On November 20, the Federal Energy Regulatory Commission (FERC) released a policy statement that allows interstate pipelines—by means of a tracker mechanism—the ability to recover certain capital expenditures made to modernize pipeline system infrastructure to enhance reliability, safety and regulatory compliance. A tracker mechanism automatically allows a pipeline operator to recover capital costs annually rather than having to file a rate increase with FERC under Section Four of the Natural Gas Act (NGA) to recover specific costs. The policy statement is intended to address anticipated regulations that will be placed on interstate pipelines through actions taken by the Pipeline and Hazardous Materials Safety Administration and Environmental Protection Agency.
Under the proposed policy statement, which is based on principles in a January 2013 FERC order that allowed Columbia Gas Transmission, LLC to implement such a tracker, a pipeline seeking a cost-recovery surcharge would have to meet five standards:
- The pipeline’s base rates must have been recently reviewed through a Natural Gas Act general Section Four rate proceeding or through a collaborative effort between the pipeline and its customers;
- Eligible costs must be limited to one-time capital costs incurred to meet safety or environmental regulations, and the pipeline must specifically identify each capital investment to be recovered by the surcharge;
- Captive customers must be protected from cost shifts if the pipeline loses shippers or increases discounts to retain business;
- There must be a periodic review to ensure rates remain just and reasonable; and,
- The pipeline must work collaboratively with shippers to seek their support for any surcharge proposal.
On January 26, the American Public Gas Association (APGA) filed comments with FERC expressing opposition to the proposed policy statement. APGA is generally opposed to tracker mechanisms as trackers automatically increase rates without any of the protections afforded by Section Four of the NGA. The various FERC filing requirements under Section Four of the NGA are intended to protect both the pipeline, by permitting it to use both actual and forecasted data, and customers, by ensuring that pipelines file sufficient data to show that unit costs are indeed increasing (i.e., that a rate increase is justified) and if so, by how much. APGA is extremely concerned about the potential ramifications of bypassing this process.
APGA’s comments also communicate that historically, pipelines have taken full advantage of the opportunity to over-recover their cost of service and retain that over-recovery for the benefit of their shareholders. The Natural Gas Supply Association (NGSA) annually tracks the returns of interstate pipelines, based on the pipelines’ own Form Two data submitted to FERC; and each year, the NGSA report shows significant over-recoveries by pipelines. For example, based on the pipeline Form Two data for the years 2008 through 2012, the most recent NGSA report in 2014 shows that of the 32 pipelines examined, they collectively earned approximately $2.7 billion in excess of what they would have collected over the five-year period using an average—and generous, under current market conditions—12 percent allowed return on equity.
APGA also maintains that the five standards that are proposed by FERC as safeguards are inadequate to the task as they simply do not provide the consumer protections afforded under NGA Section Four. If FERC determines to proceed with the proposed policy statement, the five standards need to be considerably strengthened if they are intended to prevent customers from being exploited by natural gas companies.
FERC is now in the process of reviewing the comments that were filed. At this point, it is unclear what next steps FERC will take. APGA’s comments are available at www.apga.org/comments.
APGA is the not-for-profit trade organization representing America’s publicly owned natural gas local distribution companies (LDCs)