Effective October 1, 2015, the Federal Energy Regulatory Commission (FERC) will allow interstate natural gas pipelines to seek to recover certain capital expenditures involving changes to pipeline system infrastructure that enhance system reliability, safety and regulatory compliance.  In a Policy Statement issued on April 16, 2015, FERC provided guidance on how it will evaluate such cost recovery proposals.  The intent is to encourage replacement of old and inefficient pipelines or pipeline components, such as compressors, to enhance the safe operation of pipeline systems.
In evaluating cost recovery for these type of upgrades, FERC will consider five criteria based on principles outlined in a January 2013 Order that allowed Columbia Gas Transmission, LLC to recover upgrade costs (see prior pipelinelaw alert):

• The pipeline’s base rates must have been recently reviewed through a Natural Gas Act general section 4 rate proceeding, a cost and revenue study, or through a collaborative effort between the pipeline and its customers;
• Eligible costs must generally be limited to one-time capital costs incurred to meet safety or environmental regulations or other capital costs shown to be necessary for the safe, reliable, and/or efficient operation of the pipeline, and the pipeline must specifically identify each capital investment to be recovered by the surcharge.
• Captive customers must be protected from cost shifting if the pipeline loses shippers or increases discounts to retain business;
• The pipeline must include some method to allow a periodic FERC review to ensure rates remain just and reasonable; and
• The pipeline must work collaboratively with shippers to seek their support for any surcharge proposal.

The Commission intends these standards to be flexible.  FERC’s Policy Statement notes that this opportunity to recover upgrade costs is in recognition of increased safety requirements proposed and/or promulgated by the Pipeline and Hazardous Materials Safety Administration (i.e., the 2011 amendments to the Pipeline Safety Act regarding integrity management, valves and operating pressure and PHMSA’s 2011 Advanced Notice of Proposed Rulemaking regarding the safety of gas transmission pipelines) and EPA (i.e., 2014 EPA white papers regarding reducing emissions from natural gas emissions sources including compressor stations discussed in this prior pipelinelaw alert).