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Certificate Policy Takes It on the Chin at FERC

Certificate Policy Takes It on the Chin at FERC

Interstate gas pipelines and their customers, which routinely lock horns at FERC, have found some common ground --- neither particularly is enamored with the new policy statement that encourages incremental pricing of pipeline construction. Some believe the Commission should go back to the drawing board and start over on a new policy statement, while others have called for a return to the previous policy favoring rolled-in pricing.

For the majority of pipelines, the most objectionable part wasn't the Sept. 15 policy statement per se, but rather it was the concurring opinion in which three Commission members agreed to apply the new policy to pipeline projects that were filed after July 29, 1998. Gas producers have urged FERC to re-establish its policy of rolled-in pricing for projects that limit existing rate hikes to 5% and have system-wide benefits. Producers contend the new policy is based on a "false premise" that rolled-in pricing routinely results in "subsidies" to existing shippers. Industrial and municipal gas customers opposed an "almost offhand statement" that could require shippers wishing to exercise right-of-first-refusal (ROFR) to do so at higher, incremental rates.

FERC's bifurcated application of the policy statement is "arbitrary, capricious and unreasonable," Northern Border Pipeline said, because the regulatory outcome is based on the "luck of the draw," or more precisely where a project application is positioned in FERC's "queue for processing." Conceivably, it argued that two post-July 1998 projects "filed within days of one another [could] meet entirely different fates simply because one was processed quicker" and, as a result, received pre-existing rolled-in rate treatment, while the other still awaits Commission action and is virtually assured higher incremental pricing.

Under the new policy statement, sponsors must satisfy a rigid threshold requirement that their proposed projects will result in "no subsidies" charged to existing customers --- a standard which, according to Commissioner Vicky Bailey, "virtually precludes [the] use of rolled-in rates." Sponsors also must weigh the benefits of their projects against the potential adverse effects to existing pipeline shippers, affected landowners and rival pipelines and their captive shippers.

Texas Eastern Transmission and Algonquin Gas Transmission said the pronouncement has created pricing confusion in the industry. Specifically, they contend the concurring opinion --- which would apply the new policy based on a project's "filing" date --- is at odds with language in the policy statement, which would base the applicability of the new policy on whether a certificate has been issued and investment decisions have been made. For example, under the concurring opinion's "filing" standard, the new policy statement would apply to a project that was filed Aug. 1, 1998 and received its certificate May 1, 1999, but it "would not appear to apply" under the language of the policy statement since "the certificate has already issued and the investment decisions have been made."

Like most pipelines, Tetco and Algonquin believe the new policy statement should be applied only to certificates awarded after Sept. 15 --- the date the policy was issued. "The filing date of the certificate application should not be determinative of whether the policy is applicable."

Ironically, by establishing a bright-line date, "the very projects that have raised issues of market need, affiliate contracts and landowner concerns are the projects that the Commission has now exempted from the policy," the Enron Interstate Pipelines said in their request for rehearing of the policy statement [PL99-3] "Meanwhile, on a number of smaller, more routine applications (often involving expansion of existing facilities), sponsors are left to deal with the uncertainty of how to price integrated facilities under the statement of policy."

By establishing a cut-off date, the Commission further has found itself in a position of having to decide some projects under the pre-existing rolled-in pricing policy and others under the new policy. "This will put the Commission in [a] legally untenable position.....All pending certificate applications should be treated the same. This is a fatal flaw in the policy statement," said Tetco and Algonquin.

Question Optional Exclusion

The Enron pipelines also took issue with FERC's decision not to subject optional certificate projects to the new policy statement. "If removal of the presumption [in favor of rolled-in rates] were the only change in the statement of policy, Enron would not object to exempting optional certificates" since sponsors of such projects have agreed to bear all risks. "However, the statement of policy provides more than rules for the pricing of expansions. It also prescribes procedural requirements for balancing, on the one hand, the needs of the market and the benefits of increased competition and, on the other hand, the interests of the captive customers of existing pipelines and the interests of landowners and surrounding communities," they said. And by exempting optional certificate projects from these requirements, the Commission is "bestowing an unreasonable and unfounded procedural advantage" on them.

Interestingly, the Coastal Companies, whose ANR Pipeline is seeking to construct a major optional certificate project in Florida, agreed with Enron. Coastal believes FERC's decision to exempt optional certificate projects was too "broad based," and it has asked the Commission to clarify that certain aspects of the new policy should apply directly to such projects.

While "some aspects" aren't relevant, such as requirement of "no subsidies" on existing shippers, the Coastal Companies said optional certificate projects "will raise the very same seminal public policy issues that the Commission has recognized are extremely important in the context of new pipeline construction under traditional Section 7(c) applications. These include the 'possibility of overbuilding, the avoidance of unnecessary disruption of the environmental and the unneeded exercise of eminent domain.'" ANR has filed a proposal to build its 744-mile, 1.1 Bcf/d Gulfstream project from Mobile Bay to Florida under an optional certificate.

Paiute Pipeline believes the new policy statement will cause "unreasonable delay" in the processing, review and approval of pipeline construction projects. It was especially concerned by FERC's decision to delay environmental analysis of a project until after a preliminary determination has been issued. Like the producers (Indicated Shippers), it called for the Commission to return to its 1995 rolled-in rate policy. "No policy is going to be perfect. But the 1995 policy statement struck a fair balance between considerations favoring rolled-in pricing and those favoring incremental pricing, and usually would lead to reasonable results. The new policy statement is too arbitrary, too categorical and tilts pricing policy too far" in one direction.

With this new policy, the Commission is attempting to "fix [something] that is not broken," Indicated Shippers said in seeking rehearing. In the policy statement, FERC did not explain its reason for abandoning rolled-in pricing, nor did it give any justification for incremental pricing of supply laterals, which it has "consistently recognized" provide system benefits to customers, the producer group said. "The new policy undermines [the] development of the national pipeline grid," giving the upper hand to incumbent pipelines while quashing the construction of competing projects, they told the Commission.

Some pipelines contend the policy statement also has procedural flaws. By bifurcating the application, the policy statement, the Commission has "effectively elevated" the new policy to the status of a "binding, substantive rule," which can only be issued after an adequate notice-and-comment period, Northern Border said in its request for rehearing [PL99-3]. It "bears all the earmarks of a substantive rule....." Separately, the Enron Interstate Pipelines agreed that the Commission was "blurring .....the distinction between policy and rules."

Northern Border said FERC precedent has confirmed that policy statements are designed to reflect only "an agency's tentative intentions for the future," while the courts have ruled they may not have "present effect." If a policy statement doesn't have "present effect," reasoned Northern Border, then "it most certainly cannot have retroactive effect..." It urged the Commission to rescind its announced "intention" to impose the new policy retroactively.

The concurring opinions to the policy statement indicated that July 29, 1998 was selected as the trigger date because that was when FERC issued the mega-notice of proposed rulemaking (NOPR) and notice of inquiry (NOI), which it said alerted industry to the impending policy change. But, the Enron pipelines asserted, "nowhere in either the NOPR or NOI did the Commission suggest that it was contemplating a complete reversal of its relatively recent rolled-in pricing precedent."

The Process Gas Consumers Group (PGC), which represents industrials, and the American Public Gas Association (APGA), which represents municipals, said they objected to an aspect of the policy statement that may require ROFR shippers, which obtained their capacity under rolled-in rates, to bid higher, incremental rates to maintain that capacity when their contract expires.

The ROFR policy is "at war" with the general aim of the new policy statement, APGA told the Commission. "The purpose of that policy is to prohibit financial subsidies from being provided by captive shippers, which never asked for the expansion project to begin with. By ramping up a captive shipper's rates in the ROFR process, a financial subsidy is exactly the result, only the subsidy is flowing to the pipeline and not to the expansion shippers."

The primary purpose of "applying incremental rates to new construction is to allow the market to influence whether facilities are constructed," APGA noted. But "applying incremental pricing to the capacity of a shipper with an expiring contract in the context of ROFR does not serve that purpose."

Susan Parker

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ISSN © 2577-9877 | ISSN © 1532-1266
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