State and Local Responses to Natural Gas Price Increases

Pursuant to a congressional request, GAO discussed the ways by which natural gas distribution companies and State public utility commissions are responding to increased natural gas prices.

GAO obtained information on what actions were being taken in the following areas: (1) rates charged by pipelines to distribution companies; (2) recovery of purchased gas costs by distributors; (3) rates charged by distributors to customers; and (4) efforts by distributors to maintain or expand their markets. GAO found that the transmission and sale of natural gas by interstate pipelines is subject to Federal regulation, but distribution is subject primarily to State or local regulations, usually by State public utility commissions. Distributors buy their gas at rates approved by the Federal Energy Regulatory Commission. State officials cannot adjust the federally approved prices because distributors are obligated to take a specified amount of gas at a given price. A distribution company is usually allowed to recover its cost of purchased gas by submitting a purchased gas adjustment filing to the State public utility commission. Typically the adjustment is based on the previous year's gas purchases at current rates. Distributors generally group their customers into three classes: residential, commercial, and industrial. Rates set within a class are typically based on gas use. However, State law may specify a special rate structure. Finally, distribution companies are making efforts to control their sales but many factors such as conservation, slow economic activity, warm weather, and increasing natural gas prices affect consumption. Therefore, distributors try to even out their demand by seeking new uses and new markets for natural gas.