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Description
During the 1980s, the Federal Energy Regulatory Commission (FERC) recognized that the increasing demand for natural gas would create a large need for additional pipeline construction and that existing rules and regulations governing new pipeline development and cost allocation could slow future pipeline expansion. In most cases, pipeline companies were required under Section 7c of the Natural Gas Act of 1938 to obtain a certificate of public convenience and necessity from FERC before constructing pipeline facilities. In addition, new projects had to meet review requirements of several environmental laws. These requirements often resulted in a very time-consuming and sometimes controversial process.
In September 1991 FERC issued Order 555, referred to as the "construction rule," to provide comprehensive guidance on construction project review and speed up the review process. However implementation of the order was postponed in November 1991 because of industry objections to certain provisions and uncertainty about industry restructuring under Order 636. In 1994 FERC issued a new Statement of Policy (PL94-4-000) governing the certification and pricing of new construction and expansion of natural gas pipelines. Subsequently, in 1999, in view of the many changes that had taken place in the natural gas industry in the interim, FERC issued a revised (certification and pricing) Statement of Policy (PL99-3-000).
Even before the 1994 policy statement, FERC had instituted other options for pipeline companies to expand capacity, depending on the size of the project and the amount of risk the company was willing to assume. These options included:
- Blanket certifications (under 18 CFR Part 157 of the Natural Gas Act) could be issued to pipeline companies to cover relatively small projects and speed the implementation process. A blanket certificate approves a series of similar actions in one authorization. For instance, construction of small additions to a pipeline may be authorized, provided the total cost does not exceed a threshold level and other eligibility criteria are met.
- Section 311 of the Natural Gas Policy Act (NGPA) of 1978 allowed an interstate pipeline company to sell or transport gas "on behalf of" any intrastate pipeline or local distribution company. FERC then was able to exempt the construction of facilities used solely for Section 311 transportation from certificate requirements.
- In 1987, under Order 500, FERC introduced optional expedited certificates whereby construction of a pipeline project could be approved without FERC assessment of its financial soundness. In return, the pipeline company would agree to bear the majority of the risk of the project.
Until 1994, FERC's construction certification policy was shaped mainly by the so-called Kansas Pipe Line test. Under this standard, before beginning construction, an applicant is required to have executed firm contracts and supporting market data in place demonstrating that present and future rate payers will be protected from having to make inappropriate contributions to the costs associated with the new facilities.
In some respects, FERC's 1994 "certification" guidelines did not differ significantly from previous ones. Generally, proposed pipeline projects were evaluated based on their necessity and financial soundness. The guidelines did introduce the concept that the cost of construction may be recovered in either of two ways: (1) through "incremental" pricing, which imposes an additional charge payable solely by customers who are directly served by the expansion facilities ("expansion customers"); or (2) "rolled-in" pricing, in which the cost of the new facilities are added to the pipeline's total rate base and reflected in rates charged to all customers system-wide," depending upon the economic nature of the project (as deemed by FERC).
In 1999, FERC laid out broader guidelines for a pipeline project to recover its cost and meet the criteria for being of "public convenience and necessity." Pipeline companies must be prepared to support their expansion "projects without relying on subsidization from its existing customers," but instead rely on new customers or its own funds. The idea was to eliminate subsidies inherent in rolled-in rates and allow incremental pricing to recover the cost of new facilities to send the proper signals to the marketplace. Expansion projects to improve service for existing customers by either replacing capacity or providing them additional service flexibility would still be recoverable via rolled-in rates. Procedurally, the 1999 policy statement also encouraged "applicants to devote greater efforts in advance of filing to minimize the adverse effects of a project," which would include more through advance planning and coordination with others such as landowners and environmentalists. Indeed, in 2002, FERC instituted a pre-filing process that is open to pipeline project sponsors who wish to start review of their projects (especially prior to providing binding financial commitments) before the application is formally filed with FERC and the review process formally begins (see http://www.ferc.gov/industries/gas/safety/gas_prefiling.pdf).
Impact
According to FERC, the changes in its pipeline project certification policy and procedures over the past decade have reduced the time and effort involved in processing and implementing project proposals. Between 1999 and 2003, the average time lapse between the actual filing and project completion (FERC review, approval, and construction) fell from 18 months for the 28 projects filed in 1999 to 7 months for 11 projects filed in 2003. (More projects were actually filed during these years but some were canceled or placed on hold, while actual construction of 6 FERC-approved projects filed in FY 2003 has yet to be completed or begun (as of September 2004).
Pre-filing, begun in 2002, has also grown in popularity, especially for some large pipeline projects and especially among a growing number of LNG import terminal sponsors. In 2002, five pre-filing applications were submitted to FERC, while through the first 9 months of 2004, at least 15 such applications were filed. FERC reports that pre-filing, as well as sponsor's greater attention to "open-season" procedures and development and submission of better planning data, has resulted in better communications and measurably shortened the certification process. FERC acts as the primary conduit and coordinator between the project sponsors and the many other state and Federal agencies who also must review relevant project materials, such as the Environmental Protection Agency and the U.S. Department of Transportation's Office of Pipeline Safety.
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