Introduction

Recent analyses of the natural gas market, ¹ including those of the Department of Energy (DOE), the Federal Energy Regulatory Commission (FERC), ² and the State of Louisiana, ³ conclude that there is a serious problem of regional gas supply imbalance in which most intrastate pipelines are at a disadvantage in competing with most interstate pipelines for new gas supplies. In addition to this supply imbalance, there is a related problem of price disparity. Most intrastate pipelines must pay prices for old gas supplies substantially higher than the prices interstate pipelines must pay for such supplies. Analysts predict that the twin problems of supply imbalance and price disparity between the interstate and intrastate markets will grow worse over the next five to ten years unless Congress passes legislation to avoid this result. Louisiana is particularly disadvantaged by the present situation because of its heavy reliance on intrastate suppliers of natural gas.

The present national surplus of gas has reduced the concern about potential regional gas shortages. The surplus has not eliminated the gas supply / price problem in Louisiana, however. First, the significant regional price disparity still exists. Most Louisiana consumers pay more for gas than most consumers in other states. Second, the potential remains for future gas supply shortages in Louisiana. A combination of increased oil prices, robust economic recovery, and cold weather could result in future gas shortages in Louisiana because of the characteristics of the Louisiana market and the characteristics of the federal regulatory system governing natural gas.

The price /supply problem in the intrastate market is caused primarily by certain features of the Natural Gas Act (NGA) and the Natural Gas Policy Act (NGPA). The variable price ceilings of NGPA generally provide lower ceiling prices for old interstate gas than for old intrastate gas. As a result, regulated interstate pipelines have a larger "cushion" of old gas subject to particularly low price ceilings that permits these pipelines to outbid intrastate pipelines for new gas supplies. At the same time, this cushion enables the interstate pipelines to charge lower prices for the gas they sell. In addition, two provisions of the federal statutes protect interstate pipelines against competition from intrastate pipelines for most of the old gas previously committed to interstate pipelines. First, most gas dedicated to interstate commerce prior to November 8, 1978 cannot be sold later to another purchaser without obtaining prior Federal Energy Regulatory Commission (FERC) permission to abandon service under Section 7(b) of NGA. FERC rarely grants such permission. Second, the balance of the gas dedicated to interstate commerce prior to November 8, 1978 cannot be sold later to another purchaser without providing the original interstate pipeline purchaser a right of first refusal under Section 315 of NGPA. The federal statutes provide no comparable protection to intrastate purchasers. The basic problems in the interstate gas market can be solved only at the federal level, where Congress is actively considering possible solutions. Louisiana is participating in those congressional deliberations. Still, it is well worth considering partial or temporary solutions at the state level, since a federal solution may not come for some time if it comes at all. ⁴

I investigated potential state level solutions through use of the following methodology. First, I determined the primary legal constraints on the actions available to Louisiana. Second, I interviewed officials of states with analogous problems (Texas and Oklahoma) and knowledgeable participants in the Louisiana market to obtain suggestions for state actions that might alleviate the problem. Third, I assessed the legality and likely effects of potential state actions.

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