Certification of New Interstate Natural Gas Pipeline Facilities; Statement of Policy

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. PL99-3-000]

Certification of New Interstate Natural Gas Pipeline Facilities;

Statement of Policy

Issued September 15, 1999.

Before Commissioners: James J. Hoecker, Chairman; Vicky A.

Bailey, William L. Massey, Linda Breathitt, and Curt Hebert, Jr.

In the Notice of Proposed Rulemaking (NOPR) in Docket No. RM98-10-

000 \1\ and the Notice of Inquiry (NOI) in Docket No. RM98-12-000,\2\

the Commission has been exploring issues related to the current

policies on certification and pricing of new construction projects in

view of the changes that have taken place in the natural gas industry

in recent years.

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\1\ Notice of Proposed Rulemaking, Regulation of Short-term

Natural Gas Transportation Services, 63 Fed. Reg. 42982, 84 FERC

para. 61,087 (1998).

\2\ Notice of Inquiry, Regulation of Interstate Natural Gas

Transportation Services, 63 Fed. Reg. 42974, 84 FERC para. 61,087

(July 29, 1998).

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In addition, on June 7, 1999, the Commission held a public

conference in Docket No. PL99-2-000 on the issue of anticipated natural

gas demand in the northeastern United States over the next two decades,

the timing and the type of growth, and the effect projected growth will

have on existing pipeline capacity. All segments of the industry

presented their views at the conference and subsequently filed comments

on those issues.

Information received in these proceedings as well as recent

experience evaluating proposals for new pipeline construction persuade

us that it is time for the Commission to revisit its policy for

certificating new construction not covered by the optional or blanket

certificate authorizations.\3\ In particular the Commission's policy

for determining whether there is a need for a specific project and

whether, on balance, the project will serve the public interest. Many

urge that there is a need for the Commission to authorize new pipeline

capacity to meet the growing demand for natural gas. At the same time,

others already worried about the potential for capacity turnback, have

urged the Commission to be cautious because of concerns about the

potential for creating a surplus of capacity that could adversely

affect existing pipelines and their captive customers.

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\3\ This policy statement does not apply to construction

authorized under 18 CFR Part 157, Subparts E and F.

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Accordingly, the Commission is issuing this policy statement to

provide the industry with guidance as to how the Commission will

evaluate proposals for certificating new construction. This should

provide more certainty about how the Commission will evaluate new

construction projects that are proposed to meet growth in the demand

for natural gas at the same time that some existing pipelines are

concerned about the potential for capacity turnback. In considering the

impact of new construction projects on existing pipelines, the

Commission's goal is to appropriately consider the enhancement of

competitive transportation alternatives, the possibility of

overbuilding, the avoidance of unnecessary disruption of the

environment, and the unneeded exercise of eminent domain. Of course,

this policy statement is not a rule. In stating the evaluation

criteria, it is the Commission's intent to evaluate specific proposals

based on the facts and circumstances relevant to the application and to

apply the criteria on a case-by-case basis.

I. Comments Received on the NOPR

In the NOPR the Commission explained that it wants to assure that

its policies strike the proper balance between the enhancement of

competitive alternatives and the possibility of over building. The

Commission asked for comments on whether proposed projects that will

establish a new right-of-way in order to compete for existing market

share should be subject to the same considerations as projects that

will cut a new right-of-way in order to extend gas service to a

frontier market area. Also, in reassessing project need, the Commission

said that it was considering how best to balance demonstrated market

demand against potential adverse environmental impacts and private

property rights in weighing whether a project is required by the public

convenience and necessity.

The Commission asked commenters to offer views on three options:

One option would be for the Commission to authorize all applications

that at a minimum meet the regulatory requirements, then let the market

pick winners and losers. Another would be for Commission to select a

single project to serve a given market and exclude all other

competitors. Another possible option would be for the Commission to

approve an environmentally acceptable right-of-way and let potential

builders compete for a certificate.

In addition, the Commission asked commenters to consider the

following questions: (1) Should the Commission look behind the

precedent agreement or contracts presented as evidence of market demand

to assess independently the market's need for additional gas service?

(2) Should the Commission apply a different standard to precedent

agreements or contracts with affiliates than with non-affiliates? For

example, should a proposal supported by affiliate agreements have to

show a higher percentage of contracted-for capacity than a proposal

supported by non-affiliate agreements, or, should all proposed projects

be required to show a minimum percent of non-affiliate support? (3) Are

precedent agreements primarily with affiliates sufficient to meet the

statutory requirement that construction must be required by the public

convenience and necessity, and,

[[Page 51310]]

if so, (4) Should the Commission permit rolled-in rate treatment for

facilities built to serve a pipeline affiliate? (5) Should the

Commission, in an effort to check overbuilding and capacity turnback,

take a harder look at proposals that are designed to compete for

existing market share rather than bring service to a new customer base,

and what particular criteria should be applied in looking at

competitive applications versus new market applications? (6) Should the

Commission encourage pre-filing resolution of landowner issues by

subjecting proposed projects to a diminished degree of scrutiny where

the project sponsor is able to demonstrate it has obtained all

necessary right-of-way authority? (7) Should a different standard be

applied to project sponsors who do not plan to use either federal or

state-granted rights of eminent domain to acquire right-of-way?

A. Reliance on Market Forces To Determine Optimal Sizing and Route for

New Facilities

PG&E, Process Gas Consumers (PGC), Tejas Gas, Washington Gas,

Columbia, Market Hub Partners, and Ohio PUC agree that the Commission

should continue to let the market decide which projects to pursue. PG&E

states that the Commission should authorize all projects that meet

minimum regulatory requirements, looking at whether the project will

serve new or existing markets, the firmness of commitments and

environmental and property rights issues. PGC urges the Commission to

refrain from second guessing customers' decisions. Tejas suggests that

the Commission rely on the market to the maximum extent; regulatory

changes that affect risk/reward allocation will increase regulatory

risk and deter new investment. Washington Gas suggests letting the

market decide on new construction with market based rates subject only

to environmental review and landowner concerns. Columbia comments that

it would not be economically efficient to protect competitors from the

competition created by new capacity. Market Hub Partners specifies

that, when there is no eminent domain involved, the focus should be on

competition, not protecting individual competitors from overbuilding.

Ohio PUC supports authorizing all applications for new capacity

certification which meet the minimum regulatory requirements. Ohio PUC

does not support approving a single pipeline's application while

excluding all others.

The Regulatory Studies Program of the Mercatus Center, George Mason

University suggests allowing projects to be proposed with no

certification requirements, but allowing competitors to challenge the

need. Investors would be at risk for all investments. Tejas proposes

holding pipelines at risk for reduced throughput, thereby avoiding

shifting the risk to customers. On the issue of overbuilding,

Millennium, Enron, PGC, Columbia, and Wisconsin PSC disagree with the

presumption that overbuilding must be avoided. Millennium asserts that

all competitive markets have excess capacity. Enron urges the

Commission to be receptive to overbuilding in areas of rapid growth,

difficult construction, and environmental sensitivity. PGC agrees that

some capacity in excess of initial demand may make environmental and

economic sense in that it will reduce the need for future construction,

but argues that the pipelines be at risk for those facilities. Columbia

alleges that the concern about overbuilding is misguided. Wisconsin PSC

contends that concerns of overbuilding should not operate to limit the

availability of competitive alternatives to customers currently without

choices of pipeline provider. Wisconsin PSC believes the elimination of

the discount adjustment mechanism and the imposition of reasonable at

risk provisions for new construction will deter pipelines from

overbuilding.

On the other hand, UGI recommends that overbuilding be minimized.

UGI states that the Commission should ensure a reasonable fit between

supply and demand. The Commission should limit certification of new

projects to ones which demonstrate unmet demand or demand growth over

1-3 years.

Coastal stresses that competition should not be the only or primary

factor in deciding the public convenience and necessity.

Amoco contends that, if the Commission chooses the right-of-way, it

will in many cases have chosen the parties that will ultimately build

the pipeline. Amoco urges the Commission not substitute its judgement

for that of the marketplace unless there are overwhelming environmental

concerns. Tejas also objects to the option of the Commission approving

an environmentally acceptable right-of-way and letting potential

builders compete for a certificate because it believes it would be

difficult for the Commission to implement.

Colorado Springs supports the concept of having the Commission

select a single project in a given corridor rather than letting the

market pick winners and losers.

PGC and Ohio PUC recommend that the Commission authorize all

construction applications meeting certain threshold requirements,

leaving the market to decide winners and losers. PGC urge the

Commission to facilitate construction of new pipelines that will

increase the potential for gas flows. Under no circumstances should the

Commission deny a certificate based on a complaint by an LDC or a

competing pipeline that new construction will hurt their market

position or ability to recover costs. The Commission should not afford

protection to traditional suppliers or transporters by constraining the

development of new pipeline capacity.

PGC believes that only in unusual situations, where insuperable

environmental barriers cannot be resolved through normal mitigation

measures, should the Commission select an acceptable right-of-way. Ohio

PUC does not support approving a single pipeline's application while

excluding all others. Ohio PUC recommends having market forces guide

construction projects unless or until obvious shortcomings begin to

emerge. In such instances, the option of designating a single right-of-

way with competition for the certificate could be used to spur needed

construction.

B. Reliance on Contracts To Demonstrate Demand

A number of parties commend that there is no reason to change the

current policy regarding certificate need (AlliedSignal, Millennium,

Southern Natural, Tejas, Williston, Columbia). National Fuel Gas Supply

believes the Commission should keep shipper commitment as the test

because it is more accurate than market studies. National Fuel Gas

Supply further believes the Commission's present reliance on market

forces to establish need, and its environmental review process, form

the best approach to reviewing certificate applications. Foothills

agrees, but states that a new, flexible regulatory structure for

existing pipelines is needed. Indicated Shippers also wants to keep the

current policy, but stresses that expedition in processing is needed to

lower entry barriers.

Amoco, Consolidated Natural, and Columbia urged the Commission to

continue requiring sufficient binding long-term contracts for firm

capacity. Millennium and Tejas stated that there is no need to develop

different tests for different markets. Columbia also argued that there

is no need to look behind contracts. Williams argues that the

Commission should not second guess contracts or make an independent

market analysis. Williston alleges that

[[Page 51311]]

reviewing the firmness of private contracts is ineffectual and futile.

Market Hub Partners cautions the Commission not to substitute its

judgment for that of the marketplace.

PGC argues that there should be no change to current policy where

construction affects landowners. Eminent domain is a necessary tool to

delivering clean burning natural gas to growing markets; no individual

landowners should be given a veto over pipeline construction. PGC adds

that the absence of prefiling right-of-way agreements does not mean

that a project is less good or necessary or should be treated more

harshly. Southern Natural, Millennium, and National Fuel Gas Supply

agree that no market preference should be given for projects that do

not use eminent domain. National Fuel Gas Supply agrees that such a

preference would tilt the power balance to landowners. Millennium

argues that the Commission should not establish certificate preferences

for pipelines that do not require eminent domain; such preferences are

not needed because a pipeline that does not want to use eminent domain

can already build projects under Section 311.

On the other hand, Amoco, El Paso/Tennessee, ConEd, and Wisconsin

PSC recommend modifying the current policy. El Paso/Tennessee recommend

that the Commission look behind all precedent agreements to see if real

markets exist. ConEd suggests considering forecasts for market growth;

if there is a disparity with the proposal, the Commission should look

at all circumstances. Wisconsin PSC urges the Commission to consider

market saturation and growth prospects by looking at market power

(HHIs) and the degree of rate discounting in a market. Amoco suggests

that the Commission analyze all relevant data. Peco Energy believes the

current Commission policy, which provides for minimal market

justification for authorizing construction of incremental facilities,

coupled with its presumption in favor of rolled-in rate treatment, has

contributed to discouraging existing firm shippers from embracing

longer term capacity contracts.

Consolidated Natural recommends creating a settlement forum for

market demand and reverse open season issues. Washington Gas urges the

Commission to adopt an open entry, ``let the market decide'' policy.

IPAA supports a need analysis focusing on the ability of existing

capacity to handle projected demand. IPAA alleges that the overall

infrastructure is already in place to supply current demand

projections.

Some commenters support a sliding scale approach to determine need.

ConEd states that the Commission should determine need on a case-by-

case basis, using different standards for large or small projects.

Enron advocates use of a sliding scale, requiring more market support

for projects with more landowner and/or environmental impact. Enron

supports requiring no market showing for projects using existing

easements for mutually agreed upon easements. Enron also suggests, in

addition to requiring that at least 25% of the precedent agreements

supporting a project be with non-affiliates, that the Commission relax

its market analysis if 75% or more of those agreements are with non-

affiliates. Enron would require more market data for an affiliate-

backed project. American Forest & Paper would allow negotiation of risk

if there is no subsidy by existing customers. Sempra and UGI urge the

Commission to look at whether projects serve identifiable, new or

growing markets. NARUC states that each state is unique and that the

Commission should consider those differences. Market Hub Partners

believes that a project which is at risk, requires little or no eminent

domain authority, and has potential to bring competition to a market

that is already being served by pipelines and strong operators with

market power should be expedited.

The development in recent years of certificate applicants' use of

contracts with affiliates to demonstrate market support for projects

has generated opposition from affected landowners and competitor

pipelines who question whether the contracts represent real market

demand. ConEd, Ohio PUC, and Enron believe that a different standard

should be applied to affiliates. ConEd argues that the at risk

condition is inadequate when a pipeline serves a market served by an

affiliate; risk is shifted. Ohio PUC states that pipelines should

shoulder the increased risk and that the Commission should look behind

contracts with affiliates. Enron would require more market data for

affiliate-backed projects and would require that all projects be

supported by precedent agreements at least 25% of which are with non-

affiliates.

Nevertheless, most of the commenters support applying the same

standard to contracts for new capacity with affiliates as non-

affiliates. Amoco, Coastal, Millennium, National Fuel, Southern

Natural, Tejas, Texas Eastern, Columbia, Market Hub Partners, El Paso/

Tennessee, and PGC all support applying the same standard to affiliates

as non-affiliates. Market Hub argues that a contract is a contract;

treating affiliates differently would be in the interest of incumbent

monopolists. El Paso/Tennessee agree that affiliate precedent

agreements are sufficient as long as they are supported by market

demand. PGC agrees that the same standard should apply as long as the

proposed capacity is offered on a non-discriminatory basis to all in an

open season. Amoco makes an exception for marketing affiliates, arguing

that they do not represent new demand. Columbia also makes an exception

for affiliates that are created just to show market for a project.

Other parties also offered comments on affiliate issues. PGC

recommends addressing affiliate issues on a case-by-case basis. Exxon

support offering comparable deals to non-affiliates. If there is

insufficient capacity, it should be prorated. AGA supports prohibiting

discount adjustments connected with new construction by pipelines or

affiliates. National Fuel Gas Supply and Tejas support permitting

rolled-in rates for facilities to serve affiliates. PGC argues that

there should be no presumption of rolled in rates for affiliates.

The commenters also express concern with the current policy's

effect on existing pipelines and their captive customers when the

Commission approves pipeline projects proposed to serve the same

market. In those cases, they believe that need should be measured

differently by, for example, assessing the impact on existing capacity

or requiring a strong incremental market showing and more scrutiny of

the net benefits. They urge the Commission to balance all the relevant

factors before issuing a certificate. A number of parties argued that

need should be measured differently when a project is proposed to serve

an existing market. UGI urges requiring a strong market showing for

such projects. Coastal proposes that the Commission fully integrate the

standards announced by the courts \4\ with its certificate construction

policies, balancing all the relevant factors including the ability of

the existing provider to provide the service. El Paso/Tennessee would

require more scrutiny of the net benefit. Sempra would require that,

prior to construction, all shippers be given the opportunity to turn

back capacity. Similarly, Texas Eastern would require the pipeline to

use unsubscribed capacity before construction (e.g., a reverse

auction).

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\4\ Citing FPC v. Transcontinental Gas Pipeline Corp., 365 U.S.

1, 23 (1961) and Scenic Hudson Preservation Conference v. FERC, 354

F.2d. 608, 620 (2nd Cir. 1965).

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[[Page 51312]]

Other commenters oppose a policy requiring a harder look at

projects proposed to serve existing markets. They maintain that market

demand for service in order to escape dependence on a dominant pipeline

supplier should be accorded the same weight as demand by new

incremental load growth. They contend that the benefits of competition

and potentially lower gas prices for consumers should control over

claims that an existing pipeline needs to be insulated from competition

because its revenues may decrease. National Fuel Gas Supply, PGC,

Florida Cities, Market Hub Partners, and Southern Natural in particular

object to having different policies for new or existing pipelines.

National Fuel Gas Supply contends that generally the policies on new

construction and existing pipelines should match. PGC opposes any

policy that protects incumbents by requiring a harder look at projects

proposed to serve existing markets rather than new demand. Many

existing markets have unmet demand. Likewise, Florida Cities is

concerned that the NOPR is intended to elicit a new policy where the

import and influence of competition is downplayed to minimize or

eliminate the risk of unsubscribed capacity on existing pipelines.

Florida Cities supports pipeline-on-pipeline competition as a primary

factor in determining which new capacity projects receive certificate

authority and are constructed. Florida Cities believes that additional

pipeline competition would benefit customers and any generic policy

that would decrease or inhibit pipeline competition would not be in the

best interest of the consumers the Commission is obliged to protect.

Market Hub Partners urges the Commission to attempt to limit market

incumbents' ability to forestall competition by defeating the efforts

of new market entrants to build or operate new capacity. Market Hub

Partners contend that incumbents protest on the basis of project safety

and environmental concerns when they are primarily concerned with their

own welfare and market share. Southern Natural contends the NGA does

not permit a rule disfavoring projects that enhance competitive

alternatives. Taking a harder look at competitive proposals would

effect a preference for monopoly, clearly not endorsed by the NGA or

the Courts of Appeal.

Wisconsin Distributor Group believes that meaningful pipe-on-pipe

competition can only exist where there are choices among or between

pipelines and unsubscribed firm capacity exists. Wisconsin Distributor

Group argues the Commission should view favorably new pipeline projects

that propose to create competition by introducing an alternative

pipeline to markets where no choices exist. Wisconsin Distributor Group

contends the Commission's policy should not be driven by self-

protective arguments but by the need for competitive alternatives.

Wisconsin Distributor Group supports the Commission's analysis in

Alliance and Southern because it considers the benefits of competition

and potentially lower gas prices for consumers as controlling over

claims that an existing pipeline needs to be insulated from competition

because its revenues may decrease. Market demand for service in order

to escape dependence on a dominant pipeline supplier should be accorded

the same weight as demand by new incremental load growth.

UGI, Sempra, and El Paso/Tennessee would require assessing the

impact on existing capacity. Sempra states that if existing rates are

below the maximum rate, new capacity may not be needed. Sempra adds

that the Commission should look at whether expansion capacity can stand

on its own without rolled-in treatment. Texas Eastern believes the

Commission must consider how best to use existing unsubscribed capacity

and capacity that has been turned back to pipelines.

C. The Pricing of New Facilities

A number of commenters submit that the existing presumption in

favor of rolled-in rates for pipeline expansions sends the wrong price

signals with regard to pricing new construction. They urge the

Commission to adopt policies such as incremental pricing for pipeline

projects or placing pipelines at risk for recovery of the costs of

construction. They submit that such a policy would reveal the true

value of existing capacity and properly allocate costs and risks. A

number of parties also raised issues concerning rate design in general,

but the Commission is deferring for now consideration of those kinds of

issues which also affect the Commission's policies for existing

pipelines in order to focus on issues concerning the certification of

new pipeline construction.

AGA, ConEd, and Michigan Consolidated stress the importance of

ensuring the right price signals. AGA urges the Commission to adopt

policies that reveal the true value of existing capacity. ConEd states

that rate policies should send proper price signals by properly

allocating costs and risks.

AGA contends that the Commission's certification policies should

protect recourse shippers. AGA and BG&E recommend that the Commission

ensure that pipelines are not able to impose the costs of new capacity

or the costs of consequent unsubscribed existing capacity on recourse

shippers. Amoco asserts pipelines should be at risk for unsubscribed

capacity. Similarly, AGA and Philadelphia Gas Works urge the Commission

to ensure that pipelines are at risk for unsubscribed capacity relating

to construction projects by the pipeline or its affiliate. However,

Tejas believes that treatment of any under recovery must address the

unique circumstances of deepwater pipelines.

APGA argues that, if the Commission allows initial rates based on

the life of the contract rather than the useful life of facilities, the

Commission must at least require a uniform contract with the same terms

and conditions for all customers involved in the expansion.

The Williams Companies recommend that all new capacity be subject

to market-based rates. the Williams Companies argue that, for new

capacity priced on an incremental basis rather than a rolled-in basis,

competitive circumstances in the industry support the use of market-

based rates and terms of service.

AlliedSignal contends depreciation should be based on the life of

the facilities not the life of a contract. If the Commission were to

promulgate a general rule, it should state that depreciation rates for

pipeline facilities in rate and certificate cases should be set at 25

years unless factors are brought to the Commission's attention

justifying a lesser or longer time period. NGSA believes that the

Commission's current depreciation methodology is appropriate. NGSA also

urges that the appropriate asset life of new facilities be determined

when the facilities are constructed and adhered to for the life of the

asset. On the other hand, the Williams Companies point out that market-

based rates would negate the need for the Commission to approve

depreciation rates.

Coastal believes pipelines should have the flexibility to address

new facility costs in certificate applications and in rate cases. The

Commission should not establish hard and fast rules as to how a

facility should be treated in a pipeline's rates over its entire life.

Rather, costs should be dealt with in accordance with Commission

policies from time to time in pipeline rate cases.

Enron Pipelines contend that the rate treatment for capacity

additions should continue to be determined on a case-by-case basis

using the system benefits test.

Louisville contends that the Commission should address the question

of whether its pricing policies

[[Page 51313]]

for new capacity provide appropriate incentives at the same time as it

considers auctions and negotiated rates and services and that all of

these issues should be the subject of a new NOPR.

PGC suggest that initial rates be based on a presumed level of

contract commitment (e.g., 80-90%) so the pipeline bears the risks of

uncommitted capacity but reaps a reward if it sells at undiscounted

rates. Another option would be for the commission to put at risk only

that portion of the proposed facilities for which the pipeline has not

obtained firm contracts of a minimum duration. Where an existing

pipeline constructs new facilities, PGC support the Commission's

current policy favoring rolled-in rates if certain conditions are met.

Williston Basin argues that fixed rates for long-term contracts

would create a relatively risk-free contract for shippers while

creating a total-risk contract for pipelines.

Arkansas, IPAA, Indicated Shippers, National Fuel Gas Supply, NGSA,

Peoples Energy, PGC, and the Williams Companies support the

Commission's current policy with its presumption in favor of rolled-in

pricing for new capacity only when the impact of new capacity is not

more than a 5% increase to existing rates and results in system-wide

benefits. AGA, Amoco, IPAA, Philadelphia Gas Works, PGC, and UGI

recommend that the Commission more rigidly apply its pricing policy and

more closely review claims pertaining to the 5% threshold test and/or

system benefits. Nicor urges that pipelines should not be allowed to

segment construction with the goal of falling below the 5% pricing

policy threshold.

APGA and Consolidated Edison recommend that the Commission adopt a

presumption of incremental pricing for pipeline certificate projects.

APGA would allow limited exceptions such as when the project would

lower rates to existing customers or when the benefits of the project

would fully offset the costs of the roll-in. Koch Gateway and

Pennsylvania Consumer Advocate also recommend incremental pricing for

new capacity.

Arkansas and Brooklyn Union contend that pipelines should be at

risk for the recovery of the costs of incremental facilities. Brooklyn

Union urges the Commission to eliminate the presumption in favor of

rolled-in pricing for new capacity and require pipelines to show the

benefits of each new project are proportionate to the total rate

increase sought.

El Paso/Tennessee recommend that only fully subscribed projects

with revenues equaling or exceeding project costs and supported by

demonstrated market need should be eligible for rolled-in rates. El

Paso/Tennessee believe that projects intended to compete for existing

market should not be eligible for rolled-in rates.

New York questions the 5% presumption for rolled-in pricing and

argues that a move away from rolled-in pricing would create competitive

markets for new pipeline construction.

AlliedSignal believes pipelines should be at risk for costs

relative to new services prior to filing a new rate case. In the new

rate case, the burden should be on the pipeline to justify the proper

allocation of costs.

Amoco suggests that the pipeline and customer be allowed to enter

into any agreement that does not violate existing regulations or

statutory requirements, but they must explicitly apportion any risk

between themselves.

The Illinois Commerce Commission believes this issue needs more

research and should not be addressed until state regulators are

consulted further.

Market Hub Partners and PGC contend that rolled-in rate treatment

should not be granted for facilities solely or principally being

constructed on the basis of affiliate precedent agreements. On the

other hand, Millennium asserts that affiliates and non-affiliates

should be treated alike with respect to rate design. Also, Southern

Natural argues that the fact that an affiliate subscribed for capacity

on new facilities cannot along preclude rolled-in pricing for those

facilities; the Commission must leave to individual cases the issue of

whether to price facilities on a rolled-in or incremental basis.

Nicor argues that the Commission cannot, in a competitive

marketplace, evaluate the enhancements claimed by the pipeline to

determine whether new construction should be incrementally priced or

receive rolled-in rate treatment. Instead of imposing rolled-in rate

treatment on the entire system, the Commission should allow individual

``old'' shippers to decide whether the supposed benefits are worth the

costs.

Pipeline Transportations Customer Coalition contends the existing

regulatory process does not reflect a reasonable risk-reward balance

between industry segments, asserting that pipeline rates are too high

given their relatively low risk exposure.

II. Certificate Policy Goals and Objectives

The comments present a variety of perspectives and no clear

consensus on a path the Commission should follow. Nevertheless, the

staring point for the Commission's reassessment of its certificate

policy is to define the goals and objectives to be achieved. An

effective certificate policy should further the goals and objectives of

the Commission's natural gas regulatory policies. In particular, it

should be designed to foster competitive markets, protect captive

customers and avoid unnecessary environmental and community impacts

while serving increasing demands for natural gas. It should also

provide appropriate incentives for the optimal level of construction

and efficient customer choices.

Commission policy should give the applicant an incentive to file a

complete application that can be processed expeditiously and to develop

a record that supports the need for the proposed project and the public

benefits to be obtained. Commission certificate policy should also

provide an incentive for applicants to structure their projects to

avoid, or minimize, the potential adverse impacts that could result

from construction of the project.

The Commission intends the certificate policy introduced in this

order to provide an analytical framework for deciding, consistent with

the goals and objectives stated above, when a proposed project is

required by the public convenience and necessity. In some respects this

policy is not a significant change from the kind of analysis employed

currently in certificate cases. By stating more explicitly the

Commission's analytical framework, the Commission can provide

applicants and other participants in certificate proceedings a better

understanding of how the Commission makes its decisions. By encouraging

applicants to devote more effort before filing to minimize the adverse

effects of a project, the policy given them the ability to expedite the

decisional process by working out contentious issues in advance. Thus,

this policy will provide more certainty about the Commission's

analytical process and provide participants in certificate proceedings

with a framework for shaping the record that is needed by the

Commission to expedite its decisional process.

III. Evaluation of Current Policy

A. Current Policy

Section 1(b) of the Natural Gas Act (NGA) gives the Commission

jurisdiction over the transportation of natural gas in interstate

commerce and the natural gas companies providing

[[Page 51314]]

that transportation.\5\ Section 7(c) of the NGA provides that no

natural gas company shall transport natural gas or construct any

facilities for such transportation without a certificate of public

convenience and necessity issued by the Commission.\6\

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\5\ 15 USC 717.

\6\ 15 USC 717h.

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In reaching a final determination on whether a project will be in

the public convenience and necessity, the Commission performs a

flexible balancing process during which it weights the factors

presented in a particular application. Among the factors that the

Commission considers in the balancing process are the proposal's market

support, economic, operational, and competitive benefits, and

environmental impact.

Under the Commission's current certificate policy, an applicant for

a certificate of public convenience and necessity to construct a new

pipeline project must show market support through contractual

commitments for at least 25 percent of the capacity for the application

to be processed by the Commission. An applicant showing 10-year firm

commitments for all of its capacity, and/or that revenues will exceed

costs is eligible to receive a traditional certificate of public

convenience and necessity.

An applicant unable to show the required level of commitment may

still receive a certificate but it will be subject to a condition

putting the applicant ``at risk.'' In other words, if the project

revenues fail to recover the costs, the pipeline rather than its

customers will be responsible for the unrecovered costs, the pipeline

rather than its customers will be responsible for the unrecovered

costs. Alternatively a project sponsor can apply for a certificate

under subpart E of part 157 of the Commission's regulations for an

optional certificate.\7\ An optional certificate may be granted to an

applicant without any market showing at all; however, in practice

optional certificate applicants usually make some form of market

showing. The rates for service provided through facilities constructed

pursuant to an optional certificate must be designed to impose the

economic risk of the project entirely on the applicant.

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

\7\ 18 CFR Part 157, Subpart E.

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

The Commission also has certificated projects that would serve no

new market, but would provide some demonstrated system-benefit.

Examples include projects intended to provide improved system

reliability, access to new supplies, or more economic operations.

Generally, under the current policy, the Commission does not deny

an application because of the possible economic impact of a proposed

project on existing pipelines serving the same market or on the

existing pipelines' customers. In addition, the Commission gives equal

weight to contracts between an applicant and its affiliates and an

applicant and unrelated third parties and does not look behind the

contracts to determine whether the customer commitments represent

genuine growth in market demand.\8\

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\8\ See, e.g., Transcontinental Gas Pipe Line Corp., 82 FERC

para. 61,084 at 61,316 (1998).

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Under section 7(h) of the NGA, a pipeline with a Commission-issued

certificate has the right to exercise eminent domain to acquire the

land necessary to construct and operate its proposed new pipeline when

it cannot reach a voluntary agreement with the landowner.\9\ In recent

years, this has resulted in landowners becoming increasingly active

before the Commission. Landowners and communities often object both to

the taking of land and to the reduction of their land's value due to a

pipeline's right-of-way running through the property. As part of its

environmental review of pipeline projects, the Commission's

environmental staff works to take these landowners' concerns into

account, and to mitigate adverse impacts where possible and feasible.

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

\9\ 15 USC 717f(h).

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Under the pricing policy for new facilities in Docket No. PL94-4-

000,\10\ the Commission determines, in the certificate proceeding

authorizing the facilities' construction, the appropriate pricing for

the facilities. Generally, the Commission applies a presumption in

favor of rolled-in rates (rolling-in the expansion costs with the

existing facilities' costs) when the cost impact of the new facilities

would result in a rate impact on existing customers of five percent or

less, and some system benefits would occur. Existing customers

generally bear these rate increases without being allowed to adjust

their volumes.

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

\10\ See Pricing Policy for New and Existing Facilities

Constructed by Interstate Natural Gas Pipelines, 71 FERC para.

61,241 (1995).

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When a pipeline proposes to charge a cost-based incremental rate

(establishing separate costs-of-service and separate rates for the

existing and expansion facilities) higher than its existing generally

applicable rates, the Commission usually approves the proposal.

However, the Commission generally will not accept a proposed

incremental rate that is lower than the pipeline's existing generally

applicable Part 284 rate.

B. Drawbacks of the Current Policy

1. Reliance on Contracts To Demonstrate Demand

Currently, the Commission uses the percentage of capacity under

long-germ contracts as the only measure of the demand for a proposed

project. Many of the commenters have argued that this is too narrow a

test. The reliance solely on long-term contracts to demonstrate demand

does not rest for all the public benefits that can be achieved by a

proposed project. The public benefits may include such factors as the

environmental advantages of gas over other fuels, lower fuel costs,

access to new supply sources or the connection of new supply to the

interstate grid, the elimination of pipeline facility constraints,

better service from access to competitive transportation options, and

the need for an adequate pipeline infrastructure. The amount of

capacity under contract is not a good indicator for all these benefits.

The amount of capacity under contract also is not a sufficient

indicator by itself of the need for a project, because the industry has

been moving to a practice of relying on short-term contracts, and

pipeline capacity is often managed by an entity that is not the actual

purchaser of the gas. Using contracts as the primary indicator of

market support for the proposed pipeline project also raises additional

issues when the contracts are held by pipeline affiliates. Thus, the

test relying on the percent of capacity contracted does not reflect the

reality of the natural gas industry's structure and presents difficult

issues.

In addition, the current policy's preference for contracts with 10-

year terms biases customer choices toward longer term contracts. Of

course, there are other elements of the Commission's policies that also

have this effect. However, eliminating a specific requirement for a

contract of a particular length is more consistent with the

Commission's regulatory objective to provide appropriate incentives for

efficient customer choices and the optimal level of construction,

without biasing those choices through regulatory policies.

Finally, by relying almost exclusively on contract standards to

establish the market need for a new project, the current policy makes

it difficult to articulate to landowners and

[[Page 51315]]

community interests why their land must be used for a new pipeline

project.

All of these concerns raise difficult questions of establishing the

public need for the project.

2. The Pricing of New Facilities

As the industry becomes more competitive the Commission needs to

adapt its policies to ensure that they provide the correct regulatory

incentives to achieve the Commission's policy goals and objectives. All

of the Commission's natural gas policy goals and objectives are

affected by its pricing policy, but directly affected are the goals of

fostering competitive markets, protecting captive customers, and

providing incentives for the optimal level of construction and

efficient customer choice. The current pricing policy focuses primarily

on the interests of the expanding pipeline and its existing and new

shippers, giving little weight to the interests of competing pipelines

or their captive customers. As a result, it no longer fits well with an

industry that is increasingly characterized by competition between

pipelines.

The current pricing policy sends the wrong price signals, as some

commenters have argued, by masking the real cost of the expansions.

This can result in overbuilding of capacity and subsidization of an

incumbent pipeline in its competition with potential new entrants for

expanding markets. The pricing policy's bias for rolled-in pricing also

is inconsistent with a policy that encourages competition while seeking

to provide incentives for the optimal level of construction and

customer choice. This is because rolled-in pricing often results in

projects that are subsidized by existing ratepayers. Under this policy

the true costs of the project are not seen by the market or the new

customers, leading to inefficient investment and contracting decisions.

This in turn can exacerbate adverse environmental impacts, distort

competition between pipelines for new customers, and financially

penalize existing customers of expanding pipelines and of pipelines

affected by the expansion.

Under existing policy, shippers' rates may change for a number of

reasons. These include rolling-in of an expansion's costs, changes in

the discounts given other customers, or changes in the contract

quantities flowing on the system. As a customer's rates change in a

rate case, it is generally unable to change its volumes, even though it

may be paying more for capacity. This results in shippers bearing

substantial risks of rate changes which they may be ill equipped to

bear.

III. The New Policy

A. Summary of the Policy

As a result of the Commission's reassessment of its current policy,

the Commission has decided to announce the criteria, set forth below,

that it will use in deciding whether to authorize the construction of

major new pipeline facilities. This section summarizes the analytical

steps the Commission will use under this policy to balance the public

benefits against the potential adverse consequences of an application

for new pipeline construction. Each of these steps is described in

greater detail in the later sections of this policy statement.

Once a certificate application is filed, the threshold question

applicable to existing pipelines is whether the project can proceed

without subsidies from their existing customers. As discussed below,

this will usually mean that the project would be incrementally priced,

if built by an existing pipeline, but there are cases where rolled in

pricing would prevent subsidization of the project by the existing

customers.\11\

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\11\ This policy does not apply to construction authorized under

18 CFR Part 157, Subparts E and F.

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

The next step is determine whether the applicant has made efforts

to eliminate or minimize any adverse effects the project might have on

the existing customers of the pipeline proposing the project, existing

pipelines in the market and their captive customers, or landowners and

communities affected by the route of the new pipeline. These three

interests are discussed in more detail below. This is not intended to

be a decisional step in the process for the Commission. Rather, this is

a point where the Commission will review the efforts made by the

applicant and could assist the applicant in finding ways to mitigate

the effects, but the choice of how to structure the project at this

stage is left to the applicant's discretion.

If the proposed project will not have any adverse effect on the

existing customers of the expanding pipeline, existing pipelines in

market and their captive customers, or the economic interests of

landowners and communities affected by the route of the new pipeline,

then no balancing of benefits against adverse effects would be

necessary. The Commission would proceed, as it does under current

practice, to a preliminary determination or a final order depending on

the time required to complete and environmental assessment (EA) or

environmental impact statement (EIS) (whichever is required in the

case).

If residual adverse effects on the three interests are identified,

after efforts have been made to minimize them, then the Commission will

proceed to evaluate the project by balancing the evidence of public

benefits to be achieved against the residual adverse effects. This is

essentially an economic test. Only when the benefits outweigh the

adverse effects on economic interests will the Commission then proceed

to complete the environmental analysis where other interests are

considered. It is possible at this stage for the Commission to identify

conditions that it could impose on the certificate that would further

minimize or eliminate adverse impacts and take those into account in

balancing the benefits against the adverse effects. If the result of

the balancing is a conclusion that the public benefits outweigh the

adverse effects then the next steps would be the same as for a project

that had no adverse effects. That is, if the EA or EIS would take more

than approximately 180 days then a preliminary determination could be

issued, followed by the EA or EIS and the final order. If the EA would

take less time, then it would be combined with the final order.

B. The Threshold Requirement--No Financial Subsidies

The threshold requirement in establishing the public convenience

and necessity for existing pipelines proposing an expansion project is

that the pipeline must be prepared to financially support the project

without relying on subsidization from its existing customers.\12\ This

does not mean that the project sponsor has to bear all the financial

risk of the project; the risk can be shared with the new customers in

preconstruction contracts, but it cannot be shifted to existing

customers. For new pipeline companies, without existing customers, this

requirement will have no application.

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\12\ Projects designed to improve existing service for existing

customers, by replacing existing capacity, improving reliability or

providing flexibility, are for the benefit of existing customers.

Increasing the rates of the existing customers to pay for these

improvements is not a subsidy. Under current policy these kinds of

projects are permitted to be rolled in and are not covered by the

presumption of the current pricing policy. Great Lakes Gas

Transmission Limited Partnership, 80 FERC para.61,105 (1997)

(Pricing policy statement not applicable to facilities constructed

solely for flexibility and system reliability).

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The requirement that the project be able to stand on its own

financially without subsidies changes the current pricing policy which

has a presumption

[[Page 51316]]

in favor of rolled-in pricing. Eliminating the subsidization usually

inherent in rolled-in rates recognizes that a policy of incrementally

pricing facilities sends the proper price signals to the market. With a

policy of incremental pricing, the market will then decide whether a

project is financially viable. The commenters were divided on whether

the Commission should change its current pricing policy. A number of

commenters, however, urged the Commission to allow the market to decide

which projects should be built, and this requirement is a way of

accomplishing that result.

The requirement helps to address all of the interests that could be

adversely affected. Existing customers of the expanding pipeline should

not have to subsidize a project that does not serve them. Landowners

should not be subject to eminent domain for projects that are not

financially viable and therefore may not be viable in the marketplace.

Existing pipelines should not have to compete against new entrants into

their markets whose projects receive a financial subsidy (via rolled-in

rates), and neither pipeline's captive customers should have to

shoulder the costs of unused capacity that results from competing

projects that are not financially viable. This is the only condition

that uniformly serves to avoid adverse effects on all the relevant

interests and therefore should be a test for all proposed expansion

projects by existing pipelines. It will be the predicate for the rest

of the evaluation of a new project by an existing pipeline.

A requirement that the new project must be financially viable

without subsidies does not eliminate the possibility that in some

instances the project costs should be rolled into the rates of existing

customers. In most instances incremental pricing will avoid subsidies

for the new project, but the situation may be different in cases of

inexpensive expansibility that is made possible because of earlier,

costly construction. In that instance, because the existing customers

bear the cost of the earlier, more costly construction in their rates,

incremental pricing could result in the new customers receiving a

subsidy from the existing customers because the new customers would not

face the full cost of the construction that makes their new service

possible. The issue of the rate treatment for such cheap expansibility

is one that always should be resolved in advance, before the

construction of the pipeline.

Another instance where a form of rolling in would be appropriate is

where a pipeline has vintages of capacity and thus charges shippers

different prices for the same service under incremental pricing, and

some customers have the right of first refusal (ROFR) to renew their

expiring contracts. Those customers could be allowed to exercise a ROFR

at their original contract rate except when the incremental capacity is

fully subscribed and there are competing bids for the existing

customer's capacity. In that case, the existing customer could be

required to match the highest competing bid up to a maximum rate which

could be either an incremental rate or a ``rolled-up rate'' in which

costs for expansions are accumulated to yield an average expansion

rate. Although the focus of this policy statement is the analysis for

deciding whether new capacity should be constructed, it is important

for the Commission to articulate the direction of its policy on pricing

existing capacity where a pipeline has engaged in expansions. This will

enable existing and potential new shippers to make appropriate

decisions pre-construction to protect their interests either in the

certificate proceeding or in their contracts with the pipeline.

This policy leaves the pipeline responsible for the costs of new

capacity that is not fully utilized and obviates the need for ``at

risk'' condition because it accomplishes the same purpose. Under this

policy the pipeline bears the risk for any new capacity that is under-

utilized, unless, as recommended by a number of commenters, it

contracts with the new customers to share the risk by specifying what

will happen to rates and volumes under specific circumstances. If the

pipeline finds that new shippers are unwilling to share this risk, this

may indicate to the pipeline that others do not share its vision of

future demand. Similarly, the risks of construction cost over-runs

should not be the responsibility of the pipeline's existing customers

but should be apportioned between the pipeline and the new customers in

their service contracts. Thus, in pipeline contracts for service on

newly constructed facilities, pipelines should not rely on standard

``Memphis clauses'', but should reach agreement with new shippers

concerning who will bear the risks of underutilization of capacity and

cost overruns and the rate treatment for ``cheap expansibility.'' \13\

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\13\ ``Memphis clause'' refers to an agreement that the pipeline

may change the rate during the term of the contract by making rate

filings under NGA section 4.

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In sum, if an applicant can show that the project is financially

viable without subsidies, then it will have established the first

indicator of public benefit. Companies willing to invest in a project,

without financial subsidies, will have shown an important indicator of

market-based need for a project. Incremental pricing will also lead to

the correct price signals for the new project and provide the

appropriate incentive for the optimal level of construction. This can

unnecessary adverse impacts on landowners or existing pipelines and

their captive customers. Therefore, this will be the threshold

requirement for establishing that a project will satisfy the public

convenience and necessity standard.

C. Factors To Be Balanced in Assessing the Public Convenience and

Necessity

Ideally, an applicant will structure its proposed project to avoid

adverse economic, competitive, environmental, or other effects on the

relevant interests from the construction of the new projects, and the

Commission would be able to approve such projects promptly. Of course,

elimination of all adverse effects will not be possible in every

instance. When it is not possible, the Commission's policy objective is

to encourage the applicant to minimize the adverse impact on each of

the relevant interests. After the applicant efforts to minimize the

adverse effects, construction projects that would have residual adverse

effects would be approved only where the public benefits to be achieved

from the project can be found to outweigh the adverse effects. Rather

than relying only on one test for need, for Commission will consider

all relevant factors reflecting on the need for the project. These

might include, but would not be limited to, precedent agreements,

demand projections, potential cost savings to consumers, or a

comparison of projected demand with the amount of capacity currently

serving the market. The objective would be for the applicant to make a

sufficient showing for the public benefits of its proposed project to

outweigh any residual adverse effects discussed below.

1. Consideration of Adverse Effects on Potentially Affected Interests

In deciding whether a proposal is required by the public

convenience and necessity, the Commission will consider the effects of

the project on all the affected interests; this means more than the

interests of the applicant, the potential new customers and the general

societal interests.

Depending on the type of project, there are three major interests

that may be adversely affected the approval of major certificate

projects, and that must be considered by the Commission.

[[Page 51317]]

There are: the interest of the applicant's existing customers, the

interests of competing existing pipelines and their captive customers,

and the interests of landowners and surrounding communities. There are

other interests that may need to be separately considered in a

certificate proceeding, such as environmental interests.

Of course, not every project will have an impact on each interest

identified. Some projects will be proposed by new pipeline companies to

serve new markets, so that there will be no adverse effects on the

interests of existing customers; other projects may be constructed so

that there may be no adverse effect on landowner interests.

a. Interests of existing customers of the pipeline applicants. The

interests of the existing customers of the expanding pipeline may be

adversely affected if the expansion results in their rates being

increased or if the expansion causes a degradation in service.

b. Interests of existing pipelines that already serve the market

and their captive customers. Pipelines that already serve the market

into which the new capacity would be built are affected by the

potential loss of market share and the possibility that they may be

left with unsubscribed capacity investment. The Commission need not

protect pipeline competitors from the effects of competition, but it

does have an obligation to ensure fair competition. Recognizing the

impact of a new project on existing pipelines serving the market is not

synonymous with protecting incumbent pipelines from the risk of loss of

market share to a new entrant, but rather, is a recognition that the

impact on the incumbent pipeline is an interest to be taken into

account in deciding whether to certificate a new project. The interests

of the existing pipeline's captive customers are slightly different

from the interests of the pipeline. The interests of the captive

customers of the existing pipelines are affected because, under the

Commission's current rate model, they can be asked to pay for the

unsubscribed capacity in their rates.

c. Interests of landowners and the surrounding communities.

Landowners whose land would be condemned for the new pipeline right-of-

way, under eminent domain rights conveyed by the Commission's

certificate, have an interest as does the community surrounding the

right-of-way. The interest of these groups is to avoid unnecessary

construction, and any adverse effects on their property associated with

a permanent right-of-way. In some cases, the interests of the

surrounding community may be represented by state or local agencies.

Traditionally, the interests of the landowners and the surrounding

community have been considered synonymous with the environmental

impacts of a project; however, these interests can be distinct.

Landowner property rights issues are different in character from other

environmental issues considered under the National Environmental Policy

Act of 1969 (NEPA).\14\

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\14\ 42 U.S.C. Sec. 4321 et seq.

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2. Indicators of Public Benefit

To demonstrate that its proposal is in the public convenience and

necessity, an applicant must show public benefits that would be

achieved by the project that are proportional to the project's adverse

impacts. The objective is for the applicant to create a record that

will enable the Commission to find that the benefits to be achieved by

the project will outweigh the potential adverse effects, after efforts

have been made by the applicant to mitigate these adverse effects. The

types of public benefits that might be shown are quite diverse but

could include meeting unserved demand, eliminating bottlenecks, access

to new supplies, lower costs to consumers, providing new interconnects

that improve the interstate grid, providing competitive alternatives,

increasing electric reliability, or advancing clean air objectives. Any

relevant evidence could be presented to support any public benefit the

applicant may identify. This is a change from the current policy which

relies primarily on one test to establish the need for the project.

The amount of evidence necessary to establish the need for a

proposed project will depend on the potential adverse effects of the

proposed project on the relevant interests. Thus, projects to serve new

demand might be approved on a lesser showing of need and public

benefits than those to serve markets already served by another

pipeline. However, the evidence necessary to establish the need for the

project will usually include a market study. There is no reason for an

applicant to do a new market study of its own in every instance. An

applicant could rely on generally available studies by EIA or GRI, for

example, showing projections of market growth. If one of the benefits

of a proposed project would be to lower gas or electric rates for

consumers, then the applicant's market study would need to explain the

basis for that projection. Vague assertions of public benefits will not

be sufficient.

Although the Commission traditionally has required an applicant to

present contracts to demonstrate need, that policy, as discussed above,

no longer reflects the reality of the natural gas industry's structure,

nor does it appear to minimize the adverse impacts on any of the

relevant interests. Therefore, although contracts or precedent

agreements always will be important evidence of demand for a project,

the Commission will no longer require an applicant to present contracts

for any specific percentage of the new capacity. Of course, if an

applicant has entered into contracts or precedent agreements for the

capacity, it will be expected to file the agreements in support of the

project, and they would constitute significant evidence of demand for

the project.

Eliminating a specific contract requirement reduces the

significance of whether the contracts are with affiliated or

unaffiliated shippers, which was the subject of a number of comments. A

project that has precedent agreements with multiple new customers may

present a greater indication of need than a project with only a

precedent agreement with an affiliate. The new focus, however, will be

on the impact of the project on the relevant interests balanced against

the benefits to be gained from the project. As long as the project is

built without subsidies from the existing ratepayers, the fact that it

would be used by affiliated shippers is unlikely to create a rate

impact on existing ratepayers. With respect to the impact on the other

relevant interests, a project built on speculation (whether or not it

will be used by affiliated shippers) will usually require more

justification than a project built for a specific new market when

balanced against the impact on the affected interests.

3. Assessing Public Benefits and Adverse Effects

The more interests adversely affected or the more adverse impact a

project would have on a particular interest, the greater the showing of

public benefits from the project required to balance the adverse

impact.The objective is for the applicant to develop whatever record is

necessary, and for the commission to impose whatever conditions are

necessary, for the Commission to be able to find that the benefits to

the public from the project outweigh the adverse impact on the relevant

interests.

It is difficult to construct helpful bright line standards or tests

for this area. Bright line tests are unlikely to be flexible enough to

resolve specific cases and to allow the Commission to take into account

the different interests that

[[Page 51318]]

must be considered. Indeed, the current contract test has become

problematic. However, the analytical framework described here should

give applicants more certainty and sufficient guidance to anticipate

how to structure their projects and develop the record to facilitate

the Commission's decisional process.

Under this policy, if project sponsors, proposing a new pipeline

company, are able to acquire all, or substantially all, of the

necessary right-of-way by negotiation prior to filing the application,

and the proposal is to serve a new, previously unserved market, it

would not adversely affect any of the three interests. Such a project

would not need any additional indicators of need and may be readily

approved if there are no environmental considerations. Under these

circumstances landowners would not be subject to eminent domain

proceedings, and because the pipeline was new, there would be no

existing customers who might be called upon to subsidize the project. A

similar result might be achieved by an existing pipeline extending into

a new unserved market by negotiating for a right-of-way for the

proposed expansion and following the first requirement for showing

need, financing the project without financial subsidies. It would avoid

adverse impacts to existing customers by pricing its new capacity

incrementally and it is unlikely that other relevant interests would be

adversely affected if the pipeline obtained the right-of-way by

negotiation.

It may not be possible to acquire all the necessary right-of-way by

negotiation. However, the company might minimize the effect of the

project on landowners by acquiring as much right-of-way as possible. In

that case, the applicant may be called upon to present some evidence of

market demand, but under this sliding scale approach the benefits

needed to be shown would be less than in a case where no land rights

had been previously acquired by negotiation. For example, if an

applicant had precedent agreements with multiple parties for most of

the new capacity, that would be strong evidence of market demand and

potential public benefits that could outweigh the inability to

negotiate right-of-way agreements with some landowners. Similarly, a

project to attach major new gas supplies to the interstate grid would

have benefits that may outweigh the lack of some right-of-way

agreements. A showing of significant public benefit would outweigh the

modest use of federal eminent domain authority in this example.

In most cases it will not be possible to acquire all the necessary

right-of-way by negotiation. Under this policy, a few holdout

landowners cannot veto a project, as feared by some commenters, if the

applicant provides support for the benefits of its proposal that

justifies the issuance of a certificate and the exercise of the

corresponding eminent domain rights. The strength of the benefit

showing will need to be proportional to the applicant's proposed

exercise of eminent domain procedures.

Of course, the Commission will continue to do an independent

environmental review of projects, even if the project does not rely on

the use of eminent domain and the applicant structures the project to

avoid or minimize adverse impacts on any of the identified interests.

The Commission anticipates no change to this aspect of its certificate

policies. However, to the extent applicants minimize the adverse

impacts of projects in advance, this should also lessen the adverse

environmental impacts as well, making the NEPA analysis easier. The

balancing of interests and benefits that will precede the environmental

analysis will largely focus on economic interests such as the property

rights of landowners. The other interests of landowners and the

surrounding community, such as noise reduction or esthetic concerns

will continue to be taken into account in the environmental analysis.

If the environmental analysis following a preliminary determination

indicates a preferred route other than the one proposed by the

applicant, the earlier balancing of the public benefits of the project

against its adverse effects would be reopened to take into account the

adverse effects on landowners who would be affected by the changed

route.

In another example of the proportional approach, a proposal that

may have adverse impacts on customers of another pipeline may require

evidence of additional benefits to consumers, such as lower rates for

the customers to be served. The Commission might also consider how the

proposal would affect the cost recovery of the existing pipeline,

particularly the amount of unsubscribed capacity that would be created

and who would bear that risk, before approving the project. This

evaluation would be needed to ensure consideration of the interests of

the existing pipeline and particularly its captive customers. Such

consideration does not mean that the Commission would always favor

existing pipelines and their captive customers. For instance, a

proposed project may be so efficient and offer substantial benefits,

such as significant service flexibility, so that the benefits would

outweigh the adverse impact on existing pipelines and their captive

customers.

A number of commenters were concerned that the Commission might

give too much weight to the impact on the existing pipeline and its

captive customers and undervalue the benefits that can arise from

competitive alternatives. The Commission's focus is not to protect

incumbent pipelines from the risk of loss of market share to a new

entrant, but rather to take the impact into account in balancing the

interests. In such a case the evidence of benefits will need to be more

specific and detailed than the generalized benefits that arise from the

availability of competitive alternatives. The interests of the captive

customers are slightly different from the interests of the incumbent

pipeline. The captive customers are affected if the incumbent pipeline

shifts to the captive customers the costs associated with its

unsubscribed capacity. Under the Commission's current rate model

captive customers can be asked to pay for unsubscribed capacity in

their rates, but the Commission has indicated that it will not permit

all costs resulting from the loss of market share to be shifted to

captive customers.\15\ Whether and to what extent costs can be shifted

is an issue to be resolved in the incumbent pipeline's rate case, but

the potential impact on these captive customers is a factor to be taken

into account in the certificate proceeding of the new entrant.

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\15\ El Paso Natural Gas Company, 72 FERC para. 61,083 (1995);

Natural Gas Pipeline Company of America, 73 FERC para. 61,050

(1995).

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In sum, the Commission will approve an application for a

certificate only if the public benefits from the project outweigh any

adverse effects. Under this policy, pipelines seeking a certificate of

public convenience and necessity authorizing the construction of

facilities are encouraged to submit applications designed to avoid or

minimize adverse effects on relevant interests including effects on

existing customers of the applicant, existing pipelines serving the

market and their captive customers, and affected landowners and

communities. The threshold requirement for approval, that project

sponsors must be prepared to develop the project without relying on

subsidization by the sponsor's existing customers, protects all of the

relevant interests. Applicants also must submit evidence of the public

benefits to be achieved by the proposed project such as contracts,

precedent agreements, studies of projected demand in the

[[Page 51319]]

market to be served, or other evidence of public benefit of the

project.

V. Conclusion

At a time when the Commission is urged to authorize new pipeline

capacity to meet an anticipated increase in the demand for natural gas,

the Commission is also urged to act with caution to avoid unnecessary

rights-of-way and the potential for overbuilding with the consequent

effects on existing pipelines and their captive customers. This policy

statement is intended to provide more certainty as to how the

Commission will analyze certificate applications to balance these

concerns. By encouraging applicants to devote more effort in advance of

filing to minimize the adverse effects of a project, the policy gives

them the ability to expedite the decisional process by working out

contentious issues in advance. Thus, this policy will provide more

guidance about the Commission's analytical process and provide

participants in certificate proceedings with a framework for shaping

the record that is needed by the Commission to expedite its decisional

process.

Finally, this new policy will not be applied retroactively. A major

purpose of the policy statement is to provide certainty about the

decisionmaking process and the impacts that would result from approval

of the project. This includes providing participants in a certificate

proceeding certainty as to economic impacts that will result from the

certificate. It is important for the participants to know the economic

consequences that can result before construction begins. After the

economic decisions have been made it is difficult to undo those

choices. Therefore, the new policy will not be applied retroactively to

cases where the certificate has already issued and the investment

decisions have been made.

By the Commission. Chairman Hoecker and Commissioners Breathitt

and Hebert concurred with a separate statement attached.

Commissioner Bailey dissented with a separate statement attached.

David P. Boergers,

Secretary.

Policy Statement for Certification of New Interstate Natural Gas

Pipeline Facilities

Docket No. PL99-3-000

[Issued September 15, 1999]

Hoecker, Chairman; Breathitt and Hebert, Commissioners, concurring;

Our intention is to apply this policy statement to any filings

received by the Commission after July 29, 1998 (the issuance date of

the Commission's Notice of Proposed Rulemaking regarding the Regulation

of Short-term Natural Gas Transportation Services in Docket No. RM98-

10-000 and Notice of Inquiry regarding Regulation of Interstate Natural

Gas Transportation Services in Docket No. RM98-12-000), and not before.

James J. Hoecker,

Chairman.

Linda K. Breathitt,

Commissioner.

Curt L. Hebert,

Commissioner.

Certification of New Interstate Natural Gas Facilities

[Docket No. PL99-3-000]

[Issued September 15, 1999]

Bailey, Commissioner, dissenting.

Respectfully, I will be dissenting from this policy statement.

The document puts forth the majority's statement of an analytical

framework for use in certificate proceedings. Its goal is to give

applicants and other participants in those proceedings a better

understanding of how the commission makes its decisions. This is always

a good thing to do. But ultimately, I cannot sign on to this statement

as representative of my approach to certificate policy for several

reasons.

First and foremost, the document purports that the policy outlined

is not a significant departure from the kind of analysis used currently

in certificate cases. I do not share this view. I know that it does

depart from the way I currently look at certificate issues. For

example, I cannot say that the sliding scale evaluation process and the

weighing and balancing process described in the statement actually

reflects the way I look at things. Further, the pricing changes

announced are in fact significant departures from current practice.

Thus, the document is as much about pricing policy change as it is

about articulating an analytical approach to certification questions. I

do not completely agree with the statements regarding pricing contained

in this document.

The announced policy will now require that new projects meet a

pricing threshold before work can proceed on the application--that is

they should be incrementally priced and not subsidized by existing

customers. The intent behind this is to enhance our certainty that the

market is determining which projects come to the Commission.

I do not disagree with the idea that incremental pricing is

consistent with the idea of allowing markets to decide. I also

recognize that it can protect existing customers from subsidizing

expansions as well as insulate existing pipelines form subsidized

competition. However, I find the policy statement to be far too

categorical in its approach. I am not persuaded that we should depart

from our existing policy statement on pricing that we adopted in 1995.

There is too little recognition here that some types of

construction projects are not designed solely for new markets or

customers, that existing customers can benefit from some projects, and

that rolled-in pricing may still be appropriate. Thus, while I can

agree with some of the articulated goals such as pricing should

allocate risk appropriately, and that if done properly it can assist in

avoiding construction of excess capacity, I would not adopt a threshold

requirement that virtually precludes use of rolled-in rates.

Finally, I am at a loss to explain the genesis of this particular

outcome. I recognize that certificate policy issues have been

problematic for a long time. In attempts to address these issues we

have had conferences to explore need issues and we have requested

comments on certificate issues in the pending gas Notice of Proposed

Rulemaking in Docket No. RM98-10-1000 (84 FERC para. 61,087 (1998)) and

the Notice of Inquiry in Docket No. RM98-12-000 (84 FERC para. 61,087

(1998)). The variety of views we have received in these efforts are

summarized in the policy statement ad it candidly recognizes the lack

of clear direction on what path the Commission should follow. Given

this lack of industry consensus, I question the advisability of trying

to adopt a generic approach at this time. I would prefer to weigh

further the relative merits of those comments before embarking on an

attempt to articulate a certificate policy.

Vicky A. Bailey,

Commissioner.

[FR Doc. 99-24617 Filed 9-21-99; 8:45 am]

BILLING CODE 6717-01-M