Kinder Morgan Settles Two Major Rate Cases & Is Pipeline Age a Cost Driver?
Late last week, Kinder Morgan’s Tennessee Gas Pipeline (TGP) filed a settlement agreement concerning its tariff rates, and on Monday, Kinder Morgan announced that El Paso Natural Gas Pipeline (EPNG) had also reached a settlement with its shippers. It appears that both settlements will result in a significant reduction in rates, as Kinder Morgan notes the rate adjustments, when fully implemented, will have an approximately $100 million combined annual impact on its EBITDA.
In its settlement agreement, TGP agreed to reduce its rates on November 1, 2019 by 8.5% and to make further reductions each November through 2022, so that the total reduction will be 13.5%. The settlement also includes a moratorium through November 1, 2022.
A key aspect of any pipeline company’s cost structure that is reviewed closely in a rate proceeding are the annual costs to run its transmission system and how those costs are allocated to the various classes of service. Today, we review how TGP and EPNG compare to others on this cost factor by looking at their reported transmission costs per mile of operated pipeline. We also assess whether the age of the pipeline has a substantial impact on those costs. As shown below, the age of pipelines can vary widely, as can the cost per mile to operate the pipelines. While one may expect that there should be a correlation between the cost to operate and the age of the pipeline, our data shows costs do not necessarily increase with the age of the pipeline.
Age of Aquarius
Each year, interstate pipelines are required to file a report with the Pipeline and Hazardous Materials Safety Administration of the U.S. Department of Transportation (PHMSA) that details how many miles of the pipeline company’s system were installed in each decade stretching back to the 1940s. The most recent report for the year ending on December 31, 2017 was filed earlier this year. For comparing other pipelines to TGP and EPNG, which report that they operate 11,775 and 10,059 miles of pipeline, respectively, we limit our analysis to those pipelines reporting that they operate at least one thousand miles of pipe.
Customers looking to determine whether one pipeline faces a replacement risk different than its competitors can combine the PHMSA data with the information from our platform regarding the operating costs of the pipeline.
A Key Dividing Line
PHMSA began requiring all pipelines constructed after July 31, 1971 to be protected from external corrosion by requiring the application of an external protective coating and the use of a cathodic protection system. Therefore, a key dividing line for assessing the age of a pipeline system is this 1971 date, because pipe installed after that date will have had to comply with these new requirements. Although older pipe may have such protection, there was no regulatory requirement for such measures for pipe installed prior to 1971. The reports filed with PHMSA each year are based on the decade in which the pipeline was installed, which is not a perfect match for this dividing line. But the percentage of pipeline miles installed from 1970 to the present is a good approximation. As can be seen in the chart below, the percentage of pipeline that was installed after 1969 varies widely, from less than 10% to 100%.
Percent Built After 1969 By Pipeline
Operating Costs
By combining the mileage of pipeline reported by the pipelines in their reports to PHMSA with the transmission operating costs reported to FERC in the pipelines’ annual financial reports, it is possible to calculate the average transmission operating costs incurred by these large systems on a per-mile basis. In the chart below, we show the same 34 pipelines shown above, but this time we report the pipelines’ per-mile cost for operating their systems. As you will see, the average cost per mile again varies widely from a low of less than $6,000 per mile to a high of over $36,000 per mile.
Net Transmission Cost per Pipe Mile by Pipeline
Age is Not the Driver
With this kind of variability, one would immediately suspect that the pipelines with the newer pipes would not be spending nearly as much money to operate them, as compared to their competitors with older systems. However, by comparing the costs spent per mile to operate all of the pipelines and arranging them by the percentage of each system built after 1970, one sees that there is not much of a difference across the companies, with perhaps a slightly higher average cost per mile for the newer pipeline systems.
If you would like to dive deeper into a particular pipeline to see how it compares to others, please let us know at info@lawiq.com and we would be happy to assist you with such comparisons.
Insights Coming Soon
- Impact of Pipeline Executive Order
- Waters of the U.S. (WOTUS) Rulemaking