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1.2.1.1 Delivery of Natural Gas to the Consumer

As a source of domestic energy which pre-dates electricity, natural gas has historically been viewed as an economically significant commodity that, in view of the public welfare, has required some form of public control.20 Today, it is an undeniable fixture on the American energy landscape: natural gas is transported to every area of the country and accounts for about one-quarter of the country’s total energy consumption.21 There are some 1400 local gas distribution companies that collectively serve almost 60 million residential customers.

When consumers adjust the thermostat to help heat their home, they are performing the final act in a continuous chain of economic transactions. The gas service which they enjoy typically has been transported over hundreds and even thousands of miles from its point of origin. First, the gas is gathered in the field, typically in Canada or in a state in the Southwest or Mountain State area. Then it is sold and transported by pipelines to the consumer markets. Finally, the local distribution companies who receive the gas from the pipelines make it available to the public.

Numbering more than 6000, natural gas producers look for and harvest the resource and subsequently sell it to their pipeline customers. In large measure, they are not regulated as public utilities and are generally free to charge whatever prices they feel the market will bear.22

The almost one hundred interstate pipelines that purchase gas from producers have historically been the most significant entities within the natural gas industry and the most heavily regulated. Those companies whose transmission contracts cross state lines have been subject to regulation by the federal government. These pipelines (approximately 70), which have operated exclusively intra-state have had to answer to state authorities (with some exceptions). The economic importance of pipelines is derived from the fact that, for over a half century, they have acted in a dual capacity as both sellers and the exclusive transporters of gas. Therefore, if a local gas distribution utility (LDC or local distribution company) wishes to buy gas so that it can supply its residential and business customers, it has no choice but to purchase the gas from a pipeline. Only pipelines have the means and facilities to buy gas from producers and, once they do so, will not transport gas for anyone who did not buy the gas from them. Several recent developments in natural gas regulatory policy have permanently changed this dynamic and, as a result, new challenges have arisen for residential customers.

Natural gas is received from pipelines by LDCs that then resell it within their service territories. As the vast majority of the 1400 LDCs operate within state boundaries, they are overseen by state utility commissions.23 These are the companies with which a residential consumer of natural gas must do business.

Footnotes

  • 20 {20} E.g., Natural Gas Act, 15 U.S.C. §§ 717–717z.

  • 21 {21} Natural gas has provided 22%–24% of the nation’s total primary energy since 1953, except when it provided 25%–33% in the period 1957–1984. U.S. Energy Info. Admin., Annual Energy Review database.

  • 22 {22} After a Supreme Court decision in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954), which held that producers should be regulated, Congress later passed legislation that overturned the decision. Natural Gas Policy Act of 1978, 15 U.S.C. §§ 3301–3432. See Pennzoil Co. v. Fed. Energy Regulator Comm’n, 645 F.2d 360 (5th Cir. 1981).

    Given the large numbers of producers, few dispute that they operate under very competitive conditions and thus do not require regulation as public utilities.

  • 23 {23} Frank Lindh, Federal Preemption of State Regulation in the Field of Electricity and Natural Gas: A Supreme Court Chronicle, 10 Energy L.J. 277, 306–09 (1989).