On April 10, 2020, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) granted Gulf South Pipeline Company, LP’s (“Gulf South”) petition for review in part, finding that FERC’s rejection of Gulf South’s proposed “incremental plus rates” for the Westlake Expansion Project, an expansion within the Lake Charles Zone, was arbitrary and capricious. In doing so, the D.C. Circuit found that FERC could easily distinguish between which customers are using the new facilities and which customers were using the gas pipeline’s existing facilities. The D.C. Circuit denied Gulf South’s petition for review on issues related to FERC’s denial of Gulf South’s proposed initial rate of return and depreciation rate for the Project, upholding FERC’s use of Gulf South’s last approved rate of return and depreciation rate.
On May 17, 2018, FERC approved Gulf South’s application to construct and operate the Westlake Expansion Project. The Westlake Expansion Project, consisting of a new compressor station, 0.3 miles of additional pipeline, and other facilities, will primarily serve a power plant operated by Entergy Louisiana; however, Gulf South claimed that there will be times when existing shippers in the pipelines’ Lake Charles Zone will be able to utilize the facilities on a secondary-firm basis. In its application, Gulf South proposed to provide recourse Westlake Expansion Project service on an incremental plus basis, which would mean that all shippers using the Westlake Expansion Project would pay the Westlake Expansion Project rates in addition to the Lake Charles Zone rates.
In rejecting Gulf South’s proposed incremental plus rates, FERC explained that it allows incremental plus rates for certain lateral facility services, where a shipper contracts separately for service on the lateral facility versus the mainline capacity, but only when the new lateral facilities are not integrated into the mainline facilities, meaning when it is distinguishable whether customers are using either the new facilities or the mainline facilities. FERC found that the Westlake Expansion Project facilities would be integrated into the already existing Lake Charles Zone facilities, and thus incremental plus rates were inappropriate, because the project (1) uses existing receipt points in the Lake Charles Zone; (2) proposes the installation of a new receipt point within the existing Lake Charles Zone facilities; and (3) will flow gas into Gulf South’s existing Lake Charles Zone pipeline for compression at the new compressor station, discharge into Gulf South’s existing Lake Charles Zone pipeline, and be delivered to the power plant. FERC also rejected Gulf South’s proposed rate of return and depreciation rate, stating, in both cases, that the Commission’s longstanding policy is to use the pipeline’s last approved rate of return and depreciation rate for incremental rates for expansion projects.
In reversing FERC’s decision, the D.C. Circuit found that FERC failed to reasonably explain its denial of Gulf South’s proposed incremental plus rates. The D.C. Circuit concluded that substantial evidence supported FERC’s conclusion that the Westlake Expansion Project facilities would be integrated into the Lake Charles Zone facilities, but it found that this integration did not require FERC to reject Gulf South’s pricing approach. The D.C. Circuit noted that FERC would be able to easily distinguish between the customers that are using the new facilities and the ones using the old facilities, and that FERC’s decision was inconsistent with cost causation principles, as all of the incremental costs would be assigned to one shipper, Entergy Louisiana, while other shippers that use the expansion facilities would pay a much lower rate.
The D.C. Circuit also upheld FERC’s use of Gulf South’s last approved rate of return and depreciation rate. In doing so, the court rejected Gulf South’s arguments that FERC’s policies requiring the last approved rate of return and depreciation rate to be used in developing initial rates for service on expansion projects are unjust and unreasonable as applied to the Westlake Expansion Project.
A copy of the D.C. Circuit’s opinion is available here.