Natural Gas Incremental Pricing:

A Complex Program With Uncertain Results and Impacts

EMD-80-96: Published: Sep 4, 1980. Publicly Released: Sep 4, 1980.

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Legislation requires the Federal Energy Commission (FERC) to implement an incremental pricing program under which designated industrial users of natural gas pay a surcharge for the gas they buy. The purpose of the surcharge is to transfer the higher deregulated prices of natural gas to industrial users, so they will pressure their suppliers to obtain natural gas at the lowest possible cost.

FERC has responsibly handled the task of preparing regulations for the program's operation. Numerous opportunities have been provided for those affected by the legislation to discuss problem areas and present supporting documentation; proposed actions were changed where evidence indicated the original proposal was deficient. However, problems exist which can impede the implementation of incremental pricing and preclude a meaningful evaluation of whether the program accomplishes its intended purpose. During the time regulations were being written, much of the data FERC needed to assess the impact of different incremental pricing options was not available. This hindered FERC in making assessments of expected results of various courses of action and delayed the implementation of the three-tier pricing system. Data deficiencies also affected FERC action in areas involving agricultural exemptions and direct sales by interstate pipelines to industrial users. Cost information, needed to assess the administrative costs of the program and to plan procedures for evaluating program benefits and drawbacks, is lacking. Monitoring procedures have not been established. Therefore, GAO believed FERC will be hampered in its efforts to evaluate the program and to provide Congress with an assessment of whether the program is accomplishing its objectives. One area requiring monitoring concerns the relationship of Federal regulatory requirements with State and local requirements.

Recommendation for Executive Action

  1. Status: Closed

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

    Recommendation: The Chairman, FERC, should work with the Administrator, Energy Information Administration, to develop, by October 1981, an information system incorporating key data elements that will enable FERC to: (1) make analyses which are necessary for recommending to Congress whether to continue, revise, or terminate the incremental pricing program; and (2) evaluate both the positive and negative aspects of the program's operation. As part of this effort, the Chairman should: insure that the information system provides data to substantiate that the designated alternate fuels provide the necessary balance of transferring the greatest amount of incremental costs to industrial users without causing them to switch to an alternate fuel; initiate action to incorporate data into the FERC information system to support determinations that alternate fuels for agricultural uses are reasonably available and economically practicable and that direct sales by interstate pipelines will not adversely affect the incremental pricing program; require that costs of implementing, operating, and monitoring the incremental pricing program be identified and compiled; work with State regulatory agencies to insure, to the extent possible, that State incremental pricing programs are consistent with the objectives of the legislation; and report results of the program monitoring effort to cognizant congressional committees at the time amended regulations are proposed for extending incremental pricing beyond industrial boiler fuel use.

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