United States: FERC Authorizes Construction Of Northwest Pipeline's "Kalama Lateral Project," Finds EPA's Criticisms Of FERC Staff's Environmental Assessment Unpersuasive, But Rejects The Rates Proposed For Transportation Service On The Lateral

On April 11, 2016, FERC issued a certificate order authorizing Northwest Pipeline, LLC ("Northwest"), a Williams pipeline company, to construct a lateral to connect Northwest's system to a proposed methanol plant that will be owned by Northwest Innovation Works ("NWIW") in Cowlitz County, Washington. The April 11 Order, however, rejects the rates proposed for transportation service on the lateral. The Order finds that the proposed maximum recourse rates were derived using a "day-one rate base" for the return calculation, which practice FERC has previously prohibited, requiring, instead, the use of a first-year average rate base. The April 11 Order also rejects Northwest's proposed allocation of its existing A&G costs to the incremental rates for service on the proposed lateral. The Commission holds that it "does not reallocate costs underlying existing rates in a proceeding under section 7 of the NGA," and that Northwest must wait for its next general section 4 rate case to seek such reallocation of existing costs. The Order also holds that the proposed incremental interruptible transportation rate for the lateral was improperly designed.

Northwest filed an application under Natural Gas Act ("NGA") section 7(c) on October 27, 2014, in Docket No. CP15-8-000, seeking authorization to construct a 24-inch, 3.1 mile lateral pipeline, accompanying meter station and appurtenant facilities costing, in total, $22,756,705 with a capacity of 320,000 dekatherms (Dth) per day. The lateral would connect Northwest's system to NWIW's proposed methanol plant. The methanol plant will produce methanol from natural gas for shipment to Asia, where the methanol will be used to produce olefins. Olefins are used to manufacture common household items, such as plastics, paints, nylon carpet, particle board, cell phone cases, and pharmaceuticals, among other items.

On December 10, 2015, FERC's Office of Energy Projects issued a letter request for further information from Northwest, which provided in relevant part: "Northwest states in its October 27, 2014 application that a precedent agreement would be executed upon ...(NWIW) making its final decision to construct the Methanol Plant. Please provide a copy of the precedent agreement between Northwest and NWIW for service on the Kalama Lateral to NWIW's proposed Methanol Plant." On March 30, 2016, Northwest executed a precedent agreement with NWIW for 320,000 Dth per day of firm transportation service for a term of 25 years. On the same day, Northwest filed the precedent agreement with the Commission.

FERC's April 11 Order authorizes construction of the lateral. It holds that, because Northwest proposes to charge a cost-based incremental recourse rate for service on the lateral, the project will not be subsidized by existing customers. Further, FERC finds that the project will not adversely affect service to Northwest's existing customers, and there will be no adverse effect on other existing pipelines in the region because the proposed pipeline is not intended to replace service on other pipelines. In addition, no pipeline company or their captive customers protested Northwest's proposal. FERC further finds that Northwest has minimized the project's impact on landowners by developing a route that incorporated extensive landowner input. Given the benefits associated with providing 320,000 Dth per day of firm natural gas transportation to NWIW's contemplated Methanol Plant and the lack of adverse effects on existing customers, other pipelines and their captive customers, landowners and surrounding communities, FERC holds that the public convenience and necessity require approval of Northwest's project subject to the further conditions set out in the order.

Northwest proposed initial maximum recourse reservation rates for firm transportation service of $0.03969 per Dth per day with a volumetric charge of zero. Northwest used "a day-one rate base" for its return calculation. A "day-one rate base" is computed on the total investment in pipeline facilities on the day the pipeline becomes operational without regard to, or in recognition of, depreciation that will be accrued while the rates are in effect. The April 11 Order states that the Commission has "consistently denied the use of a day-one rate base for initial rates and required instead the use of a first-year average rate base." The April 11 Order therefore directs Northwest to file revised rates reflecting use of a first-year average rate base when Northwest makes its compliance filing.

The April 11 Order also rejects Northwest's proposed allocation of existing A&G costs to the incremental rates for service on the proposed lateral. The Order notes: "The Commission does not reallocate costs underlying existing rates in a proceeding under section 7 of the NGA." The Order directs Northwest to remove the A&G costs allocated to the project's cost of service in its compliance filing, noting that this holding is without prejudice to Northwest reallocating existing costs in its next NGA section 4 general rate case.

The Order finds that in designing the incremental interruptible rate proposed for the lateral, Northwest did not credit interruptible revenues or, alternatively, allocate costs and volumes to the proposed interruptible service. The Order notes that "[w]hen establishing initial rates, the Commission requires that a pipeline either provide for the crediting of all interruptible revenues, net of variable costs, to shippers paying maximum rates or that the pipeline allocate volumes and costs to its interruptible service." The Order directs Northwest, in its compliance filing, "to either allocate costs and volumes to its interruptible service ... or revise its tariff to provide for 100 percent crediting of interruptible revenues, net of variable costs, to maximum rate firm and interruptible customers."

The April 11 Order finds that Northwest proposes a negotiated rate with NWIW but did not include in its application a negotiated rate agreement for the Commission to review. The Order requires Northwest to file either its negotiated rate agreement, or tariff records containing the essential terms of such agreement, in keeping with FERC's Alternative Rate Policy Statement and its negotiated rate policies. The Order approves Northwest's fuel proposal to charge a zero lost-and-unaccounted-for ("LAUF") fuel reimbursement factor, and develop an LAUF allocation method after the lateral is placed into service and data from actual operations becomes available.

The U.S. Environmental Protection Agency ("EPA") raised several challenges to the adequacy of the Environmental Assessment ("EA") performed by FERC staff with respect to the Kalama Lateral Project. Among other criticisms, the EPA alleged that the EA failed to follow the guidance issued by the White House's Council on Environmental Quality for considering greenhouse gas emissions and the effects of climate change in NEPA reviews. The April 11 Order finds the EPA criticisms to be misplaced or unpersuasive for the various reasons set out in the Order.

A copy of the order is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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