[Federal Register Volume 62, Number 88 (Wednesday, May 7, 1997)]
[Proposed Rules]
[Pages 24853-24860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11794]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 154
[Docket No. RM97-3-000]
Research, Development, and Demonstration Funding
April 30, 1997.
AGENCY: Federal Energy Regulatory Commission.
ACTION: Notice of Proposed Rulemaking.
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SUMMARY: The Federal Energy Regulatory Commission is amending its
research, development, and demonstration (RD&D) regulations at 18 CFR
154.401, to propose a new funding mechanism for the Gas Research
Institute. The Commission is proposing a mechanism that would fund
``core'' RD&D programs that benefit gas consumers through a
nondiscountable, non-bypassable volumetric surcharge on all pipeline
throughput. Voluntary funding would continue for all other GRI
programs.
DATES: GRI's comments are due on or before May 30, 1997. All other
comments are due on or before June 30, 1997.
ADDRESSES: File comments with the Office of the Secretary, Federal
Energy Regulatory Commission, 888 First Street, N.E., Washington, DC
20426.
FOR FURTHER INFORMATION CONTACT:
Mary E. Benge, Office of the General Counsel, Federal Energy Regulatory
Commission 888 First Street, N.E., Washington, DC 20426, (202) 208-
1214;
Harris S. Wood, Office of the General Counsel, Federal Energy
Regulatory Commission, 888 First Street, N.E., Washington, DC 20426,
(202) 208-0224.
SUPPLEMENTARY INFORMATION: In addition to publishing the full text of
this document in the Federal Register, the Commission provides all
interested persons an opportunity to inspect or copy the contents of
this document during normal business hours in Room 2A, 888 First
Street, N.E., Washington D.C. 20426.
The Commission Issuance Posting System (CIPS), an electronic
bulletin board service, provides access to the texts of formal
documents issued by the Commission. CIPS is available at no charge to
the user and may be accessed using a personal computer with a modem by
dialing 202-208-1397 if dialing locally or 1-800-856-3920 if dialing
long distance. To access CIPS, set your communications software to
19200, 14400, 12000, 9600, 7200, 4800, 2400, or 1200 bps, full duplex,
no parity, 8 data bits and 1 stop bit. The full text of this order will
be available on CIPS in ASCII and WordPerfect 5.1 format. CIPS user
assistance is available at 202-208-2474.
CIPS is also available on the Internet through the Fed World
system. Telnet software is required. To access CIPS via the Internet,
point your browser to the URL address: http://www.fedworld.gov and
select the ``Go to the FedWorld Telnet Site'' button. When your Telnet
software connects you, log on to the FedWorld system, scroll down and
select FedWorld by typing: 1 and at the command line and type: /go
FERC. FedWorld may also be accessed by Telnet at the address
fedworld.gov.
Finally, the complete text on diskette in WordPerfect format may be
purchased from the Commission's copy contractor, La Dorn Systems
Corporation. La Dorn Systems Corporation is also located in the Public
Reference Room at 888 First Street, N.E., Washington, DC 20426.
The Federal Energy Regulatory Commission is proposing to amend its
Research, Development, and Demonstration (RD&D) regulations at 18 CFR
154.401, to propose a new funding mechanism for the Gas Research
Institute (GRI). For the reasons discussed below, the Commission is
proposing a mechanism that would fund GRI ``core'' RD&D programs that
benefit gas consumers through a nondiscountable, non-bypassable,
volumetric surcharge on all jurisdictional pipeline throughput.
Voluntary funding would continue for all other GRI programs.
I. Background
A. History of RD&D Funding
The concept of a cooperative RD&D organization funded by the
natural gas industry evolved during a time of uncertainty in the
industry, when the excess of demand for natural gas over the supply
became apparent in the late 1960s and progressively through the
1970s.1 During that period, the industry's RD&D was
initially conducted by individual jurisdictional companies, with some
collective RD&D conducted under the auspices of the American Gas
Association (AGA).
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\1\ Gas Research Institute, Opinion No. 11, 2 FERC para. 61,259
(1978) (Approving GRI's initial RD&D program).
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In light of gas shortages and rapidly increasing gas prices, the
Commission sought to reduce, or at least curb, the demand, and to
augment the supply.2 The Commission began a series of
initiatives to stimulate RD&D efforts by jurisdictional companies and
to encourage jurisdictional companies to support RD&D organizations
which, in turn, would be broadly supported by energy industry sectors.
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\2\ Id. at 61,616.
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The Commission recognized a lack of concentrated and coordinated
RD&D effort by the natural gas industry to relieve the curtailment of
service then being experienced by natural gas pipelines.3
The Commission also cited the difficulty in reviewing research projects
individually to test their reasonableness. Thus, in Order No.
566,4 the Commission decided to clarify the Commission's
review and accounting procedures and provide for simplified proceedings
before the Commission by allowing advance approval of RD&D programs of
organizations funded by jurisdictional companies.
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\3\ Id. at 61,617.
\4\ Research, Development and Demonstration; Accounting; Advance
Approval of Rate Treatment, Opinion No. 566, Order Prescribing
Changes in Accounting and Rate Treatment for Research, Development
and Demonstration Expenditures, 58 FPC 2238 (1977).
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In 1976, GRI was formed in response to the Commission's challenge
in Order No. 566, with its purpose to serve the mutual interests of the
gas industry and gas consumers. GRI is a nonprofit organization that
sponsors RD&D in the fields of natural gas and manufactured
[[Page 24854]]
gas. GRI does not engage directly in RD&D activities. It is a planning
and management organization which engages in such activities through
RD&D project contracts with laboratories, universities and others. In
Opinion No. 11, the Commission authorized GRI to undertake a program of
RD&D with the objective of ameliorating the shortage of natural gas,
improving the economics and operation of the gas industry, and
developing improved conservation technology.5
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\5\ Opinion No. 11, 2 FERC at 61,616.
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GRI's program was designed to provide broad, widely dispersed
benefits that could not be captured by individual companies, or even
groups of companies within the gas industry.6 At its
inception, GRI expected to become the principal organization for
cooperative RD&D in the natural gas industry, and expected most of the
major gas pipelines and utility systems to become its
members,7 and these expectations were met. For this reason,
the Commission believed that formation of GRI was the best way to
achieve the Commission's RD&D objectives.
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\6\ See March 21, 1997 GRI Advisory Council Position, Docket No.
RP97-149-000 at 1.
\7\ Opinion No. 11, 2 FERC at 61,621.
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Because of the generalized benefits derived from cooperative RD&D
programs sponsored by GRI, the Commission, in Opinion No.
11,8 adopted the policy of:
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\8\ Id. at 61,635.
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* * *spreading the expenditures for [GRI's] RD&D program as
evenly as possible and over the broadest possible base of
jurisdictional and non-jurisdictional natural gas services in this
country. Since consumers of natural gas in particular, and Federal
taxpayers generally, are expected to benefit from the results of
GRI's RD&D program, it is proper that they should pay for the
program. But since producers, pipelines, and distributors also have
a stake in the results of the program, it is proper that they too
should pay for it * * *.
The Commission reiterated that GRI funding is fair if costs are
spread among those who will derive the benefits of GRI RD&D. The
Commission indicated that it ``expect[ed] GRI to make every effort to
obtain the broadest equitable funding.'' 9
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\9\ Id. at 61,635-6.
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The Commission has taken the position that gas consumers stand to
gain from aggressive RD&D, and therefore should share in the costs of
GRI funding. In Public Utilities Commission of Colorado v.
FERC,10 the United States Court of Appeals for the District
of Columbia Circuit affirmed the Commission's authority to take into
account even nonjurisdictional RD&D activities in setting rates. In
response to the argument that certain end-use RD&D concerning such
products as gas appliances, furnaces, and water heaters, was not
justified, the Court held that end-use research has as its goal the
conservation of natural gas, and that such RD&D is ``a means of
enhancing natural gas supplies and keeping consumer rates down,''
11 and that such RD&D was therefore ``within [the
Commission's NGA] Section 4 authority to promote.'' 12
However, the Commission is mindful that ratepayers required to pay for
RD&D must receive tangible benefits from that RD&D. In Process Gas
Consumers Group v. FERC (PGC I),13 the Court held that the
Commission had inadequately addressed the issue of whether GRI's end-
use research projects had a reasonable chance of benefiting the
ratepayer in ``a reasonable amount of time.'' 14 The Court
instructed the Commission to use a balancing test to determine whether
``the research, if successful, will work to the benefit of existing
classes of ratepayers--those customers paying for the research in the
first place.'' 15
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\10\ Pub. Util. Comm'n of Colo. v. FERC, 660 F.2d 821 (D.C. Cir.
1981), cert. denied, 456 U.S. 944 (1982).
\11\ Id. at 828.
\12\ Id. at 828 n. 13.
\13\ 866 F.2d 470 (D.C. Cir. 1989).
\14\ 866 F.2d at 471, quoting the Commission's existing RD&D
regulations.
\15\ 866 F.2d at 474.
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As competition has increased in the natural gas market, it has
become increasingly difficult to fund GRI in a manner that takes into
account the diverse interests of the various industry sectors. From
1978 through 1992, interstate pipeline members recovered their GRI
funding costs entirely through a uniform volumetric surcharge applied
to each unit of throughput. The Commission approved this method of
funding GRI programs because it met the Commission's two original aims:
to ensure stable GRI funding while spreading the costs of research as
evenly as possible and over the broadest possible base of natural gas
service.16 The use of a surcharge on a regulated price
ensured that ratepayers ultimately paid GRI's research costs. Pipelines
simply acted as conduits for funds from customers to GRI.17
The addition of a volumetric surcharge to a pipeline's maximum rates
did not affect the pipeline's revenue stream.
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\16\ Gas Research Institute, 60 FERC para. 61,203 at 61,702
(1992), aff'd, 61 FERC para. 61,121 (1992).
\17\ See In Re Columbia Gas Sys. Inc., 997 F.2d 1039, 1062 (3rd
Cir. 1993).
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Beginning in the late 1980s, changes in the industry began to
affect the viability of the uniform volumetric surcharge, by which
pipelines recovered the GRI costs from ratepayers. In an era of
competitive pricing, a pipeline might no longer be able to recover the
entire surcharge from its customers since customers were able to demand
a discounted rate. Under the original funding mechanism, each
interstate pipeline member of GRI was allocated a portion of GRI's
annual costs as an annual funding obligation that the pipeline was
required to remit to GRI regardless of whether it actually collected
that amount from its customers.
Beginning in 1992, GRI sought to change its funding mechanism after
two members of GRI, ANR Pipeline Company and United Gas Pipeline
Company, resigned from GRI membership. These pipelines maintained that
discounting had caused them to underrecover their GRI funding
obligations, and that their stockholders were paying those
underrecovered costs.18 GRI feared that other pipeline
members would resign from GRI rather than fund the remainder of GRI's
costs.
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\18\ See ANR Pipeline Co., 58 FERC para. 61,228 (1992), reh'g
denied, 59 FERC para. 61,095 (1992); and unpublished letter order
issued on December 31, 1991, in United Gas Pipe Line Co., Docket No.
TM92-11-000.
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Ultimately, the Commission approved a settlement that put in place
the current funding mechanism.19 The settlement funding
mechanism originally was approved on a temporary basis, for pipeline
recovery of GRI's 1994 and 1995 program funding.20 The
funding mechanism was later extended for another two years, through the
end of 1997, in order to give GRI and the industry sufficient time to
develop a permanent funding mechanism.21
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\19\ Gas Research Institute (GRI), 62 FERC para. 61,280 (1993);
reh'g denied, 63 FERC para. 61,316 (1993) (approving contested
settlement).
\20\ GRI, 63 FERC at 63,146.
\21\ Gas Research Institute, 71 FERC para. 61,130 (1995).
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In approving the settlement, the Commission found that pipelines
had been absorbing GRI costs and that the pipelines needed the
flexibility to discount the GRI surcharge to compete with other sources
of energy that do not carry the surcharge. Based upon these findings,
as well as the fact that the Commission had rejected mandatory pipeline
shareholder contributions in the past, the Commission accepted the
proposal to allow pipelines to discount the GRI surcharge, to discount
it first, and to remit to GRI only those GRI funds that they actually
recovered.22 In these ways, the settlement funding mechanism
differed from any that had
[[Page 24855]]
been in place previously. The new funding mechanism was, for the first
time, ``voluntary'' in the sense that it permitted pipelines to
discount without having to absorb GRI costs.
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\22\ GRI, 62 FERC at 62,805.
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The voluntary funding under the settlement raised the policy
question whether responsibility for GRI funding would be shifted
unfairly from discounted customers to captive customers that do not
receive discounted service. In approving GRI's interim funding proposal
for 1993, which also included voluntary funding, the Commission
acknowledged that cost shifting would necessarily ensue, but
nonetheless concluded that because of the mitigating factors built into
the settlement, ``[t]he proposed funding mechanism balances the costs
of GRI among all classes of service, localities, pipelines, producers
and GRI. This is a fair result,'' the Commission concluded, ``given
that all of these parties benefit from GRI programs.'' 23
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\23\ GRI, 60 FERC at 61,702.
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The United States Court of Appeals for the District of Columbia
Circuit, in Public Utilities Commission of California v.
FERC,24 upheld the Commission's approval of the settlement.
In doing so, the Court addressed arguments that the Commission's
approval constituted undue discrimination and amounted to an abdication
of its duty to protect consumers. The Court concluded that given the
underlying desirability of GRI itself, which had not been challenged,
the Commission could not be expected to revisit its earlier
determination that GRI inured to the benefit of all ratepayers, and
that the question to be addressed then became ``how GRI could remain
viable.'' 25 The Court held that the funding mechanism
chosen was reasonably designed to achieve the valid purpose for which
it was intended.
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\24\ Pub. Util. Comm'n of Cal. v. FERC, 24 F.3d 275 (D.C. Cir.
1994).
\25\ Id. at 281.
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Thus, for the past several years since the Commission's approval of
the settlement funding mechanism, GRI has been funded through a
temporary mechanism. The Commission's objective in this proceeding is
to develop a permanent GRI funding mechanism that will provide GRI with
sufficient stability to continue its RD&D with a view toward long-term,
as well as short-term, goals. The Commission is also guided by the
underlying objective of spreading the responsibility for funding the
RD&D sponsored by GRI over the broadest possible base because the
benefits go to gas consumers generally.
B. Problems With Voluntary Funding
The problems raised with respect to voluntary funding, as approved
in the settlement, continue to exert stress on the GRI funding
mechanism. Essentially, funding for GRI has become less broad-based and
less stable than ever. Pipelines, such as Koch Gateway Pipeline
Company, continue to express a desire to resign from GRI.26
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\26\ Koch Gateway Pipeline Co., 77 FERC para. 61,348 (1996),
reh'g pending.
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In a recent statement of its position on funding, GRI has indicated
that the existing voluntary funding is no longer viable for long-term
funding as competitive pressures continue to grow.27 GRI
asserts that consumer needs for technology are no longer met at the
currently reduced levels of spending in the industry. Furthermore, GRI
contends that its annual evaluation of consumer benefit/cost of
unfunded programs continues to show that many beneficial projects are
unfunded at current GRI levels. GRI also contends that industry RD&D
needs also are not fully met.
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\27\ GRI Position, filed March 19, 1997, in Docket No. RP97-149-
000.
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GRI recently submitted a new proposed funding mechanism for 1998-
1999 through which its pipeline members would collect amounts to be
remitted to GRI to satisfy its research budget.28 GRI
proposed a two-part funding mechanism, which would include a pipeline
surcharge to be levied on each unit of gas transported or sold, and an
LDC delivery charge, which would be levied on LDCs and intrastate
pipelines. GRI's proposal met with considerable protests. Many of those
protests raised the issue whether the delivery charge and the
volumetric surcharge would unfairly shift GRI's costs to LDCs,
intrastate pipelines, and the pipelines' captive customers.
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\28\ Docket No. RP97-149-000, filed December 2, 1996.
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The Commission decided to convene a public conference in that
proceeding to discuss not only GRI's proposal, but to foster a more
far-ranging public policy discussion of the future of GRI.
C. Public Conference
The Commission convened a public conference on March 21, 1997, to
discuss the future funding of RD&D in the natural gas industry. A
number of participants spoke on the advisability of continuing a
voluntary funding mechanism. Many participants, at the conference or in
written comments, expressed a need for mandatory funding for a core
program involving RD&D in the interest of gas consumers.
While there were a few exceptions, such as the Pennsylvania Office
of Consumer Advocate,29 and The Fertilizer
Institute,30 the vast majority of conference participants,
from all sectors of the industry, supported the continuation and
vitality of GRI. The success of GRI's RD&D efforts was reflected in the
American Gas Association's (AGA) comments. AGA's data showed natural
gas' share of the new home heating market at 67 percent--the highest
level in industry history.31 AGA attributed this continued
growth, in part, to an increased awareness of the environmental
advantages of natural gas. But, AGA maintained, this growth is mainly
due to the technological advances that allow the gas industry to
compete successfully on the cost of gas, as well as on the efficiency,
comfort, and performance of end-use heating equipment. Similarly,
appliance manufacturers contended that without GRI-funded programs,
manufacturers could be forced into abandoning a gas product
line.32 Participants such as the U.S. Environmental
Protection Agency (EPA) pointed out that GRI continues to conduct
important environmental RD&D that may be jeopardized if left solely to
individual companies to support.33
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\29\ March 21, 1997 comments and Tr. 147-151.
\30\ March 21, 1997 comments.
\31\ March 25, 1997 comments at 2.
\32\ Gas Appliance Manufacturers Association, March 21, 1997
comments.
\33\ United States Environmental Protection Agency, March 20,
1997 comments.
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The GRI Advisory Council (Advisory Council), which was set up at
the Commission's urging to ensure that GRI adequately utilizes the
viewpoints of scientific, engineering, economic, consumer, and
environmental interests, also submitted comments concerning the funding
of GRI. The Advisory Council asserted that there is little evidence to
suggest that the natural gas industry will voluntarily fund the level
of RD&D required to provide for the availability of gas supplies, low
cost, safe delivery, and efficient use of gas.34 Nor, the
Advisory Council contended, does it appear that voluntary funding will
sustain the high level of public benefit that has been received since
the founding of GRI.35 The Advisory Council also stated its
belief that the GRI program has already been reduced below the level
that is justified based on consumer benefit to cost
analysis.36
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\34\ March 21, 1997 position of the GRI Advisory Council in
Docket No. RP97-149-000.
\35\ Id.
\36\ Id.
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[[Page 24856]]
Some participants continued to favor voluntary
funding,37 but many participants concentrated on the
problems associated with voluntary funding. One such problem was
discussed by Professor William R. Hogan, a member of the GRI Advisory
Council and a member of the GRI board of directors, who addressed the
Commission on his own behalf.38 Professor Hogan explained
that in this era of competition, voluntary funding renders GRI's
program vulnerable to the classic ``free-rider problem.'' Professor
Hogan explained that under voluntary funding, all those contributing to
pay for the research realize that they will still receive the benefits
that flow from the research, even if they do not pay their individual
contribution. When everyone follows this strategy, Professor Hogan
explained, there is no funding, and the research is not undertaken.
Professor Hogan concluded that it would be unrealistic to think that
GRI's widely dispersed benefits are going to be paid in any other way
than through a mandatory program. These comments were echoed by Mr.
Henry R. Linden, of the Illinois Institute of Technology.39
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\37\ See March 20, 1997 comments of the Wisconsin Distributor
Group, the Northern Distributor Group, and PNM Gas Services.
\38\ March 20, 1997 comments; Tr. at 39-40.
\39\ Tr. at 46-47.
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While most participants were reacting to GRI's latest funding
proposal, some participants proposed new funding mechanisms. For
example, Mr. Leslie B. Enoch, speaking on behalf of the American Public
Gas Association (APGA), spoke in favor of a return to the use of a
volumetric surcharge to fund GRI. Mr. Enoch asserted that such funding
accomplishes three objectives: it is simple; it is in the interest of
all segments of the natural gas industry; and it is equitable. Mr.
Enoch pointed out that the benefits of RD&D are unrelated to discounts,
so, likewise, the funding should not be affected by discounts.
It was also suggested that the Commission take the approach of
funding GRI through a combination of mandatory and voluntary funding
mechanisms. Mr. Warren Mitchell,40 representing Southern
California Gas Company, suggested a combination of mandatory and
voluntary funding. He spoke in support of the funding of consumer
interest, or core, programs, through a volumetric, mandatory,
nondiscountable usage charge assessed on all throughput as a stable,
secure, and equitable funding for these programs. Mr. Mitchell also
advocated a separate, discountable, voluntary mechanism for other
programs.
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\40\ Tr. at 102-5.
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II. Discussion
A. The Commission's Proposed GRI Funding Mechanism
The industry has begun to veer from the objective of broad-based
funding for RD&D as GRI is losing funding and pipelines are drawing
away from supporting GRI economically. The public conference, while not
resulting in a consensus on the appropriate mechanism for GRI funding,
showed that there is a widely held view that RD&D continues to be in
the best interests of natural gas consumers, and that cooperative RD&D
through GRI continues to be the best means of approaching RD&D in the
gas industry.
It has been more than twenty years since the formation of GRI. The
Commission continues to firmly hold the view that GRI's programs
benefit natural gas consumers and that there is a need to ensure broad-
based and stable funding for consumer-oriented GRI programs. The
natural gas technologies developed with GRI funding over the past
decade have enabled the natural gas industry to reduce the costs of gas
to all classes of consumers. Moreover, new end-use technologies have
provided gas customers with improved energy efficiency, lower energy
bills, and more productive ways of utilizing energy resources in
residential and business applications.
The Commission shares the concerns of those who believe that the
continuation of voluntary funding threatens the RD&D efforts of GRI.
The limits of voluntary funding for GRI, in the more than three years
that the temporary voluntary funding mechanism has been in place, have
been explored. The Commission agrees with the Advisory Council that
there is little evidence to suggest that the natural gas industry will
voluntarily fund the level of RD&D required to provide for
availability, low cost, safe delivery, and efficient use of natural
gas. Nor will voluntary funding sustain the high level of public
benefit that has been received since the founding of GRI. The GRI
program has already been reduced below the level that is justified
based on an analysis of consumer benefit relative to cost.
The Commission continues to be guided by the original goals of
funding the generalized benefits of GRI's RD&D programs--to ensure
stable GRI funding while spreading the responsibility for funding
research as evenly as possible and over the broadest possible base of
natural gas service. Rather than adopt GRI's post-1997 funding
mechanism,41 the Commission proposes a new, permanent
funding mechanism to spread the responsibility for funding RD&D widely
in the natural gas industry.
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\41\ Filed December 2, 1996, in Docket No. RP97-149-000.
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The Commission is persuaded that the need for stable GRI funding
requires that at least some of GRI's funding must be mandatory. In
order for the responsibility for the funding to be as broadly-based as
possible, the Commission believes that it should be secured, at least
in part, through a volumetric surcharge, as in the past. However, the
Commission also recognizes that in a competitive market, pipelines must
have the flexibility to discount their rates.
Thus the Commission proposes to fund RD&D that is of primary
benefit to gas consumers as a group through a ``core'' RD&D program.
The core RD&D program would be comprised of RD&D activities that
produce broadly-dispersed benefits flowing predominantly to gas
consumers, and that cannot be readily captured by industry sectors. The
core program would be funded by a mandatory, non-bypassable, non-
discountable volumetric funding surcharge levied on all volumes
transported by interstate pipelines, regardless of the pipelines'
membership status in GRI. This surcharge would ensure stable and
equitable funding for gas consumer-interest programs.
GRI has proposed that other RD&D, that primarily benefits a
specific industry sector, would be funded through voluntary
funding.42 The voluntarily funded RD&D programs would
consist of RD&D activities that produce less widely-dispersed benefits
to more limited categories, such as individual consumers, groups of
consumers, industries, or groups of companies within an industry. GRI
proposed these programs to be funded by two means. One would be a
separate charge in the pipelines' tariffs which shippers could choose
to pay. Those shippers who chose to pay the charge to contribute to
this fund, called a ``Technology Management'' fund, would be able to
participate in governance over the management of the fund. It was
suggested at the conference that it is appropriate to make such non-
core RD&D funding subject to Commission oversight, rather than to leave
it to GRI to design its own funding mechanism or establish a voluntary
RD&D contract
[[Page 24857]]
service.43 GRI's proposed Technology Management charge is
consistent with this view. Accordingly, the Commission requests
comments on GRI's proposal to fund non-core RD&D through a Technology
Management charge, paid only by shippers that willingly elect to pay
for GRI RD&D over-and-above the core program. The Commission also
invites industry participants to comment on the need for any Commission
involvement with the non-core program and the appropriateness of
including any funding for the non-core program in pipeline rates.
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\42\ GRI Position, filed March 19, 1997, in Docket No. RP97-149-
000, at 2.
\43\ At the conference, Mr. William Burnett, speaking on behalf
of GRI, argued that the Commission's imprimatur as to the analysis
of the benefits of Technology Management RD&D would assist state
commissions in dealing with the passthrough of these costs by local
distribution companies. Tr. at 131-4.
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As an alternative to GRI's proposal, shippers could make voluntary
contributions to fund the Technology Management program by agreeing to
make payments directly to GRI. Another possibility would be for
shippers to arrange to pay a designated amount to the pipeline. The
pipeline would then, acting as a conduit, remit the same amount to GRI.
The pipeline could file with the Commission an amendment to its
contract with such a shipper in order to specify the amount of the
contribution.
The other way GRI proposes to fund the Technology Management
program is voluntary pipeline contributions. If a pipeline chooses to
contribute to the voluntarily funded program, GRI proposes that the
pipeline would be able to include those contributions in the pipeline's
operating budget that is used in setting the pipeline's rates in a rate
case.44 The Commission requests comment on whether to permit
pipelines to obtain recovery in their rates of their own voluntary
contributions as GRI proposes.
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\44\ GRI Position, filed March 19, 1997, in Docket No. RP97-149-
000, at 2.
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The Commission, at this time, can only estimate the budget
requirements for the core RD&D program. GRI states in its March 19,
1997 position paper that it has identified $90 million of its 1997 RD&D
projects in the areas of environment, safety, basic research, and pro-
competitive research related to emerging gas supplies and energy
efficiency. Projects of this type are examples of what the Commission
would consider to be part of the core program.
In order to identify which RD&D projects would be in the core
program and which would be in the voluntary program, the Commission has
looked to GRI's 1997-2001 Research and Development Plan. GRI has broken
down its RD&D program into smaller groups called ``Business Units'', as
shown in Exhibit 1 of its 1997-2001 Research and Development Plan. All
of GRI's individual RD&D projects are distributed among these business
units.
GRI's twelve RD&D business units are as follows:
(1) Basic Research,
(2) Commercial,
(3) Distribution,
(4) Environment and Safety,
(5) Industrial,
(6) Market and Strategic Collaboration and Technology Transfer,
(7) Natural Gas Vehicles,
(8) Power Generation,
(9) Residential,
(10) Strategic Collaboration,
(11) Supply, and
(12) Transmission.
Certain RD&D activities within the individual business units would
appear to fall easily into one of the two proposed RD&D programs. For
example, RD&D within the Basic Research and Environment & Safety
business units would likely belong in the core program, while RD&D
within the Commercial, Industrial, Natural Gas Vehicles, and Power
Generation business units would probably be more appropriately funded
through the voluntary program. GRI estimates the budget for what
appears to be non-core RD&D as ranging from $45-70 million.\45\
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\45\ In its position paper filed March 19, 1997, in Docket No.
RP97-149-000, GRI indicates that a Technology Management surcharge
is but one way of obtaining funding for the voluntary program.
Specifically, GRI states that certain gas industry segments may not
necessarily be shippers on interstate pipelines and consequently
would not be positioned to pay the Technology Management surcharge.
In these instances, GRI could be compensated for non-core RD&D in
other ways. For example, pipelines could provide funding support for
the non-core program by including the costs in their operating
budgets, while producers (and others) could directly support the
non-core program by cash or in-kind funding.
---------------------------------------------------------------------------
Some RD&D might contain elements of both the core and voluntary
programs, e.g., those activities in GRI's Distribution, Market &
Strategic Collaboration and Technology Transfer, Residential, Strategic
Collaboration, Supply and Transmission business units. For this reason,
only activities within the business units which relate to environment,
safety, basic research, and generic supply and energy efficiency
efforts, would be included in the core program, with the remainder of
the activities to be included in the voluntary program.
The business unit approach is just one of many possible methods
which may be used to identify elements of a core RD&D program. The
Commission requests GRI to submit a proposed division of categories,
and a description of the types of projects GRI would include in each
category. Interested persons may then submit comments on the business
unit approach and GRI's proposal, if different, and suggest other
possible methods of determining how GRI's RD&D activities should be
divided into the two proposed core and non-core RD&D categories.
Commenters are requested to define commercialization, as distinguished
from basic RD&D which may have no immediate commercial application, and
comment on whether it is necessary or appropriate for GRI's
commercialization of technology to be funded by pipeline rates.
Regardless of the approach taken to classify projects for purposes
of the proposed funding mechanism, once the two categories are in
place, the Commission proposes to require GRI to file an annual
application seeking approval for its core RD&D program. In this
application, GRI would continue to file all of the detailed information
necessary for advance approval and rate treatment as required by the
Commission's existing regulations, and also show that its filing is
consistent with Court and Commission precedent. In addition, GRI would
be required to specifically identify which projects are to be included
in the core program and which are in the voluntary program, along with
the anticipated costs for each program broken down by individual
project cost. Finally, GRI would have to state the surcharge proposed
to support its program. The Commission intends to scrutinize individual
core projects to ensure that gas consumers receive the benefits of such
projects. Based upon such review, the Commission will determine the
appropriate annual core program funding level.
As indicated above, the funding surcharge for the core program
would be applied to every volume of gas (or dekatherm equivalent)
transported by all regulated pipelines, and not just GRI members.
Accordingly, GRI would be required to support its core program
surcharge derivation using documented transportation volumes from the
preceding year.
Contemporaneously with the issuance of this notice, the Commission
is issuing an order in Docket No. RP97-149-000, extending the current
GRI funding mechanism for one year, through 1998. Therefore, the
funding mechanism the Commission is proposing here would become
effective after 1998. Beginning with GRI's 1999 filing, the Commission
will require GRI to file annually for
[[Page 24858]]
Commission approval of its programs. However, after the Commission,
GRI, and the industry have gained sufficient experience with the
proposed funding mechanism, the Commission will permit GRI to revert to
the two-year planning cycle the Commission approved in Opinion No.
384.46
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\46\ Gas Research Institute, Opinion No. 384, 65 FERC para.
61,027 (1993) at 61,367-8.
---------------------------------------------------------------------------
B. Changes to Regulations To Reflect GRI Mandatory Funding and Rate
Treatment of Pipelines' Contributions to GRI
Section 154.401 of the Commission's regulations governing the rate
treatment of RD&D expenditures 47 continues to reflect the
Commission's initiatives in Order No. 566. The regulation contemplates
RD&D projects by multiple jurisdictional companies although it does
provide for RD&D conducted by organizations supported by more than one
company. Since the advent of broadly funded RD&D projects that are
centrally planned and managed by GRI, these regulations do not reflect
actual practice. Consequently, the Commission proposes to replace
Section 154.401(a).
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\47\ 18 CFR 154.401.
---------------------------------------------------------------------------
Proposed Section 154.401(a) would require all natural gas companies
to include in their tariffs a non-discountable, non-bypassable
volumetric surcharge to be collected from shippers on their systems to
fund the GRI core RD&D program. This charge will be required regardless
of whether the natural gas company chooses to be a member of GRI or
support non-core RD&D programs. In this manner, those programs which
are primarily designed to benefit gas consumers will be assured of
funding. Without such a mandatory funding mechanism for these core
projects, the evidence is clear that funding of such projects is in
jeopardy, and this is not acceptable to the Commission.
Section 154.401(b)(1) of the Commission's regulations currently
provides that individual natural gas companies may apply for advance
approval of rate treatment for RD&D expenditures. It also provides that
an RD&D organization, such as GRI, that is supported by more than one
company may submit an application that covers the organization's RD&D
program, and that the Commission's approval of that application
constitutes approval of the individual companies' contributions to the
organization. In recent years, there have been no filings by individual
companies for advance approval of rate treatment for RD&D expenses.
Rather, virtually all requests for advance approval of RD&D expenses
have been filed by GRI. Therefore, to reflect actual practice, the
Commission proposes to revise Section 154.401(b) of its regulations.
Proposed Section 154.401(b)(1) would provide for the filing of
applications for advance approval of RD&D expenditures only by GRI, or
other RD&D organizations. Individual companies will be able to seek to
recover other RD&D expenses beyond the amounts related to funding RD&D
organizations as part of their general section 4 rate filings. Proposed
Section 154.401(b)(2) would define ``core'' and ``non-core'' projects
and would describe the requirements for funding core and non-core
programs.
III. Information Collection Statement
The following collections of information contained in this proposed
rule are being submitted to the Office of Management and Budget (OMB)
for review under Section 3507(d) of the Paperwork Reduction Act of
1995.48 FERC identifies the information provided under 18
U.S.C. Part 154 as FERC-545, Gas Pipeline Rates: Rate Change (non-
formal).
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\48\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------
Pursuant to Sections 4, 5 and 16 of the Natural Gas Act (NGA) (15
U.S.C. 717c-717o, P.L. 75-688) and Part 154 of the Commission's
regulations, natural gas companies must file tariffs that comprise
schedules of all rates or charges identifying transportation or sales
activities conducted by natural gas pipelines. Pursuant to the proposed
rules contained in the instant NOPR, all natural gas companies having
tariffs on file with the Commission would be required to file new
tariff provisions reflecting the mandatory GRI surcharge. Such filings
would be required annually.
The burden estimates for complying with this proposed rule are as
follows:
----------------------------------------------------------------------------------------------------------------
Total
Data collection Number of Number of Hours per annual
respondents responses response hours
----------------------------------------------------------------------------------------------------------------
FERC-545.................................................... 88 88 7.35 *647
----------------------------------------------------------------------------------------------------------------
* Rounded off.
Total Annual Hours for Collection (reporting + Recordkeeping, (if
appropriate)) =647.
These estimates reflect only the incremental burden on companies
not presently members of GRI. Inasmuch as those companies presently
members of GRI must reflect a GRI surcharge in their tariffs now, there
would be no significant change in the burden on those companies
resulting from adoption of the rules proposed in this NOPR.
Comments are solicited on the Commission's need for this
information, whether the information will have practical utility, the
accuracy of the provided burden, estimates, ways to enhance the
quality, utility and clarity of the information to be collected, and
any suggested methods for minimizing respondent's burden, including the
use of automated information techniques.
The Commission also seeks comments on the costs to comply with
these requirements. It has projected the average annualized cost for
all respondents to be:
Annualized Costs (Operations & Maintenance) $32,350.
The currently valid OMB Control Number for the collection of
information (i.e., tariff filings) that would be required by the
proposed rules is 1902-0154. Applicants shall not be penalized for
failure to respond to these collections of information unless
collection(s) of information display a valid OMB control number.
The Commission has assured itself, by means of its internal review,
that there is specific, objective support for the burden estimates
associated with the Commission requirements. The Commission's Office of
Pipeline Regulation will use the data included in these filings to
verify the costs proposed to be recovered are just and reasonable and
assists the Commission in carrying out its regulatory responsibilities
under the Natural Gas Act. These requirements conform to the
Commission's plan for efficient information collection, communication,
and management within the natural gas industry.
Interested persons may obtain information on the reporting
requirements by contacting the
[[Page 24859]]
following: Federal Energy Regulatory Commission, 888 First Street, NE,
Washington, DC 20426, [Attention: Michael Miller, Division of
Information Services, Phone: (202) 208-1415, fax: (202) 273-0873, E-
mail: mmiller@ferc.fed.us
For submitting comments concerning the collection of information(s)
and the associated burden estimate(s) please send your comments to the
contact listed above and to the Office of Management and Budget, Office
of Information and Regulatory Affairs, Washington, DC 20503.
[Attention: Desk Officer for the Federal Energy Regulatory Commission,
phone: (202) 395-3087, fax: (202) 395-7285]
IV. Environmental Analysis
The Commission is required to prepare an Environmental Assessment
or an Environmental Impact Statement for any action that may have a
significant adverse effect on the human environment.49 The
Commission has categorically excluded certain actions from these
requirements as not having a significant effect on the human
environment.50 The action proposed here is procedural in
nature and therefore falls within the categorical exclusions provided
in the Commission's regulations.51 Therefore, neither an
environmental impact statement nor an environmental assessment is
necessary and will not be prepared in this rulemaking.
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\49\ Order No. 486, Regulations Implementing the National
Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Statutes
and Regulations, Regulations Preambles 1986-1990 para. 30,783
(1987).
\50\ 18 CFR 380.4.
\51\ See 18 CFR 380.4(a)(2)(ii).
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V. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act 52 generally requires the
Commission to describe the impact that a proposed rule would have on
small entities or to certify that the rule will not have a significant
economic impact on a substantial number of small entities. An analysis
is not required if a proposed rule will not have such an
impact.53
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\52\ 5 U.S.C. 601-612.
\53\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
Pursuant to section 605(b), the Commission certifies that the
proposed rules and amendments, if promulgated, will not have a
significant adverse economic impact on a substantial number of small
entities.
VI. Comment Procedures
The Commission invites interested persons to submit written
comments on the matters and issues proposed in this notice to be
adopted, including any related matters or alternative proposals that
commenters may wish to discuss. Because the Commission is seeking in
the first instance comments from GRI on what will constitute ``core
projects,'' GRI must submit its comments no later than May 30, 1997.
All other comments, including replies to the comments of GRI concerning
its concept of ``core projects,'' must be filed with the Commission no
later than June 30, 1997. An original and 14 copies of comments should
be submitted to the Office of the Secretary, Federal Energy Regulatory
Commission, 888 First Street, NE, Washington, DC 20426, and should
refer to Docket No. RM97-3-000. Additionally, comments should be
submitted electronically. Participants can submit comments on computer
diskette in WordPerfect 6.1 or lower format or in ASCII
format, with the name of the filer and Docket No. RM97-3-000 on the
outside of the diskette.
Participants also are encouraged to participate in a Commission
pilot project to test the use of the Internet for electronic filing
either in conjunction with, or in lieu of, diskette filing. Comments
should be submitted through the Internet by E-Mail to
comment.rm@ferc.fed.us in the following format: on the subject line,
specify Docket No. RM97-3-000; in the body of the E-Mail message,
specify the name of the filing entity and the name, telephone number
and E-Mail address of a contact person; and attach the comment in
WordPerfect 6.1 or lower format or in ASCII format as an
attachment to the E-Mail message. The Commission will send a reply to
the E-Mail to acknowledge receipt. Questions or comments on the pilot
project itself should be directed to Marvin Rosenberg at 202-208-1283,
E-Mail address marvin.rosenberg@ferc.fed.us, but should not be sent to
the E-Mail address for comments on the NOPR.
All written comments will be placed in the Commission's public
files and will be available for inspection in the Commission's Public
Reference Room at 888 First Street, NE, Washington, DC 20426, during
regular business hours.
List of Subjects in 18 CFR Part 154
Natural Gas Companies, Rate Schedules and tariffs.
By direction of the Commission. Commissioner Santa concurred
with a separate statement attached.
Lois D. Cashell,
Secretary.
In consideration of the foregoing, the Commission gives notice of
its proposal to amend Part 154, Chapter I, Title 18, Code of Federal
Regulations, as set forth below.
PART 154--RATE SCHEDULES AND TARIFFS
1. The authority citation for Part 154 continues to read as
follows:
Authority: 15 U.S.C. 717-717w; 31 U.S.C. 9701; 42 U.S.C. 7102-
7352.
2. Sections 154.401(a), (b)(1) and (b)(2) are revised to read as
follows:
Sec. 154.401 RD&D expenditures.
(a) All natural gas companies must include in their tariffs a non-
discountable volumetric surcharge, as determined by the Commission upon
approval of an application filed under paragraph (b)(1) of this
section, to fund Research, Development, and Demonstration (RD&D)
programs.
(b) Applications for rate treatment approval. (1) An application
for advance approval of an RD&D program to be funded by the rates of
natural gas pipeline companies may be filed by the Gas Research
Institute or other RD&D organization. Approval by the Commission of
such an RD&D application will constitute approval of the individual
company's rate surcharges to fund the RD&D programs of the Gas Research
Institute or other RD&D organization. The rate surcharge required in
paragraph (a) of this section will be limited to funding projects that
produce broadly-dispersed benefits flowing predominantly to gas
consumers that cannot be captured readily by industry sectors.
(2) An application filed under paragraph (b)(1) of this section for
advance approval of an RD&D program to be funded by the rates of
natural gas pipeline companies must include:
(i) a 5-year program plan that identifies ``core'' RD&D projects
and ``non-core'' RD&D projects;
(ii) the anticipated costs for the ``core'' program and the ``non-
core'' program broken down by individual project cost; and
(iii) the respective surcharges proposed to fund the ``core''
program and the ``non-core'' program. ``Core'' projects are defined as
those projects that produce broadly-dispersed benefits flowing
predominantly to gas consumers that readily cannot be captured by
industry sectors. ``Non-core'' projects are defined as all other RD&D
projects. Such an application must be filed at least 180 days prior to
the commencement of the 5-year period of the plan.
* * * * *
[[Page 24860]]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. RM97-3-000]
Research, Development and Demonstration Funding
Issued: April 30, 1997.
SANTA, Commissioner, concurring:
I concur in today's notice of proposed rulemaking to amend the
Commission's research development and demonstration (RD&D)
regulations to propose a new funding mechanism for the Gas Research
Institute (GRI). Historically, GRI has served both consumers and the
natural gas industry well as the planning and management
organization for the coordination of collaborative natural gas RD&D
projects. Nonetheless, as was made clear at the Commission's March
21, 1997, public conference to explore the future funding of RD&D in
the natural gas industry, the funding crisis that has plagued GRI
for the past five years is unlikely to be resolved absent
intervention by this Commission. Therefore, I support initiating
this proceeding to provide a forum in which this issue might be
resolved conclusively.
Still, it concerns me that in proposing a mandatory volumetric
surcharge on all interstate natural gas pipeline throughput to fund
GRI's ``core'' RD&D program, the Commission is sidestepping several
threshold questions that should be answered before taking this
unprecedented step. As noted in the background discussion in today's
NOPR, both GRI and the Commission's order in Opinion No. 11,
authorizing GRI to undertake its RD&D program, are a product of the
era of wellhead price controls and comprehensive regulation of the
natural gas industry. Over the ensuing two decades, the natural gas
industry has been restructured fundamentally. There now is a
competitive commodity market for natural gas, interstate pipelines
have left the merchant function and now provide unbundled open
access transportation, and there now is the prospect for even
greater competition and customer choice with the unbundling of local
distribution company services. In sum, both the market conditions
and the regulatory environment that gave rise to the need for this
Commission's support for ratepayer-funded collaborative RD&D through
GRI are part of the industry's increasingly distant past.
In light of these fundamental changes, what is the policy
rationale for continued Commission support of collaborative natural
gas industry RD&D through the GRI surcharge on interstate pipeline
transportation services? Furthermore, is this public policy
rationale for Commission-supported collaborative RD&D so great as to
justify converting GRI funding from the heretofore voluntary program
into one which would mandate interstate pipeline participation
notwithstanding the decision by an individual pipeline, or
pipelines, not to be a member of GRI? In other words, before taking
the unprecedented step of transforming the GRI surcharge into a
nonbypassable ``tax'' on all interstate pipeline throughput, does
the Commission need to re-establish the public interest basis for
this program in view of today's natural gas market?
I also believe that in deliberating on the future funding of
RD&D in the natural gas industry, the Commission should consider
this issue in the context of trends in the broader energy markets.
With the convergence of natural gas and electricity markets, it is
appropriate to compare the natural gas and electric power
industries' mechanisms for funding collaborative RD&D. In
particular, how is the experience of the Electric Power Research
Institute (EPRI), which never has enjoyed the benefit of a
Commission-authorized surcharge, instructive in evaluating the
prospects for collaborative natural gas RD&D in the future? What, if
anything, makes natural gas so different as to justify a Commission
mandate that ratepayers fund GRI's ``core'' program when no such
mandate exists for a comparable EPRI program?
Finally, while it is reflected in the NOPR, I wish to emphasize
the question concerning whether GRI's proposed ``non-core''
voluntary program should be authorized by the Commission. Given that
this purportedly is a ``voluntary'' program, what useful purpose is
served by Commission oversight? The NOPR recounts GRI's argument in
favor of Commission oversight of the ``non-core'' program: ``[T]he
Commission's imprimatur as to the analysis of the benefits of
Technology Management RD&D would assist state commissions in dealing
with the passthrough of these costs by local distribution
companies.'' 1 Does this rationale support a finding that
it is in the public interest for the Commission to oversee the
``non-core'' program? In particular, do state commissions desire the
Commission's ``assistance'' in dealing with the passthrough of
``non-core'' program costs? Also, given the nature of the activities
that would be funded under the ``non-core'' program (i.e., ``RD&D
activities that produce less widely-dispersed benefits to more
limited categories, such as individual consumers, groups of
consumers, industries, or groups of companies within an industry''),
2 how likely is it that in overseeing the ``non-core''
program the Commission easily could make generalized findings that
``non-core'' RD&D projects would be appropriate for funding through
a generally applicable charge stated in a pipeline's tariff?
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\1\ Supra, note 43.
\2\ Supra, slip op. at p. 17.
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In raising these questions, I do not wish to leave the
impression that there is not a case to be made for collaborative
RD&D in the natural gas industry. Also, I view it as a positive
development that GRI is now focusing more intently on a ``core''
program that is intended to capture RD&D projects with widely
dispersed consumer benefits. Still, given GRI's seemingly chronic
funding crisis and the unprecedented nature of the Commission's
proposed solution, these fundamental threshold questions about the
future of collaborative RD&D in the natural gas industry and the
appropriate role of this Commission in supporting such RD&D should
be answered before the Commission proceeds. If not now, when will be
the appropriate time for such questions?
While the Commission's March 21, 1997, technical conference
touched on these questions, I do not believe that the record of that
conference alone provides a sufficient basis for taking the steps
proposed in today's NOPR. I sincerely hope that these questions
contribute to a better developed record in this proceeding so that
the Commission can make a fully informed decision when it issues a
final rule.
Donald F. Santa, Jr.,
Commissioner.
[FR Doc. 97-11794 Filed 5-6-97; 8:45 am]
BILLING CODE 6717-01-P
