Interstate gas pipelines and their customers, which routinelylock horns at FERC, have found some common ground — neitherparticularly is enamored with the new policy statement thatencourages incremental pricing of pipeline construction. Somebelieve the Commission should go back to the drawing board andstart over on a new policy statement, while others have called fora return to the previous policy favoring rolled-in pricing.

For the majority of pipelines, the most objectionable partwasn’t the Sept. 15 policy statement per se, but rather it was theconcurring opinion in which three Commission members agreed toapply the new policy to pipeline projects that were filed afterJuly 29, 1998. Gas producers have urged FERC to re-establish itspolicy of rolled-in pricing for projects that limit existing ratehikes to 5% and have system-wide benefits. Producers contend thenew policy is based on a “false premise” that rolled-in pricingroutinely results in “subsidies” to existing shippers. Industrialand municipal gas customers opposed an “almost offhand statement”that could require shippers wishing to exerciseright-of-first-refusal (ROFR) to do so at higher, incrementalrates.

FERC’s bifurcated application of the policy statement is”arbitrary, capricious and unreasonable,” Northern Border Pipelinesaid, because the regulatory outcome is based on the “luck of thedraw,” or more precisely where a project application is positionedin FERC’s “queue for processing.” Conceivably, it argued that twopost-July 1998 projects “filed within days of one another [could]meet entirely different fates simply because one was processedquicker” and, as a result, received pre-existing rolled-in ratetreatment, while the other still awaits Commission action and isvirtually assured higher incremental pricing.

Under the new policy statement, sponsors must satisfy a rigidthreshold 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 oftheir projects against the potential adverse effects to existingpipeline shippers, affected landowners and rival pipelines andtheir captive shippers.

Texas Eastern Transmission and Algonquin Gas Transmission saidthe pronouncement has created pricing confusion in the industry.Specifically, they contend the concurring opinion — which wouldapply the new policy based on a project’s “filing” date — is atodds with language in the policy statement, which would base theapplicability of the new policy on whether a certificate has beenissued and investment decisions have been made. For example, underthe concurring opinion’s “filing” standard, the new policystatement would apply to a project that was filed Aug. 1, 1998 andreceived its certificate May 1, 1999, but it “would not appear toapply” under the language of the policy statement since “thecertificate has already issued and the investment decisions havebeen made.”

Like most pipelines, Tetco and Algonquin believe the new policystatement should be applied only to certificates awarded afterSept. 15 — the date the policy was issued. “The filing date ofthe certificate application should not be determinative of whetherthe policy is applicable.”

Ironically, by establishing a bright-line date, “the veryprojects that have raised issues of market need, affiliatecontracts and landowner concerns are the projects that theCommission has now exempted from the policy,” the Enron InterstatePipelines said in their request for rehearing of the policystatement [PL99-3] “Meanwhile, on a number of smaller, more routineapplications (often involving expansion of existing facilities),sponsors are left to deal with the uncertainty of how to priceintegrated facilities under the statement of policy.”

By establishing a cut-off date, the Commission further has founditself in a position of having to decide some projects under thepre-existing rolled-in pricing policy and others under the newpolicy. “This will put the Commission in [a] legally untenableposition…..All pending certificate applications should be treatedthe same. This is a fatal flaw in the policy statement,” said Tetcoand Algonquin.

Question Optional Exclusion

The Enron pipelines also took issue with FERC’s decision not tosubject optional certificate projects to the new policy statement.”If removal of the presumption [in favor of rolled-in rates] werethe only change in the statement of policy, Enron would not objectto exempting optional certificates” since sponsors of such projectshave agreed to bear all risks. “However, the statement of policyprovides more than rules for the pricing of expansions. It alsoprescribes procedural requirements for balancing, on the one hand,the needs of the market and the benefits of increased competitionand, on the other hand, the interests of the captive customers ofexisting pipelines and the interests of landowners and surroundingcommunities,” they said. And by exempting optional certificateprojects from these requirements, the Commission is “bestowing anunreasonable and unfounded procedural advantage” on them.

Interestingly, the Coastal Companies, whose ANR Pipeline isseeking to construct a major optional certificate project inFlorida, agreed with Enron. Coastal believes FERC’s decision toexempt optional certificate projects was too “broad based,” and ithas asked the Commission to clarify that certain aspects of the newpolicy should apply directly to such projects.

While “some aspects” aren’t relevant, such as requirement of “nosubsidies” on existing shippers, the Coastal Companies saidoptional certificate projects “will raise the very same seminalpublic policy issues that the Commission has recognized areextremely important in the context of new pipeline constructionunder traditional Section 7(c) applications. These include the’possibility of overbuilding, the avoidance of unnecessarydisruption of the environmental and the unneeded exercise ofeminent domain.'” ANR has filed a proposal to build its 744-mile,1.1 Bcf/d Gulfstream project from Mobile Bay to Florida under anoptional certificate.

Paiute Pipeline believes the new policy statement will cause”unreasonable delay” in the processing, review and approval ofpipeline construction projects. It was especially concerned byFERC’s decision to delay environmental analysis of a project untilafter a preliminary determination has been issued. Like theproducers (Indicated Shippers), it called for the Commission toreturn to its 1995 rolled-in rate policy. “No policy is going to beperfect. But the 1995 policy statement struck a fair balancebetween considerations favoring rolled-in pricing and thosefavoring incremental pricing, and usually would lead to reasonableresults. The new policy statement is too arbitrary, too categoricaland 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 seekingrehearing. In the policy statement, FERC did not explain its reasonfor abandoning rolled-in pricing, nor did it give any justificationfor incremental pricing of supply laterals, which it has”consistently recognized” provide system benefits to customers, theproducer group said. “The new policy undermines [the] developmentof the national pipeline grid,” giving the upper hand to incumbentpipelines while quashing the construction of competing projects,they told the Commission.

Some pipelines contend the policy statement also has proceduralflaws. By bifurcating the application, the policy statement, theCommission has “effectively elevated” the new policy to the statusof a “binding, substantive rule,” which can only be issued after anadequate notice-and-comment period, Northern Border said in itsrequest for rehearing [PL99-3]. It “bears all the earmarks of asubstantive rule…..” Separately, the Enron Interstate Pipelinesagreed that the Commission was “blurring …..the distinctionbetween policy and rules.”

Northern Border said FERC precedent has confirmed that policystatements are designed to reflect only “an agency’s tentativeintentions for the future,” while the courts have ruled they maynot have “present effect.” If a policy statement doesn’t have”present effect,” reasoned Northern Border, then “it most certainlycannot have retroactive effect…” It urged the Commission torescind its announced “intention” to impose the new policyretroactively.

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

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

The ROFR policy is “at war” with the general aim of the newpolicy statement, APGA told the Commission. “The purpose of thatpolicy is to prohibit financial subsidies from being provided bycaptive shippers, which never asked for the expansion project tobegin with. By ramping up a captive shipper’s rates in the ROFRprocess, a financial subsidy is exactly the result, only thesubsidy is flowing to the pipeline and not to the expansionshippers.”

The primary purpose of “applying incremental rates to newconstruction is to allow the market to influence whether facilitiesare constructed,” APGA noted. But “applying incremental pricing tothe capacity of a shipper with an expiring contract in the contextof ROFR does not serve that purpose.”

Susan Parker

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