[Federal Register Volume 80, Number 77 (Wednesday, April 22, 2015)]
[Rules and Regulations]
[Pages 22366-22385]
[FR Doc No: 2015-09226]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 2

[Docket No. PL15-1-000]

Cost Recovery Mechanisms for Modernization of Natural Gas
Facilities

AGENCY: Federal Energy Regulatory Commission, Energy.

ACTION: Policy statement.

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SUMMARY: In this Policy Statement, the Commission provides greater
certainty regarding the ability of interstate natural gas pipelines to
recover the costs of modernizing their facilities and infrastructure to
enhance the efficient and safe operation of their systems. The Policy
Statement explains the standards the Commission will require interstate
natural gas pipelines to satisfy in order to establish simplified
mechanisms, such as trackers or surcharges, to recover certain costs
associated with replacing old and inefficient compressors and leak-
prone pipes and performing other infrastructure improvements and
upgrades to enhance the efficient and safe operation of their
pipelines.

DATES: This Policy Statement will become effective October 1, 2015.

FOR FURTHER INFORMATION CONTACT:
Monique Watson (Technical information), Office of Energy Markets
Regulation, Federal Energy Regulatory Commission, 888 First Street NE.,
20426, Telephone:<PHONE_NUMBER><EMAIL_ADDRESS>David E. Maranville (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street NE., 20426,
Telephone:<PHONE_NUMBER><EMAIL_ADDRESS>
TABLE OF CONTENTS

                                                        Paragraph  Nos.

I. Background........................................                  4
    A. Safety and Environmental Initiatives..........                  4
    B. Existing Policy...............................                 11
    C. Proposed Policy Statement.....................                 19
    D. Comments......................................                 22
II. Discussion.......................................                 25
    A. Adoption of Policy Statement..................                 25
    B. Standards for Modernization Cost Trackers or                   44
     Surcharges......................................
        1. Review of Existing Rates..................                 45
        2. Defined Eligible Costs....................                 54
        3. Avoidance of Cost Shifting................                 72
        4. Periodic Review of the Surcharge..........                 83
        5. Shipper Support...........................                 90
    C. Additional Questions on Which the Commission                   95
     Sought Comments.................................
        1. Accelerated Amortization..................                 96
        2. Reservation Charge Crediting..............                101
        3. Other Issues..............................                110
III. Information Collection Statement................                119
IV. Document Availability............................                132
V. Effective Date and Congressional Notification.....                135

    1. On November 20, 2014, the Commission issued a Proposed Policy
Statement and sought comments regarding potential mechanisms for
interstate natural gas pipelines to use to recover the costs of
modernizing their

facilities and infrastructure to enhance the efficient and safe
operation of their systems.\1\ The Commission proposed standards that
interstate natural gas pipelines would be required to satisfy to
establish simplified mechanisms, such as trackers or surcharges, to
recover such costs. Historically, the Commission has required
interstate natural gas pipelines to design their transportation rates
based on projected units of service. Recently, however, governmental
safety and environmental initiatives have raised the probability that
interstate natural gas pipelines will soon face increased costs to
enhance the safety and reliability of their systems. The Commission
issued the Proposed Policy Statement in an effort to address these
potential costs and to ensure that existing Commission ratemaking
policies do not unnecessarily inhibit interstate natural gas pipelines'
ability to expedite needed or required upgrades and improvements, such
as replacing old and inefficient compressors and leak-prone pipelines.
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    \1\ Cost Recovery Mechanisms for Modernization of Natural Gas
Facilities, Proposed Policy Statement, 104 FERC ] 61,147 (2014)
(Proposed Policy Statement).
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    2. After review of the comments on the Proposed Policy Statement,
the Commission has determined to establish a policy allowing interstate
natural gas pipelines to seek to recover certain capital expenditures
made to modernize system infrastructure through a surcharge mechanism,
subject to conditions intended to ensure that the resulting rates are
just and reasonable and protect natural gas consumers from excessive
costs. The Commission recognizes, as many commenters note, that
permitting pipelines to recover these expenditures through a surcharge
or tracker departs from the requirement that interstate natural gas
pipelines design their transportation rates based on projected units of
service. We find on balance, however, that consideration of such
mechanisms is justified if they are properly designed to limit a
pipeline's recovery of such costs to those shown to modernize the
pipeline's system infrastructure in a manner that enhances system
safety, reliability and regulatory compliance, and are subject to
conditions that ensure that the resulting rates are just and reasonable
and protect natural gas consumers from excessive costs. Accordingly, we
are adopting this Policy Statement to provide guidance and a framework
as to how the Commission will evaluate pipeline proposals for recovery
of infrastructure modernization costs. The Policy Statement adopts the
five guiding principles from the Proposed Policy Statement as the
standards a pipeline would have to satisfy for the Commission to
approve a proposed modernization cost tracker or surcharge. Those
criteria are (1) Review of Existing Base Rates; (2) Defined Eligible
Costs; (3) Avoidance of Cost Shifting; (4) Periodic Review of the
Surcharge and Base Rates; and (5) Shipper Support.
    3. Below we review the background that led to the development of
the Proposed Policy Statement and this Policy Statement, summarize the
comments on the Proposed Policy Statement, and discuss the
applicability of the Policy Statement in general, and of the five
conditions under the new Policy Statement, in light of those comments.
As discussed below, the Commission intends that the standards a
pipeline must satisfy to implement a cost modernization tracker or
surcharge to be sufficiently flexible so as not to require any specific
form of compliance but to allow pipelines and their customers to reach
reasonable accommodations based on the specific circumstances of their
systems. The Commission will thus evaluate any proposal for a
modernization cost surcharge against those five standards on a case-by-
case basis.

I. Background

A. Safety and Environmental Initiatives

    4. As we noted in the Proposed Policy Statement, there have been
several recent legislative actions, and resulting regulatory
initiatives, to address natural gas pipeline infrastructure safety and
reliability. In 2012, Congress passed the Pipeline Safety, Regulatory
Certainty, and Job Creation Act of 2011.\2\ That act includes
requirements for the United States Department of Transportation (DOT)
to take various actions to reduce the risk of future pipeline failures.
Among other things, the Pipeline Safety Act requires the DOT to (1)
consider expansion and strengthening of its integrity management
regulations, (2) consider requiring automatic shut-off valves on new
pipeline construction, (3) require pipelines to reconfirm their Maximum
Allowable Operating Pressures, and (4) conduct surveys to measure
progress in plans for safe management and replacement of cast iron
pipelines.
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    \2\ Pipeline Safety, Regulatory Certainty, and Job Creation Act
of 2011, 49 U.S.C.S. 60101 (2012) (Pipeline Safety Act).
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    5. The Pipeline and Hazardous Materials Safety Administration
(PHMSA) is in the process of implementing a multi-year Pipeline Safety
Reform Initiative to comply with the Pipeline Safety Act's mandate to
enhance the agency's ability to reduce the risk of future pipeline
failures.\3\ Prior to the Pipeline Safety Act's enactment, on August
25, 2011, PHMSA published an Advance Notice of Proposed Rulemaking
(ANOPR) titled ``Pipeline Safety: Safety of Gas Transmission
Pipelines,'' which asked all stakeholders whether PHMSA should modify
its existing integrity management and other pipeline safety regulations
for interstate natural gas pipelines.\4\ The ANOPR requested public
comment on a range of topics related to current industry practices, the
effects of enhanced regulations on safety and cost, and the best method
to implement proposed regulations. For example, PHMSA sought comments
on shut-off valves and remote controlled shut-off valves. In addition,
PHMSA held a public leak detection and valve workshop on March 28,
2012.
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    \3\ Written Statement of Cynthia Quarterman, Administrator,
PHSMA, before the U.S. House of Representatives, Committee on
Transportation and Infrastructure, Subcommittee on Railroads,
Pipelines, and Hazardous Materials (May 20, 2014), available at
http://transportation.house.gov/uploadedfiles/2014-05-20-quarterman.pdf (Quarterman Testimony) at 3.
    \4\ Pipeline Safety: Safety of Gas Transmission Pipelines, (RIN:
2137-AE72), 76 FR 53,086 (August 25, 2011).
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    6. Also as part of the ANOPR process, PHSMA is considering
expanding the definition of a High Consequence Area (HCA) so that more
miles of pipeline may become subject to integrity management
requirements.\5\ PHMSA is also considering potential new rules related
to repair criteria, including applying the integrity management repair
criteria to non-HCAs; reassessing the repair criteria in areas where
the population has grown since the pipeline was constructed; requiring
methods to validate in-line inspection tool performance and
qualifications of personnel; and implementing risk tiering such that
repairs in an HCA have priority over repairs in a non-HCA. PHMSA held a
Class Location Methodology workshop on April 16, 2014. Based on the
comments from the ANOPR and the workshop, PHMSA ``has started drafting
a report to Congress on this issue.'' \6\
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    \5\ An HCA is a location which is defined in the pipeline safety
regulations as an area where pipeline releases have greater
consequences to the safety, health and environment. Basically, these
are areas with greater population density.
    \6\ Quarterman Testimony at 10.
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    7. PHMSA is also considering changes to its requirements that
pipelines perform baseline and periodic assessments of pipeline
segments in an HCA through one or a combination of in-line inspection,
pressure testing,

direct assessment of external and internal corrosion, or other
technology demonstrated to accurately assess the condition of a pipe.
In June 2013, as updated in September 2013, PHMSA issued a flow chart
reflecting its draft Integrity Verification Process for natural gas
pipelines.\7\ To this end, PHMSA seeks information as to what anomalies
have been detected using the various assessment methods, and proposes
to include criteria in the regulations that would require more rigorous
corrosion control.
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    \7\ 78 FR 56,268 (Sept. 12, 2013).
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    8. As we further noted in the Proposed Policy Statement, in
addition to pipeline safety issues, there have been growing concerns
about the emissions of greenhouse gases (GHG) in the production and
transportation of natural gas. On April 15, 2014, the United States
Environmental Protection Agency (EPA) issued a series of technical
white papers, for which it has requested input from peer reviewers and
the public, to determine how to best pursue reductions of emissions
from, inter alia, natural gas compressors.\8\ The EPA Compressor White
Paper discusses the most prevalent types of compressors (reciprocating
and centrifugal) and compressor emission data. As relevant to this
Policy Statement, the EPA lays out several ``mitigation options for
reciprocating compressors involve[ing] techniques that limit the
leaking of natural gas past the piston rod packing, including
replacement of the compressor rod packing, replacement of the piston
rod, and the refitting or realignment of the piston rod.'' \9\ The EPA
also describes several mitigation options for centrifugal compressors
to limit the leaking of natural gas ``across the rotating shaft using a
mechanical dry seal, or capture the gas and route it to a useful
process or to a combustion device.'' \10\ If the EPA's white papers
result in the agency imposing mitigation requirements on natural gas
pipelines, the cost of such controls could be significant.\11\
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    \8\ See EPA, Oil and Natural Gas Air Pollution Standards, White
Papers on Methane and VOC Emission (Apr. 15, 2014), available at
http://www.epa.gov/airquality/oilandgas/whitepapers.html.
    \9\ EPA Compressor White Paper at 29.
    \10\ Id. at 29-42.
    \11\ For example, the Interstate Natural Gas Association of
America (INGAA) comments that one of its member companies ``reported
capital costs of $865,000 for replacement of a wet seal'' on a
centrifugal compressor. See INGAA Comments on EPA Compressor White
Paper at 13 (filed June 16, 2014). INGAA also commented on the EPA's
Leaks White Paper and noted that many factors could affect leak
repair costs and that ``the cost of the repair may far exceed the
benefit of eliminating a small leak.'' See INGAA Comments on EPA
Leaks White Paper at 12-13 (filed June 16, 2014).
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    9. In 2009, the EPA published a rule for mandatory reporting of GHG
from sources that, in general, emit 25,000 metric tons or more of
carbon dioxide equivalent per year in the United States.\12\ This
initiative, commonly referred to as the Greenhouse Gas Reporting
Program (GHGRP), collects greenhouse gas data from facilities that
conduct Petroleum and Natural Gas Systems activities, including
production, processing, transportation and distribution of natural gas.
Moreover, on November 14, 2014, the EPA issued a prepublication version
of a final rule revising the Petroleum and Natural Gas Systems source
category (Subpart W) and the General Provisions (Subpart A) of the
GHGRP.\13\ The final rule, which was effective January 1, 2015, imposes
new requirements for the natural gas industry to monitor methane
emissions and report them annually. On that same day, the EPA issued a
prepublication version of a proposed rule to add calculation methods
and reporting requirements for greenhouse gas emissions, as relevant
here, from blow downs of natural gas transmission pipelines between
compressor stations. The EPA also proposed confidentiality
determinations for new data elements contained in the proposed
amendments.\14\
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    \12\ Mandatory Reporting of Greenhouse Gases Rule, 74 FR 56,260
(Oct. 30, 2009). See also 40 CFR Pt. 98 (2014).
    \13\ Greenhouse Gas Reporting Rule: 2014 Revisions and
Confidentiality Determinations for Petroleum and Natural Gas
Systems, Docket Nos. EPA-HQ-OAR-2011-0512 and FR 9918-95-OAR (Nov.
14, 2014).
    \14\ See Greenhouse Gas Reporting Rule: 2015 Revisions and
Confidentiality Determination for Petroleum and Natural Gas Systems,
Docket ID No. EPA-HQ-OAR-2014-0831 (issued Nov. 14. 2014).
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    10. As we recognized in the Proposed Policy Statement, one likely
result of the Pipeline Safety Act and PHMSA's rulemaking proceedings is
that interstate natural gas pipelines will soon face new safety
standards requiring significant capital costs to enhance the safety and
reliability of their systems. Moreover, pursuant to EPA's initiatives,
pipelines may in the future face increased environmental monitoring and
compliance costs, as well as potentially having to replace or repair
existing natural gas compressors or other facilities.\15\
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    \15\ On July 29, 2014, the Department of Energy (DOE) announced
steps to help modernize natural gas infrastructure. Moreover, on
July 31, 2014, Secretary of Energy Ernest Moniz sent a letter to the
Chairman of the Commission recommending the Commission explore
efforts to provide greater certainty for cost recovery for new
investments in modernization of natural gas transmission
infrastructure as part of the FERC's work to ensure just and
reasonable natural gas pipeline transportation rates.
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B. Existing Policy

    11. The Commission's regulations generally require that interstate
natural gas pipelines design their open access natural gas
transportation rates to recover their costs based on projected units of
service.\16\ This requirement means that the pipeline is at risk for
under-recovery of its costs between rate cases but may retain any over-
recovery. As the Commission explained in Order No. 436, this
requirement gives the pipeline an incentive both to (1) ``minimize
costs in order to provide services at the lowest reasonable costs
consistent with reliable long-term service'' \17\ and (2) ``provide the
maximum amount of service to the public.'' \18\
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    \16\ 18 CFR 284.10(c)(2) (2014).
    \17\ Regulation of Natural Gas Pipelines After Partial Wellhead
Decontrol, Order No. 436, FERC Stats. & Regs., Regulations Preambles
1982-1985 ] 30,665, at 31,534 (1985).
    \18\ Id. at 31,537.
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    12. Before the Pipeline Safety Act, the Commission held that
capital costs incurred to comply with the requirements of pipeline
safety legislation or with environmental regulations should not be
included in surcharges,\19\ except in the context of an uncontested
settlement.\20\ Noting that pipelines commonly incur capital costs in
response to regulatory requirements intended to benefit the public
interest, the Commission stated that recovering those costs in a
tracking mechanism was contrary to the requirement to design rates
based on estimated units of service because the use of cost-trackers
undercuts the referenced incentives by guaranteeing the pipeline a set
revenue recovery.
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    \19\ See Granite State Gas Transmission, Inc., 132 FERC ]
61,089, at P 11 (2010) (Granite State); Florida Gas Transmission
Co., 105 FERC ] 61,171, at PP 47-48 (2003) (Florida Gas).
    \20\ See e.g., Granite State Gas Transmission, Inc., 136 FERC ]
61,153 (2011); Florida Gas Transmission Co., 109 FERC ] 61,320
(2004). In 2012, the Commission again rejected a protested proposal
that would allow a pipeline to recover regulatory safety costs
through a tracker, but noted that PHSMA was in the early stages of
developing regulations to implement the Pipeline Safety Act, and
that the Commission would consider the need for further action as
PHMSA's implementation process moved forward. CenterPoint Energy--
Mississippi River Transmission, LLC, 140 FERC ] 61,253, at P 65
(2012) (MRT).
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    13. As we stated in the Proposed Policy Statement, however, the
Commission recently approved, as part of a contested settlement, a
tracker mechanism to recover substantial pipeline modernization costs
that Columbia Gas Transmission, LLC (Columbia Gas) demonstrated were
necessary to ensure the safety and

reliability of its pipeline system.\21\ The Columbia Gas settlement
outlined significant operational and safety issues resulting from the
age and condition of Columbia Gas' system and the corresponding
inability to monitor and maintain the system using efficient modern
techniques.\22\ The Commission found that approving the settlement
would facilitate Columbia Gas' ability to make substantial capital
investments necessary to correct significant infrastructure problems,
and thus provide more reliable service while minimizing public safety
concerns.
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    \21\ Columbia Gas Transmission, LLC, 142 FERC ]61,062 (2013)
(Columbia Gas).
    \22\ Columbia Gas stated in that proceeding that over fifty
percent of its regulated pipeline system was over 50 years old, that
a significant portion of its system contained dangerous bare steel
pipeline, that many of its compressors were also outdated, that many
of its control systems were running on obsolete platforms, and that
it was only able to inspect a small percentage of its system using
modern in-line inspection tools.
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    14. The Commission's determination in Columbia Gas thus established
general parameters for pipelines to consider when seeking recovery of
pipeline investments for modernization costs related to improving
system safety and reliability. The tracker approved in that case was
designed to recover pipeline modernization capital costs of up to $300
million annually over a five-year period. The Commission found that
Columbia Gas' settlement included numerous positive characteristics
that distinguished its cost tracking mechanism from those the
Commission had previously rejected and that work to maintain the
pipeline's incentives for innovation and efficiency. The key aspects of
the settlement upon which the Commission relied to approve the tracker
included the following.
    15. First, Columbia Gas worked collaboratively with its customers
to ensure that its existing base rates, to which the tracker would be
added, were updated to be just and reasonable. This included a
reduction in Columbia Gas' base rates and a refund to its customers.
    16. Second, the settlement specifically delineated and limited the
amount of capital costs that may go into the cost recovery mechanism.
Moreover, the eligible facilities for which costs would be recovered
through that mechanism were specified by pipeline segment and
compressor station. Further, the pipeline agreed to spend $100 million
in annual capital costs as part of its ordinary system maintenance
during the initial term of the tracker, which would not be recovered
through the tracker. The Commission found that these provisions should
assure that the projects whose costs are recovered through the tracker
go beyond the regular capital maintenance expenditures the pipeline
would make in the ordinary course of business and are critical to
assuring the safe and reliable operation of Columbia Gas' system.
    17. Third, the Commission found that a critically important factor
to its approval of the settlement was the pipeline's agreement to a
billing determinant floor for calculating the cost recovery mechanism,
together with an agreement to impute the revenue it would achieve by
charging the maximum rate for service at the level of the billing
determinant floor before it trues up any cost underrcoveries. The
Commission found these provisions should alleviate its historic concern
that surcharges, which guarantee cost recovery, diminish a pipeline's
incentive to be efficient and to maximize the service provided to the
public. The Commission also found that these provisions protect the
pipeline's shippers from significant cost shifts if the pipeline loses
shippers or must provide increased discounts to retain business.
    18. Fourth, the surcharge was temporary and would terminate
automatically on a date certain unless the parties agreed to extend it
and the Commission approved the extension. Finally, the tracker was
broadly supported by the pipeline's customers.

C. Proposed Policy Statement

    19. In the Proposed Policy Statement, the Commission found that the
ultimate implementation of the recent initiatives described above, to
improve natural gas infrastructure safety and reliability and to
address environmental issues related to the operation of natural gas
pipelines, is likely to lead to the need for interstate natural gas
pipelines to make significant capital investments to modernize their
systems. The Commission stated that in light of these developments, the
Commission has a duty to ensure that interstate natural gas pipelines
are able to recover the costs of these system upgrades in a just and
reasonable manner that does not undercut their incentives to provide
service in an efficient manner and protects ratepayers from
unreasonable cost shifts.
    20. Accordingly, the Commission proposed to establish a policy
outlining the analytical framework for evaluating pipeline proposals
for special rate mechanisms to recover infrastructure modernization
costs necessary for the efficient and safe operation of the pipeline's
system and compliance with new regulations. The Commission proposed to
base the policy on the guiding principles established in Columbia Gas.
Pursuant to the Proposed Policy Statement, a pipeline proposal for a
cost recovery tracker to recover pipeline modernization costs would
need to satisfy five standards:
    (1) Review of Existing Rates--the pipeline's base rates must have
been recently reviewed, either by means of an NGA general section 4
rate proceeding or through a collaborative effort between the pipeline
and its customers; (2) Eligible Costs--the eligible costs must be
limited to one-time capital costs incurred to modify the pipeline's
existing system to comply with safety or environmental regulations
issued by PHMSA, EPA, or other federal or state government agencies,
and other capital costs shown to be necessary for the safe or efficient
operation of the pipeline, and the pipeline must specifically identify
each capital investment to be recovered by the surcharge; (3) Avoidance
of Cost Shifting--the pipeline must design the proposed surcharge in a
manner that will protect the pipeline's captive customers from cost
shifts if the pipeline loses shippers or must offer increased discounts
to retain business; (4) Periodic Review of the Surcharge and Base
Rates--the pipeline must include some method to allow a periodic review
of whether the surcharge and the pipeline's base rates remain just and
reasonable; and (5) Shipper Support--the pipeline must work
collaboratively with shippers to seek shipper support for any surcharge
proposal.
    21. The Commission sought comments on the Proposed Policy Statement
in general and on the five standards noted above. We also sought
comments on several related issues, including whether if the Commission
were to implement the instant modernization cost recovery policy, it
should revise its policy on reservation charge crediting.\23\
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    \23\ Other questions included whether the costs of modifications
to compressors for the purpose of waste heat recovery should be
eligible for recovery under a modernization surcharge, whether there
are any capital costs associated with the expansion of the
pipeline's existing capacity or its extension to serve new markets
that may reasonably be included in the surcharge as necessary one-
time capital expenditures to comply with safety and environmental
regulations, whether capital costs incurred to minimize pipeline
facility emissions be considered for inclusion in the surcharge,
even if those costs are not expressly required to comply with
environmental regulations, whether non-capital maintenance costs
associated with environmentally sound operation of a compressor be
considered for inclusion in the surcharge, and under what
circumstances should the Commission permit a pipeline to include in
the tracking mechanism the costs of additional projects not
identified in the pipeline's original filing to establish the
tracking mechanism?

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D. Comments

    22. The Commission received a variety of comments in response to
the Proposed Policy Statement.\24\ Generally, interstate pipelines and
other natural gas facility owners and operators favor the proposed
policy, commenting that the criteria for collecting modernization costs
through a surcharge should be more flexible than contemplated in the
Proposed Policy Statement. Shippers varied in supporting or opposing
the proposal, with LDCs conditionally supporting it provided that
surcharges are tailored to the individual circumstances of the
pipeline, and are designed so as not to impose unreasonable cost
burdens or risks on natural gas customers. Some marketers also favored
a program allowing the implementation of surcharges for modernization
costs. Other shippers, however, including industrials, municipals and
supply end entities, oppose the proposed policy statement. Producers
are especially opposed to the recovery of any modernization costs
through a surcharge mechanism, claiming that to allow such recovery is
contrary to the NGA and longstanding Commission policy. The individuals
filing comments also oppose the Proposed Policy Statement for varying
reasons.
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    \24\ See Appendix for a list of those entities and persons that
filed comments and/or reply comments to the Proposed Policy
Statement.
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    23. Numerous entities from a wide spectrum of industry interests
filed in favor of the Proposed Policy Statement, supporting properly
limited tracker or surcharge mechanisms to recover modernization
costs.\25\ Some advocate granting pipelines added flexibility to comply
with the five standards necessary to establish such trackers.\26\
Others filing in favor of the Commission's proposed policy state that
pipeline cost recovery mechanisms must be tailored to the individual
circumstances of the pipeline, and be designed so as not to impose
unreasonable cost burdens or risks on natural gas customers.\27\
Various pipeline customers generally support the development of
simplified mechanisms for the recovery of costs of modernizing pipeline
assets to enhance safety and reliability subject to conditions,
commenting that the costs to be recovered should be limited to capital
improvements for safety purposes and for compliance with environmental
regulations.\28\ Others state that modernization cost recovery trackers
should include safeguards to ensure that pipelines are not permitted to
pass through costs while evading shipper protections traditionally
afforded by NGA section 4 rate review.\29\ Others support the Proposed
Policy Statement as a method for enhancing certainty and the ability of
interstate pipelines to recover costs for augmenting the efficient and
safe operation of their respective systems.\30\
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    \25\ Those commenting in favor include the DOE; PHMSA; the
Interstate Natural Gas Association of America (INGAA); Kinder Morgan
Interstate Pipelines (Kinder Morgan); Southern Star Central Gas
Pipeline, Inc. (Southern Star); Boardwalk Pipeline Partners, LP
(Boardwalk); American Midstream (AlaTenn), LLC (American Midstream);
the American Gas Association (AGA); the North Carolina Public
Utility Commission (NCUC); the Kansas Corporation Commission (KCC);
the Michigan Public Service Commission (Michigan PSC); the Tennessee
Valley Authority (TVA); and the Environmental Defense Fund, the
Conservation Law Foundation, and Sustainable FERC Project
(collectively Environmental Commenters).
    \26\ See, e.g., INGAA Comments at 2, Boardwalk Comments at 4,
Kinder Morgan Comments at 5.
    \27\ See, e.g., AGA Comments at 1 Laclede Comments at 1.
    \28\ Xcel Energy Services (XES) Comments at 2; Wisconsin
Electric and Wisconsin Gas Comments at 4.
    \29\ Calpine Corporation (Calpine) Comments at 1.
    \30\ Environmental Commenters Comments at 3-5.
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    24. In contrast to the pipelines' and other comments in support of
the proposed policy, other commenters, particularly those representing
producers, marketers, municipal gas companies, and industrial users of
natural gas, expressed strong opposition to the recovery of
modernization costs through a tracker.\31\ Opponents' claims that
additional cost-recovery guarantees to incentivize compliance with
mandatory environmental and safety laws is misplaced, and that cost
trackers are inconsistent with section 284.10(c)(2) of the Commission's
regulations, which requires that transportation rates be based on
estimated units of service so that the pipeline is at risk for cost
under-recovery.\32\ Opponents also claim that a cost modernization
surcharge would be contrary to longstanding Commission policy and
precedent, noting that the Commission has consistently rejected
maintenance, compliance, and safety cost trackers, because they
guarantee cost recovery without taking into account the benefits of
cost reductions in other areas and/or increases in throughput affecting
base rate revenues.\33\ Those opposing the Proposed Policy Statement
further claim that the five standards do not provide the consumer
protections afforded under section 4 of the Natural Gas Act (NGA), and
that the record lacks a showing that pipelines cannot recover such
costs though NGA section 4 rate cases.\34\ Opponents also claim that
the Proposed Policy Statement is premature, because PHMSA and the EPA
have not yet issued new regulations.\35\
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    \31\ Those filing comments opposing the Proposed Policy
Statement include the Natural Gas Supply Association (NGSA),
Industrial Energy Consumers of America (IECA), the American Forest
and Paper Association (AF&PA), Process Gas Consumers (PGC), the
American Public Gas Association (APGA), the Independent Petroleum
Association of America (IPAA), Indicated Shippers (Anadarko Energy
Services Company, Apache Corporation, BP Energy Company, Chevron
U.S.A. Inc., ConocoPhillips Company, Cross Timbers Energy Services,
Inc., Direct Energy Business, LLC, ExxonMobil Gas & Power Marketing
Company, a division of Exxon Mobil Corporation, Fieldwood Energy
LLC, Hess Corporation, Marathon Oil Company, Noble Energy, Inc.,
Occidental Energy Marketing, Inc., Shell Energy North America (US),
L.P., SWEPI LP, and WPX Energy Marketing, LLC), the El Paso
Municipal Customer Group (EPMCG), Western Tennessee Municipal Group,
the Jackson Energy Authority, City of Jackson, Tennessee, and
Kentucky Cities (together, Cities), Independent Oil & Gas
Association of West Virginia, Inc. (IOGA), the Municipal Defense
Group (MDG), Deep Gulf Energy LP (Deep Gulf), Energy XXI (Bermuda)
Ltd. (Energy XXI), EPL Oil & Gas, Inc. (EPL), and M21K, LLC (M21K)
(collectively Energy XXI), and Helis Oil & Gas, LLC (Helis) and
Walter Oil & Gas Corporation (Walter).
    \32\ See, e.g., NGSA Comments at 3.
    \33\ NGSA Comments at 10-11, APGA Comments at 2-4, Indicated
Shippers Comments at 5-18 .
    \34\ APGA Comments at 2-4, NGSA Comments at 7-8.
    \35\ NGSA Comments at 8-9.
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II. Discussion

A. Adoption of Policy Statement

    25. After reviewing the comments filed on the Proposed Policy
Statement, the Commission has determined to establish a policy allowing
interstate natural gas pipelines to seek to recover certain capital
expenditures made to modernize system infrastructure in a manner that
enhances system reliability, safety and regulatory compliance through a
surcharge mechanism, subject to conditions intended to ensure that the
resulting rates are just and reasonable and protect natural gas
consumers from excessive costs. While we recognize that allowing
pipelines to recover these expenditures through a surcharge or tracker
departs from the requirement that interstate natural gas pipelines
design their transportation rates based on projected units of service,
we find on balance that consideration of such mechanisms is justified
in order to provide an enhanced opportunity to recover the substantial
capital costs some pipelines are likely to incur to replace aging,
unsafe and leak-prone facilities. The Policy Statement provides a
framework for how the Commission will evaluate pipeline proposals for
recovery of infrastructure modernization costs, and guidance as to how
it will

evaluate such proposals in accordance with the five adopted standards.
    26. As the comments in support of the Commission's Proposed Policy
Statement indicate, establishment of a policy to permit enhanced
recovery of modernization costs is in the public interest and necessary
to address concerns regarding the safety of the Nation's natural gas
infrastructure and the safe operation of natural gas pipelines, as well
as environmental issues related to emissions. With regard to safety and
reliability, as OPS comments, recent pipeline accidents, including the
September 2010 pipeline rupture in San Bruno, California, demonstrate
the potential consequence of aging pipeline facilities that are not
properly repaired, rehabilitated or replaced. OPS states that 59
percent of existing natural gas pipelines were built before 1970 and 69
percent of existing natural gas pipelines were built before 1980. DOE
notes that more than half of the country's natural gas transmission and
gathering infrastructure is over 40 years old. As OPS points out, while
aging pipelines are not inherently risky, older facilities have been
exposed to more threats and were likely constructed without the benefit
of today's safety standards or quality materials.
    27. To address these concerns, Congress passed the Pipeline Safety
Act mandating that DOT take various actions to improve the safety of
interstate natural gas pipelines, including requiring testing to verify
natural gas pipelines' maximum allowable operating pressure,
considering expansion and strengthening of its integrity management
regulations, and considering requiring automatic shut-off valves on new
pipeline construction. The need to address pipeline safety is also
supported by OPS' comments that multiple recommendations from the
National Transportation Safety Board and the General Accounting Office
reinforce the need to ensure that the Nation's pipeline infrastructure
is sound and reliable. The DOE states in its comments that the
Commission's proposal is ``aligned with goals of DOE's Initiative to
Help Modernize Natural Gas Transmission and Distribution Infrastructure
as well as government-wide efforts to improve pipeline safety and
enhance the resilience of our nation's critical infrastructure.\36\ DOE
asserts that offering streamlined cost recovery options will provide an
overdue incentive for pipelines to invest in new equipment and upgrades
that will improve safety, boost energy efficiency and reduce emissions.
---------------------------------------------------------------------------

    \36\ DOE Comments at 1.
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    28. In addition to pipeline safety issues, there have been growing
concerns about the emissions of GHG in the production and
transportation of natural gas. As we noted in the Proposed Policy
Statement, in 2014, the EPA issued a series of technical white papers
to determine how to best pursue reductions of emissions from, inter
alia, natural gas compressors. The EPA Compressor White Paper lays out
several ``mitigation options for reciprocating compressors and
centrifugal compressors to limit the leaking of natural gas. . . .''
\37\ Further, in 2009, the EPA published its rule for mandatory
reporting of greenhouse gas emissions. The resulting GHGRP collects
greenhouse gas data from facilities that conduct Petroleum and Natural
Gas Systems activities, including production, processing,
transportation and distribution of natural gas. Moreover, the EPA
issued a final rule effective January 1, 2015, imposing new
requirements for the natural gas industry to monitor methane emissions
and report them annually.
---------------------------------------------------------------------------

    \37\ EPA Oil and Natural Gas Sector Compressors (Apr. 2014) at
29, available at http://www.epa.gov/airquality/oilandgas/2014papers/20140415compressors.pdf at 29.
---------------------------------------------------------------------------

    29. Further, the use of natural gas as a fuel for compressors adds
to the amount of carbon dioxide emissions.\38\ DOE also estimates that
over 110 Bcf of natural gas is lost annually through routing venting
and equipment leaks. DOE states that a streamlined cost recovery
mechanism such as that proposed here for voluntary emissions reductions
can benefit pipelines and their customers. According to DOE,
infrastructure improvements that will increase compressor efficiency
and reduce venting and leaking of methane emissions will also result in
product conservation and thus cost savings.\39\
---------------------------------------------------------------------------

    \38\ See DOE Comments at 4, stating that EIA estimates that 728
billion cubic feet (Bcf) of natural gas was used as fuel by
compressor stations operating at natural gas transmission and
storage facilities in the United States in 2012, resulting in 39
million metric tons of CO2 emissions.
    \39\ DOE Comments at 5.
---------------------------------------------------------------------------

    30. The safety and reliability of the nation's natural gas
infrastructure, and the operation of those facilities in an efficient
manner that minimizes environmental impact, are issues of public
interest, and the development of mechanisms to encourage investments in
infrastructure improvements and upgrades to enhance the efficient and
safe operation of natural gas pipeline furthers that interest. As we
recognized in the Proposed Policy Statement, one likely result of the
recent regulatory safety and environmental initiatives is that
interstate natural gas pipelines will face increased costs related to
those rules and programs. Notably, while the opponents of the policy
assert its implementation is premature because the amount of those
costs is still unknown, they do not dispute that pipelines are likely
to incur substantial costs to address these issues. In light of the
referenced regulatory developments, the Commission has a duty to ensure
that interstate natural gas pipelines are able to recover the costs of
these required system upgrades in a just and reasonable manner that
does not undercut their incentives to provide service in an efficient
manner and also protects ratepayers from unreasonable cost shifts.
    31. In an effort to ensure that consumers are protected against
potential effects of any modernization cost trackers or surcharges, the
Final Policy adopts the five guiding principles proposed in the
Proposed Policy Statement as the standards a pipeline would have to
satisfy for the Commission to approve a proposed modernization cost
tracker or surcharge. Those standards are (1) a requirement for a
review of the pipeline's existing base rates by means of an NGA general
section 4 rate proceeding, a cost and revenue study, or through a
collaborative effort between the pipeline and its customers; (2) a
requirement that the costs eligible for recovery through the tracker or
surcharge must generally be limited to one-time capital costs incurred
to modify the pipeline's existing system to comply with safety or
environmental regulations or other federal or state government
agencies, or other capital costs shown to be necessary for the safe,
reliable, and/or efficient operation of the pipeline, and the pipeline
must specifically identify each projects' costs or capital investment
to be recovered by the surcharge; \40\ (3) a prohibition against cost
shifting, requiring that the pipeline design any proposed surcharge in
a manner that will protect the pipeline's captive customers from cost
shifts if the pipeline loses shippers or must offer increased discounts
to retain business; (4) a requirement that the pipeline must include
some method to allow a periodic review of whether the surcharge and the
pipeline's base rates remain just and reasonable; and (5) a requirement
that the pipeline work collaboratively with shippers to seek

shipper support for any surcharge proposal. These standards will act as
protections against pipelines unilaterally recovering costs through a
tracker that do qualify as the type intended to meet the goals of the
policy. They will also require any pipeline seeking a modernization
cost tracker to demonstrate to the Commission and its customers that
its current base rates are just and reasonable, and provide flexibility
for the parties to pursue options to reach agreement on processes to
ensure that those rates and the surcharge rate remain just and
reasonable. They will also prevent shifting of additional costs to
captive customers.
---------------------------------------------------------------------------

    \40\ As discussed below, the Commission may consider pipeline
proposals to include certain limited non-capital maintenance costs
in a modernization cost tracker.
---------------------------------------------------------------------------

    32. Opponents of the proposed policy argue that adopting the
Proposed Policy Statement would be contrary to the NGA, longstanding
Commission policy and rate regulation principles, and that the
Commission has neither justified this departure from current policy nor
demonstrated why it is necessary. NGSA, Indicated Shippers, the IPAA
and others argue that the NGA requires that pipelines be afforded an
``opportunity'' to recover their reasonable costs but that trackers
guarantee cost recovery in violation of that principle.\41\ They assert
this guaranteed cost recovery, absent any accounting of cost savings,
is the reason Commission has for years disfavored cost recovery
trackers, because it eliminates the pipeline's risk and correspondingly
any incentive for the pipeline to be efficient and to provide effective
service. They note that the Commission's rejections of such mechanisms
include proposals addressing circumstances very similar to those that
would be covered under the new policy, and that the Commission itself
has stated that it has only approved the use of trackers that were
agreed to in settlements.\42\ They further claim that there has been no
change in the law or the rationale underlying the Commission's
longstanding position that would warrant the policy modification
proposed.
---------------------------------------------------------------------------

    \41\ See, e.g., NGSA Comments at 10, Indicated Shippers'
Comments at 3.
    \42\ See, e.g., Indicated Shippers' Comments at 5-11, and cases
cited therein.
---------------------------------------------------------------------------

    33. As we stated above, the Commission acknowledges that the policy
adopted in this Policy Statement departs from the general rate policy
in our regulations that interstate natural gas pipelines design their
transportation rates based on projected units of service. We disagree,
however, that there have been no changes that may result in tracker
mechanisms being just and reasonable in certain circumstances and
subject to appropriate controls.\43\ As discussed above, the increased
concerns with pipeline safety reflected in the Pipeline Safety Act,
together with the recent DOE, PHMSA, and EPA initiatives to improve
natural gas infrastructure safety and reliability and to address
environmental issues will result in certain increased capital and
compliance costs for pipelines. In light of these developments the
Commission has a duty to ensure that interstate natural gas pipelines
are able to recover the reasonable cost of these system upgrades in a
just and reasonable manner that does not undercut their incentives to
provide service in an efficient manner and protects ratepayers from
unreasonable cost shifts.
---------------------------------------------------------------------------

    \43\ Proposed Policy Statement, PP 18-20.
---------------------------------------------------------------------------

    34. We also disagree with commenters' contentions that allowing
modernization cost trackers will eliminate the pipeline's risk of cost
under-recovery and thereby reduce pipelines' incentives to be efficient
and to provide effective service, contrary to goals of our general
policy of requiring that rates be based on projected units of service.
As discussed in more detail below, the costs included in a
modernization cost tracker will generally be limited to one-time
capital costs to improve the safe, reliable, and/or efficient operation
of the pipeline. Thus, pipelines will continue to recover all other
costs in their base rates pursuant to the Commission's ordinary
ratemaking policies. Therefore, pipelines will continue to be at risk
between rate cases for recovery of their operating and maintenance
(O&M) costs, the overall return on non-modernization capital costs, the
depreciation allowance related to those costs, and all other costs
included in their base rates.\44\ This will give pipelines an incentive
to operate their systems as efficiently as possible, consistent with
Commission policy. Moreover, the pipelines will have the burden of
showing that all costs included in a modernization cost tracker are
prudent and consistent with the Commission's eligibility standards for
including costs in such a tracker. This will give the Commission and
all interested parties an opportunity to review whether the subject
capital investments are prudent and required for the safe and efficient
operation of the pipeline.
---------------------------------------------------------------------------

    \44\ This fact distinguishes surcharges that may be approved
under the Policy Statement from ANR Pipeline Co., 70 FERC ] 61,143
(1995), where we rejected ANR's proposed base rate cost-of-service
tracker, which sought to recover all of the pipeline's cost of
service, as contrary to our regulations.
---------------------------------------------------------------------------

    35. Several commenters, including Indicated Shippers, contend that
the Proposed Policy Statement is contrary to Commission precedent
prohibiting tracker mechanisms for regulatory obligations, and discuss
a number of cases where we had rejected pipeline proposals for
regulatory compliance cost trackers.\45\ As noted above, the Commission
does not disagree that we have previously rejected proposed tariff
provisions that would establish trackers to recover costs not wholly
dissimilar to those contemplated by the Policy Statement. None of those
proposals, however, included conditions and safeguards to protect
shippers and consumers of the sort that the Columbia settlement did,
and which we adopt here as conditions for a modernization cost tracker.
---------------------------------------------------------------------------

    \45\ See, e.g., Indicated Shippers' Comments at 5- 11.
---------------------------------------------------------------------------

    36. As we noted in our order approving Columbia Gas' surcharge,
Columbia Gas' proposal contained numerous benefits and protections
agreed to with its shippers that distinguished it from our orders
rejecting tracker proposals.\46\ Notably the development of Columbia
Gas' tracker for costs to make necessary improvements and upgrades to
its system began with Columbia Gas and its shippers engaging in a
collaborative effort to review Columbia Gas' current base rates,
leading to Columbia Gas' agreement to make significant reductions to
its base rates and to provide refunds to its shippers.\47\ Further the
settlement identified by pipeline segment and compressor station, the
specific Eligible Facilities for which costs may be recovered, and
limited the amount of capital costs and expenses for each such
project.\48\ It also established a billing determinant floor for
calculating the surcharge imputing the revenue it would achieve by
charging the maximum rate for service at the level of billing
determinant floor before it trues up any cost under-recoveries.\49\
Further, Columbia Gas'

tracker is temporary, and terminates by its terms subject to extension
requiring the consent of all parties, and thus will not become a
permanent part of Columbia Gas' rates. Finally, the tracker settlement
was supported or not opposed by virtually all of Columbia Gas'
shippers.
---------------------------------------------------------------------------

    \46\ Columbia Gas, 142 FERC ] 61,062 at PP 22-27.
    \47\ Id. P 22.
    \48\ We noted that this distinguished Columbia Gas from the
surcharge mechanisms we rejected in Florida Gas, 105 FERC ] 61,171
at PP 47-48 and MRT, 140 FERC ] 61,253, which contained only general
definitions of what type of costs would be eligible for recovery,
leaving the pipeline considerable discretion as to what projects it
would subsequently propose to include in the surcharge and creating
the potential for significant disputes concerning the eligibility of
particular projects.
    \49\ As we also noted, the surcharge mechanisms proposed in
Florida Gas, MRT, and Granite State Gas Transmission, Inc., 132 FERC
] 61,089 (2011), did not include a comparable mechanism to protect
captive customers from significant cost shifts. The surcharges
proposed in the other cases cited by Indicated Shippers as examples
of the Commission's policy against surcharges and trackers,
including ANR Pipeline Company, 70 FERC ] 61,143, and El Paso
Natural Gas Co., 112 FERC ] 61,150 (2005), also did not contain the
safeguards or customer protections included in the Columbia Gas
settlement and implemented for the Final Policy. Similarly, the
greenhouse gas cost recovery mechanism we rejected as premature in
Southern Natural Gas Co., 127 FERC ] 61,003 (2009), did not provide
safeguards of the type required by this Policy Statement. Likewise,
our rejection in Tennessee Gas Pipeline Co., LLC and Kinetica Energy
Express, LLC, 143 FERC ] 61,196 (2013) of a proposed hurricane
surcharge that we found to be overly broad because it sought to
recover costs outside those caused by hurricanes, storms or other
natural disasters, did not include any of the referenced
protections. Id. P 225.
---------------------------------------------------------------------------

    37. The Commission's approval of any modernization cost tracker or
surcharge will require a showing by the pipeline of the same types or
benefits that distinguished Columbia Gas' tracker from those we had
rejected, and thus comments that the Policy Statement would represent a
complete reversal of Commission policy are exaggerated. This Policy
Statement does not provide pipelines with any ability to establish a
modernization surcharge other than in the manner and with the same
protections Commission has already approved in Columbia Gas. The
analysis to be performed under this Policy Statement will be
substantially similar to that undertaken to find that Columbia Gas'
modernization cost recovery mechanism was just and reasonable and
benefitted all interested parties. It will be incumbent on a pipeline
requesting a modernization cost tracker to demonstrate that its
proposal includes the types of benefits that the Commission found
maintained the pipeline's incentives for innovation and efficiency, and
distinguished Columbia Gas' modernization cost tracking mechanism from
those the Commission had previously rejected.
    38. Further, the requirements that a pipeline proposing a tracker
mechanism must establish that its base rates are just and reasonable
and that there be provision for a periodic review of surcharge and base
rates should alleviate concerns that the Final Policy will result in
pipelines not filing NGA section 4 rate proceedings and thus being
insulated from rate review. APGA points to examples of interstate
pipelines having not filed NGA section 4 rate cases in over a decade
and asserts that pipelines generally file rate cases very infrequently,
thus depriving customers of an opportunity to review all the pipeline's
rates for lengthy periods. However, the fact that a pipeline desiring a
modernization cost surcharge must establish that its existing base
rates are just and reasonable should increase customer opportunities to
obtain review of all the pipeline's rates. As discussed in more detail
below, if a pipeline's shippers protest a filing to establish a
modernization cost tracker on the ground that the pipeline has not
shown that its base rates are just and reasonable, the Commission will
establish appropriate procedures to enable it to make a finding, based
on substantial evidence, whether the base rates are just and
reasonable. Moreover, while offsetting decreases in cost items will not
be reflected in rates during the time between the effective date of the
surcharge and the first periodic review, that periodic review will
provide an opportunity for any offsetting cost reductions to be
reflected in rates in order to assure that the base rates and any
continued surcharge are just and reasonable.
    39. Accordingly, given the heightened sensitivity to pipeline
safety and environmental related concerns, and based on the benefits
realized from the Columbia Gas settlement, which enabled the pipeline
to efficiently make necessary upgrades and repairs to maintain the
safety and reliability of its system while ensuring that its shippers
were protected against cost shifts and other potential pitfalls
commonly associated with trackers, the Commission has determined to
modify its policy to permit the use of a tracker mechanism in the
limited circumstances provided for under the Policy Statement, which
will inure to the public interest.
    40. As noted, several commenters advocate that the Commission's
modernization cost recovery policy contain narrowly drawn conditions
and require strict adherence to those conditions to obtain approval for
such a mechanism. As many others comment, however, the Policy Statement
will be most effective and efficient if designed according to flexible
parameters that will allow for accommodation of the particular
circumstances of each pipeline's circumstances. Maintaining a
transparent policy with flexible standards will best allow pipelines
and their customers to negotiate just and reasonable, and potentially
mutually agreeable, cost recovery mechanisms to address the individual
safety, reliability, regulatory compliance and other infrastructure
issues facing that pipeline. For example, while we will require that
any pipeline seeking a modernization cost tracker demonstrate that its
existing base rates are just and reasonable, as some commenters point
out, there may not be a need in all circumstances for a pipeline to
file and litigate an NGA section 4 rate proceeding to make such a
showing. There may be less costly and less time consuming alternatives.
As we stated in the Proposed Policy Statement, the Commission proposed
the new policy to ``ensure that existing Commission ratemaking policies
do not unnecessarily inhibit interstate natural gas pipelines' ability
to expedite needed or required upgrades and improvements.'' \50\ Thus,
while we are imposing specific conditions on the approval of any
proposed modernization cost tracker, leaving the parameters of those
conditions reasonably flexible will be more productive in addressing
needed and required system upgrades in a timely manner. Further,
consistent with this approach, the Commission will be able to evaluate
any proposals in the context of the specific facts relevant to the
particular pipeline system at issue.
---------------------------------------------------------------------------

    \50\ Proposed Policy Statement at P 9.
---------------------------------------------------------------------------

    41. Accordingly, the Commission finds that modification of our
previous policy is warranted to allow for consideration of pipeline
proposals for modernization cost tracking mechanisms as a way for
pipelines to recover those costs in a timely manner while maintaining
the safe and efficient operation of pipeline systems. As we discuss
more fully below, however, the Commission's approval of any such
mechanism will be subject to the Commission's scrutiny of the proposal
and its evaluation of the stated conditions, which will work to protect
the pipeline's customers and ratepayers against potential adverse
effects of any tracker. That analysis will be on a case-by-case basis,
and thus will take into account the specific circumstances of the
individual pipeline and its customers. Any shippers opposing the
pipeline's proposal will have a full opportunity to express their
position on specific aspects of the proposed mechanism at that time,
and the pipeline will need to engage in a collaborative effort to
garner significant shipper support before the Commission will approve a
tracker proposal.
    42. Opponent commenters also claim that there is no need for the
Proposed Policy Statement because there are sufficient longstanding
procedural

options and mechanisms in place to achieve the Commission's cost
recovery goals in this initiative, including NGA rate cases and the
Commission's settlement process. Again, the Commission does not dispute
that there are existing procedures that provide pipelines an
opportunity to recover their just and reasonable costs. The instant
Policy Statement, however, is meant to address imminent and foreseeable
developments related to the safety and reliability of the natural gas
interstate pipeline system. Thus, we find it warranted in the limited
circumstances under which the Commission would approve a modernization
cost surcharge, to allow recovery through a tracker of those costs
expended to replace old and inefficient compressors and leak-prone
pipes and performing other infrastructure upgrades and improvements to
enhance efficient and safe operation of their pipeline systems.
    43. We disagree with comments that the Policy Statement is
premature because the regulatory initiatives prompting the new policy
are not yet finalized, and thus the projected increased costs are
unknown and speculative. Although the commenters are correct that the
regulatory initiatives that are the impetus for the Final Policy are
not final, there is little debate that some form of them will be in
place eventually, and that they will result in increased costs to
pipelines. It will take pipelines a significant amount of time to
review and analyze their systems to determine if there are portions
that need immediate attention, and whether the projects they identify
in their review are of the sort that would be eligible for a cost
modernization tracker. It is reasonable for the Commission to establish
this policy in advance of the final initiatives to provide guidance to
the industry as to how the Commission will analyze pipeline's proposals
to address these questions. Further, this Policy Statement will be
beneficial to those pipelines that decide to take a proactive approach
to ensuring system safety and reliability by conducting system and rate
reviews prior to governmental mandates requiring them to do so.\51\
---------------------------------------------------------------------------

    \51\ For the same reasons, we decline to adopt NGSA's suggestion
in its reply comments that we defer issuing this Policy Statement
until after PHMSA and EPA issue final regulations.
---------------------------------------------------------------------------

B. Standards for Modernization Cost Trackers or Surcharges

    44. As discussed, this Policy Statement permits pipelines to seek
Commission approval of modernization cost trackers or surcharges to
recover costs associated with performing infrastructure upgrades and
replacements in a manner that will enhance the efficient and safe
operation of their pipelines. The Commission's evaluation and approval
of any proposed modernization cost tracker will require the proposing
pipeline to satisfy the five standards from the Proposed Policy
Statement. We discuss the application of those standards under the
Policy Statement below.
1. Review of Existing Rates
    45. Under the first standard proposed by Commission, a pipeline
proposing a tracker mechanism must establish that the base rates to
which any surcharges would be added are just and reasonable and reflect
the pipeline's current costs and revenues as of the date of the initial
approval of the tracker mechanism. The Commission proposed that the
pipeline could do this in various ways, including (1) making a new NGA
general section 4 rate filing, (2) filing a cost and revenue study in
the form specified in section 154.313 of the Commission's regulations
showing that its existing rates are just and reasonable, or (3) through
a collaborative effort between the pipeline and its customers. The
Commission sought input on these or other acceptable approaches for
pipelines to demonstrate that existing base rates are just and
reasonable.
a. Comments
    46. Some commenters suggested that the Commission require pipelines
to file an NGA section 4 rate case as part of any proposed capital cost
tracker. IPAA and the NGSA argue that adoption of a capital cost
tracker must require a comprehensive review of the pipeline's base
rates and cost of service through an NGA general section 4 rate filing
with hearing procedures that include discovery and the Commission's
Office of Administrative Litigation staff. TVA states that it feels
strongly that any such review would be best accomplished through the
thorough and objective analysis of a section 4 rate filing. PEG argues
that pipelines should be required to restate all of their rates under
NGA section 4 within three years prior to a surcharge. Laclede also
argues that a cost and revenue study is not a reasonable substitute for
an NGA section 4 filing.
    47. The NYPSC, the NCUC and the KCC agree that a pipeline's base
rates must be reviewed through a full NGA general section 4 rate
proceeding or through a collaborative effort between the pipeline and
its customers, and oppose allowing pipelines to only file a cost and
revenue study. Cities and Municipals commented that the collaborative
effort standard should be abandoned in favor of a clear standard based
on a section 4 general rate case where all the pipeline's costs can be
reviewed. Others comment that the pipeline's rates should have been
reviewed and approved within a certain time-frame (3 or 4 years) prior
to the implementation of a surcharge, and that the Commission should
require pipelines with such surcharges to file rate cases on a regular
basis (every 3 years).
    48. Others comment, however, that a full NGA section 4 rate case
review would be too cumbersome for the purpose of efficiently
implementing appropriate cost modernization surcharges. INGAA argues
that the Commission should remain open to alternative approaches to
justifying existing base rates. Recognizing that rate cases, cost and
revenue studies and recent rate settlements are all appropriate methods
for determining that existing base rates are just and reasonable, INGAA
asserts that these are not the only circumstances in which relevant
rates may be reviewed and approved by the Commission, and that the
Commission should remain open to other possibilities. For example,
INGAA argues that the Commission should allow a pipeline to introduce a
cost recovery mechanism when such a proposal is broadly supported by
shippers, regardless of whether the settlement addresses other rate
issues, or when the pipeline has an upcoming obligation to file a
general NGA section 4 rate filing, a cost and revenue study, or
restatement or re-justification of its rates as the result of a
settlement provision. INGAA further states that a recent review of a
pipeline's base rates may be irrelevant to the analysis of a cost
tracker when all, or the vast majority, of a pipeline's shippers have
entered into long-term negotiated rate agreements accepted by the
Commission. INGAA asserts that a cost recovery mechanism also may be
appropriate when the Commission recently has reviewed and approved a
pipeline's base rates in an NGA section 7 proceeding to ensure that new
pipelines are not placed at a disadvantage.
    49. Calpine recommends the review of a pipeline's base rates occur
through an informal collaborative process and not a general section 4
rate case. APGA argues that permitting the rate review to occur through
a new NGA general section 4 rate filing or a cost and revenue study, as
opposed to requiring a pre-negotiated base rate settlement, would
eliminate

the benefit of the Columbia Gas case, namely negotiations among the
pipeline and its customers regarding substantial rate reductions and
refunds, which led to agreement on a just and reasonable rate level.
XES suggests having pipelines file a cost and revenue study because it
would allow pipeline to file an `unadjusted' report so that current
costs and revenues may be determined. The Environmental Commenters
express concern that requiring a general section 4 rate filing as a
prerequisite could be inapposite to the regulatory efficiency purposes
of a cost tracker.
    50. American Midstream requests that the Commission clarify that to
be eligible for the special cost recovery mechanism through a limited
section 4 filing, pipelines or at least small pipelines like American
Midstream need only demonstrate that they are not recovering their
reasonable costs under their existing recourse rates, and will not be
required to file testimony specifically supporting and explaining each
of the schedules required by section 154.313 of the Commission's
regulations.
b. Determination
    51. Under this Policy Statement, any pipeline seeking a
modernization cost recovery tracker must demonstrate that its current
base rates to which the surcharge would be added are just and
reasonable. This is necessary to ensure that the overall rate produced
by the addition of the surcharge to the base rate is just and
reasonable, and does not reflect any cost over-recoveries that may have
been occurring under the preexisting base rates.
    52. In the Proposed Policy Statement, we stated that the pipeline
could demonstrate its base rates are just and reasonable by filing a
NGA section 4 general rate proceeding, a cost and revenue study in the
form specified in section 154.313 of the Commission's regulations, or
through some other collaborative effort between the pipeline and its
customers. In applying the Final Policy we decline to require that such
rate review be conducted only through an NGA section 4 rate proceeding.
The type of rate review necessary to determine whether a pipeline's
existing rates are just and reasonable is likely to vary from pipeline
to pipeline. For example, it may be possible for some pipelines to
demonstrate that their existing base rates are under-recovering their
full cost of service and that a section 4 rate filing would likely lead
to an increase in their base rates through a showing short of filing an
NGA section 4 rate proceeding. Therefore, we remain open to considering
alternative approaches for a pipeline to justify its existing rates.
    53. We note, however, that any pipeline seeking a modernization
cost surcharge will need to satisfy the Commission that its current
base rates are no higher than a just and reasonable level. To that end,
we encourage any pipeline seeking approval of a modernization cost
tracker to engage in a full exchange of information with its customers
to facilitate that process. If a voluntary exchange of information
fails to satisfy interested parties that a pipeline's base rates are
just and reasonable, the Commission will establish appropriate
procedures to enable resolution of any issues of material fact raised
with respect to the justness and reasonableness of the pipeline's base
rates based upon substantial evidence on the record. In this regard,
the Commission notes that, if the pipeline files a contested settlement
concerning its base rates, the Commission would consider whether to
approve the settlement pursuant to the approaches discussed in
Trailblazer Pipeline Co.\52\
---------------------------------------------------------------------------

    \52\ 87 FERC ] 61,110, at 61,438-41 (1999). See e.g., Texas Gas
Transmission, LLC, 126 FERC ] 61,235 (2009); Devon Power LLC, 117
FERC ] 61,133 (2006).
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2. Defined Eligible Costs
    54. In the Proposed Policy Statement, we stated that to qualify as
``eligible costs'' for recovery under a cost modernization tracker,
costs must be limited to one-time capital costs incurred to modify the
pipeline's existing system or to comply with safety or environmental
regulations issued by PHMSA, EPA, or other federal or state government
agencies, and other capital costs shown to be necessary for the safe or
efficient operation of the pipeline. The Commission also recognized
that interstate natural gas pipelines routinely make capital
investments related to system maintenance in the ordinary course of
business, and the Commission stated that such routine capital costs
could not be included in a cost modernization tracker.
    55. The Commission also proposed to require that each pipeline
specifically identify each capital investment to be recovered by the
surcharge, the facilities to be upgraded or installed by those
projects, and an upper limit on the capital costs related to each
project to be included in the surcharge. The Commission stated that
this would allow an upfront determination that the costs are eligible
for recovery through the tracker and avoid later disputes about which
costs or facilities qualify for such recovery.
    56. The Commission also asked several questions concerning what
costs should be eligible for recovery in a tracker.
a. Comments
    57. The majority of commenters agree that proponents of a
modernization cost recovery tracking mechanism should specify the costs
and identity of projects to be recovered pursuant to any such mechanism
and limit the recovery of those costs. AGA argues that pipelines should
be required to clearly specify the investments which will be recovered
through the tracking mechanism, and that shippers should have the
ability to challenge the inclusion of projects or costs as part of the
collaborative process. Several commenters, including NGSA, IOGA, XES,
and Environmental Commenters note that facilities eligible for cost
recovery under a capital cost tracker should be limited to modification
of the pipeline's existing system for reliability, safety, or
environmental compliance, and that there be a strict distinction
between such facilities and maintaining the pipeline system in the
ordinary course of business. NGSA argues that eligible tracked costs
for recovery in a surcharge should be strictly limited to one-time
capital costs related solely to compliance with the incremental
requirements of future PHMSA and EPA regulations, as opposed to the
inclusion of ordinary capital maintenance costs. EPMCG states the
Proposed Policy fails to explain how the Commission could distinguish
between such normal expenditures and those ``necessary to address,
safety, efficiency or similar concerns.'' Southern Companies suggests
using an Eligible Facilities Plan, comparable to that used in the
Columbia Gas settlement.
    58. Wisconsin Electric and Wisconsin Gas suggest that pipelines be
required to specify the regulation that resulted in the requirement to
construct each project and to either file for approval of each project
under the NGA section 7(c) certificate application process or in the
event that a section 7(c) certificate application is not required, then
provide all information about the project in a manner similar to a
section 7(c) application. Wisconsin Electric and Wisconsin Gas also
suggest the Commission establish clear criteria for an ``eligible
modernization project'' and create a clear distinction between routine
maintenance projects versus modernization projects undertaken to comply
with safety and/or environmental regulations.

    59. Those opposed to the Policy Statement in general advocate
strict limits on the ``eligibility'' of modernization costs that can be
recovered through a surcharge. The AF&PA for example, opposes recovery
of modernization costs through a surcharge and states that the costs
the pipeline seeks to recover through the tracker/surcharge must be one
time capital costs incurred to comply with safety or environment
regulation issued by a governmental entity and such costs are necessary
for the safe or efficient operations of the pipeline. AF&PA states to
the extent that the Commission allows trackers, the Commission should
only permit trackers related to costs that are specifically tied to
laws that have already been enacted or regulations that are currently
effective. AF&PA comments that the pipeline should be required to
demonstrate that the costs are incremental to the costs imposed under
existing laws and regulations. Laclede, who also opposes the Proposed
Policy Statement, echoes the notion that modernization costs should
only be recoverable through rate trackers if the costs are tied to new
safety or health requirements. Additionally, the Industrial Energy
Consumers of America (IECA) opposes surcharges and trackers as a way
for pipeline companies to recover regulatory safety and environmental
costs, arguing that it should be a requirement for pipeline companies
to file a new tariff that includes regulatory costs. IECA recommends
strict guidelines as to what costs pertain to eligible facilities for
special cost recovery.
    60. Several commenters stated that the Commission needs to ensure
that pipelines do not recover costs related to the safe and efficient
operation of their systems that they should have already been spending.
NCUC states that pipelines should not be provided incentives to make
the investments it already should have made. Calpine also states
pipelines should already be complying with safety and reliability
requirements imposed by existing regulations and should not be incented
to recover such costs through a modernization cost mechanism. PEG
opposes the Commission's involvement in the mandates of other agencies
such as EPA and PHMSA. According to PEG, ``it is presumptuous of the
Commission to describe such expenditures as being in `advancement of
the public interest' when first, the public interest is yet to be
defined by regulatory action and second, such actions are outside of
the Commission's purview.'' \53\ PEG fails to see any reason to provide
an incentive for pipelines to take actions that they must take under
penalty of law.
---------------------------------------------------------------------------

    \53\ PEG Comments at 7.
---------------------------------------------------------------------------

    61. Other commenters found the Commission's proposal with regard to
eligible facilities too restrictive, and stated that costs should not
be limited to ``one-time, capital costs.'' INGAA argues that limiting
the tracker mechanism only to capital costs is an unnecessary
limitation on the type of costs that should be eligible for inclusion
into the tracker mechanism, and urge expansion of the scope of the
definition of eligible facilities. WBI Energy likewise comments that a
one-time capital cost limitation may preclude a pipeline from
recovering non-routine non-capital expenses which were prudently
incurred to address system safety or efficiency. WBI Energy thus argues
the final policy should be flexible enough to address each pipeline's
situation.
    62. Boardwalk states that the policy should be flexible so that if
as a result of the modification process a pipeline discovers other
actions that need to be taken in order for a pipeline to be in
compliance with the new PHMSA rules, the costs of those activities may
be included in the tracker. Boardwalk states the Commission should
provide clear and rational guidance as to categories of costs eligible
for inclusion in the tracker. Columbia Gas argues that the Commission
should allow pipelines and shippers to include the cost of projects
intended to increase the reliability or safety of existing facilities,
including those facilities not necessarily impacted by regulations,
provided that pipelines make a clear showing of net benefits to its
stakeholders. Columbia Gas suggests such potential benefits may include
improved safety, reduced emissions, increased efficiency or
reliability, reduced costs, improved fuel, or reduced lost-and-
unaccounted-for quantities.
b. Determination
    63. Consistent with the Proposed Policy Statement, costs proposed
to be recovered through a modernization cost surcharge (Eligible Costs)
should generally be limited to (1) one-time capital costs incurred to
modify or replace existing facilities on the pipeline's system to
comply with safety or environmental regulations issued by PHMSA, EPA,
or other federal or state government agencies, or (2) other one-time
capital costs shown to be necessary for the safe or efficient operation
of the pipeline.\54\ The Commission does not intend that capital costs
the pipeline incurs as part of its ordinary, recurring system
maintenance requirements should be eligible for inclusion in a
modernization cost tracker. The Commission is modifying its rate
policies to permit modernization cost trackers primarily for the
purpose of allowing pipelines to recover capital costs incurred to
upgrade the older parts of their systems (1) to comply with new, more
stringent regulatory requirements and/or (2) take advantage of new
technologies that reasonably increase safety and/or efficiency, such as
reductions in methane leaks, system modifications to allow the use of
advanced in-line inspection tools in lieu of hydrostatic testing, or
replacement of old compressors with newer more energy efficient
ones.\55\
---------------------------------------------------------------------------

    \54\ In the Proposed Policy Statement, at P 23, the Commission
proposed to define eligible costs as ``one-time capital costs to
modify the pipeline's existing system . . .'' (emphasis supplied).
Some commenters have interpreted our use of the word ``modify'' to
exclude the costs of facility replacement projects from eligibility.
We clarify that capital costs to replace existing facilities, such
as old compressors that do not comply with new EPA emission
requirements, are eligible for inclusion in a modernization cost
tracker.
    \55\ See, e.g., INGAA Comments at 13.
---------------------------------------------------------------------------

    64. By contrast, the Commission believes that pipelines should
continue to recover in their base rates ordinary capital costs of the
type they routinely incur as part of their regular system maintenance.
The Commission recognizes the potential difficulty in distinguishing
between ordinary capital costs for system maintenance, which should be
excluded from a modernization cost tracker, and capital costs for
system upgrades, which are reasonably included in such a tracker. In
order to address this concern, the parties may, as INGAA and others
suggest,\56\ consider including in a modernization cost tracker a
mechanism for ensuring that a representative level of ordinary system
maintenance capital costs are excluded from the tracker. For example,
the Columbia Gas settlement includes a provision that Columbia Gas will
continue to make capital expenditures of $100 million annually for
system maintenance and those expenditures will not be included in its
modernization cost tracker. If Columbia Gas spends less than that
amount in any year, the difference must be used to reduce the plant
investment included in the modernization cost tracker.\57\ In
developing such a mechanism, the parties could use the pipeline's
recent history of capital expenditures incurred for routine maintenance
as a basis for determining a representative level of

ordinary system maintenance capital costs to be excluded from the
modernization cost tracker.
---------------------------------------------------------------------------

    \56\ INGAA reply comments at 18-19. Environmental Commenters at
12-13.
    \57\ Section 7.3 of the Columbia Gas settlement.
---------------------------------------------------------------------------

    65. Some commenters have suggested that the Commission should
permit certain non-capital expenses to be included in a modernization
cost tracker, if they are non-routine and required by regulation or a
voluntary program adopted by a pipeline as a best practice.\58\
Commenters cite as examples the costs of in-line inspections by running
smart tools through various pipeline segments or programs to detect and
repair leaks on parts of the system most prone to leaks. To the extent
such testing uncovers the need to incur one-time capital costs that
satisfy the eligibility standards described above, such capital costs
could be included in the modernization cost tracker. However, the
Commission is reluctant to permit non-capital testing costs of the type
described by the commenters to be recovered through a modernization
cost tracker. The cost of service reflected in a pipeline's existing
base rates presumably includes a projection of the pipeline's recurring
costs of routine testing as part of the pipeline's O&M costs. The
testing described by the commenters would appear to be a best practice
for pipeline maintenance that the Commission would expect pipelines to
conduct on an ongoing basis. As such it would appear difficult to
distinguish any particular type of testing from the testing whose costs
are already included in the O&M costs reflected in the pipeline's base
rates. Therefore, while the Commission will not impose a blanket
prohibition on the inclusion of such non-capital costs in a
modernization cost tracker, particularly where supported by the
pipeline's shippers, any proposal to include such non-capital costs in
the tracker would need to demonstrate that such non-capital costs are
special non-recurring costs not reflected in the O&M costs included in
the pipeline's base rates and are directly related to the modernization
projects whose costs are included in the modernization cost tracker.
Furthermore, when determining whether a cost is a capital or non-
capital cost, a pipeline's determination must be consistent with the
Commission's accounting regulations and precedent.\59\
---------------------------------------------------------------------------

    \58\ See, e.g., INGAA Comments at 5-7, AGA Comments at 7.
    \59\ See, e.g., 18 CFR part 201 (2014); see also, Jurisdictional
Public Utilities and Licensees Natural Gas Companies, and Oil
Pipeline Companies, order on accounting for pipeline assessment
costs, 111 FERC ] 61,501 (2005).
---------------------------------------------------------------------------

    66. Some commenters also suggest that the Commission should allow
eligible costs to include a portion of the capital costs incurred in a
pipeline expansion project, if the project not only expands the
pipeline's system but also modifies or replaces existing facilities to
comply with safety or environmental regulations or make other
improvements necessary for the safe and efficient operation of the
pipeline.\60\ The Commission recognizes that some expansion projects
may include modifications to a pipeline's existing system that would be
eligible for recovery in a modernization cost tracker if not done in
conjunction with an expansion. In such circumstances, the Commission
will consider reasonable proposals for a method of cost allocation
between the expansion project and the modifications eligible for
inclusion in such a tracker.\61\
---------------------------------------------------------------------------

    \60\ See, e.g., INGAA Comments at 11-12, Columbia Gas Comments
at 14-16, Berkshire Hathaway Comments at 11, Wisconsin Electric and
Wisconsin Gas Comments at 9,
    \61\ The Columbia Gas settlement includes such a provision at
section 7.5 of that settlement.
---------------------------------------------------------------------------

    67. Some commenters state that the costs of modifications to
compressors for the purpose of waste heat recovery should be eligible
for recovery under a modernization surcharge subject to conditions,\62\
while others oppose the inclusion of such costs because they assert
that investments in modifications of compressors for purpose of waste
heat recovery are discretionary and within control of the pipeline and
should thus be subject to the normal rate review process.\63\ According
to the DOE, expanded use of waste heat recovery by natural gas
compressors could be beneficial to overall system efficiency, and while
there is a general lack of good information on the scale of heat losses
from many sectors of the economy, research published in 2008 and 2009
found substantial opportunities for additional waste heat recovery
investment at natural gas compressor stations. Accordingly, the
Commission will consider proposals for recovery of such costs in a
modernization cost tracker proposal, subject to the standards of this
Policy Statement.
---------------------------------------------------------------------------

    \62\ See, e.g., DOE Comments at 3, Wisconsin Electric and
Wisconsin Gas Comments at 8, Michigan PSC Comments at 15.
    \63\ See, e.g., PGC Comments at 17-18, NGSA Comments at 18-19,
KCC Comments at 12.
---------------------------------------------------------------------------

    68. The Commission rejects the proposals of some commenters that
eligible costs be limited to those costs which the pipeline
demonstrates are specifically tied to laws that have already been
enacted or regulations that are currently effective. The Commission
sees no reason for pipelines to wait to make needed improvements to
their systems until a regulation is adopted requiring them to do so. In
fact, the Department of Transportation has encouraged pipeline
operators to undertake voluntary initiatives to improve pipeline
safety.\64\ Permitting pipelines to recover in a modernization cost
tracker the costs of voluntary initiatives to improve safety, as well
as minimize methane emissions, will help encourage such initiatives and
thereby benefit the public. Accordingly, the Commission finds that all
prudent one-time capital costs that satisfy the eligibility
requirements may be included in a cost modernization tracker,
regardless of whether PHMSA, EPA or some other government agency has
adopted a regulation requiring the incurrence of the cost.
---------------------------------------------------------------------------

    \64\ United States Department of Transportation Call to Action
to Improve the Safety of the Nation's Energy Pipeline System (Apr.
2011), available at http://www.phmsa.dot.gov/staticfiles/PHMSA/DownloadableFiles/110404%20Action%20Plan%20Executive%20Version%20_2.pdf.
---------------------------------------------------------------------------

    69. In the Proposed Policy Statement, the Commission proposed to
require a pipeline proposing a modernization cost tracker to identify
each capital investment to be recovered by the surcharge, the
facilities to be upgraded or installed by those projects, and an upper
limit on the capital costs related to each project to be included in
the surcharge. INGAA requests that the Commission permit pipelines
either to propose a list of eligible projects or a list of categories
of future projects that would be considered eligible for recovery.
Other commenters also contend that, even if the pipeline includes an
upfront list of specific projects to be included in the modernization
cost tracker, the Commission should permit subsequent modifications,
additions, or subtractions to the listed projects. They state that this
is necessary so that the tracking mechanism can adapt to changing
circumstances including newly adopted regulations.
    70. The Commission expects that, before the pipeline makes a tariff
filing with the Commission proposing a modernization cost tracking
mechanism, it will conduct a comprehensive review of its existing
system to determine what capital investments it believes are needed to
ensure the safe and efficient operation of its system, based on the
information available to it at the time of the review. Such a review
should be comparable to the comprehensive review conducted by Columbia
Gas before it submitted its Settlement. The Commission continues to
find that the pipeline must include in its filing a

description of the facilities which its review of its system has
identified as needing upgrading and/or replacement, together an upper
limit on the capital costs projected to be spent and a schedule for
completing the projects. This detailed information will allow for a
more transparent and upfront determination of the project costs that
are eligible for recovery through the tracker so as to avoid later
disputes on which facilities qualify, than any description of general
categories of eligible costs could. This requirement will also help
ensure that normal capital or other expenditures to maintain the
pipeline's system in the ordinary course of business are not eligible
for recovery through a surcharge mechanism. Consistent with this
requirement, the filing should also include the accounting controls and
procedures that the pipeline will use to ensure that only identified
eligible costs are included in the tracker.
    71. At the same time, however, the Commission recognizes the need
for flexibility to make changes in the projects whose costs will be
included in the tracker, after the modernization cost tracking
mechanism is adopted. For example, the pipeline may discover
unanticipated problems with certain facilities during the course of its
modernization activities or may discover more effective solutions to
existing problems. Also, changes in its shippers' utilization of its
system may cause certain projects to become more critical to the safe
and efficient operation of the pipeline than originally anticipated.
Therefore, the Commission will be open to considering proposals to
include in a modernization cost tracker a mechanism pursuant to which
the parties could later modify the list of eligible projects, or the
schedule for those projects, or the cost limits, based on changing
priorities and other reasons.\65\ The Commission also recognizes that
pipelines may wish to begin modernizing their systems before PHMSA,
EPA, and other Federal or state agencies complete their various ongoing
regulatory initiatives. Therefore, the Commission will be open to
considering proposals to add new projects to a tracking mechanism which
may be required by new regulations adopted after the initial approval
of the tracking mechanism or for other reasons.
---------------------------------------------------------------------------

    \65\ See section 7.2 of the Columbia Gas Settlement setting
forth such a mechanism.
---------------------------------------------------------------------------

3. Avoidance of Cost Shifting
    72. The Proposed Policy Statement contemplated that a pipeline must
design any proposed surcharge in a manner that will protect the
pipeline's captive customers from costs shifts if the pipeline loses
shippers or must offer increased discounts to retain business. The
Commission suggested that one method of accomplishing this would be to
establish a billing determinant floor requiring the pipeline to design
the surcharge based on the greater of its actual billing determinants
or the floor.
a. Comments
    73. Virtually all commenters favored the avoidance of cost shifts
to the pipeline's captive customers that may result from the
implementation of a cost modernization surcharge. AGA, for example,
supports the need to ensure that existing shippers are protected from
substantial cost shifts, and comments that pipelines should be
required, in consultation with their shippers, to develop appropriate
measures to protect customers from cost shifts.
    74. Those opposed to the Proposed Policy Statement, however, claim
that the very implementation of cost modernization tracker necessarily
shifts costs. MDG, for example, states that trackers shift costs to
captive customers due to discounting and lost business without taking
into account offsetting cost reductions, and thus even the best
implementation of the Proposed Policy Statement would raise rates to
captive customers unfairly. MDG claims that a billing floor will not
alleviate the inherent cost shift in a policy that allows the recovery
of one set of costs absent a review of all the pipeline's costs and
revenues. MDG suggests that to the extent substantial pipeline capital
costs are recovered through a tracker there should be a reduction in
that pipeline's return on equity to reflect the pipeline's reduced
risk. The NYPSC similarly claims that while requiring a billing
determinant floor for a surcharge does allow some risk to remain with
the pipeline, a tracker mechanism still reduces a pipeline's risk and
transfers it to shippers.
    75. While NGSA, APGA, and IPAA oppose the modernization surcharge
tracker, if surcharges are allowed they all support the requirement
that pipelines must design the surcharge in a manner that will protect
the pipeline's shippers from significant cost shifts. IPAA, NGSA, and
KCC contend that at a minimum, any modernization surcharge tracker must
provide for a minimum level of billing determinants to design the
surcharge as in Columbia Gas. NGSA adds that any surcharge should apply
to all throughput in the facilities and under the rate schedules
impacted by the surcharge-related costs, so that an agreed upon floor
on the billing determinants should be greater than the firm billing
determinants (so as to include interruptible throughput, for example).
AF&PA agrees that interruptible shippers should share the costs
incurred through trackers to the extent that they are related to safety
and environmental compliance, as these costs are not related only to
firm service. IECA states costs recovered through a tracker should be
limited to no more than 5 percent of the costs recovered through the
pipeline's tariff.
    76. AF&PA submits that if the Commission implements the Proposed
Policy Statement, the policy should spread the costs as widely as
possible because environmental and safety costs are incurred for all
shippers. AF&PA cautions, however, that a shipper that has released
certain capacity should not bear any new costs related to that capacity
and recovered through the tracker.
    77. NGSA argues that if shippers are already paying for eligible
costs in negotiated contracts, or existing negotiated contracts
prohibit recovery of these costs, they should not be subject to the
modernization surcharge.
b. Determination
    78. The third standard for approval of a cost modernization tracker
adopted by the Policy Statement is that the pipeline must design any
proposed surcharge in a manner that will protect the pipeline's captive
customers from cost shifts if the pipeline loses shippers or must offer
increased discounts to retain business beyond those reflected in their
base rates.
    79. As we stated in the Proposed Policy Statement, our regulations
require that a pipeline's rates recover its costs based on projected
units of service,\66\ thereby putting the pipeline at risk for any cost
under-recovery between rate cases, incentivizing the pipeline to
minimize costs and maximize service. Recovery of costs approved for
inclusion in a tracker, however, would be guaranteed, thereby reducing
the pipeline's incentives. Moreover, a tracker mechanism can shift
costs to the pipeline's captive customers. If a pipeline recovering
costs through a tracker or surcharge loses shippers or must offer
increased discounts to retain business, a tracker mechanism may shift
the amounts previously paid by those shippers directly and
automatically to the pipeline's remaining shippers. This direct cost
shifting is one of the reasons the Commission has generally disfavored
trackers, namely that the cost

shifting described would occur without consideration of any offsetting
items that would generally be considered in a section 4 rate
proceeding, and which the pipeline would normally need to justify to
recover.\67\
---------------------------------------------------------------------------

    \66\ 18 CFR 284.10(c)(2) (2014).
    \67\ For example, in order to recover costs associated with
discounted rates the pipeline may have offered to certain shippers,
the pipeline must demonstrate that the discount was required to meet
competition. Policy for Selective Discounting by Natural Gas
Pipelines, 113 FERC ] 61,173 (2005). In the case of a tracker, no
such showing is required by the pipeline to recover the covered
costs from its remaining customers.
---------------------------------------------------------------------------

    80. Thus, as a prerequisite to the Commission allowing such a
tracker, the Commission will require that the pipeline design the
surcharge in a manner that will protect its shippers from cost shifts
and impose on the pipeline some risk of under-recovery. As we noted in
the Proposed Policy Statement, one method to accomplish this would be
that adopted by Columbia Gas, namely that the pipeline agree to a
billing determinant floor such that the pipeline must design the
surcharge on the greater of its actual billing determinants or the
established floor, and impute the revenue it would achieve by charging
the maximum rate for those determinants. While the Commission found
this to be a just and reasonable approach to preventing cost shifts in
Columbia Gas, we remain open under the Final Policy to considering
alternative methods of protecting the pipeline's existing customers
from cost shifts if the pipeline loses customers or has to offer
increased discounts of its rates to retain business during the period
the modernization cost tracker is in effect.
    81. The Commission believes that issues concerning how a
modernization cost surcharge should be allocated among a pipeline's
services and what billing determinants should be used to design the
surcharge are best addressed on a case-by-case basis when each pipeline
files to establish a modernization cost tracking mechanism. However, as
a general matter, the Commission believes that it would be reasonable
for the billing determinants used to design the surcharge to reflect a
discount adjustment comparable to any discount adjustment reflected in
the pipeline's base rates. Otherwise, a pipeline's modernization cost
tracking mechanism would be designed in a manner that would likely lead
to the pipeline under-recovering its prudently incurred modernization
costs. That would be contrary to the Commission's goal of encouraging
pipelines to expedite needed safety and environmental upgrades. The
Commission's concern about protecting the pipeline's existing customers
from cost shifts relates to cost shifts that would occur if a pipeline
were permitted to true up any modernization cost under-recoveries
resulting from the loss of customers after its modernization cost
tracker goes into effect or a need to offer increased rate discounts to
retain business after that date.\68\
---------------------------------------------------------------------------

    \68\ The Commission notes that section 154.109(c) of the
Commission's regulations (18 CFR 154.109 (2014)), requires that the
pipeline's tariff contain a statement of the order in which the
pipeline discounts its rates and charges. Therefore, pipelines with
modernization cost surcharges will have to revise their statements
of the order in which they discount rates to include the
modernization cost surcharge. Treating that surcharge as the last
rate component discounted would minimize the need for truing up any
under-recoveries due to discounting. See Natural Gas Pipeline Co. of
America, 70 FERC ] 61,317 (1995).
---------------------------------------------------------------------------

    82. Finally, with respect to the issue of the pipeline's ability to
impose a modernization cost surcharge on discounted or negotiated rate
shippers, that is a contractual issue between the pipeline and its
discounted or negotiated rate shippers. If a particular shipper's
discount or negotiated rate agreement with the pipeline permits the
pipeline to add the surcharge to the agreed-upon discounted or
negotiated rate, the pipeline will be permitted to do so.\69\
Otherwise, the pipeline may not impose the surcharge on a discounted or
negotiated rate shipper.
---------------------------------------------------------------------------

    \69\ See, e.g., Sea Robin Pipeline Co., LLC, Opinion No. 516-A,
143 FERC ] 61,129, at PP 85-213 (2013).
---------------------------------------------------------------------------

4. Periodic Review of the Surcharge
    83. In the Proposed Policy Statement, the Commission proposed that
pipelines be required to include in a modernization cost recovery
mechanism some method to allow a periodic review of whether the
surcharge and the pipeline's base rates remain just and reasonable. As
an example of such a method, the Commission cited the Columbia Gas
settlement, in which the pipeline agreed to make the surcharge a
temporary part of its rates (the surcharge expires automatically after
five years), and included a requirement that the pipeline make a new
NGA section 4 filing if it wants to continue the surcharge. However,
the Commission stated it was open to other methods.
a. Comments
    84. Virtually all commenters, including AGA, INGAA, NGSA, APGA,
PGC, IPAA, Southern, KCC, and TVA support the proposed standard
requiring a pipeline proposing a modernization cost tracker to include
a method to allow a periodic rate review of the surcharge. While
participants generally agreed such a condition was necessary, the
recommended method and frequency of review differed.
    85. Numerous commenters advocate requiring a pipeline with a cost
modernization tracker to periodically file a full NGA section 4 rate
case. NGSA for example, commented that a pipeline should have to file a
rate case with its application for a tracker and every five years
thereafter. IECA and Cities agree that a minimum 5-year rate case
filing obligation is warranted. KCC and PGC espouse refresher
requirements of 3 to 5 years, with a condition the pipeline not file to
change rates for at least 3 years after implementation of a tracker.
IPAA also supports the requirement for a full rate case refresher, and
MDG suggests a rate case filing as a condition of extending any tracker
beyond its initial term. Calpine commented that any surcharge have a
minimum 3-year initial term that is subject to extension and
renegotiation. Several commenters also advocated annual filings for
pipelines to justify the projects for which costs were collected and to
true-up such costs.
    86. Opponents of the Proposed Policy Statement commented that a
periodic review methodology was critical, though still not sufficient
to justify the use of trackers. They strongly advocate a requirement
that the review methodology involve a full blown NGA section 4 rate
case. APGA would add the requirement that, if during the period that a
surcharge mechanism is in effect, an NGA section 5 complaint is
initiated against the pipeline, then the pipeline must agree to make
refunds retroactive to the date of the complaint to the extent its
rates are determined to be unjust and unreasonable. The NYPSC and TVA
comment that the periodic review should ensure that the surcharge does
not produce earnings above authorized rates of return.
b. Determination
    87. In this Policy Statement, the Commission adopts a policy of
requiring the pipeline to include some method for a periodic review of
whether the surcharge and the pipeline's base rates remain just and
reasonable. Potential methods for satisfying this standard may include
making the surcharge temporary and/or requiring the pipeline to file an
NGA section 4 rate case to the extent it wants to extend the surcharge
beyond the initial temporary term. Because we intend the Policy
Statement to be flexible enough to meet the particular circumstances of
each pipeline's system, we will not require that a pipeline seeking
approval of a cost modernization tracker propose to file a

full NGA section 4 rate case with some specified regularity and remain
open to other reasonable means of accomplishing this goal.
    88. Similar to the review of the pipeline's existing base rates at
the beginning of the tracker proposal analysis, during the periodic
review the pipeline will have to provide sufficient information to
satisfy the Commission that both its base rates and the surcharge
amount remain just and reasonable if the surcharge is to continue. If
shippers raise any issues of material fact with respect to the
continued justness and reasonableness of the pipeline's base rates or
the surcharge, the Commission will establish appropriate procedures to
enable resolution of those issues based upon substantial evidence on
the record.
    89. If a modernization cost tracking mechanism is terminated before
the pipeline has fully recovered the costs included in that mechanism,
the pipeline may reasonably propose in a subsequent general section 4
rate case to include the unrecovered costs in its base rates. For
example, if eligible costs have been treated as rate base items in the
modernization cost tracker, the undepreciated portion of those costs as
of the time of the NGA section 4 rate filing could be included in the
rate base used to calculate the pipeline's proposed base rates in the
same manner as any other investment made between rate cases, unless the
pipeline's modernization cost tracker mechanism includes some other
provision concerning the treatment of unrecovered costs upon
termination of the mechanism.
5. Shipper Support
    90. The fifth condition proposed for a cost recovery surcharge was
that the pipeline must work collaboratively with shippers to seek
shipper support for any such proposal.
a. Comments
    91. The vast majority of commenters support this condition but
differ on the degree of shipper support the pipeline must have. On one
end, INGAA suggests that the Commission could approve a proposed
surcharge mechanism that it deems just and reasonable even if it lacks
shipper support at the outset. NGSA and APGA, on the other hand,
comment that pipeline should have the support of shippers representing
90 percent of the firm billing determinants. AGA comments that while
unanimity should not be required, any approved modernization cost
recovery tracking mechanism should be established through a robust,
ongoing, collaborative process between the pipeline and its shippers
that has widespread shipper support.
    92. IECA is more pessimistic and contends that it is completely
unrealistic for any pipeline to collaborate and work with its shippers.
The KCC supports collaboration among the pipeline and its shippers but
comments that the condition should be expanded to include support of
``interested parties,'' including state public utility commissions.
b. Determination
    93. The fifth standard for an acceptable cost modernization
surcharge adopted in this Policy Statement is that the pipeline must
work collaboratively with shippers and other interested parties to seek
support for any such proposal. As part of this collaborative process,
pipelines should meet with their customers and other interested parties
to seek resolution of as many issues as possible before submitting a
modernization cost recovery proposal to the Commission. At such
meetings, pipelines should share with their customers the results of
their review of their systems concerning what system upgrades and
improvements are necessary for the safe and efficient operations of
their systems. Pipelines should also be responsive to customer requests
for specific cost and revenue information necessary to determine
whether their existing base rates are just and reasonable.
Additionally, pipelines should provide customers and interested parties
an opportunity to comment on draft tariff language setting forth their
proposed modernization cost recovery mechanism.
    94. As we noted in the Proposed Policy Statement, however, while we
strongly encourage the pipeline to attempt to garner support for its
proposal from all interested parties, we do not intend to require
unanimity of shipper support before approving a cost modernization
surcharge. Nor will we establish any minimum level of shipper support
required before a pipeline's proposal can be accepted. This Policy
Statement will provide pipelines and their customers wide latitude to
reach agreements incorporating remedies for a variety of system safety,
reliability and/or efficiency issues. Despite comments that mutual
collaboration is futile or impractical, the Columbia Gas settlement is
evidence that a system-wide collaboration between a pipeline and its
customers can work to produce a reasonable modernization cost recovery
mechanism that benefits all sides. The Commission continues to favor
settlements, and notes that the negotiation of a modernization cost
tracker to address critical infrastructure issues is exactly the type
of issue that lends itself to pipeline customer negotiation and
agreement because it will benefit all involved. However, if a pipeline
satisfies its burden under NGA section 4 to show that its proposed
modernization cost recovery mechanism is just and reasonable, including
showing that its proposal is consistent with the guidance herein, the
Commission may accept that proposal, even if some parties oppose it.

C. Additional Questions on Which the Commission Sought Comments

    95. The Commission also sought comments on several additional
issues, including: Accelerated amortization, reservation charge
crediting, and any other factors or issues commenters believed should
be included in the Policy Statement as a prerequisite for approving a
modernization cost recovery mechanism.
1. Accelerated Amortization
    96. In the Proposed Policy Statement, the Commission pointed out
that the capital costs included in the modernization cost tracking
mechanism approved in Columbia Gas are treated as rate base items, and
thus Columbia Gas is allowed to recover a return on equity on the
portion of those costs financed by equity. Consistent with the rate
base treatment of those costs, they are depreciated over the life of
Columbia Gas' system.\70\ The Commission requested comments on whether
pipelines should also be allowed to use accelerated amortization
methodologies, akin to that approved by the Commission for hurricane
repair cost trackers,\71\ to recover the costs of any facilities
installed pursuant to a modernization cost recovery mechanism. The
Commission stated that under such a methodology the costs would not be
included in the pipeline's rate base, and the pipeline would not
recover any return on equity with respect to the costs financed by
equity. Instead, the pipeline would only be allowed to recover the
interest necessary to compensate it for the time value of money.
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    \70\ Columbia Gas, 142 FERC ] 61,062 at P 9.
    \71\ See, e.g., Sea Robin Pipeline Co., LLC, Opinion No. 516,
137 FERC ] 61,201, at PP 16-65 (2011), reh'g den, Opinion No. 516-A,
143 FERC ] 61,129 at PP 17-80.
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a. Comments
    97. The Commission received a range of comments on this issue.
Wisconsin Electric and Wisconsin Gas support using an accelerated
amortization of

costs of facilities installed pursuant to eligible modernization
projects.\72\ IECA also supports accelerated amortization for safety
and environmental compliance costs but argues for the amortization to
be set at a rate that would require the pipeline to come back for a
rate case in five years.\73\ NGSA argues that accelerated amortization,
with carrying costs, over a specified term, is the most appropriate
rate design structure for recovering all approved costs under a
tracker, with the length of any amortization period determined on a
case-by-case basis, dependent upon the level of costs.\74\ NGSA argues
that it is not appropriate for the pipeline to earn a rate of return
and taxes on these types of tracked expenditures because these would be
incremental costs, with guaranteed cost recovery (i.e., no risk on the
pipeline) under the tracker.\75\
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    \72\ Wisconsin Electric and Wisconsin Gas Comments at 14.
    \73\ IECA Comments at 21.
    \74\ NGSA Comments at 12-13, 24.
    \75\ NGSA Comments at 24.
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    98. NCUC opposes the proposal on the grounds that the accelerated
amortization allowed for storm damage repair costs would be
inappropriate for modernization costs, because accelerated amortization
would raise intergenerational cross--subsidization issues and could
magnify rate shock. Similarly, Laclede opposes recovery of capital
costs through accelerated amortization methodologies, and argues that
any costs not recovered through tracker rates should be rolled into
rate base.\76\
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    \76\ Laclede Comments at 20. See also PGC Comments at 19-20 (PGC
opposes accelerated amortization for modernization upgrades,
contending that it will only give pipelines additional latitude to
increase their profits.).
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    99. CAPP recommends that the consultative process by which
individual pipelines formulate their respective proposals include the
opportunity for stakeholders to evaluate the preferred accelerated
amortization methodology.\77\ Calpine also does not object to allowing
pipelines and their shippers to consider accelerated amortization
methodologies as part of their modernization surcharge
negotiations.\78\ Columbia Gas states the Commission should consider
permitting pipelines to use accelerated amortization methodologies but
allow pipelines and their customers the discretion to negotiate the
appropriate method of amortization, which should include the
possibility of earning a reasonable return.\79\ INGAA requests that the
Commission provide each pipeline that proposes a modernization cost
tracker the ability to propose either accelerated amortization
methodologies or depreciation over the life of the facilities, because
each pipeline faces different competitive circumstances.\80\
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    \77\ CAPP Comments at 9. See also KCC Comments at 24, 27 (KCC
does not oppose extension of the use of accelerated amortization
methodologies for recovering approved costs under a modernization
cost tracker if the costs subject to accelerated amortization are
not included in rate base, and a pipeline is not able to recover any
return on equity for costs financed by equity).
    \78\ Calpine Comments at 30.
    \79\ Columbia Gas Comments at 34. See also APGA comments at 22
(to the extent the Commission permits pipelines to implement the
modernization cost tracker, customers of the requesting pipeline
should make the decision as to whether rate base treatment or some
sort of reasonable amortization period works best for them under the
circumstances).
    \80\ INGAA Comments at 19-20.
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b. Determination
    100. The Commission agrees with the commenters who suggested that
pipelines should be allowed to negotiate with their customers
concerning whether modernization costs should be treated as (1) a rate
base item to be depreciated over the life of the pipeline with the
pipeline recovering a return on equity on the portion of those costs
financed by equity together with associated income taxes or (2) a non-
rate base item to be amortized over a shorter period with the pipeline
recovering the interest necessary to compensate it for the time value
of money but no return on equity or associated income taxes. These two
cost recovery options have varying advantages and disadvantages. For
example, rate base treatment is likely to lead to a lower per unit
daily or monthly surcharge, because it spreads the pipeline's recovery
of the costs over a substantially longer period. Such lower per unit
rates should help mitigate any rate shock. However, over the long run,
rate base treatment is likely to be more expensive for shippers,
because the surcharge will be in effect for a longer period and the
return on the equity portion of the rate base will be greater than the
interest rate on the costs being amortized.\81\ In light of these
varying advantages and disadvantages, the Commission will permit
pipelines and their shippers to negotiate which recovery method is
appropriate for each pipeline, based upon the circumstances of its
system.
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    \81\ See Opinion No. 516-A, 143 FERC ] 61,129 at PP 35-56.
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2. Reservation Charge Crediting
    101. The Commission requires pipelines to provide full reservation
charge credits for outages of primary firm service caused by non-force
majeure events, where the outage occurred due to circumstances within
the pipeline's control, including planned or scheduled maintenance.\82\
The Commission also requires the pipeline to provide partial
reservation charge credits during force majeure outages, so as to share
the risk of an event for which neither party is responsible.\83\
Partial credits may be provided pursuant to: (1) The No-Profit method
under which the pipeline gives credits equal to its return on equity
and income taxes starting on Day 1; or (2) the Safe Harbor method under
which the pipeline provides full credits after a short grace period
when no credit is due (i.e., 10 days or less).\84\ The Commission
permits pipelines to reflect the recurring cost of providing
reservation charge credits during non-force majeure events in their
rates.\85\
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    \82\ See, e.g., Tennessee Gas Pipeline Co., Opinion No. 406, 76
FERC ] 61,022 (1996), order on reh'g, Opinion No. 406-A, 80 FERC ]
61,070 (1997), as clarified by, Rockies Express Pipeline LLC, 116
FERC ] 61,272, at P 63 (2006) (Rockies Express I), and North Baja
Pipeline, LLC, 109 FERC ] 61,159 (2004), reh'g denied, 111 FERC ]
61,101 (2005), aff'd, North Baja Pipeline, LLC v. FERC, 483 F.3d 819
(D.C. Cir. 2007) (North Baja v. FERC).
    \83\ The Commission has defined force majeure outages as events
that are both unexpected and uncontrollable. Opinion No. 406, 76
FERC at 61,088. North Baja v. FERC, 483 F.3d at 823.
    \84\ The Commission has also stated that pipelines may use some
other method that achieves equitable sharing reasonably equivalent
to the two specified methods.
    \85\ See, e.g., Northern Natural Gas Co., 137 FERC ] 61,202, at
P 36 (2011), order on reh'g and compliance, 141 FERC ] 61,221, at PP
45-50 (2012) (Northern). The Commission has stated this could be
accomplished by a reduction in the billing determinants used to
design a pipeline's rates or by including the cost of the full
reservation charge credits as an item in the pipeline's cost of
service. Gulf South Pipeline Co., LP, 144 FERC ] 61,215, at P 34
(2013) (Gulf South).
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    102. In the Proposed Policy Statement, the Commission stated that
the pipelines' performance of facility upgrades and replacements
required by recent legislative and other actions to address pipeline