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

The policy statement said the Federal Energy RegulatoryCommission (FERC) also would look at the proposed project’s impacton customers of existing pipelines and require sponsors to try tomitigate the “adverse effects” of the proposed pipelines onaffected landowners.

It’s not clear how effective the new policy will be in the shortterm, however, as three of the four commissioners who voted infavor of it said they would follow it only for projects filed afterJuly 29, 1998 instead of the usual practice of applying it to allfuture Commission decisions regardless of when the projects wereinitiated. Chairman James Hoecker appeared to reluctantly agree toput his signature on a concurring statement initiated byCommissioners Curt Hebert and Linda Breathitt that exempts all thecurrent controversial applications, such as Independence,Millennium and MarketLink and SupplyLink.

Foremost, FERC raised the bar for interstate pipelines seekingto construct new projects by requiring that the facilities beingproposed be priced incrementally. Previously, smaller expansionprojects 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 increasinglandowner and environmental opposition, the policy sayscertificates will be awarded only to those projects that can showthat the public benefits are “proportional” to any drawbacks. Thesesteps are aimed at preventing the overbuilding of pipe capacity, aswell as the subsidization of new incremental projects by existingpipeline shippers [PL99-3].

It was clearly evident there was some last-minute jockeyingprior to last Wednesday’s FERC meeting, which started an hour late,over whether the new incremental pricing policy would apply topending projects as well as to future projects, an issue that wasnot specifically addressed in the policy statement. Hebert made apoint of questioning Commission staff several times to make surethey understood that although the cut-off date was not in thepolicy statement itself there were three commissioners whosupported it. Hebert then turned his attack to Hoecker, whoreasoned that “in this particular case, given the number of pendingproceedings and so forth, it seems appropriate to apply it” only topost-NOPR project filings. It also appeared that without the limitthere 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 anyfuture certificate decision, regardless of when the application wasfiled. The policy statement establishes “a threshold requirementthat pipeline certificate projects must be financially viablewithout subsidies from ratepayers, or the Commission will notprocess the application,” noted Massey. This policy on incrementalpricing “will provide the most accurate price signals as to when anew project is truly needed. It will obviate the need some pipelineproject sponsors have felt to segment their projects in order tocome within the 5% rate increase threshold [for rolled-in rates].Finally, the no-subsidy policy will provide much needed disciplineon the risk of overbuilding of capacity.”

The policy statement doesn’t totally preclude rolled-in pricing,however. “There will be circumstances where we will permitrolled-in pricing, but not as a general policy as we have in thepast,” Hoecker said. Rolled-in pricing, for example, may bepermitted “in cases where facilities can be expanded cheaplybecause of earlier [more] costly construction,” a FERC staff membersaid.

In addition to the change in pricing policy, the Commission saidit will factor in three additional elements when determining theneed for new pipeline construction: 1) the interests of landownersin the surrounding communities; 2) the interests of the existingcustomers of the pipeline applicant; and 3) the interests ofexisting pipelines that already serve the market that the newproject seeks to serve. Pipelines will be required to show they”made efforts to minimize or eliminate adverse effects” in thesethree areas.

“The weight that will be given by the various Commissioners tothe need factors is the real wildcard,” remarked Breathitt. Shesaid she looked forward with “some trepidation” to the firstproject to be decided under the new policy statement.

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

In her dissent, Commissioner Vicky Bailey said the policystatement was as much about a change in FERC’s pricing policy as itwas about the Commission’s need analysis for pipeline constructionprojects. “I do not disagree…..that incremental pricing isconsistent with the idea of allowing markets to decide [new pipeprojects]. I also recognize that it can protect customers fromunwarranted subsidies and insulate existing pipelines fromsubsidized competition. However, I find the policy statement to befar too categorical in its approach, and I am not persuaded that weshould depart from out existing policy statement on pricing,” whichfavors rolled-in rate treatment. Susan Parker

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