Market Structure

The market structure of the natural gas industry has been marked by recent regulatory change. In 1989, the Natural Gas Wellhead Decontrol Act was passed to complete the process of decontrolling wellhead prices. Beginning in the 1980's, Federal Energy Regulatory Commission (FERC) orders mandated the separation of existing economic entities and allowed open access to pipeline transportation. Pipelines were forced to unbundle sales and transporta­tion services and retain only the transportation function (though many now own non-affiliated marketing subsidiaries). Since the pipelines were no longer able to purchase directly from producers and handle sales, FERC regulation effectively shifted the purchasing function to end-users and local distribution companies. This legislation

and regulation resulted in a restructuring of the entire industry. New institutional structures such as market hubs and secondary markets for pipeline capacity rights emerged as a result of the regulation. The resulting restructured market is characterized by intense competitive pressures.

The marketing chain is comprised of distinct market segments including producers, marketers, pipelines, and local distribution companies. Production facilities, located at the wellhead, begin the marketing channel. The market is characterized by a large number of producers. Currently, there are more than 5,000 oil and gas producers in the US. The largest 20 companies, however, produce approximately 45% of total annual production.⁴⁰

Interstate pipeline companies primarily transport natural gas from the production regions to market areas. Intrastate pipeline companies are not regulated by FERC. These companies both transport and merchandise gas. A quarter of a million miles of pipeline traverse the continental US moving gas primarily in a northeast direction. Approximately 110 companies control the flow of natural gas across the US through these pipelines.⁴¹

Marketers are intermediaries that have emerged from the new regulation. Marketers match buyers and sellers of gas, trade natural gas, and can arrange transportation; in short, they have assumed the merchant function which previously belonged to the pipelines. Many large producers, local distribution companies, and pipelines have marketing arms.

Local distribution companies (LDCs) serve the residential and commercial market. Required by regulatory mandate to provide the public with natural gas, these companies are the largest suppliers of heat and energy to industrial, commercial and residential customers in non-gas producing states. Prior to FERC, LDCs purchased bundled services from pipeline companies. They faced little price risk since they were able to pass along cost increases in the price of the commodity, transportation, or service charges directly to customers. In the post regulatory era, how­ever, LDCs contract separately for gas supplies, transportation, and other services, exposing them to greater risks and forcing them to be more competitive. Problems can result if LDCs contract to supply end-users without securing adequate quantities of natural gas. In addition, LDCs face supply risk in maintaining sufficient supply, especially during periods of peak demand.

Deregulation has spawned a futures market for natural gas. With deregulated wellhead prices and increased com­petitive pressures, all segments in the industry faced greater price volatility. The introduction of natural gas futures and options created price transparency and allowed firms to manage elements of price risk in a low cost manner.