22366 Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Rules and Regulations 

(c) Each first handler responsible for 

remitting assessments shall remit the 

amounts due to the Board’s office on a 

monthly basis no later than the fifteenth 

day of the month following the month 

in which the honey or honey products 

were marketed. 

(d) Each importer shall pay an 

assessment to the Board on all honey or 

honey products the importer imports 

into the United States. An importer 

shall pay the assessment to the Board 

through the United States Customs and 

Border Protection (Customs) when the 

honey or honey products being assessed 

enters the United States. If Customs 

does not collect an assessment from an 

importer, the importer is responsible for 

paying the assessment to the Board. 

(e) The import assessment 

recommended by the Board and 

approved by the Secretary shall be 

uniformly applied to imported honey or 

honey products that are identified as 

HTS heading numbers 0409.00.00 and 

2106.90.9988 by the Harmonized Tariff 

Schedule of the United States or any 

other numbers used to identify honey or 

honey products. 

* * * * * 

■ 3. In § 1212.53, paragraph (d) is 

revised to read as follows: 

§ 1212.53 Exemption from assessment. 

* * * * * 

(d) Upon receipt of an application, the 

Board shall determine whether an 

exemption may be granted. The Board 

will then issue, if deemed appropriate, 

a certificate of exemption to each person 

who is eligible to receive one. The 

exemption is effective when approved 

by the Board. It is the responsibility of 

these persons to retain a copy of the 

certificate of exemption. 

* * * * * 

■ 4. Section 1212.71 is revised to read 

as follows: 

§ 1212.71 Book and records. 

Each first handler and importer, 

including those who are exempt under 

this subpart, must maintain any books 

and records necessary to carry out the 

provisions of this part, and any 

regulations issued under this part, 

including the books and records 

necessary to verify any required reports. 

Books and records must be made 

available during normal business hours 

for inspection by the Board’s or 

Secretary’s employees or agents. A first 

handler or importer must maintain the 

books and records for three years 

beyond the fiscal period to which they 

apply. 

Dated: April 16, 2015. 

Rex A. Barnes, 

Associate Administrator. 

[FR Doc. 2015–09292 Filed 4–21–15; 8:45 am] 

BILLING CODE 3410–02P 

DEPARTMENT OF ENERGY 

Federal Energy Regulatory 

Commission 

18 CFR Part 2 

[Docket No. PL15–1–000] 

Cost Recovery Mechanisms for 

Modernization of Natural Gas Facilities 

AGENCY: Federal Energy Regulatory 

Commission, Energy. 

ACTION: Policy statement. 

SUMMARY: In this Policy Statement, the 

Commission provides greater certainty 

regarding the ability of interstate natural 

gas pipelines to recover the costs of 

modernizing their facilities and 

infrastructure to enhance the efficient 

and safe operation of their systems. The 

Policy Statement explains the standards 

the Commission will require interstate 

natural gas pipelines to satisfy in order 

to establish simplified mechanisms, 

such as trackers or surcharges, to 

recover certain costs associated with 

replacing old and inefficient 

compressors and leak-prone pipes and 

performing other infrastructure 

improvements and upgrades to enhance 

the efficient and safe operation of their 

pipelines. 

DATES: This Policy Statement will 

become effective October 1, 2015. 

FOR FURTHER INFORMATION CONTACT: 

Monique Watson (Technical 

information), Office of Energy Markets 

Regulation, Federal Energy Regulatory 

Commission, 888 First Street NE., 

20426, Telephone: (202) 502–8384, 

Monique.Watson@ferc.gov. 

David E. Maranville (Legal Information), 

Office of the General Counsel, Federal 

Energy Regulatory Commission, 888 

First Street NE., 20426, Telephone: 

(202) 502–6351, David.Maranville@

ferc.gov. 

TABLE OF CONTENTS 

Paragraph 

Nos. 

I. Background ................................................................................................................................................................................ 4 

A. Safety and Environmental Initiatives .............................................................................................................................. 4 

B. Existing Policy .................................................................................................................................................................. 11 

C. Proposed Policy Statement .............................................................................................................................................. 19 

D. Comments ......................................................................................................................................................................... 22 

II. Discussion ................................................................................................................................................................................ 25 

A. Adoption of Policy Statement ......................................................................................................................................... 25 

B. Standards for Modernization Cost Trackers or Surcharges ............................................................................................ 44 

1. Review of Existing Rates ........................................................................................................................................... 45 

2. Defined Eligible Costs ................................................................................................................................................ 54 

3. Avoidance of Cost Shifting ........................................................................................................................................ 72 

4. Periodic Review of the Surcharge ............................................................................................................................. 83 

5. Shipper Support ......................................................................................................................................................... 90 

C. Additional Questions on Which the Commission Sought Comments .......................................................................... 95 

1. Accelerated Amortization .......................................................................................................................................... 96 

2. Reservation Charge Crediting .................................................................................................................................... 101 

3. Other Issues ................................................................................................................................................................ 110 

III. Information Collection Statement .......................................................................................................................................... 119 

IV. Document Availability ........................................................................................................................................................... 132 

V. Effective Date and Congressional Notification ....................................................................................................................... 135 

1. On November 20, 2014, the 

Commission issued a Proposed Policy 

Statement and sought comments 

regarding potential mechanisms for 

interstate natural gas pipelines to use to 

recover the costs of modernizing their 

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Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Rules and Regulations 22367 

1Cost Recovery Mechanisms for Modernization of 

Natural Gas Facilities, Proposed Policy Statement, 

104 FERC ¶ 61,147 (2014) (Proposed Policy 

Statement). 

2Pipeline Safety, Regulatory Certainty, and Job 

Creation Act of 2011, 49 U.S.C.S. 60101 (2012) 

(Pipeline Safety Act). 

3Written Statement of Cynthia Quarterman, 

Administrator, PHSMA, before the U.S. House of 

Representatives, Committee on Transportation and 

Infrastructure, Subcommittee on Railroads, 

Pipelines, and Hazardous Materials (May 20, 2014), 

available at http://transportation.house.gov/

uploadedfiles/2014-05-20-quarterman.pdf 

(Quarterman Testimony) at 3. 

4Pipeline Safety: Safety of Gas Transmission 

Pipelines, (RIN: 2137–AE72), 76 FR 53,086 (August 

25, 2011). 

5An HCA is a location which is defined in the 

pipeline safety regulations as an area where 

pipeline releases have greater consequences to the 

safety, health and environment. Basically, these are 

areas with greater population density. 

6Quarterman Testimony at 10. 

facilities and infrastructure to enhance 

the efficient and safe operation of their 

systems.1 The Commission proposed 

standards that interstate natural gas 

pipelines would be required to satisfy to 

establish simplified mechanisms, such 

as trackers or surcharges, to recover 

such costs. Historically, the Commission 

has required interstate natural gas 

pipelines to design their transportation 

rates based on projected units of service. 

Recently, however, governmental safety 

and environmental initiatives have 

raised the probability that interstate 

natural gas pipelines will soon face 

increased costs to enhance the safety 

and reliability of their systems. The 

Commission issued the Proposed Policy 

Statement in an effort to address these 

potential costs and to ensure that 

existing Commission ratemaking 

policies do not unnecessarily inhibit 

interstate natural gas pipelines’ ability 

to expedite needed or required upgrades 

and improvements, such as replacing 

old and inefficient compressors and 

leak-prone pipelines. 

2. After review of the comments on 

the Proposed Policy Statement, the 

Commission has determined to establish 

a policy allowing interstate natural gas 

pipelines to seek to recover certain 

capital expenditures made to modernize 

system infrastructure through a 

surcharge mechanism, subject to 

conditions intended to ensure that the 

resulting rates are just and reasonable 

and protect natural gas consumers from 

excessive costs. The Commission 

recognizes, as many commenters note, 

that permitting pipelines to recover 

these expenditures through a surcharge 

or tracker departs from the requirement 

that interstate natural gas pipelines 

design their transportation rates based 

on projected units of service. We find on 

balance, however, that consideration of 

such mechanisms is justified if they are 

properly designed to limit a pipeline’s 

recovery of such costs to those shown to 

modernize the pipeline’s system 

infrastructure in a manner that enhances 

system safety, reliability and regulatory 

compliance, and are subject to 

conditions that ensure that the resulting 

rates are just and reasonable and protect 

natural gas consumers from excessive 

costs. Accordingly, we are adopting this 

Policy Statement to provide guidance 

and a framework as to how the 

Commission will evaluate pipeline 

proposals for recovery of infrastructure 

modernization costs. The Policy 

Statement adopts the five guiding 

principles from the Proposed Policy 

Statement as the standards a pipeline 

would have to satisfy for the 

Commission to approve a proposed 

modernization cost tracker or surcharge. 

Those criteria are (1) Review of Existing 

Base Rates; (2) Defined Eligible Costs; 

(3) Avoidance of Cost Shifting; (4) 

Periodic Review of the Surcharge and 

Base Rates; and (5) Shipper Support. 

3. Below we review the background 

that led to the development of the 

Proposed Policy Statement and this 

Policy Statement, summarize the 

comments on the Proposed Policy 

Statement, and discuss the applicability 

of the Policy Statement in general, and 

of the five conditions under the new 

Policy Statement, in light of those 

comments. As discussed below, the 

Commission intends that the standards 

a pipeline must satisfy to implement a 

cost modernization tracker or surcharge 

to be sufficiently flexible so as not to 

require any specific form of compliance 

but to allow pipelines and their 

customers to reach reasonable 

accommodations based on the specific 

circumstances of their systems. The 

Commission will thus evaluate any 

proposal for a modernization cost 

surcharge against those five standards 

on a case-by-case basis. 

I. Background 

A. Safety and Environmental Initiatives 

4. As we noted in the Proposed Policy 

Statement, there have been several 

recent legislative actions, and resulting 

regulatory initiatives, to address natural 

gas pipeline infrastructure safety and 

reliability. In 2012, Congress passed the 

Pipeline Safety, Regulatory Certainty, 

and Job Creation Act of 2011.2 That act 

includes requirements for the United 

States Department of Transportation 

(DOT) to take various actions to reduce 

the risk of future pipeline failures. 

Among other things, the Pipeline Safety 

Act requires the DOT to (1) consider 

expansion and strengthening of its 

integrity management regulations, (2) 

consider requiring automatic shut-off 

valves on new pipeline construction, (3) 

require pipelines to reconfirm their 

Maximum Allowable Operating 

Pressures, and (4) conduct surveys to 

measure progress in plans for safe 

management and replacement of cast 

iron pipelines. 

5. The Pipeline and Hazardous 

Materials Safety Administration 

(PHMSA) is in the process of 

implementing a multi-year Pipeline 

Safety Reform Initiative to comply with 

the Pipeline Safety Act’s mandate to 

enhance the agency’s ability to reduce 

the risk of future pipeline failures.3

Prior to the Pipeline Safety Act’s 

enactment, on August 25, 2011, PHMSA 

published an Advance Notice of 

Proposed Rulemaking (ANOPR) titled 

‘‘Pipeline Safety: Safety of Gas 

Transmission Pipelines,’’ which asked 

all stakeholders whether PHMSA 

should modify its existing integrity 

management and other pipeline safety 

regulations for interstate natural gas 

pipelines.4 The ANOPR requested 

public comment on a range of topics 

related to current industry practices, the 

effects of enhanced regulations on safety 

and cost, and the best method to 

implement proposed regulations. For 

example, PHMSA sought comments on 

shut-off valves and remote controlled 

shut-off valves. In addition, PHMSA 

held a public leak detection and valve 

workshop on March 28, 2012. 

6. Also as part of the ANOPR process, 

PHSMA is considering expanding the 

definition of a High Consequence Area 

(HCA) so that more miles of pipeline 

may become subject to integrity 

management requirements.5 PHMSA is 

also considering potential new rules 

related to repair criteria, including 

applying the integrity management 

repair criteria to non-HCAs; reassessing 

the repair criteria in areas where the 

population has grown since the pipeline 

was constructed; requiring methods to 

validate in-line inspection tool 

performance and qualifications of 

personnel; and implementing risk 

tiering such that repairs in an HCA have 

priority over repairs in a non-HCA. 

PHMSA held a Class Location 

Methodology workshop on April 16, 

2014. Based on the comments from the 

ANOPR and the workshop, PHMSA 

‘‘has started drafting a report to 

Congress on this issue.’’ 6

7. PHMSA is also considering changes 

to its requirements that pipelines 

perform baseline and periodic 

assessments of pipeline segments in an 

HCA through one or a combination of 

in-line inspection, pressure testing, 

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7 78 FR 56,268 (Sept. 12, 2013). 

8See EPA, Oil and Natural Gas Air Pollution 

Standards, White Papers on Methane and VOC 

Emission (Apr. 15, 2014), available at http://

www.epa.gov/airquality/oilandgas/

whitepapers.html. 

9EPA Compressor White Paper at 29. 

10 Id. at 29–42. 

11For example, the Interstate Natural Gas 

Association of America (INGAA) comments that 

one of its member companies ‘‘reported capital 

costs of $865,000 for replacement of a wet seal’’ on 

a centrifugal compressor. See INGAA Comments on 

EPA Compressor White Paper at 13 (filed June 16, 

2014). INGAA also commented on the EPA’s Leaks 

White Paper and noted that many factors could 

affect leak repair costs and that ‘‘the cost of the 

repair may far exceed the benefit of eliminating a 

small leak.’’ See INGAA Comments on EPA Leaks 

White Paper at 12–13 (filed June 16, 2014). 

12Mandatory Reporting of Greenhouse Gases 

Rule, 74 FR 56,260 (Oct. 30, 2009). See also 40 CFR 

Pt. 98 (2014). 

13 Greenhouse Gas Reporting Rule: 2014 

Revisions and Confidentiality Determinations for 

Petroleum and Natural Gas Systems, Docket Nos. 

EPA–HQ–OAR–2011–0512 and FR 9918–95–OAR 

(Nov. 14, 2014). 

14See Greenhouse Gas Reporting Rule: 2015 

Revisions and Confidentiality Determination for 

Petroleum and Natural Gas Systems, Docket ID No. 

EPA–HQ–OAR–2014–0831 (issued Nov. 14. 2014). 

15On July 29, 2014, the Department of Energy 

(DOE) announced steps to help modernize natural 

gas infrastructure. Moreover, on July 31, 2014, 

Secretary of Energy Ernest Moniz sent a letter to the 

Chairman of the Commission recommending the 

Commission explore efforts to provide greater 

certainty for cost recovery for new investments in 

modernization of natural gas transmission 

infrastructure as part of the FERC’s work to ensure 

just and reasonable natural gas pipeline 

transportation rates. 

16 18 CFR 284.10(c)(2) (2014). 

17Regulation of Natural Gas Pipelines After 

Partial Wellhead Decontrol, Order No. 436, FERC 

Stats. & Regs., Regulations Preambles 1982–1985 

¶ 30,665, at 31,534 (1985). 

18 Id. at 31,537. 

19See Granite State Gas Transmission, Inc., 132 

FERC ¶ 61,089, at P 11 (2010) (Granite State); 

Florida Gas Transmission Co., 105 FERC ¶ 61,171, 

at PP 47–48 (2003) (Florida Gas). 

20See e.g., Granite State Gas Transmission, Inc., 

136 FERC ¶ 61,153 (2011); Florida Gas 

Transmission Co., 109 FERC ¶ 61,320 (2004). In 

2012, the Commission again rejected a protested 

proposal that would allow a pipeline to recover 

regulatory safety costs through a tracker, but noted 

that PHSMA was in the early stages of developing 

regulations to implement the Pipeline Safety Act, 

and that the Commission would consider the need 

for further action as PHMSA’s implementation 

process moved forward. CenterPoint Energy— 

Mississippi River Transmission, LLC, 140 FERC 

¶ 61,253, at P 65 (2012) (MRT). 

direct assessment of external and 

internal corrosion, or other technology 

demonstrated to accurately assess the 

condition of a pipe. In June 2013, as 

updated in September 2013, PHMSA 

issued a flow chart reflecting its draft 

Integrity Verification Process for natural 

gas pipelines.7 To this end, PHMSA 

seeks information as to what anomalies 

have been detected using the various 

assessment methods, and proposes to 

include criteria in the regulations that 

would require more rigorous corrosion 

control. 

8. As we further noted in the 

Proposed Policy Statement, in addition 

to pipeline safety issues, there have 

been growing concerns about the 

emissions of greenhouse gases (GHG) in 

the production and transportation of 

natural gas. On April 15, 2014, the 

United States Environmental Protection 

Agency (EPA) issued a series of 

technical white papers, for which it has 

requested input from peer reviewers and 

the public, to determine how to best 

pursue reductions of emissions from, 

inter alia, natural gas compressors.8 The 

EPA Compressor White Paper discusses 

the most prevalent types of compressors 

(reciprocating and centrifugal) and 

compressor emission data. As relevant 

to this Policy Statement, the EPA lays 

out several ‘‘mitigation options for 

reciprocating compressors involve[ing] 

techniques that limit the leaking of 

natural gas past the piston rod packing, 

including replacement of the 

compressor rod packing, replacement of 

the piston rod, and the refitting or 

realignment of the piston rod.’’ 9 The 

EPA also describes several mitigation 

options for centrifugal compressors to 

limit the leaking of natural gas ‘‘across 

the rotating shaft using a mechanical 

dry seal, or capture the gas and route it 

to a useful process or to a combustion 

device.’’ 10 If the EPA’s white papers 

result in the agency imposing mitigation 

requirements on natural gas pipelines, 

the cost of such controls could be 

significant.11

9. In 2009, the EPA published a rule 

for mandatory reporting of GHG from 

sources that, in general, emit 25,000 

metric tons or more of carbon dioxide 

equivalent per year in the United 

States.12 This initiative, commonly 

referred to as the Greenhouse Gas 

Reporting Program (GHGRP), collects 

greenhouse gas data from facilities that 

conduct Petroleum and Natural Gas 

Systems activities, including 

production, processing, transportation 

and distribution of natural gas. 

Moreover, on November 14, 2014, the 

EPA issued a prepublication version of 

a final rule revising the Petroleum and 

Natural Gas Systems source category 

(Subpart W) and the General Provisions 

(Subpart A) of the GHGRP.13 The final 

rule, which was effective January 1, 

2015, imposes new requirements for the 

natural gas industry to monitor methane 

emissions and report them annually. On 

that same day, the EPA issued a 

prepublication version of a proposed 

rule to add calculation methods and 

reporting requirements for greenhouse 

gas emissions, as relevant here, from 

blow downs of natural gas transmission 

pipelines between compressor stations. 

The EPA also proposed confidentiality 

determinations for new data elements 

contained in the proposed 

amendments.14

10. As we recognized in the Proposed 

Policy Statement, one likely result of the 

Pipeline Safety Act and PHMSA’s 

rulemaking proceedings is that 

interstate natural gas pipelines will soon 

face new safety standards requiring 

significant capital costs to enhance the 

safety and reliability of their systems. 

Moreover, pursuant to EPA’s initiatives, 

pipelines may in the future face 

increased environmental monitoring 

and compliance costs, as well as 

potentially having to replace or repair 

existing natural gas compressors or 

other facilities.15

B. Existing Policy 

11. The Commission’s regulations 

generally require that interstate natural 

gas pipelines design their open access 

natural gas transportation rates to 

recover their costs based on projected 

units of service.16 This requirement 

means that the pipeline is at risk for 

under-recovery of its costs between rate 

cases but may retain any over-recovery. 

As the Commission explained in Order 

No. 436, this requirement gives the 

pipeline an incentive both to (1) 

‘‘minimize costs in order to provide 

services at the lowest reasonable costs 

consistent with reliable long-term 

service’’ 17 and (2) ‘‘provide the 

maximum amount of service to the 

public.’’ 18

12. Before the Pipeline Safety Act, the 

Commission held that capital costs 

incurred to comply with the 

requirements of pipeline safety 

legislation or with environmental 

regulations should not be included in 

surcharges,19 except in the context of an 

uncontested settlement.20 Noting that 

pipelines commonly incur capital costs 

in response to regulatory requirements 

intended to benefit the public interest, 

the Commission stated that recovering 

those costs in a tracking mechanism was 

contrary to the requirement to design 

rates based on estimated units of service 

because the use of cost-trackers 

undercuts the referenced incentives by 

guaranteeing the pipeline a set revenue 

recovery. 

13. As we stated in the Proposed 

Policy Statement, however, the 

Commission recently approved, as part 

of a contested settlement, a tracker 

mechanism to recover substantial 

pipeline modernization costs that 

Columbia Gas Transmission, LLC 

(Columbia Gas) demonstrated were 

necessary to ensure the safety and 

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21Columbia Gas Transmission, LLC, 142 FERC 

¶61,062 (2013) (Columbia Gas). 

22Columbia Gas stated in that proceeding that 

over fifty percent of its regulated pipeline system 

was over 50 years old, that a significant portion of 

its system contained dangerous bare steel pipeline, 

that many of its compressors were also outdated, 

that many of its control systems were running on 

obsolete platforms, and that it was only able to 

inspect a small percentage of its system using 

modern in-line inspection tools. 

23Other questions included whether the costs of 

modifications to compressors for the purpose of 

waste heat recovery should be eligible for recovery 

under a modernization surcharge, whether there are 

any capital costs associated with the expansion of 

the pipeline’s existing capacity or its extension to 

serve new markets that may reasonably be included 

in the surcharge as necessary one-time capital 

expenditures to comply with safety and 

environmental regulations, whether capital costs 

incurred to minimize pipeline facility emissions be 

considered for inclusion in the surcharge, even if 

those costs are not expressly required to comply 

with environmental regulations, whether noncapital maintenance costs associated with 

environmentally sound operation of a compressor 

be considered for inclusion in the surcharge, and 

under what circumstances should the Commission 

permit a pipeline to include in the tracking 

mechanism the costs of additional projects not 

Continued 

reliability of its pipeline system.21 The 

Columbia Gas settlement outlined 

significant operational and safety issues 

resulting from the age and condition of 

Columbia Gas’ system and the 

corresponding inability to monitor and 

maintain the system using efficient 

modern techniques.22 The Commission 

found that approving the settlement 

would facilitate Columbia Gas’ ability to 

make substantial capital investments 

necessary to correct significant 

infrastructure problems, and thus 

provide more reliable service while 

minimizing public safety concerns. 

14. The Commission’s determination 

in Columbia Gas thus established 

general parameters for pipelines to 

consider when seeking recovery of 

pipeline investments for modernization 

costs related to improving system safety 

and reliability. The tracker approved in 

that case was designed to recover 

pipeline modernization capital costs of 

up to $300 million annually over a fiveyear period. The Commission found that 

Columbia Gas’ settlement included 

numerous positive characteristics that 

distinguished its cost tracking 

mechanism from those the Commission 

had previously rejected and that work to 

maintain the pipeline’s incentives for 

innovation and efficiency. The key 

aspects of the settlement upon which 

the Commission relied to approve the 

tracker included the following. 

15. First, Columbia Gas worked 

collaboratively with its customers to 

ensure that its existing base rates, to 

which the tracker would be added, were 

updated to be just and reasonable. This 

included a reduction in Columbia Gas’ 

base rates and a refund to its customers. 

16. Second, the settlement specifically 

delineated and limited the amount of 

capital costs that may go into the cost 

recovery mechanism. Moreover, the 

eligible facilities for which costs would 

be recovered through that mechanism 

were specified by pipeline segment and 

compressor station. Further, the 

pipeline agreed to spend $100 million 

in annual capital costs as part of its 

ordinary system maintenance during the 

initial term of the tracker, which would 

not be recovered through the tracker. 

The Commission found that these 

provisions should assure that the 

projects whose costs are recovered 

through the tracker go beyond the 

regular capital maintenance 

expenditures the pipeline would make 

in the ordinary course of business and 

are critical to assuring the safe and 

reliable operation of Columbia Gas’ 

system. 

17. Third, the Commission found that 

a critically important factor to its 

approval of the settlement was the 

pipeline’s agreement to a billing 

determinant floor for calculating the 

cost recovery mechanism, together with 

an agreement to impute the revenue it 

would achieve by charging the 

maximum rate for service at the level of 

the billing determinant floor before it 

trues up any cost underrcoveries. The 

Commission found these provisions 

should alleviate its historic concern that 

surcharges, which guarantee cost 

recovery, diminish a pipeline’s 

incentive to be efficient and to 

maximize the service provided to the 

public. The Commission also found that 

these provisions protect the pipeline’s 

shippers from significant cost shifts if 

the pipeline loses shippers or must 

provide increased discounts to retain 

business. 

18. Fourth, the surcharge was 

temporary and would terminate 

automatically on a date certain unless 

the parties agreed to extend it and the 

Commission approved the extension. 

Finally, the tracker was broadly 

supported by the pipeline’s customers. 

C. Proposed Policy Statement 

19. In the Proposed Policy Statement, 

the Commission found that the ultimate 

implementation of the recent initiatives 

described above, to improve natural gas 

infrastructure safety and reliability and 

to address environmental issues related 

to the operation of natural gas pipelines, 

is likely to lead to the need for interstate 

natural gas pipelines to make significant 

capital investments to modernize their 

systems. The Commission stated that in 

light of these developments, the 

Commission has a duty to ensure that 

interstate natural gas pipelines are able 

to recover the costs of these system 

upgrades in a just and reasonable 

manner that does not undercut their 

incentives to provide service in an 

efficient manner and protects ratepayers 

from unreasonable cost shifts. 

20. Accordingly, the Commission 

proposed to establish a policy outlining 

the analytical framework for evaluating 

pipeline proposals for special rate 

mechanisms to recover infrastructure 

modernization costs necessary for the 

efficient and safe operation of the 

pipeline’s system and compliance with 

new regulations. The Commission 

proposed to base the policy on the 

guiding principles established in 

Columbia Gas. Pursuant to the Proposed 

Policy Statement, a pipeline proposal 

for a cost recovery tracker to recover 

pipeline modernization costs would 

need to satisfy five standards: 

(1) Review of Existing Rates—the 

pipeline’s base rates must have been 

recently reviewed, either by means of an 

NGA general section 4 rate proceeding 

or through a collaborative effort between 

the pipeline and its customers; (2) 

Eligible Costs—the eligible costs must 

be limited to one-time capital costs 

incurred to modify the pipeline’s 

existing system to comply with safety or 

environmental regulations issued by 

PHMSA, EPA, or other federal or state 

government agencies, and other capital 

costs shown to be necessary for the safe 

or efficient operation of the pipeline, 

and the pipeline must specifically 

identify each capital investment to be 

recovered by the surcharge; (3) 

Avoidance of Cost Shifting—the 

pipeline must design the proposed 

surcharge in a manner that will protect 

the pipeline’s captive customers from 

cost shifts if the pipeline loses shippers 

or must offer increased discounts to 

retain business; (4) Periodic Review of 

the Surcharge and Base Rates—the 

pipeline must include some method to 

allow a periodic review of whether the 

surcharge and the pipeline’s base rates 

remain just and reasonable; and (5) 

Shipper Support—the pipeline must 

work collaboratively with shippers to 

seek shipper support for any surcharge 

proposal. 

21. The Commission sought 

comments on the Proposed Policy 

Statement in general and on the five 

standards noted above. We also sought 

comments on several related issues, 

including whether if the Commission 

were to implement the instant 

modernization cost recovery policy, it 

should revise its policy on reservation 

charge crediting.23

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22370 Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Rules and Regulations 

identified in the pipeline’s original filing to 

establish the tracking mechanism? 

24See Appendix for a list of those entities and 

persons that filed comments and/or reply comments 

to the Proposed Policy Statement. 

25Those commenting in favor include the DOE; 

PHMSA; the Interstate Natural Gas Association of 

America (INGAA); Kinder Morgan Interstate 

Pipelines (Kinder Morgan); Southern Star Central 

Gas Pipeline, Inc. (Southern Star); Boardwalk 

Pipeline Partners, LP (Boardwalk); American 

Midstream (AlaTenn), LLC (American Midstream); 

the American Gas Association (AGA); the North 

Carolina Public Utility Commission (NCUC); the 

Kansas Corporation Commission (KCC); the 

Michigan Public Service Commission (Michigan 

PSC); the Tennessee Valley Authority (TVA); and 

the Environmental Defense Fund, the Conservation 

Law Foundation, and Sustainable FERC Project 

(collectively Environmental Commenters). 

26See, e.g., INGAA Comments at 2, Boardwalk 

Comments at 4, Kinder Morgan Comments at 5. 

27See, e.g., AGA Comments at 1 Laclede 

Comments at 1. 

28 Xcel Energy Services (XES) Comments at 2; 

Wisconsin Electric and Wisconsin Gas Comments at 

4. 

29Calpine Corporation (Calpine) Comments at 1. 

30Environmental Commenters Comments at 3–5. 

31Those filing comments opposing the Proposed 

Policy Statement include the Natural Gas Supply 

Association (NGSA), Industrial Energy Consumers 

of America (IECA), the American Forest and Paper 

Association (AF&PA), Process Gas Consumers 

(PGC), the American Public Gas Association 

(APGA), the Independent Petroleum Association of 

America (IPAA), Indicated Shippers (Anadarko 

Energy Services Company, Apache Corporation, BP 

Energy Company, Chevron U.S.A. Inc., 

ConocoPhillips Company, Cross Timbers Energy 

Services, Inc., Direct Energy Business, LLC, 

ExxonMobil Gas & Power Marketing Company, a 

division of Exxon Mobil Corporation, Fieldwood 

Energy LLC, Hess Corporation, Marathon Oil 

Company, Noble Energy, Inc., Occidental Energy 

Marketing, Inc., Shell Energy North America (US), 

L.P., SWEPI LP, and WPX Energy Marketing, LLC), 

the El Paso Municipal Customer Group (EPMCG), 

Western Tennessee Municipal Group, the Jackson 

Energy Authority, City of Jackson, Tennessee, and 

Kentucky Cities (together, Cities), Independent Oil 

& Gas Association of West Virginia, Inc. (IOGA), the 

Municipal Defense Group (MDG), Deep Gulf Energy 

LP (Deep Gulf), Energy XXI (Bermuda) Ltd. (Energy 

XXI), EPL Oil & Gas, Inc. (EPL), and M21K, LLC 

(M21K) (collectively Energy XXI), and Helis Oil & 

Gas, LLC (Helis) and Walter Oil & Gas Corporation 

(Walter). 

32See, e.g., NGSA Comments at 3. 

33NGSA Comments at 10–11, APGA Comments at 

2–4, Indicated Shippers Comments at 5–18 . 

34APGA Comments at 2–4, NGSA Comments at 

7–8. 

35NGSA Comments at 8–9. 

D. Comments 

22. The Commission received a 

variety of comments in response to the 

Proposed Policy Statement.24 Generally, 

interstate pipelines and other natural 

gas facility owners and operators favor 

the proposed policy, commenting that 

the criteria for collecting modernization 

costs through a surcharge should be 

more flexible than contemplated in the 

Proposed Policy Statement. Shippers 

varied in supporting or opposing the 

proposal, with LDCs conditionally 

supporting it provided that surcharges 

are tailored to the individual 

circumstances of the pipeline, and are 

designed so as not to impose 

unreasonable cost burdens or risks on 

natural gas customers. Some marketers 

also favored a program allowing the 

implementation of surcharges for 

modernization costs. Other shippers, 

however, including industrials, 

municipals and supply end entities, 

oppose the proposed policy statement. 

Producers are especially opposed to the 

recovery of any modernization costs 

through a surcharge mechanism, 

claiming that to allow such recovery is 

contrary to the NGA and longstanding 

Commission policy. The individuals 

filing comments also oppose the 

Proposed Policy Statement for varying 

reasons. 

23. Numerous entities from a wide 

spectrum of industry interests filed in 

favor of the Proposed Policy Statement, 

supporting properly limited tracker or 

surcharge mechanisms to recover 

modernization costs.25 Some advocate 

granting pipelines added flexibility to 

comply with the five standards 

necessary to establish such trackers.26

Others filing in favor of the 

Commission’s proposed policy state that 

pipeline cost recovery mechanisms 

must be tailored to the individual 

circumstances of the pipeline, and be 

designed so as not to impose 

unreasonable cost burdens or risks on 

natural gas customers.27 Various 

pipeline customers generally support 

the development of simplified 

mechanisms for the recovery of costs of 

modernizing pipeline assets to enhance 

safety and reliability subject to 

conditions, commenting that the costs to 

be recovered should be limited to 

capital improvements for safety 

purposes and for compliance with 

environmental regulations.28 Others 

state that modernization cost recovery 

trackers should include safeguards to 

ensure that pipelines are not permitted 

to pass through costs while evading 

shipper protections traditionally 

afforded by NGA section 4 rate review.29

Others support the Proposed Policy 

Statement as a method for enhancing 

certainty and the ability of interstate 

pipelines to recover costs for 

augmenting the efficient and safe 

operation of their respective systems.30

24. In contrast to the pipelines’ and 

other comments in support of the 

proposed policy, other commenters, 

particularly those representing 

producers, marketers, municipal gas 

companies, and industrial users of 

natural gas, expressed strong opposition 

to the recovery of modernization costs 

through a tracker.31 Opponents’ claims 

that additional cost-recovery guarantees 

to incentivize compliance with 

mandatory environmental and safety 

laws is misplaced, and that cost trackers 

are inconsistent with section 

284.10(c)(2) of the Commission’s 

regulations, which requires that 

transportation rates be based on 

estimated units of service so that the 

pipeline is at risk for cost underrecovery.32 Opponents also claim that a 

cost modernization surcharge would be 

contrary to longstanding Commission 

policy and precedent, noting that the 

Commission has consistently rejected 

maintenance, compliance, and safety 

cost trackers, because they guarantee 

cost recovery without taking into 

account the benefits of cost reductions 

in other areas and/or increases in 

throughput affecting base rate 

revenues.33 Those opposing the 

Proposed Policy Statement further claim 

that the five standards do not provide 

the consumer protections afforded 

under section 4 of the Natural Gas Act 

(NGA), and that the record lacks a 

showing that pipelines cannot recover 

such costs though NGA section 4 rate 

cases.34 Opponents also claim that the 

Proposed Policy Statement is premature, 

because PHMSA and the EPA have not 

yet issued new regulations.35

II. Discussion 

A. Adoption of Policy Statement 

25. After reviewing the comments 

filed on the Proposed Policy Statement, 

the Commission has determined to 

establish a policy allowing interstate 

natural gas pipelines to seek to recover 

certain capital expenditures made to 

modernize system infrastructure in a 

manner that enhances system reliability, 

safety and regulatory compliance 

through a surcharge mechanism, subject 

to conditions intended to ensure that 

the resulting rates are just and 

reasonable and protect natural gas 

consumers from excessive costs. While 

we recognize that allowing pipelines to 

recover these expenditures through a 

surcharge or tracker departs from the 

requirement that interstate natural gas 

pipelines design their transportation 

rates based on projected units of service, 

we find on balance that consideration of 

such mechanisms is justified in order to 

provide an enhanced opportunity to 

recover the substantial capital costs 

some pipelines are likely to incur to 

replace aging, unsafe and leak-prone 

facilities. The Policy Statement provides 

a framework for how the Commission 

will evaluate pipeline proposals for 

recovery of infrastructure modernization 

costs, and guidance as to how it will 

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36 DOE Comments at 1. 

37EPA Oil and Natural Gas Sector Compressors 

(Apr. 2014) at 29, available at http://www.epa.gov/ 

airquality/oilandgas/2014papers/

20140415compressors.pdf at 29. 38See DOE Comments at 4, stating that EIA 

estimates that 728 billion cubic feet (Bcf) of natural 

gas was used as fuel by compressor stations 

operating at natural gas transmission and storage 

facilities in the United States in 2012, resulting in 

39 million metric tons of CO2 emissions. 

39 DOE Comments at 5. 

40As discussed below, the Commission may 

consider pipeline proposals to include certain 

limited non-capital maintenance costs in a 

modernization cost tracker. 

evaluate such proposals in accordance 

with the five adopted standards. 

26. As the comments in support of the 

Commission’s Proposed Policy 

Statement indicate, establishment of a 

policy to permit enhanced recovery of 

modernization costs is in the public 

interest and necessary to address 

concerns regarding the safety of the 

Nation’s natural gas infrastructure and 

the safe operation of natural gas 

pipelines, as well as environmental 

issues related to emissions. With regard 

to safety and reliability, as OPS 

comments, recent pipeline accidents, 

including the September 2010 pipeline 

rupture in San Bruno, California, 

demonstrate the potential consequence 

of aging pipeline facilities that are not 

properly repaired, rehabilitated or 

replaced. OPS states that 59 percent of 

existing natural gas pipelines were built 

before 1970 and 69 percent of existing 

natural gas pipelines were built before 

1980. DOE notes that more than half of 

the country’s natural gas transmission 

and gathering infrastructure is over 40 

years old. As OPS points out, while 

aging pipelines are not inherently risky, 

older facilities have been exposed to 

more threats and were likely 

constructed without the benefit of 

today’s safety standards or quality 

materials. 

27. To address these concerns, 

Congress passed the Pipeline Safety Act 

mandating that DOT take various 

actions to improve the safety of 

interstate natural gas pipelines, 

including requiring testing to verify 

natural gas pipelines’ maximum 

allowable operating pressure, 

considering expansion and 

strengthening of its integrity 

management regulations, and 

considering requiring automatic shut-off 

valves on new pipeline construction. 

The need to address pipeline safety is 

also supported by OPS’ comments that 

multiple recommendations from the 

National Transportation Safety Board 

and the General Accounting Office 

reinforce the need to ensure that the 

Nation’s pipeline infrastructure is sound 

and reliable. The DOE states in its 

comments that the Commission’s 

proposal is ‘‘aligned with goals of DOE’s 

Initiative to Help Modernize Natural 

Gas Transmission and Distribution 

Infrastructure as well as governmentwide efforts to improve pipeline safety 

and enhance the resilience of our 

nation’s critical infrastructure.36 DOE 

asserts that offering streamlined cost 

recovery options will provide an 

overdue incentive for pipelines to invest 

in new equipment and upgrades that 

will improve safety, boost energy 

efficiency and reduce emissions. 

28. In addition to pipeline safety 

issues, there have been growing 

concerns about the emissions of GHG in 

the production and transportation of 

natural gas. As we noted in the 

Proposed Policy Statement, in 2014, the 

EPA issued a series of technical white 

papers to determine how to best pursue 

reductions of emissions from, inter alia, 

natural gas compressors. The EPA 

Compressor White Paper lays out 

several ‘‘mitigation options for 

reciprocating compressors and 

centrifugal compressors to limit the 

leaking of natural gas. . . .’’ 37 Further, 

in 2009, the EPA published its rule for 

mandatory reporting of greenhouse gas 

emissions. The resulting GHGRP 

collects greenhouse gas data from 

facilities that conduct Petroleum and 

Natural Gas Systems activities, 

including production, processing, 

transportation and distribution of 

natural gas. Moreover, the EPA issued a 

final rule effective January 1, 2015, 

imposing new requirements for the 

natural gas industry to monitor methane 

emissions and report them annually. 

29. Further, the use of natural gas as 

a fuel for compressors adds to the 

amount of carbon dioxide emissions.38

DOE also estimates that over 110 Bcf of 

natural gas is lost annually through 

routing venting and equipment leaks. 

DOE states that a streamlined cost 

recovery mechanism such as that 

proposed here for voluntary emissions 

reductions can benefit pipelines and 

their customers. According to DOE, 

infrastructure improvements that will 

increase compressor efficiency and 

reduce venting and leaking of methane 

emissions will also result in product 

conservation and thus cost savings.39

30. The safety and reliability of the 

nation’s natural gas infrastructure, and 

the operation of those facilities in an 

efficient manner that minimizes 

environmental impact, are issues of 

public interest, and the development of 

mechanisms to encourage investments 

in infrastructure improvements and 

upgrades to enhance the efficient and 

safe operation of natural gas pipeline 

furthers that interest. As we recognized 

in the Proposed Policy Statement, one 

likely result of the recent regulatory 

safety and environmental initiatives is 

that interstate natural gas pipelines will 

face increased costs related to those 

rules and programs. Notably, while the 

opponents of the policy assert its 

implementation is premature because 

the amount of those costs is still 

unknown, they do not dispute that 

pipelines are likely to incur substantial 

costs to address these issues. In light of 

the referenced regulatory developments, 

the Commission has a duty to ensure 

that interstate natural gas pipelines are 

able to recover the costs of these 

required system upgrades in a just and 

reasonable manner that does not 

undercut their incentives to provide 

service in an efficient manner and also 

protects ratepayers from unreasonable 

cost shifts. 

31. In an effort to ensure that 

consumers are protected against 

potential effects of any modernization 

cost trackers or surcharges, the Final 

Policy adopts the five guiding principles 

proposed in the Proposed Policy 

Statement as the standards a pipeline 

would have to satisfy for the 

Commission to approve a proposed 

modernization cost tracker or surcharge. 

Those standards are (1) a requirement 

for a review of the pipeline’s existing 

base rates by means of an NGA general 

section 4 rate proceeding, a cost and 

revenue study, or through a 

collaborative effort between the pipeline 

and its customers; (2) a requirement that 

the costs eligible for recovery through 

the tracker or surcharge must generally 

be limited to one-time capital costs 

incurred to modify the pipeline’s 

existing system to comply with safety or 

environmental regulations or other 

federal or state government agencies, or 

other capital costs shown to be 

necessary for the safe, reliable, and/or 

efficient operation of the pipeline, and 

the pipeline must specifically identify 

each projects’ costs or capital 

investment to be recovered by the 

surcharge; 40 (3) a prohibition against 

cost shifting, requiring that the pipeline 

design any proposed surcharge in a 

manner that will protect the pipeline’s 

captive customers from cost shifts if the 

pipeline loses shippers or must offer 

increased discounts to retain business; 

(4) a requirement that the pipeline must 

include some method to allow a 

periodic review of whether the 

surcharge and the pipeline’s base rates 

remain just and reasonable; and (5) a 

requirement that the pipeline work 

collaboratively with shippers to seek 

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41See, e.g., NGSA Comments at 10, Indicated 

Shippers’ Comments at 3. 

42See, e.g., Indicated Shippers’ Comments at 

5–11, and cases cited therein. 

43Proposed Policy Statement, PP 18–20. 

44This fact distinguishes surcharges that may be 

approved under the Policy Statement from ANR 

Pipeline Co., 70 FERC ¶ 61,143 (1995), where we 

rejected ANR’s proposed base rate cost-of-service 

tracker, which sought to recover all of the pipeline’s 

cost of service, as contrary to our regulations. 

45See, e.g., Indicated Shippers’ Comments at 5– 

11. 

46Columbia Gas, 142 FERC ¶ 61,062 at PP 22– 

27. 

47 Id. P 22. 

48We noted that this distinguished Columbia Gas 

from the surcharge mechanisms we rejected in 

Florida Gas, 105 FERC ¶ 61,171 at PP 47–48 and 

MRT, 140 FERC ¶ 61,253, which contained only 

general definitions of what type of costs would be 

eligible for recovery, leaving the pipeline 

considerable discretion as to what projects it would 

subsequently propose to include in the surcharge 

and creating the potential for significant disputes 

concerning the eligibility of particular projects. 

49As we also noted, the surcharge mechanisms 

proposed in Florida Gas, MRT, and Granite State 

Gas Transmission, Inc., 132 FERC ¶ 61,089 (2011), 

shipper support for any surcharge 

proposal. These standards will act as 

protections against pipelines 

unilaterally recovering costs through a 

tracker that do qualify as the type 

intended to meet the goals of the policy. 

They will also require any pipeline 

seeking a modernization cost tracker to 

demonstrate to the Commission and its 

customers that its current base rates are 

just and reasonable, and provide 

flexibility for the parties to pursue 

options to reach agreement on processes 

to ensure that those rates and the 

surcharge rate remain just and 

reasonable. They will also prevent 

shifting of additional costs to captive 

customers. 

32. Opponents of the proposed policy 

argue that adopting the Proposed Policy 

Statement would be contrary to the 

NGA, longstanding Commission policy 

and rate regulation principles, and that 

the Commission has neither justified 

this departure from current policy nor 

demonstrated why it is necessary. 

NGSA, Indicated Shippers, the IPAA 

and others argue that the NGA requires 

that pipelines be afforded an 

‘‘opportunity’’ to recover their 

reasonable costs but that trackers 

guarantee cost recovery in violation of 

that principle.41 They assert this 

guaranteed cost recovery, absent any 

accounting of cost savings, is the reason 

Commission has for years disfavored 

cost recovery trackers, because it 

eliminates the pipeline’s risk and 

correspondingly any incentive for the 

pipeline to be efficient and to provide 

effective service. They note that the 

Commission’s rejections of such 

mechanisms include proposals 

addressing circumstances very similar 

to those that would be covered under 

the new policy, and that the 

Commission itself has stated that it has 

only approved the use of trackers that 

were agreed to in settlements.42 They 

further claim that there has been no 

change in the law or the rationale 

underlying the Commission’s 

longstanding position that would 

warrant the policy modification 

proposed. 

33. As we stated above, the 

Commission acknowledges that the 

policy adopted in this Policy Statement 

departs from the general rate policy in 

our regulations that interstate natural 

gas pipelines design their transportation 

rates based on projected units of service. 

We disagree, however, that there have 

been no changes that may result in 

tracker mechanisms being just and 

reasonable in certain circumstances and 

subject to appropriate controls.43 As 

discussed above, the increased concerns 

with pipeline safety reflected in the 

Pipeline Safety Act, together with the 

recent DOE, PHMSA, and EPA 

initiatives to improve natural gas 

infrastructure safety and reliability and 

to address environmental issues will 

result in certain increased capital and 

compliance costs for pipelines. In light 

of these developments the Commission 

has a duty to ensure that interstate 

natural gas pipelines are able to recover 

the reasonable cost of these system 

upgrades in a just and reasonable 

manner that does not undercut their 

incentives to provide service in an 

efficient manner and protects ratepayers 

from unreasonable cost shifts. 

34. We also disagree with 

commenters’ contentions that allowing 

modernization cost trackers will 

eliminate the pipeline’s risk of cost 

under-recovery and thereby reduce 

pipelines’ incentives to be efficient and 

to provide effective service, contrary to 

goals of our general policy of requiring 

that rates be based on projected units of 

service. As discussed in more detail 

below, the costs included in a 

modernization cost tracker will 

generally be limited to one-time capital 

costs to improve the safe, reliable, and/ 

or efficient operation of the pipeline. 

Thus, pipelines will continue to recover 

all other costs in their base rates 

pursuant to the Commission’s ordinary 

ratemaking policies. Therefore, 

pipelines will continue to be at risk 

between rate cases for recovery of their 

operating and maintenance (O&M) costs, 

the overall return on non-modernization 

capital costs, the depreciation allowance 

related to those costs, and all other costs 

included in their base rates.44 This will 

give pipelines an incentive to operate 

their systems as efficiently as possible, 

consistent with Commission policy. 

Moreover, the pipelines will have the 

burden of showing that all costs 

included in a modernization cost tracker 

are prudent and consistent with the 

Commission’s eligibility standards for 

including costs in such a tracker. This 

will give the Commission and all 

interested parties an opportunity to 

review whether the subject capital 

investments are prudent and required 

for the safe and efficient operation of the 

pipeline. 

35. Several commenters, including 

Indicated Shippers, contend that the 

Proposed Policy Statement is contrary to 

Commission precedent prohibiting 

tracker mechanisms for regulatory 

obligations, and discuss a number of 

cases where we had rejected pipeline 

proposals for regulatory compliance cost 

trackers.45 As noted above, the 

Commission does not disagree that we 

have previously rejected proposed tariff 

provisions that would establish trackers 

to recover costs not wholly dissimilar to 

those contemplated by the Policy 

Statement. None of those proposals, 

however, included conditions and 

safeguards to protect shippers and 

consumers of the sort that the Columbia 

settlement did, and which we adopt 

here as conditions for a modernization 

cost tracker. 

36. As we noted in our order 

approving Columbia Gas’ surcharge, 

Columbia Gas’ proposal contained 

numerous benefits and protections 

agreed to with its shippers that 

distinguished it from our orders 

rejecting tracker proposals.46 Notably 

the development of Columbia Gas’ 

tracker for costs to make necessary 

improvements and upgrades to its 

system began with Columbia Gas and its 

shippers engaging in a collaborative 

effort to review Columbia Gas’ current 

base rates, leading to Columbia Gas’ 

agreement to make significant 

reductions to its base rates and to 

provide refunds to its shippers.47

Further the settlement identified by 

pipeline segment and compressor 

station, the specific Eligible Facilities 

for which costs may be recovered, and 

limited the amount of capital costs and 

expenses for each such project.48 It also 

established a billing determinant floor 

for calculating the surcharge imputing 

the revenue it would achieve by 

charging the maximum rate for service 

at the level of billing determinant floor 

before it trues up any cost underrecoveries.49 Further, Columbia Gas’ 

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did not include a comparable mechanism to protect 

captive customers from significant cost shifts. The 

surcharges proposed in the other cases cited by 

Indicated Shippers as examples of the 

Commission’s policy against surcharges and 

trackers, including ANR Pipeline Company, 70 

FERC ¶ 61,143, and El Paso Natural Gas Co., 112 

FERC ¶ 61,150 (2005), also did not contain the 

safeguards or customer protections included in the 

Columbia Gas settlement and implemented for the 

Final Policy. Similarly, the greenhouse gas cost 

recovery mechanism we rejected as premature in 

Southern Natural Gas Co., 127 FERC ¶ 61,003 

(2009), did not provide safeguards of the type 

required by this Policy Statement. Likewise, our 

rejection in Tennessee Gas Pipeline Co., LLC and 

Kinetica Energy Express, LLC, 143 FERC ¶ 61,196 

(2013) of a proposed hurricane surcharge that we 

found to be overly broad because it sought to 

recover costs outside those caused by hurricanes, 

storms or other natural disasters, did not include 

any of the referenced protections. Id. P 225. 50Proposed Policy Statement at P 9. 

tracker is temporary, and terminates by 

its terms subject to extension requiring 

the consent of all parties, and thus will 

not become a permanent part of 

Columbia Gas’ rates. Finally, the tracker 

settlement was supported or not 

opposed by virtually all of Columbia 

Gas’ shippers. 

37. The Commission’s approval of any 

modernization cost tracker or surcharge 

will require a showing by the pipeline 

of the same types or benefits that 

distinguished Columbia Gas’ tracker 

from those we had rejected, and thus 

comments that the Policy Statement 

would represent a complete reversal of 

Commission policy are exaggerated. 

This Policy Statement does not provide 

pipelines with any ability to establish a 

modernization surcharge other than in 

the manner and with the same 

protections Commission has already 

approved in Columbia Gas. The analysis 

to be performed under this Policy 

Statement will be substantially similar 

to that undertaken to find that Columbia 

Gas’ modernization cost recovery 

mechanism was just and reasonable and 

benefitted all interested parties. It will 

be incumbent on a pipeline requesting 

a modernization cost tracker to 

demonstrate that its proposal includes 

the types of benefits that the 

Commission found maintained the 

pipeline’s incentives for innovation and 

efficiency, and distinguished Columbia 

Gas’ modernization cost tracking 

mechanism from those the Commission 

had previously rejected. 

38. Further, the requirements that a 

pipeline proposing a tracker mechanism 

must establish that its base rates are just 

and reasonable and that there be 

provision for a periodic review of 

surcharge and base rates should 

alleviate concerns that the Final Policy 

will result in pipelines not filing NGA 

section 4 rate proceedings and thus 

being insulated from rate review. APGA 

points to examples of interstate 

pipelines having not filed NGA section 

4 rate cases in over a decade and asserts 

that pipelines generally file rate cases 

very infrequently, thus depriving 

customers of an opportunity to review 

all the pipeline’s rates for lengthy 

periods. However, the fact that a 

pipeline desiring a modernization cost 

surcharge must establish that its existing 

base rates are just and reasonable should 

increase customer opportunities to 

obtain review of all the pipeline’s rates. 

As discussed in more detail below, if a 

pipeline’s shippers protest a filing to 

establish a modernization cost tracker 

on the ground that the pipeline has not 

shown that its base rates are just and 

reasonable, the Commission will 

establish appropriate procedures to 

enable it to make a finding, based on 

substantial evidence, whether the base 

rates are just and reasonable. Moreover, 

while offsetting decreases in cost items 

will not be reflected in rates during the 

time between the effective date of the 

surcharge and the first periodic review, 

that periodic review will provide an 

opportunity for any offsetting cost 

reductions to be reflected in rates in 

order to assure that the base rates and 

any continued surcharge are just and 

reasonable. 

39. Accordingly, given the heightened 

sensitivity to pipeline safety and 

environmental related concerns, and 

based on the benefits realized from the 

Columbia Gas settlement, which 

enabled the pipeline to efficiently make 

necessary upgrades and repairs to 

maintain the safety and reliability of its 

system while ensuring that its shippers 

were protected against cost shifts and 

other potential pitfalls commonly 

associated with trackers, the 

Commission has determined to modify 

its policy to permit the use of a tracker 

mechanism in the limited circumstances 

provided for under the Policy 

Statement, which will inure to the 

public interest. 

40. As noted, several commenters 

advocate that the Commission’s 

modernization cost recovery policy 

contain narrowly drawn conditions and 

require strict adherence to those 

conditions to obtain approval for such a 

mechanism. As many others comment, 

however, the Policy Statement will be 

most effective and efficient if designed 

according to flexible parameters that 

will allow for accommodation of the 

particular circumstances of each 

pipeline’s circumstances. Maintaining a 

transparent policy with flexible 

standards will best allow pipelines and 

their customers to negotiate just and 

reasonable, and potentially mutually 

agreeable, cost recovery mechanisms to 

address the individual safety, reliability, 

regulatory compliance and other 

infrastructure issues facing that 

pipeline. For example, while we will 

require that any pipeline seeking a 

modernization cost tracker demonstrate 

that its existing base rates are just and 

reasonable, as some commenters point 

out, there may not be a need in all 

circumstances for a pipeline to file and 

litigate an NGA section 4 rate 

proceeding to make such a showing. 

There may be less costly and less time 

consuming alternatives. As we stated in 

the Proposed Policy Statement, the 

Commission proposed the new policy to 

‘‘ensure that existing Commission 

ratemaking policies do not 

unnecessarily inhibit interstate natural 

gas pipelines’ ability to expedite needed 

or required upgrades and 

improvements.’’ 50 Thus, while we are 

imposing specific conditions on the 

approval of any proposed 

modernization cost tracker, leaving the 

parameters of those conditions 

reasonably flexible will be more 

productive in addressing needed and 

required system upgrades in a timely 

manner. Further, consistent with this 

approach, the Commission will be able 

to evaluate any proposals in the context 

of the specific facts relevant to the 

particular pipeline system at issue. 

41. Accordingly, the Commission 

finds that modification of our previous 

policy is warranted to allow for 

consideration of pipeline proposals for 

modernization cost tracking 

mechanisms as a way for pipelines to 

recover those costs in a timely manner 

while maintaining the safe and efficient 

operation of pipeline systems. As we 

discuss more fully below, however, the 

Commission’s approval of any such 

mechanism will be subject to the 

Commission’s scrutiny of the proposal 

and its evaluation of the stated 

conditions, which will work to protect 

the pipeline’s customers and ratepayers 

against potential adverse effects of any 

tracker. That analysis will be on a caseby-case basis, and thus will take into 

account the specific circumstances of 

the individual pipeline and its 

customers. Any shippers opposing the 

pipeline’s proposal will have a full 

opportunity to express their position on 

specific aspects of the proposed 

mechanism at that time, and the 

pipeline will need to engage in a 

collaborative effort to garner significant 

shipper support before the Commission 

will approve a tracker proposal. 

42. Opponent commenters also claim 

that there is no need for the Proposed 

Policy Statement because there are 

sufficient longstanding procedural 

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51For the same reasons, we decline to adopt 

NGSA’s suggestion in its reply comments that we 

defer issuing this Policy Statement until after 

PHMSA and EPA issue final regulations. 

options and mechanisms in place to 

achieve the Commission’s cost recovery 

goals in this initiative, including NGA 

rate cases and the Commission’s 

settlement process. Again, the 

Commission does not dispute that there 

are existing procedures that provide 

pipelines an opportunity to recover 

their just and reasonable costs. The 

instant Policy Statement, however, is 

meant to address imminent and 

foreseeable developments related to the 

safety and reliability of the natural gas 

interstate pipeline system. Thus, we 

find it warranted in the limited 

circumstances under which the 

Commission would approve a 

modernization cost surcharge, to allow 

recovery through a tracker of those costs 

expended to replace old and inefficient 

compressors and leak-prone pipes and 

performing other infrastructure 

upgrades and improvements to enhance 

efficient and safe operation of their 

pipeline systems. 

43. We disagree with comments that 

the Policy Statement is premature 

because the regulatory initiatives 

prompting the new policy are not yet 

finalized, and thus the projected 

increased costs are unknown and 

speculative. Although the commenters 

are correct that the regulatory initiatives 

that are the impetus for the Final Policy 

are not final, there is little debate that 

some form of them will be in place 

eventually, and that they will result in 

increased costs to pipelines. It will take 

pipelines a significant amount of time to 

review and analyze their systems to 

determine if there are portions that need 

immediate attention, and whether the 

projects they identify in their review are 

of the sort that would be eligible for a 

cost modernization tracker. It is 

reasonable for the Commission to 

establish this policy in advance of the 

final initiatives to provide guidance to 

the industry as to how the Commission 

will analyze pipeline’s proposals to 

address these questions. Further, this 

Policy Statement will be beneficial to 

those pipelines that decide to take a 

proactive approach to ensuring system 

safety and reliability by conducting 

system and rate reviews prior to 

governmental mandates requiring them 

to do so.51

B. Standards for Modernization Cost 

Trackers or Surcharges 

44. As discussed, this Policy 

Statement permits pipelines to seek 

Commission approval of modernization 

cost trackers or surcharges to recover 

costs associated with performing 

infrastructure upgrades and 

replacements in a manner that will 

enhance the efficient and safe operation 

of their pipelines. The Commission’s 

evaluation and approval of any 

proposed modernization cost tracker 

will require the proposing pipeline to 

satisfy the five standards from the 

Proposed Policy Statement. We discuss 

the application of those standards under 

the Policy Statement below. 

1. Review of Existing Rates 

45. Under the first standard proposed 

by Commission, a pipeline proposing a 

tracker mechanism must establish that 

the base rates to which any surcharges 

would be added are just and reasonable 

and reflect the pipeline’s current costs 

and revenues as of the date of the initial 

approval of the tracker mechanism. The 

Commission proposed that the pipeline 

could do this in various ways, including 

(1) making a new NGA general section 

4 rate filing, (2) filing a cost and revenue 

study in the form specified in section 

154.313 of the Commission’s regulations 

showing that its existing rates are just 

and reasonable, or (3) through a 

collaborative effort between the pipeline 

and its customers. The Commission 

sought input on these or other 

acceptable approaches for pipelines to 

demonstrate that existing base rates are 

just and reasonable. 

a. Comments 

46. Some commenters suggested that 

the Commission require pipelines to file 

an NGA section 4 rate case as part of 

any proposed capital cost tracker. IPAA 

and the NGSA argue that adoption of a 

capital cost tracker must require a 

comprehensive review of the pipeline’s 

base rates and cost of service through an 

NGA general section 4 rate filing with 

hearing procedures that include 

discovery and the Commission’s Office 

of Administrative Litigation staff. TVA 

states that it feels strongly that any such 

review would be best accomplished 

through the thorough and objective 

analysis of a section 4 rate filing. PEG 

argues that pipelines should be required 

to restate all of their rates under NGA 

section 4 within three years prior to a 

surcharge. Laclede also argues that a 

cost and revenue study is not a 

reasonable substitute for an NGA 

section 4 filing. 

47. The NYPSC, the NCUC and the 

KCC agree that a pipeline’s base rates 

must be reviewed through a full NGA 

general section 4 rate proceeding or 

through a collaborative effort between 

the pipeline and its customers, and 

oppose allowing pipelines to only file a 

cost and revenue study. Cities and 

Municipals commented that the 

collaborative effort standard should be 

abandoned in favor of a clear standard 

based on a section 4 general rate case 

where all the pipeline’s costs can be 

reviewed. Others comment that the 

pipeline’s rates should have been 

reviewed and approved within a certain 

time-frame (3 or 4 years) prior to the 

implementation of a surcharge, and that 

the Commission should require 

pipelines with such surcharges to file 

rate cases on a regular basis (every 3 

years). 

48. Others comment, however, that a 

full NGA section 4 rate case review 

would be too cumbersome for the 

purpose of efficiently implementing 

appropriate cost modernization 

surcharges. INGAA argues that the 

Commission should remain open to 

alternative approaches to justifying 

existing base rates. Recognizing that rate 

cases, cost and revenue studies and 

recent rate settlements are all 

appropriate methods for determining 

that existing base rates are just and 

reasonable, INGAA asserts that these are 

not the only circumstances in which 

relevant rates may be reviewed and 

approved by the Commission, and that 

the Commission should remain open to 

other possibilities. For example, INGAA 

argues that the Commission should 

allow a pipeline to introduce a cost 

recovery mechanism when such a 

proposal is broadly supported by 

shippers, regardless of whether the 

settlement addresses other rate issues, 

or when the pipeline has an upcoming 

obligation to file a general NGA section 

4 rate filing, a cost and revenue study, 

or restatement or re-justification of its 

rates as the result of a settlement 

provision. INGAA further states that a 

recent review of a pipeline’s base rates 

may be irrelevant to the analysis of a 

cost tracker when all, or the vast 

majority, of a pipeline’s shippers have 

entered into long-term negotiated rate 

agreements accepted by the 

Commission. INGAA asserts that a cost 

recovery mechanism also may be 

appropriate when the Commission 

recently has reviewed and approved a 

pipeline’s base rates in an NGA section 

7 proceeding to ensure that new 

pipelines are not placed at a 

disadvantage. 

49. Calpine recommends the review of 

a pipeline’s base rates occur through an 

informal collaborative process and not a 

general section 4 rate case. APGA argues 

that permitting the rate review to occur 

through a new NGA general section 4 

rate filing or a cost and revenue study, 

as opposed to requiring a pre-negotiated 

base rate settlement, would eliminate 

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52 87 FERC ¶ 61,110, at 61,438–41 (1999). See e.g., 

Texas Gas Transmission, LLC, 126 FERC 

¶ 61,235 (2009); Devon Power LLC, 117 FERC 

¶ 61,133 (2006). 

the benefit of the Columbia Gas case, 

namely negotiations among the pipeline 

and its customers regarding substantial 

rate reductions and refunds, which led 

to agreement on a just and reasonable 

rate level. XES suggests having 

pipelines file a cost and revenue study 

because it would allow pipeline to file 

an ‘unadjusted’ report so that current 

costs and revenues may be determined. 

The Environmental Commenters express 

concern that requiring a general section 

4 rate filing as a prerequisite could be 

inapposite to the regulatory efficiency 

purposes of a cost tracker. 

50. American Midstream requests that 

the Commission clarify that to be 

eligible for the special cost recovery 

mechanism through a limited section 4 

filing, pipelines or at least small 

pipelines like American Midstream 

need only demonstrate that they are not 

recovering their reasonable costs under 

their existing recourse rates, and will 

not be required to file testimony 

specifically supporting and explaining 

each of the schedules required by 

section 154.313 of the Commission’s 

regulations. 

b. Determination 

51. Under this Policy Statement, any 

pipeline seeking a modernization cost 

recovery tracker must demonstrate that 

its current base rates to which the 

surcharge would be added are just and 

reasonable. This is necessary to ensure 

that the overall rate produced by the 

addition of the surcharge to the base rate 

is just and reasonable, and does not 

reflect any cost over-recoveries that may 

have been occurring under the 

preexisting base rates. 

52. In the Proposed Policy Statement, 

we stated that the pipeline could 

demonstrate its base rates are just and 

reasonable by filing a NGA section 4 

general rate proceeding, a cost and 

revenue study in the form specified in 

section 154.313 of the Commission’s 

regulations, or through some other 

collaborative effort between the pipeline 

and its customers. In applying the Final 

Policy we decline to require that such 

rate review be conducted only through 

an NGA section 4 rate proceeding. The 

type of rate review necessary to 

determine whether a pipeline’s existing 

rates are just and reasonable is likely to 

vary from pipeline to pipeline. For 

example, it may be possible for some 

pipelines to demonstrate that their 

existing base rates are under-recovering 

their full cost of service and that a 

section 4 rate filing would likely lead to 

an increase in their base rates through 

a showing short of filing an NGA section 

4 rate proceeding. Therefore, we remain 

open to considering alternative 

approaches for a pipeline to justify its 

existing rates. 

53. We note, however, that any 

pipeline seeking a modernization cost 

surcharge will need to satisfy the 

Commission that its current base rates 

are no higher than a just and reasonable 

level. To that end, we encourage any 

pipeline seeking approval of a 

modernization cost tracker to engage in 

a full exchange of information with its 

customers to facilitate that process. If a 

voluntary exchange of information fails 

to satisfy interested parties that a 

pipeline’s base rates are just and 

reasonable, the Commission will 

establish appropriate procedures to 

enable resolution of any issues of 

material fact raised with respect to the 

justness and reasonableness of the 

pipeline’s base rates based upon 

substantial evidence on the record. In 

this regard, the Commission notes that, 

if the pipeline files a contested 

settlement concerning its base rates, the 

Commission would consider whether to 

approve the settlement pursuant to the 

approaches discussed in Trailblazer 

Pipeline Co.52

2. Defined Eligible Costs 

54. In the Proposed Policy Statement, 

we stated that to qualify as ‘‘eligible 

costs’’ for recovery under a cost 

modernization tracker, costs must be 

limited to one-time capital costs 

incurred to modify the pipeline’s 

existing system or to comply with safety 

or environmental regulations issued by 

PHMSA, EPA, or other federal or state 

government agencies, and other capital 

costs shown to be necessary for the safe 

or efficient operation of the pipeline. 

The Commission also recognized that 

interstate natural gas pipelines routinely 

make capital investments related to 

system maintenance in the ordinary 

course of business, and the Commission 

stated that such routine capital costs 

could not be included in a cost 

modernization tracker. 

55. The Commission also proposed to 

require that each pipeline specifically 

identify each capital investment to be 

recovered by the surcharge, the facilities 

to be upgraded or installed by those 

projects, and an upper limit on the 

capital costs related to each project to be 

included in the surcharge. The 

Commission stated that this would 

allow an upfront determination that the 

costs are eligible for recovery through 

the tracker and avoid later disputes 

about which costs or facilities qualify 

for such recovery. 

56. The Commission also asked 

several questions concerning what costs 

should be eligible for recovery in a 

tracker. 

a. Comments 

57. The majority of commenters agree 

that proponents of a modernization cost 

recovery tracking mechanism should 

specify the costs and identity of projects 

to be recovered pursuant to any such 

mechanism and limit the recovery of 

those costs. AGA argues that pipelines 

should be required to clearly specify the 

investments which will be recovered 

through the tracking mechanism, and 

that shippers should have the ability to 

challenge the inclusion of projects or 

costs as part of the collaborative 

process. Several commenters, including 

NGSA, IOGA, XES, and Environmental 

Commenters note that facilities eligible 

for cost recovery under a capital cost 

tracker should be limited to 

modification of the pipeline’s existing 

system for reliability, safety, or 

environmental compliance, and that 

there be a strict distinction between 

such facilities and maintaining the 

pipeline system in the ordinary course 

of business. NGSA argues that eligible 

tracked costs for recovery in a surcharge 

should be strictly limited to one-time 

capital costs related solely to 

compliance with the incremental 

requirements of future PHMSA and EPA 

regulations, as opposed to the inclusion 

of ordinary capital maintenance costs. 

EPMCG states the Proposed Policy fails 

to explain how the Commission could 

distinguish between such normal 

expenditures and those ‘‘necessary to 

address, safety, efficiency or similar 

concerns.’’ Southern Companies 

suggests using an Eligible Facilities 

Plan, comparable to that used in the 

Columbia Gas settlement. 

58. Wisconsin Electric and Wisconsin 

Gas suggest that pipelines be required to 

specify the regulation that resulted in 

the requirement to construct each 

project and to either file for approval of 

each project under the NGA section 7(c) 

certificate application process or in the 

event that a section 7(c) certificate 

application is not required, then provide 

all information about the project in a 

manner similar to a section 7(c) 

application. Wisconsin Electric and 

Wisconsin Gas also suggest the 

Commission establish clear criteria for 

an ‘‘eligible modernization project’’ and 

create a clear distinction between 

routine maintenance projects versus 

modernization projects undertaken to 

comply with safety and/or 

environmental regulations. 

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53PEG Comments at 7. 

54 In the Proposed Policy Statement, at P 23, the 

Commission proposed to define eligible costs as 

‘‘one-time capital costs to modify the pipeline’s 

existing system . . .’’ (emphasis supplied). Some 

commenters have interpreted our use of the word 

‘‘modify’’ to exclude the costs of facility 

replacement projects from eligibility. We clarify 

that capital costs to replace existing facilities, such 

as old compressors that do not comply with new 

EPA emission requirements, are eligible for 

inclusion in a modernization cost tracker. 

55See, e.g., INGAA Comments at 13. 

56 INGAA reply comments at 18–19. 

Environmental Commenters at 12–13. 

57Section 7.3 of the Columbia Gas settlement. 

59. Those opposed to the Policy 

Statement in general advocate strict 

limits on the ‘‘eligibility’’ of 

modernization costs that can be 

recovered through a surcharge. The 

AF&PA for example, opposes recovery 

of modernization costs through a 

surcharge and states that the costs the 

pipeline seeks to recover through the 

tracker/surcharge must be one time 

capital costs incurred to comply with 

safety or environment regulation issued 

by a governmental entity and such costs 

are necessary for the safe or efficient 

operations of the pipeline. AF&PA states 

to the extent that the Commission 

allows trackers, the Commission should 

only permit trackers related to costs that 

are specifically tied to laws that have 

already been enacted or regulations that 

are currently effective. AF&PA 

comments that the pipeline should be 

required to demonstrate that the costs 

are incremental to the costs imposed 

under existing laws and regulations. 

Laclede, who also opposes the Proposed 

Policy Statement, echoes the notion that 

modernization costs should only be 

recoverable through rate trackers if the 

costs are tied to new safety or health 

requirements. Additionally, the 

Industrial Energy Consumers of America 

(IECA) opposes surcharges and trackers 

as a way for pipeline companies to 

recover regulatory safety and 

environmental costs, arguing that it 

should be a requirement for pipeline 

companies to file a new tariff that 

includes regulatory costs. IECA 

recommends strict guidelines as to what 

costs pertain to eligible facilities for 

special cost recovery. 

60. Several commenters stated that 

the Commission needs to ensure that 

pipelines do not recover costs related to 

the safe and efficient operation of their 

systems that they should have already 

been spending. NCUC states that 

pipelines should not be provided 

incentives to make the investments it 

already should have made. Calpine also 

states pipelines should already be 

complying with safety and reliability 

requirements imposed by existing 

regulations and should not be incented 

to recover such costs through a 

modernization cost mechanism. PEG 

opposes the Commission’s involvement 

in the mandates of other agencies such 

as EPA and PHMSA. According to PEG, 

‘‘it is presumptuous of the Commission 

to describe such expenditures as being 

in ‘advancement of the public interest’ 

when first, the public interest is yet to 

be defined by regulatory action and 

second, such actions are outside of the 

Commission’s purview.’’ 53 PEG fails to 

see any reason to provide an incentive 

for pipelines to take actions that they 

must take under penalty of law. 

61. Other commenters found the 

Commission’s proposal with regard to 

eligible facilities too restrictive, and 

stated that costs should not be limited 

to ‘‘one-time, capital costs.’’ INGAA 

argues that limiting the tracker 

mechanism only to capital costs is an 

unnecessary limitation on the type of 

costs that should be eligible for 

inclusion into the tracker mechanism, 

and urge expansion of the scope of the 

definition of eligible facilities. WBI 

Energy likewise comments that a onetime capital cost limitation may 

preclude a pipeline from recovering 

non-routine non-capital expenses which 

were prudently incurred to address 

system safety or efficiency. WBI Energy 

thus argues the final policy should be 

flexible enough to address each 

pipeline’s situation. 

62. Boardwalk states that the policy 

should be flexible so that if as a result 

of the modification process a pipeline 

discovers other actions that need to be 

taken in order for a pipeline to be in 

compliance with the new PHMSA rules, 

the costs of those activities may be 

included in the tracker. Boardwalk 

states the Commission should provide 

clear and rational guidance as to 

categories of costs eligible for inclusion 

in the tracker. Columbia Gas argues that 

the Commission should allow pipelines 

and shippers to include the cost of 

projects intended to increase the 

reliability or safety of existing facilities, 

including those facilities not necessarily 

impacted by regulations, provided that 

pipelines make a clear showing of net 

benefits to its stakeholders. Columbia 

Gas suggests such potential benefits may 

include improved safety, reduced 

emissions, increased efficiency or 

reliability, reduced costs, improved fuel, 

or reduced lost-and-unaccounted-for 

quantities. 

b. Determination 

63. Consistent with the Proposed 

Policy Statement, costs proposed to be 

recovered through a modernization cost 

surcharge (Eligible Costs) should 

generally be limited to (1) one-time 

capital costs incurred to modify or 

replace existing facilities on the 

pipeline’s system to comply with safety 

or environmental regulations issued by 

PHMSA, EPA, or other federal or state 

government agencies, or (2) other onetime capital costs shown to be necessary 

for the safe or efficient operation of the 

pipeline.54 The Commission does not 

intend that capital costs the pipeline 

incurs as part of its ordinary, recurring 

system maintenance requirements 

should be eligible for inclusion in a 

modernization cost tracker. The 

Commission is modifying its rate 

policies to permit modernization cost 

trackers primarily for the purpose of 

allowing pipelines to recover capital 

costs incurred to upgrade the older parts 

of their systems (1) to comply with new, 

more stringent regulatory requirements 

and/or (2) take advantage of new 

technologies that reasonably increase 

safety and/or efficiency, such as 

reductions in methane leaks, system 

modifications to allow the use of 

advanced in-line inspection tools in lieu 

of hydrostatic testing, or replacement of 

old compressors with newer more 

energy efficient ones.55

64. By contrast, the Commission 

believes that pipelines should continue 

to recover in their base rates ordinary 

capital costs of the type they routinely 

incur as part of their regular system 

maintenance. The Commission 

recognizes the potential difficulty in 

distinguishing between ordinary capital 

costs for system maintenance, which 

should be excluded from a 

modernization cost tracker, and capital 

costs for system upgrades, which are 

reasonably included in such a tracker. 

In order to address this concern, the 

parties may, as INGAA and others 

suggest,56 consider including in a 

modernization cost tracker a mechanism 

for ensuring that a representative level 

of ordinary system maintenance capital 

costs are excluded from the tracker. For 

example, the Columbia Gas settlement 

includes a provision that Columbia Gas 

will continue to make capital 

expenditures of $100 million annually 

for system maintenance and those 

expenditures will not be included in its 

modernization cost tracker. If Columbia 

Gas spends less than that amount in any 

year, the difference must be used to 

reduce the plant investment included in 

the modernization cost tracker.57 In 

developing such a mechanism, the 

parties could use the pipeline’s recent 

history of capital expenditures incurred 

for routine maintenance as a basis for 

determining a representative level of 

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58See, e.g., INGAA Comments at 5–7, AGA 

Comments at 7. 

59See, e.g., 18 CFR part 201 (2014); see also, 

Jurisdictional Public Utilities and Licensees Natural 

Gas Companies, and Oil Pipeline Companies, order 

on accounting for pipeline assessment costs, 111 

FERC ¶ 61,501 (2005). 

60See, e.g., INGAA Comments at 11–12, 

Columbia Gas Comments at 14–16, Berkshire 

Hathaway Comments at 11, Wisconsin Electric and 

Wisconsin Gas Comments at 9, 

61The Columbia Gas settlement includes such a 

provision at section 7.5 of that settlement. 

62See, e.g., DOE Comments at 3, Wisconsin 

Electric and Wisconsin Gas Comments at 8, 

Michigan PSC Comments at 15. 

63See, e.g., PGC Comments at 17–18, NGSA 

Comments at 18–19, KCC Comments at 12. 

64United States Department of Transportation 

Call to Action to Improve the Safety of the Nation’s 

Energy Pipeline System (Apr. 2011), available at 

http://www.phmsa.dot.gov/staticfiles/PHMSA/

DownloadableFiles/110404%20

Action%20Plan%20Executive%20Version%20_

2.pdf. 

ordinary system maintenance capital 

costs to be excluded from the 

modernization cost tracker. 

65. Some commenters have suggested 

that the Commission should permit 

certain non-capital expenses to be 

included in a modernization cost 

tracker, if they are non-routine and 

required by regulation or a voluntary 

program adopted by a pipeline as a best 

practice.58 Commenters cite as examples 

the costs of in-line inspections by 

running smart tools through various 

pipeline segments or programs to detect 

and repair leaks on parts of the system 

most prone to leaks. To the extent such 

testing uncovers the need to incur onetime capital costs that satisfy the 

eligibility standards described above, 

such capital costs could be included in 

the modernization cost tracker. 

However, the Commission is reluctant 

to permit non-capital testing costs of the 

type described by the commenters to be 

recovered through a modernization cost 

tracker. The cost of service reflected in 

a pipeline’s existing base rates 

presumably includes a projection of the 

pipeline’s recurring costs of routine 

testing as part of the pipeline’s O&M 

costs. The testing described by the 

commenters would appear to be a best 

practice for pipeline maintenance that 

the Commission would expect pipelines 

to conduct on an ongoing basis. As such 

it would appear difficult to distinguish 

any particular type of testing from the 

testing whose costs are already included 

in the O&M costs reflected in the 

pipeline’s base rates. Therefore, while 

the Commission will not impose a 

blanket prohibition on the inclusion of 

such non-capital costs in a 

modernization cost tracker, particularly 

where supported by the pipeline’s 

shippers, any proposal to include such 

non-capital costs in the tracker would 

need to demonstrate that such noncapital costs are special non-recurring 

costs not reflected in the O&M costs 

included in the pipeline’s base rates and 

are directly related to the modernization 

projects whose costs are included in the 

modernization cost tracker. 

Furthermore, when determining 

whether a cost is a capital or non-capital 

cost, a pipeline’s determination must be 

consistent with the Commission’s 

accounting regulations and precedent.59

66. Some commenters also suggest 

that the Commission should allow 

eligible costs to include a portion of the 

capital costs incurred in a pipeline 

expansion project, if the project not only 

expands the pipeline’s system but also 

modifies or replaces existing facilities to 

comply with safety or environmental 

regulations or make other improvements 

necessary for the safe and efficient 

operation of the pipeline.60 The 

Commission recognizes that some 

expansion projects may include 

modifications to a pipeline’s existing 

system that would be eligible for 

recovery in a modernization cost tracker 

if not done in conjunction with an 

expansion. In such circumstances, the 

Commission will consider reasonable 

proposals for a method of cost allocation 

between the expansion project and the 

modifications eligible for inclusion in 

such a tracker.61

67. Some commenters state that the 

costs of modifications to compressors 

for the purpose of waste heat recovery 

should be eligible for recovery under a 

modernization surcharge subject to 

conditions,62 while others oppose the 

inclusion of such costs because they 

assert that investments in modifications 

of compressors for purpose of waste 

heat recovery are discretionary and 

within control of the pipeline and 

should thus be subject to the normal 

rate review process.63 According to the 

DOE, expanded use of waste heat 

recovery by natural gas compressors 

could be beneficial to overall system 

efficiency, and while there is a general 

lack of good information on the scale of 

heat losses from many sectors of the 

economy, research published in 2008 

and 2009 found substantial 

opportunities for additional waste heat 

recovery investment at natural gas 

compressor stations. Accordingly, the 

Commission will consider proposals for 

recovery of such costs in a 

modernization cost tracker proposal, 

subject to the standards of this Policy 

Statement. 

68. The Commission rejects the 

proposals of some commenters that 

eligible costs be limited to those costs 

which the pipeline demonstrates are 

specifically tied to laws that have 

already been enacted or regulations that 

are currently effective. The Commission 

sees no reason for pipelines to wait to 

make needed improvements to their 

systems until a regulation is adopted 

requiring them to do so. In fact, the 

Department of Transportation has 

encouraged pipeline operators to 

undertake voluntary initiatives to 

improve pipeline safety.64 Permitting 

pipelines to recover in a modernization 

cost tracker the costs of voluntary 

initiatives to improve safety, as well as 

minimize methane emissions, will help 

encourage such initiatives and thereby 

benefit the public. Accordingly, the 

Commission finds that all prudent onetime capital costs that satisfy the 

eligibility requirements may be 

included in a cost modernization 

tracker, regardless of whether PHMSA, 

EPA or some other government agency 

has adopted a regulation requiring the 

incurrence of the cost. 

69. In the Proposed Policy Statement, 

the Commission proposed to require a 

pipeline proposing a modernization cost 

tracker to identify each capital 

investment to be recovered by the 

surcharge, the facilities to be upgraded 

or installed by those projects, and an 

upper limit on the capital costs related 

to each project to be included in the 

surcharge. INGAA requests that the 

Commission permit pipelines either to 

propose a list of eligible projects or a list 

of categories of future projects that 

would be considered eligible for 

recovery. Other commenters also 

contend that, even if the pipeline 

includes an upfront list of specific 

projects to be included in the 

modernization cost tracker, the 

Commission should permit subsequent 

modifications, additions, or subtractions 

to the listed projects. They state that this 

is necessary so that the tracking 

mechanism can adapt to changing 

circumstances including newly adopted 

regulations. 

70. The Commission expects that, 

before the pipeline makes a tariff filing 

with the Commission proposing a 

modernization cost tracking mechanism, 

it will conduct a comprehensive review 

of its existing system to determine what 

capital investments it believes are 

needed to ensure the safe and efficient 

operation of its system, based on the 

information available to it at the time of 

the review. Such a review should be 

comparable to the comprehensive 

review conducted by Columbia Gas 

before it submitted its Settlement. The 

Commission continues to find that the 

pipeline must include in its filing a 

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65See section 7.2 of the Columbia Gas Settlement 

setting forth such a mechanism. 66 18 CFR 284.10(c)(2) (2014). 

description of the facilities which its 

review of its system has identified as 

needing upgrading and/or replacement, 

together an upper limit on the capital 

costs projected to be spent and a 

schedule for completing the projects. 

This detailed information will allow for 

a more transparent and upfront 

determination of the project costs that 

are eligible for recovery through the 

tracker so as to avoid later disputes on 

which facilities qualify, than any 

description of general categories of 

eligible costs could. This requirement 

will also help ensure that normal capital 

or other expenditures to maintain the 

pipeline’s system in the ordinary course 

of business are not eligible for recovery 

through a surcharge mechanism. 

Consistent with this requirement, the 

filing should also include the 

accounting controls and procedures that 

the pipeline will use to ensure that only 

identified eligible costs are included in 

the tracker. 

71. At the same time, however, the 

Commission recognizes the need for 

flexibility to make changes in the 

projects whose costs will be included in 

the tracker, after the modernization cost 

tracking mechanism is adopted. For 

example, the pipeline may discover 

unanticipated problems with certain 

facilities during the course of its 

modernization activities or may 

discover more effective solutions to 

existing problems. Also, changes in its 

shippers’ utilization of its system may 

cause certain projects to become more 

critical to the safe and efficient 

operation of the pipeline than originally 

anticipated. Therefore, the Commission 

will be open to considering proposals to 

include in a modernization cost tracker 

a mechanism pursuant to which the 

parties could later modify the list of 

eligible projects, or the schedule for 

those projects, or the cost limits, based 

on changing priorities and other 

reasons.65 The Commission also 

recognizes that pipelines may wish to 

begin modernizing their systems before 

PHMSA, EPA, and other Federal or state 

agencies complete their various ongoing 

regulatory initiatives. Therefore, the 

Commission will be open to considering 

proposals to add new projects to a 

tracking mechanism which may be 

required by new regulations adopted 

after the initial approval of the tracking 

mechanism or for other reasons. 

3. Avoidance of Cost Shifting 

72. The Proposed Policy Statement 

contemplated that a pipeline must 

design any proposed surcharge in a 

manner that will protect the pipeline’s 

captive customers from costs shifts if 

the pipeline loses shippers or must offer 

increased discounts to retain business. 

The Commission suggested that one 

method of accomplishing this would be 

to establish a billing determinant floor 

requiring the pipeline to design the 

surcharge based on the greater of its 

actual billing determinants or the floor. 

a. Comments 

73. Virtually all commenters favored 

the avoidance of cost shifts to the 

pipeline’s captive customers that may 

result from the implementation of a cost 

modernization surcharge. AGA, for 

example, supports the need to ensure 

that existing shippers are protected from 

substantial cost shifts, and comments 

that pipelines should be required, in 

consultation with their shippers, to 

develop appropriate measures to protect 

customers from cost shifts. 

74. Those opposed to the Proposed 

Policy Statement, however, claim that 

the very implementation of cost 

modernization tracker necessarily shifts 

costs. MDG, for example, states that 

trackers shift costs to captive customers 

due to discounting and lost business 

without taking into account offsetting 

cost reductions, and thus even the best 

implementation of the Proposed Policy 

Statement would raise rates to captive 

customers unfairly. MDG claims that a 

billing floor will not alleviate the 

inherent cost shift in a policy that 

allows the recovery of one set of costs 

absent a review of all the pipeline’s 

costs and revenues. MDG suggests that 

to the extent substantial pipeline capital 

costs are recovered through a tracker 

there should be a reduction in that 

pipeline’s return on equity to reflect the 

pipeline’s reduced risk. The NYPSC 

similarly claims that while requiring a 

billing determinant floor for a surcharge 

does allow some risk to remain with the 

pipeline, a tracker mechanism still 

reduces a pipeline’s risk and transfers it 

to shippers. 

75. While NGSA, APGA, and IPAA 

oppose the modernization surcharge 

tracker, if surcharges are allowed they 

all support the requirement that 

pipelines must design the surcharge in 

a manner that will protect the pipeline’s 

shippers from significant cost shifts. 

IPAA, NGSA, and KCC contend that at 

a minimum, any modernization 

surcharge tracker must provide for a 

minimum level of billing determinants 

to design the surcharge as in Columbia 

Gas. NGSA adds that any surcharge 

should apply to all throughput in the 

facilities and under the rate schedules 

impacted by the surcharge-related costs, 

so that an agreed upon floor on the 

billing determinants should be greater 

than the firm billing determinants (so as 

to include interruptible throughput, for 

example). AF&PA agrees that 

interruptible shippers should share the 

costs incurred through trackers to the 

extent that they are related to safety and 

environmental compliance, as these 

costs are not related only to firm service. 

IECA states costs recovered through a 

tracker should be limited to no more 

than 5 percent of the costs recovered 

through the pipeline’s tariff. 

76. AF&PA submits that if the 

Commission implements the Proposed 

Policy Statement, the policy should 

spread the costs as widely as possible 

because environmental and safety costs 

are incurred for all shippers. AF&PA 

cautions, however, that a shipper that 

has released certain capacity should not 

bear any new costs related to that 

capacity and recovered through the 

tracker. 

77. NGSA argues that if shippers are 

already paying for eligible costs in 

negotiated contracts, or existing 

negotiated contracts prohibit recovery of 

these costs, they should not be subject 

to the modernization surcharge. 

b. Determination 

78. The third standard for approval of 

a cost modernization tracker adopted by 

the Policy Statement is that the pipeline 

must design any proposed surcharge in 

a manner that will protect the pipeline’s 

captive customers from cost shifts if the 

pipeline loses shippers or must offer 

increased discounts to retain business 

beyond those reflected in their base 

rates. 

79. As we stated in the Proposed 

Policy Statement, our regulations 

require that a pipeline’s rates recover its 

costs based on projected units of 

service,66 thereby putting the pipeline at 

risk for any cost under-recovery 

between rate cases, incentivizing the 

pipeline to minimize costs and 

maximize service. Recovery of costs 

approved for inclusion in a tracker, 

however, would be guaranteed, thereby 

reducing the pipeline’s incentives. 

Moreover, a tracker mechanism can shift 

costs to the pipeline’s captive 

customers. If a pipeline recovering costs 

through a tracker or surcharge loses 

shippers or must offer increased 

discounts to retain business, a tracker 

mechanism may shift the amounts 

previously paid by those shippers 

directly and automatically to the 

pipeline’s remaining shippers. This 

direct cost shifting is one of the reasons 

the Commission has generally 

disfavored trackers, namely that the cost 

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67For example, in order to recover costs 

associated with discounted rates the pipeline may 

have offered to certain shippers, the pipeline must 

demonstrate that the discount was required to meet 

competition. Policy for Selective Discounting by 

Natural Gas Pipelines, 113 FERC ¶ 61,173 (2005). In 

the case of a tracker, no such showing is required 

by the pipeline to recover the covered costs from 

its remaining customers. 

68The Commission notes that section 154.109(c) 

of the Commission’s regulations (18 CFR 154.109 

(2014)), requires that the pipeline’s tariff contain a 

statement of the order in which the pipeline 

discounts its rates and charges. Therefore, pipelines 

with modernization cost surcharges will have to 

revise their statements of the order in which they 

discount rates to include the modernization cost 

surcharge. Treating that surcharge as the last rate 

component discounted would minimize the need 

for truing up any under-recoveries due to 

discounting. See Natural Gas Pipeline Co. of 

America, 70 FERC ¶ 61,317 (1995). 

69See, e.g., Sea Robin Pipeline Co., LLC, Opinion 

No. 516–A, 143 FERC ¶ 61,129, at PP 85–213 

(2013). 

shifting described would occur without 

consideration of any offsetting items 

that would generally be considered in a 

section 4 rate proceeding, and which the 

pipeline would normally need to justify 

to recover.67

80. Thus, as a prerequisite to the 

Commission allowing such a tracker, the 

Commission will require that the 

pipeline design the surcharge in a 

manner that will protect its shippers 

from cost shifts and impose on the 

pipeline some risk of under-recovery. 

As we noted in the Proposed Policy 

Statement, one method to accomplish 

this would be that adopted by Columbia 

Gas, namely that the pipeline agree to a 

billing determinant floor such that the 

pipeline must design the surcharge on 

the greater of its actual billing 

determinants or the established floor, 

and impute the revenue it would 

achieve by charging the maximum rate 

for those determinants. While the 

Commission found this to be a just and 

reasonable approach to preventing cost 

shifts in Columbia Gas, we remain open 

under the Final Policy to considering 

alternative methods of protecting the 

pipeline’s existing customers from cost 

shifts if the pipeline loses customers or 

has to offer increased discounts of its 

rates to retain business during the 

period the modernization cost tracker is 

in effect. 

81. The Commission believes that 

issues concerning how a modernization 

cost surcharge should be allocated 

among a pipeline’s services and what 

billing determinants should be used to 

design the surcharge are best addressed 

on a case-by-case basis when each 

pipeline files to establish a 

modernization cost tracking mechanism. 

However, as a general matter, the 

Commission believes that it would be 

reasonable for the billing determinants 

used to design the surcharge to reflect 

a discount adjustment comparable to 

any discount adjustment reflected in the 

pipeline’s base rates. Otherwise, a 

pipeline’s modernization cost tracking 

mechanism would be designed in a 

manner that would likely lead to the 

pipeline under-recovering its prudently 

incurred modernization costs. That 

would be contrary to the Commission’s 

goal of encouraging pipelines to 

expedite needed safety and 

environmental upgrades. The 

Commission’s concern about protecting 

the pipeline’s existing customers from 

cost shifts relates to cost shifts that 

would occur if a pipeline were 

permitted to true up any modernization 

cost under-recoveries resulting from the 

loss of customers after its modernization 

cost tracker goes into effect or a need to 

offer increased rate discounts to retain 

business after that date.68

82. Finally, with respect to the issue 

of the pipeline’s ability to impose a 

modernization cost surcharge on 

discounted or negotiated rate shippers, 

that is a contractual issue between the 

pipeline and its discounted or 

negotiated rate shippers. If a particular 

shipper’s discount or negotiated rate 

agreement with the pipeline permits the 

pipeline to add the surcharge to the 

agreed-upon discounted or negotiated 

rate, the pipeline will be permitted to do 

so.69 Otherwise, the pipeline may not 

impose the surcharge on a discounted or 

negotiated rate shipper. 

4. Periodic Review of the Surcharge 

83. In the Proposed Policy Statement, 

the Commission proposed that pipelines 

be required to include in a 

modernization cost recovery mechanism 

some method to allow a periodic review 

of whether the surcharge and the 

pipeline’s base rates remain just and 

reasonable. As an example of such a 

method, the Commission cited the 

Columbia Gas settlement, in which the 

pipeline agreed to make the surcharge a 

temporary part of its rates (the surcharge 

expires automatically after five years), 

and included a requirement that the 

pipeline make a new NGA section 4 

filing if it wants to continue the 

surcharge. However, the Commission 

stated it was open to other methods. 

a. Comments 

84. Virtually all commenters, 

including AGA, INGAA, NGSA, APGA, 

PGC, IPAA, Southern, KCC, and TVA 

support the proposed standard requiring 

a pipeline proposing a modernization 

cost tracker to include a method to 

allow a periodic rate review of the 

surcharge. While participants generally 

agreed such a condition was necessary, 

the recommended method and 

frequency of review differed. 

85. Numerous commenters advocate 

requiring a pipeline with a cost 

modernization tracker to periodically 

file a full NGA section 4 rate case. 

NGSA for example, commented that a 

pipeline should have to file a rate case 

with its application for a tracker and 

every five years thereafter. IECA and 

Cities agree that a minimum 5-year rate 

case filing obligation is warranted. KCC 

and PGC espouse refresher requirements 

of 3 to 5 years, with a condition the 

pipeline not file to change rates for at 

least 3 years after implementation of a 

tracker. IPAA also supports the 

requirement for a full rate case refresher, 

and MDG suggests a rate case filing as 

a condition of extending any tracker 

beyond its initial term. Calpine 

commented that any surcharge have a 

minimum 3-year initial term that is 

subject to extension and renegotiation. 

Several commenters also advocated 

annual filings for pipelines to justify the 

projects for which costs were collected 

and to true-up such costs. 

86. Opponents of the Proposed Policy 

Statement commented that a periodic 

review methodology was critical, 

though still not sufficient to justify the 

use of trackers. They strongly advocate 

a requirement that the review 

methodology involve a full blown NGA 

section 4 rate case. APGA would add 

the requirement that, if during the 

period that a surcharge mechanism is in 

effect, an NGA section 5 complaint is 

initiated against the pipeline, then the 

pipeline must agree to make refunds 

retroactive to the date of the complaint 

to the extent its rates are determined to 

be unjust and unreasonable. The NYPSC 

and TVA comment that the periodic 

review should ensure that the surcharge 

does not produce earnings above 

authorized rates of return. 

b. Determination 

87. In this Policy Statement, the 

Commission adopts a policy of requiring 

the pipeline to include some method for 

a periodic review of whether the 

surcharge and the pipeline’s base rates 

remain just and reasonable. Potential 

methods for satisfying this standard may 

include making the surcharge temporary 

and/or requiring the pipeline to file an 

NGA section 4 rate case to the extent it 

wants to extend the surcharge beyond 

the initial temporary term. Because we 

intend the Policy Statement to be 

flexible enough to meet the particular 

circumstances of each pipeline’s system, 

we will not require that a pipeline 

seeking approval of a cost 

modernization tracker propose to file a 

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70Columbia Gas, 142 FERC ¶ 61,062 at P 9. 

71See, e.g., Sea Robin Pipeline Co., LLC, Opinion 

No. 516, 137 FERC ¶ 61,201, at PP 16–65 (2011), 

reh’g den, Opinion No. 516–A, 143 FERC ¶ 61,129 

at PP 17–80. 

full NGA section 4 rate case with some 

specified regularity and remain open to 

other reasonable means of 

accomplishing this goal. 

88. Similar to the review of the 

pipeline’s existing base rates at the 

beginning of the tracker proposal 

analysis, during the periodic review the 

pipeline will have to provide sufficient 

information to satisfy the Commission 

that both its base rates and the surcharge 

amount remain just and reasonable if 

the surcharge is to continue. If shippers 

raise any issues of material fact with 

respect to the continued justness and 

reasonableness of the pipeline’s base 

rates or the surcharge, the Commission 

will establish appropriate procedures to 

enable resolution of those issues based 

upon substantial evidence on the 

record. 

89. If a modernization cost tracking 

mechanism is terminated before the 

pipeline has fully recovered the costs 

included in that mechanism, the 

pipeline may reasonably propose in a 

subsequent general section 4 rate case to 

include the unrecovered costs in its base 

rates. For example, if eligible costs have 

been treated as rate base items in the 

modernization cost tracker, the 

undepreciated portion of those costs as 

of the time of the NGA section 4 rate 

filing could be included in the rate base 

used to calculate the pipeline’s 

proposed base rates in the same manner 

as any other investment made between 

rate cases, unless the pipeline’s 

modernization cost tracker mechanism 

includes some other provision 

concerning the treatment of unrecovered 

costs upon termination of the 

mechanism. 

5. Shipper Support 

90. The fifth condition proposed for a 

cost recovery surcharge was that the 

pipeline must work collaboratively with 

shippers to seek shipper support for any 

such proposal. 

a. Comments 

91. The vast majority of commenters 

support this condition but differ on the 

degree of shipper support the pipeline 

must have. On one end, INGAA suggests 

that the Commission could approve a 

proposed surcharge mechanism that it 

deems just and reasonable even if it 

lacks shipper support at the outset. 

NGSA and APGA, on the other hand, 

comment that pipeline should have the 

support of shippers representing 90 

percent of the firm billing determinants. 

AGA comments that while unanimity 

should not be required, any approved 

modernization cost recovery tracking 

mechanism should be established 

through a robust, ongoing, collaborative 

process between the pipeline and its 

shippers that has widespread shipper 

support. 

92. IECA is more pessimistic and 

contends that it is completely 

unrealistic for any pipeline to 

collaborate and work with its shippers. 

The KCC supports collaboration among 

the pipeline and its shippers but 

comments that the condition should be 

expanded to include support of 

‘‘interested parties,’’ including state 

public utility commissions. 

b. Determination 

93. The fifth standard for an 

acceptable cost modernization surcharge 

adopted in this Policy Statement is that 

the pipeline must work collaboratively 

with shippers and other interested 

parties to seek support for any such 

proposal. As part of this collaborative 

process, pipelines should meet with 

their customers and other interested 

parties to seek resolution of as many 

issues as possible before submitting a 

modernization cost recovery proposal to 

the Commission. At such meetings, 

pipelines should share with their 

customers the results of their review of 

their systems concerning what system 

upgrades and improvements are 

necessary for the safe and efficient 

operations of their systems. Pipelines 

should also be responsive to customer 

requests for specific cost and revenue 

information necessary to determine 

whether their existing base rates are just 

and reasonable. Additionally, pipelines 

should provide customers and 

interested parties an opportunity to 

comment on draft tariff language setting 

forth their proposed modernization cost 

recovery mechanism. 

94. As we noted in the Proposed 

Policy Statement, however, while we 

strongly encourage the pipeline to 

attempt to garner support for its 

proposal from all interested parties, we 

do not intend to require unanimity of 

shipper support before approving a cost 

modernization surcharge. Nor will we 

establish any minimum level of shipper 

support required before a pipeline’s 

proposal can be accepted. This Policy 

Statement will provide pipelines and 

their customers wide latitude to reach 

agreements incorporating remedies for a 

variety of system safety, reliability 

and/or efficiency issues. Despite 

comments that mutual collaboration is 

futile or impractical, the Columbia Gas 

settlement is evidence that a systemwide collaboration between a pipeline 

and its customers can work to produce 

a reasonable modernization cost 

recovery mechanism that benefits all 

sides. The Commission continues to 

favor settlements, and notes that the 

negotiation of a modernization cost 

tracker to address critical infrastructure 

issues is exactly the type of issue that 

lends itself to pipeline customer 

negotiation and agreement because it 

will benefit all involved. However, if a 

pipeline satisfies its burden under NGA 

section 4 to show that its proposed 

modernization cost recovery mechanism 

is just and reasonable, including 

showing that its proposal is consistent 

with the guidance herein, the 

Commission may accept that proposal, 

even if some parties oppose it. 

C. Additional Questions on Which the 

Commission Sought Comments 

95. The Commission also sought 

comments on several additional issues, 

including: Accelerated amortization, 

reservation charge crediting, and any 

other factors or issues commenters 

believed should be included in the 

Policy Statement as a prerequisite for 

approving a modernization cost 

recovery mechanism. 

1. Accelerated Amortization 

96. In the Proposed Policy Statement, 

the Commission pointed out that the 

capital costs included in the 

modernization cost tracking mechanism 

approved in Columbia Gas are treated as 

rate base items, and thus Columbia Gas 

is allowed to recover a return on equity 

on the portion of those costs financed by 

equity. Consistent with the rate base 

treatment of those costs, they are 

depreciated over the life of Columbia 

Gas’ system.70 The Commission 

requested comments on whether 

pipelines should also be allowed to use 

accelerated amortization methodologies, 

akin to that approved by the 

Commission for hurricane repair cost 

trackers,71 to recover the costs of any 

facilities installed pursuant to a 

modernization cost recovery 

mechanism. The Commission stated that 

under such a methodology the costs 

would not be included in the pipeline’s 

rate base, and the pipeline would not 

recover any return on equity with 

respect to the costs financed by equity. 

Instead, the pipeline would only be 

allowed to recover the interest necessary 

to compensate it for the time value of 

money. 

a. Comments 

97. The Commission received a range 

of comments on this issue. Wisconsin 

Electric and Wisconsin Gas support 

using an accelerated amortization of 

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72Wisconsin Electric and Wisconsin Gas 

Comments at 14. 

73 IECA Comments at 21. 

74NGSA Comments at 12–13, 24. 

75NGSA Comments at 24. 

76Laclede Comments at 20. See also PGC 

Comments at 19–20 (PGC opposes accelerated 

amortization for modernization upgrades, 

contending that it will only give pipelines 

additional latitude to increase their profits.). 

77CAPP Comments at 9. See also KCC Comments 

at 24, 27 (KCC does not oppose extension of the use 

of accelerated amortization methodologies for 

recovering approved costs under a modernization 

cost tracker if the costs subject to accelerated 

amortization are not included in rate base, and a 

pipeline is not able to recover any return on equity 

for costs financed by equity). 

78Calpine Comments at 30. 

79Columbia Gas Comments at 34. See also APGA 

comments at 22 (to the extent the Commission 

permits pipelines to implement the modernization 

cost tracker, customers of the requesting pipeline 

should make the decision as to whether rate base 

treatment or some sort of reasonable amortization 

period works best for them under the 

circumstances). 

80 INGAA Comments at 19–20. 

81See Opinion No. 516–A, 143 FERC ¶ 61,129 at 

PP 35–56. 

82See, e.g., Tennessee Gas Pipeline Co., Opinion 

No. 406, 76 FERC ¶ 61,022 (1996), order on reh’g, 

Opinion No. 406–A, 80 FERC ¶ 61,070 (1997), as 

clarified by, Rockies Express Pipeline LLC, 116 

FERC ¶ 61,272, at P 63 (2006) (Rockies Express I), 

and North Baja Pipeline, LLC, 109 FERC ¶ 61,159 

(2004), reh’g denied, 111 FERC ¶ 61,101 (2005), 

aff’d, North Baja Pipeline, LLC v. FERC, 483 F.3d 

819 (D.C. Cir. 2007) (North Baja v. FERC). 

83The Commission has defined force majeure 

outages as events that are both unexpected and 

uncontrollable. Opinion No. 406, 76 FERC at 

61,088. North Baja v. FERC, 483 F.3d at 823. 

84The Commission has also stated that pipelines 

may use some other method that achieves equitable 

sharing reasonably equivalent to the two specified 

methods. 

85See, e.g., Northern Natural Gas Co., 137 FERC 

¶ 61,202, at P 36 (2011), order on reh’g and 

compliance, 141 FERC ¶ 61,221, at PP 45–50 (2012) 

(Northern). The Commission has stated this could 

be accomplished by a reduction in the billing 

determinants used to design a pipeline’s rates or by 

including the cost of the full reservation charge 

credits as an item in the pipeline’s cost of service. 

Gulf South Pipeline Co., LP, 144 FERC ¶ 61,215, at 

P 34 (2013) (Gulf South). 

86See, e.g., TransColorado Gas Transmission Co. 

LLC, 144 FERC ¶ 61,175 (2013) (TransColorado); 

Gulf South, 144 FERC ¶ 61,215. 

87Proposed Policy Statement at P 34. 

costs of facilities installed pursuant to 

eligible modernization projects.72 IECA 

also supports accelerated amortization 

for safety and environmental 

compliance costs but argues for the 

amortization to be set at a rate that 

would require the pipeline to come back 

for a rate case in five years.73 NGSA 

argues that accelerated amortization, 

with carrying costs, over a specified 

term, is the most appropriate rate design 

structure for recovering all approved 

costs under a tracker, with the length of 

any amortization period determined on 

a case-by-case basis, dependent upon 

the level of costs.74 NGSA argues that it 

is not appropriate for the pipeline to 

earn a rate of return and taxes on these 

types of tracked expenditures because 

these would be incremental costs, with 

guaranteed cost recovery (i.e., no risk on 

the pipeline) under the tracker.75

98. NCUC opposes the proposal on 

the grounds that the accelerated 

amortization allowed for storm damage 

repair costs would be inappropriate for 

modernization costs, because 

accelerated amortization would raise 

intergenerational cross—subsidization 

issues and could magnify rate shock. 

Similarly, Laclede opposes recovery of 

capital costs through accelerated 

amortization methodologies, and argues 

that any costs not recovered through 

tracker rates should be rolled into rate 

base.76

99. CAPP recommends that the 

consultative process by which 

individual pipelines formulate their 

respective proposals include the 

opportunity for stakeholders to evaluate 

the preferred accelerated amortization 

methodology.77 Calpine also does not 

object to allowing pipelines and their 

shippers to consider accelerated 

amortization methodologies as part of 

their modernization surcharge 

negotiations.78 Columbia Gas states the 

Commission should consider permitting 

pipelines to use accelerated 

amortization methodologies but allow 

pipelines and their customers the 

discretion to negotiate the appropriate 

method of amortization, which should 

include the possibility of earning a 

reasonable return.79 INGAA requests 

that the Commission provide each 

pipeline that proposes a modernization 

cost tracker the ability to propose either 

accelerated amortization methodologies 

or depreciation over the life of the 

facilities, because each pipeline faces 

different competitive circumstances.80

b. Determination 

100. The Commission agrees with the 

commenters who suggested that 

pipelines should be allowed to negotiate 

with their customers concerning 

whether modernization costs should be 

treated as (1) a rate base item to be 

depreciated over the life of the pipeline 

with the pipeline recovering a return on 

equity on the portion of those costs 

financed by equity together with 

associated income taxes or (2) a non-rate 

base item to be amortized over a shorter 

period with the pipeline recovering the 

interest necessary to compensate it for 

the time value of money but no return 

on equity or associated income taxes. 

These two cost recovery options have 

varying advantages and disadvantages. 

For example, rate base treatment is 

likely to lead to a lower per unit daily 

or monthly surcharge, because it 

spreads the pipeline’s recovery of the 

costs over a substantially longer period. 

Such lower per unit rates should help 

mitigate any rate shock. However, over 

the long run, rate base treatment is 

likely to be more expensive for shippers, 

because the surcharge will be in effect 

for a longer period and the return on the 

equity portion of the rate base will be 

greater than the interest rate on the costs 

being amortized.81 In light of these 

varying advantages and disadvantages, 

the Commission will permit pipelines 

and their shippers to negotiate which 

recovery method is appropriate for each 

pipeline, based upon the circumstances 

of its system. 

2. Reservation Charge Crediting 

101. The Commission requires 

pipelines to provide full reservation 

charge credits for outages of primary 

firm service caused by non-force 

majeure events, where the outage 

occurred due to circumstances within 

the pipeline’s control, including 

planned or scheduled maintenance.82

The Commission also requires the 

pipeline to provide partial reservation 

charge credits during force majeure 

outages, so as to share the risk of an 

event for which neither party is 

responsible.83 Partial credits may be 

provided pursuant to: (1) The No-Profit 

method under which the pipeline gives 

credits equal to its return on equity and 

income taxes starting on Day 1; or (2) 

the Safe Harbor method under which 

the pipeline provides full credits after a 

short grace period when no credit is due 

(i.e., 10 days or less).84 The Commission 

permits pipelines to reflect the recurring 

cost of providing reservation charge 

credits during non-force majeure events 

in their rates.85

102. In the Proposed Policy 

Statement, the Commission stated that 

the pipelines’ performance of facility 

upgrades and replacements required by 

recent legislative and other actions to 

address pipeline efficiency, safety, and 

environmental concerns may result in 

disruption of primary firm service. The 

Commission also cited recent 

Commission orders clarifying that onetime outages of primary firm service, if 

necessary to comply with government 

orders, may be treated as force majeure 

outages, for which only partial 

reservation charge credits are 

required.86 The Commission requested 

comments on whether it should make 

any adjustments to its current 

reservation charge crediting policy in 

light of the Proposed Policy 

Statement.87

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88 INGAA Comments at 15–18. 

89 INGAA Comments at 18. 

90 INGAA Comments at 18–19. KM Comments at 

8 (agreeing with INGAA that reservation charge 

crediting not apply for interruptions of firm service 

when pipelines are performing either voluntary or 

mandatory maintenance to improve safe and 

efficient operations.). 

91Columbia Gas Comments at 36. Boardwalk 

suggests the Commission should modify its current 

reservation charge crediting policy to allow for a 

more equitable balancing of the risks between 

pipelines and their customers for service 

disruptions caused by testing, repair or replacement 

activities taken to comply with the new PHMSA 

rules. (Boardwalk Comments at 24.). 

92Michigan PSC Comments at 20. IECA and 

American Midstream do not support changes to the 

existing reservation charge credits. IECA Comments 

at 21; American Midstream Comments at 8. 

93NCUC Comments at 34. 

94PGC Comments at 20, APGA Comments at 22, 

IPAA Comments at 3, 26–27, NGSA Comments at 

13, 25. 

95Tennessee Gas Pipeline Co., L.L.C., 139 FERC 

¶ 61,050, at PP 80–82 (2012). Texas Eastern 

Transmission, LP, 149 FERC ¶ 61,143, at PP 121– 

123 (2014). 

96TransColorado, 144 FERC ¶ 61,175 at PP 35– 

43. 

97 Gulf South, 144 FERC ¶ 61,215 at PP 31–34. 98Texas Eastern, 149 FERC ¶ 61,143 at P 123. 

a. Comments 

103. The pipeline industry generally 

advocated that the Commission modify 

its policy requiring pipelines to pay 

reservation charge credits starting on 

Day One for disruption of primary firm 

service required by either voluntary or 

mandatory system improvements 

eligible for surcharge cost recovery. 

They contend that the pipeline 

modernization programs under 

consideration are not representative of 

pipeline mismanagement and are 

significantly different than conducting 

routine maintenance,88 and thus the 

Commission should not impose any 

reservation charge crediting requirement 

or at least treat any resulting outages as 

force majeure events requiring only 

partial reservation charge credits. 

INGAA also argued that the Commission 

should explicitly provide that costs to 

comply with other statutory and 

regulatory requirements, such as 

hydrostatic testing to confirm maximum 

pressure levels, are not subject to 

reservation charge credits.89 INGAA 

also argues, however, that to the extent 

that a pipeline must pay reservation 

charge credits for a service outage 

required by a system improvement 

eligible for surcharge cost recovery, it 

should be permitted to recover such 

crediting costs through the 

modernization cost recovery tracker.90

Columbia Gas urges the Commission to 

extend its policy of granting partial 

reservation charge credits to outages due 

to construction of eligible 

modernization projects.91

104. Shippers and various state 

commissions encourage the Commission 

to require pipelines with modernization 

cost trackers to provide full reservation 

charge credits during periods that the 

pipeline must interrupt primary firm 

service to replace or install eligible 

facilities under the provisions of the 

modernization tracker.92 NCUC states 

that full reservation charge credits will 

provide pipelines a stronger incentive to 

schedule any necessary construction or 

modification of facilities required to 

comply with any new regulations in an 

efficient manner.93 Likewise, while 

PGC, APGA, IPAA, and NGSA oppose 

the implementation of modernization 

cost trackers, they request that to the 

extent the Commission chooses to allow 

their implementation, it modify its 

reservation charge crediting policy to 

require pipelines with modernization 

cost trackers to provide full reservation 

charge credits to firm customers during 

any period that the pipeline must 

interrupt primary firm service to replace 

or install eligible facilities.94

b. Determination 

105. The Commission’s current 

reservation charge crediting policies 

require pipelines to provide some level 

of reservation charge credits whenever 

the pipeline is unable to schedule 

reserved primary firm service because of 

a government action. The level of 

credits to be provided turns on whether 

the government action is considered a 

force majeure event.95

106. The Commission has defined 

force majeure outages as events that are 

both ‘‘unexpected and uncontrollable.’’ 

In TransColorado 96 and Gulf South,97

the Commission clarified the basic 

distinction as to whether outages 

resulting from governmental actions are 

force majeure or non-force majeure 

events. The Commission found that 

outages necessitated by compliance 

with government standards concerning 

the regular, periodic maintenance 

activities a pipeline must perform in the 

ordinary course of business to ensure 

the safe operation of the pipeline, 

including PHMSA’s integrity 

management regulations, are non-force 

majeure events requiring full 

reservation credits. Outages resulting 

from one-time, non-recurring 

government requirements, including 

special, one-time testing requirements 

after a pipeline failure, are force 

majeure events requiring only partial 

crediting. 

107. In Gulf South, the Commission 

explained that this distinction is 

reasonable for two reasons. First, the 

pipeline is likely to have greater 

discretion as to when it performs 

regular, periodic maintenance on 

particular pipeline segments than when 

the government orders special one-time 

testing, for example after a pipeline 

failure. Thus, regular, periodic 

maintenance required by government 

regulation may be considered 

reasonably within the control of the 

pipeline and expected, in contrast to 

one-time, non-recurring government 

requirements, which the pipeline may 

have to implement within a short 

timeframe. Second, the recurring costs 

of regular, periodic maintenance 

performed in the ordinary course of 

business may be included in a 

pipeline’s rates in a general NGA 

section 4 rate case, whereas one-time, 

non-recurring costs are generally not 

eligible for inclusion in a pipeline’s 

rates in a section 4 rate case. The 

Commission explained that because the 

full crediting policy is premised on the 

ability of the pipeline to recover the 

costs associated with that policy 

through its rates, it follows that 

eligibility for such cost recovery is an 

important factor in distinguishing 

between the types of government testing 

and maintenance requirements that 

trigger the full crediting requirement 

and those that only trigger a partial 

crediting requirement.98 Thus, under 

TransColorado and Gulf South, outages 

resulting from one-time non-recurring 

government requirements that (1) are 

not part of the pipeline’s routine, 

periodic maintenance programs and (2) 

provide the pipeline little discretion as 

to when the outage occurs, qualify as 

force majeure events. 

108. Against this background, we 

recognize that facility upgrade and 

replacement projects whose costs would 

be eligible for recovery under a 

modernization tracker do not lend 

themselves easily to the governmental 

action force majeure/non-force majeure 

distinction described above. On the one 

hand, such projects do not constitute 

routine periodic maintenance of the 

type for which the Commission requires 

full reservation charge credits; in fact, 

the Commission has held that such 

routine maintenance costs are not 

eligible for inclusion in a modernization 

cost tracker. Moreover, because each 

project constitutes a one-time, nonrecurring event, any reservation charge 

credits provided by the pipeline would 

not be a recurring cost eligible for 

recovery in a pipeline’s NGA section 4 

general rate case. On the other hand, 

pipelines will likely have considerable 

discretion as to the timing of when they 

perform each project, with projects 

likely to be scheduled and performed 

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Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Rules and Regulations 22383 

99Because the Policy Statement would address 

issues pertaining to the Commission’s review of 

natural gas rate filings, the statement is 

categorically excluded from the requirements of the 

National Environmental Policy Act (NEPA), thus 

neither an environmental assessment nor an 

environmental impact statement is required. See 18 

CFR 380.4(a)(25) (2014). 

100EPMCG Comments at 43, APGA Comments at 

22–23, and MDG Comments at P 2, NYPSC 

Comments at P 1–3. 

101 IPAA Comments at 3, 26, NGSA Comments at 

13. 

102APGA Comments at 11–12. 

103Wisconsin Electric and Wisconsin Gas 

Comments at 15. 

104Columbia Gas Comments at 37. 

over a multi-year period. Therefore, the 

projects are not unexpected in the sense 

ordinarily required for treatment as a 

force majeure event. 

109. In these circumstances, the 

Commission believes the issue of 

reservation charge credits for projects 

included in a modernization cost tracker 

is best addressed, at least initially, on a 

case-by-case basis in each proceeding in 

which a pipeline proposes such a 

tracker. In its filing to establish a 

tracker, the pipeline should state the 

extent to which it anticipates that any 

particular project will disrupt primary 

firm service, explain why it expects it 

will not be able to continue to provide 

firm service, and describe what 

arrangements the pipeline intends to 

make to mitigate the disruption or 

provide alternative methods of 

providing service. To the extent a 

pipeline incurs costs to make temporary 

alternative arrangements to provide 

service while a project is under 

construction, such as through temporary 

line bypasses or natural gas tankers, 

such costs may be considered for 

inclusion in the tracker. However, if a 

modernization project unavoidably 

causes an outage of primary firm 

service, the Commission believes that 

pipelines should provide some relief 

from the payment of reservation charge 

to shippers directly affected by that 

outage. To the extent the pipeline 

provides such shippers full reservation 

charge credits, the Commission would 

consider proposals for the pipeline to 

recover such costs through the tracker, 

consistent with the Commission’s policy 

that pipelines may recover the costs of 

full reservation charge credits in rates. 

Alternatively, the Commission would 

consider partial reservation charge 

crediting methods tailored to the 

circumstances of the projects included 

in the tracker. 

3. Other Issues 

110. The Commission sought 

comments on any other issues or factors 

interested parties though the 

Commission should consider for 

inclusion in the Policy Statement as a 

prerequisite for approving a 

modernization cost recovery 

mechanism.99 The Commission received 

comments on a variety of proposals on 

additional items to include in the Policy 

Statement, including return on equity, 

and formula rates. 

a. Return on Equity 

111. EPMCG, MDG, APGA and the 

NYPSC argue that if the portion of 

capital investment subject to a tracker is 

significant to the pipeline’s rate base, 

then the Commission should adjust 

downward the pipeline’s allowed rate of 

return on equity to reflect the decreased 

risk that the pipeline has to recover its 

cost of investment given the existence of 

a tracker.100 IPAA and NGSA also argue 

that the plant facilities to be constructed 

pursuant to the proposed modernization 

surcharge should not be eligible to earn 

a rate of return and taxes, because these 

facilities are not included in a pipeline’s 

rate base through an NGA general 

section 4 rate filing.101

112. The Commission will not 

mandate an automatic ROE reduction 

for pipelines that have a modernization 

surcharge or tracker. We do agree, 

however, that a modernization tracker 

or surcharge could be a factor that is 

considered as to the appropriate level of 

a pipeline’s ROE. We agree that 

considerations of return on equity 

reduction may be considered during 

shipper and pipeline negotiations. 

b. Formula Rates 

113. APGA argues that, if the 

Commission wants a tracker mechanism 

that ensures just and reasonable rates, it 

must apply to the pipeline’s entire cost 

of service, similar to the transmission 

formula rates that the Commission has 

approved for electric utilities under the 

Federal Power Act.102 APGA states that 

the advantage of such formula rates, 

most of which allow projected capital 

additions to be included in a given 

year’s formula rate and are trued up for 

actuals, are that the electric utilities are 

assured timely recovery of capital 

outlays and customers are assured that 

rates are premised on full and updated 

cost-of-service data, including 

throughput, so that the over-recovery 

problem associated with tracker 

mechanisms applicable to only a 

portion of the pipeline’s cost of service 

is obviated. 

114. The Commission will not adopt 

APGA’s proposal. In the instant 

proceeding the Commission is adopting 

a policy permitting pipelines to recover 

a limited category of one-time costs 

through a tracker mechanism, namely 

the costs of making needed upgrades for 

the safe and efficient operation of the 

pipeline. For the reasons discussed 

above, the Commission can permit this 

limited exception to our general policy 

of requiring pipelines to design their 

rates based on projected units of service, 

without undercutting the benefits of that 

policy of providing pipeline an 

incentive to minimize costs and 

maximize the service they provide. 

APGA’s proposal to require pipelines to 

track all changes in their cost of service, 

on the other hand, would eliminate both 

those incentives. 

c. Transparency 

115. Wisconsin Electric and 

Wisconsin Gas propose that the 

Commission include additional 

transparency measures to require 

pipelines to identify and track all costs 

associated with each project or project 

phase and file a quarterly summary 

report detailing the progress and 

completion of the projects included in 

the tracker. In addition, Wisconsin 

Electric and Wisconsin Gas state 

existing service customers should have 

the right to validate the premise and the 

projected results of a pipeline’s 

modernization and to audit costs. 

Finally, Wisconsin Electric and 

Wisconsin Gas submit that the pipeline 

should be required to quantify current 

costs that are reduced or avoided as a 

result of the and net those costs out of 

the total eligible cost.103

116. The Commission will not adopt 

a policy requiring pipelines to submit 

reports on its projects based on any 

particular schedule, or specify the 

content of those reports in this Policy 

Statement. These are issues that should 

be addressed in the individual 

proceedings where each pipeline 

proposes a modernization cost tracker. 

Likewise, the validation and 

quantification of costs and projects may 

be negotiated. Nevertheless, a pipeline’s 

compliance with its tariff to implement 

a modernization cost tracker may be 

subject to scrutiny through a 

Commission audit. 

d. Proposed Certificate Policy 

Modifications 

117. Columbia Gas proposes that the 

Commission undertake a review and 

implement a ‘‘fast track’’ processing for 

NGA 7(c) projects that involve 

replacement of older vintage pipelines, 

like bare steel replacement, or involve 

an important public safety aspect.104

Columbia Gas also comments that not 

all pipeline facilities are appropriate for 

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22384 Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Rules and Regulations 

105Columbia Gas Comments at 21. 

106Boardwalk Comments at 18–19. 

107 44 U.S.C. 3507(d) (2012). 

108 5 CFR part 1320. 

109The information collection requirements in 

this Policy Statement would normally be included 

in FERC–545 (OMB Control No. 1902–0154) which 

covers rate change filings made by natural gas 

pipelines, including tariff changes. However, 

another item is pending OMB review under FERC– 

545, and only one item per OMB Control Number 

can be pending review at OMB at a time. Therefor 

in order to submit this timely to OMB, we are using 

a temporary collection number (FERC–545A) to 

cover the requirements implemented in PL15–1– 

000. 

110An estimated 165 natural gas pipelines (Part 

284 program) may be affected by this Policy 

Statement. Of the 165 pipelines, Commission staff 

estimates that 3 pipelines may choose to submit an 

application for a modernization cost tracker per 

year. 

111The most recent hourly wage figures are 

published by the Bureau of Labor Statistics, U.S. 

Department of Labor, National Occupational 

Employment and Wage Estimates, United States, 

Occupation Profiles, May 2014 (available 4/1/2015) 

at http://www.bls.gov/oes/home.htm, and the 

benefits are calculated using BLS information, at 

http://www.bls.gov/news.release/ecec.nr0.htm. 

The average hourly cost (salary plus benefits) to 

prepare the modernization cost tracker filing is 

$65.59. It is the average of the following hourly 

costs (salary plus benefits): Manager ($77.93, NAICS 

11–0000), Computer and mathematical ($58.17, 

NAICS 15–0000), Legal ($129.68, NAICS 23–0000), 

Office and administrative support ($39.12, NAICS 

43–0000), Accountant and auditor ($51.04, NAICS 

13–2011), Information and record clerk ($37.45, 

NAICS 43–4199), Engineer ($66.74, NAICS 17– 

2199), Transportation, Storage, and Distribution 

Manager ($64.55, NAICS 11–3071). 

The average hourly cost (salary plus benefits) to 

perform the periodic review is $67.04. It is the 

average of the following hourly costs (salary plus 

benefits): Manager ($77.93, NAICS 11–0000), Legal 

($129.68, NAICS 23–0000), Office and 

administrative support ($39.12, NAICS 43–0000), 

Accountant and auditor ($51.04, NAICS 13–2011), 

Information and record clerk ($37.45, NAICS 43– 

4199). 

112The pipeline’s modernization cost tracker 

filing is expected to include information to: 

• Demonstrate that its current rates are just and 

reasonable and that proposal includes the types of 

benefits that the Commission found maintained the 

pipeline’s incentives for innovation and efficiency; 

• identify each capital investment to be 

recovered by the surcharge, the facilities to be 

upgraded or installed by those projects, and an 

upper limit on the capital costs related to each 

project to be included in the surcharge, and 

schedule for completing the projects; 

• establish accounting controls and procedures 

that it will utilize to ensure that only identified 

eligible costs are included in the tracker; 

• include method for periodic review of whether 

the surcharge and the pipeline’s base rates remain 

just and reasonable; and 

• state the extent to which any particular project 

will disrupt primary firm service, explain why it 

expects it will not be able to continue to provide 

firm service, and describe what arrangements the 

pipeline intends to make to mitigate the disruption 

or provide alternative methods of providing service. 

113Based on the Columbia case, we estimate that 

a review may be required every 5 years, triggering 

the first pipeline reviews to be done in Year 6 (for 

the pipelines which applied and received approval 

in Year 1). 

replacement or upgrade because some 

facilities may have reached or are close 

to the end of their useful life. Therefore, 

Columbia states a full replacement of 

certain facilities may be cost 

prohibitive, even with a tracker, because 

shippers on the facilities are unwilling 

or unable to support the costs of the 

replacement.105 Similarly, Boardwalk 

states abandonment of facilities that will 

no longer be economic to operate 

because of substantial costs necessary to 

modify the facilities in order to achieve 

compliance with new requirements may 

be the best option and in the public 

interest.106

118. Columbia Gas’ and Boardwalk’s 

proposals are beyond the scope of this 

Policy Statement, and thus we will not 

address them here. 

III. Information Collection Statement 

119. The collection of information 

discussed in the Policy Statement is 

being submitted to the Office of 

Management and Budget (OMB) for 

review under section 3507(d) of the 

Paperwork Reduction Act of 1995 107

and OMB’s implementing 

regulations.108 OMB must approve 

information collection requirements 

imposed by agency rules. 

120. The Commission solicits 

comments from the public on the 

Commission’s need for this information, 

whether the information will have 

practical utility, the accuracy of the 

burden estimates, recommendations to 

enhance the quality, utility, and clarity 

of the information to be collected, and 

any suggested methods for minimizing 

respondents’ burden, including the use 

of automated information techniques. 

The burden estimates are for 

implementing the information 

collection requirements of this Policy 

Statement. The Commission asks that 

any revised burden estimates submitted 

by commenters include the details and 

assumptions used to generate the 

estimates. 

121. The collection of information 

related to this Policy Statement falls 

under FERC–545A (Gas Pipeline Rates: 

Rate Change (Non-Formal), 

Modernization Tracker).109 The 

following estimate of reporting burden 

is related only to this Policy Statement. 

122. Public Reporting Burden: The 

estimated annual burden and cost 

follow. 

FERC–545A, AS IMPLEMENTED IN POLICY STATEMENT IN PL15–1–000 

Number of 

respondents 110

Number of 

responses per 

respondent 

Average 

burden hours 

per response 

Total annual 

burden hours 

Total annual 

cost ($) 111

(rounded) 

(1) (2) (3) (1) × (2) × (3) 

Provide information to shippers for any surcharge proposal, and prepare modernization cost tracker filing 112 .............................. 3 1 750 2,250 $147, 578 

Perform periodic review and provide information to show that both base rates and the 

surcharge amount remain just and reasonable ............................................................... 3 113 0.60 350 630 42,235 

123. Title: FERC–545A (Gas Pipeline 

Rates: Rate Change (Non-Formal), 

Modernization Tracker). 

124. Action: Proposed information 

collection. 

125. OMB Control No.: To be 

determined. 

126. Respondents: Business or other 

for profit enterprise (Natural Gas 

Pipelines). 

127. Frequency of Responses: 

Ongoing. 

128. Necessity of Information: The 

Commission is establishing a policy to 

allow interstate natural gas pipelines to 

seek to recover certain capital 

expenditures made to modernize system 

infrastructure through a surcharge 

mechanism, subject to certain 

conditions. The information that the 

pipeline should share with its shippers 

and submit to the Commission is 

intended to ensure that the resulting 

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Federal Register / Vol. 80, No. 77 / Wednesday, April 22, 2015 / Rules and Regulations 22385 

rates are just and reasonable and protect 

natural gas consumers from excessive 

costs 

129. Internal Review: The 

Commission has reviewed the guidance 

in the Policy Statement and has 

determined that the information is 

necessary. These requirements conform 

to the Commission’s plan for efficient 

information collection, communication, 

and management within the natural gas 

pipeline industry. The Commission has 

assured itself, by means of its internal 

review, that there is specific, objective 

support for the burden estimates 

associated with the information 

requirements. 

130. Interested persons may obtain 

information on the reporting 

requirements by contacting the 

following: Federal Energy Regulatory 

Commission, 888 First Street NE., 

Washington, DC 20426 [Attention: Ellen 

Brown, Office of the Executive Director, 

email: DataClearance@ferc.gov, phone: 

(202) 502–8663, fax: (202) 273–0873]. 

131. Comments concerning the 

collection of information and the 

associated burden estimate should be 

sent the Commission by June 22, 2015. 

IV. Document Availability 

132. In addition to publishing the full 

text of this document in the Federal 

Register, the Commission provides all 

interested persons an opportunity to 

view and/or print the contents of this 

document via the Internet through 

FERC’s Home Page (http://

www.ferc.gov) and in FERC’s Public 

Reference Room during normal business 

hours (8:30 a.m. to 5:00 p.m. Eastern 

time) at 888 First Street NE., Room 2A, 

Washington, DC 20426. 

133. From FERC’s Home Page on the 

Internet, this information is available on 

eLibrary. The full text of this document 

is available on eLibrary in PDF and 

Microsoft Word format for viewing, 

printing, and/or downloading. To access 

this document in eLibrary, type the 

docket number excluding the last three 

digits of this document in the docket 

number field. 

134. User assistance is available for 

eLibrary and the FERC’s Web site during 

normal business hours from FERC 

Online Support at (202) 502–6652 (toll 

free at 1–866–208–3676) or email at 

ferconlinesupport@ferc.gov, or the 

Public Reference Room at (202) 502– 

8371, TTY (202) 502–8659. Email the 

Public Reference Room at 

public.referenceroom@ferc.gov. 

V. Effective Date and Congressional 

Notification 

135. This Policy Statement will 

become effective October 1, 2015. 

The Commission orders: 

The Commission adopts the Policy 

Statement and supporting analysis 

contained in the body of this order. 

By the Commission. 

Issued: April 16, 2015. 

Nathaniel J. Davis, Sr., 

Deputy Secretary. 

Note: The following appendix will not 

appear in the Code of Federal Regulations. 

Appendix—List of Commenters 

American Forest & Paper Association 

American Gas Association 

American Midstream, LLC 

American Public Gas Association 

Beatrice Gahman 

Berkshire Hathaway Energy Company 

Boardwalk Pipeline Partners, LP 

Calpine Corporation 

Canadian Association of Petroleum 

Producers 

CenterPoint Energy Resources Corp. 

Clean Air Task Force 

Columbia Gas Transmission, LLC 

Deep Gulf Energy LP 

El Paso Municipal Customer Group 

Elizabeth Balogh 

Energy XXI Ltd. 

Environmental Defense Fund, Conservation 

Law Foundation and the Sustainable FERC 

Project 

Ernest J. Moniz, Secretary. United States 

Department of Energy 

Fairfax Hutter 

Helis Oil and Gas Company, L.L.C. 

Independent Oil & Gas Association of West 

Virginia, Inc. 

Independent Petroleum Association of 

America 

Indicated Shippers 

Industrial Energy Consumers of America 

Interstate Natural Gas Association of America 

Kansas Corporation Commission 

Karen Feridum 

Kinder Morgan Interstate Pipelines 

Laura Pritchard 

Michigan Public Service Commission 

Missouri Public Service Commission 

Municipal Defense Group 

Natural Gas Supply Association 

New York Public Service Commission 

Norman W. Torkelson 

North Carolina Utilities Commission 

Patriots Energy Group 

Pipeline Safety Coalition 

Process Gas Consumers Group and the 

American Forest & Paper Association 

Secretary of Energy 

Southern Company Services 

Southern Star Central Gas Pipeline, Inc. 

Tenneesse Valley Authority 

Teresa Ecker 

The Laclede Group, Inc. 

U.S. Department of Energy 

U.S. Department of Transportation, Pipeline 

and Hazardous Materials Safety 

Administration 

WBI Energy Transmission, Inc. 

Western Tennessee Municipal Group 

Wisconsin Electric Power Company and 

Wisconsin Gas LLC 

Xcel Energy Companies 

[FR Doc. 2015–09226 Filed 4–21–15; 8:45 am] 

BILLING CODE 6717–01–P 

DEPARTMENT OF ENERGY 

Federal Energy Regulatory 

Commission 

18 CFR Part 40 

[Docket No. RM14–13–000; Order No. 808] 

Communications Reliability Standards 

AGENCY: Federal Energy Regulatory 

Commission. 

ACTION: Final rule. 

SUMMARY: Pursuant to the Federal Power 

Act, the Commission approves two 

revised Reliability Standards, COM– 

001–2 (Communications) and COM– 

002–4 (Operating Personnel 

Communications Protocols), developed 

by the North American Electric 

Reliability Corporation (NERC), which 

the Commission has certified as the 

Electric Reliability Organization 

responsible for developing and 

enforcing mandatory Reliability 

Standards. The two revised Reliability 

Standards will enhance reliability by, 

among other things, requiring adoption 

of predefined communication protocols, 

annual assessment of those protocols 

and operating personnel’s adherence 

thereto, training on the protocols, and 

use of three-part communications. In 

addition, the Commission directs NERC 

to develop a modification to Reliability 

Standard COM–001–2 that addresses 

internal communications capabilities 

that could involve the issuance or 

receipt of Operating Instructions or 

other communications that could have 

an impact on reliability. 

DATES: This rule will become effective 

June 22, 2015. 

FOR FURTHER INFORMATION CONTACT: 

Vincent Le (Technical Information), 

Office of Electric Reliability, Federal 

Energy Regulatory Commission, 888 

First Street NE., Washington, DC 20426, 

(202) 502–6204, Vincent.le@ferc.gov. 

Michael Gandolfo (Technical 

Information), Office of Electric 

Reliability, Federal Energy Regulatory 

Commission, 888 First Street NE., 

Washington, DC 20426, (202) 502–6817, 

Michael.gandolfo@ferc.gov. 

Julie Greenisen (Legal Information), 

Office of the General Counsel, Federal 

Energy Regulatory Commission, 888 

First Street NE., Washington, DC 20426, 

(202) 502–6362, julie.greenisen@

ferc.gov. 

SUPPLEMENTARY INFORMATION: 

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