mechanisms such as “open season” processes for identifying potential shippers for new pipelines and tradable transport “capacity rights” that provide a secondary market for that pipeline capacity.

This allows market signals to lead the way in encouraging pipelines and local distributors to build out their systems to add new customers.

Markets now give industry participants the price signals for gas producers to decide whether to explore for new gas supplies, for gas pipelines to decide whether new transmission capacity is needed, and for gas distributors to decide whether to build out their systems to serve new customers.

Pipelines and gas distributors typically line up enough customers to support the project before making capital investments to extend their systems to new customers. That’s what’s currently happening with numerous proposals to provide new gas lines in central Maine.

Gas distributors are no longer captive to their pipeline suppliers. Because of wellhead price decontrol and the reforms that FERC made in the 1980s, gas distributors and large industrial customers now have a myriad of choices .

Natural gas now trades at a large discount — about 77 percent for 2010-12 — which improves the economics of oilto gas conversions.

For Maine and New England, of course, things are a bit more complicated.

For example, Nova Scotia’s natural production from Sable Island is declining and production from Deep Panuke is still to come. There are pipeline constraints, as well.

Nevertheless, potential gas supplies from Pennsylvania and other places have already begun to change the dynamics of the natural gas market.

Regulatory reform of the natural gas industry is a major success story for the American economy — and may prove to be an underpinning of U.S. economic growth for many decades.

WAYNE P. OLSON, a former Brunswick resident, is the author of the forthcoming book “The A to Z of Public Utility Regulation.”


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