Regulation and Long-Term Contracting in us Natural Gas Markets

This paper addresses the recent experience of the US natural gas industry with contracting and regulation--the so-called "contracts problem" between producers and pipelines. We develop a simple model of contracting between a single buyer and seller, emphasizing the determination of price and minimum-purchase ("take-or-pay") provisions. We find that take-or-pay provisions are likely to emerge in regulated and unregulated markets characterized by uncertainty, but that phased deregulation may well exacerbate the problem of contract adjustment. Our model is supported by empirical evidence drawn from recent samples of contracts between wellhead producers and pipelines.