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NatGas Pipeline Modernization Costs Can Be Covered by Surcharges, FERC Says

Certain capital expenditures made to modernize natural gas pipeline system infrastructure to enhance reliability, safety and regulatory compliance can be recovered through surcharge or tracker mechanisms, according to a policy statement approved Thursday by FERC.

The policy statement "establishes guidance and a framework as to how the Commission will evaluate pipelines' proposals for recovering costs associated with replacing old and inefficient compressors or leak-prone pipelines and for performing other infrastructure improvements and upgrades to enhance the efficient and safe operations of their pipeline systems," the Federal Energy Regulatory Commission said [PL15-1].

The policy statement is based on principles outlined in a January 2013 order in which FERC allowed Columbia Gas Transmission to implement such a tracker (see Daily GPI, Nov. 20, 2014; Jan. 31, 2013). Companies seeking modernization cost-recovery surcharges or trackers would be required to meet five standards:

  • 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 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;
  • Captive customers must be protected from cost shifts if the pipeline loses shippers or increases discounts to retain business;
  • Periodic reviews must be conducted to ensure that rates remain just and reasonable; and
  • Pipelines must work with shippers to seek support for surcharge proposals.

"This policy statement is an example of the way in which the Commission can help incent the modernization of pipelines, which has important safety and environmental benefits," said FERC Chairman Norman Bay. "As a general matter, the Commission disfavors the use of cost trackers, but here we have added five different conditions to ensure that rates remain just and reasonable. All pipelines are also allowed to modernize their facilities to meet new regulations."

The policy statement takes effect Oct. 1.

"We're disappointed with FERC’s approval of the policy statement on standards for evaluation of pipeline modernization surcharges, although we appreciate the Commission's effort to include some safeguards in the process," said Dena Wiggins, CEO of the Natural Gas Supply Association. "There's no question that pipelines should have the opportunity to recover costs for actions taken to comply with environmental and safety requirements; however, we believe that using a surcharge mechanism for recovery of these capital costs undermines the existing time-tested Section 4 rate case process that currently provides strong protections for pipeline shippers."

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