Natural Gas:

Costs, Benefits, and Concerns Related to FERC's Order 636

RCED-94-11: Published: Nov 8, 1993. Publicly Released: Nov 8, 1993.

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Pursuant to a congressional request, GAO reviewed the costs and benefits of the Federal Energy Regulatory Commission's (FERC) new order 636 and its potential impact on residential end-users, focusing on: (1) shifts in pipeline customers' fixed costs; (2) pipeline companies' estimated transition costs for implementing the new rule; and (3) the costs and benefits of changes in legislation and FERC regulations to deregulate the natural gas pipeline industry.

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.

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