On November 20, 2014, FERC issued a proposed policy statement that would allow interstate natural gas pipelines to use a surcharge or tracker mechanism to recover certain capital expenditures made to modernize pipeline system infrastructure in order to enhance reliability, safety and regulatory compliance.

In proposing the policy, FERC noted that certain regulatory reforms made by the Pipeline and Hazardous Materials Safety Administration and Environmental Protection Agency initiatives will likely require pipelines to make significant capital cost expenditures to enhance the safety and reliability of their systems, require replacement or repair of existing compressors and other facilities, and require increased environmental monitoring and compliance costs.  In light of these reforms, FERC proposed the cost recovery policy to ensure that existing FERC ratemaking policies do not inhibit the ability of pipelines to engage in the needed alterations.

FERC proposed to base the policy on the five guiding principles that it established in Columba Gas Transmission, LLC, 142 FERC ¶ 61,062 (2013), wherein it approved a similar cost tracker as part of a settlement addressing significant operational and safety issues associated with an aging system.  These guiding principles include:

  • Just and Reasonable Rates.  The pipeline’s base rates must have been recently reviewed through a Natural Gas Act general section 4 rate proceeding or through a collaborative effort between the pipeline and its customers.  FERC seeks comments on these methods, or on other potential methods for pipelines to make a demonstration that its existing rates are just and reasonable.
  • Eligible Facilities.  Eligible costs must be limited to one-time capital costs incurred to meet safety or environmental regulations, and the pipeline must specifically identify each capital investment to be recovered by the surcharge.  FERC seeks comments on the range of potential costs for projects and maintenance that increase the safe and environmentally sound operation that should reasonably be included in such cost adders.
  • Avoid Cost Shifts.  Captive customers must be protected from cost shifts if the pipeline loses shippers or increases discounts to retain business.  FERC seeks comments on potential methods for preventing cost shifts.
  • Period Review of Surcharge.  There must be a periodic review to ensure rates remain just and reasonable.  FERC seeks comments on reasonable methods for accomplishing this review.
  • Shipper Support.  The pipeline must work collaboratively with shippers to seek their support for any surcharge proposal.  FERC noted that though it “strongly encourage[s] the pipeline to attempt to garner support for its proposal among all interested parties, [FERC] may nonetheless approve any proposal the pipeline demonstrates to be just and reasonable without one-hundred percent shipper agreement.”

In addition to the above considerations, FERC also seeks comments on the following related issues:

  • Accelerated Amortization.  FERC questions whether pipelines should be allowed to use accelerated amortization methodologies to compensate for the time value of money related to the costs of any facilities installed with regard to a modernization cost recovery mechanism, or whether the Commission should require pipelines to depreciate facilities subject to a modernization cost tracker over the life of the facilities.
  • Reservation Credit Charges.  FERC requested comment on whether it should require “pipelines with modernization cost trackers to provide full reservation charge credits during periods that the pipeline must interrupt primary firm service to replace or install eligible facilities under the provisions of the modernization tracker.”

Comments on the proposed policy statement may be made within 30 days after publication in the Federal Register.  Reply comments are due 50 days after such publication.  A copy of the proposal is available here.