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Highlight Updates Gas Restructuring and Impacts on Residential Customers

Culminating with its Order No. 636 issued in April 1992,27 the FERC instituted a decade-and-a-half-wide-scale deregulation of the interstate pipeline system. In the simplest terms, pipelines have been forced to surrender their traditional monopoly over natural gas sales. Whereas pipeline owners were once able to deny access to other parties who wished to use the pipelines, buy gas from producing well fields or sell gas to end-users, now pipeline owners must provide “open-access” transportation to whomever requests it.

Thus, instead of depending upon the pipeline for both the transportation and sale of gas, an LDC, a gas marketer or broker, or a large industrial end-user is only dependent upon the pipeline for transportation. These parties can contract directly with the producer for the sale of its gas and then hire a pipeline to transport the purchased gas to where it is needed.28

Residential and small commercial customers may also be able to arrange for a supply of gas directly with a seller, marketer or broker unaffiliated with the LDC. However, less than a majority of states have full “retail access,” that is, allowing smaller customers to purchase gas directly and by-pass the LDC.29 In addition, even in those states that legally allow retail access, there may not be sellers or marketers interested in dealing with small customers.

In creating this regulatory environment in which pipeline customers can “bypass” pipeline facilities to meet their supply needs, the FERC has placed public utility commissions and the consumers that PUCs seek to protect in a tenuous position. Many LDCs have large industrial plants and factories as customers. These customers typically have the resources to either bypass the LDC and construct their own pipeline “spur” to the interstate pipeline or to switch back and forth among energy sources altogether (that is, switch from gas to petroleum or coal depending upon which is cheaper). Most residential consumers, by contrast, do not have these options and are thus captive customers of the LDCs. LDCs typically spread their large, fixed costs (the cost of distribution lines, valves, maintenance equipment, administrative overhead, and so forth) throughout their customer base, so any decrease in this base creates pressure to raise rates on remaining customers.30 Typically, these customers will largely be residential consumers, many of whom do not have the means to easily absorb any rate increases.31


  • 27 {27} Order, Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 57 Fed. Reg. 13267, FERC Statutes and Regulations ¶ 30,939 (1992) (No. RM87-34-000; Order 636).

  • 28 {28} Charles F. Phillips, The Regulation of Public Utilities: Theory and Practice 711–15 (1993). In theory, smaller customers can also contract directly with a producer to purchase gas, but this rarely happens.

  • 29 {29} According to the Energy Information Administration, twenty-one states and the District of Columbia had natural gas retail access for residential customers as of December 2009. U.S. Energy Info. Admin., Natural Gas Residential Choice Programs, at

  • 30 {30} Harry G. Broadman & Joseph P. Kalt, How Natural Is Monopoly? The Case of Bypass in Natural Gas Distribution Markets, 6 Yale J. on Reg. 181, 185–86 (1989). The increase in gas prices for the individual customer can be considerable.

  • 31 {31} This is not as far-fetched as it sounds. In Panhandle E. Pipeline Co., 38 F.E.R.C. ¶ 63,009 at 65,039 (1987), an LDC allocated to its remaining captive users a $51 million loss that was due to a bypass.