Originally published for customers October 6, 2023
GTN Xpress has been recently listed and pulled from FERC meeting agendas and is quite an outlier on timing. We think the delay is unrelated to GHGs and may have to do with traditional rate issues.
What’s the issue?
At its two most recent open meetings, FERC listed certain pipeline and LNG projects for decision and then pulled them from consideration at the meeting.
Why does it matter?
The inability of the Commission to reach a decision on projects noticed for decision a week in advance of meetings is a sure sign of dysfunction at the Commission. In addition, one project, GTN Xpress, was pulled from the July open meeting agenda and then not even listed for the September meeting, and will soon become the poster child for projects impacted by FERC polarization.
What’s our view?
It certainly should be considered a bit of tea leaf reading to speculate on why GTN Xpress cannot get a vote up or down. But by comparing that project to others that have been voted out while it lingers, our theory is that it is not being delayed solely by internal disputes about environmental issues, but, more importantly, may be hung up by a deadlock over more traditional rate issues.
At its two most recent open meetings, FERC listed certain pipeline and LNG projects for decision and then pulled them from consideration at the meeting. The inability of the Commission to reach a decision on projects noticed for decision a week in advance of meetings is a sure sign of dysfunction at the Commission. In addition, one project, GTN Xpress, was pulled from the July open meeting agenda and then not even listed for the September meeting, and will soon become the poster child for projects impacted by FERC polarization.
It certainly should be considered a bit of tea leaf reading to speculate on why GTN Xpress cannot get a vote up or down. But by comparing that project to others that have been voted out while it lingers, our theory is that it is not being delayed solely by internal disputes about environmental issues, but, more importantly, may be hung up by a deadlock over more traditional rate issues.
Chairman Phillips
In a situation that can best be described as classic Washington drama, we learned that acting Chairman Phillips may have always just been Chairman Phillips. When he was appointed as Chairman in January after the departure of Chairman Glick, all of the announcements indicated that President Biden had named him as Acting Chairman. In fact, that announcement is still on the FERC website. However, earlier this week, an activist website released the document signed on January 3 which simply appoints Chairman Phillips as chair of FERC without mentioning the word Acting. While we are sure there are political reasons for such drama, our only reason to raise this is to let you know we will no longer be using the word Acting when we refer to Chairman Phillips.
Functioning of FERC Under Chairman Phillips
Following his appointment, we noted in Acting Chairman Phillips Appears to Be Enforcing Key Aspects of the Failed Draft Certificate Policy Statement that Chairman Phillips had taken positive steps to reverse decisions by Chairman Glick that could accelerate FERC’s review process for pipeline and LNG projects. However, we also warned that he had not yet abandoned all aspects of the failed policies that Chairman Glick had issued and then withdrawn. During the early months of his tenure, FERC seemed to be working through the backlog of cases created during Chairman Glick’s reign, but those efforts hit a wall in the July open meeting, which we discussed in FERC Tries to Clear Pipeline Project Backlog, but Republican Commissioner Says No.
At the July open meeting, there were six projects that were on the agenda issued a week in advance of the meeting, but Chairman Phillips was forced to pull five of them from the agenda and was clearly peeved at a press conference following the meeting. He suggested there that he and Commissioner Christie were prepared to act on all of them and that the press would need to ask the other commissioners why they could not be voted out. Four of those five projects that were pulled from the July agenda were back on the September agenda and were finally unanimously approved. The “dissents” filed by Commissioner Clements and Danly in all four cases are nearly identical and do not find fault at all with the substantive decisions of the Commission in approving the projects in question. Instead, as Commissioner Danly noted, his main concern is that if he were the decision’s “sole author, I would have addressed several parts of it quite differently.”
The two dissenters are primarily focused on the scope of FERC’s assessment of greenhouse gas emissions and whether it should revitalize the failed policies of Chairman Glick, as Commissioner Clements believes, or formally renounce such policies as fundamentally flawed, as Commissioner Danly thinks. However, in the meantime, the two centrist commissioners are able to vote all of the projects through because ultimately the two extreme commissioners are in agreement with the substantive decisions reached in the Commission decisions. But there was one project, GTN Xpress, that was on the July agenda, but didn’t even make the September agenda. So what is different about GTN Xpress?
The GTN Xpress Project
GTN Xpress is a very small project from almost any perspective. It is designed to provide only an additional 150,000 dth/day of capacity and is projected to cost just over $75 million. In addition, that capacity increase is achieved by very limited changes at three existing compressor stations. At the Athol Compressor Station, the horsepower of the station will be increased from 49,300 to 58,470, accomplished by reprogramming the existing compressor unit’s software controls and thus requiring no construction. The horsepower of the Starbuck Compressor Station would be increased from 54,000 to 86,640 by installing a new 23,470 gas-fired, turbine compressor and related facilities, uprating an existing compressor by reprogramming its software controls and installing three additional gas cooling bays. Finally, the horsepower at the Kent Compressor Station would increase from 47,900 to 57,070, again by reprogramming the existing software and installing auxiliary facilities, including four additional gas cooling bays.
The Length of the Review
GTN Xpress was first filed at FERC on October 4, 2021 and thus was one of the projects that was subjected to Chairman Glick’s excessive environmental review. As a result, FERC staff was required to complete an environmental impact statement for the project which took them almost fourteen months to complete, with the final report being issued on November 18, 2022. Since then, the project has been awaiting action by the Commission, but as we have noted has become something of an outlier even there because many other projects of both greater size and complexity have received approval, yet GTN Xpress seems to be stuck.
Above, we show the time from application to a decision for every pipeline project in our data set with a total cost of $125 million or less. We have assumed that GTN Xpress gets a vote at this month’s open meeting, which it may not, but even if it does, it will have the dubious honor of having taken the longest of all the projects in our data set to be voted out.
Controversial from the Beginning
Not only was GTN Xpress subjected to an excessively long environmental review, it also was the subject of protests from the beginning and not only about the project’s environmental aspects. On November 9, 2021, Pacific Gas and Electric (PGE), an existing firm shipper on the GTN system, intervened and filed a protest against the project. Then on November 17, 2021, a few days after the deadline for interventions, Puget Sound Energy (PSE), also an existing firm shipper on the GTN system, filed a late intervention and similarly protested the filing. Both PGE and PSE are local gas distribution companies that rely on the GTN system for gas supply. Neither company objected to the project receiving a FERC certificate, but both vehemently objected to another aspect of the application, the request by GTN to have the costs of the project “rolled in” to the rate base used to calculate its system-wide rates.
Rolled In Versus Incremental
For those not familiar with the concept of rolled in rate treatment, a quick lesson may be in order to understand the objections of PGE and PSE. The threshold question under the 1999 Certificate Policy Statement that FERC continues to work under following Chairman Glick’s failed attempt to revise it, is whether the project sponsor can show that the project’s costs will not be subsidized by existing customers who may not receive a benefit from the project. The most straightforward way to satisfy this requirement, and the method used in the vast majority of expansion cases, is to establish a new tariff rate that is “incrementally priced” and is only paid by those shippers who would use the new facilities. This method avoids any subsidization by the existing customers by not allowing recovery of the project’s costs from anyone other than customers who use the incremental capacity. The other way to meet this requirement is to request that the project costs be “rolled in” to the existing rate base. This method only works, however, if the pipeline can show that the revenues for a project exceed the project’s estimated cost-of-service. GTN asserted that it had met this threshold because its project could be shown to generate “estimated revenues of approximately $14.1 million during the first year of operation, which is greater than the estimated cost-of-service associated with the Project facilities of approximately $10.6 million during the same time period.”
Objections About the Cost of Service Calculation
GTN’s calculation of its cost of service included only the facilities it was seeking to add as part of the project and which were being depreciated over a period of almost fifty years. The first assumption was challenged by PGE and PSE, and the second was eventually challenged by three states opposing the project on environmental grounds. Those states argued that the depreciation rate should be driven by the useful life of the assets given the climate change goals of the states that receive supply from GTN.
The challenges by PGE and PSE relate to the fact that some of the increased horsepower being added at the three stations was being achieved by reprogramming gas turbines that had been previously installed at those stations with all of the costs being assigned to the company’s existing rate base. Their argument is that because those units were now having their computer programming modified to allow them to operate at the maximum capacity, then, consequently, a fraction of the costs for those units should be included in the rate base for calculating the cost of service for the project to meet the no subsidization rule in the certificate policy statement.
The states of Oregon, Washington and California have opposed the project on a number of grounds, including a lack of need because of the climate policies of their states and how the reduction in demand created by those policies will make the pipeline unnecessary by no later than 2050. This lack of need impacts the calculation of whether rolled in treatment is appropriate because, as argued by the states, calculating the capital costs of the project over an extended period of close to 50 years is inappropriate when the terms of the precedent agreements relied on to demonstrate need have only 30 to 33-year terms. Instead, the states proposed the use of a twenty-year amortization period to reflect “the anticipated decline in total regional gas consumption” over that period.
If you replace either of the assumptions GTN used regarding the cost of the project, or the appropriate amortization period, the shippers and the states opposing GTN’s proposed rolled in treatment assert that the company has failed to satisfy the key threshold inquiry under the existing policy statement — that the costs of the project not be subsidized by the existing customers.
Could the Rate Issue Be the Snag Stopping GTN Xpress?
This dispute over how to recover the costs of the project could be the reason the project has been hung up at FERC while others ahead of them in line seem to move forward. Of the projects approved since Chairman Phillips took over, only one other, Northern Lights 2023, had requested rolled in treatment for its costs and there was no opposition to that request by its existing customers. While the dispute over GHG issues appears to be what created the problem in July, those issues were sufficiently worked out by September to allow all but GTN Xpress to receive a vote.
We do know from past statements and actions, including on the Oil Index decision we discussed in FERC Reverses Oil Index Rate Decision — Commission Considers Accelerating Inflation and Ire between Pipes and Shippers, that Commissioner Christie and Chairman Phillips are very focused on making sure that FERC fulfills its role in ensuring rates that are just and reasonable. Thus, it may just be that the two centrists are for approving the project’s certificate but denying the request for rolled in treatment. If Commissioner Danly was in complete agreement with the two centrists on both issues, there would be no reason for the project’s approval to be delayed. But if he is dissenting on the rate treatment, his no vote on that issue could be creating a tied vote which means FERC cannot act on the application. We suspect that Commissioner Clements is sufficiently concerned about the need question raised by the opposing states that she may be voting against issuing the project a certificate and could be strategically voting with Commissioner Danly on the rate question to create a tied Commission which would stop the project from being voted out. If we are correct, a possible solution would be for Commissioner Danly to act pragmatically and vote with the two centrists on both the certificate and the rate question and let the project sponsor decide whether it wants to appeal the rate portion of the decision. Otherwise, GTN Xpress may just linger until Commissioner Danly leaves and the vote becomes 2-1.