
[Federal Register: November 26, 2008 (Volume 73, Number 229)]
[Notices]               
[Page 72039-72041]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26no08-68]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. RM07-20-000]

 
Fuel Retention Practices of Natural Gas Companies

Issued November 20, 2008.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice Terminating Proceeding.

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SUMMARY: The Federal Energy Regulatory Commission is terminating its 
notice of inquiry regarding its policy on the in-kind recovery of fuel 
and lost and unaccounted-for gas by natural gas pipeline companies and 
will consider any changes to the application of such policy in 
individual cases.

Effective Date: November 26, 2008.

FOR FURTHER INFORMATION CONTACT: Anna Fernandez (Legal Information), 
Office of the General Counsel, Federal Energy Regulatory Commission, 
888 First Street, NE., Washington, DC 20426, (202) 502-6682.

SUPPLEMENTARY INFORMATION:

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. Kelly, 
Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff

    1. On September 30, 2007, the Commission issued a Notice of Inquiry 
concerning its current policy on the in-kind recovery of fuel and lost 
and unaccounted-for gas by natural gas pipeline companies.\1\ The 
Commission sought comments on whether it should change its current 
policy to provide pipelines a greater incentive to reduce their fuel 
use and lost and unaccounted-for gas and to minimize pipeline over-
recoveries of these costs. For the reasons discussed below, the 
Commission is terminating this proceeding.
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    \1\ Fuel Retention Practices of Natural Gas Companies, FERC 
Stats. & Regs. ] 35,556 (2007) (NOI).
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I. Background

    2. A detailed discussion of the Commission's current policy 
regarding in-kind fuel retention by natural gas pipeline companies is 
contained in the NOI and will not be repeated here. Briefly, interstate 
natural gas pipelines frequently require that customers contribute in-
kind a small percentage of the volumes of natural gas tendered for 
transportation service to provide fuel for compressors and to make up 
for lost and unaccounted-for gas. Each pipeline states the percentage 
of gas it retains in its tariff.
    3. The Commission established its current policy concerning a 
pipeline's in-kind recovery of fuel use and lost and unaccounted-for 
gas in ANR Pipeline Company (ANR).\2\ In its January 2005 order in the 
ANR case,\3\ the Commission stated that pipelines have two options to 
recover these costs. The first option is to establish a fixed fuel 
retention percentage in a general Natural Gas Act (NGA) section 4 rate 
case, and leave that

[[Page 72040]]

percentage unchanged until the pipeline files its next general section 
4 rate case. That option is consistent with the Commission's general 
ratemaking policy, set forth in section 284.10(c)(2) of the 
Commission's regulations,\4\ that pipelines must design their rates 
based on estimated units of service without any type of tracker or 
true-up mechanism. That policy provides pipelines an incentive to 
minimize costs, by allowing them to retain any cost over-recoveries 
between rate cases, while putting them at risk for cost under-
recoveries.\5\ The second recovery option is for the pipeline to 
include in its tariff a mechanism permitting periodic changes in its 
fuel retention percentage outside of a general section 4 rate case, as 
allowed by section 154.403 of the Commission's regulations.\6\ ANR held 
that, if a pipeline chooses the second option, it must include in its 
tariff a mechanism to true-up any over- and under-recoveries of fuel, 
absent agreement otherwise by all interested parties.
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    \2\ ANR Pipeline Co., order on compliance filing, 108 FERC ] 
61,050, order inviting comments, 109 FERC ] 61,038 (2004), order on 
reh'g and compliance filing, 110 FERC ] 61,069, order on reh'g and 
compliance filing, 111 FERC ] 61,290 (2005).
    \3\ 110 FERC ] 61,069 at P 18-28.
    \4\ 18 CFR 284.10(c)(2).
    \5\ See Canyon Creek Compression Co., 99 FERC ] 61,351, at P 14 
(2002).
    \6\ 18 CFR 154.403.
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    4. In ANR,\7\ the Commission also left open the possibility that a 
pipeline could include an incentive mechanism in a fuel cost tracker, 
if the pipeline made the proposal pursuant to the Commission's 
incentive ratemaking policy. The Commission's current policy on 
incentive rates is set forth in Alternatives to Traditional Cost-of-
Service Ratemaking for Natural Gas Pipelines (1996 Incentive Ratemaking 
Policy Statement).\8\
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    \7\ 110 FERC ] 61,069 at P 39.
    \8\ 74 FERC ] 61,076, at 61,237-38 (1996).
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    5. In the NOI, the Commission sought comments on whether it should 
change its current in-kind fuel retention policy for the purpose of (a) 
minimizing pipeline over-recoveries of fuel and lost and unaccounted-
for gas or (b) providing pipelines with a greater incentive to reduce 
their fuel use and lost and unaccounted-for gas, for example by 
permitting pipelines with fuel trackers and true-up mechanisms to 
include a profit or loss sharing mechanism.\9\
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    \9\ NOI at P 23-26.
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    6. Thirty-two parties filed comments in response to the NOI.\10\ 
Shippers and end-users generally argued that the Commission should 
require all pipelines to use a tracker with a true-up in order to 
prevent over-recovery of costs. The pipelines, however, argued that the 
Commission should retain its current policy and continue to permit 
pipelines to choose whether a fixed retention percentage established in 
a section 4 rate case or a tracker is best suited to their particular 
circumstances. Most parties stated that including some form of 
incentive mechanism in a tracker true-up mechanism could encourage 
greater efficiency. However, the parties asserted that the Commission 
should consider such mechanisms on a case-by-case basis rather than 
imposing any generic requirements.
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    \10\ The parties are listed in Appendix A.
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II. Discussion

    7. After carefully reviewing the comments, the Commission has 
determined to terminate this proceeding and consider any changes to the 
application of the Commission's policy concerning fuel recovery in 
individual cases.
    8. As described above, a number of non-pipeline commenters contend 
that the Commission should require all pipelines to recover their fuel 
costs through trackers with true-up mechanisms in order to minimize 
pipeline over-recovery of fuel costs. However, the Commission would 
have to act under NGA section 5 to require pipelines which currently 
have fixed fuel charges established in general section 4 rate cases to 
adopt trackers and true-up mechanisms. In order to do that, the 
Commission would have to find that all fixed fuel charges are unjust 
and unreasonable and that the only just and reasonable method for 
pipelines to recover fuel costs is through a tracker with a true-up 
mechanism. The commenters have failed to provide the Commission a basis 
to take such generic action under NGA section 5.
    9. Recovery of fuel costs through a fixed charge established in a 
general section 4 rate case is consistent with the Commission's general 
ratemaking policy for open access pipelines, set forth in section 
284.10(c)(2) of the Commission's regulations, that pipelines design 
their rates based on estimated units of service, without any type of 
true-up mechanism.\11\ The non-pipeline commenters' only basis for 
requiring all pipelines to recover their fuel costs in a manner 
contrary to that policy is that (1) fixed fuel charges present too much 
potential for pipelines to over-recover their fuel costs and (2) 
remedying such over-recoveries through complaints under NGA section 5 
is too difficult.\12\ However, the courts have insisted that the 
Commission not ``compromise section 5's limits on its power to revise 
rates.'' \13\ Requiring pipelines to recover their fuel costs through a 
tracker and true-up mechanism based solely on the alleged difficulty of 
remedying cost overrecoveries under NGA section 5, and without any 
other independent policy justification, would be contrary to the 
court's holding that the Commission may not order pipelines to make 
section 4 filings in order ``to avoid the `insufficient protection' 
afforded by section 5, i.e., to avoid its procedural constraints.'' 
\14\
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    \11\ In Order No. 436, the Commission explained that this 
requirement means that the pipeline is at risk for under-recovery of 
its costs between rate cases, and may retain any over-recovery. This 
gives the pipeline an incentive both to minimize its costs and 
maximize the service it provides. A cost tracker would undercut 
these incentives by guaranteeing the pipeline a set revenue 
recovery. Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation; and Regulation of 
Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 
636, FERC Stats. & Regs. ] 30,939, order on reh'g, Order No. 636-A, 
FERC Stats. & Regs. ] 30,950, order on reh'g, Order No. 636-B, 61 
FERC ] 61,272 (1992), order on reh'g, 62 FERC ] 61,007 (1993), aff'd 
in part and remanded in part sub nom. United Distribution Cos. v. 
FERC, 88 F.3d 1105 (D.C. Cir. 1996), order on remand, Order No. 636, 
78 FERC ] 61,186 (1997).
    \12\ Industry Associations at 7-8 (``Although the Commission and 
pipeline customers are entitled to bring Section 5 complaints, such 
complaints require the complainant to carry the burden of proof, can 
be extremely expensive, and only offer prospective relief.''). See 
also Ameren, TVA, and Texas Producers.
    \13\ Western Resources, Inc. v. FERC, 9 F.3d 1568, 1578 (D.C. 
Cir. 1993).
    \14\ Public Service Commission of New York v. FERC, 866 F.2d 
487, 491 (D.C. Cir. 1989).
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    10. Accordingly, if a shipper believes that a particular pipeline 
is over-recovering its fuel costs, it should file a complaint under NGA 
section 5, pursuant to the procedures set forth in section 385.206 of 
the Commission's procedural regulations. While several shippers 
commented that section 5 does not provide an adequate remedy,\15\ in 
fact, section 5 complaints have resulted in significantly reduced fuel 
charges on several pipelines. National Fuel \16\ and Dominion \17\ are 
two examples of how actual or potential section 5 complaints can cause 
pipelines to reduce their fuel retention percentages.
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    \15\ See, e.g., comments of the American Public Gas Association 
at 3-4.
    \16\ National Fuel Gas Supply Corporation, 118 FERC ] 61,091 
(2007) (National Fuel) (settlement agreement followed section 5 
complaint).
    \17\ Dominion Transmission, Inc., 111 FERC ] 61,285 (2005) 
(Dominion) (settlement agreement came about in response to potential 
section 5 complaint).
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    11. In addition, the changes recently enacted by the Commission to 
the financial reporting requirements for natural gas pipelines should 
assist shippers who wish to file a section 5 complaint involving fuel 
cost over-recovery. In March 2008, the Commission issued Order No. 
710,\18\ a

[[Page 72041]]

Final Rule to change the financial forms and reporting requirements for 
natural gas pipelines in order to enhance the transparency of financial 
reporting by interstate natural gas pipelines and better reflect the 
current market and cost information. Among the changes were new 
reporting requirements that require natural gas companies to provide 
detailed information regarding the acquisition and disposition of fuel 
use and lost and unaccounted-for gas.\19\ With this new information, 
shippers will be better able to use the section 5 complaint process to 
address fuel cost over-recovery by a pipeline.
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    \18\ Revisions to Forms, Statements and Reporting Requirements 
for Natural Gas Pipelines, Order No. 710, 73 FR 19389 (Apr. 10, 
2008), FERC Stats. & Regs. ] 31,267 (2008), reh'g and clarification, 
Order No. 710-A, 123 FERC ] 61,278 (June 20, 2008).
    \19\ Order No. 710 at P 16.
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    12. Finally, the operation of the interstate pipeline system 
involves a significant amount of fuel use and lost and unaccounted-for 
gas to deliver supplies to market. Fuel gas charges now make up a 
greater percentage of the overall interstate transportation rate than 
they have in the past. Such considerations reinforce the need to 
improve the efficiency of our existing infrastructure. While the 
parties generally commented that fuel savings incentive mechanisms 
could be helpful in reducing fuel use and, therefore, fuel costs, they 
believed that such mechanisms should be developed by the parties in 
individual proceedings. In light of those comments, the Commission will 
take a case-by-case approach at this time. In a recent order, the 
Commission ordered a technical conference to consider a three-year 
experimental fuel incentive mechanism proposed by Texas Gas 
Transmission, L.L.C. and what changes, if any, might be necessary or 
appropriate.\20\ The Commission concludes that case-by-case 
consideration of incentive proposals will assist in the development of 
the Commission's policies concerning pipelines' recovery of fuel costs, 
and encourages pipelines to work with their customers to develop these 
mechanisms.
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    \20\ See Texas Gas Transmission, LLC, 125 FERC ] 61,134 (2008).
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    13. For these reasons, Docket No. RM07-20-000 is terminated.
    The Commission orders:
    Docket No. RM07-20-000 is terminated.

    By the Commission.
Nathaniel J. Davis, Sr.,
Deputy Secretary.

Appendix A

List of Parties

Ameren Energy Generating Company, Central Illinois Public Service 
Company, Central Illinois Light Co., Illinois Power Co., and Union 
Electric Company (Ameren)
American Chemistry Council
American Gas Association
American Public Gas Association
Apache Corporation
Atmos Energy Corporation
Boardwalk Pipeline Partners, LP, Gulf Crossing Pipeline Company LLC, 
Gulf South Pipeline Company, LP, and Texas Gas Transmission, LLC
Calpine Corporation
Columbia Gas Transmission Corporation, Columbia Gulf Transmission 
Company, Crossroads Pipeline Company, Granite State Gas Transmission, 
Inc., and Central Kentucky Transmission Company
Dominion Resources, Inc.
El Paso Corporation
Enbridge, Inc. and Enbridge Energy Partners, L.P.
FPL Group, Inc.
Honda of America Mfg., Inc.
Interstate Natural Gas Association of America
Independent Oil & Gas Association of West Virginia
The Independent Petroleum Association of America, The Process Gas 
Consumers Group, The American Forest & Paper Association and The 
American Iron and Steel Institute (Industry Associations)
Kinder Morgan Interstate Gas Transmission, LLC, Natural Gas Pipeline 
Company of America, Trailblazer Pipeline Company, and TransColorado Gas 
Transmission
Louisville Gas and Electric Company
MidAmerican Energy Company and PacifiCorp
Middle Tennessee Natural Gas Utility District
National Fuel Gas Supply Corporation
Natural Gas Supply Association
Northern Natural Gas Company and Kern River Gas Transmission Company
The Ohio Oil & Gas Association
Public Service Commission of New York
Sequent Energy Management, L.P.
Spectra Energy Transmission, LLC
Tennessee Valley Authority (TVA)
Texas Independent Producers and Royalty Owners Association (Texas 
Producers)
Transwestern Pipeline Company, LLC
Williston Basin Interstate Pipeline Company

[FR Doc. E8-28021 Filed 11-25-08; 8:45 am]

BILLING CODE 6717-01-P
