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Cost-of-Service Rate Filings


Recent Highlights
January 21, 2016
  • Items G-1, G-2, G-3 & G-4: FERC Initiates Investigations of Four Interstate Pipeline Companiesí Rates News Release | Decisions: G-1 PDF, G-2 PDF, G-3 PDF and G-4 PDF

The Natural Gas Act External link (NGA) requires that rates charged for interstate pipeline services be "just and reasonable." Setting just and reasonable rates requires a balancing of equities between the interests of the pipeline and its ratepayers. The basic methodology we use to establish just and reasonable rates is cost-of-serve ratemaking. Under cost-of-service ratemaking, rates are designed based on a pipeline's cost of providing service including an opportunity for the pipeline to earn a reasonable return on its investment.

The Commission sets rates for interstate pipeline services in a number of proceedings. For example, when a pipeline files to increase its rates, it makes a filing with the Commission under Section 4 of the NGA. These types of filings are referred to as general Section 4 rate cases. In these proceedings, the Commission reviews all of a pipelines rates and services. A pipeline can file a general Section 4 rate case anytime it wishes, provided the pipeline did not agree otherwise in a settlement. A pipeline must demonstrate that the new rates it proposes to charge are just and reasonable. When a rate increase filing is made pursuant to Section 4, the application is typically suspended and set for hearing by the Commission's litigation staff in Office of Administrative Litigation (OAL). The issues in the application can be settled if parties can reach consensus. However, if the issues cannot be resolved, they will proceed to a hearing before an Administrative Law Judge (ALJ). Whether the case is settled or proceeds to hearing, the Commission will eventually need to act upon the settlement, or upon the record in the hearing.

The Commission also has authority under Section 5 of the NGA to require prospective changes in the rates charged by a pipeline when it can be demonstrated that the rates are no longer just and reasonable. The Commission can initiate a Section 5 proceeding on its own motion or upon complaint from an interested party. In a Section 5 proceeding, the Commission has the burden of demonstrating that the currently effective rates of the pipeline are no longer just and reasonable, and of establishing just and reasonable rates.

The Commission also sets rates for pipeline services under Section 7 of the NGA. Under Section 7(c) of the NGA a pipeline files to request a "Certificate of Public Convenience and Necessity" to construct a new pipeline or to expand existing facilities, in order to offer new or additional services. The rates established by the Commission under Section 7 for these services are referred to as "initial rates" and generally remain in effect until such time as the pipeline files a Section 4 rate filing in which all of a pipeline's rates are reviewed.

Additionally, the Commission sets rates for intrastate pipelines under Section 311 of the Natural Gas Policy Act External link (NGPA). Under Section 311, intrastate pipelines are permitted to transport gas for interstate pipelines and local distribution companies (LDC) in interstate commerce without becoming subject to jurisdiction under the NGA (intrastate pipelines are regulated by their State Agencies). The rates established under Section 311 must meet a "fair and equitable" standard, as opposed to a "just and reasonable" standard. When this Commission sets the rates for Section 311 service, the rates are computed using the same cost-of-service methodology used under the NGA. However, an intrastate pipeline may elect to use an approved cost-based rate on file with the State agency that regulates its intrastate business.

Finally, there are "limited" Section 4 filings where pipelines file to add a new service and establish new rates, as well as, complaint proceedings that raises rate issues to be addressed by the Commission.

The Implementation Guide for Electronic Filing PDF contains information for interstate pipelines creating the required Schedules and Statements for a general rate cases, and for the public to understand the content of a general rate cases.

 
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Updated: January 21, 2016