A State Regulatory Strategy for the Transitional Phase of Gas Regulation

Abstract

This Article addresses the transitional period of natural gas deregulation under the Federal Energy Regulatory Commission's recently promulgated Order No. 636. Regulation of the natural gas industry is complicated because although production is competitive, transportaion and local delivery systems remain monopolistic. Order No. 636 requires gas pipelines to act as common carriers and therefore shifts the locus of regulation to local distribution companies (LDCs). This change means that small customers unable to switch gas suppliers will likely face higher gas costs. Changes in the manner of calculating rates and fuel-switching capabilities by larger purchasers encourages this shift in cost. Additionally, deregulation of gas provision will increase the exposure of LDCs to fluctuations in gas price and availability. This Article proposes that state regulators adopt a system of advanced planning and incentive rate setting. Primarily this involves setting target gas cost ranges for LDCs based on a mix of spot and longer-term contract prices for natural gas and a sharing of gains and losses by the utility and its customers. Using planning, utilities and regulatory commissions can reduce the amount of regulatory risk inherent in the changing environment. By explicitly allowing some risk sharing, state commissions can encourage utilities to take advantage of competitive opportunities in gas commodity markets to the benefit of both large and small gas customers.