FERC Order 636

Definition

FERC Order 636 is a pivotal regulatory decision made by the Federal Energy Regulatory Commission in 1999 that significantly changed the natural gas market in the United States. This order aimed to enhance competition and efficiency by unbundling the services provided by pipelines, allowing for a more market-driven approach to natural gas transportation and sales. It facilitated a shift from a vertically integrated system to one where consumers have greater access to various suppliers, thereby promoting competition.

5 Must Know Facts For Your Next Test

1. FERC Order 636 mandated that pipeline companies must separate their transportation services from their sales services, fostering a more competitive market environment.
2. This order allowed for non-discriminatory access to pipeline capacity, meaning all shippers could access pipelines on equal terms, which promoted fairness in the market.
3. As a result of Order 636, local distribution companies could purchase gas from multiple suppliers instead of being tied to one pipeline, increasing consumer choice.
4. FERC Order 636 also introduced new mechanisms for dealing with capacity release, enabling companies to sell or lease their unused pipeline capacity to others.
5. The implementation of Order 636 had a lasting impact on natural gas pricing and availability, ultimately leading to increased efficiency and lower prices for consumers.

Review Questions

• How did FERC Order 636 change the structure of the natural gas market in the U.S.?
  • FERC Order 636 transformed the natural gas market by unbundling pipeline services, allowing consumers to access multiple suppliers instead of being locked into one provider. This shift encouraged competition among suppliers, leading to better pricing and service options for consumers. By ensuring non-discriminatory access to pipelines, the order created a more transparent market environment where supply and demand could drive prices.
• Discuss the implications of unbundling services in the context of FERC Order 636 for both consumers and suppliers.
  • The unbundling of services under FERC Order 636 had significant implications for consumers and suppliers alike. For consumers, it meant increased choices and potentially lower costs as they could shop around for better deals from various suppliers. For suppliers, this created a competitive landscape where they needed to innovate and offer better services to attract customers. This dynamic not only improved overall market efficiency but also enhanced consumer protection as firms had to remain responsive to consumer needs.
• Evaluate the long-term effects of FERC Order 636 on natural gas pricing and market dynamics.
  • The long-term effects of FERC Order 636 on natural gas pricing and market dynamics have been profound. By fostering a competitive marketplace, the order led to more efficient pricing mechanisms where prices reflect real-time supply and demand. This resulted in generally lower prices for consumers compared to the previous regulated environment. Additionally, it paved the way for innovative practices within the industry, such as capacity release programs, further enhancing flexibility and responsiveness in the market. The shift initiated by this order continues to influence how natural gas is bought and sold today.

Related terms

Unbundling: The process of separating different components of a service, such as transportation and storage, so that customers can purchase them individually.

Market-Based Rates: Pricing mechanisms established by the market rather than by regulation, allowing suppliers to set prices based on supply and demand.

Natural Gas Act: A federal law that regulates the interstate transmission and sale of natural gas, providing the legal framework for FERC's authority over natural gas markets.