Operators with miles of aging natural gas transmission lines may understandably feel overwhelmed by new regulatory provisions that are about to become effective under the new Mega Rule. Under the Rule, operators must develop and document plans and procedures to comply with this significant regulatory update. This date also starts the clock to implement actual processes and projects, which must be completed around the 2035 time frame.
This sweeping regulatory update was initiated by Congress during reauthorization of the Pipeline Safety Act of 2011, following public alarm over well-publicized pipeline safety incidents. Congress directed the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) to update federal pipeline safety rules while also addressing safety measures more broadly affecting U.S. energy infrastructure. Collectively called the Mega Rule because of its broad scope, it has been 10 years in the making and has been subject to many rounds of feedback by operators and others.
Changing Mindsets
Compliance with these stringent new regulations might appear to be an extreme burden. A review of their company’s existing internal and external resources could easily lead operators to conclude that this an impossible mountain to climb.
However, this need not be the case.
The Mega Rule actually represents a golden opportunity to transition from a mindset of basic compliance and just scraping by to one in which it is viewed as a transformational event. The industry can make a major leap forward if the new regulations are viewed as the foundation to justify increasing capital and operations and maintenance (O&M) budgets, adding required internal and external resources, and expanding the replacement of aging transmission infrastructure. Operators can make their systems safer and more reliable while also growing rate base and increasing earnings for their company.
We have the opportunity to turn what seems like a monumental regulatory challenge into a win-win situation for all stakeholders.
Pipeline Integrity Demonstrates Prudency
The key to unlocking this opportunity is knowing that investments in pipeline integrity line up with the agendas of regulatory agencies. Investments in safety will be strong evidence to demonstrate intent to fully comply with federal regulations. A strong, well-documented case for these programs will serve as the foundation for regulatory orders setting operator’s rates.
Regulatory rate cases are highly complex proceedings in which the operator must provide detailed documentation and analysis supporting and justifying every aspect of a capital investment program. Investments that cannot be supported by documentation and evidence that they will help meet service requirements may be disallowed from the operator’s rate base, thereby reducing the overall rates and earnings potential of that company.
Investments made to comply with the Mega Rule — which by definition is designed to ensure the safety and integrity of pipeline systems — places operators on solid ground in demonstrating the prudence of investment decisions.
In fact, many state regulatory agencies are so supportive of pipeline integrity investments and infrastructure modernization programs that they (or their state legislatures) have approved rate riders — or surcharges — to allow operators to immediately recover investments made to modernize aging pipeline systems and comply with safety regulations. Infrastructure modernization riders such as the Qualified Infrastructure Plant (QIP) rider in Illinois or the Transmission Distribution Storage System Improvement Charge (TDSIC) rider in Indiana allow operators to recover investments via a surcharge that is adjusted monthly or quarterly without the need for continuous filing of rate cases which typically take a year or more to complete.
These mechanisms greatly reduce the regulatory lag that can always be anticipated with traditional rate cases. This results in significant benefits for operators, including making these companies more attractive investments for the capital markets.
Win-Win-Win
Infrastructure modernization programs can be true win-win-wins, for utilities, customers, and debt and equity holders. These programs do more than simply reduce O&M expenses associated with aging pipeline systems. They also provide more “headroom” for rate base growth without placing undue pressure on customer rates.
The way forward will take a shift in mindset from considering the Mega Rule as an insurmountable challenge, to a realization that this is actually a golden opportunity for all stakeholders. It will enable operators to build safer and more reliable pipeline systems, develop long-term investment projects, attract capital and grow earnings while complying with regulations and enhancing customer service.
Learn more about the prescriptive approach for pipeline integrity set out under the Mega Rule.
