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Actions on Gas-Electric Coordination & Gas Pipelines' Recovery of System Modernization Costs

Today, FERC approved two orders having important implications for interstate natural gas pipelines and their shippers. The following summaries of the actions are based on staff presentations and the commissioners’ remarks at FERC’s open meeting this morning.

First, FERC adopted new rules in its Docket No. RM14-2-000 regarding coordination of the gas and electric industries’ respective processes for scheduling daily use of pipelines and electric transmission grids. In response to FERC’s March 2014 notice of proposed rulemaking (79 Fed. Reg. 18223 (April 1, 2014)), the gas and electric industries, under the auspices of the North American Energy Standards Board (“NAESB”), reached consensus on proposed changes to NAESB business standards to incorporate several aspects of FERC’s proposed changes, specifically:

  • The gas day should not include more than three intraday nomination cycles;
  • The rule prohibiting bumping of flowing interruptible gas in the last intraday cycle should be retained; and
  • There should be at least four hours of processing time between the timely day-ahead nomination deadline and the deadline for timely scheduling, and at least three and a half hours of processing time between the nomination and scheduling deadlines for all other standard nomination cycles.

However, the NAESB process did not produce a consensus regarding FERC’s proposal to change the start of the Gas Day from 9:00 a.m. Central Clock Time (“CCT”) to 4:00 a.m. CCT. That issue was left to FERC to resolve, and was vigorously debated by gas and electric industry stakeholders in comments submitted to the agency in its rulemaking process.

In today’s action, FERC announced that it will modify its regulations to incorporate by reference the revised NAESB standards supported by industry consensus, but will not adopt its proposed change to the start of the gas day. According to the commissioners’ and staff’s discussions of the order approved today, FERC concluded that the adverse safety and cost implications of moving the start of the gas day to a pre-dawn hour outweigh the potential efficiency and reliability benefits of the change. Several of the commissioners stated they nevertheless realize much work on improving gas-electric coordination remains to be done. Their comments cited in particular FERC’s ongoing evaluation of the sufficiency of regional transmission organization and independent system operator (“RTO/ISO”) tariffs regarding “fuel assurance,” i.e., electric generators’ access to sufficient and reliable fuel supplies in RTO/ISO markets (see Centralized Capacity Markets, 149 FERC ¶ 61,145 (2014)), and its order of March 20, 2014, directing all RTOs/ISOs, within 90 days after publication in the Federal Register of the new rules approved today, to file any changes to their respective tariffs’ day-ahead scheduling provisions that are needed to coordinate with the new pipeline scheduling rules, or to show cause why no such revisions are needed (see Cal. Indep. Sys. Operator, Inc., 146 FERC ¶ 61,202, at P 14 (2014)).

Second, FERC announced today its adoption in Docket No. PL15-1-000 of a policy statement (proposed in November 2014) on mechanisms to permit interstate gas pipelines to recover the costs of modernizing their facilities for purposes of enhancing system reliability, safety and regulatory compliance (see Cost Recovery Mechanisms for Modernization of Natural Gas Facilities, 151 FERC ¶ 61,047 (2015)). The end result is to apply industry-wide the standards for such mechanisms the Commission crafted in a January 2013 order approving a modernization surcharge for Columbia Gas Transmission, LLC (see Columbia Gas Transmission, LLC, 142 FERC ¶ 61,062 (2013)). FERC indicates the new policy is appropriate because of capital investments pipelines will have to make to comply with new safety regulations of the U.S. Pipeline and Hazardous Materials Safety Administration and new environmental standards of the U.S. Environmental Protection Agency.

Under the policy promulgated today, FERC will approve cost recovery surcharges on a case-by-case basis under the same five principles it applied in the Columbia decision (see id. at PP 23-27):

  • 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 shifts 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 new policy will become effective on October 1, 2015.

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For more than 65 years, Wright & Talisman, P.C. has been a trusted advisor to energy industry clients in regulatory and compliance matters before FERC, other federal and state agencies, and the courts. Please contact Michael Thompson (202-393-1200) if you have any questions or would like further information regarding this or other issues affecting the natural gas industry.