Federal Energy Regulation

The U.S. federal government plays a pervasive role in the supply, delivery, and use of energy resources. Defining regulation as a set of governmental programs or activities intended to yield results that otherwise would not have occurred, as of 2002, other than military and national security operations, federal government energy regulation extended through 150 energy-related programs and 11 energy-related tax preferences. These programs and activities address a variety of energy concerns, including supply, environment and health effects, low-income assistance, basic research, delivery infrastructure, conservation, system reliability and physical security, market competition, and education. There are at least 18 major federal departments and agencies that have substantial energy-related responsibilities, including the Department of Energy (DOE), the Interior Department, the Department of Health and Human Services, the Nuclear Regulatory Commission, and the Federal Energy Regulatory Commission. In 2003, the federal government spent, directly or by tax preferences, $14.2 billion on energy programs and collected $44.7 billion in energy-related fees, taxes, royalties, and other program revenue.

Federal government energy regulation mechanisms include a variety of constraints, inducements, and development and support efforts. Examples of constraints are limits placed on energy prices, environmental pollution, and energy use efficiency. Examples of inducements include tax incentives and favorable access to federal lands for energy production. Development efforts range from supporting basic energy research to funding demonstration projects. Support activities include low-income energy use assistance and energy production subsidies. Energy policy has been used to pursue a variety of objectives including geopolitical standing, income distribution, and the promotion of ideologies.

Federal control of energy prices is most evident in the electricity and natural gas industries. The Federal Energy Regulatory Commission (FERC), the successor in name of the Federal Power Commission (FPC), has regulatory authority over electric and natural gas wholesale and transmission prices. The FPC was established in 1920 to license hydroelectric generation facilities on navigable streams and waterways. The FPC's authority was extended by the Federal Power Act (1935) and the Natural Gas Act (1938) to include the regulation of various electricity and natural gas prices. The FERC has regulatory authority over the construction of natural gas and petroleum pipelines though, at least historically, not over the construction of electric power transmission lines. In recent years the FERC has shifted its regulatory focus from costbased regulation to the promotion of competition.

The FPC originally interpreted its price regulation authority under the Natural Gas Act to be limited to the control of interstate pipeline company wholesale prices. In 1954, the United States Supreme Court ruled in Phillips v. Wisconsin, 347 U.S. 672 (1954), that the FPC was required to regulate the prices that pipelines pay producers for the purchase of natural gas, effectively regulating natural gas wellhead prices. The FERC's regulation of production prices was phased out by the Natural Gas Policy Act (1978) and the Natural Gas Wellhead Decontrol Act (1989).

Prior to the 1990s, natural gas pipeline companies were merchant intermediaries. Pipeline companies purchased natural gas from producers and sold it to local distribution companies and various industrial customers. Local distribution companies and end-use consumers were effectively precluded from purchasing natural gas supplies directly from producers because they could not obtain transmission service from pipeline companies. Starting with FERC Order 436 (1985) and extending through FERC Order 636 (1992), FERC opened consumer access to the producer supply market by requiring natural gas pipelines to provide transmission service for natural gas purchased by local distribution companies and end use consumers from producers or brokers. Subsequently, interstate pipeline companies have transformed from wholesale supply merchants into the equivalent of transportation common carriers. In the past few years, most of the FERC's natural gas utility regulatory efforts have focused on pipeline transportation rates and service.

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