In light of anticipated increases in operator compliance costs associated with PHMSA safety initiatives, FERC is issuing a Proposed Policy Statement for public comment that would allow interstate natural gas pipelines to use cost recovery mechanisms, such as surcharges or cost trackers, to recoup expenditures related to improved safety, reliability, and regulatory compliance.  Comments on this proposed change will be due within 30 days of the proposal’s publication in the Federal Register, with reply comments due 20 days later (thus initial comments will be due after January 3, 2015).

As background to this proposed policy, the Commission mentions the following PHMSA natural gas pipeline safety initiatives:  proposed expansion of IMP regulations, possible automatic shut off valves on new construction, confirmation of MAOP and the draft Integrity Verification Process, and cast iron replacement program.  It also discusses recent EPA initiatives signaling a likely increase in the regulation of natural gas production and transportation-related emissions.  As examples, FERC cites EPA’s white paper on emission reduction from natural gas compressors and its 2009 greenhouse gas reporting rule.

According to FERC, in light of these PHMSA and EPA regulatory initiatives, gas pipeline operators “will soon face new safety standards requiring significant capital cost expenditures to enhance safety and reliability,” as well as “increased environmental monitoring and compliance costs.”  Proposed Policy Statement at 9.  The purpose of the Proposed Policy Statement is to ensure that FERC ratemaking policies do not unnecessarily inhibit the ability of gas pipelines to make needed or required upgrades and improvements.  Id.  To this end, the Policy would allow gas pipeline operators to recoup costs incurred in modernizing their systems through shipper surcharges, subject to certain conditions “intended to ensure that the resulting rates are just and reasonable” and to “protect natural gas consumers from excessive costs.”  Id.  In addition, under the new Policy, only costs related to improvements made in response to increased safety and environmental regulation are eligible for cost recovery.  Pipelines must therefore show that costs to be recovered are not ordinary capital investments related to routine maintenance.  Id. 

The Policy Statement is an outgrowth of the Commission’s recent decision in Columbia Gas Transmission, LLC, 142 FERC ¶ 61,062 (2013).  In Columbia Gas, FERC approved a rate settlement designed to allow the operator to address safety and reliability issues in its aging pipeline system (according to the Order, 73% of Columbia’s DOT-regulated pipelines and 55% of its regulated compressor units were installed prior to 1970).  The unique features of the settlement persuaded FERC that it was “just and reasonable” and provided a blueprint for FERC’s analysis of cost recovery mechanisms under the Proposed Policy.  Under this analysis, an operator’s cost recovery proposal must satisfy five elements to be approved: (1) rates must have been recently reviewed; (2) limit eligible costs to one-time capital costs incurred for system modifications to comply with PHMSA, EPA, or other government agency regulations; (3) design the surcharge to protect captive customers from cost shifts if the pipeline loses customers or has to offer increased discounts to retain business; (4) include a method for periodic review of whether the surcharge and base rates remain just and reasonable; and (5) collaborate with shippers to seek their support for any surcharge proposal.

Instructions for submitting comments to FERC appear in the Proposed Policy Statement (pages 25-26).