Case Overview, Affiliate Relationships

 

           The route from a natural gas field to the end user in a home or factory is a complicated one. As one government official told us, "all the entities along the path [include] the producers, who pull the gas out of a well, the gatherers, who collect the gas from different producers, the refiners who do different things and take any impurities out, the pipeline that transmits the gas, the LDC's [or] local distribution companies, and the marketers, who don't really have a physical structure anywhere along the chain." Not surprisingly regulation of this industry is complicated as well. Indeed, parts of the industry are heavily regulated; others hardly at all.

           A critical problem is that while some of these companies at different stages are independent and are only involved in one endeavor like production or distribution, others are related to companies in other parts of the industry. The reason that this a problem is that the price of natural gas is unregulated and to ensure a free and honest market, all those selling natural gas should be competing on a level playing field. If other parts of a company possess information that could influence market prices, but gives that information only to its affiliate, that could provide it with an advantage. For example, if "Colossal Natural Gas" had different subsidiaries that produced gas and sold gas, the production company might know exactly when supplies were to expand. If it passed that information on to its distribution affiliate, that affiliate might drop the price before the new market conditions prevailed and pull considerable business away from other distributors who were unaware that more gas would soon drive down the price.

           The Federal Energy Regulatory Commission (FERC) is the regulatory body that devises the rules that govern this market. Its original rules on affiliate relationships were issued in 1985, and more regulations were added later. In 2001 FERC issued a notice of Proposed Rulemaking to expand regulation of affiliate relationships. Its intended purpose was to expand and update the rules so that they effectively applied to all different segments of the market. The existing rules primarily apply to the pipelines' relationships and marketing affiliates.

           The interests of different parts of the industry are reflected in the different perspectives on what needs to be done that each segment brought forward during FERC's fact finding phase. As one lobbyist for an energy company put it, "at the end of the day, this is a very divisive issue that different companies read differently." This makes rulemaking difficult to be sure but the rationale for expanded regulation grew in the wake of the electricity crisis in California, where markets were manipulated to create false shortages and a spike in prices. It was also spurred on by the Enron scandal, which revealed both the dangers of deregulation and the difficulty of following movement of the product (electricity) because of the various middlemen involved and the complex trading strategies used by brokers. Indeed, sentiment grew that natural gas and electricity should be regulated in the same way since these industries present similar problems in terms of their structure.

           In the short run the division in the industry appeared to be the strongest influence on FERC. By the end of 2002 the agency still had not issued its final rules. It seemed likely that FERC was still searching for greater consensus among all the disparate gas companies and gas company affiliates.