[Federal Register Volume 59, Number 148 (Wednesday, August 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18870]
[[Page Unknown]]
[Federal Register: August 3, 1994]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. PL94-4-000]
Pricing Policy For New And Existing Facilities Constructed By
Interstate Natural Gas Pipelines;
NOTICE OF PUBLIC CONFERENCE AND OPPORTUNITY TO FILE WRITTEN
COMMENTS
July 28, 1994.
Take notice that the Commission will convene a public conference in
the above-captioned proceeding to consider the methodologies to be used
in setting rates for transportation service with regard to new and
existing facilities constructed by interstate natural gas pipelines.
The Commission also will be accepting written comments prior to the
conference. The date and procedures for the conference will be
established by a subsequent notice. Written comments may be filed
within 60 days of the date of this notice.
I. Scope of Inquiry
Historically, when pipelines have sought to enlarge their
facilities, the Commission had a preference for rolling-in the costs of
the new construction into the pipeline's cost-of-service and
establishing a single rate for both the existing customers and the
expansion customers (those customers obtaining capacity as a result of
the new facilities). The Commission found that rolled-in pricing would
be appropriate when the new facilities were part of an integrated
system and provided system-wide benefits.1 When the new
construction was not integrated into the pipeline's existing system,
the Commission would approve incremental pricing in which a separate
cost-of-service is established for the existing and expansion
facilities, and the prior holders of capacity (existing shippers) and
expansion shippers pay different rates.
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\1\See Trunkline Gas Company, 21 FPC 704 (1959), aff'd, Battle
Creek Gas Company v. FPC, 281 F.2d 42 (D.C. Cir. 1960); Great Lakes
Gas Transmission Limited Partnership, 45 FERC 61,237 (1988).
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The Commission, however, became concerned about the effect of
rolling-in the costs of new construction that is integrated into the
pipeline's existing system. The Commission was particularly concerned
with the effects of expensive construction because using rolled-in
rates could result in disproportionate costs being imposed on existing
customers when compared with the benefits they receive from the
expansion.2 The Commission was further concerned that rolling-in
rates in this situation could conflict with its efforts to adopt rate
designs that promote economic efficiency by causing the pipeline's
existing customers to subsidize the rates paid by expansion customers.
As a result of these concerns, the Commission, in its Great Lakes
orders, required the pipeline to charge incremental prices for a system
expansion based on a test in which the benefits to existing customers
were weighed against the costs of rolling-in the facilities
(commensurate benefits test).
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\2\See Great Lakes Gas Transmission Limited Partnership, 57 FERC
61,140 (1991) (Opinion No. 367), reh'g denied, 62 FERC 61,101
(1993), 57 FERC 61,141 (1991) (Opinion No. 368), reh'g denied, 62
FERC 61,102 (1993) remanded, No. 91-1380, (D.C. Cir. June 10,
1994), 1994 U.S. App. LEXIS 14190; and Southern Natural Gas Company,
51 FERC 61,296 (1990).
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In TransCanada Pipelines Limited v. FERC,3 the court of
appeals, however, remanded the Commission's determination to use
incremental rates in Great Lakes. The court concluded that the
Commission had not justified its focus on commensurate benefits in
light of the Commission's past approach of examining whether the new
facilities were integrated into existing facilities and whether the
facilities provided system-wide benefits, qualitatively described. The
court also expressed concern that the use of incremental pricing may
result in undue discrimination because facility expansion is caused not
only by the demands of the new customers, but by the continuing demands
of the existing customers. 4
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\3\No. 91-1380, (D.C. Cir. June 10, 1994), 1994 U.S. App. LEXIS
14190.
\4\The Commission will decide its position in the Great Lakes
remand in concert with its consideration of the appropriate pricing
policy to use generically in this proceeding.
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The Commission has been moving towards greater reliance on market
forces both in its rates and certificate policies. In Order Nos.
4365 and 6366, the Commission required pipelines to provide
unbundled, open access transportation in order to promote greater
efficiency and increased competition among pipelines and their
customers, two goals that can be affected by the pricing policies used
for new construction. In order to contribute to achieving these two
goals, the Commission also required pipelines to institute capacity
release mechanisms and to adopt flexible receipt and delivery point
policies. In the competitive world of unbundled transportation,
shippers have many more transportation options, and the prices shippers
pay for transportation on different pipelines has become a critically
important aspect of competition in the market. In the competitive
capacity market created by Order Nos. 436 and 636, the development of
consistent pricing policies is important both for pipelines and their
customers, because they need to know the rates that will be charged in
order to make appropriate decisions about the amount of capacity to
build and to purchase.
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\5\Regulation of Natural Gas Pipelines After Partial Wellhead
Decontrol, Order No. 436, 50 FR 42408 (Oct. 18, 1985), FERC Stats. &
Regs. [Regulations Preambles 1982-1985] 30,665 (Oct. 9, 1985).
\6\Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation; and Regulation of
Natural Gas Pipelines After Partial Wellhead Decontrol, 57 Fed. Reg.
13,267 (Apr. 16, 1992), III FERC Stats. & Regs. Preambles 30,939
(Apr. 8, 1992).
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The Commission is interested in undertaking a comprehensive
evaluation of its current pricing policies to determine whether
revisions are needed. One goal of this effort is to develop pricing
policies for new construction that will properly reflect cost
responsibility and that will further efficiency and competition in the
market and promote the development of the industry. Another important
goal is to identify how best to provide pipelines and their existing
and future customers with as much certainty as possible about whether
projects will be approved and the rates customers will be paying for
capacity when pipelines expand. Unless pipelines and customers are
aware of the rate implications of expansions, they cannot make informed
decisions about the amount of capacity to build and to purchase.
As part of the inquiry into ways to provide greater certainty about
project approvals and rates for new construction, the Commission is
interested in reexamining its current certificate and rates policies
for new construction. As a result of the increased reliance on market
forces brought about by Order Nos. 436 and 636, the Commission has
reevaluated its certificate policies to place greater reliance on the
market. The Commission has established procedures under which pipelines
can obtain construction certificates for projects that are not fully
subscribed at the time of application. First, pipelines may apply for
optional certificates for undersubscribed projects under which the
pipelines are at risk for cost recovery.7 Second, if pipelines
apply for a traditional certificate and have not been able to
demonstrate that the project will be fully subscribed under long term
contracts, the Commission has permitted the construction to go forward
by issuing certificates containing conditions under which the pipeline
is placed at risk for unsubscribed capacity.8 The Commission,
however, has declined to issue at-risk certificates where companies
have failed to demonstrate support for a significant amount of the
projected capacity.9
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\7\18 CFR Part 157, Subpart E.
\8\See, e.g., Arkla Energy Resources Company, 63 FERC 61,215
at 62,590 (1993).
\9\See, e.g., Questar Pipeline Company, 67 FERC 61,145 (1994).
But see, Petal Gas Storage Company, 64 FERC 61,190 (1993), in
which the Commission issued a certificate approving operation of
existing storage facilities to provide third party storage service
at market-based rates, though the applicant, a newly formed company,
had no executed contracts or binding precedent agreements.
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The Commission's policy has been to determine whether to allow a
rolled-in pricing methodology for new facilities when pipelines have
sought to recover the costs for these facilities in proceedings under
Sec. 4 of the Natural Gas Act (NGA), rather than when the pipelines
have sought certificate approval for construction under Sec. 7 of NGA.
However, when a pipeline seeks incremental pricing treatment, the
Commission generally addresses this issue in the Sec. 7 certificate
proceeding where a new facility or service is first proposed. The
Commission has not made rolled-in pricing determinations in certificate
applications because, in Sec. 7 certificate proceedings, the Commission
is considering rates only for new service or customers and cannot
change the rates of the pipeline's existing customers.10 One
effect of making rolled-in pricing determinations in Sec. 4 rate
proceedings is that the decision is made after the facilities are built
and after the customers have determined whether to sign contracts for
the facilities.
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\1\0See Northern Natural Gas Company v. FERC, 827 F.2d 779 (D.C.
Cir. 1987); Panhandle Eastern Pipe Line Company v. FERC, 613 F.2d
1120 (D.C. Cir. 1979), cert. denied, 449 U.S. 889 (1980). The
Commission could change existing customers' rates only by acting
under Sec. 5 of the NGA and finding that their rates are unjust and
unreasonable.
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In a recent order in Northwest Pipeline Corporation,11 the
Commission sought to provide greater certainty about rate treatment by
issuing a declaratory order in Northwest's certificate proceeding
providing a preliminary determination of rate design methodology. Based
on the information provided by Northwest in its application and in
response to Commission data requests, the Commission found that rolled-
in rate treatment would be appropriate in a subsequent Sec. 4 rate
filing to recover the facility costs, provided, however, that Northwest
could show in the Sec. 4 rate proceeding that the expansion facilities
would provide the system-wide benefits it alleged in the certificate
application and that the rate impact of rolling-in the facilities would
be approximately the same as, and not materially greater than, that
projected by Northwest.
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\1\159 FERC 61,289 (1992), order on reh'g, 68 FERC 61,037
(1994).
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The Commission is interested in obtaining the industry's views on
the extent of contractual support for a project that should be required
before the Commission expends resources evaluating the project's rate
and environmental aspects. The Commission is concerned about
authorizing activities that will affect the environment or confer
eminent domain powers on an applicant when the applicant offers no
support (whether by way of contracts or precedent agreements) for its
proposal. The Commission, however, also is aware that some applicants,
particularly new entrants to the market, may not be able to obtain the
financing needed to attract customers for their project without some
indication by the Commission that the project ultimately may be
approved and, if so, at what price capacity will be available.
Depending on the policy adopted for recovering expansion costs, the
Commission is also interested in examining whether its current policy
of making rolled-in rate determinations in Sec. 4 rate proceedings may
need to be revised. For example, if the Commission were to adopt a
specific policy (such as always pricing on a rolled-in or incremental
basis) or definitive criteria, the question of the proceeding (whether
a Sec. 7 certificate or a Sec. 4 rate case) in which to make the
determination could be less important, since pipelines and customers
would know in advance how the facilities would be priced. However, if
the Commission were to adopt more general criteria, such as a system-
wide benefits or commensurate benefits test, the Commission may need to
consider whether and how to revise its current policies on when and in
what proceeding to make the determination.
The Commission is establishing this conference to obtain views from
all facets of the gas industry on issues relating to the methods for
recovering facility costs. The Commission discusses below some of the
issues bearing on the determination of pricing methodologies. The
Commission is interested in hearing the industry's views on these
issues, as well as other issues related to facility cost recovery, in
written submissions and in oral presentations at the conference.
II. Issues to be Considered
A. Benefits And Effects Resulting From The Adoption Of Rolled-in Or
Incremental Pricing
The Commission is interested in receiving comments on the
competitive effects of adopting rolled-in or incremental pricing as
well as other effects resulting from the choice of pricing methodology.
The following are some of the questions that will be considered.
1. Which pricing methodology better reflects cost responsibility
and provides better market signals about the appropriate scale of
construction? Will rolled-in pricing lead to overbuilding because the
existing customers are contributing to the costs of construction? On
the other hand, does rolled-in pricing better avoid piecemeal
expansions, and higher overall costs, by permitting pipelines to build
facilities to better serve future needs? Is Commission oversight
through its certificate regulation sufficient to prevent overbuilding?
2. What is the effect of each pricing methodology on other national
goals, such as promoting the use of natural gas or protecting the
environment? For example, which methodology would better permit the
market to make the appropriate fuel choice given environmental and
other impacts of the choice?
3. Does the choice of pricing methodology have a significant effect
on competition among pipelines? For example, does a new pipeline, whose
prices reflect current construction costs, have difficulty competing
against an existing pipeline that can roll-in new facilities costs? If
so, should this be a regulatory concern?
4. Does the choice of pricing methodology have a significant effect
on competition in the capacity release market? For example, does an
incremental shipper, whose rates reflect the current cost of
construction, have difficulty competing in the capacity release market
with a shipper paying a pre-expansion rate?
5. Does the adoption of any pricing methodology better comport with
a regulatory regime that relies on private contracts and market forces?
For example, does the choice of pricing methodology affect business
planning and the negotiation of long-term contracts? How important is
long-term contracting to the industry?
6. Does charging shippers different prices for the same service
under incremental pricing (vintage pricing) create economic distortions
or undue discrimination, as raised by the Court in TransCanada?
Commenters should consider the following questions.
a. Does vintage pricing create economic distortions and, if so, are
such distortions greater or less than those associated with rolled-in
pricing?
b. Should existing shippers be entitled to receive lower prices
because they signed long-term contracts with the pipelines when prices
were lower? Commenters should address the terms and conditions relating
to rate increases that would exist in long term contracts in a
competitive market for capacity. They also should address the prices
existing shippers should pay when their contracts expire.
c. What price should a new shipper which acquires existing capacity
(formerly priced at a pre-expansion rate) pay? For example, if an
existing shipper exercises a contractual right to reduce its contract
demand freeing capacity for a new shipper, should a new shipper pay the
pre-expansion, the incremental, or some other rate for that freed-up
capacity?
d. Are there methods of dealing with the vintage pricing issue? For
example, should current shippers be able to release capacity prior to
the expansion at up to the proposed incremental rate? If current
shippers are willing to release some of their existing capacity prior
to the expansion, the scale of the expansion could be reduced.
Permitting current shippers to release capacity also would ensure that
all shippers would make their capacity determinations based on
incremental prices and that capacity would be allocated to those
shippers valuing it the most.
B. What Pricing Methodology Or Test Should The Commission Adopt For New
And Existing Facilities?
Given the economic effects of the potential choices, the Commission
is interested in obtaining comments on the pricing methodology or
methodologies that should be used. Comments should not be limited to
the rolled-in or incremental methodologies used in the past, but should
include potential alternative approaches, with a discussion of the
benefits of each approach. If the Commission were to continue its case-
by-case approach to determining pricing methodology, the Commission is
interested in obtaining comments on the appropriate test that should be
used in making this determination. The following are some questions to
be considered.
1. What does the industry need in the way of new construction over
the next decade (e.g., expansion of facilities, access to new market or
supply areas, replacement of old facilities, connections between
existing facilities to create greater flexibility) and how do these
needs bear upon the methodology or methodologies used by the Commission
to set rates for new construction?
2. Do changes in the industry warrant the adoption of a new
approach to establishing pricing methodologies for new or existing
construction? For example, are there relevant differences between
current and past expansions in terms of the rate impact of the
expansions or the customers served by the expansion (e.g., all the
pipeline's customers rather than a subset)? What effect does the advent
of open access transportation and the unbundling of gas sales from
transportation brought about by Order Nos. 436 and 636 have on the
choice of pricing methodology?
3. To what extent should other aspects of rate design (e.g.,
unbundling, mileage-based rate design, seasonal rate design, production
area rate design, or market based rates) affect the Commission's policy
on the choice between rolled-in and incremental rates?
4. Should the Commission continue to use general criteria, such as
the extent of system-wide benefits, or should it adopt discrete
policies or guidelines for determining the appropriate methodologies.
The following are some possible options to be considered.
a. Different methodologies could be used depending on the type of
construction, for example mainline expansions, laterals, extensions
beyond the existing termination point, or facilities directly connected
to certain customers.
b. Thresholds could be set for determining which methodology to
apply, for example, rolling-in costs for facilities unless they would
increase rates by more than a certain percentage.
c. Rates for expansion customers could be set at the higher of
rolled-in or incremental rates.
5. Should the Commission consider options other than full rolled-in
or incremental pricing of new facilities? The following are some
options to be considered.
a. Rates for expansion customers could be set based on the sum of
incremental costs and a share of pre-expansion costs to reflect the
benefits expansion customers receive from existing facilities. The
rates for existing shippers also could be adjusted to reflect benefits
received from the expansion.
b. Rates could be set on an incremental basis, with the costs
rolled-in after some specified period of time or rolled-in gradually
over time at a pre-determined level each year.
c. Incremental rates could be used for the expansion customers, but
as lower priced contracts for existing shippers expire, their capacity
would be rolled-in to the expansion capacity, thus reducing the
incremental rate.
d. Rolled-in rates could be used for expansions (or portions of
expansions) built to serve existing markets and incremental rates for
expansions (or portions of expansions) used to serve new markets.
6. If more general criteria are to be used in individual cases,
what should the tests or criteria be? Among the issues to be considered
are:
a. Should the Commission adopt a rebuttable presumption in favor of
a particular pricing method and what test should be used to overcome
the presumption?
b. Should the commensurate benefits test be used for approving
rolled-in pricing or is it sufficient that existing shippers obtain
positive benefits?
c. What are the advantages and disadvantages of each test, or is
another formulation more appropriate?
d. Do benefits need to be measurable? What weight should be given
to various criteria, and how should non-measurable criteria be valued?
7. How should the Commission handle multiple expansions, in
particular when an initial, expensive addition makes subsequent
additions less costly?
For example, pure incremental pricing could cause customers to seek
to delay making commitments until the later, less expensive expansion
in order to obtain lower rates, while rolled-in pricing could
discourage construction of the less expensive expansion because rates
would be above the incremental cost of the project.
a. Which of the options is preferable?
b. Are there methods that could avoid both problems?
c. Should the Commission adopt a policy under which the costs for
expansions starting from a particular date are cumulated or ``rolled-
up'' to yield an average expansion rate?
C. Should The Commission Revise Its Policies To Provide More Guidance
On Construction Approvals And Rates In Sec. 7 Certificate Proceedings?
The Commission is interested in reviewing its current policies
relating to granting at-risk certificates and determining the rate
methodology for new projects to determine if changes in these policies
are needed. For example, if the Commission adopts more general policies
for recovering the costs of new facilities, rather than a bright-line
test, pipeline customers may need notice of the rates they will be
paying prior to the completion of the Sec. 4 proceeding in order to
make better informed decisions about the amount of capacity for which
to contract.
The Commission is interested in receiving comments on the following
questions.
1. What pricing methodology is most consistent with the
Commission's at-risk certificate policy?
a. Is there any reason to differentiate between at-risk
construction and fully subscribed construction in terms of the pricing
methodology used for facility cost recovery?
b. If rolled-in pricing is used, how should the at-risk condition
be maintained?
c. In light of the Commission's at-risk policy, should the optional
certificate regulations be continued?
2. What are the benefits or detriments of issuing preliminary
determinations on certain aspects of a certificate application (such as
environmental issues and rates)? Are preliminary determinations useful
in dealing with economic aspects of a certificate proposal? What level
of contractual or market support should be required to justify the
issuance of a preliminary determination? What time limitations, if any,
should the Commission impose on submission of supplemental evidence
demonstrating contractual or market support?
3. Should the Commission make a distinction in granting preliminary
determinations depending on whether: (a) Market-based rates are
proposed; (b) the applicant is a new company; or (c) little or no new
construction of facilities is involved? What other distinctions, if
any, should be made?
4. What are the benefits and detriments of making pricing decisions
in or coincident with certificate proceedings?
a. Should the Commission use the preliminary determination or
declaratory order approach as in Northwest? If so, what should be the
burden of proof, what procedures should be used, and how binding should
the determination be on subsequent Sec. 4 proceedings?
In particular, commenters should address whether to use abbreviated
procedures to make the preliminary determination. For example, the more
abbreviated the procedures used during the certificate proceeding, the
more quickly the determination will be made. On the other hand, the use
of abbreviated procedures may increase the risk that the full Sec. 4
proceeding may reveal problems or difficulties that were not apparent
during the certificate examination. In other words, should the
Commission provide certificate applicants with the choice of: (1) A
fast-track procedure for applicants which wish to charge incremental
rates, or which otherwise have no need for an up-front determination of
the rolled-in rate treatment issue; or (2) a separate procedure for
applicants which desire an up-front determination on rolled-in rate
treatment and are willing to accept the likely evidentiary burdens as
well as the additional time likely to process such an application? If
so, how should these different tracks be designed?
b. Should the Commission exercise its Sec. 5 authority in the
certificate proceeding to establish rates for all customers?
c. Should the Commission require pipelines seeking rolled-in rate
treatment to file a Sec. 4 proceeding along with the certificate
application?
Commenters should address whether the filing should be a limited
Sec. 4 filing examining only the expansion costs and the pricing
methodology for these costs or whether it should be a full Sec. 4
proceeding in which all the pipeline's costs are examined. Would a
limited Sec. 4 proceeding be appropriate when the pipelines agrees to
file a full Sec. 4 proceeding within a stipulated time frame?
d. Should the Commission be able to change the initial rate
methodology adopted for facilities at a later point in time? Does
changing methodologies upset the goal of providing rate certainty? What
criteria should the Commission use in making such changes?
D. Implementation Issues Related To Use Of Incremental Rates
The Commission is interested in exploring a number of questions
relating to the implementation of incremental rates.
1. How should the maximum rate for interruptible transportation be
determined under incremental rates?
2. The Commission has a policy that all shippers have a right to
use all receipt and delivery points within the firm transportation path
to which the shipper is entitled or for which it is willing to pay.
a. How does the charging of different rates (in terms of an
expansion shipper paying incremental rates and a non-expansion shipper
paying pre-expansion rates) affect the flexible receipt and delivery
point policy? Should non-expansion shippers have access to points on
the expansion facilities? And, at what rate?
b. Should expansion shippers have access to points on the existing
facilities? Is it equitable for existing non-expansion shippers, who
pay a pre-expansion rate, to have access to receipt and/or delivery
points in competition with expansion shippers paying a higher
incremental rate at the same points?
3. Are there other administrative burdens on the industry or the
Commission that would be occasioned by incremental rates? For example,
pipelines now administer complex zone rate schedules. How much
additional burden is created by incremental rates?
E. Questions Relating To Other Inquiries
The Commission anticipates that it will initiate two other
inquiries in the near future to address: (1) The performance of the
current Order No. 636 capacity release program and whether that program
can be improved to make the present secondary market in pipeline
capacity more efficient; and (2) the relationship between the
Commission's open access transportation policies and the use of natural
gas as a fuel for electric generation.
1. How do incremental rates, with different customers paying
different rates, affect the current capacity release program and how
should any problems or issues be handled? For example, what maximum
rate should apply to shippers paying different rates?
2. If the Commission were to modify the current capacity release
program (e.g., by eliminating the price cap or by allowing releases
outside of the pipeline's Electronic Bulletin Boards), would there be
any effect that should be considered in deciding whether to apply
rolled-in or incremental rates? Conversely, would the Commission's
decision to use either rolled-in or incremental rates require
modification of the Commission's regulations governing capacity release
transactions? Or, will the secondary market, with or without
modification, work equally well under either rate approach?
3. Would either rolled-in or incremental treatment of new
facilities be most consistent with a policy designed to facilitate the
use of natural gas for the electric generation and cogeneration market?
Please provide specific examples to the extent available.
III. Comment and Conference Procedures
An original and 14 copies of comments on these issues should be
filed with the Commission within 60 days after the date of this notice.
Comments should be submitted to the Office of the Secretary, Federal
Energy Regulatory Commission, 825 North Capitol Street, NE, Washington,
DC 20426, and should refer to Docket No. PL94-4-000. All written
comments will be placed in the Commission's public files and will be
available for inspection in the Commission's Public Reference Room at
941 North Capitol Street, NE, Washington, DC 20426, during regular
business hours. The Commission will issue a subsequent notice of the
date for the public conference and the procedures regarding
presentations by the public at the conference.
By direction of the Commission.
Lois D. Cashell,
Secretary.
[FR Doc. 94-18870 Filed 8-2-94; 8:45 am]
BILLING CODE 6717-01-P