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FERC Issues Proposed Policy Statement Regarding Cost Recovery For Pipeline Modernization

FERC is seeking comments on a proposed Policy Statement regarding Cost Recovery Mechanisms for Modernization of Natural Gas Facilities.  The proposed Policy Statement, issued on November 20, 2014 in Docket No. PL15-1, notes that interstate pipelines are likely to incur costs associated with modernizing their facilities pursuant to obligations imposed by the Pipeline and Hazardous Materials Safety Administration (PHMSA) and with complying with greenhouse gas emission requirements imposed by the Environmental Protection Agency (EPA).  FERC is proposing a means to permit pipelines to recover these costs in a manner that will continue to ensure that pipeline rates remain just and reasonable and that natural gas consumers are protected from excessive costs.

FERC’s policy is to preclude pipelines from implementing cost trackers in order to ensure that pipelines do not have guaranteed means of cost recovery and have incentives to operate efficiently.  The proposed Policy Statement is a break from the policy against trackers.  Specifically, FERC proposes to permit pipelines to implement tracker or surcharge mechanisms to recover these costs, subject to five conditions:

  • Pipelines must establish base rates to which trackers or surcharges would be added.  The Commission suggests that pipelines may meet this obligation by either reaching pre-negotiated rate settlements with their shippers or by filing full NGA Section 4 rate cases when seeking to implement a tracker.

  • Pipelines must ensure that only costs associated with eligible facilities are recovered through the tracker and may not recover costs associated with general system maintenance under tracking mechanisms and must specifically identify the projects subject to the tracker.  The costs recovered through trackers should be one-time costs associated with complying with regulations such as those that may be imposed by PHMSA or EPA.

  • Pipelines must propose mechanisms to ensure that costs are not shifted to captive customers.  In a recent Columbia Gas proceeding, the Commission approved a PHMSA-related tracker that provided for a billing determinant floor to protect captive customers against cost shifts that might result if the pipeline loses customers.

  • Pipelines must provide for periodic review of their proposed trackers.

  • Pipelines must attempt to obtain broad customer support for their proposed trackers.

FERC also seeks comment regarding whether pipelines should be allowed to use accelerated amortization methods to recover costs associated with modernization programs and whether its reservation charge crediting policy should be modified if a pipeline is unable to provide firm service while modernizing its facilities pursuant to federal requirements.

Initial comments will be due 30 days after the proposed Policy Statement is published in theFederal Register, with reply comments due 20 days thereafter.

© 2017 Schiff Hardin LLP

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About this Author

Partner

Debra Ann Palmer has been involved in a variety of proceedings before the Federal Energy Regulatory Commission (FERC) and the U.S. Courts of Appeals. She has 25 years of experience advising participants in the electric and natural gas industries on matters related to:

Enforcement and compliance with FERC rules and policies
Rates and terms and conditions of service
Competitive electric and gas markets
Electric reliability requirements
Regional Transmission Organization (RTO) requirements

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