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PL94-4: Pricing for New Pipeline Construction

Fortnightly Magazine - April 15 1996

will also be in continual flux, reflecting the shifting allocation of nonplant costs and the increasing capital additions of new nonexpansion plant as depreciated plant is replaced (see sidebar).

Seen in this context, the upfront certainty sought in PL94-4 amounts to certainty only with respect to cost allocation for plant-related costs. Shippers contracting for expansion facilities with vintage-cost treatment, as well as pre-expansion shippers, will confront both upfront uncertainty (unknown higher O&M and other overhead costs in the first rate case), and long-term uncertainty (changing future rate

levels caused by plant depreciation and additions for each vintage). Little can be done to change this dynamic. It is not feasible to allocate O&M and overhead costs to vintage expansion service in the certificate application; such an allocation changes rates to all customers, a result clearly outside the scope of a certificate proceeding. Therefore, the issue must be resolved in the next general rate case, which may follow several years after initiation of expansion service.

Vintage Cost Allocation: The Certainty Issue

The discussion thus far pertains simply to procedure. Unfortunately, the procedural aspect of vintage cost allocation marks only the tip of the iceberg. The more contentious issue, by far, is what standard to use for allocation of costs. As the chart illustrates, vintage cost allocation leaves a large number of the FERC Accounts with no defined allocation method. The tools brought to bear on this problem are weak indeed. The tool most sorely lacking is precedent. Because the vintage cost-allocation issue is new, no existing allocation methods qualify as "generally accepted."7 The few cases to tackle the issue have exacerbated the situation by favoring settlement, without precedential value. Faced with what is basically a clean slate on this issue, existing and expansion customers are pitted against each other in the general rate case, with little sense of the standards that will apply, and less idea of the outcome.

Vintage Cost Allocation: Substantive Issues

All of which leads to the core issue: Lacking precedent or established practice, what rules should form the basis for vintage cost allocation?

One proposal would employ allocators (such as gross plant ratios or labor ratios) broadly for all FERC Accounts requiring allocation. Such allocators represent borrowed methods that have been applied to the allocation of costs among pipeline functions. The Kansas-Nebraska method, for example, uses labor and plant ratios. The premise behind these allocators, and the reason they were used in the past, is that all functions use or benefit from these expenditures for administration, compressor maintenance, and so forth. Thus, logic dictates that all customers share in the cost allocation.

Despite its intuitive appeal and ease of application, this method, which the economic literature labels "full-cost apportionment" or "fully distributed costs," suffers on several levels. First, a method based on benefits appears incongruous for a pipeline that has received a determination that costs will be allocated on a vintage basis. Put another way, it is difficult to reconcile the vintaging of plant costs while distributing the costs of operating that plant. Second, the method stands contrary to the