Risky Rate Business - 2019 Will Go Down as the Year of the Rate Case
We are a week away from the Chinese New Year, the Year of the Pig, but as we said in Insights Needed in ’19 - Projects, Permian, Rates, LNG, FERC, DC, the Courts and More , 2019 will be the year of the rate case for interstate pipelines. Today, we look at the status of the many rate cases that are still pending. We also look ahead to those pipelines that plan to file Section 4 rate cases this year and assess the risk of FERC launching a Section 5 rate investigation by looking at the cases it announced earlier this month.
Whether you are a shipper on one of the many pipelines involved in these rate cases, a pipeline trying to assess the risk of a rate investigation against you, or an investor trying to understand how possible rate increases or decreases will impact the companies in which you have an interest, you will no doubt need a scorecard for 2019. This will be our first look at this issue for 2019 but not our last.
Predictive Indicator of a Rate Investigation
Earlier this month, FERC issued a series of rulings on the pipeline filings that were made in the first wave of Form 501G filings made in October. Of the 26 filings made in the first wave, FERC announced that it was commencing investigations into the reasonableness of the rates of three of them, Bear Creek Storage , Berkshire Hathaway’s Northern Natural, and Energy Transfer Partners’ Panhandle Eastern , bringing the total to four. FERC also announced it was closing the file on nine pipelines, leaving exactly half of the first wave pipelines in limbo.
Although FERC has not indicated how it is choosing the pipelines against which it is launching Section 5 investigations, a good predictor based on the three it chose to investigate in January can be derived by multiplying the indicated rate reduction by the percentage of the pipeline’s revenue that comes from recourse rate contracts. This could be characterized as a calculation of the real world impact any rate reduction would actually have. Using this as a measure, the three pipelines included in FERC’s first group of Section 5 proceedings were in the top nine of the 26 filers and only one of the nine pipelines whose filing was closed was in the top nine by this measure, leaving five of the top nine by this measure in the limbo class.
If we assume that this measure constitutes a good proxy for the remaining pipelines in waves 1, 2 and 3, there are only 27 pipelines whose combined score on this scale is higher than the lowest of the three and which do not currently have a moratorium in place.
These 27 pipelines have an indicated rate reduction that ranges from a low of 3.91% for Pine Needle LNG to a high of 18.53% for West Texas Gas. The percentage of recourse rate revenue for this group ranges from Northern Natural’s 58.1% to the 100% of recourse rate revenue reported by 16 of the 27 pipelines.
The following graphic shows how these companies stack up against the three companies included in FERC’s announcement (those three are shown as diamonds in the graphic below).
The final factor we apply is whether the shippers of the pipeline filed comments or protests concerning the Form 501G filing, like they did in the three cases FERC initiated. The following table shows this select list of pipelines, with the three who already are subject to a rate investigation highlighted in red.
Current Section 4 Cases
In addition to these new Section 5 proceedings, FERC has a number of Section 4 proceedings currently pending, including for two of the largest pipeline systems in the country, Enbridge’s Texas Eastern (TETCO) and Williams’ Transcontinental (Transco). The list below ranks these pending cases by the total revenue of the pipeline systems that are subject to the rate case
Future Section 4 Cases
There were a few companies that received waivers from the 501G filing requirement by representing that they were either negotiating with their shippers or intended to file a rate case in the near future. This group includes yet another one of the largest pipelines in the country, Kinder Morgan’s Tennessee Gas Pipeline . In addition, a number of companies have previously agreed to file a rate case this year under prior settlements. The table below shows the expected date on which each of these cases are expected to proceed.
Presuming FERC launches Section 5 rate investigations against only one-third of the 27 pipelines set forth at the beginning of this discussion, 2019 could see FERC dealing with 27 pipeline rate investigations/cases simultaneously. This will undoubtedly stretch thin the staff, including the administrative law judges, and could lead to these cases taking longer than usual. While the parties work to settle these cases, there will be a high level of uncertainty for shippers, pipelines and investors.
Insights Coming Soon
- Review of market share of Asset Management Agreements (AMAs)
- Launch of our Cost Data
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