501G Saga Concludes - Which Pipes Risk a Rate Investigation?

Our year-end note, Insights Needed in ’19 - Projects, Permian, Rates, LNG, FERC, DC, the Courts and More, offered our viewpoints for 2019 and recapped regulatory issues central to our customers’ businesses, including the maze of issues that began with modeling the impact of the Tax Cuts and Jobs Act on all pipelines (predating the upheaval driven by FERC’s March 15 tax policy decisions), which recently concluded with the filing of 501Gs by all 127 natural gas pipelines.

As discussed in our various Insights after the March 15 decisions, our view then was that the issues would not likely lead to quick or substantial decreases in the tariff rates paid by shippers, with pipelines likely opting to make small decreases or do nothing. Now, having analyzed all 501G filings and data, we offer the following three primary takeaways:

As we expected, the filings had limited impact on the overall revenue for pipelines, primarily because 86% of those that filed chose not to adjust their rates.
There has not been a substantial reduction in the rates paid by shippers that, so far, have not challenged the pipelines that chose not to adjust their rates.
In 2019, FERC must decide whether to investigate those pipelines that indicated there was no reason to adjust their rates. Depending upon the strategy chosen, which we detail below, the pipelines at greatest risk will vary.

Today, we focus on how to leverage the data to spot those pipelines that are at the highest risk of being subjected to a Section 5 investigation depending on how FERC decides to prioritize its limited resources to commence such rate investigations. We have uploaded every form 501G which allows us to analyze the data in those filings across the industry to calculate much more than just rate risk, but industry-wide and company specific data like administrative costs as a percentage of revenue, average debt ratios, state tax rates, and annual depreciation. Anyone interested in such additional data please talk with us about your needs. For today, though, pipelines trying to assess their own rate risk will want to see how they stack up against the rest of the industry, shippers will want to see whether they are likely to get any additional rate decreases, and those investing in the pipelines will want to consider if there is still additional downside risk.

The 50,000 Foot View of the Process

The FERC directed 127 pipeline companies with a total annual revenue of almost $23 billion to file a Form 501G. Ultimately, only 105 actually did and those 105 reported total operating revenues of slightly more than $16 billion. Of the 22 pipelines that did not file a Form 501G, 11 of them received either a complete waiver from FERC or an extension of time beyond the end of 2018, while the other 11 chose to file either a pre-arranged settlement of a Section 4 proceeding or actually commenced a full Section 4 proceeding.
Twenty-one pipelines have filed to reduce their current rates by an amount that ranges from 0.20% to 25%. The real world impact, calculated by adjusting these 21 pipelines’ recourse rate revenue by the agreed percentage rate reduction, is only slightly more than $68 million annually, which equates to less than one-half of 1% of the total annual revenue reported by the 127 pipelines subjected to the 501G process, and only about 3.5% of revenue reported by the 21 companies that took the rate reductions.
Not all of these 21 pipelines are immune from further FERC review of their rates. Only one, Southeast Supply Header, qualified for a three-year moratorium from FERC Section 5 action as a result of its filing. The others remain subject to having their rates reviewed by FERC and FERC has actually commenced a Section 5 proceeding against one pipeline - East Tennessee Natural Gas.

Those Who Chose to Do Nothing

Because the Form 501G was an informational filing, FERC acknowledged that the pipelines that filed it could elect to do nothing with their rate -- and, in fact, 86% of those that filed (90 of the 105) did just that. If you have followed our prior reports on 501G issues, you are familiar with LawIQ’s proprietary risk assessment tool, which, as depicted below, divides the pipelines into four quadrants based on two key demarcations: a post-tax cut ROE of +/-16% and an Indicated Rate Reduction of +/-8%. Below, we have arrayed the 90 pipelines that chose not to adjust their rates.

Twelve of these pipelines have existing rate moratoriums and because FERC granted a number of 501G filing waivers to pipelines with moratoriums, we do not view these 12 as being subject to much risk for a Section 5 investigation. That leaves 78 pipelines that did not adjust their rates that are the most likely targets for FERC’s Section 5 investigation power.

How Will FERC Allocate its Limited Resources for Launching Section 5 Investigations?

We view it as unlikely that FERC will initiate, based on the 501G process, more than a handful of Section 5 rate investigations in 2019. There are a number of theories on how FERC will focus its investigatory efforts. Below, we consider three different strategies which, as seen, produce a very different list of top ten pipelines.

FERC could review the pipelines with the highest Indicated Rate Reduction on their Form 501Gs in the hope of getting the biggest reductions done first.
FERC could review the pipelines with the highest post-tax cut ROEs under the theory that these cases will be the easiest to prove and are most likely to be successful.
FERC could focus on obtaining the biggest real-world results by reviewing the rates of pipelines that have the potential of producing the greatest dollar reduction in recourse tariffs for the benefit of shippers.

As seen below, these three strategies produce a very different list of top ten targets. Only one company, Equitrans, appears on all three lists and only two, Lake Charles LNG and Southern LNG Company, appear on two of the lists. The other 23 companies appear on only one list.

Pipelines with the Highest Indicated Rate Reduction

Pipelines with the Highest Post-Tax Cut ROEs

Pipelines With ROEs > 16% That Result in Biggest Revenue Impact

Insights Coming Soon

Potential Line 5 opposition tactics
TETCO rate case analysis