501G - Wave 2 Results and FERC Begins Approving Wave 1 Filings
The second wave of pipelines was required to file their Forms 501G last Thursday and eight of the 29 decided to voluntarily adjust their rates by either filing a limited Section 4 rate case or settling with their customers. The third wave of filings is due on December 6 and we will be projecting how we see those filings going in a later report, as we have for Waves 1 and 2. Just yesterday, FERC began making decisions with regard to some of the filings made in Wave 1, and those decisions may provide insight to the Wave 3 filers as to what they should do. Below, we review both the results of Wave 2 and the more significant decisions regarding Wave 1 issued by FERC yesterday.
Wave 2 Filers
As we pointed out in FERC Form 501G Wave Two: Our Projected Results and Rate Implications for 29 Pipelines , most of the pipelines in our high-risk category generated all of their revenue from negotiated rate contracts, or from less than three customers. Interestingly, none of these six companies chose to adjust their rates. All of the eight companies that have indicated that they will adjust their rates came from our mixed-risk category, with seven of the eight having a projected post-tax ROE greater than 16%, which is consistent with the type of filer in the mixed-risk category that chose to file in Wave 1. Southeast Supply Header, a joint venture between Enable Midstream and Enbridge, and clearly the largest of all of the pipelines that filed to reduce their rates, was the lone pipeline that we projected having an ROE of less than 16% that voluntarily reduced its rates.
Wave 2 Filers by LawIQ Risk Categories
The eight companies that chose to adjust their rates and the amount of that rate reduction:
FERC Begins Approving Rate Filings Regarding the Tax Cut and Jobs Act
At its open meeting yesterday, FERC issued orders with respect to the filings of four of the seven Wave 1 pipelines that filed to reduce their rates. The background section of each of the four orders made it clear that all “pass-through pipelines, including MLPs,” could choose to “either eliminate their tax allowances or reduce their rates to reflect the reduced income tax expenses provided by the Tax Cuts and Jobs Act.”
Millennium Pipeline Company , in its filing, noted that it was a pass-through entity that was owned by subsidiaries of Columbia Pipeline Group, Inc., National Grid PLC, and DTE Energy Company. Millennium also noted its understanding that, because of the presence of a master limited partnership in the ownership structure of one of its owners, Millennium was required to answer “No” to the question on the Form 501G asking whether it was a taxpaying entity. This answer resulted in the elimination of its ADIT balance and the elimination of its tax allowance. Millennium noted that, as a result of these changes, the indicated rate reduction would be 8.8%.
Despite this fact, Millennium filed its limited Section 4 proceeding using an addendum to the Form 501G in which it chose to be treated as a taxpaying entity, thus increasing the rate reduction to 10.3%. Consistent with the indicated rate reduction calculated in the addendum, Millennium proposed to reduce its maximum recourse rates by 10.3%. No objections were filed to Millennium’s petition. In its order, FERC accepted Millennium’s filing and noted that, because Millennium’s unadjusted Form 501G showed that its ROE was 14.6%, Millennium was consequently not eligible for the three-year moratorium period established for those whose ROEs are less than 12%. One notable aspect of this decision is that it appears to confirm that, even if a pipeline were to agree to a higher rate decrease, it would not qualify for the rate moratorium unless its unadjusted Form 501G shows that the pipeline has less than a 12% ROE.
Vector Pipeline , a joint venture of Enbridge and DTE Energy, filed an unadjusted Form 501G that called for a 9.3% rate reduction. Vector asserted that because it is a pass-through entity owned by two C corporations, it should be considered subject to federal taxes under the first question on Form 501G. There were no objections filed with respect to Vector’s filing, and, in its order, FERC simply accepted Vector’s filing. The interesting fact to note in this case is it seems to have established that pass-through entities owned by more than one C corporation can choose to be treated as a taxpaying entity -- a proposition that was not clear from the form’s instructions.
North Baja Pipeline , a subsidiary of TC Pipelines, filed a limited Section 4 proceeding that reduced its rate by 10.8% based on an adjusted Form 501G. Like Millennium, North Baja noted that the adjusted Form 501G yielded a greater reduction than the unadjusted form. The adjustments that it made to the form included adjusting its capital structure to reflect that it is in the process of adding debt to its existing capitalization and acquiring a credit rating, and adjusting its overall revenues to reflect that approximately 80 percent of its revenue is from negotiated rate contracts. These adjustments increased the indicated rate reduction from the 5.1% reduction reflected in the unadjusted form to the 10.8% reduction included in its limited Section 4 filing. No objections were filed to North Baja’s proposal. In its order, FERC accepted the filing, but, like Millennium, FERC determined North Baja’s eligibility for a moratorium by using its ROE under the unadjusted Form 501G.
Kern River Gas Transmission , a Berkshire Hathaway subsidiary, filed a settlement that it had reached with its customers. Under that settlement, its shippers were to receive a credit equal to 11% of the tariff rate for each class of shipper, which was the indicated rate reduction found in Kern River’s adjusted Form 501G. Kern River stated that its rate structure was fundamentally different from every other major interstate pipeline and that adjustments to the Form 501G were required to accommodate Kern River’s levelized rates and to account for a prior settlement approved by the Commission.
While there were comments and protective objections filed in the case, FERC approved the settlement. Interestingly, Commissioner Glick, while voting “yes,” noted in his opening remarks at FERC’s open meeting that he had concerns about one aspect of the settlement. As described in the order, the proposed 11% credit would immediately end if FERC were to initiate a Section 5 proceeding against Kern River. Now that this unique crediting structure has been approved, other Wave 3 pipelines may follow Kern River’s lead and implement a similar structure that immediately denies shippers the benefit of the deal based on an action they don’t control, namely FERC initiating a proceeding.
Insights Coming Soon
- Top ten contractor analysis
- Washington update - McNamee confirmation, Fast-41, MOU with PHMSA, etc.