Natural Gas Policy Act
The Federal Energy Regulatory Commission (FERC) was created out of the old FPC and directed to reform natural gas pricing. Essentially this was a reversal of the Phillip’s decision as it allowed the deregulation of wellhead gas prices.
Production increased dramatically in response to pent-up demand which led to a gas surplus in the 1980s. However, a competitive market failed to develop, mainly due to the role pipelines played in the market. Since pipelines charged consumers enough to cover the cost of what they had to pay producers, there was no incentive for them to select the most competitively priced gas produced.
FERC Order 436
This required pipelines to provide open access to transportation services allowing consumers to negotiate prices directly with producers and contract separately with the pipelines for transportation.
FERC Order 500
Order 500 implemented shared contract costs on take-or-pay (TOP) contracts. Take-or-pay contracts leave the buyer responsible for some portion of the cost even if the product is not provided.
The combination of Orders 436 and 500 allowed producers to balance supplies of gas across production regions, if volume was lacking in one area, but plentiful in another, the producer could arrange to transport the surplus to where it was needed. The transportation system became a mechanism owned by one party but it could be accessed by other parties on an equal basis, hence the concept of open-access. Differences between contract gas shipments and actual consumption left pipelines to make up the difference (balancing) and FERC made balancing a competitive service.
The establishment of gas market companies was also a feature of the 1980s, a direct result of deregulation. These firms, often with no ties to any one gas company, provided an intermediary service between a gas buyer and all other industry segments.