501G Wave Three and FERC Launches Section 5

The third and final set of Form 501G filings are scheduled to be submitted tomorrow, and will include about as many filings as the first two waves combined, 65 in total. Based on our analysis of the first two waves, we project below what is likely to happen in this third and final wave. Also, late last week, FERC took affirmative action in response to the 501G filings -- it approved two previously filed limited Section 4 proceedings and launched an action under Section 5 against one of those companies.

Our customers are no doubt 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%.
A unique feature of this wave, not present in the first two, is that more than one-third of the pipelines, 24, have previously settled rate cases that include a moratorium that is still in effect. Therefore, we have divided Wave Three into two groups: (1) those subject to an effective moratorium; and (2) those without a moratorium. We then arrayed each group using our tool, as shown below.

Pipelines With an Effective Moratorium In Place?

In applications for waivers filed by Ozark Gas Transmission, Alliance Pipeline and Maritimes & Northeast, FERC granted the applicants a waiver from the requirement to file Form 501G on the grounds that the companies had an existing moratorium in place. In its decision in Ozark, FERC specifically found “that in order to preserve the benefits in Ozark’s Settlement and honor the agreement between Ozark and its customers it is appropriate to grant Ozark’s request for a waiver of the FERC Form No. 501-G filing requirement.” Therefore, although some of these pipelines appear to be in our higher risk categories, we don’t expect that any of them will agree to reduce their rates. Instead, we anticipate that they will all choose Option Three, which is to file the 501G form and explain why they should not be required to adjust their rates and cite to the existing moratorium.

Pipelines Without an Effective Moratorium

That leaves us with the remaining 41 pipelines that do not have a currently effective moratorium.

Consistent with the first two waves, we expect that substantially more than half of the companies will not adjust their rates. In the first two waves, only one pipeline that had a projected ROE lower than 16% filed to reduce its rates. Using this as our primary screening tool for Wave Three, our analysis suggests that only eight of the 41 pipelines would be likely candidates to file for some sort of rate reduction.

The Elite Eight

Two of the remaining eight pipelines are exempt from being required to file the Form 501G. The first is Saltville Gas Storage, which previously filed a limited Section 4 proceeding that was accepted by FERC, but which also resulted in FERC initiating a hearing under Section 5 to examine various issues about Saltville’s rates including, but not limited to, Saltville’s “cost of service, MLP status, cost of capital including return on equity, contract volumes and billing determinants, fuel percentage, depreciation, negative salvage value, and ADIT.” The second exempt pipeline is Transcontinental Pipeline, which filed a Section 4 proceeding in August. (We understand that both companies are actively seeking a settlement.)
This leaves us with the following six pipelines, each with a projected post-tax cut ROE above 16%, which makes them likely candidates for considering whether to file for a rate reduction.

Based on the results from Waves One and Two, we believe there is a high probability that the three pipelines that are owned at least in part by TC Pipelines could file to reduce their rates, primarily because: (1) the projected rate reduction is fairly small; and (2) by making a voluntary filing they could reduce the risk that FERC would seek additional reductions. Given the size of the rate reduction for Sierrita and Viking, we think the likelihood of them filing is lower than for the pipelines owned by TC Pipelines. As for USG Pipeline, it only has two customers and the only one that is a recourse contract is with an affiliate. Therefore, we believe that USG’s filing decision will be purely driven by the discussions with those two shippers.

FERC Approves Limited Section 4s but Launches a Section 5 Inquiry

Central Kentucky Transmission Company, a small interstate pipeline owned by NiSource Inc., filed a limited Section 4 case when it filed its Form 501G on October 30. In an order issued on November 30, FERC simply accepted, effective as of December 1, 2018, the tariff records reflecting the 3.1% rate reduction found in the Form 501G.
The more significant decision was the one issued in the limited Section 4 that had been filed by East Tennessee Natural Gas, which is a subsidiary of Spectra Energy Partners, an MLP owned by Enbridge. East Tennessee’s rate proceeding decreased its rates by 1%, which was consistent with the unmodified Form 501G it filed and which reflected its ownership by an MLP.
A number of shippers objected, raising a number of issues, including the following:

East Tennessee’s parent, Spectra, is currently in the process of converting from an MLP to a C corporation and East Tennessee is improperly benefiting from the elimination of ADIT balances from its books
East Tennessee’s total estimated ROE used in the Form 501G was excessive

The Commission found that East Tennessee’s Form 501G was consistent with the instructions that accompany that form and, thus, FERC accepted the rate reduction effective as of December 1, 2018 so that the shippers would at least immediately benefit from that minimal rate reduction. However, the Commission also launched a proceeding under Section 5 of the Natural Gas Act to determine whether East Tennessee’s rates, even after the 1% reduction, were still unjust, unreasonable, or otherwise unlawful.

As in other recent Section 5 proceedings, FERC ordered East Tennessee to file a cost and revenue study within 75 days of the order, February 14, 2019. In addition, FERC directed that the initial decision by the administrative law judge be issued within 47 weeks after the filing of that cost and revenue study.
Once the filings are made in Wave 3, we will provide our customers with a summary of all three waves and a ranking of pipelines that appear to be most at risk for additional rate investigation by FERC.

Insights Coming Soon