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Clean Cheap Heat: the Development of Residential Markets for Natural Gas in the United States.

This short monograph traces the development of residential natural gas markets from the beginning of the twentieth century to the present. It endeavors to demonstrate how various social, economic, and technological factors interacted to bring a relatively new energy source from obscurity to widespread use by the residential sector. Among the significant factors leading to the emergence of natural gas as a major energy source according to the author was the development and refinement of specific natural using appliances coupled with the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. To this should be added the relative price differential between natural gas and its competing energy types (primarily electrical energy, manufactured gas, and distillate fuel oil) for various end uses as well as the expanded availability of natural gas over time in different regions of the country.

The author does a nice job of mixing descriptive facts with sound economic analysis to give a comprehensive picture of how the residential market for natural gas developed regionally in the United States. Moreover, unlike most efforts of this sort that simply recount the institutional development of a specific industry, the author does not dwell on just a single facet of the industry (e.g., the technological enhancements leading to the expansion of the industry). Rather, he truly endeavors to integrate his discussion of the institutional and technological developments of the industry with the economics of the energy markets prevailing at a given point in time. This gives the reader a better sense of the complexities associated with the acceptance of natural gas as a popular energy source for the home. This effort is illustrated well by the discussion of the developments in the natural gas market just after the end of World War II. Provided is a delineation of the improvements in technology by the industry for the storage of natural gas to meet seasonal variations in the demand for natural gas but a failure on it's (industry's) part to pursue the development of gas air conditioners and refrigerators. (The reason for this is examined.) Superimposed on this discussion is a recounting of the social and economic conditions impacting consumer appliance purchase decisions leading to a slow but steady expansion in the natural gas market at the expense of manufactured gas and fuel oil in most regions of the country.

The book is composed of nine chapters and four appendices. The first and last chapters are, respectively, an introduction and conclusion. The chapters in-between cover specific time periods beginning with the natural gas market near the turn of the century and ending with the residential market after 1973.

In the early part of the Twentieth Century, the natural gas industry looked considerably different than it does today. Pennsylvania was the largest producer of natural gas and a substantial portion of the natural gas produced was for private use. The industry was not well organized. This changed, however, as the flood of immigrants into West Virginia, Ohio, and Pennsylvania increased the demand for natural gas for cooking, space conditioning, and lighting. This, coupled with the availability of the iron pipe produced in this region and a significant labor force, gave the initial impetus for the development of the natural gas industry throughout the century. The lessons learned here were transferred to other regions of the country with the result that by the end of World War I, a sizeable market and interstate commerce had developed in several parts of the United States. This story is cogently told with the requisite data on costs, production, prices, and consumption and the like presented in a coherent and consistent fashion. In fact, one of the strong points of this monograph is its drawing together and presenting data from diverse sources including government publications, industry reports and newsletters, testimony at rate hearings, etc.

Developments in the 1920s and early 1930s emulated those of the earlier two decades. While the consumption of natural gas continued to grow, it did not grow as rapidly as the markets for coal and petroleum products. This differential in growth rates is attributable to the relatively higher cost of natural gas and because of the lack of adequate means for transporting natural gas long distances. (A 500 mile pipeline was considered very long.)

Things changed in the mid-1930s. Residential consumers of natural gas began to express their concern over the disparity in the price of natural gas charged industrial customers relative to the prices they were paying. (Residential customers on average over the period 1932 to 1938 were paying more than four times what industrial customers were paying for natural gas.) This, together with the intransigence on the part of the large natural gas companies controlling the natural gas distribution network to provide natural gas at prices approximating their cost of producing natural gas from the newly developed reserves in the Panhandle of Texas, lead to the passage of the Natural Gas Act of 1938 (NGA). The NGA established the Federal Power Commission (FPC)--the precursor to the current Federal Energy Regulatory Commission--which was mandated to control the price charged for natural gas by interstate pipelines and encouraged the establishment of just and reasonable rates without undue price discrimination among customer classes. The FPC also assumed control over extension and service abandonment by pipelines and over entry of new pipelines in end-use markets.

World War II impeded the growth in the residential natural gas market in the United States. The end of the War, however, in concert with the lower residential price of natural gas (relative to competing energy types) resulting from the implementation of the provisions of the NGA saw a resumption in the growth of this market. Between 1950 and 1960, for example, the number of residential natural gas customers nearly doubled while consumption nearly tripled. This was a consequence of the expansion in the use of natural gas for space heating and water heating especially in the New England, East North Central, and Mid-Atlantic regions which was the result of, among other things the relative price advantage and convenience of natural gas. The data presented seem to support this hypothesis.

The rapid post-World War II expansion in the residential natural gas market came to a halt in the early 1970s. Among the factors cited as contributing to this were restrictions on new hookups due to a reduced availability of natural gas reserves and the passage of the Natural Gas Policy Act of 1978 (NGPA) which deregulated the price of natural gas. Deregulation it was felt at the time would result in a higher natural gas price and stimulate the exploration and development activities needed for increasing the supply of natural gas. The author's argument for the slowdown in the growth of the residential natural gas market becomes a little fuzzy at this point. It is true that the NGPA resulted in an increase in the nominal residential natural gas price. But, between 1979 and 1990, the real price of natural gas remained virtually unchanged. Thus, attributing the slower growth to price impacts alone seems incorrect. (This points to another problem in some of the analysis. The author sometimes analyzes nominal values and sometimes real values of prices. This forces the reader (which is not necessarily bad) to be very judicious in reading the analysis presented.) The industry at this time (by the late 1970s) had become a mature industry and so to expect continued growth commensurate with that of the 1950s and 1960s without some substantial exogeneous factor or factors impacting the market is not realistic.

The book ends with a quantitative analysis of the factors affecting the residential demand for natural gas after 1960. This is straightforward and is based on a number of previously published papers in professional journals by the author. This work is nicely integrated with the earlier discussion of the development of the residential natural gas market post-1960. The empirical results are compared to a limited number of previous studies on this issue. Some of the results and the model development are relegated to the Appendices.

In sum, the author presents a nice discussion of the development of the residential natural gas market in the United States. While his writing style is not florid, he does get his main points across by relating the main economic, social and technological factors leading to the development of the industry as we know it today. Moreover, the coverage is complete and ample references are provided enabling the interested reader to pursue one or more secondary issues. If the reader has an interest in understanding the juxtaposition of the various elements relating to the development of the residential natural gas market in the United States, then this book is to be recommended.
COPYRIGHT 1993 Southern Economic Association
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Author:Uei, Noel D.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Apr 1, 1993
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