United States: FERC Expounds Upon When A Natural Gas Pipeline May Add To The Record To Support Proposed Initial Rates For A Certificated Project

On May 19, 2016, FERC issued an Order on Voluntary Remand ("Remand Order") to Kinetica Deepwater Express, LLC, formerly TC Offshore LLC ("TC Offshore") in Docket No. CP11-544-004. At issue was the Commission's rejection of TC Offshore's proposed initial negative salvage rates. The Remand Order reaffirms FERC's prior holdings. First, FERC held that, by waiting until after issuance of its requested Certificate to submit data to support its proposed initial negative salvage rates, despite being confronted with protests challenging its proposed salvage rates as unsupported, TC Offshore missed its opportunity to respond to the protests by submitting more supporting material. Further, FERC held that once a Certificate has issued, a party must show good cause to receive permission to reopen the evidentiary record to support changing a rate accepted by the Commission in issuing the Certificate. For example, a party may show changed circumstances resulting from the development of more information, such as more completed contracts with shippers, actual versus estimated inflation rates or other costs – new information that changes the estimates or other information on which accepted rates were based. In the instant case, however, FERC determined that TC Offshore was not making a showing of new, better evidence or changed circumstances, but instead was seeking to submit data it possessed prior to issuance of the Certificate and for the purpose of relitigating an issue it lost in the Certificate proceeding. FERC also held that the avenue of seeking an "amended certificate" was foreclosed by the fact that the proposed in-service or effective commencement date of the existing certificated rates was too close, and provided no opportunity for effective review and challenges by interested parties to any proposed amended certificate. FERC upheld its earlier holdings that TC Offshore must use the existing negative salvage rates accepted in the Commission's Certificate Order and seek to change those rates in an NGA Section 4 proceeding.

On September 1, 2011, ANR Pipeline Company ("ANR") filed an application in Docket No. CP11-543-000, under NGA section 7(b), for authority to abandon by sale to its wholly-owned subsidiary, TC Offshore, all of its offshore pipeline facilities in the Gulf of Mexico, consisting of 600 miles of pipeline and seven offshore platforms, as well as certain onshore pipeline facilities in Louisiana and Texas. TC Offshore filed a companion certificate application in Docket No. CP11-544-000, under NGA section 7(c), for authority to acquire and operate the facilities. In the companion application, TC proposed initial rates that, among other things, reflected use of a negative salvage rate of 3.122 percent for gathering plant and 0.985 percent for transmission plant. (Negative salvage occurs when the cost of removing an asset after it reaches the end of its useful life exceeds the revenue that would be realized if the asset were sold. Both depreciation and negative salvage are amortized over the asset's useful life, and both are treated as annual operating expenses for ratemaking purposes). ANR's existing negative salvage rates were lower than TC Offshore's proposed ones – that is, ANR's were 0.23 percent for both gathering and transmission plant. Protests of the proposed negative salvage rates were filed by Apache Corporation and by Indicated Shippers, arguing that TC Offshore had not filed any cost data to support its proposed higher negative salvage rates, and had provided merely a sentence of text in support.

On June 12, 2012, the Commission issued an order approving ANR's abandonment, and issuing a certificate of public convenience and necessity to TC Offshore to acquire and operate the facilities. The Certificate Order required TC Offshore to use ANR's last-approved negative salvage rate of 0.23 percent, agreeing with the protesting parties that TC Offshore had not supported its proposed negative salvage figures.

On July 23, 2012, TC Offshore sought rehearing on several issues, including the rejection of its proposed negative salvage rates. TC Offshore argued that it had adequately supported its proposed initial negative salvage rates in its application or, alternatively, FERC should accept a newly submitted Negative Salvage Study accompanying TC Offshore's rehearing request.

On August 1, 2012, while its first rehearing request was pending before FERC, TC Offshore made a filing in Docket No. RP12-908-000. In this filing, TC Offshore proposed to commence service under the Certificate on October 1, 2012.

On September 28, 2012, FERC issued an order on rehearing (First Rehearing Order). The Commission denied rehearing on the issue of TC Offshore's proposed higher negative salvage rates. FERC noted that TC Offshore had provided a mere one sentence explanation of these rates in Exhibit P to its original certificate application. The First Rehearing Order did not evaluate the Negative Salvage Study attached to TC Offshore's first rehearing request, but did state that the denial of rehearing was without prejudice to TC Offshore requesting to change – i.e., increase – its negative salvage rates pursuant to an NGA section 4 filing after service had commenced.

On November 1, 2012, TC Offshore commenced service on the facilities acquired from ANR. One day before, on October 31, 2012, TC Offshore filed another rehearing request, again seeking rehearing regarding its proposed negative salvage rates.

On June 7, 2013, the Commission issued an order addressing this issue and other rehearing requests relating to its Certificate Order (the "Second Rehearing Request"). On the negative salvage rates issue, the Commission reaffirmed prior holdings stating that once a pipeline company has commenced service under a certificate order, its initial rates cannot be amended in an NGA section 7 proceeding. Thus, because TC Offshore had commenced service on November 1, 2012, the request for an amendment to the Certificate Order was moot.

On August 6, 2013, TC Offshore petitioned the D.C. Circuit for review of the Commission's rejection of its proposed negative salvage rates. On January 29, 2014, the D.C. Circuit granted the Commission's unopposed motion for voluntary remand of the case. On May 19, 2016, FERC issued the present Remand Order reviewed here.

First, on remand FERC affirmed its initial holding that TC Offshore failed adequately to support its proposed negative salvage rates in its application, and further affirmed that, given this, FERC appropriately directed TC Offshore to continue to use ANR's last approved negative salvage rates. In reaching this conclusion, FERC noted that a certificate applicant bears the burden of supporting the costs it proposes to recover through its rates. While initial rate proposals are evaluated under the "public interest standard" of NGA section 7, and other rate proposals under the "just and reasonable standard" of NGA section 4, "the Commission, nevertheless, generally applies the same ratemaking policies to initial rates that it would apply in an NGA section 4 rate proceeding." "As a practical and procedural matter, the difference between the approval of NGA section 7 initial rates and the setting of rates in subsequent NGA section 4 proceedings is that initial rates are based on estimates of costs and revenues, whereas in a[n] NGA section 4 rate proceeding the rates are based on actual operating history and actual costs." The Commission noted that in its application TC Offshore had provided merely the following sentence to support the proposed negative salvage rates: "TC Offshore proposes recovery of plant decommissioning costs through negative salvage rates, which were calculated using the same . . . [Production to Reserve] factors used for depreciation." FERC held that, while this sentence reveals the period of time over which TC Offshore proposes to collect negative salvage costs/rates, it "failed to provide any account or explanation of [TC Offshore's] analysis of the negative salvage costs associated with the pipeline facilities." In response to protests that its proposed negative salvage rates were unsupported, TC Offshore had stated that it anticipates significantly higher salvage costs than those reflected in the existing ANR rates. FERC held that TC Offshore had failed to support its proposed new requested negative salvage rates, and its justification failed to satisfy section 7's public interest standard. While normally this could have resulted in a negative salvage rate of zero for an applicant, the Commission relied on various policies and precedents to permit TC Offshore to use the last approved negative salvage rate applicable to the facilities TC Offshore was acquiring.

FERC next turned to its refusal to consider the Negative Salvage Study accompanying TC Offshore's first rehearing request. TC Offshore argued that FERC should have considered the Negative Salvage Study on the alternative grounds that (1) it was a supplement to TC Offshore's certificate application, or (2) it was an amendment to TC Offshore's certificate.

FERC rejected TC Offshore's argument that FERC should have considered the Negative Salvage Study as a late-filed supplement to its application for a certificate. The Commission relied on its "long-standing policy of not accepting additional evidence at the rehearing stage of a proceeding, absent a compelling showing of good cause." FERC found that TC Offshore did not explain or justify why the Negative Salvage Study should be admitted after the issuance of a dispositive order. In this regard, TC Offshore's rehearing request stated that the Study had been prepared in August 2011, and revised in December 2011, yet did not explain why the Study could not have been filed with FERC before the Certificate Order issued on June 21, 2012. FERC further held that accepting such evidence at the rehearing stage would disrupt the administrative process, and that, "[a]s a general matter, it is inappropriate for an applicant to file a study supporting initial rates after a certificate has been issued, and even more so when the material could have been submitted earlier. This particularly holds true where the adequacy of the support . . . had so clearly been called into question by other parties to the proceeding. We will not encourage applicants to adopt a 'wait-and-see' approach to providing evidence of costs in support of proposed initial rates." Accordingly, FERC rejected "the efforts . . . to introduce supplemental evidence at the rehearing stage of the proceeding."

FERC also rejected TC Offshore's alternative argument that FERC should have considered the Negative Salvage Study "as a section 7 certificate amendment." The Remand Order notes: "The Commission has recognized our ability to change initial rates in a section 7 proceeding by amending a certificate and indeed has often amended certificates to allow pipelines to adjust initial rates prior to newly authorized facilities being placed into service." (Emphasis added). "However, we are under no obligation to do so in the absence of an adequate justification. The Commission has generally found it appropriate to exercise such discretion in instances where the initially-authorized rates are being revised to account for updated estimates and actual construction costs incurred." (Citations omitted). The present case, however, was "not a case where the company is seeking to revise the previously-authorized initial rates to reflect increases in construction costs, revised capital structure, actual prices from contracts, and/or inflation." Rather, having failed to support it initial rates prior to issuance of its certificate, the applicant "is seeking another venue to raise the same issue." In these circumstances, "the Commission is justified in declining to exercise its discretion to process TC Offshore's late-filed study as an application to amend its certificate."

The Commission further noted that even in cases where it is appropriate to amend a certificate to reflect "intervening change[s]" falling between certificate issuance and commencement of service, the timing of the amendment request's filing can impact whether the request can be considered and acted upon by the Commission. FERC noted that in a prior proceeding it had held that an application to amend a certificate filed 41 days prior to the anticipated service commencement date would have, if FERC had not been able to act especially expeditiously, left the applicant with the choice of delaying its service commencement date or accepting rejection of its amendment. In another prior proceeding, the Commission had refused to resolve issues raised in a section 7 certificate amendment because the issues could not be resolved based on the data submitted by the applicant prior to the requested in-service date. Here, the Commission held that while TC Offshore had filed its Negative Salvage Study on July 23, 2012, it also filed on August 1, 2012 its proposal to commence service on October 1, 2012. As of the date of the First Rehearing Order denying rehearing on the salvage rates issue, "TC Offshore had filed nothing indicating that it intended to postpone commencement of service beyond October 1, 2012, to allow sufficient time for the Commission to consider its amendment request." The appropriateness of the proposed, increased negative salvage rates was a contested issue, and "there was insufficient time to develop an adequate record on TC Offshore's newly-filed study and reach a reasoned resolution . . . before the date the company stated it intended to go into service."

Further, the Remand Order holds that TC Offshore's submission, "as a proposed [certificate] amendment . . . was deficient on its face." It did not constitute "a separate and complete certificate amendment application, including exhibits, in full compliance with" Commission regulations and precedent.

In conclusion, on the request to consider the Study as "a certificate amendment," FERC concludes that "exercising our discretion to consider TC Offshore's late-filed study as an amendment to its certificate application is unjustified and contrary to the public interest." The Remand Order concludes: "The Commission hereby responds to the issue remanded to it by the D.C. Circuit, as set forth in the body of this order."

The Kinetica Remand Order can be found here.

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