Pipeline Purchases of High-Cost Natural Gas:

Extent and Contested Issues

EMD-82-53: Published: Apr 6, 1982. Publicly Released: May 5, 1982.

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GAO compiled information on certain aspects of pipeline company purchases of high-cost natural gas. Pipeline tariff rates are established at least every 3 years based on a cost-of-service review. One aspect of such a review is a determination of the cost of gas purchased by the pipeline for resale. A pipeline's request to change its base tariff rates to reflect purchased gas costs is known as a purchased gas adjustment filing. These filings have become more controversial in recent years, as wellhead prices have accounted for a larger share of retail gas costs.

GAO found considerable variations, both from pipeline to pipeline and from period to period in terms of (1) volumes purchased, (2) average prices paid, and (3) total costs. The total costs of gas purchased depended on both the quantity and the average price paid. Filings by six companies were challenged because of the issues relating to the purchase of deregulated gas. The protesters contended that: (1) prices for deregulated gas were too high relative to prices for competing fuels; (2) prices paid to pipeline affiliates were too high; and (3) pipelines bought more deregulated gas than they needed. The companies responded that: (1) gas was purchased to obtain adequate reserves; (2) it was not shown that purchases were unwarranted; and (3) protesters were reimposing price ceilings.

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