The Advance Payment Program:

An Uncontrolled Experiment

EMD-78-47: Published: Jul 10, 1978. Publicly Released: Jul 10, 1978.

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The Federal Power Commission (FPC), whose responsibilities were transferred to the Federal Energy Regulatory Commission (FERC), approved an experimental program in 1970 that permitted interstate pipelines to provide natural gas producers with advance payments. The expectation was that this would bring additional quantities of gas to the interstate market. These advances were interest-free loans to be used by producers to cover the cost of exploration, development, and production of natural gas. About $3.3 billion in fixed advance payment commitments were made during the program, and about $2.2 billion in indefinite advances can still be made to producers until December 31, 1980. As a result of a 1974 suit filed by the Public Service Commission of New York, FPC was ordered to evaluate the program fully.

FPC did not adequately evalute the program's results nor provide adequate and timely guidance to participants and allowed the program to continue for about 5 years without knowing whether or not it was meeting its goals. The program probably played a relatively minor role in bringing additional gas reserves to the interstate market or in bringing them in sooner. Advances may have expedited development of proven reserves in some cases, but this cannot be determined explicitly. Some customers paid increased rates for gas, and producers benefited financially. Producers' expenditures on advance payment properties were prudent, and payment vouchers were prepared in accordance with procedures. Their control over gas developed with advance payments was restrictive. An FPC order limits producers' rights to retain offshore federal domain natural gas for their own use.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Chairman, FERC, should: (1) establish policy guidelines requiring that any special programs and experiments provide for measuring the results against clearly defined objectives; (2) consider the impact of the programs and experiments on FERC ability to perform its duty of rate regulation before implementing projects; (3) provide guidance regarding how remaining advance repayment schedules should be structured and take measures to induce modification of schedules to comply with regulations; and (4) establish program guidelines which would prohibit including indefinite or tentative commitments of advance payments in the rate base of pipeline companies.

    Agency Affected:

 

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