INGAA comments on FERC’s Cost Recovery Mechanisms for Modernization of Natural Gas Facilities

Against the backdrop of several legislative and regulatory initiatives designed to enhance the safety of pipeline facilities and reduce emissions of greenhouse gases, the Commission has promulgated a Proposed Policy Statement to ensure that its ratemaking policies do not unnecessarily inhibit pipelines’ ability to expedite needed or required upgrades and improvements. The Commission has recognized correctly that pipelines must be afforded a cost recovery mechanism that will encourage them to accelerate the significant investment required to achieve these important public policy objectives. At the same time, the Commission recognized the need to protect ratepayers and proposed several customer safeguards designed to ensure that pipeline rates remain just and reasonable.

Government agencies and various segments of the natural gas and electric industries filed comments on the Proposed Policy Statement. Several commenters agree that a different cost recovery mechanism is needed to provide the proper incentives to pipelines to modernize their systems, reduce their impact on the environment and make them safer, more reliable and more efficient. For example, the Department of Energy states that offering a streamlined cost recovery mechanism will provide a long overdue incentive for pipelines to invest in new equipment and upgrades that will improve safety, boost efficiency and reduce emissions. The Office of Pipeline Safety (“OPS”), within the Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (“PHMSA”), stresses the need to allow for the recovery of gas pipeline modernization costs without a full rate review and, therefore, strongly supports the Proposed Policy Statement. Several environmental advocacy groups also opine that the Proposed Policy Statement “provides a viable framework for modernization expenditures and a cost recovery mechanism that is reasonable and in the public interest.”

 

On the other hand, a number of commenters oppose the recovery of the costs of upgrading pipeline facilities through a cost tracking mechanism. Various Opponents argue that (1) allowing modernization costs to be recovered through a tracker will improperly “guarantee” pipelines cost recovery; (2) incentives are not needed for pipelines to comply with safety and environmental regulations; (3) the need for a different cost recovery mechanism is based on speculation about future regulations; (4) the proposed tracker does not meet the two-part test for an exception to the general requirement that pipelines recover costs through a rate case in which in all costs and revenues can be examined; and (5) the Proposed Policy Statement is contrary to precedent established in several cases in which the Commission has rejected trackers for the recovery of safety and environmental compliance costs.

 

The challenges to the Commission’s authority to promulgate the Proposed Policy Statement are without merit. Given the looming environmental and safety regulations that will be enacted in the near future, as well as the desirability of encouraging pipelines’ voluntary efforts to improve safety and reduce emissions, the Commission clearly is acting within its statutory authority by proactively announcing policies to promote these important regulatory and societal goals.

The argument that the Proposed Policy Statement is contrary to precedent is misplaced. The proposed tracker does not impermissibly “guarantee” cost recovery because (1) pipelines still must demonstrate the costs are prudent, and (2) the Commission has proposed customer safeguards that subject pipelines to the risk of cost under-recovery. The Proposed Policy Statement is consistent with precedent on trackers generally,3 as well as the most recent precedent regarding the tracking of modernization costs, as reflected in the Commission’s order on Columbia Gas’ contested settlement.4

In the Proposed Policy Statement, the Commission appropriately has recognized that filing successive general Natural Gas Act (“NGA”) Section 4 rate cases to recover the substantial costs required to upgrade pipeline systems, which would be cumbersome, expensive and time consuming, does not provide the appropriate incentives for pipelines to modernize their systems and achieve these important public policy objectives. Contrary to the claims of the Opponents, who generally ignore the consumer safeguards proposed by the Commission, the Proposed Policy Statement strikes a fair balance between providing incentives for pipelines to undertake and accelerate the required or needed upgrades, and protecting customers from potential cost over-recovery and cost shifts. 

 

Any narrowing of the cost recovery policies proposed in the Policy Statement will reduce these incentives and would be contrary to the goal of improving safety and reducing emissions.