In November 2014, the Federal Energy Regulatory Commission (“FERC”) proposed a new policy statement that outlines the standards interstate natural gas pipelines would need to satisfy in order to recover the costs to modernize their facilities and infrastructure. Initial comments on the proposed policy were due by January 26, 2015.

As expected, shippers and state commissions overwhelmingly opposed the proposal. Several comments argued that the policy is premature. The proposed policy states that a tracker is necessary to allow pipelines to recover the costs of complying with EPA and PHMSA regulations. However, commenters pointed out that these federal regulations have not been enacted yet. SeeInitial Comments of the Process Gas Consumers Group; see also Initial Comments of the American Public Gas Association. Others argued that even if the EPA and PHMSA regulations were enacted, pipelines should not receive additional incentives simply to comply with federal policy. See Initial Comments of the Process Gas Consumers Group; see also Initial Comments of the American Public Gas Association.

Additionally, shipper groups forcefully warned that the proposed policy would short-circuit the rate filing requirements and significant rate protections underlying Section 4 of the Natural Gas Act. 15 U.S.C. § 717c. With a pre-approved tracker, a pipeline would have the ability to increase rates without filing a Section 4 rate case and thus avoid demonstrating that its proposed rates are just and reasonable. See Comments of American Public Gas Association. These shippers proposed that if FERC nevertheless allows this type of tracker, then pipelines should be required to file the tracker only as part of a Section 4 rate case, thus permitting shippers to have the benefit of formal discovery and close scrutiny of the entire rate proposal, including the tracker. See Initial Comments of the Process Gas Consumers Group. The New York Public Service Commission recommended that if FERC allows the tracker, it should require a concurrent Section 4 rate proceeding or a collaborative review with shippers so that there could be a corresponding reduction in ROE, ensuring that the surcharge does not produce earnings above the authorized rate of return.

Not surprisingly, the pipeline community supported the proposed policy, stating that it would provide them flexible options to recover the costs of upgrades to their systems. See Comments of the Interstate Natural Gas Association of America.Columbia Gas Transmission, LLC, who filed the settlement upon which the modernization policy is based, recommended that FERC expand the proposed policy to allow pipelines to include expansion, replacement, and reliability costs in the tracker. Kinder Morgan Interstate Pipelines recommended that, at a minimum, FERC should allow pipelines to recover costs for voluntary modernization efforts, not just efforts to comply with environmental and safety regulations. Environmental groups also supported the proposal, arguing that the tracker would allow pipelines to recover the costs of modernization projects without the regulatory lag and costs associated with a full Section 4 rate case. See Comments of the Environmental Defense Fund, Conservation Law Foundation and the Sustainable FERC Project.

The extreme polarization between those opposing the policy as eliminating fundamental Section 4 rights of shippers and those supporting and seeking to expand the scope of the policy, could present the Commission with a difficult decision. FERC may decide not to proceed at this time or it may decide to substantially strengthen the proposal to protect shippers against potential pipeline over-recoveries. We will continue to monitor this proceeding closely. Reply comments are due February 26, 2015.