With respect to the regulatory framework, the FERC has

recognized the changing environment in several recent actions. In the natural gas industry the single most important economic change has been that natural gas has become a separate and distinct energy commodity. Moreover, this commodity is increasingly viewed as distinct from natural gas transportation, storage, and other services.

In addition, the pipeline industry has matured,

and there is now an interconnected nationwide pipeline grid, involving both interstate and intrastate pipelines. The Commission is confronted with a generally competitive wellhead market for natural gas, most of which has been removed by Congress from Federal regulation as to market entry, exit, and price. However, we are also confronted with an interstate gas pipeline network, monopolistic in some markets, competitive in others, over which Congress has generally determined to retain utility-type regulation as to market entry, exit, and price.

Accordingly, the Commission, in its Order No. 436 issued in October 1985, is attempting to adjust the regulatory framework for natural gas in ways which retain and revise utility-type regulation over the interstate transportation function and allow the commodity market for natural gas to continue to develop in a competitive fashion. Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 50 Fed. Reg. 42,408 (Oct. 18, 1985) (Order No. 436), reh'g granted in part, 50 Fed. Reg. 52,217 (Dec. 23, 1985). In this way, regulation will allow competitive forces to operate in those areas where Congress has determined they will protect the public interest better than traditional utility-type regulation. On the other hand, we will retain traditional regulation in those areas where competitive forces have been found inadequate by the Congress.

Major changes have also occurred in the direction of the Commission's hydropower program. These changes, which are

primarily the result of recent court decisions, have necessitated a reconsideration of many long-held principles underlying the

program. The result has been to devote considerable effort to reviewing the existing licensing program and seeking ways to maintain an administrative approach that is smooth and efficient, yet legally sound and capable of withstanding judicial review.

Finally, the electric industry is in the midst of a transition that may result in significant structural change, especially in the generation sector, where competition is becoming more apparent. This competition is being stimulated by regional and Canadian power surpluses, the growth of cogeneration and small power production as a result of the Public Utility Regulatory Policies Act (PURPA), and interfuel competition.

Since the FERC recognizes

the need for regulatory predictability in the management of change, we are in the midst of re-examining our policies and strategies.

Last year, we initiated a broad, two-phase Notice of Inquiry concerning our jurisdictional regulation of the electric utility industry. We are concerned that our regulatory policies be appropriate to the changes taking place and have solicited comments on modifications to our policies which will better promote the public interest. The first phase of the Notice addresses our regulation of coordination transactions and transmission service. The second phase addresses our regulation of requirements transactions.

With respect to internal operations, the Commission has made considerable progress in managing its workload, both through standard managerial techniques as well as innovative uses of data processing. As a result, productivity has increased significantly over the past 2 years

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improving by more than 25 percent.

The Commission's FY 1987 budget reflects the evolving, external environment and improved internal operations as well as recent judicial interpretations of Commission responsibilities. In FY 1987, we will emphasize the management of the changing workload fashioned by external changes in the natural gas, hydropower, oil pipeline, and electric rate programs.

NATURAL GAS REGULATION

The FERC's FY 1987 budget request includes $45,174,000 to support the natural gas regulation program.

This level reflects

a decrease of $1,057,000 from our FY 1986 appropriation and highlights our efforts to limit spending where possible, while continuing to carry out our regulatory responsibilities efficiently and effectively. Pending natural gas workload is projected to be reduced at the end of FY 1987 by more than 35 percent from the

FY 1985 level.

Under the Natural Gas Act (NGA), the FERC regulates the rates that interstate pipelines charge for the transportation and sale for resale of natural gas in interstate commerce. The Commission has a statutory responsibility to ensure that these rates are just and reasonable. The Commission also has a continuing regulatory responsibility over gas producers for approximately 50 percent of the total volume of gas produced. In the pipeline certificate area, the Commission reviews the construction and operation of new or expanded interstate pipeline facilities, and the abandonment of existing facilities, to determine whether such certification or abandonment is in the public interest.

The Commission also administers the wellhead pricing program for natural gas established by the Natural Gas Policy Act (NGPA) of 1978. When the NGPA was passed 8 years ago, it was described as being a comprehensive statute to govern future natural gas regulation. In adopting the NGPA, one of Congress' purposes was to eliminate the dual market that existed in interstate and intrastate sales of natural gas. This integration of the two markets was to be established by a scheme of gradual removal of federal price controls over natural gas at the wellhead (NGPA Title I and section 601 (a) (1) and (b) (1)) and by the provision for more efficient transportation of natural gas (NGPA Title III and section 601 (a) (2). See generally 15 U.S.C.SS 3301-3432 (1982). In short, the NGPA set in motion a gradual transition from

a regulatory scheme in which interstate natural gas was subject

to federal regulation from the wellhead to the city-gate to a scheme whereby wellhead and burner-tip prices are increasingly set by competitive market forces, even though interstate pipelines remain subject to regulation under the NGA.

Since 1978,

Developments over the last 6 years have moved the natural gas industry significantly along in this transition. wellhead prices have risen, encouraging the development of new supplies of natural gas. At the same time, rising prices have provided incentives for users of gas to conserve, employ more fuel-efficient equipment, or even shift to alternate fuels, thereby cutting back on demand. After the sharp increases from 1978 to 1982, average wellhead prices stabilized in early 1983 and have remained relatively stable during the last 2 years.

One result of the rapid supply and demand changes under the NGPA was the appearance in 1982 of a substantial surplus of gas deliverability. This surplus translated into significant

take-or-pay exposure for many interstate pipelines. As the price of natural gas in the "spot" or short-term markets fell below the price of gas in the long-term or "contract" market, demand for transportation services also tended to increase.

Equally significant have been changes that have occurred at the other end of the pipeline. Economic forces, in the form of declining oil prices and improvements in electricity-using technologies, have created strong and viable competition for end users in many markets previously dominated by natural gas. The combined effects of the above referred to changes in gas supplies and markets have been to increase competition at both ends of pipelines.

The competitive pressures on wellhead prices caused by partial wellhead deregulation continue to grow and have become even more evident since January 1, 1985, when additional wellhead prices were decontrolled. Demand for transportation services to reflect the growing competition at both wellhead and burner-tip can also be expected to increase. Greater customer access to

alternate suppliers and transporters of gas is giving rise to innovative marketing strategies both by new entrants to the natural gas sales business as well as by traditional suppliers. Changes in the way risks are shared, more open access to transportation and concomitant changes in service agreements, and new gas purchase policies are reflections of and responses to fundamental changes which have already occurred in natural gas markets.

These new ways of doing business in response to market forces have had important implications for the way the industry is regulated, and have made necessary proposals for timely regulatory adjustments.

On December 24, 1984, and January 19, 1985, the Commission issued Notices of Inquiry in Docket No. RM85-1-000 to gather information regarding an appropriate regulatory response to the changing conditions in the natural gas industry. Interstate Transportation of Gas for Others, 50 Fed. Reg. 114 (Jan. 2, 1985) (Phase I); and Natural Gas Pipeline Ratemaking, Risk, and Financial Implications After Partial Wellhead Decontrol, 50 Fed. Reg. 3801 (Jan. 28, 1985) (Phase II & III). On May 30, 1985, the Commission issued a Notice of Proposed Rulemaking (NOPR), Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 50 Fed. Reg. 24,130 (June 7, 1985), and on October 9, 1985, the Commission issued Order No. 436 which promulgated a final rule. Id., 50 Fed. Reg. 42,408 (Oct. 18, 1985), reh'g granted in part, 50 Fed. Reg. 52,217 (Dec. 23, 1985). The NOPR included a "block billing" proposal which would have required that gas supplies subject to the maximum lawful prices of NGPA categories 104, 106 (a) and 109 be billed separately from all other gas supplies. When the Commission issued Order No. 436, it renoticed the block billing proposal, requesting additional written comments, and held further hearings on December 11 and 12. The Commission is currently reviewing that record.