On April 16, 2015, FERC approved a new policy statement that will allow interstate natural gas pipelines to recover certain capital costs used to modernize or replace the pipeline’s existing facilities through the use of a surcharge mechanism.  FERC explained that the new policy statement was created in anticipation of new, future requirements from the Pipeline and Hazardous Materials Safety Administration that will likely require interstate pipelines to upgrade their pipeline systems for improved safety and reliability.  Although FERC’s policy statement discusses the framework that interstate pipelines must meet generally in order to recover such costs, FERC also clarified that such proposals will be evaluated on a case-specific basis.

Notably, the policy statement adopted the same five requirements that FERC included in its proposed policy statement in determining whether or not to allow the proposed modernization surcharge mechanism (see November 24, 2014 edition of the WER).  These criteria are:

  • The pipeline’s existing base rates must have been recently reviewed through a Natural Gas Act general section 4 rate proceeding, a cost and revenue study, or through a collaborative effort between the pipeline and its customers;
  • The pipeline must specifically identify each capital investment to be recovered by the surcharge and those eligible costs must generally be limited to one-time capital costs incurred to meet safety or environmental regulations, or other capital costs shown to be necessary for the safe, reliable, and/or efficient operation of the pipeline;
  • The pipeline’s customers must be protected from cost shifts if the pipeline loses shippers or increases discounts to retain business;
  • The pipeline must include some method that would allow for a periodic FERC review of the modernization surcharge mechanism to ensure that rates remain just and reasonable; and
  • The pipeline must work collaboratively with its shippers to seek their support for any modernization surcharge proposal.

With regard to avoided cost shifts, FERC recognized that allowing a modernization surcharge would represent a departure from the general requirement that interstate pipelines design their transportation rates based on projected units of service.  However, FERC concluded that considering such a surcharge is justified if the mechanism is properly limited to eligible modernization costs that enhances system safety, reliability and regulatory compliance, and there are conditions in place that ensure that the resulting rates are just and reasonable and protect customers from excessive costs.  FERC also explained that the criteria can be satisfied in a variety of ways and are intended to be flexible to allow a pipeline to demonstrate its compliance based on the specific circumstances of their systems.

The policy statement will be placed into effect on October 1, 2015.  A copy of the policy statement is available here.