CHAPTER 3 CURRENT FEDERAL REGULATIONS OF INTERSTATE PIPELINES
| Jurisdiction | United States |
(Jan 1995)
CURRENT FEDERAL REGULATIONS OF INTERSTATE PIPELINES
Holme Roberts & Owen LLC
Denver, Colorado
TABLE OF CONTENTS
I. INTRODUCTION
II. HISTORICAL OVERVIEW
A. The Natural Gas Act
B. The Natural Gas Policy Act of 1978
C. FERC Order No. 380
D. Results
III. TRANSITION
A. Special Marketing Programs
B. FERC Order No. 436
C. FERC Order No. 500
IV. FERC ORDER NO. 636
A. New Rules
B. Compliance And Results
V. AFFILIATE CONTROLS
A. FERC Order No. 497
B. FERC Order No. 566
VI. CONTINUING PROBLEMS AND ISSUES
A. Dispatch, Allocation and Penalties
B. Bypass
C. Rolled In Versus Incremental Expansion Rates
D. Market Regulation Proposals
E. Gathering
VII. CONCLUSION
VIII. BIBLIOGRAPHY
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I. INTRODUCTION
This presentation of federal regulation of interstate pipeline contains four broad themes: the basics of utility regulation; a brief history of the regulatory changes that have led to current conditions; an outline of the current regulations affecting interstate pipelines; and a discussion of some existing problems and unresolved regulatory questions. The history of regulatory developments is included because it assists in understanding existing regulations and the current situation. Many of the current regulations areas answers to old questions and knowing how the questions developed helps understand the answers. Also, many people in the industry speak and think, in part, by reference to the prior regulations.
The goal of this paper is to show how federal regulation of interstate pipelines generally affects the gas industry as a whole and to provide a foundation for review of the details of pipeline regulation if needed. The primary issues of regulation that currently face interstate natural gas pipelines are questions relating to transportation. The emphasis in this paper is on those transportation issues rather than the regulation of pipeline rates or of the construction of new facilities.
Many of the FERC orders and decisions referred to in this paper were subject to multiple rehearings, modifications and updates by FERC, each of which resulted in a new separate written decision. For such a series of decisions, this paper cites the original order, but does not cite following decisions unless specifically referred to in text. Descriptions of FERC orders and appellate decisions in this paper are of general impacts, not details. The impact of regulation upon any particular pipeline or transaction is ultimately dependant upon the language in the specific rate schedule or certificate of public convenience involved. Language used by one pipeline in its rate schedule to comply with general, or even specific, FERC instructions may vary in detail from the language used by another pipeline to comply with the same or similar instructions.
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To describe regulatory developments this paper refers to the FERC order adopting the change. All of the orders referred to adopted, modified or refused to modify regulations found in Title 18 of the Code of Federal Regulations. The format of an FERC order is a narrative discussion of the issues involved and FERC's general decision followed by a short formal decision adopting regulations stated in the exact language to be included in 18 C.F.R. People who immerse themselves in FERC regulation usually refer to regulations by reference to the order adopting them rather than exact regulations adopted. Understanding what FERC intended by a regulatory change is usually easier from reading the explanation in the order than it is from reading the regulatory language adopted. This paper does not quote the regulations adopted or changed by any order, but the orders referred to include the exact regulatory text added or deleted and state exactly where in Title 18 it was added or deleted.
II. HISTORICAL OVERVIEW
A. The Natural Gas Act
The Natural Gas Act ("NGA")1 was passed in 1938. This statute followed court decisions that the states could not regulate the sale of gas moving in interstate commerce and a recommendation by the Federal Trade Commission that interstate natural gas pipelines be regulated because of their market power. The FTC recommended that interstate gas pipelines be required to operate as common carriers, but that recommendation was not adopted. Instead, Congress adopted a regulatory model closer to the typical regulation of a local utility.
The NGA created an administrative agency, originally the Federal Power Commission and now the Federal Energy Regulatory Commission ("FERC"),2 and gave the agency broad authority to regulate three jurisdictional areas: the interstate transportation of natural gas; sales of natural gas for resale in interstate commerce; and the natural gas companies themselves. Under the NGA, a natural gas company is any entity engaged in the interstate transportation of natural gas or the sale of natural gas for resale in interstate commerce. In 1954, the Supreme Court said the NGA applied to producer
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sales at the wellhead to an interstate buyer.3 Since then, authority to regulate producers and wellhead sales under the NGA has been reduced and eventually removed by the Natural Gas Policy Act of 19784 and the Natural Gas Wellhead Decontrol Act of 1989.5 While federal regulation of wellhead natural gas sales has ended, the NGA remains substantially unchanged as the basis for federal regulation of interstate pipelines.
One of the primary features of the regulation of interstate pipelines under the NGA is a requirement that regulated services be provided and facilities be constructed or extended only pursuant to a certificate of public convenience and necessity granted under § 7 of the NGA.6 In some cases, the certificate is a budget certificate allowing categories of facilities to be built without specific approval up to a preapproved budget limit. For significant construction or facilities that do not meet the standards for a budget certificate, specific authority from FERC is required prior to installation or construction. A corollary to certification is that a pipeline is not allowed to "abandon" any certificated service or facility without permission to do so from FERC, also under § 7 of the NGA.7 In deciding whether to certify a new service or new facility or allow the abandonment of a certificated service or facility, FERC is supposed to decide if the proposed action is in the public interest. As discussed below, FERC has in the recent past substantially reduced the practical impact of § 7 certification and abandonment, but the formal requirement is statutory and remains.
The rates a pipeline proposes to charge its customers are reviewed by FERC under § 4 of the NGA8 to ensure that they are just and reasonable. Traditionally, FERC has interpreted the just and reasonable requirement to mean that the rates should not exceed cost plus a fair rate of return. In reviewing specific rate requests, the first step is to determine the proper total revenue that the pipeline involved should be
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charge during some period of time. Costs typically include both the current expenses of providing service plus an appropriate amount for depreciation of the pipeline's investment. The fair rate of return is some percentage return on the pipeline's undepreciated investment in facilities for providing services. The specifics of determining the proper revenue target for a regulated pipeline are far more complex, but the basic three elements are current costs, depreciation of investment and return on undepreciated investment.
After the total amount that the pipeline should charge over some period of time has been determined, the remaining problem of rate design is allocating that amount among the various services provided by the pipeline and among the various customers or categories of customers receiving those services. Both estimating current costs and deciding how to allocate total charges among services and customers requires estimating the amount of service that will be provided for all of the pipeline's services through the period for which rates are being set. Obviously, misestimating future services can result in the pipeline getting more or less than the total revenue target, perhaps substantially more or less.
FERC often announces general features that it wants to see in all rate schedules, but each rate schedule submitted to FERC under § 4 is separately designed by the pipeline involved. Disputes over pipeline rate filings are often resolved by negotiated settlements among the pipeline, its customers and the staff of FERC, but in theory and occasionally in fact, a rate filing is reviewed and judged by FERC after court-like proceedings involving presenting evidence and legal arguments. FERC's decisions about rate filings are commonly appealed to a United States Court of Appeals. In reviewing what FERC has done, the court is supposed to approve the FERC decision if the resulting rate is within a "zone of reasonableness".
The NGA itself does not require that FERC apply a cost plus fair rate of return standard to determine if rates are just and reasonable, but cost plus fair rate of return has been relatively uniformly used in reviewing interstate gas pipeline rates since passage of the NGA. In recent years, FERC has expressed interest in moving away from a cost plus standard where there is sufficient competition for the market to prevent pipelines from charging unreasonable rates. FERC has not yet approved any significant transportation rate filing relying upon market forces to keep rates reasonable.
In its regulation of interstate gas pipelines, FERC has also required or blessed various social allocations of
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service. In some cases, FERC has decided that certain classes or categories of customers deserved better service than others and instructed pipelines to...
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