Natural Gas

The Federal Energy Regulatory Commission's (FERC) Order 636 is intended to spur development of a more open and accessible pipeline system for buyers and sellers of natural gas. The order requires many interstate pipeline companies to offer their customers transportation, storage, and other services separately or as part of a "bundled" package by the 1993 winter heating season. The pipeline companies will be able to recover from their customers the costs that can be directly attributed to the new regulation as long as FERC determines that these costs were prudently incurred. Order 636 changes how FERC sets the pipeline transportation rates. Under the new rate design, customers requiring uninterrupted service--mainly local distribution companies serving residential or commercial users--will pay more of the pipeline companies' fixed costs. Customers that can tolerate "interruptible" service, such as manufacturers of fertilizer or glass, could end up paying less. In response to congressional concerns about the effect of Order 636 on consumers' gas bills, this report (1) estimates the potential shift in fixed costs among pipeline consumers resulting from the changes in the way that transportation rates are designed, (2) reports the pipeline companies' estimates of the transition costs of implementing the new rule, and (3) summarizes available information on the benefits of the new order and the costs and benefits arising from changes in the law and FERC regulations since 1978.

GAO found that: (1) although it is estimated that the new rate design will shift about $1.2 billion in fixed costs annually, the actual amount of fixed costs that will be shifted among distribution companies and their end-users cannot be accurately determined until the new order is fully implemented; (2) the changes in rate design could increase residential consumers' gas bills up to 9 percent and decrease nonresidential consumers' bills by 7 percent; (3) the actual cost-shift for the local distributors served by pipeline companies will depend on the pipeline companies' fixed costs, the utilization of pipeline capacity reservations, pipeline companies' efforts to mitigate the cost-shifts, and actions taken by state and local authorities to limit end-user rates; (4) pipeline companies estimate that their transition costs will total $4.8 billion to include the costs of terminating or modifying existing purchase contracts, abandoning obsolete equipment, resolving unpaid balances, and purchasing new equipment; (5) firm-service customers and interruptable-service customers will pay the majority of pipeline companies' transition costs; (6) the new order enables pipeline companies to recover 100 percent of their transition costs; (7) industry analysts believe that the order is needed to continue the increase in efficiency and competition achieved by previous statutory and regulatory initiatives; (8) although FERC estimates that the benefits of the order will significantly exceed its costs, its estimate is questionable because it is based on unreliable sources; and (9) the benefits from the order will depend on how concerns about it are resolved.