Certification of New Interstate Natural Gas Pipeline Facilities

UNITED STATES OF AMERICA88 FERC ¶ 61,227

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: James J. Hoecker, Chairman;

Vicky A. Bailey, William L. Massey,

Linda Breathitt, and Curt Hébert, Jr.

Certification of New Interstate

Docket No. PL99-3-000

Natural Gas Pipeline Facilities

STATEMENT OF POLICY

(Issued September 15, 1999)

In the Notice of Proposed Rulemaking (NOPR) in Docket No. RM98-10-0001 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.

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.

1Notice of Proposed Rulemaking, Regulation of Short-term Natural Gas

Transportation Services, 63 Fed. Reg. 42982, 84 FERC ¶ 61,087 (1998).

2Notice of Inquiry, Regulation of Interstate Natural Gas Transportation Services,

63 Fed. Reg. 42974, 84 FERC ¶ 61,087 (July 29, 1998).

ustry

presented their views at the conference and subsequently filed comments on those issues.

1Notice of Proposed Rulemaking, Regulation of Short-term Natural Gas

Transportation Services, 63 Fed. Reg. 42982, 84 FERC ¶ 61,087 (1998).

2Notice of Inquiry, Regulation of Interstate Natural Gas Transportation Services,

63 Fed. Reg. 42974, 84 FERC ¶ 61,087 (July 29, 1998).

Docket No. PL99-3-000

2

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.

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

tement 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

3This policy statement does not apply to construction authorized under 18 CFR

Part 157, Subparts E and F.

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

3This policy statement does not apply to construction authorized under 18 CFR

Part 157, Subparts E and F.

Docket No. PL99-3-000

3

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 the 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, if so, (4) Should the Commission

e 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, 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 right issues. PGC urges the Commission to refrain from

, 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 right issues. PGC urges the Commission to refrain from

Docket No. PL99-3-000

4

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

ge 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

ation 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

Docket No. PL99-3-000

5

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

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 comment 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

dicated 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

Docket No. PL99-3-000

6

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 reviewing the firmness of private contracts is ineffectual and futile.

Market Hub Partners cautions the Commission not to substitute its judgement 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

o 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

pacity 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

Docket No. PL99-3-000

7

more market support for projects with more landowner and/or environmental impact.

Enron supports requiring no market showing for projects using existing easements or

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

storage 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

er 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 supports offering comparable

deals to non-affiliates

eason. 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 supports offering comparable

deals to non-affiliates. If there is insufficient capacity, it should be prorated. AGA

Docket No. PL99-3-000

8

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

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).

4Citing 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)

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.

Docket No. PL99-3-000

9

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

y 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

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.

Docket No. PL99-3-000

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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

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

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

Docket No. PL99-3-000

11

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

ates.

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 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

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.

Docket No. PL99-3-000

12

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

ts 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 alone

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.

ennium 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 alone

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.

Docket No. PL99-3-000

13

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 Transportation 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 starting 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

e 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 gives 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

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 gives 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

Docket No. PL99-3-000

14

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 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

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 weighs 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

nd 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. 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

515 USC 717.

615 USC 717h.

718 CFR Part 157, Subpart E.

Docket No. PL99-3-000

15

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.

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

e 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

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.

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

8See, e.g., Transcontinental Gas Pipe Line Corp., 82 FERC ¶ 61,084 at 61,316

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

8See, e.g., Transcontinental Gas Pipe Line Corp., 82 FERC ¶ 61,084 at 61,316

(1998).

915 USC 717f(h).

10See Pricing Policy for New and Existing Facilities Constructed by Interstate

Natural Gas Pipelines, 71 FERC ¶ 61,241 (1995).

Docket No. PL99-3-000

16

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.

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-term

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 test for all the public benefits that can be

achieved by a proposed project

Contracts to Demonstrate Demand

Currently, the Commission uses the percentage of capacity under long-term

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 test 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 of 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

ates. 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.

Docket No. PL99-3-000

17

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 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

e 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.

olling-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.

Docket No. PL99-3-000

18

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

The next step is to 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

e

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 the 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

11This policy does not apply to construction authorized under 18 CFR Part 157,

Subparts E and F.

Docket No. PL99-3-000

19

determination or a final order depending on the time required to complete an

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

e 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

12Projects 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

isting 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

Docket No. PL99-3-000

20

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.

policy. Great Lakes Gas Transmission Limited Partnership, 80 FERC ¶ 61,105 (1997)

(Pricing policy statement not applicable to facilities constructed solely for flexibility and

system reliability).

The requirement that the project be able to stand on its own financially without

subsidies changes the current pricing policy which has a presumption 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

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 of 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.

Docket No. PL99-3-000

21

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

at 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 an "at risk" condition because it accomplishes the

same purpose

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 an "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 that 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

Docket No. PL99-3-000

22

risks of underutilization of capacity and cost overruns and the rate treatment for "cheap

expansibility."13

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 avoid unnecessary adverse impacts on landowners

or existing pipelines and their captive customers

o 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 avoid 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

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.

Docket No. PL99-3-000

23

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 project, 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 makes 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, the 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

d to outweigh the adverse effects.

Rather than relying only on one test for need, the 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 of 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 by approval of major certificate projects, and that must be considered

by the Commission. These are: the interests 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.

icate 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.

Docket No. PL99-3-000

24

a. Interests of existing customers of the pipeline applicant

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

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

1442 USC § 4321 et seq.

Docket No. PL99-3-000

25

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

pplicant 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

ts 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

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

Docket No. PL99-3-000

26

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 must be considered

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 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.

gotiating 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.

Docket No. PL99-3-000

27

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

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,

ners 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,

Docket No. PL99-3-000

28

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

efits 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.

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

15El Paso Natural Gas Company, 72 FERC ¶ 61,083 (1995); Natural Gas Pipeline

Company of America, 73 FERC ¶ 61,050 (1995).

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

15El Paso Natural Gas Company, 72 FERC ¶ 61,083 (1995); Natural Gas Pipeline

Company of America, 73 FERC ¶ 61,050 (1995).

Docket No. PL99-3-000

29

as contracts, precedent agreements, studies of projected demand in the 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

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 Hébert

concurred with a separate statement attached.

( S E A L ) Commissioner Bailey dissented with a separate statement

statement attached.

David P. Boergers,

Secretary.

Policy Statement for Certification of New Interstate

Docket No. PL99-3-000

Natural Gas Pipeline Facilities

(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. Hébert

Commissioner

98-10-000 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. Hébert

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

scribed 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 from 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

n 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

2

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. RM98-10-000 (84 FERC ¶ 61,087 (1998)) and the Notice of Inquiry in

Docket No. RM98-12-000 (84 FERC ¶ 61,087 (1998)). The variety of views we have

received in these efforts are summarized in the policy statement and 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