FERC Clarifies Applicability of SFV Rate Design Methodology to NGPA Section 311 Pipelines

Background

On October 31, 2024, Matterhorn, a new intrastate pipeline operating in Texas, filed with FERC to establish initial rates for NGPA Section 311 transportation service, electing to base its rates on those approved by the Railroad Commission of Texas (“RRC”) pursuant to Section 284.123(b)(1)(ii) of the Commission’s regulations. Matterhorn’s proposed rates included a maximum one-part daily volumetric rate of $0.89 per MMBtu and a $0.000 per MMBtu minimum daily rate for all transportation services.  FERC accepted Matterhorn’s Statement of Operating Conditions (“SOC”) subject to conditions, but rejected the proposed rates on the grounds that they failed to employ the SFV methodology and did not provide for a non-zero minimum usage rate, as required by Commission policy to ensure recovery of variable costs.

The Commission directed Matterhorn to revise its initial rates using the Commission’s SFV methodology based on the supporting cost and revenue evidence on file with the RRC.  The Commission also provided a non-binding, illustrative example in an appendix to its initial order demonstrating how Matterhorn could derive maximum and minimum rates using the SFV methodology and explained that Matterhorn was not obligated to reach the same result.  Following the initial order, Matterhorn sought a stay, filed a compliance filing under protest, and requested rehearing, challenging the Commission’s application of the SFV methodology and minimum rate requirements to NGPA Section 311 pipelines.  On December 18, 2025, the Commission issued its Order on Rehearing, Motion for Stay, and Compliance dismissing Matterhorn’s request for stay as moot, rejecting Matterhorn’s compliance filing, and directing Matterhorn to submit a further compliance filing within 30 days following the date thereof.

Key Findings and Commission Rationale

1. Applicability of SFV Methodology and Minimum Rate Requirements

In its December 18, 2025 order, FERC stated that its longstanding policy and precedent require NGPA Section 311 pipelines electing cost-based rates under Section 284.123(b)(1) of the Commission’s regulations to employ the SFV methodology—recovering fixed costs through a demand charge and variable costs through a usage charge.  The Commission emphasized that the minimum usage rate must reflect the average variable costs allocated to the service, and that a $0.000 per MMBtu minimum usage rate is impermissible where variable costs are incurred.  The Commission explained that these requirements are grounded in the need to promote transparency, prevent predatory pricing, and ensure fair competition between interstate and intrastate pipelines.

2. Application of Federal Policy to State-Approved Rates

While state-approved rates are entitled to a rebuttable presumption of being “fair and equitable,” the Commission found that this presumption was rebutted in Matterhorn’s case due to the failure to use the SFV methodology and the proposal of a zero minimum usage rate. FERC clarified that its review of Section 311 rates is not merely ministerial and that it retains an independent statutory obligation to ensure that rates are fair and equitable, even where state regulators have approved the underlying rates.  However, FERC stated that while it “did not look behind the [state regulator’s] cost and revenue findings in support of the rate, it cannot turn a blind eye to [the] use of a one-part volumetric firm rate to recover both its fixed and variable costs and its use of a $0.000 minimum rate.”

3. Exceptions to SFV Methodology

Further, FERC emphasized that the exceptions to the SFV methodology continue to be applicable and may be granted, including where market-based rates, settlement rates, or non-recourse rates are used, or where both of the following criteria are met: (i) the pipeline operates in an area with competitors using non-SFV rates and (ii) no objections are raised.  According to FERC’s order, Matterhorn did not provide support for any of the exceptions.

4. Procedural and Due Process Considerations

Matterhorn argued that FERC’s actions deprived it of procedural protections and departed from the regulatory framework governing Section 311 rate elections. The Commission rejected these arguments, finding that Matterhorn had the opportunity to present its case both in its initial filing and on rehearing, and that the absence of a specific process for addressing rebutted state-elected rates did not constitute a denial of due process.  FERC also noted that Matterhorn was not precluded from filing a new rate petition under Section 284.123(b)(2) if it so chose.

5. Consistency and Retroactivity

Addressing Matterhorn’s claims of inconsistent treatment and retroactive application of policy, FERC acknowledged that some prior orders may not have consistently enforced the SFV methodology but then stated that the requirement applies to all Section 311 pipelines unless a specific exception is met.  The Commission rejected the argument that application of the SFV methodology to Matterhorn was retroactive, characterizing it as a continuation of established policy.

Key Takeaways

The Commission’s order in Matterhorn provides several key takeaways for intrastate pipelines providing interstate transportation under Section 311 of the NGPA. First, and most importantly, FERC clarified the uniform application of its SFV methodology and minimum rate requirements for NGPA Section 311 pipelines electing cost-based rates, unless a specific exception applies. The Commission’s order states that while state-approved rates carry a rebuttable presumption of being fair and equitable, this presumption can be overcome if the rates do not align with federal policy, such as the requirement that minimum rates reflect variable costs to prevent anti-competitive pricing.  Furthermore, FERC clarified the regulatory hierarchy vis-à-vis the Commission and state regulatory commissions, noting its requirements for interstate rates do not undermine state authority over intrastate rates, as each applies to its respective jurisdiction. Ultimately, the Commission’s order in Matterhorn clarifies that Section 311 pipelines should ensure their rates for interstate service conform to SFV rate design principles, regardless of state regulatory approval.

Additional Developments from the December Open Meeting

In addition to the Matterhorn order, the Commission issued two additional orders related to intrastate pipelines offering interstate service under the Commission’s NGPA Section 311 regulations (Part 284, Subpart C). First, the Commission accepted Northern Indiana Public Service Company’s (“NIPSCO”) revised SOC, finding the revisions to NIPSCO’s gas quality standards to facilitate the development and transportation of RNG to be fair and equitable.

Second, the Commission granted Consumers Energy Company (“Consumers”) a blanket certificate of limited jurisdiction under 18 C.F.R. § 284.224, accepted its baseline SOC and state rate election effective June 1, 2025, but, consistent with its decision in Matterhorn, directed Consumers to file a compliance filing to adopt SFV rate design with maximum/minimum rate ranges and to modify several non-rate provisions.