On May 31, 1995, the Federal Energy Regulatory Commission (FERC) issued its Statement of Policy in Docket No. PL94-4-000, Pricing Policy for New and Existing Facilities Constructed by Interstate Natural Gas Pipelines.1 In that decision, the FERC sought to provide upfront rate certainty, thereby giving pipelines and shippers a firm basis for making decisions on large-scale investments.
But is that objective realistic?
A comprehensive review of the ratemaking consequences of the new policy (em primarily the consequences for the biggest projects that will result in vintage rates2 (em reveals that the FERC's objective may be impossible. The barrier to providing upfront certainty lies in the fact that cost allocation for the many nonplant-related accounts can only be decided in a rate case, after the certificate has been issued. As for certainty, a barrier arises because cost allocation of these accounts in a vintage environment can call upon little in the way of precedent or established practice, thereby prompting controversy. The future can best be characterized as a mixed bag. On the one hand, there is no quick fix, in terms of process improvements, that would move the necessary cost-allocation decisions up front. On the other hand, more experience with cost-allocation issues in a
vintage environment should lead over time to an established practice. The cost-allocation challenge will come in developing methods that provide an appropriate basis for ratemaking (em that is, methods that enhance economic efficiency, rather than methods that allocate costs simply because they exist.
Background: PL94-4 in Context