On April 16, 2015, FERC issued a Policy Statement in Cost Recovery Mechanisms for Modernization of Natural Gas Facilities, Docket No. PL15-1-000, 151 FERC ¶ 61,047 (2015). Effective October 1, 2015, the Policy Statement permits interstate natural gas pipelines to seek implementation of surcharges or cost trackers designed to recover the costs of modernizing their facilities in response to Pipeline and Hazardous Materials Safety Administration (PHMSA), U.S. Environmental Protection Agency (EPA), and other government safety and environmental initiatives. The Policy Statement adopts the five criteria, first applied in a Columbia Gas Transmission LLC case that FERC will apply on a case-by-case basis to proposed modernization cost recovery mechanisms:

  1. Review Existing Rates - A pipeline must establish that the base rates to which any surcharge or tracker 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 pipeline’s proposed cost recovery mechanism. Pipelines may satisfy this requirement through: (i) a new Natural Gas Act Section 4 rate case; (ii) a cost and revenue study; or (iii) a collaborative effort with its customers.
  2. Define Eligible Costs - The costs eligible for recovery through the pipeline’s proposed mechanism must be limited to: (i) 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 (ii) other one-time capital costs shown to be necessary for the safe or efficient operation of the pipeline, and could not include routine capital costs.
  3. Avoid Cost Shifts - A pipeline’s proposed cost recovery mechanism must protect captive customers from cost shifts if the pipeline loses shippers or must offer increased discounts to retain business.
  4. Periodic Review - A pipeline must include a method for periodic review of whether its cost recovery mechanism and base rates remain just and reasonable.
  5. Shipper Support - A pipeline must work collaboratively with shippers to seek shipper support for a proposed cost recovery mechanism. FERC declined to establish a minimum level of shipper support needed for approval of a pipeline’s proposal.

Through these Policy Statement standards, FERC seeks to protect ratepayers from recovery mechanisms that would include costs unrelated to system modernization, produce unjust and unreasonable rates, or shift costs to captive customers. At the same time, the Policy Statement would afford pipelines and their shippers significant flexibility in the design and implementation of a modernization cost recovery mechanism.

The Policy Statement acknowledges, as many commenters emphasized, that permitting the implementation of pipeline cost tracker/surcharge mechanisms represents a change in FERC policy. FERC concludes, however, that application of the Policy Statement’s five criteria distinguishes this new policy from prior instances in which FERC has rejected proposed pipeline cost trackers. In addition, because FERC will apply the Policy Statement on a case-by-case basis, interested parties will have a meaningful opportunity to express their views on a proposed cost recovery mechanism. While stopping short of establishing a minimum threshold for shipper support, FERC makes clear that a pipeline must demonstrate significant shipper support to win approval for a proposed modernization cost recovery mechanism.

Finally, FERC declines to include standards in the Policy Statement concerning several matters on which public comment had been sought, preferring instead to leave these issues to negotiation between pipelines and their shippers. Such matters include: (1) whether modernization costs should be depreciated as rate base items or as non-rate base items subject to accelerated amortization; and (2) whether reservation charge credits should be provided to shippers for service interruptions caused by modernization projects.