In a recent Order on remand from the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”),[1] the Federal Energy Regulatory Commission (“Commission”) reversed its earlier decisions and determined that the rolled-in vs. incremental rate policies established in its 1999 Certificate Policy Statement[2] do not justify Transcontinental Gas Pipe Line Corporation’s (“Transco”) Section 4 rate proposal to allocate the costs associated with its purchases of replacement base gas from the Washington Storage Field to BNP Paribas Energy Trading GP (“Paribas”) and South Jersey Resources Group, LLC (“South Jersey”) (collectively, “Replacement Shippers”) through a new incremental storage rate.

The proposed incremental rate sought to recover costs incurred by Transco for purchases of base gas for the Washington Storage Field. Transco’s Historic Shippers supplied base gas to support their storage entitlements at the Washington Storage Field and have a right, pursuant to a 1975 Settlement, to purchase their respective share of the base gas at historic cost from Transco when terminating storage service from the field. During the period 2005-2006, two of Transco’s Historic Shippers permanently released their Washington Storage Field capacity rights to the Replacement Shippers and exercised their right to purchase approximately 3.4 million Dth of base gas at its historic cost. As a result, Transco had to purchase approximately 3.4 million Dth of base gas to support the top gas needs of its shippers.

Transco sought to recover the costs of this purchase with an incremental rate charged to the Replacement Shippers. Initially, the Commission accepted Transco’s proposed incremental rate, rejecting arguments that such rate violated cost allocation principles established in the Policy Statement. The Commission found that its Policy Statement was inapplicable because the case did not involve any construction or expansion requiring certificate authorization—only the replenishment of base gas at a preexisting facility. The Commission further rejected arguments that the incremental rate violated cost-causation principles requiring that all approved rates reflect to some degree the costs actually caused by the customer who must pay them. The Commission reasoned that the permanent capacity releases to Paribas and South Jersey were the “most immediate and proximate” cause of Transco’s need to purchase new base gas in 2005 and 2006.

On appeal, the D.C. Circuit vacated and remanded the Commission’s decision to accept Transco’s incremental rate as just and reasonable.[3] The D.C. Circuit was not persuaded that the exiting Historic Shippers’ releases to the Replacement Shippers should be viewed as the most immediate and proximate cause of Transco’s need to purchase base gas; and held that the Commission failed to explain how the Historic Shippers’ continued demand did not contribute to the need for the new base gas.

  • On remand, the Commission reversed its prior decisions and found that the Policy Statement analysis used to determine whether the costs of an expansion should be borne solely by the new shippers or whether existing shippers should also be allocated a share of the project costs, does provide a reasonable framework for resolving the cost allocation issue in this case. The Commission reasoned that, while Transco did not need to apply for a new certificate to purchase replacement base gas, the pipeline had made an investment to increase the capabilities of its system and the Commission had to determine whether it is reasonable to allocate the cost of the new investment to all the pipeline’s customers, old and new, or allocate those costs only to the new customers.
  • The Commission used two factors established in the Policy Statement to determine whether a rolled-in or an incremental rate should apply: (1) whether the new investment provides specific benefits to existing shippers; and (2) whether rolling in the cost of the new investment increases rates for the existing shippers. Following a lengthy analysis, the Commission determined that it is reasonable and equitable to allocate to the remaining historic shippers the costs associated with Transco’s purchase of the base gas necessary to continue to provide service to them, given that the need to purchase this base gas arises from provisions of a settlement they agreed to, and the allocation is consistent with the Policy Statement. The analysis also showed that rolling in the costs associated with Transco’s additional purchases of base gas needed to serve the Replacement Shippers benefits the Historic Shippers by leading to lower rates.