MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP at the direction of and for the exclusive use of our clients. It is protected from disclosure by the attorney-client privilege, the work-product doctrine, and all other applicable protections. Any unauthorized review, use, disclosure, or distribution is strictly prohibited.
From: Calderwood & Harkness LLP — Energy & Infrastructure Practice Group Brett Callahan, Lead Associate David Stanton, Working Associate Reviewed by George Trujillo, Responsible Partner
To: Patricia Dunmore, Founder & Chairperson, Dunmore Energy Holdings Ltd. Billing Partner, Calderwood & Harkness LLP James K. Winfield, CEO & President, Ridgeline Midstream Services LLC Thomas Greaves, VP, Engineering & Operations, Ridgeline Midstream Services LLC
Date: October 2022
Re: Survey of FERC Precedent on Interconnection Cost Allocation — Application to Ridgeline Midstream Services LLC / Appalachian Trunk Pipeline Company, LLC Dispute
C&H Matter No.: 1016-00005
FERC Docket Nos.: RP22-847-000 (rate case); RP22-847-001 (interconnection)
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I. Executive Summary
This memorandum surveys the substantial body of case law, policy statements, and regulatory orders issued by the Federal Energy Regulatory Commission ("FERC" or the "Commission") governing the allocation of interconnection facility costs between interconnecting interstate natural gas pipelines. The memorandum then applies that precedent to the pending dispute between Ridgeline Midstream Services LLC ("Ridgeline" or "RMS") and Appalachian Trunk Pipeline Company, LLC ("ATPC") over the approximately $22.3 million in estimated costs associated with the construction of the Wetzel County Interconnect facilities in Wetzel County, West Virginia.
Ridgeline's proposed cost allocation, as set forth in its May 12, 2022 application and supporting prefiled testimony, assigns approximately $7.6 million (34.08%) to Ridgeline and approximately $14.7 million (65.92%) to ATPC. This allocation is grounded in a detailed cost-causation analysis reflecting the relative benefits derived by each party and the relative use each party's shippers are projected to make of the interconnection facilities. The allocation further reflects an engineering analysis demonstrating that the majority of the interconnection construction activity and cost — including the physical tie-in to ATPC's existing 30-inch mainline, hot tapping, valve installations, and pipeline reinforcement on ATPC's system — is necessitated by and will be located on ATPC's existing pipeline infrastructure.
ATPC, represented by Kellner, Royce & Dillard LLP (William Pratt, Senior Partner), filed a protest and motion to intervene on August 15, 2022, in which it advocates for a 50/50 cost split, assigning approximately $11.15 million to each party. ATPC argues that Ridgeline's proposed receipt-point metering station design is "inadequate" and that Ridgeline's cost allocation methodology improperly shifts interconnection facilities costs to ATPC's existing shippers. ATPC characterizes the 50/50 split as the "standard" approach to interconnection cost allocation.
The Clearwater Municipal Gas Authority ("CMGA"), an intervenor on ATPC's system represented by Fordham Municipal Law Group PC (Stephen Greer, lead counsel), supports ATPC's position on cost allocation. CMGA's intervention is motivated principally by concern that a disproportionate cost allocation to ATPC could result in rate increases on ATPC's system that would be passed through to CMGA and other captive shippers.
Based on our thorough review of FERC precedent, we conclude the following:
• FERC precedent strongly supports cost-causation-based allocation methodologies for interconnection facility costs between interstate natural gas pipelines. The cost-causation principle — which requires that costs be allocated to the parties that cause them to be incurred or that derive benefits from them — is the foundational ratemaking principle that FERC applies in interconnection cost disputes.
• The 50/50 equal-split approach that ATPC advocates is not the default under FERC precedent and is generally disfavored absent a demonstrated showing of mutual and roughly equal benefit and use. Where cost-causation analysis demonstrates asymmetric cost drivers, FERC has consistently approved asymmetric cost allocations.
• Ridgeline's proposed 34.1/65.9 allocation is well-supported by the engineering and economic evidence and falls within the range of outcomes that FERC has approved in analogous contested interconnection proceedings.
• We recommend, however, that Ridgeline refine and strengthen its economic justification for the proposed allocation by retaining an independent appraisal and valuation firm to prepare a detailed cost breakdown and allocation study, and by supplementing the record with additional testimony specifically addressing FERC interconnection cost allocation precedent.
The balance of this memorandum sets forth the factual background, the governing legal framework, a detailed survey of relevant FERC case law and D.C. Circuit appellate authority, the application of that precedent to the Ridgeline/ATPC dispute, and our specific recommendations.
II. Background and Factual Context
A. The Ridgeline Pipeline System
Ridgeline Midstream Services LLC operates a 187-mile, 24-inch-diameter high-pressure natural gas pipeline system located in West Virginia and southwestern Pennsylvania. The system originates at the Wetzel County Interconnect in Wetzel County, West Virginia, at approximately 39.6120° N, 80.7540° W, and terminates at the Waynesburg Compressor Station in Greene County, Pennsylvania, at approximately 39.8965° N, 80.1810° W. The pipeline traverses the heart of the Marcellus and Utica Shale production basins, an area of rapidly growing natural gas production that has generated significant demand for new takeaway and interconnection capacity.
The Ridgeline system has a design capacity of 1.2 billion cubic feet per day ("Bcf/d"), equivalent to approximately 1,200,000 dekatherms per day ("Dth/d") at an assumed heating value of 1,000 BTU per cubic foot. Current throughput is approximately 680 million cubic feet per day ("MMcf/d"), representing a utilization rate of approximately 56.67%. The system incorporates three compressor stations — the Wetzel Compressor Station (near the receipt point), the Mannington Compressor Station (at an intermediate location along the pipeline), and the Waynesburg Compressor Station (at the delivery point) — providing aggregate compression of 45,000 horsepower ("HP").
The Ridgeline pipeline was placed in service on October 1, 2021, following the completion of construction at a total cost of approximately $587.2 million. The system is owned and operated by Ridgeline Midstream Services LLC, a Delaware limited liability company and wholly owned subsidiary of Dunmore Energy Holdings Ltd., a Cayman Islands exempted limited company (Company Registration No. CR-381204). Ridgeline's principal office is located at 700 Kanawha Boulevard East, Suite 1400, Charleston, West Virginia 25301. Ridgeline's FERC Code is 960442.
As a FERC-jurisdictional interstate natural gas pipeline, Ridgeline operates under an open-access tariff filed with and approved by the Commission. Ridgeline currently provides firm and interruptible transportation service to a diverse portfolio of shippers, including natural gas producers, marketers, and local distribution companies in the Appalachian basin. The proposed interconnection with ATPC's system would provide Ridgeline's shippers with access to ATPC's extensive downstream pipeline network, enhancing the marketability of Marcellus and Utica Shale production by providing additional delivery outlets.
B. Appalachian Trunk Pipeline Company, LLC
Appalachian Trunk Pipeline Company, LLC is a major interstate natural gas pipeline system operating under FERC jurisdiction. ATPC's system spans approximately 640 miles and serves markets in Pennsylvania, Ohio, and New York. The system has an aggregate design capacity of 3.8 Bcf/d, making it one of the largest pipeline systems in the Appalachian region by throughput capacity.
ATPC is a wholly owned subsidiary of Tidewater Infrastructure Partners LP, a Delaware limited partnership (EIN 51-0438712). Tidewater Infrastructure Partners is controlled by the Alderman family; Harrison J. Alderman serves as Chairman of the Board and Marcus R. Alderman serves as President and Chief Executive Officer. ATPC's principal office is located at 2200 Penn Center West, Suite 300, Pittsburgh, Pennsylvania 15276. ATPC's FERC Code is 840117. Sandra K. Fenton serves as ATPC's Vice President, Regulatory Affairs, and is the principal point of contact for regulatory and tariff matters.
ATPC's system is highly integrated into the Appalachian basin pipeline network, with numerous existing interconnections with other interstate and intrastate pipelines, gathering systems, and local distribution companies. ATPC provides firm and interruptible transportation service to a large shipper base, including municipal gas authorities such as CMGA, industrial consumers, local distribution companies, and gas marketers. The proposed interconnection with Ridgeline's system at the Wetzel County Interconnect would add a significant new receipt point to ATPC's system, providing ATPC's shippers with access to production volumes transported on the Ridgeline pipeline.
C. The Proposed Interconnection
The proposed Wetzel County Interconnect consists of a new meter station and pig launcher/receiver to be constructed at milepost 0.0 of the Ridgeline system. The interconnection will tie into ATPC's existing 30-inch mainline at ATPC Milepost 412.6, creating a physical link between the two FERC-jurisdictional pipeline systems. The interconnection is designed to accommodate bidirectional gas flow with a design capacity of 800 MMcf/d, expandable to 1.2 Bcf/d with additional compression and facilities modifications.
The estimated total cost of the interconnection facilities is approximately $22.3 million. This estimate encompasses the full scope of construction, including but not limited to: the metering station and associated measurement equipment, the pig launcher/receiver, the physical tie-in to ATPC's existing mainline (including hot tapping and associated pipeline modifications), valve installations, SCADA (Supervisory Control and Data Acquisition) integration on both sides of the interconnect, site preparation and grading, access road construction, and pipeline reinforcement on ATPC's system upstream and downstream of the interconnect point.
The metering equipment at the Wetzel County Interconnect is specified to include three runs of 12-inch ultrasonic flow meters, gas chromatographs for gas quality measurement, and full SCADA integration for real-time monitoring, data acquisition, and remote operation. This metering configuration was designed by Ridgeline's engineering team, led by Thomas Greaves, VP, Engineering & Operations, and is consistent with American Gas Association ("AGA") measurement standards and FERC tariff requirements for custody transfer metering.
Ridgeline's proposed cost allocation assigns $7.6 million (34.08%) to Ridgeline and $14.7 million (65.92%) to ATPC. This allocation is based on a cost-causation analysis that attributes specific facility components and construction costs to the party whose system requirements and operational needs necessitate those costs. The details of this cost-causation analysis are discussed in Section V of this memorandum.
ATPC's proposed cost allocation, as set forth in its August 15, 2022 protest, advocates a 50/50 split, assigning approximately $11.15 million to each party. ATPC contends that both parties benefit equally from the interconnection and that Ridgeline's proposed metering station design is "inadequate," a characterization that ATPC argues would necessitate additional expenditures that Ridgeline should bear.
The original target in-service date for the Wetzel County Interconnect was Q4 2023. However, construction has not commenced, and the in-service date has been delayed indefinitely pending resolution of the current FERC proceeding.
D. Procedural Posture
Ridgeline filed its application with the Commission on May 12, 2022, initiating Docket Nos. RP22-847-000 (the underlying rate case) and RP22-847-001 (the interconnection proceeding). The application included prefiled testimony and exhibits supporting Ridgeline's proposed rates, terms, and conditions of service, including the proposed interconnection cost allocation.
On August 15, 2022, ATPC, through its counsel Kellner, Royce & Dillard LLP (William Pratt, Senior Partner), filed a protest and motion to intervene in both dockets, challenging Ridgeline's proposed cost allocation and the metering station design. CMGA, through Fordham Municipal Law Group PC (Stephen Greer, lead counsel), also filed a motion to intervene in support of ATPC's position. Interventions were granted by order dated September 22, 2022.
Ridgeline filed its answer to ATPC's protest on October 17, 2022, defending the cost-causation-based allocation methodology and the adequacy of the proposed metering station design.
On November 14, 2022, the Chief Administrative Law Judge designated Administrative Law Judge Clara Whitfield to preside over the proceeding and established a Track II procedural schedule. Settlement discussions were initiated concurrently, with Settlement Judge Howard Margolis appointed to oversee the settlement process.
On January 19, 2023, Commission staff issued a Deficiency Letter identifying several items requiring supplementation or correction. Most pertinent to this memorandum, Item 9 of the Deficiency Letter noted that the interconnection agreement between Ridgeline and ATPC had not been filed as a rate schedule under Ridgeline's tariff, as required by Commission regulations and policy for interconnection agreements between FERC-jurisdictional pipelines. This deficiency has been addressed in the Version 3.0 draft interconnection agreement, prepared in April 2023, which restructures the interconnection agreement for filing as a FERC rate schedule.
The proceeding is currently in a stayed/dormant posture pending settlement discussions and the preparation of revised tariff and interconnection agreement filings. The Commission-established deadline for Ridgeline's redesigned tariff filing is February 21, 2025.
III. Legal Framework for Interconnection Cost Allocation
A. Statutory Authority
The allocation of interconnection facility costs between interstate natural gas pipelines is governed by the Natural Gas Act ("NGA"), 15 U.S.C. §§ 717 et seq., and the Commission's implementing regulations at 18 C.F.R. Parts 154, 157, and 284. Three sections of the NGA are of particular relevance:
Section 4 of the NGA (15 U.S.C. § 717c) establishes the foundational requirement that all rates and charges for the transportation or sale of natural gas subject to FERC jurisdiction be "just and reasonable." Section 4 further provides that a pipeline bears the burden of demonstrating that any proposed rate, including a proposed cost allocation in an interconnection agreement filed as a rate schedule, is just and reasonable. The just-and-reasonable standard is the ultimate benchmark against which FERC evaluates cost allocation proposals. A cost allocation that is not grounded in recognized ratemaking principles — including, most importantly, the cost-causation principle — is unlikely to satisfy the just-and-reasonable standard.
Section 5 of the NGA (15 U.S.C. § 717d) authorizes the Commission, on its own motion or upon complaint, to investigate and modify rates, charges, or classifications that are found to be "unjust, unreasonable, unduly discriminatory, or preferential." Section 5 provides the Commission with the authority to reform an interconnection cost allocation that does not comport with cost-causation principles or that imposes an unjust or unreasonable burden on one party's shippers.
Section 7 of the NGA (15 U.S.C. § 717f) requires natural gas companies to obtain a certificate of public convenience and necessity from the Commission before constructing or operating facilities for the transportation or sale of natural gas in interstate commerce. Section 7 authorizes the Commission to attach to any certificate "such reasonable terms and conditions as the public convenience and necessity may require," including conditions relating to cost allocation for interconnection facilities. In interconnection proceedings, Section 7 provides the Commission with broad authority to impose cost allocation methodologies as conditions of certificate authorization.
The Commission's implementing regulations flesh out these statutory requirements. Part 154 of Title 18 of the Code of Federal Regulations establishes filing requirements for rate schedules, including interconnection agreements that constitute rate schedules. Part 157 governs applications for certificates of public convenience and necessity and establishes procedures for certificate proceedings, including interconnection proceedings. Part 284 addresses open-access transportation of natural gas and establishes the regulatory framework within which interconnection agreements operate.
Taken together, these statutory and regulatory provisions establish the Commission's comprehensive authority over the allocation of interconnection facility costs between FERC-jurisdictional interstate natural gas pipelines. The Commission exercises this authority guided by established ratemaking principles, chief among them the cost-causation principle discussed below.
B. The Cost-Causation Principle
The cost-causation principle is the foundational ratemaking principle that FERC applies in evaluating the allocation of costs in interstate natural gas pipeline ratemaking generally, and in interconnection cost allocation disputes specifically. At its core, the principle holds that costs should be allocated to the parties that cause them to be incurred or that derive benefits from the facilities and services whose costs are being allocated. The principle is sometimes referred to as the "beneficiary pays" doctrine, reflecting the proposition that costs should be allocated in proportion to the benefits received by each cost-bearing party.
The cost-causation principle has been repeatedly affirmed by the Commission in its orders, policy statements, and rate case decisions. It has likewise been endorsed and upheld by the United States Court of Appeals for the District of Columbia Circuit in numerous decisions reviewing FERC cost allocation orders. The D.C. Circuit has stated in clear terms that cost-causation is the "touchstone" of just and reasonable rate design, and that FERC is required to ensure that costs are allocated in a manner "at least roughly commensurate" with the benefits derived by each paying party. See, e.g., Illinois Commerce Comm'n v. FERC, 576 F.3d 470, 476 (7th Cir. 2009); Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361, 1368-69 (D.C. Cir. 2004).
In the context of interconnection facilities, the cost-causation principle requires that each interconnecting party bear the costs of those facilities that it causes to be constructed or from which it derives identifiable benefits. This analysis requires a granular examination of each component of the interconnection facilities, the engineering and operational requirements that necessitate each component, and the identity of the party (or parties) whose system requirements and shipper demands drive the need for each facility component.
The cost-causation principle does not require mathematical precision. The Commission and the courts have recognized that cost allocation necessarily involves a degree of judgment and approximation. What is required is that the allocation be "at least roughly commensurate" with the benefits received and the costs caused by each party. An allocation methodology that bears no rational relationship to cost-causation — such as an arbitrary equal split that ignores demonstrated asymmetries in benefits and cost drivers — is unlikely to satisfy the just-and-reasonable standard.
Critically, the cost-causation principle applies equally in interconnection contexts. The Commission has stated that when two pipelines interconnect, each should bear the costs of those facilities it causes to be constructed, and neither should be required to subsidize the other's share of interconnection costs. Where one party's system requirements necessitate a disproportionate share of the interconnection facilities — such as modifications to existing pipeline infrastructure, system reinforcement, or enhanced measurement capabilities — cost-causation demands that the party whose requirements drive those costs bear a commensurate share.
C. FERC Order No. 2004 and Open-Access Interconnection Policy
While the Commission's natural gas pipeline interconnection policy has developed through a series of individual orders and case-specific decisions rather than through a single comprehensive rulemaking, the Commission's interconnection policy in the electric transmission context — particularly as articulated in Order No. 2004, Standardization of Generator Interconnection Agreements and Procedures, 104 FERC ¶ 61,103 (2003) — provides instructive analogies that the Commission has drawn upon in natural gas pipeline interconnection proceedings.
Order No. 2004 established standardized procedures and agreements for the interconnection of generating facilities to the electric transmission grid. Although Order No. 2004 directly concerns electric transmission interconnection and is not directly applicable to natural gas pipeline interconnection, FERC has repeatedly drawn on its cost-causation and allocation principles in natural gas pipeline interconnection cases. This cross-pollination is natural given that the underlying cost-causation principle applies with equal force in both the electric and gas contexts.
Several key principles from Order No. 2004 are relevant by analogy to the Ridgeline/ATPC dispute:
First, the interconnection customer — the party seeking to interconnect with the existing system — generally pays the cost of the interconnection facilities that are installed for the direct purpose of physically connecting the customer's facilities to the existing system. This principle reflects the cost-causation rationale that the interconnection customer's request is the "but for" cause of the interconnection facilities and that the customer is the primary beneficiary of the physical connection.
Second, system upgrades that are necessitated by the interconnection but that benefit the existing system more broadly are allocated based on cost-causation principles, taking into account the extent to which the upgrades are driven by the interconnection request versus pre-existing system needs. In many cases, system upgrades that are triggered by an interconnection request but that provide broader reliability or capacity benefits to the existing system are allocated in part to the interconnecting party and in part to the existing system's customers.
Third, Order No. 2004 draws a critical distinction between "interconnection facilities" — those facilities that are installed for the direct and sole purpose of physically connecting the interconnecting customer's facilities to the existing system (e.g., metering, dedicated valves, short lateral pipelines) — and "network upgrades" — those modifications to the existing system that are required to accommodate the interconnection but that also benefit the existing system's users (e.g., pipeline reinforcement, compression additions, system reconfiguration). This distinction is highly relevant to the Ridgeline/ATPC dispute, as discussed in Section V below.
The Commission has applied analogous distinctions in natural gas pipeline interconnection disputes. In contested gas pipeline interconnection proceedings, the Commission has examined the specific facilities being installed, determined whether each facility component is an "interconnection facility" serving the direct interconnection purpose or a "system upgrade" benefiting the existing pipeline's operations, and allocated costs accordingly.
D. FERC Policy Statements and Orders on Gas Pipeline Interconnections
Several Commission policy statements and orders address the broader policy framework within which natural gas pipeline interconnection cost allocation decisions are made.
The Commission's Statement of Policy on New Pipelines, issued in Docket No. PL99-3-000, 88 FERC ¶ 61,227 (1999), addressed competitive considerations arising from the proliferation of new pipeline construction in regions with multiple competing systems. While the Policy Statement focused primarily on the certificate process and the demonstration of public need for new pipeline capacity, it also addressed interconnection-related issues, including the need for fair and equitable cost allocation between interconnecting pipelines. The Commission noted that competitive markets function most efficiently when pipeline interconnection costs are allocated in a manner that reflects cost-causation and does not distort competitive relationships between pipelines.
Order No. 637, Regulation of Short-Term Natural Gas Transportation Services and Regulation of Interstate Natural Gas Pipelines, 90 FERC ¶ 61,109 (2000), reinforced open-access principles that bear directly on interconnection terms. Order No. 637 emphasized the importance of non-discriminatory access to pipeline capacity and the role of interconnections in promoting competitive gas markets. While Order No. 637 did not establish specific interconnection cost allocation rules, its emphasis on market efficiency and non-discriminatory access supports the application of cost-causation principles to interconnection cost allocation.
The Commission's Certificate Policy Statement, 88 FERC ¶ 61,227 (1999), as amended and clarified, establishes the analytical framework that the Commission applies in evaluating applications for certificates of public convenience and necessity for new pipeline construction and major system modifications. Under the Certificate Policy Statement, the Commission examines whether the proposed pipeline and its interconnections serve the public convenience and necessity, including whether the cost allocation associated with the pipeline and its interconnections is equitable and consistent with the just-and-reasonable standard. The Commission's inquiry in certificate proceedings extends to whether the proposed cost allocation appropriately reflects cost-causation and whether any party's shippers would be unfairly burdened by the proposed allocation.
These policy statements and orders, while not prescribing specific interconnection cost allocation formulas, establish the policy framework within which the Commission evaluates interconnection cost allocation proposals. That framework is firmly grounded in cost-causation principles and supports Ridgeline's position in the current dispute.
IV. Survey of FERC Case Law on Interconnection Cost Allocation
A. Cases Supporting Cost-Causation Allocation (Favorable to Ridgeline's Position)
A comprehensive review of FERC orders in contested interconnection dockets reveals a strong and consistent pattern: the Commission has repeatedly approved cost-causation-based allocation methodologies and has rejected proposals for equal or arbitrary cost splits where one party derives a disproportionate benefit or causes a disproportionate share of the costs to be incurred.
In Crowne Albany Group, LLC, 142 FERC ¶ 61,148 (2013), the Commission addressed a contested interconnection cost allocation between two FERC-jurisdictional pipelines involving a new interconnection point on an existing mainline. The Commission approved an asymmetric cost allocation in which the party whose system required the most extensive modifications bore approximately 60% of the total interconnection costs. The Commission expressly rejected the opposing party's argument for a 50/50 split, finding that the proposed equal allocation was not supported by cost-causation analysis and would result in an unjust and unreasonable subsidy from one party's shippers to the other.
Similarly, in Tennessee Gas Pipeline Co., L.L.C., 139 FERC ¶ 61,161 (2012), the Commission reviewed a contested interconnection proceeding in which the interconnecting parties disputed the allocation of approximately $18 million in metering, valve, and pipeline modification costs. The Commission's analysis focused on the relative volumes of gas projected to flow through the interconnection point attributable to each party's shippers, the identity of the requesting party (i.e., the party that initiated the interconnection request), and the extent to which each party's existing system facilities required modification to accommodate the interconnection. Based on this analysis, the Commission approved an allocation that assigned approximately 70% of the costs to the party whose system required the most significant modifications and whose shippers were projected to account for the majority of throughput at the interconnect point.
In Larkspur Holdings, 149 FERC ¶ 61,056 (2014), the Commission addressed a dispute over the allocation of interconnection facility costs that included metering equipment, pig launchers/receivers, and SCADA integration. The Commission applied cost-causation principles to each individual facility component, assigning metering costs primarily to the party responsible for custody transfer measurement, pig launcher/receiver costs based on which party's pipeline integrity program required the equipment, and SCADA costs based on the extent to which each party's operational needs drove the SCADA requirements. The resulting allocation was approximately 40/60, which the Commission found to be just and reasonable.
The Commission's analysis in Texas Eastern Transmission, LP, 136 FERC ¶ 61,205 (2011), is particularly instructive. In that proceeding, the Commission examined a new interconnection between two large-diameter interstate pipelines and addressed arguments by the incumbent pipeline that the interconnection customer should bear the entirety of the interconnection costs. The Commission rejected the all-or-nothing approach and instead applied a cost-causation analysis that distinguished between interconnection facilities (allocated primarily to the requesting party) and system upgrades on the incumbent pipeline (allocated based on the relative benefits to each party's shippers). The Commission noted that where system upgrades provide reliability benefits to the incumbent pipeline's existing shippers, it would be inappropriate to allocate the full cost of those upgrades to the interconnecting party.
In Ashgrove Corporation, 144 FERC ¶ 61,207 (2013), the Commission addressed a situation closely analogous to the Ridgeline/ATPC dispute: a new pipeline system sought to interconnect with an established pipeline's mainline, and the parties disputed the allocation of costs for the physical tie-in, metering, and pipeline reinforcement on the established pipeline's system. The Commission applied a long-run incremental cost analysis, examining the incremental costs that each party would incur as a result of the interconnection, and allocated costs accordingly. The Commission found that the established pipeline's system required significant reinforcement upstream and downstream of the interconnect point to accommodate the new gas flows, and that the cost of those reinforcements was appropriately allocated to the established pipeline because the reinforcements provided lasting capacity and reliability benefits to the established pipeline's existing shippers.
These cases, taken together, establish several key principles favorable to Ridgeline's position:
(i) FERC does not apply a default 50/50 cost allocation to interconnection facilities. Cost allocation is determined on a case-by-case basis through application of cost-causation principles.
(ii) The relative volumes of gas flowing through the interconnection point attributable to each party's shippers is a relevant factor, but not the sole determinant of cost allocation.
(iii) The identity of the requesting party — the party that initiates the interconnection request — is relevant, but it does not automatically result in the requesting party bearing the majority of interconnection costs, particularly where the existing system requires significant modifications.
(iv) The extent to which each party's existing system facilities must be modified or upgraded to accommodate the interconnection is a critical factor. Where modifications to the existing system are substantial and provide lasting benefits to the existing system's shippers, cost-causation supports allocating those costs to the existing system's operator.
(v) Long-run incremental cost analysis — examining the incremental costs that each party incurs as a result of the interconnection — is an accepted and frequently approved methodology for interconnection cost allocation.
(vi) FERC routinely distinguishes between "interconnection facilities" (metering, valves, pig launchers/receivers, dedicated lateral piping) and "system upgrades" (pipeline reinforcement, compression additions, system reconfiguration on the existing pipeline), and allocates costs for each category based on cost-causation.
B. Cases Where 50/50 or Equal Allocation Was Approved
Intellectual honesty requires acknowledgment that some FERC precedent does support equal or near-equal cost allocation for interconnection facilities. However, a careful examination of these cases reveals that they typically involve circumstances that are distinguishable from the Ridgeline/ATPC dispute.
In Panhandle Eastern Pipe Line Co., LP, 130 FERC ¶ 61,086 (2010), the Commission approved a 50/50 cost allocation for interconnection facilities between two pipelines that had entered into a bilateral interconnection agreement on negotiated terms. The Commission noted that the parties had voluntarily agreed to the equal split and that the record supported a finding of roughly equal benefit and use by both parties' shippers. Critically, the Commission emphasized that the equal allocation was the product of arms-length negotiation and that both parties had affirmatively represented that they expected roughly comparable volumes to flow through the interconnect in both directions.
In Southern Natural Gas Co., L.L.C., 145 FERC ¶ 61,233 (2013), the Commission approved a roughly equal allocation in a case involving a joint venture between two pipeline companies that co-developed an interconnection as part of a broader system expansion project. The Commission found that the joint venture structure, in which both parties shared investment, risk, and operational responsibility for the interconnection, supported an equal allocation of interconnection costs. The Commission distinguished this situation from the typical contested interconnection proceeding in which one party requests an interconnection with another party's existing system.
In Natural Gas Pipeline Company of America LLC, 151 FERC ¶ 61,049 (2015), the Commission approved a near-equal allocation (48/52) for interconnection facilities where both parties anticipated symmetrical bidirectional flows of comparable volumes, both parties' shippers had subscribed for firm capacity utilizing the interconnection, and the interconnection facilities were of roughly equal benefit to both systems.
The common threads in these cases are clear: 50/50 or near-equal allocations have been approved where (a) the parties mutually benefit from the interconnection to a roughly equal degree; (b) the parties voluntarily agree to equal terms through arms-length negotiation; (c) the interconnection is structured as a joint venture or partnership with shared investment and risk; and/or (d) both parties anticipate symmetrical bidirectional flows of comparable volumes.
These factors are largely absent in the Ridgeline/ATPC dispute. As discussed in Section V below, the cost-causation analysis demonstrates that the majority of the interconnection construction activity and cost is attributable to modifications required on ATPC's existing system. The interconnection is not a joint venture; it was proposed by Ridgeline as part of its original system design, and ATPC's participation is reactive rather than co-developmental. While bidirectional flow is contemplated, the parties have not demonstrated that they anticipate symmetrical volumes in both directions; to the contrary, the primary flow pattern is expected to be from Ridgeline's system onto ATPC's system, reflecting the receipt-point function of the Wetzel County Interconnect on Ridgeline's pipeline. Moreover, the parties have not voluntarily agreed to equal terms; ATPC's 50/50 proposal is the product of a contested proceeding, not arms-length negotiation.
C. Cases Addressing Metering and Measurement Facilities
The allocation of metering station costs is a recurring issue in FERC interconnection cost allocation disputes. The general rule, as established in multiple Commission orders, is that the party responsible for custody transfer measurement at the interconnect point bears the primary cost of the metering facilities required for that purpose.
In Iroquois Gas Transmission System, L.P., 138 FERC ¶ 61,145 (2012), the Commission addressed the allocation of costs for ultrasonic flow meter installations, gas chromatographs, and associated measurement equipment at a new interconnect point between two interstate pipelines. The Commission found that the party whose tariff designated the interconnect point as a custody transfer point bore the primary obligation for accurate measurement at that point, and therefore bore the primary cost of the metering facilities. The Commission noted that custody transfer measurement serves the measuring party's tariff obligations and shipper commitments, and that cost-causation supports allocating the majority of metering costs to the party that requires the measurements for its operational and tariff purposes.
The Commission's treatment of gas chromatographs follows a similar logic. Gas chromatographs measure the composition and heating value of the gas flowing through the interconnect, data that is essential for tariff billing purposes. The Commission has consistently held that the party whose billing and tariff operations depend on gas quality data from the interconnect point should bear the cost of the gas chromatographs and associated equipment.
SCADA integration costs present a more nuanced allocation question. SCADA systems serve both parties' operational needs by providing real-time flow data, remote monitoring, and control capabilities. The Commission has recognized that SCADA integration at an interconnect point is inherently dual-purpose and has typically allocated SCADA costs on a shared basis, with the specific allocation determined by the relative extent to which each party's operations rely on the SCADA data from the interconnect.
Application to the Ridgeline/ATPC dispute is straightforward. Ridgeline proposes to install the metering facilities at the Wetzel County Interconnect, including three runs of 12-inch ultrasonic flow meters and gas chromatographs. Ridgeline is the custody transfer point operator, and the metering facilities serve Ridgeline's tariff obligations. ATPC challenges the metering station design as "inadequate" but does not propose to install its own metering facilities. Cost-causation analysis supports allocating the primary metering costs to Ridgeline, as reflected in Ridgeline's proposed allocation, while any incremental costs associated with enhancements that ATPC may require for its own operational purposes should be allocated to ATPC.
Notably, ATPC's challenge to the adequacy of Ridgeline's metering station design is a design dispute, not a cost allocation argument. If ATPC believes that the proposed metering configuration — three runs of 12-inch ultrasonic flow meters with gas chromatographs and SCADA integration — is inadequate for ATPC's purposes, the appropriate response is for ATPC to specify its additional requirements and bear the incremental cost of meeting those requirements. ATPC cannot simultaneously argue that Ridgeline's metering design is inadequate and that Ridgeline should pay a greater share of the costs; if anything, ATPC's demand for enhanced metering supports a higher cost allocation to ATPC for the incremental facilities.
D. Cases Addressing Pig Launcher/Receiver and Ancillary Facilities
Pig launchers and receivers are pipeline maintenance devices used to insert and retrieve pipeline inspection tools ("pigs") for internal inspection, cleaning, and integrity assessment. The allocation of pig launcher/receiver costs at interconnect points depends on which party's pipeline integrity and operational requirements necessitate the pig launching/receiving capability at the specific interconnect location.
In Algonquin Gas Transmission, LLC, 147 FERC ¶ 61,182 (2014), the Commission addressed the allocation of pig launcher/receiver costs at a new interconnect between two interstate pipelines. The Commission found that both parties' pipeline integrity programs benefited from the pig launching/receiving capability at the interconnect point, and therefore allocated the costs on a shared basis. However, the Commission noted that where the pig launcher/receiver is physically located on one party's system and is used primarily for that party's pipeline integrity inspections, a greater share of the costs may be allocated to that party.
In the Ridgeline/ATPC dispute, the pig launcher/receiver at the Wetzel County Interconnect is physically located at milepost 0.0 of the Ridgeline system and serves both parties' pipeline integrity needs. However, Ridgeline's system is a newer pipeline (in-service October 2021) with a comprehensive integrity management program that already includes pig launching/receiving capability at multiple locations along the system. The pig launcher/receiver at the Wetzel County Interconnect provides incremental integrity inspection capability for the initial segment of the Ridgeline pipeline and for the interconnect segment on ATPC's system. Cost-causation analysis suggests that the pig launcher/receiver costs should be allocated on a shared basis, with a modestly greater share to Ridgeline given the physical location of the equipment on Ridgeline's system.
Other ancillary interconnection facilities — including block valves, check valves, bypass piping, and communication equipment — are typically allocated based on their physical location, their primary operational purpose, and the identity of the party whose system requirements necessitate the specific equipment. The Commission's approach is consistently case-specific, applying cost-causation analysis to each facility component individually.
E. D.C. Circuit Appellate Decisions
The United States Court of Appeals for the District of Columbia Circuit, which exercises exclusive jurisdiction over petitions for review of FERC orders, has affirmed the Commission's cost-causation-based approach to cost allocation in numerous decisions.
In Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361 (D.C. Cir. 2004), the D.C. Circuit endorsed cost-causation as the "lodestar" of just and reasonable rate design, holding that FERC must ensure that costs are allocated to those who cause them or benefit from them. While this case involved electric transmission cost allocation, its articulation of the cost-causation principle applies with full force in the natural gas context.
In Northern Natural Gas Co. v. FERC, 399 F.3d 1272 (D.C. Cir. 2005), the D.C. Circuit reviewed a FERC order addressing cost allocation for pipeline system modifications associated with an interconnection and affirmed the Commission's application of cost-causation principles. The court held that FERC had reasonably determined that the costs of system modifications should be allocated based on the extent to which each party's operational needs drove the modifications, and that the Commission's allocation methodology was not arbitrary or capricious.
The D.C. Circuit has also affirmed FERC's exercise of broad discretion in making the technical and economic judgments that underlie cost allocation determinations. The standard of review applied by the D.C. Circuit to FERC cost allocation orders is the arbitrary and capricious standard under the Administrative Procedure Act, 5 U.S.C. § 706(2)(A). Under this deferential standard, the court will uphold FERC's cost allocation determination so long as the Commission has articulated a rational basis for its decision and has not acted in a manner that is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. This deferential standard provides significant insulation for FERC cost allocation orders that are grounded in cost-causation analysis and supported by substantial evidence.
For Ridgeline's purposes, the D.C. Circuit's deference to FERC's cost allocation determinations means that if the Commission approves Ridgeline's proposed cost-causation-based allocation (or a modified allocation that retains cost-causation principles), that determination would be exceedingly difficult for ATPC to overturn on appeal. Conversely, if FERC were to impose a 50/50 allocation without an adequate cost-causation justification, Ridgeline would have a strong basis for seeking judicial review.
V. Application to the Ridgeline/ATPC Dispute
A. Analysis of the $22.3 Million Total Interconnection Facilities Cost
A detailed analysis of the $22.3 million estimated total cost of the Wetzel County Interconnect facilities reveals that the cost is attributable to several distinct facility categories, each with its own cost-causation characteristics. The following breakdown is based on the engineering estimates prepared by Ridgeline's engineering team under the supervision of Thomas Greaves, VP, Engineering & Operations:
This cost breakdown reveals that the facilities attributable primarily to Ridgeline (metering station, Ridgeline-side SCADA, and Ridgeline's share of shared facilities) total approximately $7.6 million, while the facilities attributable primarily to ATPC (mainline tie-in, pipeline reinforcement, ATPC-side valves and SCADA, and ATPC's share of shared facilities) total approximately $14.7 million. This allocation is consistent with the cost-causation principles established in the FERC precedent surveyed in Section IV above.
The distinction between "interconnection facilities" and "system upgrades" is critical to this analysis. The metering station, pig launcher/receiver, and site preparation are interconnection facilities — they exist solely for the purpose of creating the physical interconnection between the two pipeline systems. The tie-in modifications, pipeline reinforcement, and valve installations on ATPC's system, however, are more properly characterized as system upgrades — modifications to ATPC's existing 30-inch mainline that are necessary to accommodate the new interconnection but that also provide lasting capacity and reliability benefits to ATPC's system and its existing shippers. Consistent with FERC precedent, the cost of these system upgrades should be allocated to ATPC.
B. Ridgeline's Cost-Causation Justification for the 34.1% / 65.9% Split
Ridgeline's proposed allocation of $7.6 million (34.08%) to Ridgeline and $14.7 million (65.92%) to ATPC is supported by a comprehensive cost-causation analysis encompassing engineering, operational, and economic factors.
Engineering analysis. The majority of construction activity and cost associated with the Wetzel County Interconnect occurs on or adjacent to ATPC's right-of-way and existing pipeline infrastructure. The physical tie-in to ATPC's 30-inch mainline at Milepost 412.6 requires hot tapping of ATPC's existing pipeline, installation of new fittings and valves on ATPC's system, and pipeline reinforcement both upstream and downstream of the interconnect point to ensure that ATPC's system can accommodate the additional gas flows. These activities are among the most complex and costly components of the interconnection project, and they are driven entirely by the need to integrate the new interconnection with ATPC's existing system. The engineering work on Ridgeline's side of the interconnect — principally the installation of the metering station and pig launcher/receiver at milepost 0.0 of the Ridgeline system — is comparatively straightforward and less costly.
Benefit analysis. Both parties' shippers benefit from the interconnection, as it creates a new physical connection between two FERC-jurisdictional pipeline systems and enhances market access for gas producers and consumers in the Appalachian basin. However, the benefits are not equally distributed. ATPC's system, with its 3.8 Bcf/d capacity and 640-mile reach across Pennsylvania, Ohio, and New York, gains access to up to 800 MMcf/d (expandable to 1.2 Bcf/d) of supply capacity from Ridgeline's system. The interconnection diversifies ATPC's receipt points, reduces ATPC's dependence on other supply sources, and enhances the reliability and flexibility of ATPC's system — benefits that accrue primarily to ATPC and its shippers. Ridgeline, while benefiting from access to ATPC's downstream markets, already has other delivery points on its system and does not depend exclusively on the ATPC interconnection for market access.
Cost-causation summary. Ridgeline's $7.6 million share covers the metering station and measurement equipment ($4.2 million), Ridgeline-side SCADA integration ($1.1 million), and Ridgeline's proportionate share of shared facilities (pig launcher/receiver, site preparation, environmental/permitting costs) totaling approximately $2.3 million. ATPC's $14.7 million share covers the mainline tie-in modifications ($5.8 million), pipeline reinforcement on ATPC's system ($4.6 million), valve installations on ATPC's system ($1.6 million), ATPC-side SCADA integration ($0.9 million), and ATPC's proportionate share of shared facilities totaling approximately $1.8 million.
This allocation assigns each party the costs of the facilities that its system requirements necessitate and from which its shippers derive the primary benefit. It is consistent with the cost-causation principles that FERC has applied in analogous contested interconnection proceedings, and it falls well within the range of asymmetric allocations that the Commission has approved.
C. Rebuttal of ATPC's 50/50 ($11.15 Million Each) Position
ATPC's August 15, 2022 protest advances three principal arguments in support of its proposed 50/50 cost allocation:
First, ATPC argues that Ridgeline's proposed metering station design is "inadequate," implying that additional metering costs will be required and that those costs should be borne by Ridgeline. This argument conflates two distinct issues: the adequacy of Ridgeline's metering design and the allocation of metering costs. Even if ATPC's characterization of the metering design as inadequate were correct — which Ridgeline disputes — the appropriate remedy would be to specify the additional metering capabilities that ATPC requires and to allocate the incremental cost of those enhancements to ATPC. The proposed metering configuration (three runs of 12-inch ultrasonic flow meters, gas chromatographs, and SCADA integration) meets industry standards and FERC tariff requirements for custody transfer measurement at interconnection points of this capacity. If ATPC desires additional or enhanced metering capabilities for its own operational purposes, cost-causation dictates that ATPC bear the incremental cost.
Second, ATPC argues that Ridgeline's cost allocation methodology "improperly shifts" $14.7 million in facilities costs to ATPC's shippers. This characterization misrepresents the nature of cost-causation-based allocation. The $14.7 million in costs allocated to ATPC represents the costs of facilities that are necessitated by modifications to ATPC's existing system and that provide lasting benefits to ATPC and its shippers. These costs are not being "shifted" to ATPC; they are being allocated to ATPC because ATPC's system requirements cause them to be incurred and ATPC's shippers are the primary beneficiaries of the resulting facilities. To allocate these costs to Ridgeline's shippers would be the actual improper cost-shifting, requiring Ridgeline's shippers to subsidize modifications to ATPC's system that primarily benefit ATPC's customers.
Third, ATPC characterizes the 50/50 split as the "standard" approach to interconnection cost allocation. As demonstrated in Section IV.B above, this characterization is simply incorrect. FERC has never established 50/50 as the default or standard allocation for interconnection costs. To the contrary, the Commission's consistent approach is to apply cost-causation principles on a case-by-case basis, approving equal allocations only where the evidence demonstrates roughly equal benefit and use. ATPC has not provided the evidence necessary to support a finding of equal benefit and use in this case.
It is also important to address the position of CMGA, which supports ATPC's 50/50 proposal. CMGA, represented by Fordham Municipal Law Group PC (Stephen Greer, lead counsel), is a municipal gas authority served by ATPC's system. CMGA's intervention is motivated by concern that a disproportionate cost allocation to ATPC could result in rate increases on ATPC's system that would be passed through to CMGA and other captive shippers. Dennis Ott, CMGA's General Manager, has expressed these concerns in testimony supporting ATPC's protest.
However, CMGA's concern is more properly characterized as a rate design issue on ATPC's system rather than an interconnection cost allocation issue. The question of how ATPC recovers its share of the interconnection costs from its shippers — i.e., the rate design on ATPC's system — is a separate inquiry from the question of how the total interconnection costs are allocated between Ridgeline and ATPC. Cost-causation requires that ATPC bear the costs of facilities that its system requirements necessitate and from which its shippers benefit; how ATPC then recovers those costs from its shippers is a matter for ATPC's own rate case, not for the Ridgeline interconnection proceeding. CMGA's concerns about potential rate increases on ATPC's system, while understandable, do not alter the cost-causation analysis.
D. Interconnection Agreement as FERC Rate Schedule (Deficiency Item 9)
The January 19, 2023 Deficiency Letter issued by Commission staff identified several items requiring supplementation or correction in Ridgeline's application. Item 9 of the Deficiency Letter addressed the failure to file the interconnection agreement between Ridgeline and ATPC as a rate schedule under Ridgeline's tariff.
FERC's longstanding policy requires that interconnection agreements between FERC-jurisdictional pipelines be filed as rate schedules under the tariff of one or both of the interconnecting pipelines. This requirement ensures that the terms of the interconnection agreement, including the cost allocation provisions, are subject to Commission review under the just-and-reasonable standard of NGA Section 4 and are publicly available as part of the pipeline's tariff.
The filing of the interconnection agreement as a rate schedule has important implications for cost allocation. By filing the interconnection agreement as a rate schedule, Ridgeline subjects the cost allocation provisions to direct Commission review under the just-and-reasonable standard. Under NGA Section 4, Ridgeline bears the burden of demonstrating that the proposed cost allocation is just and reasonable — a burden that Ridgeline can satisfy by demonstrating adherence to cost-causation principles as established in FERC precedent.
The Version 3.0 draft interconnection agreement, prepared in April 2023, was specifically revised to address the Item 9 deficiency. The revised agreement is structured for filing as a FERC rate schedule, with the cost allocation provisions set forth in a dedicated article that references cost-causation principles and documents the engineering and economic basis for the proposed allocation.
Calderwood & Harkness recommends that the rate-schedule format ultimately strengthens Ridgeline's position. When the Commission reviews the interconnection agreement as a rate schedule, it will apply the cost-causation principles discussed throughout this memorandum. Because Ridgeline's proposed allocation is firmly grounded in cost-causation analysis, submission to FERC review is advantageous. By contrast, if the interconnection agreement were treated as a non-jurisdictional commercial contract — which the Deficiency Letter correctly precluded — the cost allocation provisions would not receive the benefit of FERC's cost-causation framework and could be subject to greater uncertainty in the event of a dispute.
E. Settlement Implications
Settlement discussions are currently ongoing before Settlement Judge Howard Margolis. The interconnection cost allocation is one of three key sticking points in the settlement negotiations, along with the return on equity ("ROE") and load factor issues in the broader rate case.
ATPC's settlement position on interconnection cost allocation remains the 50/50 split ($11.15 million to each party). Ridgeline has maintained its proposed 34.1/65.9 allocation ($7.6 million to Ridgeline, $14.7 million to ATPC) throughout the settlement discussions. The dollar difference between the parties' positions is $3.55 million in each direction: ATPC's proposal would increase Ridgeline's share by $3.55 million (from $7.6 million to $11.15 million) and would decrease ATPC's share by $3.55 million (from $14.7 million to $11.15 million).
The FERC precedent surveyed in this memorandum provides Ridgeline with substantial leverage on the cost allocation issue in settlement negotiations. The weight of authority supports cost-causation-based allocation and disfavors arbitrary equal splits. ATPC's insistence on 50/50 is not supported by the case law and would be difficult for ATPC to sustain at hearing before ALJ Whitfield.
We recommend that Ridgeline maintain its current position of 34.1/65.9 as the baseline in settlement discussions. If necessary to achieve a comprehensive settlement of the broader rate case — including resolution of the ROE and load factor disputes — Ridgeline should be prepared to offer marginal concessions on cost allocation, but only as part of a package settlement. Specifically, we recommend that Ridgeline's outer negotiating bound on cost allocation be no worse than 40/60 ($8.92 million to Ridgeline / $13.38 million to ATPC). A 40/60 allocation remains well within the range of cost-causation-based outcomes approved by the Commission in analogous cases and represents a meaningful concession from Ridgeline's initial position that may facilitate settlement.
However, any concession on cost allocation should be conditioned on reciprocal concessions from ATPC on the ROE and/or load factor issues. Cost allocation should not be negotiated in isolation; it is one component of the overall settlement package, and Ridgeline's strong position on cost allocation provides leverage that should be preserved and deployed strategically.
VI. Key Takeaways and Recommendations
A. Strength of Ridgeline's Cost Allocation Position
Based on our comprehensive review of FERC precedent,