[Federal Register Volume 64, Number 183 (Wednesday, September 22, 1999)]
[Notices]
[Pages 51309-51319]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24617]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. PL99-3-000]
Certification of New Interstate Natural Gas Pipeline Facilities;
Statement of Policy
Issued September 15, 1999.
Before Commissioners: James J. Hoecker, Chairman; Vicky A.
Bailey, William L. Massey, Linda Breathitt, and Curt Hebert, Jr.
In the Notice of Proposed Rulemaking (NOPR) in Docket No. RM98-10-
000 \1\ and the Notice of Inquiry (NOI) in Docket No. RM98-12-000,\2\
the Commission has been exploring issues related to the current
policies on certification and pricing of new construction projects in
view of the changes that have taken place in the natural gas industry
in recent years.
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\1\ Notice of Proposed Rulemaking, Regulation of Short-term
Natural Gas Transportation Services, 63 Fed. Reg. 42982, 84 FERC
para. 61,087 (1998).
\2\ Notice of Inquiry, Regulation of Interstate Natural Gas
Transportation Services, 63 Fed. Reg. 42974, 84 FERC para. 61,087
(July 29, 1998).
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In addition, on June 7, 1999, the Commission held a public
conference in Docket No. PL99-2-000 on the issue of anticipated natural
gas demand in the northeastern United States over the next two decades,
the timing and the type of growth, and the effect projected growth will
have on existing pipeline capacity. All segments of the industry
presented their views at the conference and subsequently filed comments
on those issues.
Information received in these proceedings as well as recent
experience evaluating proposals for new pipeline construction persuade
us that it is time for the Commission to revisit its policy for
certificating new construction not covered by the optional or blanket
certificate authorizations.\3\ In particular the Commission's policy
for determining whether there is a need for a specific project and
whether, on balance, the project will serve the public interest. Many
urge that there is a need for the Commission to authorize new pipeline
capacity to meet the growing demand for natural gas. At the same time,
others already worried about the potential for capacity turnback, have
urged the Commission to be cautious because of concerns about the
potential for creating a surplus of capacity that could adversely
affect existing pipelines and their captive customers.
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\3\ This policy statement does not apply to construction
authorized under 18 CFR Part 157, Subparts E and F.
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Accordingly, the Commission is issuing this policy statement to
provide the industry with guidance as to how the Commission will
evaluate proposals for certificating new construction. This should
provide more certainty about how the Commission will evaluate new
construction projects that are proposed to meet growth in the demand
for natural gas at the same time that some existing pipelines are
concerned about the potential for capacity turnback. In considering the
impact of new construction projects on existing pipelines, the
Commission's goal is to appropriately consider the enhancement of
competitive transportation alternatives, the possibility of
overbuilding, the avoidance of unnecessary disruption of the
environment, and the unneeded exercise of eminent domain. Of course,
this policy statement is not a rule. In stating the evaluation
criteria, it is the Commission's intent to evaluate specific proposals
based on the facts and circumstances relevant to the application and to
apply the criteria on a case-by-case basis.
I. Comments Received on the NOPR
In the NOPR the Commission explained that it wants to assure that
its policies strike the proper balance between the enhancement of
competitive alternatives and the possibility of over building. The
Commission asked for comments on whether proposed projects that will
establish a new right-of-way in order to compete for existing market
share should be subject to the same considerations as projects that
will cut a new right-of-way in order to extend gas service to a
frontier market area. Also, in reassessing project need, the Commission
said that it was considering how best to balance demonstrated market
demand against potential adverse environmental impacts and private
property rights in weighing whether a project is required by the public
convenience and necessity.
The Commission asked commenters to offer views on three options:
One option would be for the Commission to authorize all applications
that at a minimum meet the regulatory requirements, then let the market
pick winners and losers. Another would be for Commission to select a
single project to serve a given market and exclude all other
competitors. Another possible option would be for the Commission to
approve an environmentally acceptable right-of-way and let potential
builders compete for a certificate.
In addition, the Commission asked commenters to consider the
following questions: (1) Should the Commission look behind the
precedent agreement or contracts presented as evidence of market demand
to assess independently the market's need for additional gas service?
(2) Should the Commission apply a different standard to precedent
agreements or contracts with affiliates than with non-affiliates? For
example, should a proposal supported by affiliate agreements have to
show a higher percentage of contracted-for capacity than a proposal
supported by non-affiliate agreements, or, should all proposed projects
be required to show a minimum percent of non-affiliate support? (3) Are
precedent agreements primarily with affiliates sufficient to meet the
statutory requirement that construction must be required by the public
convenience and necessity, and,
[[Page 51310]]
if so, (4) Should the Commission permit rolled-in rate treatment for
facilities built to serve a pipeline affiliate? (5) Should the
Commission, in an effort to check overbuilding and capacity turnback,
take a harder look at proposals that are designed to compete for
existing market share rather than bring service to a new customer base,
and what particular criteria should be applied in looking at
competitive applications versus new market applications? (6) Should the
Commission encourage pre-filing resolution of landowner issues by
subjecting proposed projects to a diminished degree of scrutiny where
the project sponsor is able to demonstrate it has obtained all
necessary right-of-way authority? (7) Should a different standard be
applied to project sponsors who do not plan to use either federal or
state-granted rights of eminent domain to acquire right-of-way?
A. Reliance on Market Forces To Determine Optimal Sizing and Route for
New Facilities
PG&E, Process Gas Consumers (PGC), Tejas Gas, Washington Gas,
Columbia, Market Hub Partners, and Ohio PUC agree that the Commission
should continue to let the market decide which projects to pursue. PG&E
states that the Commission should authorize all projects that meet
minimum regulatory requirements, looking at whether the project will
serve new or existing markets, the firmness of commitments and
environmental and property rights issues. PGC urges the Commission to
refrain from second guessing customers' decisions. Tejas suggests that
the Commission rely on the market to the maximum extent; regulatory
changes that affect risk/reward allocation will increase regulatory
risk and deter new investment. Washington Gas suggests letting the
market decide on new construction with market based rates subject only
to environmental review and landowner concerns. Columbia comments that
it would not be economically efficient to protect competitors from the
competition created by new capacity. Market Hub Partners specifies
that, when there is no eminent domain involved, the focus should be on
competition, not protecting individual competitors from overbuilding.
Ohio PUC supports authorizing all applications for new capacity
certification which meet the minimum regulatory requirements. Ohio PUC
does not support approving a single pipeline's application while
excluding all others.
The Regulatory Studies Program of the Mercatus Center, George Mason
University suggests allowing projects to be proposed with no
certification requirements, but allowing competitors to challenge the
need. Investors would be at risk for all investments. Tejas proposes
holding pipelines at risk for reduced throughput, thereby avoiding
shifting the risk to customers. On the issue of overbuilding,
Millennium, Enron, PGC, Columbia, and Wisconsin PSC disagree with the
presumption that overbuilding must be avoided. Millennium asserts that
all competitive markets have excess capacity. Enron urges the
Commission to be receptive to overbuilding in areas of rapid growth,
difficult construction, and environmental sensitivity. PGC agrees that
some capacity in excess of initial demand may make environmental and
economic sense in that it will reduce the need for future construction,
but argues that the pipelines be at risk for those facilities. Columbia
alleges that the concern about overbuilding is misguided. Wisconsin PSC
contends that concerns of overbuilding should not operate to limit the
availability of competitive alternatives to customers currently without
choices of pipeline provider. Wisconsin PSC believes the elimination of
the discount adjustment mechanism and the imposition of reasonable at
risk provisions for new construction will deter pipelines from
overbuilding.
On the other hand, UGI recommends that overbuilding be minimized.
UGI states that the Commission should ensure a reasonable fit between
supply and demand. The Commission should limit certification of new
projects to ones which demonstrate unmet demand or demand growth over
1-3 years.
Coastal stresses that competition should not be the only or primary
factor in deciding the public convenience and necessity.
Amoco contends that, if the Commission chooses the right-of-way, it
will in many cases have chosen the parties that will ultimately build
the pipeline. Amoco urges the Commission not substitute its judgement
for that of the marketplace unless there are overwhelming environmental
concerns. Tejas also objects to the option of the Commission approving
an environmentally acceptable right-of-way and letting potential
builders compete for a certificate because it believes it would be
difficult for the Commission to implement.
Colorado Springs supports the concept of having the Commission
select a single project in a given corridor rather than letting the
market pick winners and losers.
PGC and Ohio PUC recommend that the Commission authorize all
construction applications meeting certain threshold requirements,
leaving the market to decide winners and losers. PGC urge the
Commission to facilitate construction of new pipelines that will
increase the potential for gas flows. Under no circumstances should the
Commission deny a certificate based on a complaint by an LDC or a
competing pipeline that new construction will hurt their market
position or ability to recover costs. The Commission should not afford
protection to traditional suppliers or transporters by constraining the
development of new pipeline capacity.
PGC believes that only in unusual situations, where insuperable
environmental barriers cannot be resolved through normal mitigation
measures, should the Commission select an acceptable right-of-way. Ohio
PUC does not support approving a single pipeline's application while
excluding all others. Ohio PUC recommends having market forces guide
construction projects unless or until obvious shortcomings begin to
emerge. In such instances, the option of designating a single right-of-
way with competition for the certificate could be used to spur needed
construction.
B. Reliance on Contracts To Demonstrate Demand
A number of parties commend that there is no reason to change the
current policy regarding certificate need (AlliedSignal, Millennium,
Southern Natural, Tejas, Williston, Columbia). National Fuel Gas Supply
believes the Commission should keep shipper commitment as the test
because it is more accurate than market studies. National Fuel Gas
Supply further believes the Commission's present reliance on market
forces to establish need, and its environmental review process, form
the best approach to reviewing certificate applications. Foothills
agrees, but states that a new, flexible regulatory structure for
existing pipelines is needed. Indicated Shippers also wants to keep the
current policy, but stresses that expedition in processing is needed to
lower entry barriers.
Amoco, Consolidated Natural, and Columbia urged the Commission to
continue requiring sufficient binding long-term contracts for firm
capacity. Millennium and Tejas stated that there is no need to develop
different tests for different markets. Columbia also argued that there
is no need to look behind contracts. Williams argues that the
Commission should not second guess contracts or make an independent
market analysis. Williston alleges that
[[Page 51311]]
reviewing the firmness of private contracts is ineffectual and futile.
Market Hub Partners cautions the Commission not to substitute its
judgment for that of the marketplace.
PGC argues that there should be no change to current policy where
construction affects landowners. Eminent domain is a necessary tool to
delivering clean burning natural gas to growing markets; no individual
landowners should be given a veto over pipeline construction. PGC adds
that the absence of prefiling right-of-way agreements does not mean
that a project is less good or necessary or should be treated more
harshly. Southern Natural, Millennium, and National Fuel Gas Supply
agree that no market preference should be given for projects that do
not use eminent domain. National Fuel Gas Supply agrees that such a
preference would tilt the power balance to landowners. Millennium
argues that the Commission should not establish certificate preferences
for pipelines that do not require eminent domain; such preferences are
not needed because a pipeline that does not want to use eminent domain
can already build projects under Section 311.
On the other hand, Amoco, El Paso/Tennessee, ConEd, and Wisconsin
PSC recommend modifying the current policy. El Paso/Tennessee recommend
that the Commission look behind all precedent agreements to see if real
markets exist. ConEd suggests considering forecasts for market growth;
if there is a disparity with the proposal, the Commission should look
at all circumstances. Wisconsin PSC urges the Commission to consider
market saturation and growth prospects by looking at market power
(HHIs) and the degree of rate discounting in a market. Amoco suggests
that the Commission analyze all relevant data. Peco Energy believes the
current Commission policy, which provides for minimal market
justification for authorizing construction of incremental facilities,
coupled with its presumption in favor of rolled-in rate treatment, has
contributed to discouraging existing firm shippers from embracing
longer term capacity contracts.
Consolidated Natural recommends creating a settlement forum for
market demand and reverse open season issues. Washington Gas urges the
Commission to adopt an open entry, ``let the market decide'' policy.
IPAA supports a need analysis focusing on the ability of existing
capacity to handle projected demand. IPAA alleges that the overall
infrastructure is already in place to supply current demand
projections.
Some commenters support a sliding scale approach to determine need.
ConEd states that the Commission should determine need on a case-by-
case basis, using different standards for large or small projects.
Enron advocates use of a sliding scale, requiring more market support
for projects with more landowner and/or environmental impact. Enron
supports requiring no market showing for projects using existing
easements for mutually agreed upon easements. Enron also suggests, in
addition to requiring that at least 25% of the precedent agreements
supporting a project be with non-affiliates, that the Commission relax
its market analysis if 75% or more of those agreements are with non-
affiliates. Enron would require more market data for an affiliate-
backed project. American Forest & Paper would allow negotiation of risk
if there is no subsidy by existing customers. Sempra and UGI urge the
Commission to look at whether projects serve identifiable, new or
growing markets. NARUC states that each state is unique and that the
Commission should consider those differences. Market Hub Partners
believes that a project which is at risk, requires little or no eminent
domain authority, and has potential to bring competition to a market
that is already being served by pipelines and strong operators with
market power should be expedited.
The development in recent years of certificate applicants' use of
contracts with affiliates to demonstrate market support for projects
has generated opposition from affected landowners and competitor
pipelines who question whether the contracts represent real market
demand. ConEd, Ohio PUC, and Enron believe that a different standard
should be applied to affiliates. ConEd argues that the at risk
condition is inadequate when a pipeline serves a market served by an
affiliate; risk is shifted. Ohio PUC states that pipelines should
shoulder the increased risk and that the Commission should look behind
contracts with affiliates. Enron would require more market data for
affiliate-backed projects and would require that all projects be
supported by precedent agreements at least 25% of which are with non-
affiliates.
Nevertheless, most of the commenters support applying the same
standard to contracts for new capacity with affiliates as non-
affiliates. Amoco, Coastal, Millennium, National Fuel, Southern
Natural, Tejas, Texas Eastern, Columbia, Market Hub Partners, El Paso/
Tennessee, and PGC all support applying the same standard to affiliates
as non-affiliates. Market Hub argues that a contract is a contract;
treating affiliates differently would be in the interest of incumbent
monopolists. El Paso/Tennessee agree that affiliate precedent
agreements are sufficient as long as they are supported by market
demand. PGC agrees that the same standard should apply as long as the
proposed capacity is offered on a non-discriminatory basis to all in an
open season. Amoco makes an exception for marketing affiliates, arguing
that they do not represent new demand. Columbia also makes an exception
for affiliates that are created just to show market for a project.
Other parties also offered comments on affiliate issues. PGC
recommends addressing affiliate issues on a case-by-case basis. Exxon
support offering comparable deals to non-affiliates. If there is
insufficient capacity, it should be prorated. AGA supports prohibiting
discount adjustments connected with new construction by pipelines or
affiliates. National Fuel Gas Supply and Tejas support permitting
rolled-in rates for facilities to serve affiliates. PGC argues that
there should be no presumption of rolled in rates for affiliates.
The commenters also express concern with the current policy's
effect on existing pipelines and their captive customers when the
Commission approves pipeline projects proposed to serve the same
market. In those cases, they believe that need should be measured
differently by, for example, assessing the impact on existing capacity
or requiring a strong incremental market showing and more scrutiny of
the net benefits. They urge the Commission to balance all the relevant
factors before issuing a certificate. A number of parties argued that
need should be measured differently when a project is proposed to serve
an existing market. UGI urges requiring a strong market showing for
such projects. Coastal proposes that the Commission fully integrate the
standards announced by the courts \4\ with its certificate construction
policies, balancing all the relevant factors including the ability of
the existing provider to provide the service. El Paso/Tennessee would
require more scrutiny of the net benefit. Sempra would require that,
prior to construction, all shippers be given the opportunity to turn
back capacity. Similarly, Texas Eastern would require the pipeline to
use unsubscribed capacity before construction (e.g., a reverse
auction).
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\4\ Citing FPC v. Transcontinental Gas Pipeline Corp., 365 U.S.
1, 23 (1961) and Scenic Hudson Preservation Conference v. FERC, 354
F.2d. 608, 620 (2nd Cir. 1965).
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[[Page 51312]]
Other commenters oppose a policy requiring a harder look at
projects proposed to serve existing markets. They maintain that market
demand for service in order to escape dependence on a dominant pipeline
supplier should be accorded the same weight as demand by new
incremental load growth. They contend that the benefits of competition
and potentially lower gas prices for consumers should control over
claims that an existing pipeline needs to be insulated from competition
because its revenues may decrease. National Fuel Gas Supply, PGC,
Florida Cities, Market Hub Partners, and Southern Natural in particular
object to having different policies for new or existing pipelines.
National Fuel Gas Supply contends that generally the policies on new
construction and existing pipelines should match. PGC opposes any
policy that protects incumbents by requiring a harder look at projects
proposed to serve existing markets rather than new demand. Many
existing markets have unmet demand. Likewise, Florida Cities is
concerned that the NOPR is intended to elicit a new policy where the
import and influence of competition is downplayed to minimize or
eliminate the risk of unsubscribed capacity on existing pipelines.
Florida Cities supports pipeline-on-pipeline competition as a primary
factor in determining which new capacity projects receive certificate
authority and are constructed. Florida Cities believes that additional
pipeline competition would benefit customers and any generic policy
that would decrease or inhibit pipeline competition would not be in the
best interest of the consumers the Commission is obliged to protect.
Market Hub Partners urges the Commission to attempt to limit market
incumbents' ability to forestall competition by defeating the efforts
of new market entrants to build or operate new capacity. Market Hub
Partners contend that incumbents protest on the basis of project safety
and environmental concerns when they are primarily concerned with their
own welfare and market share. Southern Natural contends the NGA does
not permit a rule disfavoring projects that enhance competitive
alternatives. Taking a harder look at competitive proposals would
effect a preference for monopoly, clearly not endorsed by the NGA or
the Courts of Appeal.
Wisconsin Distributor Group believes that meaningful pipe-on-pipe
competition can only exist where there are choices among or between
pipelines and unsubscribed firm capacity exists. Wisconsin Distributor
Group argues the Commission should view favorably new pipeline projects
that propose to create competition by introducing an alternative
pipeline to markets where no choices exist. Wisconsin Distributor Group
contends the Commission's policy should not be driven by self-
protective arguments but by the need for competitive alternatives.
Wisconsin Distributor Group supports the Commission's analysis in
Alliance and Southern because it considers the benefits of competition
and potentially lower gas prices for consumers as controlling over
claims that an existing pipeline needs to be insulated from competition
because its revenues may decrease. Market demand for service in order
to escape dependence on a dominant pipeline supplier should be accorded
the same weight as demand by new incremental load growth.
UGI, Sempra, and El Paso/Tennessee would require assessing the
impact on existing capacity. Sempra states that if existing rates are
below the maximum rate, new capacity may not be needed. Sempra adds
that the Commission should look at whether expansion capacity can stand
on its own without rolled-in treatment. Texas Eastern believes the
Commission must consider how best to use existing unsubscribed capacity
and capacity that has been turned back to pipelines.
C. The Pricing of New Facilities
A number of commenters submit that the existing presumption in
favor of rolled-in rates for pipeline expansions sends the wrong price
signals with regard to pricing new construction. They urge the
Commission to adopt policies such as incremental pricing for pipeline
projects or placing pipelines at risk for recovery of the costs of
construction. They submit that such a policy would reveal the true
value of existing capacity and properly allocate costs and risks. A
number of parties also raised issues concerning rate design in general,
but the Commission is deferring for now consideration of those kinds of
issues which also affect the Commission's policies for existing
pipelines in order to focus on issues concerning the certification of
new pipeline construction.
AGA, ConEd, and Michigan Consolidated stress the importance of
ensuring the right price signals. AGA urges the Commission to adopt
policies that reveal the true value of existing capacity. ConEd states
that rate policies should send proper price signals by properly
allocating costs and risks.
AGA contends that the Commission's certification policies should
protect recourse shippers. AGA and BG&E recommend that the Commission
ensure that pipelines are not able to impose the costs of new capacity
or the costs of consequent unsubscribed existing capacity on recourse
shippers. Amoco asserts pipelines should be at risk for unsubscribed
capacity. Similarly, AGA and Philadelphia Gas Works urge the Commission
to ensure that pipelines are at risk for unsubscribed capacity relating
to construction projects by the pipeline or its affiliate. However,
Tejas believes that treatment of any under recovery must address the
unique circumstances of deepwater pipelines.
APGA argues that, if the Commission allows initial rates based on
the life of the contract rather than the useful life of facilities, the
Commission must at least require a uniform contract with the same terms
and conditions for all customers involved in the expansion.
The Williams Companies recommend that all new capacity be subject
to market-based rates. the Williams Companies argue that, for new
capacity priced on an incremental basis rather than a rolled-in basis,
competitive circumstances in the industry support the use of market-
based rates and terms of service.
AlliedSignal contends depreciation should be based on the life of
the facilities not the life of a contract. If the Commission were to
promulgate a general rule, it should state that depreciation rates for
pipeline facilities in rate and certificate cases should be set at 25
years unless factors are brought to the Commission's attention
justifying a lesser or longer time period. NGSA believes that the
Commission's current depreciation methodology is appropriate. NGSA also
urges that the appropriate asset life of new facilities be determined
when the facilities are constructed and adhered to for the life of the
asset. On the other hand, the Williams Companies point out that market-
based rates would negate the need for the Commission to approve
depreciation rates.
Coastal believes pipelines should have the flexibility to address
new facility costs in certificate applications and in rate cases. The
Commission should not establish hard and fast rules as to how a
facility should be treated in a pipeline's rates over its entire life.
Rather, costs should be dealt with in accordance with Commission
policies from time to time in pipeline rate cases.
Enron Pipelines contend that the rate treatment for capacity
additions should continue to be determined on a case-by-case basis
using the system benefits test.
Louisville contends that the Commission should address the question
of whether its pricing policies
[[Page 51313]]
for new capacity provide appropriate incentives at the same time as it
considers auctions and negotiated rates and services and that all of
these issues should be the subject of a new NOPR.
PGC suggest that initial rates be based on a presumed level of
contract commitment (e.g., 80-90%) so the pipeline bears the risks of
uncommitted capacity but reaps a reward if it sells at undiscounted
rates. Another option would be for the commission to put at risk only
that portion of the proposed facilities for which the pipeline has not
obtained firm contracts of a minimum duration. Where an existing
pipeline constructs new facilities, PGC support the Commission's
current policy favoring rolled-in rates if certain conditions are met.
Williston Basin argues that fixed rates for long-term contracts
would create a relatively risk-free contract for shippers while
creating a total-risk contract for pipelines.
Arkansas, IPAA, Indicated Shippers, National Fuel Gas Supply, NGSA,
Peoples Energy, PGC, and the Williams Companies support the
Commission's current policy with its presumption in favor of rolled-in
pricing for new capacity only when the impact of new capacity is not
more than a 5% increase to existing rates and results in system-wide
benefits. AGA, Amoco, IPAA, Philadelphia Gas Works, PGC, and UGI
recommend that the Commission more rigidly apply its pricing policy and
more closely review claims pertaining to the 5% threshold test and/or
system benefits. Nicor urges that pipelines should not be allowed to
segment construction with the goal of falling below the 5% pricing
policy threshold.
APGA and Consolidated Edison recommend that the Commission adopt a
presumption of incremental pricing for pipeline certificate projects.
APGA would allow limited exceptions such as when the project would
lower rates to existing customers or when the benefits of the project
would fully offset the costs of the roll-in. Koch Gateway and
Pennsylvania Consumer Advocate also recommend incremental pricing for
new capacity.
Arkansas and Brooklyn Union contend that pipelines should be at
risk for the recovery of the costs of incremental facilities. Brooklyn
Union urges the Commission to eliminate the presumption in favor of
rolled-in pricing for new capacity and require pipelines to show the
benefits of each new project are proportionate to the total rate
increase sought.
El Paso/Tennessee recommend that only fully subscribed projects
with revenues equaling or exceeding project costs and supported by
demonstrated market need should be eligible for rolled-in rates. El
Paso/Tennessee believe that projects intended to compete for existing
market should not be eligible for rolled-in rates.
New York questions the 5% presumption for rolled-in pricing and
argues that a move away from rolled-in pricing would create competitive
markets for new pipeline construction.
AlliedSignal believes pipelines should be at risk for costs
relative to new services prior to filing a new rate case. In the new
rate case, the burden should be on the pipeline to justify the proper
allocation of costs.
Amoco suggests that the pipeline and customer be allowed to enter
into any agreement that does not violate existing regulations or
statutory requirements, but they must explicitly apportion any risk
between themselves.
The Illinois Commerce Commission believes this issue needs more
research and should not be addressed until state regulators are
consulted further.
Market Hub Partners and PGC contend that rolled-in rate treatment
should not be granted for facilities solely or principally being
constructed on the basis of affiliate precedent agreements. On the
other hand, Millennium asserts that affiliates and non-affiliates
should be treated alike with respect to rate design. Also, Southern
Natural argues that the fact that an affiliate subscribed for capacity
on new facilities cannot along preclude rolled-in pricing for those
facilities; the Commission must leave to individual cases the issue of
whether to price facilities on a rolled-in or incremental basis.
Nicor argues that the Commission cannot, in a competitive
marketplace, evaluate the enhancements claimed by the pipeline to
determine whether new construction should be incrementally priced or
receive rolled-in rate treatment. Instead of imposing rolled-in rate
treatment on the entire system, the Commission should allow individual
``old'' shippers to decide whether the supposed benefits are worth the
costs.
Pipeline Transportations Customer Coalition contends the existing
regulatory process does not reflect a reasonable risk-reward balance
between industry segments, asserting that pipeline rates are too high
given their relatively low risk exposure.
II. Certificate Policy Goals and Objectives
The comments present a variety of perspectives and no clear
consensus on a path the Commission should follow. Nevertheless, the
staring point for the Commission's reassessment of its certificate
policy is to define the goals and objectives to be achieved. An
effective certificate policy should further the goals and objectives of
the Commission's natural gas regulatory policies. In particular, it
should be designed to foster competitive markets, protect captive
customers and avoid unnecessary environmental and community impacts
while serving increasing demands for natural gas. It should also
provide appropriate incentives for the optimal level of construction
and efficient customer choices.
Commission policy should give the applicant an incentive to file a
complete application that can be processed expeditiously and to develop
a record that supports the need for the proposed project and the public
benefits to be obtained. Commission certificate policy should also
provide an incentive for applicants to structure their projects to
avoid, or minimize, the potential adverse impacts that could result
from construction of the project.
The Commission intends the certificate policy introduced in this
order to provide an analytical framework for deciding, consistent with
the goals and objectives stated above, when a proposed project is
required by the public convenience and necessity. In some respects this
policy is not a significant change from the kind of analysis employed
currently in certificate cases. By stating more explicitly the
Commission's analytical framework, the Commission can provide
applicants and other participants in certificate proceedings a better
understanding of how the Commission makes its decisions. By encouraging
applicants to devote more effort before filing to minimize the adverse
effects of a project, the policy given them the ability to expedite the
decisional process by working out contentious issues in advance. Thus,
this policy will provide more certainty about the Commission's
analytical process and provide participants in certificate proceedings
with a framework for shaping the record that is needed by the
Commission to expedite its decisional process.
III. Evaluation of Current Policy
A. Current Policy
Section 1(b) of the Natural Gas Act (NGA) gives the Commission
jurisdiction over the transportation of natural gas in interstate
commerce and the natural gas companies providing
[[Page 51314]]
that transportation.\5\ Section 7(c) of the NGA provides that no
natural gas company shall transport natural gas or construct any
facilities for such transportation without a certificate of public
convenience and necessity issued by the Commission.\6\
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\5\ 15 USC 717.
\6\ 15 USC 717h.
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In reaching a final determination on whether a project will be in
the public convenience and necessity, the Commission performs a
flexible balancing process during which it weights the factors
presented in a particular application. Among the factors that the
Commission considers in the balancing process are the proposal's market
support, economic, operational, and competitive benefits, and
environmental impact.
Under the Commission's current certificate policy, an applicant for
a certificate of public convenience and necessity to construct a new
pipeline project must show market support through contractual
commitments for at least 25 percent of the capacity for the application
to be processed by the Commission. An applicant showing 10-year firm
commitments for all of its capacity, and/or that revenues will exceed
costs is eligible to receive a traditional certificate of public
convenience and necessity.
An applicant unable to show the required level of commitment may
still receive a certificate but it will be subject to a condition
putting the applicant ``at risk.'' In other words, if the project
revenues fail to recover the costs, the pipeline rather than its
customers will be responsible for the unrecovered costs, the pipeline
rather than its customers will be responsible for the unrecovered
costs. Alternatively a project sponsor can apply for a certificate
under subpart E of part 157 of the Commission's regulations for an
optional certificate.\7\ An optional certificate may be granted to an
applicant without any market showing at all; however, in practice
optional certificate applicants usually make some form of market
showing. The rates for service provided through facilities constructed
pursuant to an optional certificate must be designed to impose the
economic risk of the project entirely on the applicant.
---------------------------------------------------------------------------
\7\ 18 CFR Part 157, Subpart E.
---------------------------------------------------------------------------
The Commission also has certificated projects that would serve no
new market, but would provide some demonstrated system-benefit.
Examples include projects intended to provide improved system
reliability, access to new supplies, or more economic operations.
Generally, under the current policy, the Commission does not deny
an application because of the possible economic impact of a proposed
project on existing pipelines serving the same market or on the
existing pipelines' customers. In addition, the Commission gives equal
weight to contracts between an applicant and its affiliates and an
applicant and unrelated third parties and does not look behind the
contracts to determine whether the customer commitments represent
genuine growth in market demand.\8\
---------------------------------------------------------------------------
\8\ See, e.g., Transcontinental Gas Pipe Line Corp., 82 FERC
para. 61,084 at 61,316 (1998).
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Under section 7(h) of the NGA, a pipeline with a Commission-issued
certificate has the right to exercise eminent domain to acquire the
land necessary to construct and operate its proposed new pipeline when
it cannot reach a voluntary agreement with the landowner.\9\ In recent
years, this has resulted in landowners becoming increasingly active
before the Commission. Landowners and communities often object both to
the taking of land and to the reduction of their land's value due to a
pipeline's right-of-way running through the property. As part of its
environmental review of pipeline projects, the Commission's
environmental staff works to take these landowners' concerns into
account, and to mitigate adverse impacts where possible and feasible.
---------------------------------------------------------------------------
\9\ 15 USC 717f(h).
---------------------------------------------------------------------------
Under the pricing policy for new facilities in Docket No. PL94-4-
000,\10\ the Commission determines, in the certificate proceeding
authorizing the facilities' construction, the appropriate pricing for
the facilities. Generally, the Commission applies a presumption in
favor of rolled-in rates (rolling-in the expansion costs with the
existing facilities' costs) when the cost impact of the new facilities
would result in a rate impact on existing customers of five percent or
less, and some system benefits would occur. Existing customers
generally bear these rate increases without being allowed to adjust
their volumes.
---------------------------------------------------------------------------
\10\ See Pricing Policy for New and Existing Facilities
Constructed by Interstate Natural Gas Pipelines, 71 FERC para.
61,241 (1995).
---------------------------------------------------------------------------
When a pipeline proposes to charge a cost-based incremental rate
(establishing separate costs-of-service and separate rates for the
existing and expansion facilities) higher than its existing generally
applicable rates, the Commission usually approves the proposal.
However, the Commission generally will not accept a proposed
incremental rate that is lower than the pipeline's existing generally
applicable Part 284 rate.
B. Drawbacks of the Current Policy
1. Reliance on Contracts To Demonstrate Demand
Currently, the Commission uses the percentage of capacity under
long-germ contracts as the only measure of the demand for a proposed
project. Many of the commenters have argued that this is too narrow a
test. The reliance solely on long-term contracts to demonstrate demand
does not rest for all the public benefits that can be achieved by a
proposed project. The public benefits may include such factors as the
environmental advantages of gas over other fuels, lower fuel costs,
access to new supply sources or the connection of new supply to the
interstate grid, the elimination of pipeline facility constraints,
better service from access to competitive transportation options, and
the need for an adequate pipeline infrastructure. The amount of
capacity under contract is not a good indicator for all these benefits.
The amount of capacity under contract also is not a sufficient
indicator by itself of the need for a project, because the industry has
been moving to a practice of relying on short-term contracts, and
pipeline capacity is often managed by an entity that is not the actual
purchaser of the gas. Using contracts as the primary indicator of
market support for the proposed pipeline project also raises additional
issues when the contracts are held by pipeline affiliates. Thus, the
test relying on the percent of capacity contracted does not reflect the
reality of the natural gas industry's structure and presents difficult
issues.
In addition, the current policy's preference for contracts with 10-
year terms biases customer choices toward longer term contracts. Of
course, there are other elements of the Commission's policies that also
have this effect. However, eliminating a specific requirement for a
contract of a particular length is more consistent with the
Commission's regulatory objective to provide appropriate incentives for
efficient customer choices and the optimal level of construction,
without biasing those choices through regulatory policies.
Finally, by relying almost exclusively on contract standards to
establish the market need for a new project, the current policy makes
it difficult to articulate to landowners and
[[Page 51315]]
community interests why their land must be used for a new pipeline
project.
All of these concerns raise difficult questions of establishing the
public need for the project.
2. The Pricing of New Facilities
As the industry becomes more competitive the Commission needs to
adapt its policies to ensure that they provide the correct regulatory
incentives to achieve the Commission's policy goals and objectives. All
of the Commission's natural gas policy goals and objectives are
affected by its pricing policy, but directly affected are the goals of
fostering competitive markets, protecting captive customers, and
providing incentives for the optimal level of construction and
efficient customer choice. The current pricing policy focuses primarily
on the interests of the expanding pipeline and its existing and new
shippers, giving little weight to the interests of competing pipelines
or their captive customers. As a result, it no longer fits well with an
industry that is increasingly characterized by competition between
pipelines.
The current pricing policy sends the wrong price signals, as some
commenters have argued, by masking the real cost of the expansions.
This can result in overbuilding of capacity and subsidization of an
incumbent pipeline in its competition with potential new entrants for
expanding markets. The pricing policy's bias for rolled-in pricing also
is inconsistent with a policy that encourages competition while seeking
to provide incentives for the optimal level of construction and
customer choice. This is because rolled-in pricing often results in
projects that are subsidized by existing ratepayers. Under this policy
the true costs of the project are not seen by the market or the new
customers, leading to inefficient investment and contracting decisions.
This in turn can exacerbate adverse environmental impacts, distort
competition between pipelines for new customers, and financially
penalize existing customers of expanding pipelines and of pipelines
affected by the expansion.
Under existing policy, shippers' rates may change for a number of
reasons. These include rolling-in of an expansion's costs, changes in
the discounts given other customers, or changes in the contract
quantities flowing on the system. As a customer's rates change in a
rate case, it is generally unable to change its volumes, even though it
may be paying more for capacity. This results in shippers bearing
substantial risks of rate changes which they may be ill equipped to
bear.
III. The New Policy
A. Summary of the Policy
As a result of the Commission's reassessment of its current policy,
the Commission has decided to announce the criteria, set forth below,
that it will use in deciding whether to authorize the construction of
major new pipeline facilities. This section summarizes the analytical
steps the Commission will use under this policy to balance the public
benefits against the potential adverse consequences of an application
for new pipeline construction. Each of these steps is described in
greater detail in the later sections of this policy statement.
Once a certificate application is filed, the threshold question
applicable to existing pipelines is whether the project can proceed
without subsidies from their existing customers. As discussed below,
this will usually mean that the project would be incrementally priced,
if built by an existing pipeline, but there are cases where rolled in
pricing would prevent subsidization of the project by the existing
customers.\11\
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\11\ This policy does not apply to construction authorized under
18 CFR Part 157, Subparts E and F.
---------------------------------------------------------------------------
The next step is determine whether the applicant has made efforts
to eliminate or minimize any adverse effects the project might have on
the existing customers of the pipeline proposing the project, existing
pipelines in the market and their captive customers, or landowners and
communities affected by the route of the new pipeline. These three
interests are discussed in more detail below. This is not intended to
be a decisional step in the process for the Commission. Rather, this is
a point where the Commission will review the efforts made by the
applicant and could assist the applicant in finding ways to mitigate
the effects, but the choice of how to structure the project at this
stage is left to the applicant's discretion.
If the proposed project will not have any adverse effect on the
existing customers of the expanding pipeline, existing pipelines in
market and their captive customers, or the economic interests of
landowners and communities affected by the route of the new pipeline,
then no balancing of benefits against adverse effects would be
necessary. The Commission would proceed, as it does under current
practice, to a preliminary determination or a final order depending on
the time required to complete and environmental assessment (EA) or
environmental impact statement (EIS) (whichever is required in the
case).
If residual adverse effects on the three interests are identified,
after efforts have been made to minimize them, then the Commission will
proceed to evaluate the project by balancing the evidence of public
benefits to be achieved against the residual adverse effects. This is
essentially an economic test. Only when the benefits outweigh the
adverse effects on economic interests will the Commission then proceed
to complete the environmental analysis where other interests are
considered. It is possible at this stage for the Commission to identify
conditions that it could impose on the certificate that would further
minimize or eliminate adverse impacts and take those into account in
balancing the benefits against the adverse effects. If the result of
the balancing is a conclusion that the public benefits outweigh the
adverse effects then the next steps would be the same as for a project
that had no adverse effects. That is, if the EA or EIS would take more
than approximately 180 days then a preliminary determination could be
issued, followed by the EA or EIS and the final order. If the EA would
take less time, then it would be combined with the final order.
B. The Threshold Requirement--No Financial Subsidies
The threshold requirement in establishing the public convenience
and necessity for existing pipelines proposing an expansion project is
that the pipeline must be prepared to financially support the project
without relying on subsidization from its existing customers.\12\ This
does not mean that the project sponsor has to bear all the financial
risk of the project; the risk can be shared with the new customers in
preconstruction contracts, but it cannot be shifted to existing
customers. For new pipeline companies, without existing customers, this
requirement will have no application.
---------------------------------------------------------------------------
\12\ Projects designed to improve existing service for existing
customers, by replacing existing capacity, improving reliability or
providing flexibility, are for the benefit of existing customers.
Increasing the rates of the existing customers to pay for these
improvements is not a subsidy. Under current policy these kinds of
projects are permitted to be rolled in and are not covered by the
presumption of the current pricing policy. Great Lakes Gas
Transmission Limited Partnership, 80 FERC para.61,105 (1997)
(Pricing policy statement not applicable to facilities constructed
solely for flexibility and system reliability).
---------------------------------------------------------------------------
The requirement that the project be able to stand on its own
financially without subsidies changes the current pricing policy which
has a presumption
[[Page 51316]]
in favor of rolled-in pricing. Eliminating the subsidization usually
inherent in rolled-in rates recognizes that a policy of incrementally
pricing facilities sends the proper price signals to the market. With a
policy of incremental pricing, the market will then decide whether a
project is financially viable. The commenters were divided on whether
the Commission should change its current pricing policy. A number of
commenters, however, urged the Commission to allow the market to decide
which projects should be built, and this requirement is a way of
accomplishing that result.
The requirement helps to address all of the interests that could be
adversely affected. Existing customers of the expanding pipeline should
not have to subsidize a project that does not serve them. Landowners
should not be subject to eminent domain for projects that are not
financially viable and therefore may not be viable in the marketplace.
Existing pipelines should not have to compete against new entrants into
their markets whose projects receive a financial subsidy (via rolled-in
rates), and neither pipeline's captive customers should have to
shoulder the costs of unused capacity that results from competing
projects that are not financially viable. This is the only condition
that uniformly serves to avoid adverse effects on all the relevant
interests and therefore should be a test for all proposed expansion
projects by existing pipelines. It will be the predicate for the rest
of the evaluation of a new project by an existing pipeline.
A requirement that the new project must be financially viable
without subsidies does not eliminate the possibility that in some
instances the project costs should be rolled into the rates of existing
customers. In most instances incremental pricing will avoid subsidies
for the new project, but the situation may be different in cases of
inexpensive expansibility that is made possible because of earlier,
costly construction. In that instance, because the existing customers
bear the cost of the earlier, more costly construction in their rates,
incremental pricing could result in the new customers receiving a
subsidy from the existing customers because the new customers would not
face the full cost of the construction that makes their new service
possible. The issue of the rate treatment for such cheap expansibility
is one that always should be resolved in advance, before the
construction of the pipeline.
Another instance where a form of rolling in would be appropriate is
where a pipeline has vintages of capacity and thus charges shippers
different prices for the same service under incremental pricing, and
some customers have the right of first refusal (ROFR) to renew their
expiring contracts. Those customers could be allowed to exercise a ROFR
at their original contract rate except when the incremental capacity is
fully subscribed and there are competing bids for the existing
customer's capacity. In that case, the existing customer could be
required to match the highest competing bid up to a maximum rate which
could be either an incremental rate or a ``rolled-up rate'' in which
costs for expansions are accumulated to yield an average expansion
rate. Although the focus of this policy statement is the analysis for
deciding whether new capacity should be constructed, it is important
for the Commission to articulate the direction of its policy on pricing
existing capacity where a pipeline has engaged in expansions. This will
enable existing and potential new shippers to make appropriate
decisions pre-construction to protect their interests either in the
certificate proceeding or in their contracts with the pipeline.
This policy leaves the pipeline responsible for the costs of new
capacity that is not fully utilized and obviates the need for ``at
risk'' condition because it accomplishes the same purpose. Under this
policy the pipeline bears the risk for any new capacity that is under-
utilized, unless, as recommended by a number of commenters, it
contracts with the new customers to share the risk by specifying what
will happen to rates and volumes under specific circumstances. If the
pipeline finds that new shippers are unwilling to share this risk, this
may indicate to the pipeline that others do not share its vision of
future demand. Similarly, the risks of construction cost over-runs
should not be the responsibility of the pipeline's existing customers
but should be apportioned between the pipeline and the new customers in
their service contracts. Thus, in pipeline contracts for service on
newly constructed facilities, pipelines should not rely on standard
``Memphis clauses'', but should reach agreement with new shippers
concerning who will bear the risks of underutilization of capacity and
cost overruns and the rate treatment for ``cheap expansibility.'' \13\
---------------------------------------------------------------------------
\13\ ``Memphis clause'' refers to an agreement that the pipeline
may change the rate during the term of the contract by making rate
filings under NGA section 4.
---------------------------------------------------------------------------
In sum, if an applicant can show that the project is financially
viable without subsidies, then it will have established the first
indicator of public benefit. Companies willing to invest in a project,
without financial subsidies, will have shown an important indicator of
market-based need for a project. Incremental pricing will also lead to
the correct price signals for the new project and provide the
appropriate incentive for the optimal level of construction. This can
unnecessary adverse impacts on landowners or existing pipelines and
their captive customers. Therefore, this will be the threshold
requirement for establishing that a project will satisfy the public
convenience and necessity standard.
C. Factors To Be Balanced in Assessing the Public Convenience and
Necessity
Ideally, an applicant will structure its proposed project to avoid
adverse economic, competitive, environmental, or other effects on the
relevant interests from the construction of the new projects, and the
Commission would be able to approve such projects promptly. Of course,
elimination of all adverse effects will not be possible in every
instance. When it is not possible, the Commission's policy objective is
to encourage the applicant to minimize the adverse impact on each of
the relevant interests. After the applicant efforts to minimize the
adverse effects, construction projects that would have residual adverse
effects would be approved only where the public benefits to be achieved
from the project can be found to outweigh the adverse effects. Rather
than relying only on one test for need, for Commission will consider
all relevant factors reflecting on the need for the project. These
might include, but would not be limited to, precedent agreements,
demand projections, potential cost savings to consumers, or a
comparison of projected demand with the amount of capacity currently
serving the market. The objective would be for the applicant to make a
sufficient showing for the public benefits of its proposed project to
outweigh any residual adverse effects discussed below.
1. Consideration of Adverse Effects on Potentially Affected Interests
In deciding whether a proposal is required by the public
convenience and necessity, the Commission will consider the effects of
the project on all the affected interests; this means more than the
interests of the applicant, the potential new customers and the general
societal interests.
Depending on the type of project, there are three major interests
that may be adversely affected the approval of major certificate
projects, and that must be considered by the Commission.
[[Page 51317]]
There are: the interest of the applicant's existing customers, the
interests of competing existing pipelines and their captive customers,
and the interests of landowners and surrounding communities. There are
other interests that may need to be separately considered in a
certificate proceeding, such as environmental interests.
Of course, not every project will have an impact on each interest
identified. Some projects will be proposed by new pipeline companies to
serve new markets, so that there will be no adverse effects on the
interests of existing customers; other projects may be constructed so
that there may be no adverse effect on landowner interests.
a. Interests of existing customers of the pipeline applicants. The
interests of the existing customers of the expanding pipeline may be
adversely affected if the expansion results in their rates being
increased or if the expansion causes a degradation in service.
b. Interests of existing pipelines that already serve the market
and their captive customers. Pipelines that already serve the market
into which the new capacity would be built are affected by the
potential loss of market share and the possibility that they may be
left with unsubscribed capacity investment. The Commission need not
protect pipeline competitors from the effects of competition, but it
does have an obligation to ensure fair competition. Recognizing the
impact of a new project on existing pipelines serving the market is not
synonymous with protecting incumbent pipelines from the risk of loss of
market share to a new entrant, but rather, is a recognition that the
impact on the incumbent pipeline is an interest to be taken into
account in deciding whether to certificate a new project. The interests
of the existing pipeline's captive customers are slightly different
from the interests of the pipeline. The interests of the captive
customers of the existing pipelines are affected because, under the
Commission's current rate model, they can be asked to pay for the
unsubscribed capacity in their rates.
c. Interests of landowners and the surrounding communities.
Landowners whose land would be condemned for the new pipeline right-of-
way, under eminent domain rights conveyed by the Commission's
certificate, have an interest as does the community surrounding the
right-of-way. The interest of these groups is to avoid unnecessary
construction, and any adverse effects on their property associated with
a permanent right-of-way. In some cases, the interests of the
surrounding community may be represented by state or local agencies.
Traditionally, the interests of the landowners and the surrounding
community have been considered synonymous with the environmental
impacts of a project; however, these interests can be distinct.
Landowner property rights issues are different in character from other
environmental issues considered under the National Environmental Policy
Act of 1969 (NEPA).\14\
---------------------------------------------------------------------------
\14\ 42 U.S.C. Sec. 4321 et seq.
---------------------------------------------------------------------------
2. Indicators of Public Benefit
To demonstrate that its proposal is in the public convenience and
necessity, an applicant must show public benefits that would be
achieved by the project that are proportional to the project's adverse
impacts. The objective is for the applicant to create a record that
will enable the Commission to find that the benefits to be achieved by
the project will outweigh the potential adverse effects, after efforts
have been made by the applicant to mitigate these adverse effects. The
types of public benefits that might be shown are quite diverse but
could include meeting unserved demand, eliminating bottlenecks, access
to new supplies, lower costs to consumers, providing new interconnects
that improve the interstate grid, providing competitive alternatives,
increasing electric reliability, or advancing clean air objectives. Any
relevant evidence could be presented to support any public benefit the
applicant may identify. This is a change from the current policy which
relies primarily on one test to establish the need for the project.
The amount of evidence necessary to establish the need for a
proposed project will depend on the potential adverse effects of the
proposed project on the relevant interests. Thus, projects to serve new
demand might be approved on a lesser showing of need and public
benefits than those to serve markets already served by another
pipeline. However, the evidence necessary to establish the need for the
project will usually include a market study. There is no reason for an
applicant to do a new market study of its own in every instance. An
applicant could rely on generally available studies by EIA or GRI, for
example, showing projections of market growth. If one of the benefits
of a proposed project would be to lower gas or electric rates for
consumers, then the applicant's market study would need to explain the
basis for that projection. Vague assertions of public benefits will not
be sufficient.
Although the Commission traditionally has required an applicant to
present contracts to demonstrate need, that policy, as discussed above,
no longer reflects the reality of the natural gas industry's structure,
nor does it appear to minimize the adverse impacts on any of the
relevant interests. Therefore, although contracts or precedent
agreements always will be important evidence of demand for a project,
the Commission will no longer require an applicant to present contracts
for any specific percentage of the new capacity. Of course, if an
applicant has entered into contracts or precedent agreements for the
capacity, it will be expected to file the agreements in support of the
project, and they would constitute significant evidence of demand for
the project.
Eliminating a specific contract requirement reduces the
significance of whether the contracts are with affiliated or
unaffiliated shippers, which was the subject of a number of comments. A
project that has precedent agreements with multiple new customers may
present a greater indication of need than a project with only a
precedent agreement with an affiliate. The new focus, however, will be
on the impact of the project on the relevant interests balanced against
the benefits to be gained from the project. As long as the project is
built without subsidies from the existing ratepayers, the fact that it
would be used by affiliated shippers is unlikely to create a rate
impact on existing ratepayers. With respect to the impact on the other
relevant interests, a project built on speculation (whether or not it
will be used by affiliated shippers) will usually require more
justification than a project built for a specific new market when
balanced against the impact on the affected interests.
3. Assessing Public Benefits and Adverse Effects
The more interests adversely affected or the more adverse impact a
project would have on a particular interest, the greater the showing of
public benefits from the project required to balance the adverse
impact.The objective is for the applicant to develop whatever record is
necessary, and for the commission to impose whatever conditions are
necessary, for the Commission to be able to find that the benefits to
the public from the project outweigh the adverse impact on the relevant
interests.
It is difficult to construct helpful bright line standards or tests
for this area. Bright line tests are unlikely to be flexible enough to
resolve specific cases and to allow the Commission to take into account
the different interests that
[[Page 51318]]
must be considered. Indeed, the current contract test has become
problematic. However, the analytical framework described here should
give applicants more certainty and sufficient guidance to anticipate
how to structure their projects and develop the record to facilitate
the Commission's decisional process.
Under this policy, if project sponsors, proposing a new pipeline
company, are able to acquire all, or substantially all, of the
necessary right-of-way by negotiation prior to filing the application,
and the proposal is to serve a new, previously unserved market, it
would not adversely affect any of the three interests. Such a project
would not need any additional indicators of need and may be readily
approved if there are no environmental considerations. Under these
circumstances landowners would not be subject to eminent domain
proceedings, and because the pipeline was new, there would be no
existing customers who might be called upon to subsidize the project. A
similar result might be achieved by an existing pipeline extending into
a new unserved market by negotiating for a right-of-way for the
proposed expansion and following the first requirement for showing
need, financing the project without financial subsidies. It would avoid
adverse impacts to existing customers by pricing its new capacity
incrementally and it is unlikely that other relevant interests would be
adversely affected if the pipeline obtained the right-of-way by
negotiation.
It may not be possible to acquire all the necessary right-of-way by
negotiation. However, the company might minimize the effect of the
project on landowners by acquiring as much right-of-way as possible. In
that case, the applicant may be called upon to present some evidence of
market demand, but under this sliding scale approach the benefits
needed to be shown would be less than in a case where no land rights
had been previously acquired by negotiation. For example, if an
applicant had precedent agreements with multiple parties for most of
the new capacity, that would be strong evidence of market demand and
potential public benefits that could outweigh the inability to
negotiate right-of-way agreements with some landowners. Similarly, a
project to attach major new gas supplies to the interstate grid would
have benefits that may outweigh the lack of some right-of-way
agreements. A showing of significant public benefit would outweigh the
modest use of federal eminent domain authority in this example.
In most cases it will not be possible to acquire all the necessary
right-of-way by negotiation. Under this policy, a few holdout
landowners cannot veto a project, as feared by some commenters, if the
applicant provides support for the benefits of its proposal that
justifies the issuance of a certificate and the exercise of the
corresponding eminent domain rights. The strength of the benefit
showing will need to be proportional to the applicant's proposed
exercise of eminent domain procedures.
Of course, the Commission will continue to do an independent
environmental review of projects, even if the project does not rely on
the use of eminent domain and the applicant structures the project to
avoid or minimize adverse impacts on any of the identified interests.
The Commission anticipates no change to this aspect of its certificate
policies. However, to the extent applicants minimize the adverse
impacts of projects in advance, this should also lessen the adverse
environmental impacts as well, making the NEPA analysis easier. The
balancing of interests and benefits that will precede the environmental
analysis will largely focus on economic interests such as the property
rights of landowners. The other interests of landowners and the
surrounding community, such as noise reduction or esthetic concerns
will continue to be taken into account in the environmental analysis.
If the environmental analysis following a preliminary determination
indicates a preferred route other than the one proposed by the
applicant, the earlier balancing of the public benefits of the project
against its adverse effects would be reopened to take into account the
adverse effects on landowners who would be affected by the changed
route.
In another example of the proportional approach, a proposal that
may have adverse impacts on customers of another pipeline may require
evidence of additional benefits to consumers, such as lower rates for
the customers to be served. The Commission might also consider how the
proposal would affect the cost recovery of the existing pipeline,
particularly the amount of unsubscribed capacity that would be created
and who would bear that risk, before approving the project. This
evaluation would be needed to ensure consideration of the interests of
the existing pipeline and particularly its captive customers. Such
consideration does not mean that the Commission would always favor
existing pipelines and their captive customers. For instance, a
proposed project may be so efficient and offer substantial benefits,
such as significant service flexibility, so that the benefits would
outweigh the adverse impact on existing pipelines and their captive
customers.
A number of commenters were concerned that the Commission might
give too much weight to the impact on the existing pipeline and its
captive customers and undervalue the benefits that can arise from
competitive alternatives. The Commission's focus is not to protect
incumbent pipelines from the risk of loss of market share to a new
entrant, but rather to take the impact into account in balancing the
interests. In such a case the evidence of benefits will need to be more
specific and detailed than the generalized benefits that arise from the
availability of competitive alternatives. The interests of the captive
customers are slightly different from the interests of the incumbent
pipeline. The captive customers are affected if the incumbent pipeline
shifts to the captive customers the costs associated with its
unsubscribed capacity. Under the Commission's current rate model
captive customers can be asked to pay for unsubscribed capacity in
their rates, but the Commission has indicated that it will not permit
all costs resulting from the loss of market share to be shifted to
captive customers.\15\ Whether and to what extent costs can be shifted
is an issue to be resolved in the incumbent pipeline's rate case, but
the potential impact on these captive customers is a factor to be taken
into account in the certificate proceeding of the new entrant.
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\15\ El Paso Natural Gas Company, 72 FERC para. 61,083 (1995);
Natural Gas Pipeline Company of America, 73 FERC para. 61,050
(1995).
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In sum, the Commission will approve an application for a
certificate only if the public benefits from the project outweigh any
adverse effects. Under this policy, pipelines seeking a certificate of
public convenience and necessity authorizing the construction of
facilities are encouraged to submit applications designed to avoid or
minimize adverse effects on relevant interests including effects on
existing customers of the applicant, existing pipelines serving the
market and their captive customers, and affected landowners and
communities. The threshold requirement for approval, that project
sponsors must be prepared to develop the project without relying on
subsidization by the sponsor's existing customers, protects all of the
relevant interests. Applicants also must submit evidence of the public
benefits to be achieved by the proposed project such as contracts,
precedent agreements, studies of projected demand in the
[[Page 51319]]
market to be served, or other evidence of public benefit of the
project.
V. Conclusion
At a time when the Commission is urged to authorize new pipeline
capacity to meet an anticipated increase in the demand for natural gas,
the Commission is also urged to act with caution to avoid unnecessary
rights-of-way and the potential for overbuilding with the consequent
effects on existing pipelines and their captive customers. This policy
statement is intended to provide more certainty as to how the
Commission will analyze certificate applications to balance these
concerns. By encouraging applicants to devote more effort in advance of
filing to minimize the adverse effects of a project, the policy gives
them the ability to expedite the decisional process by working out
contentious issues in advance. Thus, this policy will provide more
guidance about the Commission's analytical process and provide
participants in certificate proceedings with a framework for shaping
the record that is needed by the Commission to expedite its decisional
process.
Finally, this new policy will not be applied retroactively. A major
purpose of the policy statement is to provide certainty about the
decisionmaking process and the impacts that would result from approval
of the project. This includes providing participants in a certificate
proceeding certainty as to economic impacts that will result from the
certificate. It is important for the participants to know the economic
consequences that can result before construction begins. After the
economic decisions have been made it is difficult to undo those
choices. Therefore, the new policy will not be applied retroactively to
cases where the certificate has already issued and the investment
decisions have been made.
By the Commission. Chairman Hoecker and Commissioners Breathitt
and Hebert concurred with a separate statement attached.
Commissioner Bailey dissented with a separate statement attached.
David P. Boergers,
Secretary.
Policy Statement for Certification of New Interstate Natural Gas
Pipeline Facilities
Docket No. PL99-3-000
[Issued September 15, 1999]
Hoecker, Chairman; Breathitt and Hebert, Commissioners, concurring;
Our intention is to apply this policy statement to any filings
received by the Commission after July 29, 1998 (the issuance date of
the Commission's Notice of Proposed Rulemaking regarding the Regulation
of Short-term Natural Gas Transportation Services in Docket No. RM98-
10-000 and Notice of Inquiry regarding Regulation of Interstate Natural
Gas Transportation Services in Docket No. RM98-12-000), and not before.
James J. Hoecker,
Chairman.
Linda K. Breathitt,
Commissioner.
Curt L. Hebert,
Commissioner.
Certification of New Interstate Natural Gas Facilities
[Docket No. PL99-3-000]
[Issued September 15, 1999]
Bailey, Commissioner, dissenting.
Respectfully, I will be dissenting from this policy statement.
The document puts forth the majority's statement of an analytical
framework for use in certificate proceedings. Its goal is to give
applicants and other participants in those proceedings a better
understanding of how the commission makes its decisions. This is always
a good thing to do. But ultimately, I cannot sign on to this statement
as representative of my approach to certificate policy for several
reasons.
First and foremost, the document purports that the policy outlined
is not a significant departure from the kind of analysis used currently
in certificate cases. I do not share this view. I know that it does
depart from the way I currently look at certificate issues. For
example, I cannot say that the sliding scale evaluation process and the
weighing and balancing process described in the statement actually
reflects the way I look at things. Further, the pricing changes
announced are in fact significant departures from current practice.
Thus, the document is as much about pricing policy change as it is
about articulating an analytical approach to certification questions. I
do not completely agree with the statements regarding pricing contained
in this document.
The announced policy will now require that new projects meet a
pricing threshold before work can proceed on the application--that is
they should be incrementally priced and not subsidized by existing
customers. The intent behind this is to enhance our certainty that the
market is determining which projects come to the Commission.
I do not disagree with the idea that incremental pricing is
consistent with the idea of allowing markets to decide. I also
recognize that it can protect existing customers from subsidizing
expansions as well as insulate existing pipelines form subsidized
competition. However, I find the policy statement to be far too
categorical in its approach. I am not persuaded that we should depart
from our existing policy statement on pricing that we adopted in 1995.
There is too little recognition here that some types of
construction projects are not designed solely for new markets or
customers, that existing customers can benefit from some projects, and
that rolled-in pricing may still be appropriate. Thus, while I can
agree with some of the articulated goals such as pricing should
allocate risk appropriately, and that if done properly it can assist in
avoiding construction of excess capacity, I would not adopt a threshold
requirement that virtually precludes use of rolled-in rates.
Finally, I am at a loss to explain the genesis of this particular
outcome. I recognize that certificate policy issues have been
problematic for a long time. In attempts to address these issues we
have had conferences to explore need issues and we have requested
comments on certificate issues in the pending gas Notice of Proposed
Rulemaking in Docket No. RM98-10-1000 (84 FERC para. 61,087 (1998)) and
the Notice of Inquiry in Docket No. RM98-12-000 (84 FERC para. 61,087
(1998)). The variety of views we have received in these efforts are
summarized in the policy statement ad it candidly recognizes the lack
of clear direction on what path the Commission should follow. Given
this lack of industry consensus, I question the advisability of trying
to adopt a generic approach at this time. I would prefer to weigh
further the relative merits of those comments before embarking on an
attempt to articulate a certificate policy.
Vicky A. Bailey,
Commissioner.
[FR Doc. 99-24617 Filed 9-21-99; 8:45 am]
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