The implications of transaction cost economics on restructuring in the US natural gas industry

The natural gas industry in the United States has a long traditio of regulation at the federal, state, and local level involving at various times all segments of the natural gas industry including production, long distance transportation, and distribution. This regulatory structure, which has traditionally involved increasing regulation is evolving towards a more competitive environment. While transportation and distribution are still regulated, well head prices of natural gas have been freed of controls and the Federal Regulatory Commission (FERC) has moved to break up the monopoly merchant function of pipelines where they buy gas from producers, store and transport it, and sell gas to local distribution companies. In place of the merchant function pipelines are being relegated to the status of open access transporters of natural gas. In this paper, we summarize the evolution of these transformations within the framework of transaction cost economics. We use transaction costs to explain the earlier history of the natural gas markets and the more recent complex evolution of exchange relationships (using spot markets, long term contracts, or vertical integration) in reaction to open access to transportation and the unbundling of transportation and storage from sales. Within the transaction cost paradigm specificity is seed as changing from physical assets to delivery reliability. Uncertainty is now embodied in the unpredictability of spot prices and the behavior of trading partners.