[BETA] Fortnightly

Let's hope that by now we all prefer market solutions to government mandates. Markets are generally more efficient and equitable. Recent experiences with deregulation for airlines and telecommunications have vindicated Adam Smith's notion that the "invisible hand" can prove superior to regulation.

Unfortunately, this knowledge offers little comfort today to natural gas pipelines (em even to those companies not saddled with a surplus of transportation capacity.

A Great Start (But Too Cautious)

Congress and the Federal Energy Regulatory Commission (FERC) FERC have made a great start in the deregulation of the energy industry generally, and the natural gas business in particular. Several industry segments are now completely deregulated. The balance of the industry is ripe for similar consideration. The apparent reluctance to extend competitive market principles to the interstate pipelines, even though such reform is warranted and justified, has proved frustrating.

The FERC has moved with excessive caution in some respects. In others, one could even say that it has bolstered regulatory barriers to open markets. This backward step comes in spite of the fact that the FERC has precipitated changes in some cases that break the "regulatory compact" that limits revenues earned by the pipeline industry in exchange for restrictions against would-be competitors.

The FERC broke with that traditional model a number of years ago when it moved the industry through deregulation, including capacity release and segmentation. Today there are major pipeline markets that carry a significant surplus of transportation capacity as a result of such regulatory changes. Because of this excess capacity, the pipelines serving those markets stand exposed to all of the market dynamics of competition, but remain tied to regulation that presumes the opposite. Even those pipelines serving markets with more limited current delivery capacity can take little comfort in their positions, as it is clear that potential competitors (who, in today's market, need not duplicate the pipelines investment in infrastructure) will be allowed freely to enter the market if conditions so warrant.

Other market segments have used the regulatory process as a tool to encourage the FERC either to delay or forego pipeline deregulation. Producers who suffered a drop in prices when wellhead deregulation caused a supply bubble now apparently feel that the pipelines haven't yet sufficiently shared their pain. On the other hand, marketers who built businesses on the arbitrage between unregulated and wellhead-controlled gas felt frustration in the early years with their limited ability to gain access to pipeline capacity as the FERC rewrote the rules, culminating in Order 636. Whatever those past frustrations or beliefs, the reality today is a robust and diverse market.

The energy industry must by now certainly recognize the merit in market solutions. It's time to put this idea to work in the transportation of natural gas. The FERC should direct its energy to pipeline deregulation to the maximum extent permissible under the Natural Gas Act. The Congress should give the FERC added flexibility to finish the job.

Market-Set Rates

(The Ultimate Outcome)

The obvious ultimate outcome is market-based and negotiated rates (plus terms and conditions) in a very competitive