[Federal Register: June 26, 2006 (Volume 71, Number 122)]
[Proposed Rules]
[Page 36276-36294]
[DOCID:fr26jn06-25]

-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 157

[Docket No. RM06-7-000]

Revisions to the Blanket Certificate Regulations and
Clarification Regarding Rates

June 16, 2006.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Federal Energy Regulatory Commission (Commission) proposes
to amend its blanket certification regulations to expand the scope and
scale of activities that may be undertaken pursuant to blanket
authority. The Commission proposes to expand the types of natural gas
projects permitted under blanket authority and to increase the cost
limits that apply to blanket projects. In addition, the Commission will
clarify that a natural gas company is not necessarily engaged in an
unduly discriminatory practice if it charges different customers
different rates for the same service based on the date that customers
commit to service.

DATES: Comments are due August 25, 2006.

ADDRESSES: You may submit comments, identified by Docket No. RM06-7-
000, by one of the following methods:
     Agency Web Site: http://www.ferc.gov. Follow the

instructions for submitting comments via the eFiling link found in the
Comment Procedures Section of the preamble. The Commission encourages
electronic filing.
     Mail: Commenters unable to file comments electronically
must mail or hand deliver an original and 14 copies of their comments
to: Federal Energy Regulatory Commission, Office of the Secretary, 888
First Street, NE., Washington, DC 20426. Please refer to the Comments
Procedures Section of the preamble for additional information on how to
file paper comments.

FOR FURTHER INFORMATION CONTACT: Gordon Wagner, Office of the General
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426<EMAIL_ADDRESS>(202) 502-8947.
    John Leiss, Office of Energy Projects, Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426.
<EMAIL_ADDRESS>(202) 502-8058.

SUPPLEMENTARY INFORMATION:
     1. The Federal Energy Regulatory Commission (Commission) proposes
to amend its part 157, subpart F, blanket certification regulations to
expand the scope and scale of activities that may be undertaken
pursuant to blanket authority.\1\ The Commission proposes to expand the
types of natural gas projects permitted under blanket authority and to
increase the cost limits that apply to blanket projects. In addition,
the Commission will clarify that a natural gas company is not
necessarily engaged in an unduly discriminatory practice if it charges
different customers different rates for the same service based on the
date that customers commit to service.
---------------------------------------------------------------------------

    \1\ 18 CFR 157.201-157.218 (2005).
---------------------------------------------------------------------------

    2. A natural gas company must obtain a certificate of public
convenience and necessity pursuant to section 7 of the Natural Gas Act
(NGA) to construct, acquire, alter, abandon, or operate jurisdictional
gas facilities or to provide jurisdictional gas services. Natural gas
companies holding an NGA section 7(c) certificate may also obtain
blanket certificate authority under part 157, subpart F, of the
Commission's regulations to undertake certain types of activities
without the need to obtain case-specific certificate authorization for
each project. Activities undertaken pursuant to blanket certificate
authority are not subject to the longer and more exacting review
process associated with individual authorizations issued on an
application-by-application basis.\2\
---------------------------------------------------------------------------

    \2\ Certain activities are exempted from the certificate
requirements of NGA section 7(c). For example, Sec.  2.55 of the
Commission's regulations exempts auxiliary installations and the
replacement of physically deteriorated or obsolete facilities; part
284, subpart I, of the regulations provides for the construction and
operation of facilities needed to alleviate a gas emergency.
---------------------------------------------------------------------------

    3. Natural gas facilities that may be constructed, acquired,
altered, or abandoned pursuant to blanket authority are currently
constrained by a cost limit of $8,200,000 for projects which can be
undertaken without prior notice (also referred to as self-implementing
or automatic authorization projects) and $22,700,000 for projects for
which prior notice is required.\3\ In addition, the blanket certificate
provisions apply only to a restricted set of eligible facilities; \4\
ineligible facilities currently include mainlines, storage field
facilities, and facilities receiving gas from a liquefied natural gas
(LNG) plant or a synthetic gas plant.\5\
---------------------------------------------------------------------------

    \3\ See 18 CFR 157.208(d), Table I (2006), as updated. In
November 2005, in response to the impacts of hurricanes Katrina and
Rita on gas production, processing, and transportation in and along
the Gulf of Mexico, these cost limits were temporarily raised to
$50,000,000 for prior notice projects and $16,000,000 for self-
implementing projects, provided the projects increase access to gas
supply and will be completed by October 31, 2006. See Expediting
Infrastructure Construction To Speed Hurricane Recovery, 113 FERC ]
61,179 (2005). The October 31, 2006 deadline was subsequently
extended to February 28, 2007. 114 FERC ] 61,186 (2006).
    \4\ See Sec.  157.202(b)(2)(i) of the Commission's regulations,
defining ``eligible facilities,'' and Sec.  157.202(b)(2)(ii) (2005)
of the regulations, describing facilities excluded from the
definition of ``eligible facilities.''
    \5\ The November 2005 Order cited in note 3 also temporarily
extended blanket certificate authority to include what would
otherwise be ineligible facilities, namely, an extension of a
mainline; a facility, including compression and looping, that alters
the capacity of a mainline; and temporary compression that raises
the capacity of a mainline.
---------------------------------------------------------------------------

    4. In this notice of proposed rulemaking (NOPR) the Commission
proposes to expand the scope of activities that can be undertaken
pursuant to blanket authority by (1) increasing the project cost limit
to $9,600,000 for an automatic authorization project and $27,400,000
for a prior notice project and (2) expanding the category of facilities
eligible for construction under blanket certificate authority to
include mainline facilities, certain LNG and synthetic gas facilities,
and certain storage facilities. In addition, the Commission will
clarify that a natural gas company is not necessarily engaged in an
unduly discriminatory practice if it charges different customers
different rates for the same service based on the date that customers
commit to service.

Background

Petition To Expand the Blanket Certificate Program and Clarify Criteria
Defining Just and Reasonable Rates

    5. On November 22, 2005, the Interstate Natural Gas Association of
America (INGAA) and the Natural Gas Supply Association (NGSA) jointly
filed a petition under Sec.  385.207(a) of the Commission's regulations
proposing that the blanket certificate provisions be expanded ``to
improve the industry's ability to ensure the adequacy of
infrastructure, without impairing any legitimate rights of any party
and without frustrating any public-policy objectives.'' \6\ Petitioners
point to natural gas prices and tight gas supply and demand, and stress
the need to ensure that natural gas facilities are adequate to reliably
move available gas supplies to consuming markets. By way of example,
Petitioners observe that natural gas producers faced with takeaway
constraints can experience shut-ins, the depression of wellhead prices,
and uncertainty as to when and where to

drill new wells. Petitioners add that companies faced with an inability
to build new facilities when and where they are needed can experience a
lack of growth, operational problems, and constraints on system
flexibility. Petitioners argue that implementing their requested
regulatory revisions will diminish the likelihood of experiencing such
adverse events.\7\
---------------------------------------------------------------------------

    \6\ INGAA/NGSA Petition at 2 (November 22, 2005).
    \7\ While Petitioners have ``determined that there is little to
be improved in the Commission's processing of certificate
applications,'' and that ``there are few changes to the current
authorization process that would accelerate the process beyond its
current, efficient state,'' they nevertheless contend that adopting
the proposed revisions will ``further enhance the authorization
process'' and provide additional certainty regarding regulatory
treatment. INGAA/NGSA Petition at 2 and 4 (November 22, 2005).
---------------------------------------------------------------------------

Expanded Blanket Certificate Authority

    6. Petitioners observe that the natural gas industry has undergone
fundamental change since the blanket certificate provisions were put in
place in 1982,\8\ and believe that the rationale for certain of the
limitations imposed when the blanket certificate program was
implemented should no longer apply. Petitioners request that blanket
certificate authority be expanded to include mainline facilities, LNG
takeaway facilities, and certain underground storage field facilities
which are currently excluded from the blanket certificate program, and
request that the cost limits for blanket projects be raised.
---------------------------------------------------------------------------

    \8\ Interstate Pipeline Certificates for Routine Transactions,
Order No. 234, 47 FR 24254 (June 4, 1982), FERC Stats. & Regs. ]
30,368 (1982); Order No. 234-A, 47 FR 38871 (September. 3, 1982),
FERC Stats. & Regs. ] 30,389 (1982).
---------------------------------------------------------------------------

Blanket Project Cost Limits
    7. Petitioners comment that ``in the Commission's original
justification for the [blanket certificate program] restrictions in
Order No. 234, the primary reason given was the impact on ratepayers,
not environmental impact or safety.'' \9\ In 1982, the blanket project
cost limits were set at $4,200,000 for automatic projects and
$12,000,000 for prior notice projects; presently, these cost limits
stand at an inflation adjusted $8,200,000 and $22,700,000,
respectively. Petitioners assert that the current blanket project cost
cap is ``sufficiently small'' to render any rate impacts de minimis and
state their belief in ``the likelihood that new investments will
produce new revenue that covers the cost of the investments.'' \10\
---------------------------------------------------------------------------

    \9\ INGAA/NGSA Petition at 8 (November 22, 2005).
    \10\ Id.
---------------------------------------------------------------------------

    8. Petitioners claim that natural gas project costs have escalated
faster than inflation, citing costs attributable to more extensive
public outreach, greater agency involvement, a more complex permitting
process, additional environmental remediation requirements, and the use
of technologically advanced construction equipment. In view of this,
Petitioners ask the Commission to reassess project costs and raise the
blanket project cost limits in Sec.  157.208(d), Table I, of the
regulations. Petitioners do not characterize this as enlarging the
scale of projects permitted under blanket authorization,\11\ but as
recalibrating the cost limits to permit a project that could have been
constructed within the cost limit in effect in 1982 to be built again
today within today's updated cost limit.
---------------------------------------------------------------------------

    \11\ ``[I]t is not contemplated that an increase in the dollar
limits will cause blanket projects to be larger, in terms of the
project foot print or right of way needed, than they would have
been'' in 1982. INGAA/NGSA Petition at 16 (November 22, 2005).
---------------------------------------------------------------------------

Request To Clarify Criteria Defining Just and Reasonable Rate
    9. Petitioners state that a natural gas company's decision to go
forward with a proposed project can turn on whether there are customer
service commitments in hand sufficient to demonstrate the proposal's
economic viability. Petitioners request that the Commission allow
preferential rate treatment for ``foundation shippers,'' i.e.,
customers that sign up early for firm service and thereby establish the
financial foundation for a new project. Doing so, Petitioners claim,
will ``provide a strong incentive for more potential shippers to become
foundation shippers, thus allowing needed infrastructure projects to
get underway earlier.'' \12\ Petitioners seek assurance that offering
customers that commit early to a proposed project a more favorable rate
than customers that seek service later will not be viewed as unduly
discriminatory.
---------------------------------------------------------------------------

    \12\ Id. at 20.
---------------------------------------------------------------------------

Notice and Comments

    10. Notice of the INGAA/NGSA petition was published in the Federal
Register on December 9, 2005.\13\ The Commission sought comments on
whether it should take further action on the petition. Responses were
filed by: American Gas Association (AGA); American Public Gas
Association (APGA); Anadarko Petroleum Corporation (Anadarko); Devon
Energy Corporation (Devon); Duke Energy Gas Transmission Corporation
(Duke); Enstor Operating Company, LLC (Enstor); Honeoye Storage
Corporation (Honeoye Storage); Illinois Municipal Gas Agency (Illinois
Municipal); Independent Petroleum Association of America (IPAA); Kinder
Morgan Interstate Gas Transmission, LLC (Kinder Morgan); NiSource Inc.
(NiSource); Process Gas Consumers Group (Process Gas Consumers); Public
Service Commission of New York (PSCNY); and Sempra Global (Sempra).
---------------------------------------------------------------------------

    \13\ 70 FR 73,232 (2005).
---------------------------------------------------------------------------

    11. Duke, Enstor, Honeoye Storage, IPAA, and Process Gas Consumers
unequivocally support the petition, and the majority of the remaining
comments support aspects of the proposal. Several comments question
and/or oppose the petition's proposals. The comments are discussed
below.

Request for Technical Conference and Commission Response

    12. AGA requests the Commission convene a technical conference to
consider whether the proposal could adversely impact rates or degrade
service, and thus be inconsistent with Commission policy which requires
weighing the impact of new facilities on existing customers.\14\ AGA is
concerned expanding blanket certificate authority would undermine the
Commission's rationale for initiating the blanket certificate program,
which rests on the premise that blanket activities are minor in scope
and ``so well understood as an established industry practice that
little scrutiny is required to determine their compatibly with the
public convenience and necessity.'' \15\
---------------------------------------------------------------------------

    \14\ See Certification of New Interstate Natural Gas Pipeline
Facilities (Policy Statement on New Facilities), 88 FERC ] 61,227
(1999), orders clarifying statement of policy, 90 FERC ] 61,128 and
92 FERC ] 61,094 (2000), order further clarifying statement of
policy, 92 FERC ] 61,094 (2000).
    \15\ Interstate Pipeline Certificates for Routine Transactions,
Order No. 234, FERC Stats. & Regs. ] 30,368 at 30,200 (1982). See
also, Distrigas of Massachusetts Corp., 60 FERC ] 61,274 at 61,931
(1992), in which the Commission stated that ``[t]he blanket
procedures were intended to apply only to proposals which by their
very nature require limited Commission involvement.''
---------------------------------------------------------------------------

    13. AGA raises legitimate issues relevant to the outcome of this
proceeding. That said, the Commission expects all interested persons
will have an adequate opportunity to express their views in comments in
response to this NOPR. Given that comments have yet to be submitted on
the merits of the regulatory revisions proposed herein, the Commission
will dismiss AGA's request for a technical conference as premature.
Following a review of the comments received in response to this NOPR,
the request will be reassessed.

Proposed Regulatory Revisions

Rationale for the Blanket Certificate
    14. The blanket certificate program was designed to provide an
administratively efficient means to authorize a generic class of
routine activities, without assessing each prospective project on a
case-by-case basis. In 1982, in instituting the blanket certificate
program, the Commission explained the new program as follows:

    [T]he final regulations divide the various actions that the
Commission certificates into several categories. The first category
applies to certain activities performed by interstate pipelines that
either have relatively little impact on ratepayers, or little effect
on pipeline operations. This first category also includes minor
investments in facilities which are so well understood as an
established industry practice that little scrutiny is required to
determine their compatibility with the public convenience and
necessity. The second category of activities provides for a notice
and protest procedure and comprises certain activities in which
various interested parties might have a concern. In such cases there
is a need to provide an opportunity for a greater degree of review
and to provide for possible adjudication of controversial aspects.
Activities not authorized under the blanket certificate are those
activities which may have a major potential impact on ratepayers, or
which propose such important considerations that close scrutiny and
case-specific deliberation by the Commission is warranted prior to
the issuance of a certificate.\16\
---------------------------------------------------------------------------

    \16\ 47 FR 24254 (June 4, 1982).

    15. The Commission continues to apply the above criteria in an
effort to distinguish those types of activities that may appropriately
be constructed under blanket certificate authority from those projects
that merit closer, case-specific scrutiny due to their potentially
significant impact on rates, services, safety, security, competing
natural gas companies or their customers, or on the environment.
    16. ''Under section 7 of the NGA, pursuant to which the blanket
certificate rule is promulgated,'' the Commission has ``an obligation
to issue certificates only where they are required by the public
convenience and necessity. The blanket certificate rules set out a
class of transactions, subject to specific conditions, that the
Commission has determined to be in the public convenience and
necessity.'' \17\ To the extent this class of transactions is enlarged,
there must be an assessment, and assurance, that each added class of
transactions is similarly required by the public convenience and
necessity.
---------------------------------------------------------------------------

    \17\ Regulation of Natural Gas Pipelines After Partial Wellhead
Decontrol, Order No. 436, 50 FR 42408 (October 18, 1985).
---------------------------------------------------------------------------

    17. In this NOPR, the Commission proposes to expand the scope of
blanket certificate activities to include mainlines, storage
facilities, and certain facilities carrying regasified LNG and
synthetic gas, and to expand the scale of blanket certificate
activities by raising the project cost limits. The Commission seeks
comments on whether this can be accomplished without compromising the
rationale upon which the blanket certificate program is founded.

Comments and Commission Response

    18. APGA questions the rationale for revising the blanket
certificate program. Unlike Petitioners, APGA sees no cause to
attribute current high natural gas prices and recent price volatility
to inadequate gas transportation or storage facilities. Instead, APGA
contends prices reflect tight supplies and a relatively inelastic
demand.\18\ Consequently, APGA does not expect the proposed regulatory
revisions to result in lower gas prices or less price volatility. APGA
contends the proposed changes will eliminate protections mandated by
the NGA and will be contrary to Commission's Policy Statement on New
Facilities.\19\
---------------------------------------------------------------------------

    \18\ APGA adds that the municipal and publicly-owned local
distribution systems it represents, and the retail customers they
serve, are ``extremely sensitive'' to increases in the cost of
natural gas and it urges the Commission to ``take all reasonable
actions to ensure the lowest natural gas prices and to minimize
price volatility.'' APGA's Comments at 4 (January 17, 2006).
    \19\ See note 14.
---------------------------------------------------------------------------

    19. The regulatory revisions proposed herein are not intended to
drive down current gas costs; rather, the Commission seeks to provide a
streamlined means for natural gas companies to make infrastructure
enhancements in a timely manner. Nevertheless, to the extent prices
reflect capacity constraints that might be alleviated by adding or
upgrading facilities, then expanding the blanket certificate program,
which offers companies an expedited means to obtain construction
authorization, may indirectly drive prices down by allowing companies
to address system bottlenecks expeditiously through use of their
blanket certificate authority. The Commission recognizes that the
proposed revisions, by expanding blanket certificate authorization,
would modify the nature of the blanket program; however, for the
reasons discussed below, the Commission believes the proposed revisions
comport with the Commission's mandate under the NGA and are consistent
with current Commission policy.
    20. APGA observes that in the past, the Commission has temporarily
altered provisions of the blanket certificate program in response to
natural gas emergencies, and states that these temporary measures have
proved effective. In view of the Commission's success in making
temporary adjustments, APGA sees no need to permanently expand blanket
certificate authority. APGA contends that but for the electric crisis
in the Western United States in 2000-2001, Petitioners have not cited
any instance of mainline pipeline capacity constraint that would
justify lifting the prohibition on adding mainline capacity under
blanket certificate authority. APGA states that the Commission's
response to the 2005 Gulf Coast hurricanes is designed to expedite
rebuilding infrastructure to restore lost services, and does not
reflect a need to permanently alter the blanket certificate regulations
in order to promote a nationwide expansion of facilities and services.
    21. The Commission concurs with APGA that flexibility afforded by
the NGA, and the intermittent use of provisional waivers of certain
Commission regulations, have proved effective in accelerating the
industry's recovery from natural gas emergencies. However, the
Commission does not view the result of a temporary waiver of compliance
with certain blanket certificate requirements --whether the result be
deemed a success or not--as a reason to adopt or reject the blanket
certificate program expansion as Petitioners propose. The Commission
believes the emphasis of the blanket certificate program should remain,
as it always has, on expediting the process of adding and improving gas
facilities and services, while ensuring that there are no adverse
impacts on existing rates, services, or the environment. The immediate
crisis in the aftermath of the hurricanes has eased. However, the need
to restore and add infrastructure remains critical: (1) To attach new
supplies to offset the continuing decline from existing gas sources;
(2) to add interconnections, extensions, and other new facilities to
enhance the flexibility and responsiveness of the grid; and (3) to
accommodate anticipated increases in imports of LNG. It is with these
objectives in mind that the Commission proposes to expand its blanket
certificate program.
    22. The Commission seeks comment whether allowing project sponsors
the option of requesting an incremental rate

for a particular project \20\ will provide additional flexibility to
expedite the process of adding and improving gas facilities and
services, while ensuring that there are no adverse impacts on existing
rates, services, or the environment. Further, the Commission seeks
comment regarding what additional or alternative revisions to the
blanket certificate regulations would be necessary to establish the
appropriate procedures.
---------------------------------------------------------------------------

    \20\ See, e.g., Tennessee Gas Pipeline Company, 110 FERC ]
61,047, order denying reh'g, 111 FERC ] 61,094 (2005), discussing
the Commission's rejection of a pipeline's proposal to construct a
five-mile lateral line under blanket authority and charge an
incremental rate.
---------------------------------------------------------------------------

Facilities Subject to Blanket Certificate Authority
    23. To meet the above stated objectives, the Commission proposes to
expand the scope of the blanket certificate program by including
certain facilities associated with LNG and synthetic gas plants,
storage facilities, and mainlines--all of which have heretofore been
excluded from the blanket certificate program.\21\ In 1982, these
facilities were excluded principally due to their perceived potential
to adversely impact existing customers' rates and services. With
respect to rates, a presumption that blanket certificate project costs
will qualify for rolled-in rate treatment will continue to apply,
subject to rebuttal by showing adverse impacts in a NGA section 4 rate
case proceeding. With respect to facilities and services, the proposal
discussed below to require prior notice for projects undertaken as a
result of expanded blanket certificate authority, in conjunction with
the proposal to lengthen the prior notice period, should provide a
reasonable opportunity to review the potential system impacts of a
proposed blanket project prior to its construction.
---------------------------------------------------------------------------

    \21\ Certain limited underground storage field testing and
development is permitted under Sec.  157.215; this NOPR proposes a
significant expansion of blanket-eligible storage field activities.
Also, as noted above, blanket certificate authority has been
extended to otherwise ineligible facilities on a temporary basis in
order to respond to a natural gas emergency.
---------------------------------------------------------------------------

Facilities Receiving LNG and Synthetic Gas
    24. The blanket certificate regulations exclude facilities used to
take gas away from plants regasifying LNG and manufacturing synthetic
gas, a restriction imposed in 1982, in part, to protect customers from
the impact of paying the high commodity cost of LNG and synthetic
gas.\22\ Such rate protection is now little more than an artifact of
the era when jurisdictional pipelines provided merchant service,
charging customers a bundled rate that combined a transportation charge
for delivering natural gas plus the cost to purchase gas. In 1992, in
Order No. 636,\23\ the Commission undertook a process of restructuring
the gas industry, resulting in the itemization and separate billing of
previously bundled gas services. As a result, today's jurisdictional
rates no longer include the commodity cost of gas purchased by the
pipeline and sold to the customer. Further, over the last several
years, the cost differential between non-traditional energy sources,
particularly imported LNG, and traditional domestic, Canadian, and
Mexican gas supplies has narrowed. In view of recent and anticipated
market conditions, barring facilities receiving LNG and synthetic gas
from the blanket program may be hindering consumers' access to
competitively-priced gas supplies.
---------------------------------------------------------------------------

    \22\ As stated in the 1982 order promulgating the blanket
certificate regulations, because LNG and synthetic gas ``facilities
may have a significant impact on ratepayers, the Commission believes
they should not be authorized under a blanket certificate, but
should be subjected instead to the scrutiny of a case-specific
determination.'' 47 FR 24254 (June 4, 1982).
    \23\ Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation Under Part 284 of the
Commission's Regulations, and Regulation of Natural Gas Pipelines
After Partial Wellhead Decontrol, Order No. 636, FERC Stats. & Regs.
] 30,939 (1992), order on reh'g, Order No. 636-A, FERC Stats. &
Regs. ] 30,950 (1992), order on reh'g, Order No. 636-B, 61 FERC ]
61,272 (1992), aff'd in part, rev'd in part sub nom. United
Distribution Cos. v. FERC, 88 F.3d 1105 (D.C. Cir. 1996), cert.
denied sub nom. Associated Gas Distributors v. FERC, 520 U.S. 1224
(1997), on remand, Order No. 636-C, 78 FERC P 61,186 (1997), order
on reh'g, Order No. 636-D, 83 FERC ] 61,210 (1998).
---------------------------------------------------------------------------

    25. The Commission believes that increasing access to LNG and
synthetic gas is consistent with the public interest. Accordingly, the
Commission proposes to revise its regulations to permit certificate
holders to rely on blanket authority to add, alter, or abandon certain
pipeline facilities used to carry gas away from an LNG terminal, a
deepwater LNG port, an inland LNG storage facility, or a synthetic gas
manufacturing plant.
    26. The Commission proposes to add Sec.  157.212, to read as
follows:

Sec.  157.212 Synthetic and liquefied natural gas facilities.

    Prior Notice. Subject to the notice requirements of Sec. Sec.
157.205(b) and 157.208(c), the certificate holder is authorized to
acquire, abandon, construct, modify, replace, or operate natural gas
facilities that are used to transport exclusively either synthetic
gas or revaporized liquefied natural gas and that are not ``related
jurisdictional natural gas facilities'' as defined in Sec.
153.2(e). The cost of a project may not exceed the cost limitation
set forth in column 2 of Table I of Sec.  157.208(d). The
certificate holder must not segment projects in order to meet this
cost limitation.

    27. This approach is intended to provide advance notice of proposed
blanket certificate projects involving facilities carrying exclusively
LNG or synthetic gas to allow the public, or Commission staff, to
comment or protest, and thereby possibly compel case-specific
consideration of a proposal.\24\ The Commission views ``facilities that
are used to transport exclusively either synthetic gas or revaporized
liquefied natural gas'' as pipelines interconnected directly to an LNG
or synthetic gas plant and downstream laterals; the facilities extend
from an LNG or synthetic gas source to the first junction with a line
carrying natural gas drawn from the ground. Once gas supply sources are
commingled, Sec.  157.212 becomes inapplicable. Pursuant to Sec.
153.2(e), blanket certificate authority will not apply to the outlet
pipe of an LNG or synthetic gas plant, but only to those facilities
that attach to the directly interconnected pipe.
---------------------------------------------------------------------------

    \24\ A protest may be filed in response to a prior notice of a
proposed blanket project. 18 CFR 157.205(e) (2005). If the protest
is not withdrawn or dismissed within the time allotted, the prior
notice proceeding is then treated as an application for a case-
specific NGA section 7 certificate authorization. 18 CFR 157.205(f)
and (g) (2005).
---------------------------------------------------------------------------

    28. The Commission acknowledges that there may be no objections
presented to certain LNG and synthetic gas takeaway pipeline projects,
e.g., a meter at a line leading from an inland LNG peaking plant.
Nevertheless, the Commission believes it is prudent to provide prior
notice of all LNG and synthetic gas takeaway pipeline projects to give
end users, local distribution companies, the Commission, and others the
opportunity to review the potential impacts of a proposal and the
option to comment or protest.
    29. The blanket certificate provisions do not apply to LNG plant
facilities,\25\ and this proposed regulatory revision will not change
that. LNG plant facilities are not within the class of minor, well-
understood, routine activities that the blanket certificate program is
intended to embrace; LNG plant facilities necessarily require a review
of engineering, environmental,

safety, and security issues that the Commission believes only can be
properly considered on a case-by-case basis. Similarly, the proposed
blanket certificate provisions will be inapplicable to jurisdictional
natural gas facilities directly attached to an LNG terminal, since such
facilities are subject to the mandatory 180-day pre-filing process
specified in Sec.  157.21 of the Commission's regulations.\26\
---------------------------------------------------------------------------

    \25\ LNG facilities' construction and operation remain subject
to separate regulatory requirements, either NGA section 3 approval
for import or export plant facilities, or NGA section 7 case-
specific certificate authorization for LNG storage facilities. The
Commission's jurisdiction over the transportation and sale of
natural gas in interstate commerce does not apply to synthetic gas
manufacturing plant facilities.
    \26\ Section 153.2 of the Commission's regulations states that
the construction of any pipelines or other natural gas facilities
subject to section 7 of the NGA which will directly interconnect
with the facilities of an LNG terminal, and which are necessary to
transport gas to or regasified LNG from a proposed or existing
authorized LNG terminal, are subject to a mandatory minimum six-
month pre-filing process. 18 CFR 153.2 (2006). See Regulations
Implementing Energy Policy Act of 2005; Pre-Filing Procedures for
Review of LNG Terminals and Other Natural Gas Facilities, Order No.
665, 113 FERC ] 61,015 (2005).
---------------------------------------------------------------------------

    30. The mandatory 180-day pre-filing process for jurisdictional
natural gas facilities that directly interconnect with the facilities
of an LNG terminal was put in place last year pursuant to section
311(d) of the Energy Policy Act of 2005 (EPAct 2005).\27\ Petitioners
ask that the Commission revise these recently enacted regulations so
that ``the pipeline lateral receiving LNG is not subject to the
Commission's mandatory pre-filing process,'' asserting that a ``lateral
to hook up to existing LNG facilities should cause no additional issues
regarding safety and environmental concerns.'' \28\ The Commission
disagrees. Because an LNG terminal and the facilities that attach
directly to it are interdependent--inextricably bound in design and
operation--a terminal and its takeaway facilities must be evaluated in
tandem; both merit a similar degree of regulatory scrutiny.
---------------------------------------------------------------------------

    \27\ Public Law 109-58, 119 Stat. 594 (2005).
    \28\ INGAA/NGSA Petition at 14 (November 22, 2005).
---------------------------------------------------------------------------

    31. Petitioners argue that rules ``that make it considerably more
difficult to hook up LNG to the interstate grid * * * differentiate
between facilities for different types of supply'' which ``appears
unduly discriminatory.'' \29\ Again, the Commission disagrees. The
different rules applicable to different natural gas supply sources
reflect the different technology involved in importing, storing, and
regasifying LNG. In addition, different public policy considerations
apply to LNG, e.g., safety and reliability concerns and issues related
to gas quality and interchangeability. In view of this, the Commission
finds legitimate cause to draw a regulatory distinction between LNG
imports and traditional gas supplies, and will decline the request to
revisit the provisions put in place in last year's Order No. 665.
---------------------------------------------------------------------------

    \29\ Id.
---------------------------------------------------------------------------

Comments and Commission Response
    32. Devon is apprehensive that expanding blanket certificate
authority to include certain LNG pipelines could give LNG imports a
competitive advantage over domestic gas supplies. The Commission is not
in a position to address this, as it is not charged with or conducting
a comparative analysis of types of energy, or with promoting one source
or type of energy over another, or with determining whether the
national interest lies with obtaining energy independence or foreign
energy supplies. More to the point, LNG import terminals and the
pipelines directly interconnected to them need to be constructed, or
expanded, in tandem before additional volumes of LNG can be brought
into the United States, and the proposed expansion of blanket
certificate authority will not apply to either LNG terminals or the
facilities that are directly interconnected with them.\30\ Thus, the
construction, expansion, or modification of facilities capable of
boosting LNG imports will remain subject to case-specific NGA section 7
certificate authorization and case-specific NGA section 3 approval.
---------------------------------------------------------------------------

    \30\ See 18 CFR 153.2(e) (2006).
---------------------------------------------------------------------------

    33. Devon and APGA observe that LNG imports can have
characteristics different from traditional gas supplies and assert that
the changed character of the gas could result in adverse impacts on
pipelines carrying imported LNG and end users consuming it. The
Commission's Policy Statement on Provisions Governing Natural Gas
Quality and Interchangeability in Interstate Natural Gas Pipeline
Company Tariffs (Policy Statement on Gas Quality) in Docket No. PL04-3-
000, issued concurrently with this NOPR, provides direction for
addressing gas quality and interchangeability concerns. Assuming LNG
supplies conform to the gas quality standards of jurisdictional
pipelines' tariffs, and the tariffs are in accord with the Policy
Statement on Gas Quality, the Commission believes that objections that
concern the character of particular volumes of gas are best presented
to parties buying and reselling the gas. However, if there are
indications that gas volumes--regardless of their source--may have
characteristics incompatible with pipelines' tariff provisions, or
inconsistent with the Policy Statement on Gas Quality, then it would be
appropriate to inform the Commission either by a protest to a proposed
blanket certificate project or by presenting an NGA section 5
complaint.
    34. Devon suggests that LNG imports could interfere with pipelines'
operations by creating capacity constraints. A pipeline would not agree
to accept LNG imports--or, indeed, additional quantities of gas from
any source--if doing so could compromise its ability to continue to
reliably meet its commitments to its existing customers, since doing so
would conflict with the pipeline's certificate obligation to meet its
customers' firm service requirements. If there is an indication that a
change in a natural gas company's operations, be it due to receipt of
LNG or any other cause, may interfere with the company's capability to
continue to provide certificated services, allegations to this effect
may be presented in a protest to a proposed blanket certificate project
or in an NGA section 5 complaint. The Commission will act as necessary
to prevent and remedy improper practices; as appropriate, the
Commission will employ its NGA enforcement authority, under which it
may impose a civil penalty of up to $1,000,000 per day for the
violation of any provision of the NGA ``or any rule, regulations,
restriction, condition, or order made or imposed by the Commission
under authority of'' the NGA.\31\
---------------------------------------------------------------------------

    \31\ See EPAct 2005 section 314, amending the Commission's civil
penalty authority under NGA section 22.
---------------------------------------------------------------------------

    35. AGA and Petitioners concur that the motive for excluding LNG
takeaway facilities from blanket certificate projects--i.e., the
concern that high-priced LNG imports would raise gas costs for the
customers of merchant pipelines--is now no more than an artifact of the
bundled era, and is thus no longer relevant. Nevertheless, AGA urges
that LNG takeaway lines continue to be excluded from the blanket
certificate program due to the public safety and operational issues
raised by the import of additional LNG supplies. AGA suggests awaiting
the outcome of the proceeding in Docket No. PL04-3-000 prior to
applying any expanded blanket certificate authority to LNG pipeline
facilities. Similarly, APGA maintains that modifications to LNG
takeaway facilities raise technical issues that merit examination prior
to implementation. APGA adds that the compatibility of LNG supplies
with existing transmission equipment and with end users' facilities and
processes is an issue that should be considered, yet might not receive
the attention deserved if LNG takeaway facilities were expanded under
blanket certificate authority.

    36. First, pursuant to Order No. 665, the blanket certificate
provisions do not apply to facilities attached directly to an LNG
terminal. With respect to LNG and synthetic gas takeaway facilities to
which the blanket certificate provisions will apply, all proposed Sec.
157.212 projects will require prior notice, which should permit the
public an adequate opportunity to identify, address, and resolve issues
before construction can commence. If there is an interest in exploring
gas quality and interchangeability issues, or any issues related to the
operational characteristics of LNG and synthetic gas plants, an
interested person may protest, and by doing so, potentially convert the
blanket proceeding to a case-specific NGA section 7 certificate
authorization proceeding. Finally, as noted, in Docket No. PL04-3-000 a
Policy Statement on Gas Quality is issued concurrently with this NOPR
and will apply to all blanket certificate projects.

Underground Storage Field Facilities

    37. Currently, the blanket certificate program excludes a
``facility required to test or develop an underground storage field or
that alters the certificated capacity, deliverability, or storage
boundary, or a facility required to store gas above ground * * * or
wells needed to utilize an underground storage field.'' \32\
Petitioners request these restrictions be removed, provided blanket
certificate activities do not result in inappropriate changes to the
physical characteristics of an underground storage field. Specifically,
Petitioners seek to expand the blanket certificate program to include:
(1) Facilities that provide deliverability enhancements (e.g.
aboveground piping or compression); (2) infill wells that increase
injection or withdrawal capability; (3) the development of new caverns
or storage zones within a previously defined project area or field, as
long as there is no change in the certificated boundaries or pressure
of the field.
---------------------------------------------------------------------------

    \32\ 18 CFR 157.202(b)(2)(ii)(D) (2005).
---------------------------------------------------------------------------

    38. As a general proposition, it is easier to track gas volumes
moving through a pipeline than gas volumes moving in and out of an
underground reservoir. The boundaries, integrity, and operational
characteristics of a segment of pipe are known and fixed, but these
characteristics are neither obvious nor immutable for an underground
storage facility. In view of the operational and engineering
ambiguities inherent in managing underground storage facilities, these
facilities (but for a limited Sec.  157.215 exception for facilities
for testing and development) have been excluded from the blanket
certificate program.
    39. Underground storage fields are designed, constructed,
developed, and operated based on initial available data, and as
additional data are obtained over the course of a storage field's
operation, the facilities' design and the operational parameters may be
modified to optimize the field's development and productivity. Because
storage design and development is not an exact science, it typically
takes three to ten years of full operation to understand and
incorporate engineering, geological, and related data to obtain optimal
storage field functioning.
    40. The Commission seeks to ensure that storage facilities are
operated in a manner that will maintain their long-term integrity while
meeting day-to-day performance requirements. Because certain
modifications may affect operational parameters such as total storage
capacity and working and cushion gas volumes, the Commission believes
it would be imprudent to expand blanket certificate authority to
activities that could impact the operating pressures, reservoir or
buffer boundaries, or the certificated capacity of a storage facility.
Nevertheless, the Commission believes the administrative advantages of
construction under blanket certificate authority can be prudently
extended to certain storage field activities provided there is
sufficiently detailed prior notice of a proposed project. This will
allow companies, under blanket certificate authority, to utilize re-
engineering to enhance the capability of existing storage facilities
while permitting the Commission and the public to assess whether a
proposal might compromise a storage field's integrity or alter its
physical characteristics or certificated capacity.
    41. The Commission proposes to add Sec.  157.213, specifying
information to be included in a prior notice of a proposed project
affecting underground storage field facilities.\33\ Under these
proposed regulatory revisions, if a certificate holder is able to
demonstrate, by theoretical or empirical evidence, that a proposed
project will improve storage operations without altering an underground
storage facility's total inventory, reservoir pressure, or reservoir or
buffer boundaries, and will comply with environmental and safety
provisions, then blanket certificate authority may be used to re-
engineer an existing storage facility to decrease cushion gas, increase
working gas, improve injection and withdrawal capabilities, and add
more cycles per season. Storage field facilities can include gathering
lines, wells (vertical, horizontal, directional, observation, and
injection and withdrawal), pipelines, compression units, and
dehydration and other gas treatment facilities. This proposed expanded
blanket certificate authority might be used to maintain and enhance
deliverability in existing fields with lagging performance due to
deteriorated wells or flow strings, damage to well bore drainage areas,
water encroachment, and other operational and facility problems, and to
make field enhancements, such as converting a nonjurisdictional
observation well to withdrawal or injection/withdrawal status. These
enhancements can serve to improve peak, daily, and/or seasonal
deliverability by decreasing cushion gas, increasing working gas,
improving injection and withdrawal capabilities, or adding more cycles
per season--all without affecting overall operating limits.
---------------------------------------------------------------------------

    \33\ The information to be included in prior notice should
satisfy APGA's request for an opportunity to review blanket project
storage field modifications before construction.
---------------------------------------------------------------------------

    42. Petitioners promote expanding blanket certificate authority to
encompass the development of new caverns or storage zones within a
previously defined and certificated project area or field. The
Commission, however, views the blanket certificate program as ill
suited to construction that would create new storage zones, because
impacts associated with such projects are wide ranging and go beyond
the limited impact that increases in deliverability are expected to
have on existing fields. The development of new storage zones within a
previously defined and certificated field is no different than the
development of an entirely new storage field and thus deserves the same
level of scrutiny. The issues to be considered in establishing new
underground gas reservoirs require a close review of technical
characteristics and test results, among other criteria, that go far
beyond the project description, and limited assessment thereof,
available in prior notice proceeding.\34\
---------------------------------------------------------------------------

    \34\ This also applies to the development of new salt caverns.
The safety parameters of a salt cavern within a salt dome or salt
formation are more complicated and require more detailed studies and
analysis than depleted gas or oil fields. The development of salt
caverns, even if within a previously studied and certificated dome
or bedded salt formation, calls for exacting step-by-step procedures
to verify the validity of the original and modified design.
---------------------------------------------------------------------------

    43. Similarly, the proposed expanded blanket certificate authority
is not

intended to include storage reservoirs that are still under development
or reservoirs which have yet to reach their inventory and pressure
levels as determined from their original certificated construction
parameters. Such reservoirs may or may not have reliable information
available on geological confinement or operational parameters via data
gathered throughout the life of a storage field, whereas new storage
zones lack data collected over time on physical and operational aspects
of a field. Therefore, for such facilities, the Commission finds it
necessary to individually examine each reservoir to determine its
potential operating parameters (capacity, cushion and working gas,
operational limits, well locations, etc.) and to review data essential
to understand and predict how modifications might affect the integrity,
safety, and certificated parameters of the facility.
    44. The Commission proposes to expand the blanket certificate
program to permit additional storage field activities subject to the
Sec. Sec.  157.205 and 157.208(c) prior notice provisions and the
submission of information pertinent to the proposed project, as
specified below. The current Sec.  157.215 automatic authorization
remains in effect for limited storage testing and development. The
Commission proposes to add a new Sec.  157.213 for prior notice storage
projects, as follows:

Sec.  157.213 Underground storage field facilities.

    (a) Prior Notice. Subject to the notice requirements of
Sec. Sec.  157.205(b) and 157.208(c), the certificate holder is
authorized to acquire, abandon, construct, modify, replace, or
operate natural gas underground storage facilities, provided the
storage facility's total inventory, reservoir pressure, reservoir
and buffer boundaries, certificated capacity, and compliance with
environmental and safety provisions remain unaffected. The cost of a
project may not exceed the cost limitation set forth in column 2 of
Table I of Sec.  157.208(d). The certificate holder must not segment
projects in order to meet this cost limitation.
    (b) Contents of request. In addition to the requirements of
Sec. Sec.  157.206(b) and 157.208(c), requests for activities
authorized under paragraph (a) must contain:
    (1) A description of the current geological interpretation of
the storage reservoir, including both the storage formation and the
caprock, including summary analysis of any recent cross-sections,
well logs, quantitative porosity and permeability data, and any
other relevant data for both the storage reservoir and caprock;
    (2) The latest isopach and structural maps of the storage field,
showing the storage reservoir boundary, as defined by fluid contacts
or natural geological barriers; the protective buffer boundary; the
surface and bottomhole locations of the existing and proposed
injection/withdrawal wells and observation wells; and the lengths of
open-hole sections of existing and proposed injection/withdrawal
wells;
    (3) Isobaric maps (data from the end of each injection and
withdrawal cycle) for the last three injection/withdrawal seasons,
which include all wells, both inside and outside the storage
reservoir and within the buffer area;
    (4) A detailed description of present storage operations and how
they may change as a result of the new facilities or modifications.
Include a detailed discussion of all existing operational problems
for the storage field, including but not limited to gas migration
and gas loss;
    (5) Current and proposed working gas volume, cushion gas volume,
native gas volume, deliverability (at maximum and minimum pressure),
maximum and minimum storage pressures, at the present certificated
maximum capacity or pressure, with volumes and rates in MMcf and
pressures in psia;
    (6) The latest field injection/withdrawal capability studies
including curves at present and proposed working gas capacity,
including average field back pressure curves and all other related
data;
    (7) The latest inventory verification study for the storage
field, including methodology, data, and work papers;
    (8) The shut-in reservoir pressures (average) and cumulative
gas-in-place (including native gas) at the beginning of each
injection and withdrawal season for the last 10 years; and
    (9) A detailed analysis, including data and work papers, to
support the need for additional facilities (wells, gathering lines,
headers, compression, dehydration, or other appurtenant facilities)
for the modification of working gas/cushion gas ratio and/or to
improve the capability of the storage field.

Comments and Commission Response

    45. APGA argues that making modifications to underground storage
facilities raises technical issues that should be reviewed in advance
of any construction activity, and that the blanket certificate program
does not provide for adequate advance oversight. The Commission
believes adequate oversight will be assured because prospective storage
field projects will be subject to prior notice, which notice must
include the detailed information descried above.
    46. Honeoye Storage contends that there is no reason to subject
storage field construction to greater scrutiny than other construction
activities as long as additional well construction or other activities
do not alter the certificated parameters of existing storage
facilities. For the reasons discussed above, the Commission believes
that activities that alter certain characteristics of a storage field
merit close scrutiny. However, provided there is adequate advance study
and documentation of the proposed construction, the Commission finds no
reason to bar every activity that might alter a certificated parameter
from the blanket certificate program.\35\ The information a project
sponsor is required to submit pursuant to proposed Sec.  157.213 is
intended to give the Commission and interested persons a sufficient
basis upon which to assess the prudence of proposed storage field
activities.
---------------------------------------------------------------------------

    \35\ See Texas Eastern Transmission Corporation, 62 FERC ]
61,196 (1993).
---------------------------------------------------------------------------

Mainline Facilities

    47. The Commission proposes to extend blanket certificate authority
to mainline facilities. Heretofore, the blanket certificate provisions
have excluded mainline facilities, in part out of concern that mainline
project costs could be large enough to adversely impact existing rates.
Without this exclusion, it might be possible for a natural gas company
to break a costly mainline project into several blanket-sized segments.
This remains a valid concern, and as stressed in comments, this concern
is rendered more acute as blanket project cost limits increase.
    48. To allay this concern, the Commission proposes to require that
all blanket certificate projects involving mainline facilities be
subject to prior notice to give the Commission and interested persons a
means to assess a proposal and express objections before construction
begins. Section 157.208(b) of the Commission's regulations states that
a blanket certificate holder ``shall not segment projects in order to
meet the cost limitation set forth in column 2 of Table I,'' i.e., the
prior notice project cost cap. The Commission intends to continue to
closely monitor blanket certificate projects, and in cases when a
project sponsor relies on blanket certificate authority for multiple
projects, to review blanket activities to verify that individual
projects are not piecemeal portions of a larger integrated undertaking.
If the Commission determines segmentation has occurred, it may impose
sanctions, which can include precluding a natural gas company from
acting under blanket certificate authority \36\ and penalties of up to
$1,000,000 per day per violation.
---------------------------------------------------------------------------

    \36\ See, e.g., Destin Pipeline Company, L.L.C., 90 FERC ]
61,270 (2000), in which the Commission responded to construction
costs that greatly exceeded the project cost limit by suspending the
natural gas company's blanket certificate authority.
---------------------------------------------------------------------------

    49. The Commission proposes to add Sec.  157.210, to read as
follows:

Sec.  157.210 Mainline natural gas facilities.

    Prior Notice. Subject to the notice requirements of Sec. Sec.
157.205(b) and 157.208(c),

the certificate holder is authorized to acquire, abandon, construct,
modify, replace, or operate natural gas mainline facilities. The
cost of a project may not exceed the cost limitation set forth in
column 2 of Table I of Sec.  157.208(d). The certificate holder must
not segment projects in order to meet this cost limitation.

Comments and Commission Response

    50. Petitioners observe that one of the reasons for excluding
mainline capacity expansion projects in the past was the worry that the
new capacity might be inequitably allocated, and reply that the
regulations instituted since the industry restructuring following Order
No. 636 have reduced the potential to allocate existing or new capacity
inequitably. The Commission believes its current capacity allocation
requirements, e.g., posting and bidding, which apply to capacity made
available as a result of blanket projects, will act as a check on
discrimination in capacity allocation. If a party suspects a request
for service has been improperly awarded, it may seek redress by
submitting a complaint to the Commission under NGA section 5. The
Commission will act as necessary to prevent, remedy, and penalize
improper practices.
    51. AGA is apprehensive that expanding blanket authority to include
mainline facilities could lead to insufficient scrutiny of
environmental or operational impacts, particularly in the case of
automatic authorization projects. First, the Commission does not
propose to permit automatic authorization for projects involving
mainline facilities, regardless of cost. Second, blanket certificate
projects are subject to the Sec.  157.206(b) environmental compliance
conditions to ensure that actions that could cause a significant
adverse impact on the human environment are not conducted under blanket
certificate authority, but are instead subject to case-specific review.
If the blanket certificate program is enlarged to include mainline
facilities as proposed, the Sec.  157.206(b) conditions will apply. In
view of this, and the proposal herein to fortify prior notice and
environmental compliance provisions, the Commission concludes that
proposals involving mainline facilities will receive sufficient
scrutiny.
    52. Anadarko is apprehensive the proposed revisions could undermine
the Commission's authority to ensure that the legislative goals and
requirements of the Alaska Natural Gas Transportation Act of 1976
(ANGTA) \37\ and the Alaska Natural Gas Pipeline Act (ANGPA) \38\ are
met. Anadarko states that the Commission's consideration of a case-
specific certificate application, and the attendant open season
allocation requirement, provides ``the first, and perhaps the only,
opportunity for objections to be raised to the size of the proposed
expansion, the allocation of capacity, or the rate to be charged, and
it is the first opportunity for discrimination claims to be raised.''
\39\ Anadarko argues that allowing ``any mainline expansion of an
Alaskan natural gas pipeline'' without ``all of the protections
afforded by a complete NGA section 7(c) certificate proceeding'' could
conflict with the ANGTA and ANGPA rate and the open season regulatory
requirements recently articulated in the Commission's Order No.
2005.\40\ Anadarko asks that the Commission specifically exempt an
Alaska natural gas transportation project from any expanded blanket
certificate authority.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 719, et seq. (2000).
    \38\ 15 U.S.C. 720, et seq. (2000).
    \39\ Anadarko's Comments at 4 (January 17, 2005).
    \40\ Regulations Governing the Conduct of Open Seasons for
Alaska Natural Gas Transportation Projects, Order No. 2005, 70 FR
8269 (February 9, 2005) 110 FERC ] 61,095 (2005).
---------------------------------------------------------------------------

    53. The Commission, in implementing its regulatory authority under
ANGPA, explained that ``a number of existing Commission policies
predicated on competitive conditions in the lower 48 states are ill-
suited for application in the case of an Alaska natural gas
transportation project;'' therefore, there is a ``need in certain
instances to accommodate existing Commission policy to the unique
circumstances surrounding the exploration, production, development, and
transportation to market of Alaska natural gas.'' \41\ Consequently,
the Commission will consider the need to accommodate the blanket
certificate program to the unique circumstances of an Alaska project in
any future proceedings authorizing such a project.
---------------------------------------------------------------------------

    \41\ Order No. 2005-A, 70 FR 35011, 35016 (June 16, 2005); 111
FERC ] 61,332, P 36 (2005).
---------------------------------------------------------------------------

    54. Kinder Morgan states its intention to extend or expand
mainlines in order to bring natural gas to new ethanol production
plants. Kinder Morgan cites public policy initiatives intended to
promote the production and consumption of ethanol and expresses the
concern that the current blanket certificate program's exclusion of
mainline facilities may hinder the timely construction of facilities
necessary to supply gas to new ethanol plants. The Commission expects
the proposal to expand the blanket certificate provisions to include
mainlines will provide Kinder Morgan with the additional authority it
seeks. Kinder Morgan describes requests it has received from a
developer of two new ethanol plants: one to extend a mainline by adding
2 to 3 miles of 8-inch pipe, the other to loop a mainline with 14 miles
of 12-inch pipe. Under the proposed revised regulations, both projects
would fall well within the parameters of the expanded blanket
certificate program.

Blanket Project Cost Limits

    55. Blanket certificate projects are constrained (1) by cost caps,
(2) by compliance with the Sec.  157.206(b) environmental requirements,
and (3) by being limited to a restricted set of facilities.\42\ The
Commission proposes to raise the cost caps for blanket certificate
projects.
---------------------------------------------------------------------------

    \42\ Further, as a prerequisite for a blanket certificate, the
Commission requires a company to first obtain a case-specific
certificate, because it is in the context of evaluating an
application for an NGA section 7 certificate authorization that the
Commission establishes a ``jurisdictional and informational base * *
* concerning such matters as rates, system supplies and certificated
customers.'' Interstate Pipeline Certificates for Routine
Transactions, Order No. 234, 47 FR 24254 (June 4, 1982); 47 FR 30724
(July 15, 1982), Reg. Preambles 1982-1985 P 30,200 (1982).
---------------------------------------------------------------------------

    56. The blanket certificate project cost limits were initially set
at $4,200,000 for an automatic authorization project and $12,000,000
for a prior notice project. Since 1982, the Commission has used an
inflation tracker (the gross domestic product implicit price deflator
as determined by the Department of Commerce) that has resulted in
incrementally ratcheting up blanket project cost limits to the current
level of $8,200,000 for an automatic authorization project and
$22,700,000 for a prior notice project. Petitioners contend these
inflation-adjusted cost caps fail to take into account additional
costs, such as regulatory compliance requirements and the use of more
expensive construction technology, which did not play as prominent a
part in 1982 as they do today, and request the Commission initiate a
study to analyze and compare costs in 1982 to costs today.
    57. There is no question that construction costs vary over time,
and do so in a manner that is not easily predicted. Recently, for
example, certain project components--notably the price of steel pipe--
have risen far faster than any measure of overall inflation. However,
although steel prices have run up over the past several years, in
looking back to 1982, there were periods during which steel prices fell
substantially. Further, changing regulatory requirements and
construction techniques, to which Petitioners attribute cost increases,
do

not always add to project costs, and may well contribute to cost
reductions and efficiencies.
    58. Petitioners request the Commission reassess construction costs
to determine if a project constructed within 1982 cost limits could be
replicated within today's cost limits. The Commission is concerned that
a focus on changes in construction costs over time risks losing sight
of the fundamental premise of the blanket certificate program, namely,
that blanket authorization be restricted (1) to projects that are
modest in scale and routine in nature, i.e., projects that are
sufficiently well understood so as to permit them to proceed with a
lesser level of regulatory scrutiny, and (2) to projects that will not
result in unjustified increases in existing customers' rates. With
respect to the latter, comparing construction costs over time is
irrelevant; the relevant question is whether the project cost caps have
served to adequately insulate existing rates from increases
attributable to blanket program costs. The Commission cautions that
even if it were possible to mirror 1982 costs to costs today, the
dollar amounts would not reflect proportionate impacts on existing
rates, since in 1982 the commodity cost of gas was a significant
portion of pipeline customers' merchant service rate, whereas today,
gas costs are no longer a component of pipeline customers'
transportation service rate. In view of this, the Commission questions
the utility of undertaking a formal inquiry to try to true up
construction costs from 1982 to today, and so declines Petitioners'
invitation to do so.
    59. Nevertheless, in an effort to gauge whether the inflation
tracker employed by the Commission over the past quarter century has
functioned as a reliable indicator of the rise in construction costs,
the Commission has reviewed changes in gas utility construction
materials costs. Between 1982 and 2005, such costs have risen by a
factor of approximately 2.29,\43\ compared to a factor of approximately
1.90 using the inflation tracker employed by the Commission. To account
for this divergence, the Commission proposes to raise blanket cost
limits to $9,600,000 for a no-notice project and to $27,400,000 for a
prior notice project. In view of the relatively small disparity
demonstrated between utility construction materials costs and the
Department of Commerce's GDP implicit price deflator, the Commission
proposes to continue to rely the latter, a commonly used and generally
accepted measure of overall inflation levels, as the measure for making
annual adjustments to the project cost limits. The Commission declines
to tie the blanket cost limit adjustment to commodity prices (such as
steel), labor rates, or other potentially subjective and varying
project cost components out of a concern that this could result in
volatile or inappropriate cost limit adjustments.
---------------------------------------------------------------------------

    \43\ The gas utility construction materials cost factor is
derived by averaging regional costs throughout the 48 contiguous
states, as estimated in the Handy-Whitman Index of Public Utility
Construction Costs, Trends of Construction Costs, Bulletin No. 162,
1912 to July 1, 2005. In initiating the blanket certificate program,
``[m]any commenters argued against the use of the ``GNP implicit
price deflator'' for adjusting * * * [project cost] limits and
recommended using the Handy-Whitman Index, a pricing index of
various utility and utility-type equipment, updated semi-annually,
for this purpose. The Commission believes that it is preferable to
use the GNP implicit price deflator instead of an index based on a
private collection of data not easily susceptible to governmental
verification.'' (Footnote omitted.) 47 FR 24254 (June 4, 1982). The
Commission reaffirms this preference.
---------------------------------------------------------------------------

    60. The Commission requests comments on (1) the merits of this
proposed boost in the blanket project cost limits, (2) whether the
inflation tracker mechanism currently employed by the Commission
accurately reflects changes in blanket project costs, and (3) whether
another means of accounting for changes in project costs may be
preferable. With respect to prospective comments, the Commission notes
that the blanket certificate program was implemented to allow a generic
class of minor projects to go forward without case-specific review,
based on the expectation that the cumulative effect of such
construction would neither raise existing rates nor degrade existing
services. Thus, the pertinent question is not the extent to which
construction costs may have changed over the last quarter century, but
whether blanket certificate activities can be expanded without
compromising the program's premise that there be no significant adverse
impacts on existing ratepayers, services, or the environment.

Comments and Commission Response

    61. Commentors did not argue for either particular new cost limits
or any means to calculate such limits, although AGA did ask as an
initial matter to establish ``whether the initial purpose of the
blanket construction certificate regulations is being frustrated by the
current dollar limits.'' \44\ The Commission welcomes comments on this
question.
---------------------------------------------------------------------------

    \44\ AGA's Comments at 12 (January 17, 2005).
---------------------------------------------------------------------------

    62. Several commentors caution that increasing the blanket
certificate project cost limits will put exiting customers at risk for
rising rates. Currently, blanket certificate project costs are afforded
a presumption that they will qualify for rolled in rate treatment in a
future NGA section 4 rate proceeding.\45\ Commentors are apprehensive
that if the blanket certificate program is expanded as proposed,
additional construction will take place under blanket certificate
authority, and the costs of this additional construction subsequently
will be rolled into a natural gas company's existing rate base, and
thereby raise systemwide rates. The Commission believes that the
proposed measured increase in blanket certificate project cost caps, in
conjunction with the proposal to require prior notice for projects that
rely on the expanded blanket certificate authority proposed herein,
will provide interested persons a preview of and opportunity to comment
on the rate impact of proposed blanket certificate projects. As noted,
persons that object to a blanket project subject to prior notice can
file a protest, which if not withdrawn or dismissed within the allotted
time, will result in the proposed blanket certificate project being
treated as a case-specific NGA section 7 certificate application.
---------------------------------------------------------------------------

    \45\ The Commission has routinely allowed blanket certificate
project costs to be rolled into a natural gas company's existing
rate base. See, e.g., Pricing Policy for New and Existing Facilities
Constructed by Interstate Natural Gas Pipelines, 71 FERC ] 61,241,
61917 (1995), stating that blanket ``projects will be presumed to
qualify for the presumption in favor of rolled-in pricing upon a
showing of system-wide benefits,'' and Destin Pipeline Company,
L.L.C., 83 FERC ] 61,308, 61,308 (1988), further clarifying ``the
Commission has determined that such facilities qualify for the
presumption of rolled-in rate treatment without a case-specific
analysis of system-wide benefits because the resulting rate impact
in such situations is usually de minimis.''
---------------------------------------------------------------------------

    63. Commentors suggest the proposed revisions could alter the
nature of the blanket certificate program and undermine the premise of
the program: that the impacts of projects constructed under blanket
certificate authority will be insignificant. The Commission seeks
comments on what additional measures, if any, it should consider to
limit any potentially adverse impacts which might be associated with
its proposed expansion of the blanket certificate program.\46\
---------------------------------------------------------------------------

    \46\ For example, in 1982, in promulgating the blanket program,
the Commission considered shielding existing customers from the
impact of the costs of blanket certificate projects by imposing both
a per-project cost cap and an annual cost cap, the latter at a
suggested maximum of three percent of the certificate holder's net
plant. In the end, the Commission elected not to impose any annual
limit, reasoning that ``[g]iven the high costs of purchased gas
relative to the customer's total gas bill, it is unlikely that the
cumulative effect of the activities approved under this section will
have any significant effect on ratepayers.'' 47 FR 24254 (June 4,
1982).

---------------------------------------------------------------------------

    64. NiSource supports the petition, but cautions the Commission to
guard against segmentation, i.e., a series of small projects, each of
which is within the blanket certificate cost limit, but each of which
is also an integral part of a larger project that would otherwise
exceed the cost limit. NiSource contends that when blanket certificate
costs are afforded a presumption that they will receive rolled-in rate
treatment, segmentation could result in existing customers subsidizing
expansion costs. The Commission has previously cautioned against
segmenting a large project into a daisy chain of smaller blanket-sized
projects, and reiterates its intention to exercise close oversight when
a certificate holder presents a series of potentially interrelated
blanket certificate proposals. To the extent any person suspects a
natural gas company is employing its blanket certificate authority to
put in place projects that are not only interrelated but
interdependent, such an abuse of the blanket certificate program should
be brought to the Commission's attention.
    65. APGA notes the Commission's Policy Statement on New Facilities
declares that the threshold criterion for a proposed project is that
revenues meet or exceed costs so that there will be no subsidization,
and cautions this threshold calculation, and the Commission's
assessment of the remaining public interest criteria articulated in its
policy statement, are not considered when the costs of facilities added
under blanket certificate authority are presumed to merit rolled-in
rate treatment. To date, the Commission has not found cause to apply
its Policy Statement on New Facilities to blanket certificate
facilities,\47\ and invites comments on whether this approach merits
reconsideration in light of the proposed expansion of the blanket
certificate program.
---------------------------------------------------------------------------

    \47\ 88 FERC ] 61,227, 61,737, note 3 (1999).
---------------------------------------------------------------------------

    66. AGA observes that cost limits were imposed to ensure projects
constructed under blanket authorization would have a de minimis impact
on existing rates, and argues that if cost limits are raised, then
rolled-in rate treatment for blanket certificate costs should be
reconsidered. AGA suggests it may be prudent to require that all
blanket certificate projects be subject to prior notice, in order to
provide an opportunity to review the potential rate, service, and
environmental impacts.
    67. The Commission does not anticipate the relatively modest
proposed increase in blanket certificate project cost limits will
significantly shift the impact that costs of construction under blanket
certificates now have on existing rates. However, recognizing that
expanding blanket certificate authority to include types of projects
heretofore excluded from the blanket certificate program may lead to
additional expenditures on blanket certificate construction, the
Commission is proposing all newly enfranchised blanket certificate
projects be subject to prior notice. As noted above, concerns regarding
rate impacts may be raised in response to a prior notice or in an NGA
section 4 rate proceeding. To the extent the AGA has remaining concerns
regarding rate impacts, the Commission welcomes comments on whether
additional or alternative revisions to the blanket certificate
regulations are necessary to ensure that projects constructed pursuant
to blanket certificate authority will have no more than a de minimis
impact on existing rates.

Notification Requirements

    68. The Commission has previously emphasized the ``need for advance
notification of landowners for blanket certificate activities'' so that
landowners are able to air their views and concerns ``to make sure that
our regulations provide for similar protections for similar
activities.'' \48\ If the scale or scope of blanket certificate-
eligible activities is expanded, the Commission believes additional
notice and compliance provisions are needed to guarantee that
protections under the blanket certificate program remain comparable to
those applicable to case-specific applications.
---------------------------------------------------------------------------

    \48\ Landowner Notification, Expanded Categorical Exclusions,
and Other Environmental Filing Requirements, Order No. 609, 64 FR
57374, 57383 (October 25, 1999).
---------------------------------------------------------------------------

    69. Section 157.203(d) describes the procedures for notice to
landowners affected by a proposed project, and Sec.  157.205 describes
the public prior notice procedure applicable to blanket certificate
projects that exceed the automatic authorization cost limit. Currently,
Sec.  157. 203(d)(1) requires that project sponsors must notify
landowners affected by an automatic authorization project at least 30
days prior to construction.\49\ The Commission proposes to extend this
to 45 days. In view of the proposed expanded scope and scale of blanket
certificate authority, which can be expected to increase number of
automatic authorization projects undertaken and the number of people
impacted, an additional 15 days offers greater assurance that there
will be adequate time for landowners to state their concerns and for
project sponsors and the Commission to respond.
---------------------------------------------------------------------------

    \49\ A project sponsor's contact with a landowner to initiate
easement negotiations qualifies as notice. A landowner may waive the
30-day notice requirement in writing, provided notice has been
provided. For activity required to restore service in an emergency,
the 30-day prior notice period is satisfied if a natural gas company
obtains all necessary easements. These aspects of Sec.  157.
203(d)(1) are unaffected by this NOPR.
---------------------------------------------------------------------------

    70. In addition, the Commission proposes to modify Sec. Sec.
157.203(d)(2)(iv) and 157.205(d) to extend the deadline to protest a
proposed prior notice project from 45 to 60 days. This additional time
will offer greater certainty that public notice of a proposed project
reaches all potentially interested persons and that they have an
adequate interval to reply. Further, the additional time will provide
the Commission with a more reasonable period of time to conduct and
conclude its environmental assessment (EA) of a proposal. This NOPR
contemplates an increase the number, extent, kind, and complexity of
facilities subject to blanket certificate authority, yet even for the
types of projects currently permitted, 45 days has proved to be, on
occasion, an unrealistically short time for the consultation and
analysis required to complete an EA. The additional time will ensure
the Commission is not forced to protest a prior notice project merely
as a means to gain time to finish an EA. The Commission does not expect
the extended landowner and public notice periods to unduly delay
blanket certificate projects, since natural gas companies, in large
part, can dictate when a blanket certificate project may begin
construction by when the company elects to initiate the notice process.
    71. To provide landowners with a more complete understanding of the
blanket certificate program and the potential impacts of a particular
blanket certificate project, the Commission proposes to expand the
description of the program and project that is provided in the notice
to landowners. The proposed new landowner notification requirements at
Sec. Sec.  157.203(d)(1)(iii) and 157.203(d)(2)(vii) will require the
notice to include: A general map; a statement of the proposed project's
purpose and timing; a discussion of what the project sponsor will need
from the landowner and how to contact the project sponsor; a Commission
pamphlet addressing basic concerns of landowners; a brief summary of
the landowner's rights under the eminent domain rules of the relevant
state; and the project sponsor's environmental complaint resolution
procedure. While this suggested change

will require that future notices include more information than they
currently do, the more detailed new notice will still require a project
sponsor to present considerably less information than would be
necessary for a case-specific application. The Commission notes that
all the activities this NOPR contemplates placing under the proposed
expanded blanket certificate authority, but for the expanded blanket
certificate authority, would require case-specific NGA section 7
certificate authorization.

Environmental Conditions

    72. Commenters note, and the Commission concurs, that as the scope
and scale of the blanket certificate program grows, so does the
potential for a blanket certificate project to constitute a major
federal action likely to have a significant impact on the quality of
the human environment. A blanket certificate project must continue to
meet the environmental conditions set forth in Sec.  157.206(b) of the
Commission regulations, and compliance with these conditions serves to
reduce the potential adverse environmental impacts of a project to
acceptable levels. To ensure that this continues to be the case with
larger and more varied types of blanket certificate projects, the
Commission proposes to modify the blanket certificate program's
environmental compliance conditions as follows.
    73. Section 157.6(d)(2)(i) will be revised to clarify that
``facility sites'' include wells and all other aboveground facility
sites. Section 157.206(b)(5), describing noise attributable to
compressor stations, will be revised to specify that the noise level is
to be measured at the site property boundary. Also in Sec.
157.206(b)(5), a goal is established that horizontal directional
drilling (HDD) and well drilling noise not exceed a day-night level
(Ldn) of 55 decibels (dBA) at the nearest noise sensitive area (NSA).
In turn, Sec.  157.208(c)(9) will be revised to require a description
of the steps to be taken to comply with the revised Sec.  157.206(b)(5)
HDD and well drilling noise levels, or a description of the mitigation
to be employed. Finally, the Commission proposes to revise Sec.
157.208(e)(4) to require a noise survey verifying compliance with Sec.
157.206(b)(5) for new or modified compression.
    74. The Commission proposes to add a new Sec.  157.208(c)(10),
directing the certificate holder to include a statement committing to
have the environmental inspector(s) report--as currently required by
Sec.  157.206(b)(3)(iv) under the Upland Erosion Control, Revegetation
and Maintenance Plan--filed with the Commission on a weekly basis. This
is necessitated by the proposed wider scope of prior notice projects,
which present a greater potential for environmental harm, and
consequently require a heightened vigilance to ensure environmental
safeguards are not inadvertently overlooked. Moreover, this will allow
the Commission, through its staff, to more efficiently monitor
compliance; this may also reduce the need for the natural gas company
to assist in routine staff field investigations.
    75. Recently, in certain regions, the United States Fish and
Wildlife Service has adopted a practice of not responding in writing if
a determination of no effect on endangered or threatened species is
reached; yet the Commission's current regulations require the
certificate holder to provide copies of the agency's determination. To
reconcile this regulatory incompatibility, the Commission proposes to
modify Sec.  157.208(c)(9) to allow the certificate holder to present
substitute documentation of agency concurrence if no written
concurrence is received. This substitute documentation may consist of
telephone logs, copies of e-mails, or any other reliable means of
identifying the agency personnel contacted from whom confirmation of
the agency's determination is received.
    76. In anticipation of an increase in the number and type of
automatic authorization projects, and in view of the fact that
automatic authorization projects are not identified by a docket number,
the Commission proposes to modify Sec.  157.208(e)(4) by adding new
paragraphs (ii) and (iii) to require the annual report for
automatically authorized projects to document the progress toward
restoration, and a discussion of problems or unusual construction
issues--including those identified by affected landowners--and
corrective actions taken or planned.

Comments and Commission Response

    77. Sempra contends that expanded blanket certificate authority
could induce competitive inequities because a potential new entrant
would have to undergo a de novo environmental review, whereas an
incumbent could construct identical facilities as long as it is able to
satisfy the Sec.  157.206((b) environmental compliance conditions. This
purported inequity is likely to be tempered by the additional notice
and environmental compliance conditions proposed above. Moreover, a new
entrant submitting an NGA section 7 application and a certificate
holder relying on blanket authority for equivalent projects must both
comply with the same set of environmental requirements.
    78. Nevertheless, Sempra's objection to the blanket certificate
environmental provisions remains, and in effect constitutes a
collateral attack on the entire blanket certificate program. The
Commission concedes that in terms of procedural efficiency, a new
market entrant can be at a competitive disadvantage when pitted against
a certificate holder able to act under blanket certificate authority.
This disparity is inherent in the blanket certificate program, as the
blanket certificate program provides for expedited authorization when
compared to having to obtain case-specific section 7 authorization. The
Commission is unaware of any systematic distortion of infrastructure
development due to its blanket certificate program's providing
incumbent certificate holders with this advantage over prospective, but
as yet uncertificated, competitors. Comments on this are requested.

Clarification of Criteria Defining Just and Reasonable Rates

Rate Treatment for Foundation Shippers
    79. Turning from requested revisions to the blanket certificate
program and to NGA section 7 applications in general, Petitioners
request clarification that it is not undue discrimination for a natural
gas company to offer rate benefits to prospective customers who commit
to a project before the company makes a public statement of its intent
to build the project. Petitioners state that reaching bilateral
agreements with as many of a project's potential customers as early as
possible may be the most significant variable affecting the timing of
infrastructure additions. Petitioners argue that project sponsors must
have a critical mass of customers willing to commit early as
``foundation shippers'' to provide the financial support for a project
before project sponsors commit to go forward with the project.
    80. However, Petitioners state that there is an economic incentive
for a potential customer to ``sit in the wings,'' and bet that the
critical mass of support will evolve, and the project go forward, at
which point the customer may then make a choice as to whether to take
service. Petitioners assert that if enough potential customers adopt
this ``wait and see'' approach, project sponsors may not be able to
justify spending the capital required to initiate the environmental
review and certificate application process. Petitioners desire to
encourage early commitments by offering rates to customers that commit
early which are more favorable than the

rates that will be available to those that seek service later.
    81. Petitioners propose to divide the foundation shippers eligible
for such favorable rates into two groups. ``Group I Foundation
Shippers'' would receive the most favorable rates; this group includes
all shippers who execute a binding precedent agreement by the deadline
established in the open season for the project.\50\ Petitioners
subdivide Group I into three different types of shippers. First, those
typically large shippers that reach agreements with the project sponsor
through one-on-one negotiation in formulating the project and come
forward hand-in-hand with the project sponsor when the project is
announced. Second, shippers of multiple sizes that bid successfully in
the public open season and execute binding precedent agreements by the
deadline established by the project sponsor. Third, shippers that make
their first contractual commitment to the project by the deadline
established in the open season by the project's sponsor.\51\
Petitioners state that such shippers, large and small, ultimately
provide the critical mass of support for the project.
---------------------------------------------------------------------------

    \50\ To date, it has been the Commission's policy, developed
through its orders and opinions, that all new interstate pipeline
construction be preceded by a nondiscriminatory, nonpreferential
public ``open season'' process through which all potential shippers
may seek and obtain firm capacity rights.
    \51\ INGAA/NGSA Petition at 18-19 (November 22, 2005). However,
at page 21, Petitioners describe their proposal somewhat
differently, stating that the common defining criterion for Group I
shippers is their execution of a binding commitment by the point at
which a project sponsor makes the ``go/no go'' decision for the
project. The Commission assumes that the point at which the
project's sponsors make the ``go/no go'' decision is approximately
the same time as the deadline established by the open season for a
binding agreement to be signed.
---------------------------------------------------------------------------

    82. ``Group II Foundation Shippers'' would consist of shippers that
do not execute binding commitments until after the deadline set in the
open season, but do commit to the project prior to the point at which
the project sponsor commits publicly to its willingness to build the
project. Petitioners state that such shippers also provide essential
support for a project, but should not necessarily be considered
similarly situated with the Group I shippers because they did not
commit to the project by the open-season deadline.
    83. Petitioners assert that project sponsors and the foundation
shippers currently risk their bargain being undone by the Commission,
either by disallowing the preferential rate treatment afforded to
shippers that signed up early or by extending the preferential rate to
shippers seeking service later in time. Petitioners request the
Commission confirm that it is not undue discrimination to provide rate
benefits to foundation shippers and withhold the same benefits from
later-generation shippers. Similarly, Petitioners request the
Commission confirm that it is not undue discrimination to provide rate
benefits to Group I shippers that are not available to Group II
shippers. Petitioners state that their proposal does not address
distinctions among foundation shippers within Group I, thus Petitioners
do not ask the Commission to address whether rate preferences among the
different categories of Group I shippers would be unduly
discriminatory.
    84. Petitioners assert that a Commission statement affirming the
legitimacy of disparate rate offerings will allow project sponsors and
foundation shippers to negotiate bilateral commitments confident that
their agreements will be neither overturned nor conferred on later
shippers. Petitioners argue that such a confirmation will provide a
strong incentive for more potential shippers to become foundation
shippers, thus enabling needed infrastructure projects to get underway
earlier.
Comments
    85. The AGA finds the proposal worthy of discussion and believes
that shippers that commit early to new projects should be recognized
for the risks they take. The AGA also states that it is important to
clarify that all shippers should have the ability to become foundation
shippers and that existing customers should not be made to subsidize
the foundation shippers.
    86. Duke endorses a policy to encourage relatively early
commitments by potential shippers. In particular, Duke contends that
shippers willing to sign up for capacity prior to a project's
development should be able to rely on their contracted-for capacity
without the risk of pro rata reallocation if additional shippers
request capacity at a later time. Duke asserts that unless foundation
shippers are protected against reallocations resulting from open
seasons, there is little incentive to make an early commitment to a
project. NiSource asserts that the Commission should not view the
proposed differential rates as undue discrimination, but as a positive
practical benefit that will prompt the development of needed
infrastructure.
    87. Illinois Municipal seeks assurance that if the foundation
shipper proposal is accepted, the Commission will still continue to
prohibit discount adjustments for discounts given on expansion
capacity.\52\ Illinois Municipal asserts that the Commission's discount
policies do not prohibit project sponsors from granting special lower
negotiated rates to foundation shippers. However, there should be no
attempt to impose a discount adjustment on the rate to the pre-
expansion shippers.
---------------------------------------------------------------------------

    \52\ Illinois Municipal at 3, citing, Policy For Selective
Discounting By Natural Gas Pipelines, 113 FERC ] 61,173 (2005).
---------------------------------------------------------------------------

    88. PSCNY asserts that the proposal is overly complicated and may
cause more problems than it solves, but should be explored. PSCNY
asserts that the qualifications for membership in the two groups of
foundation shippers appear to be based upon arbitrary deadlines, which
leads to concern over the criteria used to define a bid as binding and
how project sponsors will designate deadlines. PSCNY states that the
creation of rate distinctions will complicate Commission policies
regarding the pricing of pipeline expansions and produce additional
issues for litigation in subsequent rate cases. PSCNY also argues that
it is not clear why customers that commit in a later open season should
receive less favorable treatment than customers that commit in an
earlier open season, especially when the reason or cause of a
subsequent open season is within the control of the pipeline. Further,
PSCNY argues that there is no assurance that this proposal will achieve
its objective of providing an incentive for customers to make an early
commitment to a new project. Finally, PSCNY claims that forcing
shippers to commit early to a project may conflict with the public
interest, since having binding commitments in hand might discourage the
development of competing project proposals.
    89. PSCNY states that the preferential rates given to the Group I
Foundation Shippers may provide such shippers with a competitive
advantage over later-committing shippers, and that this competitive
advantage may discourage smaller marketers from entering retail open
access markets. PSCNY asserts that policies that promote
nondiscriminatory pricing are more likely to achieve the desired
objective of establishing competitive retail as well as wholesale
markets.
    90. PSCNY appreciates the need for project sponsors to obtain
binding commitments from prospective customers in order to obtain
financial backing for projects, but argues that issues associated with
the difficulties in obtaining such commitments go far

beyond rate treatment. PSCNY insists that the way to keep the process
as transparent and nondiscriminatory as possible is to establish clear
guidelines for implementing a transparent open-season process that
define the criteria for eligible bids and the binding nature of such
bids. PSCNY claims this will ensure that all shippers, including those
that commit in a secondary open season, have equal access to new
capacity. Potential customers will have a built-in incentive to make
binding bids before the end of an open season, because if they delay,
they risk the capacity being fully subscribed.
    91. Sempra states that preferential rate treatment for foundation
shippers may pose no undue discrimination in most cases. However, it
prefers for the Commission to develop undue discrimination policies
through individual natural gas company adjudications because such
determinations are necessarily fact specific, and a case-by-case
approach allows the Commission to fully consider the implications of
each individual proposal, including public interest considerations
particular to a proposed project. Accordingly, Sempra rejects
Petitioners' contention that the Commission issue a rulemaking or
policy statement to address the foundation shipper rate issue on a
generic basis.
    92. Anadarko requests that the Commission clarify that its action
regarding foundation shippers will have no effect on or application to
an Alaska project authorized under ANGTA or the NGA.

Discussion

    93. The Commission does not dispute the premise that a project
sponsor is best positioned to secure financial backing and perfect an
application if it has customer commitments in hand. Accordingly, the
sooner a project sponsor can induce customers to sign up for firm
service, the sooner a project can be expected to go forward. For the
reasons discussed below, the Commission finds that its existing
policies can accommodate the Petitioners' desire to offer rate
incentives to obtain such early project commitments, and pursuant to
these existing policies, rate incentives do not constitute undue
discrimination.
    94. The NGA contemplates individualized contracts for service.\53\
Under the NGA, the Commission's role is to ensure that the rates
offered and accepted as a result of individual negotiations are just
and reasonable and not unduly discriminatory.\54\ Further, the Supreme
Court has held that the purpose of the NGA was not to ``abrogate
private contracts to be filed with the Commission'' and that the NGA
``expressly recognized that rates to particular customers may be set by
individual contracts.'' \55\ Therefore, not all differentiations in
rate treatment are unreasonable or illegal. Rather, ``[it] is only when
a preference or advantage accorded to one customer over another is
undue or a difference in service as between them is unreasonable that *
* * [the undue discrimination provisions] of the Act come [ ] into
play.'' \56\
---------------------------------------------------------------------------

    \53\ United Gas Pipe Line Co. v. Mobile Gas Service Corp.
(Mobile), 350 U.S. 332 at pp. 338-9 (1956); FPC v. Sierra Pacific
Power Co. (Sierra), 350 U.S. 348 (1956).
    \54\ Id. NGA section 4 prohibits natural gas companies subject
to the Commission's jurisdiction from: (1) Making or granting any
undue preference or advantage to any person or subjecting any person
to any undue prejudice or disadvantage, or (2) maintaining any
unreasonable difference in rates, charges, service, facilities or in
any other respect, either as between localities or as between
classes of service.
    \55\ Mobile, 350 U.S. 332 at pp. 338-339.
    \56\ Michigan Consolidated Gas Co. v. FPC, 203 F.2d 895, 901 (3d
Cir. 1953).
---------------------------------------------------------------------------

    95. Moreover, in Cities of Bethany, et al v. FERC,\57\ the Court of
Appeals found that the ``mere fact of a rate disparity [between
customers receiving the same service] does not establish unlawful rate
discrimination'' under the NGA, and that ``rate differences may be
justified and rendered lawful by facts--cost of service or otherwise.''
\58\ Relying on the Supreme Court's decisions in Mobile and Sierra, the
court held that the anti-discrimination mandate of NGA section 4(b)
should not be interpreted as ``obliterating the public policy
supporting private rate contracts'' between natural gas pipelines and
their customers.\59\ Therefore, it is clear that pipelines may provide
different rates to different customers based upon different
circumstances.
---------------------------------------------------------------------------

    \57\ 727 F.2d 1131 (D.C. Cir. 1984).
    \58\ Id. at 1139. Thus, the court observed that fixed rate
contracts between the parties may justify a rate disparity, citing
Town of Norwood v. FERC, 587 F.2d 1306, 1310 (D.C. Cir. 1978);
Boroughs of Chambersburg, et al. v. FERC, 580 F.2d 573, 577 (D.C.
Cir. 1978) (per curium)). See also, United Municipal Distributors
Group v. FERC, 732 F.2d 202 (D.C. Cir. 1984).
    \59\ Id.
---------------------------------------------------------------------------

    96. Consistent with this statutory scheme, in both its discounted
rate and negotiated rate programs, the Commission has authorized
natural gas companies to negotiate individualized rates with particular
customers. Section 284.10(c)(5) of the Commission's open access
regulations permits a pipeline to offer discounted rates in a range
between its maximum and minimum tariff rate; discounted rates must
reflect the same rate design as the tariff rate. In its 1996 negotiated
rate policy statement,\60\ the Commission allowed pipelines to
negotiate individualized rates that are not constrained by the maximum
and minimum rates in the pipeline's tariff and need not reflect the
same rate design.\61\
---------------------------------------------------------------------------

    \60\ Alternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines, Regulation of Negotiated Transportation
Services, Statements of Policy and Comments, 74 FERC ] 61,076
(1996), order on clarification, 74 FERC ] 61,194 (1996), order on
reh'g, 75 FERC ] 61,024 (1996).
    \61\ See Northern Natural Gas Co., 105 FERC ] 61,299 at P12-16
(2003) (discussing the distinction between discounted and negotiated
rates).
---------------------------------------------------------------------------

    97. The Commission has permitted pipelines to use both discounted
and negotiated rates in establishing rates for the participants in new
projects. In fact, in the Commission's Policy Statement on New
Facilities, the Commission encouraged pipelines to negotiate risk
sharing agreements with shippers participating in a new project
regarding the effect of cost overruns and underutilized capacity on
rates for the proposed facilities.\62\ Negotiated rates that will
remain fixed regardless of actual construction costs are an obvious way
of accomplishing such risk sharing. In recent years, many project
sponsors have entered into such negotiated rate agreements with their
foundation shippers, and the Commission has approved the rates.\63\
---------------------------------------------------------------------------

    \62\ 88 FERC ] 61,128 at 61,747 (1999), stating ``should reach
such agreements with new shippers concerning who will bear the risks
of underutilization of capacity and cost overruns.''
    \63\ In some instances, the negotiated rates have been lower
than the ultimate recourse rate for the service provided. See e.g.
Natural Gas Pipeline Co. of America, 110 FERC ] 61,341 (2005)
(``Natural executed three precedent agreements with shippers for the
full capacity of the proposed project. The $4,911,988 in revenue
generated by the fixed $3.07 per Dth monthly negotiated rate under
the precedent agreements will not fully recover the estimated $6.6
million cost of service for the project. Thus, Natural will be at
risk for any revenue shortfall due to the lower negotiated contract
rates with the incremental shippers.'') (Footnote omitted.) Id. at P
23-25.
---------------------------------------------------------------------------

    98. It is within this regulatory framework that the Commission
considers whether to confirm that it is not unduly discriminatory to
provide rate benefits to foundation shippers and withhold the same
benefits from later-generation shippers \64\ or to provide rate
benefits to Group I shippers and withhold the same benefits from Group
II shippers. The Commission finds, as a general matter, that rate
differentials between foundation shippers that sign

up for service early and shippers that sign up for service later are
not unduly discriminatory, since the later shippers are not similarly
situated to the foundation shippers. However, integral to this finding
is the concept discussed below, that all potential shippers have an
equal and open opportunity to become foundation shippers. The
contractual commitments by the foundation shippers to purchase capacity
on the new projects provide essential support for the sponsor to
proceed with the project. For example, these contractual commitments
help the project sponsor to obtain financing for the construction of
the project, and may reduce the cost of that financing by reducing the
perceived risk of the investment in the new facilities. Moreover, by
committing to a particular project, foundation shippers may be giving
up other competitive alternatives to obtain their needed capacity,
either on an existing pipeline or by participating in a different new
project. An essential component of the Commission's certificate policy
has been to provide both the project sponsor and project participants
the opportunity to obtain greater certainty concerning the rate that
the participants will pay, so that all parties can make an informed
decision as to whether to go forward. Approving negotiated rates that
will remain fixed regardless of subsequent developments is consistent
with this policy.\65\
---------------------------------------------------------------------------

    \64\ As discussed above, Petitioners do not ask the Commission
to address distinctions among foundation shippers within the same
group; thus, the Commission does not do so.
    \65\ However, rate distinctions based on the timing of a
customers' commitment are inapplicable to the blanket certificate
program. The streamlined blanket certificate process is intended for
relatively small projects; financing such small scale projects
should not entail finding customers willing to provide an economic
incentive.
---------------------------------------------------------------------------

    99. The Commission's policies contain adequate safeguards to
minimize the possibility of undue discrimination in permitting the use
of rate incentives to obtain early commitments for construction
projects. First, under the Commission's policies, all new interstate
pipeline construction must be preceded by a nondiscriminatory,
nonpreferential, open-season process through which potential shippers
may seek and obtain firm capacity rights. The instant proposal
contemplates the use of such an open season. Therefore, under the
instant proposal all potential shippers would have an opportunity to
become foundation shippers in a nondiscriminatory, nonpreferential
open-season process, consistent with Commission policy. Second, as part
of the open season, the project sponsor must offer a maximum recourse
rate so that the bidder in the open season may have the option to
choose between the recourse rate or a negotiated rate.\66\ This
recourse rate may be based upon an estimated cost of service for the
proposed project where actual construction costs are not yet known.\67\
---------------------------------------------------------------------------

    \66\ Natural Gas Pipeline Co. of America, 101 FERC ] 61,125
(2002).
    \67\ Id. at P 39. ``In the certificate proceeding for any such
project the Commission will approve an initial recourse rate for the
project which the pipeline must file before the project goes into
service. Moreover, in this proceeding, the Commission may ensure
that pre-expansion shippers on a pipeline will not subsidize a
proposed expansion project. However, the Commission will permit a
newly constructed pipeline to employ the same discounting policies
as an existing pipeline.'' See Policy for Selective Discounting By
Natural Gas Pipelines, 113 FERC ] 61,173 P 96-99 (2005). The
pipeline will have to offer available capacity for sale to new
shippers that offer to pay the maximum just and reasonable recourse
rate, and this rate may change from time to time pursuant to
sections 4 and 5 of the NGA.
---------------------------------------------------------------------------

    100. PSCNY raises various concerns about the procedures to be used
in open seasons in which the proposed rate incentives are offered. The
Commission believes such issues are best addressed on a case-by-case
basis. Petitioners do not propose the Commission modify any aspect of
its open-season policies, which require that pipelines conduct
nondiscriminatory, nonpreferential open seasons for new projects.\68\
To the extent any potential shipper believes that a pipeline's open
season did not comply with this policy, it may raise that issue in the
certificate proceeding or in an NGA section 5 complaint. The Commission
will act as necessary to prevent, remedy, and penalize improper
practices.
---------------------------------------------------------------------------

    \68\ The Commission endorses the Petitioners' clarification of
this policy as follows: ``As long as potential shippers received the
same notice and ability to acquire capacity created by a * * * [new]
expansion as they do on any existing capacity that becomes
available, any risk of undue discrimination should be avoided''
INGAA/NGSA Petition at 8 (November 22, 2005).
---------------------------------------------------------------------------

    101. Here, Petitioners posit an open-season process that will
produce in two distinct sets of foundation shippers. Group I shippers
sign a binding agreement either by the date established in the open
season for executing contracts or by the date the project sponsor makes
a ``go/no go'' decision for the project; Group II shippers sign a
binding agreement prior to the time the project sponsor commits
publicly to build the project. Under the Petitioners' proposal, the
rate incentives a project sponsor offers to obtain early commitments to
a project will be based solely on the timing of each shipper's
contractual commitment to the project. However, the Commission can
envision that different project sponsors may prefer to offer rate
incentives based on something other than the timing of contractual
commitments. Because Commission policies permit rate differentials
among customers based on a number of grounds \69\--including differing
elasticities of demand, volumes to be transported, and length of
service commitments--a project sponsor might wish to offer preferential
rates to shippers who contract for larger volumes of service.
---------------------------------------------------------------------------

    \69\ Policy For Selective Discounting By Natural Gas Pipelines,
113 FERC ] 61,173 (2005).
---------------------------------------------------------------------------

    102. Given the variety of rate incentives that might be offered
consistent with Commission policy, the Commission believes it would be
premature to go beyond our general finding above and seek to itemize
every rate incentive that might be offered in an open season without
risk of undue discrimination. Instead, the Commission prefers to review
different rate incentives on a case-by-case basis. The Commission
observes that the risk of undue discrimination would be reduced to the
extent that the rate incentives offered are clearly defined in the
announcement of the open season, publicly verifiable, and equally
available to all potential shippers. For example, Petitioners have
described the eligibility standard for Group I foundation shippers
variously as (1) the date established in the open season for executing
contracts or (2) the date the project sponsor makes a ``go/no go''
decision for the project. The first date would appear to involve less
risk of discrimination, since it would be publicly available from the
start of the open season, whereas the second date appears to give the
project sponsor considerable discretion as to when to terminate
eligibility for Group I.
    103. AGA and Illinois Municipal are concerned that existing
customers not subsidize the foundation shippers. We find these concerns
are adequately addressed by our Policy Statement on New Facilities,
which requires that existing pipelines proposing new projects must be
prepared to financially support the project without relying on
subsidies from existing customers. Moreover, the Commission has stated
that when an expansion project is incrementally priced, there will be
no discount adjustment for service on the expansion that affects the
rates of the current shippers, since rates for the expansion service
will be designed incrementally.\70\
---------------------------------------------------------------------------

    \70\ Id. at P 98.
---------------------------------------------------------------------------

    104. Duke submits that shippers willing to sign up for capacity
prior to pipeline development (when the project is being sized) should
be able to rely on their contracted-for capacity without the

risk of pro rata reallocation if additional shippers request capacity
at a later time. As Petitioners state, the instant proposal does not
apply to non-rate issues such as capacity allocation. The Commission
requires that capacity be allocated on a basis that is not unduly
discriminatory, but the Commission has not prescribed any particular
capacity allocation method that must be used. Thus, the Commission has
permitted pipelines to use a first-come first-served allocation method,
and has not required the use of a pro-rata allocation method. For
example, in approving certain new projects, the Commission found that
the finite nature of capacity and the anchor shippers' reliance on
receiving the full capacity for which they had bargained justified
giving the anchor shippers their required capacity, while open-season
shippers were subject to an allocation of available capacity.\71\ The
instant proposal does not contemplate any change from existing
Commission policy and precedent in these non-rate areas.
---------------------------------------------------------------------------

    \71\ See, e.g., Garden Banks Gas Pipeline, LLC, 78 FERC ] 61,066
(1997); Green Canyon Pipe Line Co., 47 FERC ] 61,310 (1989); Destin
Pipeline Co. L.L.C., 81 FERC ] 61,211 (1997); Maritimes & Northeast
Pipeline, L.L.C., 76 FERC ] 61,124 (1996), order on reh'g, 80 FERC ]
61,136 (1997).
---------------------------------------------------------------------------

    105. APGA claims that by far the largest group of potential new
customers that may seek rate inducements to contract for capacity on
new projects, if not the only potential new customers of any size, are
electric generators.\72\ APGA sees no justification for a policy that
would act as an incentive to increase demand during a period of supply
constraints. PSCNY and Sempra also question whether rate incentives
based on timing might distort infrastructure development. Petitioners
and commentors supporting the petition argue the opposite.
---------------------------------------------------------------------------

    \72\ APGA's Comments at 11. APGA adds that there is no need to
offer rate inducements to local distribution companies, as they are
captive customers subject to a public interest mandate to contract
for capacity as necessary to meet demand.
---------------------------------------------------------------------------

    106. The Commission seeks to promote new infrastructure in order to
help relieve existing supply constraints. The Commission agrees that
new facilities should not be added unless they fulfill a demonstrated
need. However, in the Commission's view, this showing of need is
satisfied by the willingness of companies and customers to take on the
economic risk of the cost of constructing and operating new facilities.
The Commission proposes no changes in its existing policy that
pipelines must be willing to financially support a project without
subsidies from its existing customers.
    107. Anadarko requests that the Commission clarify that its action
regarding foundation shippers will have no effect on or application to
an Alaska project. The Commission recognizes the unique nature of an
Alaska natural gas pipeline project and will consider the applicability
of its rate policies, both in general and with respect to blanket
facilities, to an Alaska project in any future proceeding authorizing
such a project.

Information Collection Statement

    108. The Office of Management and Budget (OMB) regulations require
that OMB approve certain reporting, recordkeeping, and public
disclosure requirements (collections of information) imposed by an
agency.\73\ Therefore, the Commission is providing notice of its
proposed information collections to OMB for review in accordance with
section 3507(d) of the Paperwork Reduction Act of 1995.\74\ Upon
approval of a collection of information, OMB will assign an OMB control
number and an expiration date. The only entities affected by this rule
would be the natural gas companies under the Commission's jurisdiction.
---------------------------------------------------------------------------

    \73\ 5 CFR 1320.11 (2005).
    \74\ 44 U.S.C. 3507(d) (2000).
---------------------------------------------------------------------------

    109. FERC-537, ``Gas Pipeline Certificates: Construction,
Acquisition and Abandonment,'' identifies the Commission's information
collections relating to part 157 of its regulations, which apply to
natural gas facilities for which authorization under NGA section 7 is
required, and includes all blanket certificate projects. FERC-577,
``Gas Pipeline Certificates: Environmental Impact Statement,''
identifies the Commission's information collections relating to Part
380 of its regulations implementing the National Environmental Policy
Act of 1969 (NEPA),\75\ which include the environmental compliance
conditions of Sec.  157.206(b).
---------------------------------------------------------------------------

    \75\ 42 U.S.C. 4321, et seq. (2000).
---------------------------------------------------------------------------

    110. The proposed revisions to the Commission's regulations, as
contained in the NOPR, and the resulting change in collections of
information burdens, are as follows.
    111. The NOPR proposes to provide an additional 15 days for notice
to landowners and the public. This will have no impact on the
collections of information.
    112. The NOPR proposes specific additional information to be
included in the notice to landowners located along the route of a
proposed blanket certificate project and in the prior notice to the
public of a proposed project. This should have a minor impact on
blanket certificate project sponsors, since the additional information
is already required for the landowner notification for case-specific
NGA section 7 applications. Expanding the blanket certificate program
to include mainline, certain LNG and synthetic gas facilities, and
storage facilities is expected to allow approximately 62 projects per
year to proceed under blanket certificate authority that would
otherwise be required to obtain case-specific NGA section 7 certificate
authorization. Thus, these 62 projects will be removed from FERC-577
and shifted to FERC-537. Project sponsors permitted to rely on the
proposed expanded blanket certificate authority to undertake projects
that currently require case-specific NGA section 7 certificate
authorization will not need to submit any additional information to
meet the proposed blanket certificate notice requirements. The
exception to this is the proposal to require a description of a natural
gas company's environmental complaint resolution procedure in the
blanket certificate program notice. However, this information is also
frequently required for case-specific NGA section 7 projects and may be
satisfied by a generic description of the complaint resolution process
applicable to all projects along with individual contact information
applicable to each project.
    113. The NOPR proposes to specify additional information to be
included in the prior notice to the public and in the annual report.
This should result in a minor increase in the existing burden. Only
proposed prior notice blanket certificate projects that involve HDD and
well drilling will be required to include a description of how noise
limits will be achieved. Prior notice projects will also need to commit
to file weekly environmental inspector reports. The annual reports
covering projects subject to automatic blanket certificate authority
will require discussions of the progress of restoration efforts,
problems, and corrections. Where applicable, noise surveys are also
required in annual reports, but such surveys are normally done to
verify compliance with the standard environmental conditions, so this
requirement adds only a minimal burden.
    114. The NOPR proposes to revise the environmental compliance
conditions to apply the noise standard to the site property boundary
instead of the noise-sensitive areas, and as a goal, to apply the noise