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Industry Majority Supports Bid to Reform Blanket Certificate Construction Rules

Pipeline/storage providers and certain large shippers believe an industry petition to award blanket certificate authorization to natural gas projects that traditionally have not been afforded such treatment -- mainline pipeline expansions, new storage capacity and facilities related to liquefied natural gas (LNG) import projects -- has merit and that FERC should move forward with it. But some customers, such as municipal gas utilities, have called on FERC to reject the proposal.

The American Gas Association (AGA), which represents local distribution companies, recommended that the agency proceed with the joint petition filed by the Interstate Natural Gas Association of America (INGAA) and the Natural Gas Supply Association (NGSA) in November, which urged FERC to permit blanket certificate treatment for the construction of certain mainline pipeline expansions, underground storage improvements and takeaway facilities for LNG projects (see Daily GPI, Nov. 23, 2005).

The two industry groups asked the Federal Energy Regulatory Commission to begin an inquiry and rulemaking process to raise the dollar limits for blanket construction facilities beyond the inflation levels recognized by the agency in its existing regulations. And with respect to larger, non-blanket certificate projects, they called on the Commission to issue a policy statement or rule "clearly [stating] that it will not be construed as undue discrimination under the Natural Gas Act to provide favorable rate treatment for the shippers who make a project financially possible." The joint INGAA-NGSA petition still is pending at FERC. The Commission requested industry comments prior to its acting on the groups' request.

Blanket certificate treatment typically has been reserved for smaller, less costly and non-controversial pipeline projects. Under FERC's existing blanket regulations, project sponsors have been permitted to proceed with the construction of eligible facilities costing up to $7.8 million without receiving prior notice from FERC. INGAA and the NGSA are asking FERC to permanently expand the definition of eligible facilities under its blanket certificate rules, as well as raise the cost limitations for blanket certificate projects.

"AGA believes that there is convincing reason to move forward with a rulemaking on the proposals offered by petitioners, except the proposal to remove the LNG facilities exemption, to determine whether the Commission's blanket certificate construction policies should be revised," the group told the Commission in comments filed this week [RM06-7].

"This is not to say necessarily that all of the policy changes outlined in the petition should be granted, however. Given the critical role of interstate pipeline capacity in today's energy market and the downward pressure that additional capacity can have on the city-gate price of gas, the public interest would be well-served in pursuing a more formal debate on the proposals," the utility group said.

"Accordingly, AGA suggests that a technical conference may be the next best course of action so that more facts as to how these proposals will overcome existing obstacles and achieve infrastructure development can be ascertained," it noted.

In contrast, Duke Energy Gas Transmission (DEGT) asked that the proposed blanket certificate changes be implemented "as quickly as possible" at the Commission. "DEGT believes, as do the joint petitioners, that the blanket certificate authorizations...should be expanded to allow self-implementing or prior-notice authorizations for more types of infrastructure facilities," the pipeline said.

In addition, "DEGT believes, as do the joint petitioners, that a clear policy should be established to allow for predictable, favorable treatment of those shippers who underwrite a new facility through timely commitments." It called on FERC to begin "whatever rulemaking and/or policy proceedings sufficient to place these proposed changes into effect."

Honeoye Storage Corp. -- which like DEGT would benefit from reform of the blanket certificate rules -- said it also "strongly supports" the INGAA-NGSA petition, which would amend FERC regulations to allow blanket treatment of facilities that increase deliverability, such as above-ground piping and compression, or the drilling of new wells to improve or increase storage injection and withdrawal capacity.

"While the primary intent of the existing regulation [that excludes storage from blanket certificate authorization] was to protect customers from the 'significant impact' which the Commission believed construction of such facilities or wells could impose on customers' rates, there is no reason to believe that storage operators will utilize their construction authority merely to justify increases in rates," Honeoye said.

"The competitive nature of the storage market ensures that storage operators will only undertake storage field enhancements that are necessary and appropriate. This is particularly true for storage facilities that have market-based rate authority," the storage company noted. With this in mind, it urged FERC to revise its Section 157 blanket certificate regulations to permit certain gas storage construction activities that do not alter the certificated parameters of an existing storage facility.

Independent producers signaled their approval of the proposed changes in the blanket certificate rules as well. Members of the Independent Petroleum Association of America "have a strong interest in the adequacy and development of the interstate pipeline system and, therefore, support the petitioners' goals of regulatory certainty and improvements that can enhance the ability of the industry to build needed capacity."

Likewise, the Process Gas Consumers Group (PGC), which represents industrial gas consumers, said it favored the INGAA-NGSA proposed measures, and asked FERC to "proceed with a rulemaking that considers and explores various procedures to expedite the authorization and construction of pipeline facilities."

INGAA and the NGSA "responsibly point out that the 'exclusions' section of the blanket rules has not been effectively revised to meet the nation's growing demand for natural gas. As a result, investors are potentially being discouraged from financing new projects that would help to ensure the adequacy of the interstate pipeline system," the industrial consumer group said.

"If FERC chooses to go forward with a rulemaking, it should consider expanding the types of facilities and projects that are eligible to receive blanket certification. Such an expansion would improve the pipelines' ability to meet consumer demand and protect against price volatility," the PGC noted.

Anadarko Pipeline called on the Commission to make it "abundantly clear" that any consideration of a change in the blanket certificate rules will not apply to an Alaska natural gas pipeline. "The Commission must be certain, if it embarks on a rulemaking on this issue, that it clearly differentiates between an Alaska natural gas pipeline and pipelines in the Lower 48."

Anadarko contends that "allowing the blanket certification of mainline expansions through looping or the addition of compression, if applied to the Alaska natural gas pipeline, would adversely affect the Commission's ability to ensure that the legislative goals and requirements" are met under the Alaska Natural Gas Transportation Act of 1976 and the Alaska Natural Gas Pipeline Act.

The American Public Gas Association (APGA), which represents municipal gas utilities, called on FERC to reject the INGAA-NGSA petition, saying "the combined impact of these proposals would be to exempt a number of projects either from any prior Commission scrutiny...or require virtually no substantive support."

The proposed changes "would eliminate protections mandated by the Natural Gas Act against unnecessary pipeline projects and unreasonable rates," according to APGA. The protections shield customers against a "number of significant, unacceptable consequences," such as subsidization of project costs by other customers; unnecessary pipeline facilities that impose unwarranted burdens on captive customers; unfair competitive edge to the applicant's pipeline; and unnecessary impacts on landowners and the environment, the group said.

The APGA disputed INGAA's and NGSA's claim that the run-up in gas prices is directly tied to the inadequacy of the pipeline infrastructure. "The Commission has certificated numerous pipeline and storage projects recently and [has] done so expeditiously," it said. "It is the dramatic increase over the last several years in electric generation load served by new natural gas projects that has been a major contributor to the gas supply and related pricing concerns of today," the municipal gas group told FERC.

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