Abstract: The Philips vs. Wisconsin Decision and the Decline of Regulatory Effectiveness

David Raley

Abstract

The effectiveness of natural gas regulation and the health of the natural gas industry began a long, slow process of decline in the mid-1950s.  Prior to this time, federal regulation of natural gas was generally successful.  The FPC had reordered the struggling gas industry of the 1920s and 1930s and eliminated the gas oligarchy, overseen the construction of new trunk lines during the challenging times of World War II, provided leadership to the industry in building a national network of pipelines, and safeguarded the interests of gas consumers.  As the FPC accomplished these goals, it also virtually guaranteed a steady rate of return year-after-year for the gas companies and their stockholders.  The FPC's successes occurred during the period when it operated under the original interpretation of the Natural Gas Act of 1938, which restricted federal regulation to interstate gas companies, and excluded most gas producers.  In these years, the commission oversaw a natural gas revolution in the U.S. through the creation of a system of trunk lines connecting gas-rich regions in the Southwest to the giant gas markets of the Northeast. 

                In 1954, the Supreme Court reinterpreted the NGA, finding an implied “legislative intent” to oversee all sales of gas involved in interstate commerce.  The decision fundamentally altered the nature of natural gas regulation by placing thousands of small gas producers under the oversight of a reluctant FPC and greatly expanding the power and authority of that regulatory body, without expanding its resources or abilities.  Unable to cope with the sheer number of new regulatory cases, the FPC's effectiveness diminished over the next two decades.  It resorted to a series of stop-gap measures to deal with the many rate cases resulting from Phillips.  These stop-gap measures, primarily area rate pricing, greatly contributed to gas shortages by the early 1970s.  The Phillips vs. Wisconsin case was a disastrous example of judicial intervention which seriously undermined the effectiveness of regulation as well as the long-term health of the gas industry and the overall supply of natural gas in the United States.  The Phillips decision marked an important turning point in the evolution of the natural gas industry as a whole.