Readers Forum
To the Editors:
J.D. Steelman’s essay, “Deregulation of the Natural Gas industry,” (June 1986) interestingly describes some of the revolutionary changes taking place as the gas industry breaks out of its decades-old regulatory straitjacket. Out of the distortions of shortage and surplus that have affected the production, transmission, and distribution phases of this industry for over a decade, new institutions and business practices have been developing that seen as a whole make up what F.A. Hayek calls “spontaneous order.” But unlike the impression given in this essay, there is still significant regulation and much to resolve before a free market can be said to reign in the gas industry.
In response to growing market forces and distortions requiring market solutions, the Federal Economic Regulatory Commission (FERC) has faced the age-old regulatory question—more regulation or less regulation. (This is not new; the past of industry regulation has been closing one regulatory gap after another.) Beginning with self-help transportation programs in the 1970s to move gas from surplus areas to shortage areas, the FERC has been pragmatically deregulating piecemeal to create a greater role for market forces. As competitive forces snowballed, propelled by the gas surpluses of the 1980s, the FERC was forced to overhaul the Natural Gas Act of 1938 with Order 436 of October 1985 which Mr. Steelman refers to. Importantly, this overhaul is not deregulatory although certain provisions such as relaxed certification for entry and exit tend to be. Order 436 substitutes new regulation for relaxed regulation and magnifies existing industry problems.
A particularly onerous provision forces interstate pipelines to accept all transportation requests by outsiders (whether producers, brokers, pipelines, or end-users) whether or not there is capacity or whether the pipeline wishes to do so. By removing pipeline “monopoly power,” it is believed, mandatory contract carriage makes the industry more competitive and lowers prices for consumers. At the same time end-user contracts are incrementally terminated (begun previously by Order 380 of May 1984 and Opinion 238 of July 1985) which leaves pipelines in the predicament of holding unmarketable high-take, high-price producer contracts entered into on the basis of voided end-user “minimum-bill” commitments. There are many distortions in the making from the new regulation of Order 436 that cannot be presented here, but let it be said that pipeline regulation (not to mention partial wellhead regulation, conservation laws, and comprehensive distribution company regulation) remains a powerful force in the natural gas business environment.
I make these points in regard to Mr. Steelman’s article not as an end in itself but in the hope of interesting young “Austrian” economists (who are increasingly populating graduate economics programs around the country) to examine the insightful history of natural gas intervention to teach us more. I single out Austrianism for this topic for good reason. So far only neoclassical economists and industry related observers have interpreted the story. Yet there are many Austrian themes that are vital for understanding, such as the interrelationships (dynamics) of industry intervention, the development of new market institutions and spontaneous order in relation to regulatory and market changes, and the role of integration, non-access, and cooperation (as opposed to free access and rivalry) in market coordination and efficiency.
—Robert L. Bradley, Jr.
Mr. Steelman replies:
Mr. Bradley’s ideas were most thought provoking. I do not disagree with his proposition that the natural gas industry is still a regulated industry—so is every industry in the United States. Those industries not regulated by a commission such as the FERC, FCC, FAA or the like, are subject to antitrust laws and other laws. Although I prefer the free market approach of Mises, Hayek, and the Austrian economists the issue in today’s environment is whether the regulations give one a long or short leash. Certainly regulation of the natural gas industry is being relaxed in comparison to the comprehensive wellhead to burner tip regulation that had existed. Market forces are being allowed to have much more of an impact on the industry. Meaningful deregulation is a possibility. However, neither the FERC nor the state regulations on natural gas are being relaxed rapidly enough. The concluding paragraph of my article called for acceleration of deregulation not merely a relaxation of regulations.
At the time I wrote my article, Order No. 436 had all the makings of a comprehensive deregulation order, as did Order No. 451 when it was first proposed by the Department of Energy; subsequently, the picture became muddled. In my opinion, Order Nos. 436 and 451, as now being finalized, are causing chaos in the industry and the marketplace. The result among virtually everyone I know in the industry is a preference for comprehensive legislation deregulating the industry (this in itself is a radical departure by the industry from past positions). Not only is the natural gas industry desirous of greater flexibility within the industry, it also must have greater flexibility to compete with energy substitutes that are less regulated than natural gas. This more than anything else was the impression I meant to convey—the marketplace is de facto deregulating and beginning to operate like a competitive marketplace. Entrepreneurs and managers have acknowledged by their actions that the natural gas industry is subject to competition like any other industry and they are responding accordingly.
In summary, I believe the industry is beginning to function more like a competitive marketplace than a regulated public utility and that the industry will continue to seek the removal of marketplace barriers. Regulation will be relaxed, though it is unlikely that the FERC or state regulatory commissions will be abolished. Nor do I believe that the Natural Gas Act or even the Natural Gas Policy Act will be repealed in the foreseeable future. However, I do believe that there will be forthcoming further relaxation in regulations and perhaps some real deregulation. This will allow a more competitive and efficient natural gas market to evolve and will be healthy for both the natural gas industry and the marketplace.
—J.D. Steelman
