Verification of Trunkline Gas Company's Incremental Pricing Data

EMD-79-39: Published: Aug 27, 1979. Publicly Released: Aug 27, 1979.

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Information submitted to the Federal Energy Regulatory Commission (FERC) in liquefied natural gas (LNG) proceedings by Trunkline LNG Co. was subjected to a verification examination by GAO. The question involved the requirement that high-cost natural gas be incrementally priced to certain users, except for LNG imported under projects certificated by FERC before May 1, 1978. This exception covered Trunkline, and, although GAO did not challenge FERC Opinion 796A, which required rolled-in, or averaged, pricing, it did conclude that the data supplied by Trunkline, upon which FERC relied in reaching its decision, was inadequate. FERC ordered Trunkline in June 1977 to sell imported LNG at rolled-in prices, modifying its earlier order stipulating incremental pricing. The change was the result of a determination that a supplemental gas supply project proposed by Trunkline was in the public interest and its economic viability shoud be ensured. For its part, Trunkline claimed inability to finance the project if selling prices had to be incremental, because few of its customers would buy at actual cost. FERC concluded that rolled-in pricing was a necessary ingredient of the project's financeability, which was consistent with its decisions in other cases.

The ability to market incrementally priced LNG has been controversial since the initial project hearings by FERC, with staff witnesses arguing for a true market test of pricing policies to gauge customers' willingness to pay actual costs and complaining that averaging gas prices gave consumers incorrect signals as to the scarcity and costliness of additional gas supplies. The administrative law judge's approval of rolled-in pricing was due to lack of assurance that the Trunkline project could succeed without it, but FERC objected that rolled-in pricing would encourage inefficient use of LNG and reversed the decision, asking State commissioners to adopt the same policy for local distributors. Trunkline, at oral arguments appealing this ruling, cited a survey of its customers and declared that they would not purchase LNG at incremental prices, persuading FERC to modify its decision by permitting rolled-in pricing as a necessary feature of the project. GAO examined the accuracy, reliability, and adequacy of the data gathered by Trunkline and found that no detailed analysis of the customer survey results had been prepared. Because of survey limitations, GAO could only determine that customers unwilling to buy LNG at incremental prices accounted for a minority of Trunkline's LNG sales. The marketability decision could have been better supported if FERC had required additional support for oral claims and verified the evidence. FERC failed to address such matters as customers' projected LNG demands, fuel options available and their price ranges, and the uses to be made of LNG.

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