The Federal Energy Regulatory Commission has issued a policy statement to guide U.S. oil and gas pipelines in proposing incentive rate proposals.
FERC affirmed the principles and regulatory standards it had set out in a proposed policy earlier this year: that the goal is to lower costs to consumers while encouraging companies to operate more efficiency to increase their rate of return.
The commission is offering incentive rates only as an alternative to traditional cost of service rates for electric utilities, gas companies, and oil pipelines. It said traditional cost of service regulations lack the mechanisms that foster efficiency, especially longer term efficiency.
WHAT'S ALLOWED
The policy will allow FERC to divorce tariffs from underlying cost of service, lengthen the period between rate cases-normally every 3 years at present-and let companies split the benefits of cost savings between consumers and stockholders.
FERC said the incentive rates would not be an appropriate substitute for market based rates where markets are workably competitive or where there is no exercise of market power. It said incentive regulation gives greater emphasis on productive efficiency in noncompetitive markets.
The commission had issued a proposed policy statement in March and said two thirds of the 109 organizations commenting on the plan supported the change.
FERC stressed that incentive regulation should encourage efficiency and initial rates under incentive regulation should conform to its traditional just and reasonable standard.
It plans to judge incentive rate proposals on whether they are prospective, voluntary, and understandable and will result in quantified benefits to consumers.
In response to comments, FERC added two more standards. The incentive rates should:
- Demonstrate how they will maintain or enhance incentives to improve the quality of service.
- Include a cap on incentive rate increases to guarantee rates will be no higher than they would have been under traditional cost of service regulation.
FERC plans to examine incentive rate proposals case by case. It initially will authorize incentive rate mechanisms for limited terms to give itself time to evaluate how they are working.
The commission said, "Traditional regulation lacks mechanisms that foster long run productive efficiency. Utilities face few explicit rewards for taking risks to cut their costs aggressively and few penalties for excessive spending.
"However, traditional regulation is not without incentives to be efficient in the short term. Regulatory lag provides some incentive to minimize costs since savings achieved between rate cases accrue to the benefit of stockholders."
FERC said incentive rates will foster long term efficiency by divorcing rates from the underlying cost of service, lengthening the period between rate cases, and sharing the benefits of cost savings between consumers and stockholders.
The commission said incentive regulation is appropriate only in noncompetitive markets. So it will not entertain such proposals from oil pipelines that choose to pursue market based rates.
"Further," FERC said, "since the commission has found trended original cost to be an acceptable alternative to original cost for setting oil pipeline rates, it will accept proposals from oil pipelines so long as the starting rates are consistent with the cost based ratemaking principles applicable to oil pipelines.
"This will insure that the initial distribution of benefits between the oil pipeline's shareholders and its customers is fair."
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