Natural Gas Regulation, Deregulation, and Contracts

Abstract

This article shows the ways in which regulation, phased deregulation, and contract provisions can interact to produce anomalous results. Regulation has influenced the process of contracting and the nature of bargains struck. Partial deregulation will change in unanticipated ways the nature of the risks and uncertainties that contracting parties foresaw and allocated in their agreements. This sequence can produce results that are both inequitable and inefficient. The article begins with a brief history of gas producer price regulation and a discussion of the adverse effects of regulation on aggregate social welfare. Then, it discusses the current opeeration of the natural gas industry and the long-term contracts that govern the relationships between suppliers and pipelines. Next, the article discusses the deregulation scheme enacted in the Natural Gas Policy Act of 1978, and the likely effects of the interaction of this scheme with existing long-term supply contracts. The article explores several remedies that would avoid these adverse effects: voluntary contracting behavior, application of contract law doctrines, and several statutory solutions. Finally, the article draws general inferences about the relationship between regulation, deregulation, and long-term contracts. 171 references.