FERC Form 501G Wave Two: Our Projected Results and Rate Implications for 29 Pipelines
While shippers have already begun to argue about the filings in the first wave of 501G forms, the second set of Form 501G filings are scheduled to be filed on November 8, 2018. As with the first wave, this wave will include filings from about one-fourth of the pipeline companies required to file by the end of this year. Based on the insights gleaned from our analysis of the first wave discussed in The Results are In - Form 501G Causes Rate Adjustments, we can project what is likely to happen in this second wave.
In summary, consistent with the first wave, we expect more than half of the companies will not adjust their rates. Also similar to the first wave, the reductions will generally be limited in their impact because they are likely to be filed by pipelines with limited recourse rate exposure or for which the rate decrease will be minimal.
Wave One Recap: Shared Characteristics of Pipelines Reducing Rates
A summary of our key findings from Wave One included:
- 75% of the pipelines in our high-risk category filed to adjust their rates
- None of the pipelines in our low-risk category filed to adjust their rates
- Only about 30% of the pipelines in our mixed-risk categories reduced their rates
- All mixed-risk pipelines that filed to reduce rates had a post-tax cut ROE above 16%
- Limited Section 4 filings had a minimal revenue impact because either the tariff rate reduction was minimal or the pipeline had a low proportion of recourse rate revenue
LawIQ’s Expects Similar Results Based on Our Pro Forma Form for Wave Two
By now, our customers are familiar with LawIQ’s proprietary risk assessment tool that 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%. We have used this same tool for assessing the risks for each company required to file in Wave Two, as shown below.
High-Risk Pipelines
As with Wave One, there are a limited number of pipelines - six out of 29 - in our “high-risk” category, the upper right quadrant of the graph. We anticipate that, at most, four of these pipelines may file to voluntarily reduce their rates with a Limited Section 4 rate case. All four pipelines that we see as possible Section 4 case filers, Elba Express, Fayetteville Express, Big Sandy Pipeline and PGPipeline, receive over 99% of their revenue from negotiated rate contracts, which would not likely be impacted by a change in the tariff rates. The remaining two companies, Lake Charles LNG and Southern LNG, have fewer than three customers and will probably base any decision on discussions with those key stakeholders.
Mixed-Risk Pipelines
While we consider the pipelines that are in either the upper left quadrant or the lower right quadrant to be “mixed-risk,” the only Wave One pipelines in these quadrants that elected to voluntarily reduce their rates were in the upper left (high ROE, low rate reduction). A review of the nine pipelines in the upper left quadrant for Wave Two shows that none have 2017 revenue exceeding $50 million, only two have 2017 revenue exceeding $10 million, and most have fewer than three firm customers. Of these nine, we anticipate that, at most, three pipelines will take any action with regard to their rates, with the most likely pipelines being Young Gas Storage, Markwest New Mexico and OkTex Pipeline.
Low-Risk Pipelines
Based on our analysis and the results from Wave One, we do not expect any of the pipelines in the lower left quadrant or lower right quadrant to take any action with regard to their rates. The only pipeline of any size from the lower right quadrant that may act is Dominion Energy Carolina Gas Transmission. Our proforma 501G shows that this pipeline has a nearly 16% post-tax cut ROE, but if it were to follow the path of the first wave, any likely action would be via negotiated rate settlements with its shippers, and not the Limited Section 4 option.
Insights Coming Soon
- Update on Permian Basin projects
- Review of top mainline contractor spend