The new policy statement on pipeline certification, which callsfor incremental pricing of projects filed past a certain deadline,came under fire at FERC last week from a cross-section of interestsin the natural gas industry.

Northern Border Pipeline challenged the policy statement on the”limited issue” of its application solely to pending pipelineprojects that were filed at the Commission after July 29, 1998.Industrial and municipal gas customers, on the other hand, citedtheir opposition to an “almost offhand statement” in the policystatement that could require shippers wishing to exerciseright-of-first-refusal (ROFR) to do so at higher, incrementalrates.

FERC’s retroactive application of the policy statement is”arbitrary, capricious and unreasonable,” Northern Border said,because the regulatory outcome is based on the luck of the draw, ormore precisely where a project application is positioned in FERC’s”queue for processing.” Conceivably, it argued that two post-July1998 projects “filed within days of one another [could] meetentirely 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 virtuallyguaranteed higher incremental pricing.

Under the new policy statement, sponsors must satisfy a rigidthreshold requirement that their proposed projects will result in”no subsidies” for existing customers – a standard which, accordingto Commissioner Vicky Bailey, “virtually precludes [the] use ofrolled-in rates.”

By retroactively applying the policy statement, the Commissionhas “effectively elevated” its policy to the status of a “binding,substantive rule,” which can only be issued following adequatenotice and comment, the Enron pipeline said in a request forrehearing [PL99-3]. It “bears all the earmarks of a substantiverule…”

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 the Enron pipeline, then “it mostcertainly cannot have retroactive effect…” It urged theCommission to rescind its announced “intention” to impose the newpolicy retroactively.

Although not explained in the policy statement, the Commissionmajority picked July 29, 1998 as the trigger date because that waswhen FERC issued the mega-notice of proposed rulemaking (NOPR) andnotice of inquiry (NOI), which “presumably” gave industry notice ofthe impending policy change. But Northern Border argued that”notice cannot be deemed to occur until, at the earliest, the firstcase-specific application” of the new policy statement. “Only atsuch time, and as of that date, can the Commission attempt tojustify its abrupt policy reversal, based upon the particular factsand circumstances of the application before it.”

Furthermore, Northern Border believes the Commission will face”serious legal battles” in trying to meet the courts’ test forretroactive application of standards. Although FERC’s policyreversal “is by all accounts a departure from well-establishedpractice, it neither fills a ‘void’ in FERC policy nor does itcrystallize a prior policy that was unclear or inconsistent,” asthe courts have required, the pipeline said.

Nor does it believe the Commission factored in the “degree ofburden or hardship” that an abrupt change to incremental ratemakingwould cause to pending, yet unprocessed pipeline projects. It “isunreasonable for the Commission to suggest that imposing its newpolicy on pending, but unapproved applications will not undermine(or undo) economic and investment decisions simply becauseconstruction has not begun,” Northern Border noted.

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.

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. Such an internally inconsistent policy lacks a reasonedbasis and is arbitrary and capricious.”

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.”

PGC was concerned the policy statement would give pipesunilateral authority to raise rates. “In effect, the policystatement would allow a pipeline to increase the existing shipper’srate without notice to the Commission or the public and withouthaving to submit the rate increase to scrutiny to determine whichsuch rate is just and reasonable,” the industrial group said. TheROFR policy is “unduly discriminatory” and a violation of theNatural Gas Act, noted PGC, which asked FERC to reconsider andrescind it.

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