WATCHING WASHINGTON GAO BACKS ORDER 636

With Patrick Crow A long awaited General Accounting Office report has endorsed the Federal Energy Regulatory Commission's Order 636, which forces U.S. gas pipelines to unbundle their rates. That was a relief for the gas pipeline industry because most lines have submitted new rates to FERC, which has accepted 22 plans. A strongly negative report could have stalled the process and given Congress or the courts a reason to undo the rule. Order 636 is being challenged in federal appeals court.

July 19, 1993

3 min read

A long awaited General Accounting Office report has endorsed the Federal Energy Regulatory Commission's Order 636, which forces U.S. gas pipelines to unbundle their rates.

That was a relief for the gas pipeline industry because most lines have submitted new rates to FERC, which has accepted 22 plans.

A strongly negative report could have stalled the process and given Congress or the courts a reason to undo the rule. Order 636 is being challenged in federal appeals court.

COST ESTIMATES

The draft of the GAO report, which was leaked last week, did disagree with FERC's cost estimates.

The congressional watchdog agency said Order 636's mandated change in rate design could shift about $1.2 billion/year in pipeline companies' fixed costs-about 11% of such costs-to distribution companies and end users, particularly residential end users.

GAO said, "Our estimate is $400 million higher than FERC's estimate of $800 million primarily because we used what we believe to be more appropriate assumptions about local distribution companies' purchases of interruptible service and discounts of such service by pipeline companies."

It said its review of five pipeline companies shows that, depending on how distribution companies allocate changes in costs to their end users, residential customers may see increases in their gas bills of as much as 9% while nonresidential customers may see decreases of as much as 7%.

The draft said, "Industry analysts agree that certain aspects of Order 636 are needed to continue the increases in efficiency and competition achieved by previous statutory and regulatory initiatives. However, estimates of Order 636's benefits cannot be made with certainty until the order has been implemented.

"FERC estimated the benefits will exceed the costs by $2.1-6 billion/year on average. Although Order 636 may produce net benefits, we question FERC's estimate because it is based on various independent projections of increased gas use that did not consider Order 636."

Nicholas Bush, Natural Gas Supply Association president, said, "While reflecting the perceptions of some natural gas stakeholders that certain aspects of 636 present problems, the report shows FERC has anticipated ways these potential problems can be mitigated in the order's implementation." He added the FERC commissioners have said they will consider many of the issues cited in the report.

REGULATORY STABILITY

Michael Baly, American Gas Association president, said his group has been pleased by the commissioners' efforts to address concerns raised by the draft report.

He said although Order 636 is imperfect, it will provide some much needed regulatory stability. "Creating more uncertainty by further delaying the long transition of the gas business to a more competitive industry, we believe, would be a disservice to the nation. We therefore recommend against legislative intervention in this area."

John Riordan, chairman of the Interstate Natural Gas Association of America and president and CEO of Midcon Corp., said, "The evidence indicates that no large negative impacts on consumers or the natural gas markets will occur as the result of Order 636."