FERC Issues Proposed Policy Statement on Cost Recovery Mechanisms for Modernization of Natural Gas Facilities

Eversheds Sutherland (US) LLP

On November 20, the Federal Energy Regulatory Commission (Commission) issued a Proposed Policy Statement on cost recovery mechanisms, such as trackers or surcharges, that pipelines may use to recoup infrastructure modernization costs. The Proposed Policy Statement provides interstate natural gas pipelines and shippers with the Commission’s suggested framework for evaluating proposed modernization cost recovery mechanisms.

The Commission’s Proposed Policy Statement comes in response to recent regulatory initiatives from the Pipeline and Hazardous Materials Safety Administration (PHMSA) and the Environmental Protection Agency (EPA) to improve natural gas pipeline infrastructure safety and reliability. These regulatory initiatives, particularly PHMSA’s multi-year Pipeline Safety Reform Initiative, would require pipelines to incur significant capital costs to enhance and/or replace their system infrastructure. Such improvements would include, for example, replacing old and inefficient compressors and leak-prone pipes so that the infrastructure complies with new pipeline safety regulations.

The Commission’s framework for evaluating proposed modernization cost recovery mechanisms reflects a series of “guiding principles” set forth in the Commission’s January 2013 Order concerning the Columbia Gas Transmission LCC system. In that order, the Commission authorized Columbia to implement a tracker to recover substantial pipeline modernization costs. The Proposed Policy Statement explains that a pipeline seeking a cost-recovery surcharge would have to meet the following five standards:

  • Review of Existing 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.
  • Eligible Costs. 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.
  • Avoidance of Cost Shifting. Captive customers must be protected from cost shifts if the pipeline loses shippers or increases discounts to retain business.
  • Periodic Review of the Surcharge. There must be a periodic review to ensure rates remain just and reasonable.
  • Shipper Support. The pipeline must work collaboratively with shippers to seek their support for any surcharge proposal.

In addition to requesting comments on these five standards, the Commission also is seeking comments on:

  • Accelerated Amortization. Whether pipelines should be allowed to use accelerated amortization methodologies to recover the costs of facilities installed under a modernization cost recovery mechanism.
  • Reservation Charge Credits. Whether the Commission should require pipelines with modernization cost trackers to provide full reservation charge credits during those periods when the pipeline must interrupt primary firm service to conduct modernization-related repairs or installations.

Comments on the proposed Policy Statement are due 30 days from the date it is published in the Federal Register, with reply comments due 20 days later. As of November 21, 2014, the Proposed Policy Statement has not yet been published in the Federal Register.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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