Natural Gas Act

Natural Gas Act
source
Shorttitle	Natural Gas Act
Longtitle	An Act to regulate the transportation and sale of natural gas in interstate commerce, and for other purposes.
Colloquialacronym	NGA
Enacted by	the 75th United States Congress
Effective date	June 21, 1938
Cite public law	75th–Pub. L. 75–688
Introducedin	House
Introducedby	Clarence F. Lea (D–CA)
Committees	Interstate and Foreign Commerce
Passedbody1	House
Passeddate1	June 7, 1938
Passedbody2	Senate
Passeddate2	June 10, 1938
Signedpresident	Franklin D. Roosevelt
Signeddate	June 21, 1938
Amendments	Natural Gas Policy Act of 1978, Energy Policy Act of 1992, Energy Policy Act of 2005
Scotus cases	Phillips Petroleum Co. v. Wisconsin, FPC v. Hope Natural Gas Co., United Gas Pipe Line Co. v. Mobile Gas Service Corp.

Natural Gas Act. Enacted in 1938, it established the first comprehensive federal regulation of the natural gas industry in the United States. The legislation was designed to address monopolistic practices and ensure "just and reasonable" rates for consumers by granting regulatory authority to the Federal Power Commission. This landmark act fundamentally reshaped the market structure for interstate gas transportation and sales, creating a distinct regulatory framework that persisted for decades.

Background and legislative history

The push for federal regulation emerged from the chaotic and often exploitative state of the interstate commerce in natural gas during the early 20th century. Following the landmark Public Utility Holding Company Act of 1935, which targeted electric utility abuses, attention turned to the gas industry. Investigations, such as those by the Federal Trade Commission, revealed that large holding companies like Insull utilities exerted excessive control, leading to inflated prices for consumers in states like Pennsylvania and New York. The United States Supreme Court decision in Missouri v. Kansas Natural Gas Co. (1924) had previously limited state authority, creating a regulatory vacuum for interstate pipelines. Spearheaded by Representative Clarence F. Lea and supported by the administration of Franklin D. Roosevelt, the legislation moved through the United States House Committee on Interstate and Foreign Commerce. It faced opposition from segments of the oil industry and producers but was ultimately passed as part of the broader New Deal regulatory agenda, receiving Roosevelt's signature on June 21, 1938.

Key provisions and regulatory framework

The act granted the Federal Power Commission (FPC), later succeeded by the Federal Energy Regulatory Commission (FERC), authority over the transportation and sale of natural gas in interstate commerce. A core provision required that all rates and charges be "just and reasonable," and any new rates could only be implemented after a public hearing. It mandated that interstate natural gas pipeline companies obtain a certificate of public convenience and necessity from the FPC before constructing new facilities or abandoning service. The FPC's jurisdiction explicitly covered pipeline companies and natural gas companies engaged in interstate transportation or sales for resale, but it initially exempted the "production or gathering" of gas and direct sales to industrial end-users. This framework established a cost-of-service ratemaking model, where pipeline rates were set based on a company's prudent investment and operating expenses, ensuring a guaranteed return as established in the FPC v. Hope Natural Gas Co. decision.

Impact on the natural gas industry

The act created a stable, monopolistic structure for the interstate pipeline industry for over four decades. By guaranteeing a return on investment, it incentivized the massive post-World War II expansion of the interstate pipeline network, connecting prolific basins like the Permian Basin and the Gulf of Mexico to growing markets in the Midwestern United States and Northeastern United States. This fostered the widespread adoption of natural gas for home heating and industrial use. However, the regulatory system also led to persistent problems. The distinction between regulated interstate sales and unregulated intrastate sales created a dual market. Furthermore, the price controls on interstate gas, particularly after the Phillips Petroleum Co. v. Wisconsin (1954) decision extended FPC authority to wellhead prices, contributed to supply shortages in the 1970s as producers shifted gas to the higher-priced intrastate market.

Amendments and related legislation

Major amendments began with the Natural Gas Policy Act of 1978 (NGPA), enacted during the Carter administration to address the energy crisis by beginning the phased deregulation of wellhead prices. The Natural Gas Wellhead Decontrol Act of 1989 completed this price deregulation. The most transformative subsequent legislation was FERC Order 436 in 1985 and the Natural Gas Wellhead Decontrol Act of 1989, which were codified and expanded by the Energy Policy Act of 1992 (EPAct 1992). EPAct 1992 mandated that FERC implement rules requiring pipeline companies to provide open access transportation, fundamentally restructuring the industry away from the merchant model. Further adjustments were made by the Energy Policy Act of 2005, which strengthened FERC's enforcement authority and addressed issues related to liquefied natural gas terminal siting.

Legal challenges and court rulings

The act's scope and implementation were defined by pivotal United States Supreme Court rulings. In Interstate Natural Gas Co. v. FPC (1947), the Court upheld the FPC's authority over pipeline sales. The seminal case of Phillips Petroleum Co. v. Wisconsin (1954) dramatically expanded federal jurisdiction by ruling that independent producers selling gas to interstate pipelines were subject to regulation, a decision that led to decades of price controls. FPC v. Hope Natural Gas Co. (1944) established the foundational legal precedent for ratemaking, focusing on the end result for investors rather than a specific formula. Later, in United Gas Pipe Line Co. v. Mobile Gas Service Corp. (1956), the Court affirmed the sanctity of contracts within the regulatory system. The move toward deregulation was judicially supported in cases like Associated Gas Distributors v. FERC (1987), which upheld the open access rules that dismantled the old pipeline monopoly model.

Category:United States federal energy legislation Category:1938 in American law Category:New Deal