Regional Planning for Just and Reasonable Rates

Abstract

Natural gas—a fuel used for electricity generation, heating, and transportation—plays an outsized role in the U.S. economy. Under the Natural Gas Act, the Federal Energy Regulatory Commission (FERC or the Commission) is responsible for overseeing the orderly development of interstate natural gas pipelines, which facilitate the transmission of natural gas throughout the country. Before a developer can construct or expand an interstate pipeline, it must apply to FERC for authoriza-tion; FERC can approve the pipeline only if it finds that it is required by the “public convenience and necessity.” Although FERC should consid-er a range of factors to determine whether a pipeline will serve the public interest, in practice, it looks primarily to the existence of prece-dent agreements, i.e., contracts between a developer and its customers for the purchase of pipeline capacity. If a developer can demonstrate that there is a party willing to pay to use its pipeline, FERC rarely asks questions and almost always finds “public” need. In this way, the natu-ral gas transmission network has developed through a system of ad hoc decisionmaking organized around the needs of private companies that earn a hefty return on their capital investments.

This pipeline-by-pipeline approach to natural gas transmission build-out leads to the construction of unnecessary, underused pipe-lines, which in turn increases ratepayer costs and decreases consumer welfare. Climate change further increases the risk that pipelines will become obsolete as cities and states move toward electrification. Fur-thermore, the gas transmission planning process—or lack thereof—stands in stark contrast to electric transmission planning, an activity that FERC also regulates but that is conducted by centralized entities on a regional scale. This contrast is especially confounding consider-ing that electric transmission is regulated under the Federal Power Act, a sister law to the Natural Gas Act with similar statutory require-ments.

Relying on economic theory, legal history, and policy analysis, we make the case for FERC’s adoption of regional gas transmission plan-ning. We begin by describing the status quo and articulating why FERC’s current process is economically inefficient. In doing so, we draw parallels between gas and electric transmission planning and de-scribe how FERC treats the two activities inconsistently. We then ex-plain why, under two provisions of the Natural Gas Act, FERC possesses both the legal authority and obligation to require regional planning. Finally, we envision how FERC might conduct gas transmission plan-ning going forward, encouraging FERC to account for increasing elec-trification efforts and to plan for gas and electric transmission in tan-dem.