Last month we informed you that the Federal Energy Regulatory Commission (“FERC”) had received initial comments on its proposed policy to allow interstate pipelines to recover the costs of modernizing their facilities through a cost tracker. On February 26th, FERC received reply comments.

While the initial comments elicited many responses from both supporters and protestors of the proposed policy, the reply comments primarily reflected the views of those who opposed it. These comments focused on three major issues: (1) the uncertain nature of the Environmental Protection Agency (“EPA”) and Pipeline and Hazardous Materials Safety Administration (“PHMSA”) regulations; (2) the need for a rate case under Section 4 of the Natural Gas Act, 15 U.S.C. § 717c; and (3) whether FERC should adopt a broad or narrow definition of the “Eligible Facilities” costs that the pipeline may recover.

EPA and PHMSA Regulations

Both the Indicated Shippers and the Process Gas Consumers Group and the American Forest and Paper Association (“Joint Reply Commenters”) argued that none of the supporting comments offered any evidence as to why the pipelines need an incentive to comply with the EPA and PHMSA regulations. See Reply Comments of the Indicated Shippers; see also Reply Comments of The Process Gas Consumers Group and American Forest and Paper Association. The Indicated Shippers argued that pipelines routinely face compliance costs and EPA and PHMSA compliance costs are no different. The Indicated Shippers then pointed out that no party has disputed that the EPA and PHMSA have not implemented any regulations and that there is considerable uncertainty about the effects of these potential regulations. The Natural Gas Supply Association (“NGSA”) requested that FERC refrain from issuing any order in this proceeding until the EPA and PHMSA actually issue any regulations. See Reply Comments of the Natural Gas Supply Association and Request for Technical Conference.

Section 4 Rate Cases

Reiterating points made in their initial comments, the Indicated Shippers, NGSA, and the Joint Reply Commenters argued that the tracker would contravene the need for traditional Section 4 rate cases. The Indicated Shippers argued that without a rate case, pipeline rates would gradually inflate as pipelines included new costs in the tracker without prior FERC review. The NGSA argued that pipelines have exaggerated the risk of pancaked rates, because pipelines “generally try to avoid filing Section 4 rate cases” anyway.

The Definition of Eligible Facilities

The major disagreement between the pipelines and the shippers has been over the definition of “Eligible Facilities.” FERC proposed to limit costs recovered through the tracker 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.”

The Indicated Shippers stated that such a broad definition would eliminate the need for a Section 4 proceeding. Instead of filing a Section 4 rate case, pipelines would just include any voluntarily incurred upgrade costs into the tracker. The NGSA argued that eligible costs should be one-time, mandatory costs incurred to comply with PHMSA and EPA regulations, while the Joint Reply Commenters added that Eligible Facilities should not include the costs of undefined projects. The Joint Reply Commenters recommended that the Commission revisit the definition of Eligible Facilities at a technical conference after the EPA and PHMSA have issued their regulations.

In contrast, Berkshire Hathaway, one of the few reply commenters that supported the proposal, argued that the disagreement over the definition of Eligible Facilities is the exact reason why FERC should adopt a broad definition of Eligible Facilities. See Reply Comments of Berkshire Hathaway Energy Company on Notice of Proposed Policy Statement. Berkshire Hathaway reasoned that a broad definition would permit pipelines and shippers to collaborate on what costs the pipeline should recover.

These reply comments present difficult questions for the Commission. Does it move forward with the proposed policy now, or await EPA and PHMSA’s release of their regulations? When FERC does move forward, will it adopt a broad or narrow definition of Eligible Facilities?