|Author(s):||MacAvoy, Paul W.|
|Reviewer(s):||Castaneda, Christopher J.|
Published by EH.NET (July 2001)
Paul W. MacAvoy, The Natural Gas Market: Sixty Years of Regulation and
Deregulation. New Haven: Yale University Press, 2000. xv + 140 pp. $35
(hardback), ISBN: 0-300-08381-5.
Reviewed for EH.NET by Christopher Castaneda, Department of History,
California State University – Sacramento.
Paul W. MacAvoy has had a distinguished career as a scholar, dean, corporate
board member, and natural gas industry expert. Since 1991, he has been the
Williams Brothers Professor of Management Studies at Yale University.
(Williams is an energy and high-technology firm that currently transports
approximately 16 percent of the nation’s natural gas.) Much, but by no means
all, of MacAvoy’s distinguished career has involved natural gas issues.
In The Natural Gas Market, MacAvoy argues that government regulation of
the natural gas industry benefits no one. The author examines the major
federal regulatory acts imposed during the last sixty years, and he utilizes
econometric analysis to prove that in each case regulation has not provided
consistent benefits to either consumers or industry participants. The real
temporal focus of this treatise, however, is on events following the
nationwide natural gas shortages that appeared first in the late 1960s. Thus,
the book in some ways complements an earlier work MacAvoy, co-authored with
Stephen Breyer, Energy Regulation by the Federal Power Commission
(1974) that examined the regulatory causation of those shortages.
Although The Natural Gas Market is a brief book, it is the capstone of
a career-long studious investigation into U.S. natural gas industry economics.
MacAvoy notes that this book’s origins are found in his Yale doctoral
dissertation written during the late 1950s. Since then, MacAvoy has published
several books and testified before the Federal Energy Regulatory Commission
(FERC) on natural gas issues.
Federal gas industry regulation commenced in 1938 when Congress passed the
Natural Gas Act (NGA). This law authorized the Federal Power Commission (FPC)
to regulate interstate gas pipelines through controls on sales prices and
industry entry. The guiding principle of initial FPC regulation was to protect
consumers by ensuring “just and reasonable” prices and a “fair profit” for gas
companies. It is, in fact, coverage of early regulatory efforts that is the
least developed part of the book. MacAvoy delves neither into the causes nor
reasons for the NGA. The NGA is therefore not presented in historical context.
Rather, it represents here more of a starting point for understanding federal
regulatory administrative powers than highlighting a significant political or
social event. Also, unlike MacAvoy’s argument throughout the latter part of
the book, the very brief discussion of federal regulation from 1938 through
the mid-1950s is not supplemented with tables of historical statistics or
econometric models that estimate prices, production, and supply without
The strength of MacAvoy’s book begins with his analysis of regulatory policy
in the 1950s. In 1954, the U.S. Supreme Court’s so-called Phillips Decision
case resulted in the FPC gaining new regulatory power. The FPC acquired
authority to regulate the prices at which producers sold natural gas to
interstate gas pipelines for resale. Previously, the FPC regulated the prices
at which interstate pipelines sold gas but not the price at which they
purchased that gas from producers. This augmentation of the FPC’s
price-setting powers is shown to be, in this work and many others, the single
most important cause of the natural gas shortages that first appeared in the
late 1960s. By further restricting the prices at which producers could sell
their gas to interstate pipelines for resale, the FPC inadvertently removed
the producers’ financial incentive to discover and produce additional gas
supplies. Thus, MacAvoy shows how the FPC’s attempt to restrict prices for the
consumers’ benefit resulted in a declining supply base, market imbalance, and
overall industry dysfunction that resulted in the 1970s shortages.
The shortages prompted government to modify natural gas regulatory policy in
order to stimulate production. A complex series of events led to congressional
passage of the Natural Gas Policy Act of 1978 (NGPA). Basically, the NGPA,
administered by the newly created Federal Energy Regulatory Commission (FERC)
of the Department of Energy, sought to phase out gas price ceilings and
stimulate production to eliminate shortages. The NGPA, as MacAvoy effectively
depicts, was effective in creating a natural gas supply “bubble.” This
oversupply situation created a new problem: pipelines committed to long-term
gas contracts found that these contracts required substantially higher prices
than those in the emerging “spot” market that developed in order to clear the
This new market scenario prompted yet another federal regulatory reaction. In
order to relieve gas pipelines of their long-term, high cost gas purchase
contracts with producers, FERC initiated a new process that ultimately
resulted in eliminating interstate pipelines’ merchant status and replacing it
with a transportation function. Thus, under FERC Order 636 (as well as other
orders leading up to this one), FERC transformed gas pipelines into virtual
common carriers. Industrial and large consumers now contracted directly with
producers for natural gas supply and pipelines for transportation services.
However, FERC has continued to regulate the gas pipelines’ transportation
MacAvoy argues that while this partial deregulation of the natural gas
industry is a step in the right direction, it has not solved the gas
industry’s structural problems. By regulating transportation service prices,
FERC is ultimately restricting growth in overall pipeline capacity. He states
that “By preventing markets from fully using available capacity, FERC
regulation continues to impose rigidities in supply that were inherent in the
merchant contract system of the 1970s and 1980s” (p. 95). Later in the
conclusion, MacAvoy admits that “Gas production and transport is moving toward
long-term supply levels that are likely to be close to those realized if
markets were free of regulation.” (p. 120), but he calls for full deregulation
now in order to benefit from “prices today that are 20 percent less .” (p.
MacAvoy also examines what has become the “missing person” in the deregulated
energy industry. The once highly touted prospect that residential consumers
nationwide would be able to chose their gas supplier in a way similar to that
of long-distance telephone companies has not come to fruition for many
customers. MacAvoy attributes this reality to both consumer indifference and
the fact that individual consumers probably would not realize a significant
benefit from such unbundled services.
MacAvoy’s concise book provides a strong argument buttressed by historical
statistics and econometric modeling that natural gas regulation has not
provided consistent benefits to any segment of the natural gas industry
including consumers. Ultimately, MacAvoy posits that over time an unregulated
gas market will function in the public interest more so than a regulated one.
His thesis is compelling, but it leaves unaddressed the issue of why
government imposed regulation in the first place. MacAvoy has shown that even
a well-intentioned regulatory regime is no match for an unregulated and truly
competitive market in maintaining supply-demand balance and reasonable prices.
Christopher Castaneda is an Associate Professor of History at California
State University, Sacramento and author of several books on the natural gas
industry including Invisible Fuel: Manufactured and Natural Gas in America,
1800-2000 (New York: Twayne Publishers, 1999).
|Subject(s):||Government, Law and Regulation, Public Finance|
|Geographic Area(s):||North America|
|Time Period(s):||20th Century: WWII and post-WWII|