Problems Identified in FERC's Incentive Pricing Program for Natural Gas From Tight Formations

Pursuant to a congressional request, GAO reviewed the Federal Energy Regulatory Commission's (FERC) incentive pricing program to determine the risks, costs, and other aspects of producing and pricing natural gas from tight formations.

GAO found that the tight formations were not extraordinarily risky or costly to develop, and the criteria FERC used for qualifying tight formations depended heavily on its ability to collect and measure well permeability and expected production rate. FERC had problems applying these criteria because: (1) permeability testing was not common and not done with the degree of accuracy implied in the standards; (2) test data on well production rates were not available; and (3) the standards did not specify how to compute average permeability. The incentive pricing was intended to encourage development of high-potential formations; however, little program activity occurred in the undeveloped areas FERC considered to have high development potential. Since phased price deregulation was provided under the Natural Gas Policy Act of 1978 and a related FERC ruling included tight formation gas in the deregulation, the tight formation program will have limited application in the future; therefore, GAO did not recommend any program changes.