Appalachian/Marcellus natural gas producers and distributors expressed their support — or said they did not oppose — Columbia Gas Transmission LLC’s proposed settlement aimed at a long-overdue modernization of its natural gas pipeline system, but the NiSource Inc. line’s proposal to recover its investment via a tracker-surcharge drew some critics.

The capital cost recovery mechanism (CCRM) surcharge is designed to recover annually a substantial portion of Columbia’s revenue requirement for eligible facilities without full tariff revisions [RP121021]. The aim is to bypass rate case proceedings, which could take a number of years, and start replacement of substantial portions of the very old pipeline as quickly as possible. Much of the Columbia system needing repairs or replacement cannot be inspected using contemporary mechanical devices, such as pigging tools.

FERC agreed to fast-track its procedures after Columbia and its customers said they would leapfrog a full blown rate case and go straight to settlement. The settlement was filed Sept. 4 and the Federal Energy Regulatory Commission called for interventions or comments by Sept. 24. Columbia said 95% of shippers who participated in the settlement process supported it.

The U.S. Department of transportation also gave the modernization program a priority. After launching a national pipeline safety initiative aimed at repairing and replacing aging pipelines, Transportation Secretary Ray LaHood in April said his agency would lead the effort to expedite federal permitting for NiSource’s modernization of the Columbia Gas Transmission pipeline and storage system (see Daily GPI, April 23).

“Improving the reliability of Columbia’s system will also provide Columbia with the ability to provide critical takeaway capacity from the Marcellus and Utica shale production areas, which are experiencing rapid growth,” Columbia told FERC.

An objection came from the Maryland Public Service Commission (MPSC). “Contrary to the stated justification for this mechanism, permitting Columbia to implement the CCRM tracker-surcharge as proposed could, among other things, reduce Columbia’s incentives for innovation and efficiency…; shift the burden of normal and customary investment costs from Columbia to its customers; and set the stage for replacing rate cases as the primary method of recovery of major investment costs.”

Columbia should seek recovery of its modernization costs through a Natural Gas Act Section 4 rate case, MPSC said.

However, other stakeholders cited safety and reliability concerns on Columbia in supporting the settlement. The Independent Oil and Gas Association of West Virginia (IOGA) and Duke Energy Ohio/Duke Energy Kentucky (DEO, DEK), filing separately, said they supported the action as a one-time occurrence, not to be repeated for other pipelines.

The settlement calls for a retroactive refund of $50 million to Jan. 1, 2012 for shippers that hold primary firm transportation contracts and a rate reduction of ultimately $60 million. “The up-front rate reductions help mitigate the additional cost of new facilities that Columbia will recover through the CCRM beginning on Feb. 1, 2014 if the Commission approves the settlement,” Columbia said.

IOGA supports the settlement because of “all of the above” (rate reduction, refund and facility upgrades), said Randal Rich, an attorney with the Washington, DC-based law firm of Pierce Atwood LLP, which represents IOGA. He wouldn’t go as far as to say shippers are concerned about mishaps on Columbia’s aging system, but he said “every owner of every pipeline in the United States is aware of San Bruno [CA].”

“IOGA does not favor capital cost tracking by interstate pipelines, particularly of the scope proposed over the five-year term of the settlement. However, Columbia’s unique safety and reliability concerns given the age and condition of certain of its transmission and compression facilities, the tight parameters the settlement places around the facilities that will be eligible for cost recovery under the CCRM, the significant up-front rate reductions and refunds…and other benefits under the settlement provide a basis for IOGA to support the settlement and for the Commission to find that the settlement is fair and equitable,” said the group of independent producers.

However, “there [is] no valid reason for the Commission to treat the settlement as a precedent that would permit any other interstate pipeline, in the Appalachian Basin or otherwise, to replicate Columbia’s proposal, for settlement purposes or otherwise,” IOGA said.

“The settlement is designed to apply to the unique circumstances of the Columbia Gas system as it currently exists and should not be regarded as a precedent for any other pipeline systems or the Columbia Gas system in a subsequent period,” said DEO and DEK.

Chesapeake Energy Marketing Inc., a firm shipper, said “unlike some other proposals filed with the Commission, the [settlement] specifically identifies projects to be implemented, preserves the rights of shippers to monitor and challenge Columbia’s expenditures, and provides shippers with meaningful and concrete rate benefits.”

Furthermore, the CCRM “will protect shippers from a series of pancaked rate cases, filed one after the other,” which would place “enormous burdens on Columbia’s shippers.” Chesapeake said.

It also noted that Columbia’s settlement identified specific system projects that it needs to address and the timing for the projects. “Thus Columbia is not requesting an open-ended program based on speculative projects or regulatory requirements.”

Columbia proposes to invest about $4 billion over an extended period to upgrade the safety and reliability of its pipeline system in Kentucky, Maryland, Ohio, Pennsylvania, Virginia and West Virginia. The pipeline, which transports an average 3 Bcf/d through a nearly 12,000-mile network, is one of the oldest in the country. It was built more than 40 years ago and includes legacy facilities that were constructed in the early 20th century to transport crude oil.

Columbia said it plans to replace bare steel pipeline, which will better prevent degradation; increase the amount of pig-able facilities; expand in-line inspection capability and install modern control systems. It has asked FERC to approve the settlement by Dec. 1.

During the first few years that the CCRM rate applies, the combination of the reduced rates and the CCRM surcharge will be lower than the currently effective base rates, Columbia said.

Other parts of the settlement call for: revenue sharing in the event Columbia over-recovers a target revenue level; a moratorium on general Section 4 fate filings through Jan. 31, 2018; a requirement that Columbia file a Section 4 rate case to be effective no later than Feb. 1, 2019; and the expiration of the CCRM on the earlier of a Columbia rate filing or Jan. 31, 2019.

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