After more than two years and much debate, FERC recently approved Gas Transmission Northwest LLC's (GTN) GTN XPress Project. GTN XPress was designed to add 150,000 Dth/d of pipeline capacity to the GTN system, enabling it to expand its gas service in the Pacific Northwest.
Most press coverage of the GTN XPress order has focused on FERC's assessment of climate-related impacts. Not to be overlooked, however, FERC also made important and precedent-setting findings on the appropriate allocation of expansion pipeline facilities costs.
FERC rejected GTN's request for a predetermination that in the pipeline's next Section 4 Natural Gas Act rate case, it may roll the $75 million cost of GTN XPress into existing system rates. Further, FERC explained that GTN's existing customers may also challenge the pipeline's inclusion in system rates of additional monies previously spent by the pipeline in anticipation of this expansion. These findings not only protect GTN's customers here but also will likely cause pipelines to reconsider the manner in which they design expansion projects in the future.
FERC's Certificate Policy Statement prohibits a pipeline from constructing a new project to expand its system unless the pipeline can demonstrate that it is "prepared to financially support the project without relying on subsidization from its existing customers." That is to say, all costs associated with an expansion project must be borne by the new customers for whom the additional capacity is being created.
In the GTN XPress proceeding, intervenors pointed out that GTN's application excluded costs associated with three gas compressors it had just recently replaced under FERC's abbreviated blanket certificate process, which allows pipelines to expeditiously replace certain pre-existing certificated compressors with equipment having a "substantially equivalent designed delivery capacity." Intervenors noted that while these recently replaced compressors were substantially larger than the pre-existing compressors, GTN eluded regulatory restrictions by using software controls to reduce the operational horsepower of the replacement compressors to the certificated limits. GTN then assigned 100% of the $251 million cost of these new compressors to system rates on the basis that the replacement compressors were needed to maintain system reliability.
Shortly thereafter, in the GTN XPress certificate application, GTN proposed to remove the software limits on these three new compressors and use the excess horsepower for the GTN XPress Project. However, GTN did not propose to reassign any costs of the replacement compression to the incremental shippers, maintaining that the entirety of these expenses were appropriately treated as system reliability costs borne by existing customers only. Intervenors in the certificate docket argued that existing customers should only be responsible for costs associated with the portion of the three replacement compressors that corresponded to the replaced horsepower, and the balance of the compression costs should be assigned to the expansion project.
FERC agreed, finding that "it appears that a portion of the horsepower from the replacement compressors, which was not necessary or used to replicate the service provided by the old compressors that they were installed to replace, will be activated and used to provide expansion project service." Although the costs of the replacement compressors were appropriately included in existing customer rates, FERC found that a portion of the horsepower to be used for the expansion project (by removing software controls limiting the horsepower on the three compressors) was not then in use. It determined that "because this project will involve the removal of the horsepower restrictions on the replacement compressor units, … the parties to a future general section 4 rate proceeding should be able to raise the question of whether some allocation of the compression costs to the GTN Xpress Project is appropriate." FERC therefore denied GTN's request for a predetermination that roll-in of the expansion costs into its system rates would be permitted in a future general Section 4 rate case.
FERC got it right in this precedent-setting ruling. Most pipeline expansions enjoy the presumption of future roll-in, and full cost recovery is not easily disputed. FERC's action here is likely to provide economic benefit to GTN's existing customers in the pipeline's next rate case. More importantly, this ruling sends a clear signal to industry that FERC will look askance at pipeline expansion projects in which an applicant attempts to circumvent the Certificate Policy Statement's no subsidy rule.