NGI The Weekly Gas Market Report / NGI All News Access

Divided FERC Votes Against Subsidies for New Pipes

Divided FERC Votes Against Subsidies for New Pipes

As Floyd wreaked havoc up and down the East Coast last week, Hurricane FERC wrought its own brand of torrent on new pipeline construction. Shifting its policy more toward a market-based and consumer-oriented focus, the Commission voted out (4-1) a policy statement eliminating set requirements for supporting contracts and any presumption for rolled-in pricing that would raise the rates of existing customers.

The policy statement said the Federal Energy Regulatory Commission (FERC) also would look at the proposed project's impact on customers of existing pipelines and require sponsors to try to mitigate the "adverse effects" of the proposed pipelines on affected landowners.

It's not clear how effective the new policy will be in the short term, however, as three of the four commissioners who voted in favor of it said they would follow it only for projects filed after July 29, 1998 instead of the usual practice of applying it to all future Commission decisions regardless of when the projects were initiated. Chairman James Hoecker appeared to reluctantly agree to put his signature on a concurring statement initiated by Commissioners Curt Hebert and Linda Breathitt that exempts all the current controversial applications, such as Independence, Millennium and MarketLink and SupplyLink.

Foremost, FERC raised the bar for interstate pipelines seeking to construct new projects by requiring that the facilities being proposed be priced incrementally. Previously, smaller expansion projects on existing pipelines that would raise existing customers' rates no more than 5% had a presumption for rolled-in pricing. Critics say, however, that policy had been abused.

Responding to the tenor of the times, which includes increasing landowner and environmental opposition, the policy says certificates will be awarded only to those projects that can show that the public benefits are "proportional" to any drawbacks. These steps are aimed at preventing the overbuilding of pipe capacity, as well as the subsidization of new incremental projects by existing pipeline shippers [PL99-3].

It was clearly evident there was some last-minute jockeying prior to last Wednesday's FERC meeting, which started an hour late, over whether the new incremental pricing policy would apply to pending projects as well as to future projects, an issue that was not specifically addressed in the policy statement. Hebert made a point of questioning Commission staff several times to make sure they understood that although the cut-off date was not in the policy statement itself there were three commissioners who supported it. Hebert then turned his attack to Hoecker, who reasoned that "in this particular case, given the number of pending proceedings and so forth, it seems appropriate to apply it" only to post-NOPR project filings. It also appeared that without the limit there might not have been the votes to pass the policy.

Commissioner William Massey disagreed with his colleagues, arguing that the new policy statement instead should apply to any future certificate decision, regardless of when the application was filed. The policy statement establishes "a threshold requirement that pipeline certificate projects must be financially viable without subsidies from ratepayers, or the Commission will not process the application," noted Massey. This policy on incremental pricing "will provide the most accurate price signals as to when a new project is truly needed. It will obviate the need some pipeline project sponsors have felt to segment their projects in order to come within the 5% rate increase threshold [for rolled-in rates]. Finally, the no-subsidy policy will provide much needed discipline on the risk of overbuilding of capacity."

The policy statement doesn't totally preclude rolled-in pricing, however. "There will be circumstances where we will permit rolled-in pricing, but not as a general policy as we have in the past," Hoecker said. Rolled-in pricing, for example, may be permitted "in cases where facilities can be expanded cheaply because of earlier [more] costly construction," a FERC staff member said.

In addition to the change in pricing policy, the Commission said it will factor in three additional elements when determining the need for new pipeline construction: 1) the interests of landowners in the surrounding communities; 2) the interests of the existing customers of the pipeline applicant; and 3) the interests of existing pipelines that already serve the market that the new project seeks to serve. Pipelines will be required to show they "made efforts to minimize or eliminate adverse effects" in these three areas.

"The weight that will be given by the various Commissioners to the need factors is the real wildcard," remarked Breathitt. She said she looked forward with "some trepidation" to the first project to be decided under the new policy statement.

Another feature of the statement is that FERC no longer will demand that pipes show contracts or precedent agreements to justify market need for projects. In the past, pipelines were required to have at least 25% of the proposed capacity of a project under contract in order for the Commission to process their applications. In recent times pipelines have simply produced capacity contracts from affiliates to back their proposals. FERC now will require project applicants to submit market studies.

In her dissent, Commissioner Vicky Bailey said the policy statement was as much about a change in FERC's pricing policy as it was about the Commission's need analysis for pipeline construction projects. "I do not disagree.....that incremental pricing is consistent with the idea of allowing markets to decide [new pipe projects]. I also recognize that it can protect customers from unwarranted subsidies and insulate existing pipelines from subsidized competition. However, I find the policy statement to be far too categorical in its approach, and I am not persuaded that we should depart from out existing policy statement on pricing," which favors rolled-in rate treatment. Susan Parker

©Copyright 1999 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

ISSN © 2577-9877 | ISSN © 1532-1266
Comments powered by Disqus