Complementary Expert Insights: Pipeline Rates at Risk from FERC 501G
The first wave of Form 501G filings are due to the Federal Energy Regulatory Commission (FERC) on October 11th. Based on our 501G analytics, we expect a significant number of filings for "major pipelines" (more than $100 million of annual revenue in 2017), will show high ROEs (above 16%) by FERC standards, and will have "indicated rate reductions" exceeding 8%.
Our team has pre-populated a Form 501G, specific to each of the 126 companies required to file to assess each pipeline's particular circumstances: ROE, revenue by rate structure, and optimal filing scenarios considering ADIT, ITA and rate case moratoria. The graph below for the 46 major pipeline companies shows why the calculations that the 501G forms generate can create risks for pipelines.
Whether you are a pipeline seeking to benchmark to your competitors, an investor assessing the risk to the total revenue of a pipeline and its parent company, or a shipper expecting to benefit from a rate reduction, understanding where a pipeline falls on this chart is critical, and the details matter. So let's take an initial look at the chart's four quadrants.
Major Pipelines Ranked by Post-Tax-Cut ROE and Indicated Rate Reduction
Upper Right - Double-Barreled Risk Profile
The sixteen pipelines in the chart's upper right quadrant will likely be primary targets for rate reductions by FERC and the shipper community, because both their post-tax-cut ROE, over 16%, and the indicated rate reduction, over 8%, are higher than most of the other pipelines. This group will likely need to explain why their ROEs are high and be able to rebut the expectation that a rate cut of the calculated magnitude is appropriate. Certainly, these pipes will have arguments against a regulator required rate cut, but if they are not persuasive, this group of major pipelines face the double-barreled risk arising from filing the Form 501G: 1) they will be the focus of FERC and the shipper community; and, 2) if they need to reduce their rates, the magnitude of those rate reductions may be substantial.
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Upper Left - Regulatory Risk, But Will Anyone Care?
The ten pipelines in the chart's Upper Left Quadrant face the same regulatory risk as those in the upper right, because their post-tax-cut ROE is also higher than most, but their indicated rate reduction is lower than the upper right quadrant pipelines. However, a quick review shows their post-tax-cut ROEs are not substantially lower; they all have an indicated rate reduction of at least 6%. Interestingly, this group of ten includes seven pipelines currently subject to a rate moratorium under prior settlements. This should, at least temporarily, protect them from any rate reduction.
Lower Right - A Healthy Rate Reduction, If It's Real
The Form 501G filings by the thirteen pipelines in the chart's lower right quadrant are expected to show a substantial rate reduction due to their customers, ranging from 8% to almost 14%. However, these pipelines all have less than a 16% ROE (an ROE comparable to that recently asserted by Transcontinental Pipeline as being the median rate of return needed to attract capital) and many of them have less than a 12% ROE, which is what FERC indicated they need to achieve after any rate reduction to obtain a three-year moratorium.
We expect the pipelines in this quadrant to assert that even after the tax cut, they still are not earning an allowed rate of return and should not be obligated to make any rate reduction. Should that assertion be rejected, they could be candidates for making a rate reduction to reduce their ROE to less than 12% and seeking a three-year moratorium on any future rate cases in exchange.
Lower Left - Help, I am Drowning
The seven pipelines in the chart's lower left quadrant are likely candidates for taking the fourth option FERC has offered to pipelines when they file - to simply file the Form 501G and leave well enough alone. These pipelines not only have post-tax-cut ROEs lower than their peers, but will also show a lower indicated rate reduction. If you assume FERC and shippers have limits on the resources needed to bring Section 5 cases against pipelines that don't adjust their rates, the pipelines in this quadrant are prime candidates for taking that risk and simply filing the Form 501G and moving on with their business.
LawIQ is offering 501G analytics so customers can calculate filing scenarios for all pipelines.
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The graphic in this write-up was made using this product. To purchase or learn more, contact James Cahalin at jcahalin@lawiq.com, or call us anytime at (202) 505-5296.