Federal regulation of the natural gas and electricity industries is applied to facilities or commodity transactions involved in interstate commerce. In the gas industry, federal regulation is applied to gas transactions and facilities associated with gas that crosses state lines. In the electric industry, federal regulation is applied to electric transactions and facilities in all wholesale transactions (except in the ERCOT region of Texas and the states of Hawaii and Alaska) since it is assumed that any electricity on the transmission system may cross state lines and it is not possible to distinguish between electrons that do or do not cross lines. The Federal Energy Regulation (FERC) is the entity that regulates much of the interstate gas and electric industries. Other federal agencies regulate environmental impacts, pipeline safety, and other aspects of the energy industry.
Following is a history of federal regulation in each industry:
Natural gas
On the federal level, the history of gas regulation dates back to the late 19th century. In 1887, the Interstate Commerce Act was enacted, which affected the transportation of goods and services across state lines – though an amendment to the act in 1906 specifically excluded the activities of natural gas pipelines. In 1938 the Federal Power Commission was created by the Natural Gas Act (NGA). This represented the first real regulation of the natural gas industry on a federal level. In a nutshell, the Natural Gas Act set reasonable rates for the sale of gas on interstate pipelines. These rates were calculated so that the pipelines could cover their costs of doing business and still make a fair rate of return. The NGA also set the requirements for the 7(c) certification process. This process, still in effect today, required pipelines to file for a Certificate of Public Convenience and Necessity (CPCN) before building new facilities. Prior to granting such a certificate, the FPC would consider whether the facilities truly were in the best interest of the public. And finally, the NGA set out to ensure that pipelines did not discriminate in the provision of service to their customers and that rates could not be discounted without prior approval.
While comprehensive in its regulation, the NGA did not regulate the sale of gas at the wellhead from the producer to the interstate pipeline. In 1954, the Supreme Court changed this and empowered the FPC to regulate the price of gas sold into interstate commerce. Because oversight of individual producers was unworkable, the agency developed mandatory pricing based on a number of criteria. Unfortunately, the effect of this price fixing was to lower gas prices to such a degree that it was no longer profitable for producers to sell their gas into interstate commerce. Looking to increase profits, they began to focus on intrastate markets, which were not subject to the federal regulation.
This resulted in highly limited availability of gas volumes in interstate markets. In the 1970s, the OPEC oil embargo and other market forces caused severe shortages of natural gas. So severe that many people believed our supply would soon run out. The truth, however, was not that we were running out of the fuel – it was just not economical to produce at the below-market rates set by the federal government. In 1974, the Department of Energy Organization Act created FERC as the successor agency to the FPC. Then in 1978, attempting to allow a free market to resolve these shortages, Congress enacted the Natural Gas Policy Act, which initiated deregulation of the price of gas at the wellhead and was the beginning of the deregulated market we know today. This deregulation caused a boom in the industry as producers saw rapidly rising prices and the opportunity for increased profits. With the opportunity for increased profits, drilling rates increased and new supply entered the market. Ultimately, this success led to deregulation across the gas industry sectors in the U.S.
In the natural gas industry, FERC is now responsible for:
Other key federal regulators include the Pipeline Hazardous Materials Safety Administration (PHMSA), which regulates pipeline safety, and the Environmental Protection Agency (EPA), which regulates many environmental aspects of the gas industry.
Electricity
In the electric industry’s early years, Congress allowed utilities to build and operate dams without regulation. But in 1905, the federal government began to license dams and charge fees for their construction. In 1920, the Federal Water Power Act created the Federal Power Commission whose role was to regulate rates, financing, and services of companies licensed to operate dams.
By the late 1920s, the government grew concerned with the emerging large utility holding companies. These holding companies owned multiple local utility operating companies through a complex web of subsidiaries. By 1929, seven utility holding companies controlled 60% of the power in the U.S. Although the local utilities were regulated, nobody was responsible for oversight of the holding companies. Concerns about the potential for market power and financial shenanigans became so widespread that the federal government felt compelled to act. It took initial action with construction of federal power projects that, rather than selling their output to IOUs, made the power available to public power agencies on a preference basis. This encouraged public power as competition to the IOUs.
Then in 1935 Congress enacted two new laws. The Public Utility Holding Company Act (PUHCA) required interstate utility holding companies to register with the Securities and Exchange Commission (SEC) and to follow specific rules. PUHCA also broke up holding company systems that were not contiguous and prevented utilities from investing in non utility businesses. The Federal Power Act exerted federal control over electric sales across state lines and expanded the authority of the Federal Power Commission to include regulation of such sales. Thus large utilities had two tiers of regulation — operations for service to their own customers were regulated by state commissions while sales to neighboring utilities were subject to federal jurisdiction.
Although the Federal Power Act referenced sales across state lines, future court decisions extended this jurisdiction to all sales between utilities using transmission lines, since physically once electricity is on the transmission line it is impossible to say whether it stays within a state or not (ERCOT, the electric grid in Texas, is an exception). PUHCA was highly effective in breaking apart holding companies — between 1935 and 1950, 759 utilities were separated from holding companies, and between 1938 and 1958 the number of registered holding companies declined from 216 to 18. In 1974, the Department of Energy Organization Act created FERC as the successor agency to the FPC.
Other key activities that strengthened federal involvement in the electric industry include:
In the electric industry, FERC is now responsible for:
Other key federal regulators include the North American Electric Reliability Corporation (NERC), which regulates transmission system reliability and security, the Environmental Protection Agency (EPA), which regulates many environmental aspects of the electric industry, and the Nuclear Regulatory Commission, which regulates construction and operation of nuclear power plants.