Special Report: Questions Remain Following Leach Order and Rate Investigations

Last Thursday marked the last Federal Energy Regulatory Commission hearing under the Obama administration resulted in decisions that offer a lens into future project rulings and rate investigations. While the FERC typically includes dockets concerning Certificates of Public Convenience and Necessity on its agenda for consent agreement, these dockets are usually relatively insignificant projects (e.g., abandonments, storage, blankets). But on Thursday, the Commission broke from longstanding precedent by issuing orders approving Columbia Gas and Columbia Gas Transmission's (Columbia) Leach and Rayne Xpress Expansion Projects. The underlying FERC Order and Columbia's request for partial notice to proceed, filed yesterday, offer a window into what needs to be completed before construction begins.

On the same day, the Commission also launched rate investigations into Kinder Morgan's Natural Gas Pipeline Company of America (NGPL) and the Wyoming Interstate Pipeline (WIC) for over-recovery. While we expected FERC to launch Natural Gas Act, Section 5 rate investigations at this meeting, the pipelines targeted were, in our view, unlikely candidates, given calculations we conduct for these pipelines and all interstate pipelines.

Leach - Almost Ready to Go

These approvals came five months later than Columbia had requested, August 1, 2016, when they filed their applications for the Leach and Rayne Xpress Projects. Both projects have been contracted for a November 2017 in-service date -- despite some confusion (now corrected) noted in the draft implementation plan yesterday -- and the impacts resulting from the delay in FERC approval on this anticipated date are still unclear. Columbia must still obtain all necessary permits, as well as an order granting notice to proceed with construction prior to initiating construction of the project.

Significant remaining hurdles for the Projects include:

• Completing Clean Water Act Section 401 review in Ohio and West Virginia as well as 12 other federal and state permits and consultations;
  
• Completing Migratory Bird and Endangered Species consultation, including voluntary contribution of compensatory mitigation funds, although FERC noted that it "neither requires mitigation funding nor recommends a specific model, methodology, or mitigation ratio for calculating voluntary mitigation funding for FERC projects"; and
  
• Incorporating six outstanding variations to the Leach Xpress route, including some in response to landowner requests, or providing why the variation cannot be practically accommodated.
  

Significant capacity has been committed by way of precedent agreements on both projects. In addition, Columbia proposes to provide service to their shippers under negotiated rate agreements. Columbia proposes a monthly maximum incremental firm recourse reservation charge of $14.033 per Dth for service on the Leach XPress Project. This incremental reservation charge was based on billing determinants of 1,500,000 Dth/d.  However, the facilities that Columbia is constructing allow the pipeline to provide up to 1,530,000 Dth/d of additional firm transportation service. As a result, the FERC has directed Columbia to modify its incremental reservation charges to reflect actual capacity.  Columbia provided that Leach shippers will be responsible for approximately $1.38 billion of the project's costs, and existing shippers will be responsible for the remaining $140 million. In addition, these values are based on estimated project costs that may prove different and could result in the amendment of rates.

On Monday, Columbia submitted to the FERC its request for written authorization of the Implementation Plan, Project modifications and Partial Notice to Proceed with construction for the Leach Project, setting January 30 as it's targeted date to proceed with construction. Similar projects in Ohio have taken closer to two months to receive a similar notice. Buried in a gantt chart in this filing, Columbia mistakenly provided an in-service date of October 2018 rather than November 2017, the in-service date Columbia had provided since the filing of its application. Later in the day, Columbia filed a correction, leaving the full in-service date as November 2017.

Unlikely Rate Investigations

The Commission initiated investigations of the rates of NGPL and WIC and found that WIC earned a 17.7% and a 19% return in 2014 in 2015, respectivley while NGPL earned a return of 28.5% and a return of 20.8% in 2014 and 2015, respectively. In response, NGPL filed a motion for the Commission to take notice of "significant calculation errors" in calculating the 2014 and 2015 ROEs identified in the Orders Initiating the Investigation.

There are various reason for why NGPL and WIC are unlikely candidates for rate investigations. For example, both companies have been the subject of recent rate investigations and are the subject of re-examination following the termination of their settlement moratoriums. On November 19, 2009, the Commission instituted a Section 5 investigation into NGPL's  rates that resulted in a settlement approved on July 29, 2010. The 2010 settlement provided for phased reductions to NGPL's  transportation and fuel rates. The 2010 settlement also provided that neither NGPL nor any settling parties would file to propose changes to the settlement rates before April 1, 2016.

Similarly, for WIC, on November 15, 2012, the Commission instituted a Section 5 investigation into WIC's rates that resulted in a settlement approved on October 1, 2013. The 2013 settlement provided for rate reductions to be effective January 1, 2014, and imposed a rate case moratorium on the pipeline until July 1, 2016.

Interestingly, both NGPL and WIC listed a 100% equity capitalization on their Form 2s, the FERC's primary source, along with state tax information, for its investigation. As a result, the FERC used a hypothetical capital structure to calculate the pipeline's cost of service. The FERC generally accepts a pipeline's actual capital structure. However, more recently, the Commission determined that it was only reasonable to use a subsidiary pipeline's actual capital structure when the subsidiary pipeline issues its own debt which is not guaranteed by its parent. In these instances, hypothetical capital structures are applied because it is more costly to the rate payer to finance a pipeline's investment with equity.

The FERC is not implying that the 50/50 split it suggested constitutes a just and reasonable capital structure for NGPL. That, as well as the companies' rates, are among the issues set for hearing. However, in NGPL's Motion yesterday, it did not raise any issue with the FERC's suggested capital structure. Instead, NGPL suggested that the FERC's estimated ROE is based on a significant error in the calculations, and noted that corrected calculations result in ROEs of 17.7% and 15.7% for 2014 and 2015, respectively. NGPL identified discrepancies in several sections, including "Other Revenues," "Net Storage Costs" and "Net Transmission Costs," where in particular, the FERC included NGPL's revenue for fuel, but then reduced NGPL's  total Operation and Maintenance expenses by the costs of its "Gas for Compressor Fuel." NGPL has requested that the FERC issue an errata order to correct the calculations and ROE estimates. WIC has yet to provide any rebuttal to the FERC's calculations. In response to these investigations, you can expect both NGPL and WIC will file full cost and revenue studies within 75 days of the initiating order.

President Trump's Executive Actions - this week, our team plans to release another special report, with a focus on the impact of recent executive actions related to the pipeline industry.