U.S. demand for natural gas is projected to increase by more than 50% by 2020. Companies are building—and the public is opposing—receiving terminals on three coasts that would increase imports of liquefied natural gas. The pros and cons of "opening up" Alaska, coastal waters, and federal lands to drilling are still being debated.

These politically charged battles divert attention from regulatory policies and practices that are inhibiting greater production of natural gas from proven fields with less environmental impact. These regulatory barriers include:

  • Inadequate access to transmission and gas-gathering systems.
  • Restrictions on the delivery of gas to storage facilities.
  • Opaque rules that effectively bar needed investments in gas infrastructure.

Sick transit

Maximum production of natural gas requires a reliable, cost-effective system for moving the gas from underground fields to gas-gathering systems and then into interstate pipelines or local distribution networks. A confluence of circumstances is limiting the rate of this flow.

In many cases, utilities fail to provide adequate means for moving the gas from the wellhead to the gathering system and/or from the gathering system to the utility’s system. In other cases, the owner of a gathering system—often, the interconnecting utility—concurrently lacks incentives to maintain or expand the system and faces regulatory disincentives to sell it to a party more financially able to expand it. In yet other cases, the utility or gathering system imposes minimum wellhead flow requirements or takes months to provide new hookups.

As a poster child for ineffective regulation, in 1989 the California Public Utilities Commission "strongly encouraged" one utility to divest all of its gathering systems with the intent of encouraging needed investment in them. Nearly 20 years later, the first two of those systems are only now beginning the sales process. In the interim, the utility’s entire gas-gathering system has been starved of financial sustenance to the detriment of its health.

Gas quality’s Catch-22

Storage facilities can greatly improve the flexibility of natural gas systems. For example, many can blend low-Btu gas (which is denied access to pipeline systems for justifiable quality-control reasons) with higher-Btu gas, bringing the mixture "up to spec" for acceptance into a pipeline network.

Yet, many jurisdictions prohibit producers from delivering gas directly to non-utility storage facilities. This restriction, intended to prevent the supposed uneconomic bypass of the utility’s facilities, creates a Catch-22 for low-Btu natural gas. In effect, the producer is barred both from delivering its low-Btu gas due to its deficient quality and from remedying the deficiency—a perfect storm of the negative consequences of anachronistic natural gas regulations.

Free up infrastructure finance

Investors willing to develop and finance new natural gas infrastructure that would remove bottlenecks created by inadequate utility facilities should be encouraged. However, they often are subjected to utility claims that the operation of a proprietary pipeline or an interconnection with non-utility facilities constitutes a "sham transaction" that deprives the utility of rents to which its monopoly status entitles it. Adding insult to injury, many such claims call on regulators to penalize the investing "violator," either financially or by subjecting it to regulation as a public utility.

Unfortunately, rather than promulgate clear rules to exclude certain ownership structures from their jurisdiction, regulators often prefer to review each claim of this sort on its own unique merits, and only after the fact. Regulators’ failure to prescribe up-front "black and white" rules that free investors to finance infrastructure projects without concern for subsequent litigation or regulation fosters utility parochialism and limits needed expansion of U.S. natural gas infrastructure.

Needed: Regulatory clarity

Regulators should mandate that utility owners of gas-gathering facilities maintain and expand them with the objective of maximizing U.S. gas production and deliverability. Alternatively, regulators should order the utilities to divest their gathering facilities in a timely fashion. Whatever the approach, the order should make clear that those facilities are—from a regulatory perspective—distinct from the facilities used to serve retail customers. The use of gathering facilities should be facilitated on a nonregulated basis to maximize the movement of domestic gas to market.

When a utility is unable or unwilling to accept gas into its system, regulators should authorize the producer to ship that gas directly to storage facilities and/or on non-utility pipelines to make this otherwise stranded gas available to consumers.

Finally, regulators also should establish clear rules that enable potential investors in natural gas infrastructure to fund projects without worrying about exposure to penalties or legal challenges. The vagaries of regulatory jurisdiction that are inhibiting the production and deliverability of U.S. natural gas cannot continue to be tolerated when the nation’s economic health and security demand reduced dependence on foreign energy supplies.

—Christopher A. Hilen is Of Counsel to the Energy Practice Group of the national law firm Davis Wright Tremaine LLP. He can be reached at 415-276-6573 or chrishilen@dwt.com. Steven F. Greenwald leads Davis Wright Tremaine’s Energy Practice Group. He can be reached at 415-276-6528 or stevegreenwald@dwt.com.