Document ID: FERC-2014-1496-0001
Agency: ferc
Document Type: Notice
Title: Cost Recovery Mechanisms for Modernization of Natural Gas Facilities
Posted Date: 2014-11-26T05:00Z

[Federal Register Volume 79, Number 228 (Wednesday, November 26, 2014)]
[Notices]
[Pages 70517-70522]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28015]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. PL15-1-000]

Cost Recovery Mechanisms for Modernization of Natural Gas 
Facilities

AGENCY: Federal Energy Regulatory Commission, Energy.

ACTION: Proposed policy statement.

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SUMMARY: In this proposed Policy Statement, the Commission seeks to 
provide greater certainty concerning 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 proposed Policy Statement explains the standards the 
Commission would require interstate natural gas pipelines to satisfy in 
order to establish simplified mechanisms, such as trackers or 
surcharges, to recover 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: Initial Comments are due December 26, 2014, and Reply Comments 
are due January 15, 2015.

ADDRESSES: Comments, identified by docket number, may be filed in the 
following ways:
     Electronic Filing through http://www.ferc.gov. Documents 
created electronically using word processing software should be filed 
in native applications or print-to-PDF format and not in a scanned 
format.
     Mail/Hand Delivery: Those unable to file electronically 
may mail or hand-deliver comments to: Federal Energy Regulatory 
Commission, Secretary of the Commission, 888 First Street NE., 
Washington, DC 20426.
    Instructions: For detailed instructions on submitting comments and 
additional information on the rulemaking process, see the Comment 
Procedures Section of this document.

FOR FURTHER INFORMATION CONTACT: 
Monique Watson (Technical Information), Office of Energy Markets 
Regulation, Federal Energy Regulatory Commission, 888 First Street NE., 
Washington, DC 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., Washington, 
DC 20426, Telephone: (202) 502-6351, David.Maranville@ferc.gov

SUPPLEMENTARY INFORMATION:

Proposed Policy Statement

    1. In this proposed Policy Statement, the Commission seeks to 
provide greater certainty concerning 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 proposed Policy Statement explains the standards the 
Commission would require interstate natural gas pipelines to satisfy in 
order to establish simplified mechanisms, such as trackers or 
surcharges, to recover 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. The Commission requests comments on 
this Proposed Policy Statement. Initial Comments are due 30 days after 
publication of this order in the Federal Register, with reply comments 
due 50 days after publication in the Federal Register.

I. Background

    2. 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.\1\ 
That act includes requirements for the Department of Transportation to 
take various actions to reduce the risk of future pipeline failures. 
Among other things, the Pipeline Safety Act requires the Department of 
Transportation 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 (MAOP), and (4) 
conduct surveys to measure progress in plans for safe management and 
replacement of cast iron pipelines.
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    \1\ Pipeline Safety, Regulatory Certainty, and Job Creation Act 
of 2011, 49 U.S.C. 60101 (2012) (Pipeline Safety Act).
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    3. 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.\2\ 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.\3\ 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

[[Page 70518]]

shut-off valves. In addition, PHMSA held a public leak detection and 
valve workshop on March 28, 2012.
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    \2\ Written 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), http://transportation.house.gov/uploadedfiles/2014-05-20-quarterman.pdf 
(Quarterman Testimony) at 3.
    \3\ Pipeline Safety: Safety of Gas Transmission Pipelines, (RIN: 
2137-AE72), 76 FR 53086 (August 25, 2011).
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    4. 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.\4\ 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.'' \5\
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    \4\ An 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.
    \5\ Quarterman Testimony at 10.
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    5. 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, 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.\6\ 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.
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    \6\ 78 FR 56268 (Sept. 12, 2013).
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    6. 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, EPA 
issued a series of technical white papers, for which they have 
requested input from peer reviewers and the public, to determine how to 
best pursue reductions of emissions from, inter alia, natural gas 
compressors.\7\ The EPA Compressor White Paper discusses the most 
prevalent types of compressors (reciprocating and centrifugal) and 
compressor emission data. As relevant to this proposed 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.'' \8\ 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.'' \9\ If the EPA's white papers 
result in the agency imposing mitigation requirements on natural gas 
pipelines, such controls could be significant.\10\
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    \7\ See http://www.epa.gov/airquality/oilandgas/whitepapers.html.
    \8\ EPA Compressor White Paper at 29.
    \9\ Id. at 29-42.
    \10\ For 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).
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    7. We also note that in 2009, the EPA published a rule for 
mandatory reporting of greenhouse gas emissions (GHG) from sources 
that, in general, emit 25,000 metric tons or more of carbon dioxide 
equivalent per year in the United States.\11\ 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.\12\ The final 
rule, which is effective January 1, 2015, imposes new requirements for 
the natural gas industry to monitor methane emissions and report them 
annually. Lastly, we note that 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 blowdowns of natural gas transmission pipelines between 
compressor stations. The EPA also proposes confidentiality 
determinations for new data elements contained in the proposed 
amendments.\13\
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    \11\ Mandatory Reporting of Greenhouse Gases Rule, 74 FR 56260 
(Oct. 30, 2009). See also 40 CFR Pt. 98 (2014).
    \12\ 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).
    \13\ See 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).
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    8. 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 cost 
expenditures to enhance the safety and reliability of their 
systems.\14\ 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.
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    \14\ On 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.
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    9. Against this background, the Commission is proposing the instant 
Policy Statement in an effort to ensure that existing Commission 
ratemaking policies do not unnecessarily inhibit interstate natural gas 
pipelines' ability to expedite needed or required upgrades and 
improvements. The proposed Policy Statement would allow interstate 
natural gas pipelines to recover certain capital expenditures made to 
modernize pipeline 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. Further, under the proposed Policy 
Statement, the Commission may consider capital costs to replace 
compressor facilities or make other improvements in response to 
increased federal or state environmental regulations as eligible for 
inclusion in a modernization cost recovery mechanism, to the extent a 
pipeline shows such costs to be beyond ordinary capital investments in 
a pipeline's existing system for maintenance purposes.
    10. The Commission generally requires that interstate natural gas

[[Page 70519]]

pipelines design their open access natural gas transportation rates to 
recover their costs based on projected units of service.\15\ 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'' \16\ and (2) ``provide the maximum amount of service to 
the public.'' \17\
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    \15\ 18 CFR 284.10(c)(2) (2014).
    \16\ Regulation of Natural Gas Pipelines After Partial Wellhead 
Decontrol, Order No. 436, FERC Stats. & Regs., Regulations Preambles 
1982-1985 ] 30,665, at 31,534 (1985).
    \17\ Id. at 31,537.
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    11. 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,\18\ except in the context of an uncontested 
settlement.\19\ 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.
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    \18\ See 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).
    \19\ See 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 the 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).
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    12. More recently, however, the Commission approved a contested 
settlement which included a tracker to recover substantial pipeline 
modernization costs that were shown to be necessary to ensure the 
safety and reliability of Columbia Gas Transmission LLC's (Columbia 
Gas) pipeline system.\20\ The Columbia Gas settlement outlined 
significant operational and safety issues resulting from the age of its 
system and the corresponding inability to monitor and maintain the 
system using efficient modern techniques.\21\ 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.
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    \20\ Columbia Gas Transmission, LLC, 142 FERC ] 61,062 (2013) 
(Columbia Gas).
    \21\ Columbia 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 dated, 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.
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    13. 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 five year 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.
    14. 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.
    15. Second, the settlement specifically delineated and limited the 
amount of capital costs and expenses 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 
for normal system maintenance annually 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.
    16. 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 underrecoveries. 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.
    17. 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.

II. Discussion

    18. 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, appear likely to lead to the need for interstate natural gas 
pipelines to make significant capital investments to modernize their 
systems. 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.
    19. As noted, the Pipeline Safety Act and EPA's proposed revisions 
to the Petroleum and Natural Gas Systems source category address 
serious concerns that directly affect the public interest. Although 
historically the Commission has generally disfavored pipelines' use of 
trackers to recover costs, the high probability that the initiatives 
discussed will lead to imposition of significant compliance costs on 
pipelines justifies the consideration of such mechanisms, subject to 
specified conditions, as a way for pipelines to recover those costs in 
a timely manner, while also maintaining safe and efficient operation of 
pipeline systems and providing the maximum

[[Page 70520]]

amount of service at a just and reasonable cost consistent with safe 
operations. Establishing a framework for pipelines to accelerate the 
recovery of one-time capital costs necessary to make system 
improvements to comply with new safety and environmental requirements 
should maintain pipelines' incentives for innovation and efficiency and 
prompt them to make such necessary system modifications in an 
expeditious manner, in advancement of the public interest.
    20. Accordingly, the Commission proposes to establish a policy 
outlining the analytical framework for evaluating proposed cost 
recovery mechanisms to recoup infrastructure modernization costs 
necessary for the efficient and safe operation of the pipeline's system 
and compliance with new regulations. The Commission proposes to base 
the policy on the guiding principles established in Columbia Gas. 
Pursuant to the proposed policy, 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 costs 
shifts if the pipeline loses shippers or must offer increased discounts 
to retain business; (4) Periodic Review of the Surcharge--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. We discuss these five proposed standards, and potential issues 
for comment, below.

1. Review of Existing Rates

    22. Pursuant to this standard, the Commission proposes to require a 
pipeline proposing a tracker mechanism to 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. While in Columbia Gas the 
pipeline did this through a negotiated settlement with its shippers in 
which it agreed to reduce its base rates and establish a revenue 
sharing mechanism for base rate revenues above a certain level, the 
Commission will consider methods other than a pre-negotiated base rate 
settlement by which the pipeline could establish that its current base 
rates are just and reasonable. For example, concurrently with the 
pipeline's filing to establish the tracker, the pipeline could make a 
new NGA general section 4 rate filing, or the pipeline could file 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. The Commission seeks input on these or other acceptable 
approaches for pipelines to demonstrate that existing base rates are 
just and reasonable.

2. Eligible Facilities

    23. The Commission intends that any tracking mechanism authorized 
under this policy be used by pipelines to recover only capital costs 
incurred to modify their existing systems to address the safety and 
other concerns discussed above. Accordingly, the Commission proposes 
that the capital costs eligible for recovery through the tracking 
mechanism authorized under the proposed policy be limited to one-time 
capital costs to modify the pipeline's existing system to comply with 
safety and environmental regulations, such as those being considered by 
PHMSA and by the EPA, as well as other capital costs shown to be 
necessary for the safe or efficient operation of the pipeline.
    24. As we have recognized previously, interstate natural gas 
pipelines routinely make capital investments related to system 
maintenance in the ordinary course of business. It will continue to be 
the Commission's policy that such ordinary capital maintenance costs 
should not be included in a tracker mechanism. Permitting normal system 
capital maintenance costs to be recovered through a surcharge mechanism 
would inhibit a pipeline's incentives to minimize costs and maximize 
service because it would guarantee a certain level of cost recovery. 
Thus, the Commission proposes to establish a policy that, in order for 
a pipeline to recover costs through a proposed modernization surcharge 
mechanism, it would need to demonstrate that the costs to be included 
are not normal capital maintenance expenditures but are costs necessary 
to address system safety, efficiency, or other similar concerns, such 
as in Columbia Gas, or to comply with federal or state regulations.
    25. The Commission also proposes to require that, when the pipeline 
files to establish a tracker mechanism, it should specifically identify 
in its proposal the projects eligible for recovery, 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. 
This will 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. These requirements will 
also help ensure that normal capital expenditures to maintain the 
pipeline's system will not be eligible for recovery through a surcharge 
mechanism.\22\ Allowing pipelines to only recover costs incurred to 
address critical system efficiency, safety, and environmental concerns 
and requirements through a tracker will provide the pipeline with an 
inducement to make the necessary modifications on an expedited basis 
without inhibiting the pipeline's incentive to provide the maximum 
level of service. Allowing such recovery will also advance the public's 
interest in the safe, efficient and environmentally sound operation of 
the nation's natural gas pipeline system.
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    \22\ For example, the costs allowed to be recovered through 
Columbia Gas' modernization program are limited to capital costs to 
modify the pipeline's existing system that go beyond its normal 
capital investments to modify its system, and costs of expansions 
are expressly excluded from that surcharge.
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    26. In relation to this standard, the Commission also seeks 
comments on the following questions:
     Should the costs of modifications to compressors for the 
purpose of waste heat recovery be eligible for recovery under a 
modernization surcharge?
     This proposed policy statement would limit the capital 
costs eligible for recovery through the surcharge to costs incurred to 
modify the pipeline's existing system. However, the Commission requests 
comment on 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.

[[Page 70521]]

     Should 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?
     Should non-capital maintenance costs associated with 
environmentally sound operation of a compressor be considered for 
inclusion in the surcharge?
     Under what circumstances should the Commission permit a 
pipeline to include in the tracking mechanism the costs of additional 
projects not identified in the pipeline's original filing to establish 
the tracking mechanism?

3. Avoid Cost Shifts

    27. As noted above, the Commission's general open access interstate 
natural gas transportation rate regulations require that a pipeline's 
costs be recovered based on projected units of service. 18 CFR 
284.10(c)(2) (2014). This requirement results in pipelines being placed 
at risk for any cost underrecovery between rate cases but also allows 
pipelines to retain any over recovery during that period, thereby 
providing pipelines with an incentive to minimize costs and to provide 
the maximum amount of service to the public.
    28. The recovery of certain costs through a tracker mechanism, 
however, reduces those incentives because it guarantees the pipeline 
recovery of those costs. 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 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.\23\
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    \23\ For 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.
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    29. Accordingly, as a prerequisite to the Commission approving a 
modernization cost tracker, and thereby effectively granting an 
exemption from the requirement that a pipeline recover costs based on 
projected units of service, the Commission proposes to establish a 
policy that the pipeline is required to design the surcharge in a 
manner that will protect the pipeline's shippers from significant cost 
shifts. One way to accomplish this goal may be that approved in 
Columbia Gas, where the pipeline sought to provide rate stability and 
safeguard shippers against cost shifts resulting from losses in billing 
determinants by agreeing to a floor on the billing determinants that 
could be used to design the surcharge. The provisions of the Columbia 
Gas tracker require the pipeline to design the surcharge based on the 
greater of actual annual billing determinants or the agreed upon floor, 
and to impute the revenue it would achieve by charging the maximum rate 
for service at the level of the billing determinant floor before 
trueing up any cost under-recoveries. The Commission found that these 
provisions alleviated the historical concern that allowing the recovery 
of capital costs through a surcharge will diminish the pipeline's 
incentive to operate efficiently and maximize service to the public, as 
well as provided protections from cost shifts if the pipeline lost 
customers or had to offer increased discounts to retain business.\24\ 
While the Commission found this to be a just and reasonable way to 
ensure the prevention of cost shifts, we are open to considering other 
methods that may similarly protect a pipeline's customers.
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    \24\ Columbia Gas, 142 FERC ] 61,062 at P 25.
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4. Periodic Review of Surcharge

    30. Under this standard, the Commission proposes to require 
pipelines seeking approval of a modernization surcharge to include some 
method to allow a periodic review of whether the surcharge and the 
pipeline's base rates remain just and reasonable. For example, in 
Columbia Gas, 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. The settlement 
also requires Columbia Gas to file a new NGA general section 4 rate 
case at that time. While the Commission intends to require that 
surcharge proposals must include a mechanism for periodic review, we 
remain open to, and seek comments on, reasonable methods of 
accomplishing this goal aside from that approved in Columbia Gas.

5. Shipper Support

    31. The Commission expects any pipeline seeking approval of a 
pipeline modernization surcharge to work collaboratively with its 
shippers to seek support for the pipeline's proposal.\25\ We note, 
however, that while we strongly encourage the pipeline to attempt to 
garner support for its proposal among all interested parties, the 
Commission may nonetheless approve any proposal the pipeline 
demonstrates to be just and reasonable without one-hundred percent 
shipper agreement. Thus, the Commission does not intend to require 
support from all shippers as a prerequisite to approval of a cost 
recovery surcharge.
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    \25\ As we noted in Columbia Gas, the proposed surcharge had the 
support of a broad spectrum of the pipeline's shippers.
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    32. In addition to the considerations outlined above, the 
Commission also seeks comment on the following related issues:
 Accelerated Amortization
    33. The capital costs included in the Columbia Gas surcharge 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 to be 
depreciated over the life of Columbia Gas' system.\26\ The Commission 
requests 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,\27\ to recover the costs 
of any facilities installed pursuant to a modernization cost recovery 
mechanism. 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. The Commission has approved 
amortization periods for hurricane or storm surcharges ranging from one 
year to four years at the Commission's interest rate for refunds.\28\

[[Page 70522]]

Thus, the Commission seeks comments on whether pipelines should be 
permitted to use accelerated amortization methodologies, such as those 
approved for hurricane trackers, to recover the costs of any facilities 
installed pursuant to the modernization cost recovery mechanism, or 
whether the Commission should require pipelines to depreciate 
facilities subject to a modernization cost tracker over the life of the 
facilities.
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    \26\ Columbia Gas, 142 FERC ] 61,062 at P 9.
    \27\ See, e.g., Sea Robin Pipeline Co., LLC, 144 FERC ] 61,008 
(2013) (Sea Robin).
    \28\ See, e.g., Sea Robin Pipeline Co., 137 FERC ] 61,201, at P 
51 (2011) (approving 4-year recovery period for hurricane surcharge 
and finding surcharge to be just and reasonable); High Island 
Offshore System, L.L.C., 135 FERC ] 61,105, (2011); Stingray 
Pipeline Co., L.L.C., 127 FERC ] 61,308 (2009) (approving tariff 
provisions that allowed up to 36 months to amortize hurricane-
related costs); Discovery Transmission LLC, 122 FERC ] 61,099, at P 
8 (2008) (approving a 12-month recovery period for a hurricane 
surcharge subject to a cap with any uncollected amounts due to the 
cap to be recovered in a subsequent period); Chandeleur Pipe Line 
Co., 117 FERC ] 61,250 (2006) (approving 12-month hurricane 
surcharge recovery period that was subsequently extended to 24 
months).
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 Reservation Charge Credits
    34. The Commission requests comments on whether it should make any 
adjustments to its current reservation charge crediting policy in light 
of the proposed Policy Statement. As noted, given recent legislative 
and other actions to address pipeline efficiency, safety, and 
environmental concerns, it is likely that pipelines will be required to 
meet additional requirements that may include performing facility 
upgrades and replacements. This work, particularly the replacement of 
existing compressors or pipelines, may result in disruption of primary 
firm service. Pursuant to the Commission's existing reservation charge 
crediting policies, such one-time outages, if necessary to comply with 
government orders, may be treated as force majeure outages, for which 
only partial reservation charge credits are required.\29\ Thus, the 
Commission seeks comment on whether it should modify its existing 
reservation crediting policy 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.
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    \29\ See e.g., TransColorado Gas Transmission Co., LLC, 144 FERC 
] 61,175 (2013); Gulf South Pipeline Co., LP, 144 FERC ] 61,215 
(2013).
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 Other Considerations
    35. The Commission welcomes comments on any other issues or factors 
the Commission should consider for inclusion in the Policy Statement as 
a prerequisite for approving a modernization cost recovery 
mechanism.\30\
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    \30\ Because the proposed 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).
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III. Procedure for Comments

    36. The Commission invites interested persons to submit written 
comments on the Commission's proposed policy to establish guidelines 
for pipelines to implement trackers or surcharges to recover 
infrastructure modernization costs as discussed above. Comments are due 
30 days from the date of publication in the Federal Register and reply 
comments are due 50 days from the date of publication in the Federal 
Register. Comments must refer to Docket No. PL15-1-000, and must 
include the commentor's name, the organization it represents, if 
applicable, and its address. To facilitate the Commission's review of 
the comments, commentors are requested to provide an executive summary 
of their position. Additional issues the commentors wish to raise 
should be identified separately. The commentors should double space 
their comments.
    37. The Commission encourages comments to be filed electronically 
via the eFiling link on the Commission's Web site at http://www.ferc.gov. The Commission accepts most standard word processing 
formats. Documents created electronically using word processing 
software should be filed in native applications or print-to-PDF format 
and not in a scanned format. Commenters filing electronically do not 
need to make a paper filing.
    38. Commenters that are not able to file comments electronically 
must send an original of their comments to: Federal Energy Regulatory 
Commission, Secretary of the Commission, 888 First Street NE., 
Washington, DC 20426.
    39. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to serve copies of their comments on other commenters.

IV. Document Availability

    40. 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 the Commission's Home Page (http://www.ferc.gov) and 
in the Commission'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.
    41. From the Commission's Home Page on the Internet, this 
information is available in the Commission's document management 
system, 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) in the docket number field.
    42. User assistance is available for eLibrary and the Commission's 
Web site during normal business hours. For assistance, please contact 
the Commission's Online Support at 1-866-208-3676 (toll free) or 202-
502-6652 (email at FERCOnlineSupport@ferc.gov) or the Public Reference 
Room at 202-502-8371, TTY 202-502-8659 (email at 
public.referenceroom@ferc.gov).

    By the Commission.
Kimberly D. Bose,
Secretary.
[FR Doc. 2014-28015 Filed 11-25-14; 8:45 am]
BILLING CODE 6717-01-P