FERC Proposes Policy on Cost Recovery for Modernization of Natural Gas Facilities

Following its open meeting on November 20, 2014, the Federal Energy Regulatory Commission (“FERC”) is seeking comments on a proposed new policy statement (PL15-1-000) that will outline the standards interstate natural gas pipelines must satisfy in order to recover the costs of modernizing their facilities and infrastructure. Once approved, this policy would allow pipelines to recover, through a simplified mechanism such as a surcharge or tracker, capital expenditures made to replace old and inefficient compressors and leak-prone pipes and perform other infrastructure improvements and upgrades to enhance reliability, safety, and regulatory compliance. FERC issued this policy proposal in response to recent federal and state regulations concerning pipeline safety, reliability, and environmental concerns.

Applying the guidelines spelled out in its order approving settlement in Columbia Gas Transmission, LLC,142 FERC ¶ 61,062 (2013), FERC proposed five standards that a pipeline would need to satisfy in its proposal for a cost recovery tracker or surcharge:

1. The pipeline’s base rates to which any surcharges would be added must have been recently found just and reasonable, either through a general Natural Gas Act Section 4 rate proceeding or a collaborative effort between the pipeline and its customers (i.e. a settlement). FERC seeks comments addressing other acceptable approaches to demonstrating that existing base rates are just and reasonable.
2. The costs eligible for recovery are demonstrated to be one-time capital costs incurred to modify facilities to comply with federal or state safety and environmental regulations, such as those being considered by the Pipeline and Hazardous Materials Safety Administration and by the Environmental Protection Agency, as well as other capital costs shown to be necessary for the safe or efficient operation of the pipeline. The pipeline must demonstrate that the recovered costs are not normal capital maintenance expenditures and are necessary for compliance. As in Columbia Gas, the pipeline would have to specifically identify projects eligible for recovery, the facilities to be upgraded or installed by those projects, and an upper limit on the capital costs related to each project to be included in the surcharge.  FERC seeks comments on whether costs of modifications to compressors for waste heat recovery, and costs associated with pipeline expansions should be covered.
3. A pipeline must design its proposed surcharge or tracker to protect its captive customers from cost shifts should the pipeline lose shippers or must offer discounts to retain customer business. One way suggested to meet this goal would be for the pipeline to agree to set a floor on the billing determinants that it uses to design the surcharge. FERC seeks comments on similar types of protections that could be imposed.
4. A pipeline must permit a periodic review of its approved surcharge or tracker to insure that such charge, as well as the base rates, remains just and reasonable. FERC is open to reasonable methods for accomplishing this goal.
5. A pipeline must work collaboratively with its shippers to seek support for the pipeline’s recovery proposal. However, FERC did state that it may approve filings that are found to be just and reasonable but do not necessarily have 100% shipper support.

In addition to requesting comments on the five proposed standards, FERC seeks input on the following related issues:

1. Whether pipelines should be allowed to use accelerated amortization methodologies to recover modernization costs; and
2. Whether FERC should make any changes to the current reservation charge crediting policy to adjust for disruption of primary service resulting from modernization replacements and upgrades.

Initial comments are due by December 26, 2014. Reply comments are due by January 15, 2015. If you have questions or would like more information on the issues discussed in this article, please feel free to contact us.