FERC Thursday addressed the issue of pipeline over-recovery of fuel costs, approving a Columbia Gulf Transmission plan for an incentive-based methodology providing lower fixed fuel retainage percentages, plus revenue sharing among the pipeline and shippers of any savings from pipeline improvements (RP10-134).

The Federal Energy Regulatory Commission said “the order sets a precedent for a pipeline to establish, in a limited section 4 filing, a fixed fuel rate significantly below the cost-based level that it could otherwise justify. In exchange, the pipeline may keep a share of the fuel usage savings that result from fuel-related capital improvements it makes while the incentive mechanism is in effect.

“This new methodology is intended to assure customers an immediate, real rate reduction and encourage pipelines to make investments to improve the fuel efficiency of their systems.” In stating the new policy the Commission labeled it an incentive fixed fuel (IFF) mechanism.

While the Commission approved the precedent-setting proposal, it said the rates proposed by Columbia Gulf were too high and ordered the pipeline to recalculate them, filing new tariff sheets in 20 days. The pipeline’s current rates may remain in effect until the tariff sheets are filed and the Commission issues an order.

Following a FERC technical conference earlier this year Columbia Gulf had lowered its initially-proposed fixed fuel retainage percentages to the following: mainline forward haul 2.57%, mainline backhaul 0.40%, onshore 0.65% and offshore, 0.40%.

Absent the new plan, Columbia Gulf had proposed a 2.952% current retainage percentage for the mainline in its 2010 Transportation Retainage Adjustment (TRA). However, the Commission said that based upon the most recent cost and throughput data, the fixed fuel rates proposed by Columbia did not appear to be below the cost-based level Columbia Gulf could otherwise justify.

The order addressed customers’ long-time complaints that pipelines were grossly over-recovering both company use gas, mainly gas used in compressors, and lost and unaccounted for gas, from shippers’ gas streams, thus adding to the pipelines’ overall return.

The previous Republican-dominated Commission scrapped an inquiry into pipeline fuel retention practices just after President Obama was elected but before he took office (see Daily GPI, Jan. 7, 2009). At the time the Commission said the issue could be addressed on a pipeline-by-pipeline basis, saying shippers could file Section 5 complaints against pipelines.

Shippers, however, see Section 5 as a weak straw since they can only recover excess costs prospectively after the case is settled, leading pipelines to use the legal process to draw cases out as long as possible to continue collecting at a higher rate. In calling for Columbia to set rates lower than calculated fuel costs, the Commission noted it was not reopening the issue of overall pipeline costs through a general rate case, which pipelines have avoided almost entirely since the required updating of rates every three years was dropped with the establishment of open access.

A study commissioned by the Process Gas Consumers (PGC) and the Independent Petroleum Association of America found that several interstate pipelines are reaping millions of dollars in additional income each year from excess fuel costs paid by shippers, said Dena Wiggins, Ballard Spahr partner and general counsel for PGC. The study concluded that in 2006 alone fuel cost over-recoveries accounted for 37.5% ($435.8 million) of the net operating income of 11 leading interstate gas pipelines ($1.16 billion).

The current Commission has made clear it is, and will continue to, address the issue of pipelines adding to their bottom lines by cost over-recovery. Last November FERC opened Section 5 investigations of three pipelines for over-recovery of costs, including in one case the pipeline’s fuel retention practices (see Daily GPI, May 17; Nov. 20, 2009). At the time the Commission indicated these were not the only pipelines staff was investigating.

Chairman Jon Wellinghoff pointed out the pipeline orders addressed the time factor, calling for completion of the cases against the three companies as quickly as possible, with an initial decision by an administrative law judge within 47 weeks. At this point proposed settlements have already been filed by two of the pipelines.

The new IFF mechanism would substitute for the pipeline’s annual TRA filing. Columbia Gulf is authorized to establish up front, fixed fuel rates that reflect a portion of the fuel savings the pipeline projects would result from capital improvements made under the incentive mechanism. Columbia Gulf’s plan proposes customers get a 64% share of any revenue increases attributable to investments in capital improvements leading to greater efficiency.

The proposal mandates the pipeline reopen the methodology before seven years is up. Columbia Gulf, its shippers, or the Commission, nevertheless, would each have the right to seek at any time changes to the fixed fuel rates pursuant to a NGA limited section 4 or general section 5 filing, respectively.

In calling on Columbia Gulf to refigure the rates, the Commission said it recognized the pipeline then might want to adjust other provisions, such as the 64% allocation of savings to customers.

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