Seven Billion in Annual Revenue Under Review by FERC
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As we wrote in Risky Rate Business - 2019 Will Go Down as the Year of the Rate Case, 2019 is poised to be one of the biggest years ever for rate cases pending at FERC, with 19 cases, representing $6.7 billion, or a quarter of all annual revenue, pending or expected to be filed this year. And this is before what many anticipate will be another group of Section 5 investigations that FERC may launch this month based on its review of the the third wave of the 501G filings.
Today, we look at the sheer number of these cases, and identify the key next date in each one so that you can follow along if you like. Finally, we dive into some of the key issues that have been raised in cases other than Transco and TETCO, since we discussed those two cases previously in Transco's FERC Rate Case - A Divide at the Mason-Dixon Line and TETCO's FERC Rate Case - Awaiting the Battle, Part 2.
Pending Rate Cases
Of the 19 cases currently pending or expected to be filed in 2019, the biggest case anticipated this year is the filing by Kinder Morgan’s Tennessee Gas Pipeline. FERC has granted Tennessee a couple of extensions of the requirement to file Form 501G based on Tennessee’s representation that it is in settlement discussions with its customers. The current extension runs until April 5, 2019, and Tennessee has assured FERC that any settlement reached will consider the impact of the Tax Cuts and Jobs Act.
Tennessee Gas Pipeline filed a settlement in 2015 rather than initiate a Section 4 rate case. That settlement reduced Tennessee’s rates by 3% on November 1, 2015 and an additional 2% on November 1, 2018. It also called for an additional 1% reduction on November 1, 2020 and a final 1% reduction on November 1, 2022. However, the moratorium under that settlement ends on November 1, 2019, which is presumably why Tennessee is negotiating with its shippers.
While Tennessee has yet to file its Form 501G, we have completed one for it that shows its indicated rate reduction would be almost 8% and that, even after making such a reduction, its ROE would be around 20%. For all of these reasons, we suspect that, unlike TETCO and Transco which are seeking rate increases, the discussions between Tennessee and its shippers are about how much more the pipeline’s rates should be reduced beyond the two 1% rate decreases included in the prior settlement agreement.
Timelines Don’t Fly
While FERC will usually suspend an increase in rates for the maximum period of five months, those rates still often go into effect because the rate process, including the settlement process, often extends beyond the suspended effective date for the proposed tariff changes. This means that MoGas Pipeline, Trailblazer Pipeline, Enable Mississippi River Transmission, Empire Pipeline and Transcontinental Pipeline have all begun collecting their increased tariff rates. While the collection of these rates is subject to refund, it is an indication that the process simply does not typically get resolved before the rates are ultimately charged to the pipeline’s shippers. Given the pace of the process, it is important to maintain some awareness of the significant dates for each of the cases, which we set forth below.
Some Key Points of Dispute
Both Kinder Morgan’s Bear Creek Gas Storage and Energy Transfer’s Panhandle Eastern have challenged the process FERC is using in the Section 5 investigations launched following the filing of Form 501G. In particular, the pipelines do not believe FERC has the authority to require them to include a derivation of rates as part of the cost and revenue study FERC is requiring the pipelines to file. Both of these pipelines are required to file that study by April 1, so we may see FERC respond to this challenge to its authority before then. If it does not, we would expect the pipelines to refuse to provide that information in the filings they make on April 1, and this dispute may spread to other cases.
The last fully litigated rate case for a natural gas pipeline was the El Paso Natural Gas Section 4 proceeding filed on October 28, 2010 and decided almost three years later, which resulted in the ROE rate of 10.55% that was used in the Form 501G. However, based on the most recent filing in the Trailblazer case, that Section 4 case may be heading down the full litigation path. After FERC issued its order on February 21 concerning Trailblazer’s entitlement to an income tax allowance, the settlement judge handling the case filed a notice that he was recommending terminating the settlement procedures because the parties were at an impasse. The next step in the case has not yet been identified, but this is certainly a case that bears watching, both because it may provide an opportunity for FERC to set clear precedent regarding the entitlement to an income tax allowance, but also because of other issues, such as the method to be used to calculate ROE, which we discussed in
A Case That May Not Settle
The last fully litigated rate case for a natural gas pipeline was the El Paso Natural Gas Section 4 proceeding filed on October 28, 2010 and decided almost three years later, which resulted in the ROE rate of 10.55% that was used in the Form 501G. However, based on the most recent filing in the Trailblazer case, that Section 4 case may be heading down the full litigation path. After FERC issued its order on February 21 concerning Trailblazer’s entitlement to an income tax allowance, the settlement judge handling the case filed a notice that he was recommending terminating the settlement procedures because the parties were at an impasse. The next step in the case has not yet been identified, but this is certainly a case that bears watching, both because it may provide an opportunity for FERC to set clear precedent regarding the entitlement to an income tax allowance, but also because of other issues, such as the method to be used to calculate ROE, which we discussed in Will FERC Surprise Pipeline Markets Tomorrow by Ruling on its ITA and ADIT Guidance?
A Range of Requested ROEs and Weighted Cost of Capital
A key area for expert testimony in any rate case is the ROE that the company should earn on its rate base. But this is not the only issue -- there is also the determination of the amount of equity the company can include in its capital structure and the rate to be used for its debt. These last two features are captured in the overall weighted average cost of capital. A review of the pending cases shows the pipeline ROE experts coalescing around an ROE of 14.5%, but there is quite a range of values for the weighted average cost of capital.
Insights Coming Soon
- Review of environmental stakeholder activities
- Discussion on pipeline cost data