TETCO’s FERC Rate Case - Awaiting the Battle
Texas Eastern Transmission (TETCO) filed its previously delayed, but much anticipated, rate case last Friday. What TETCO did not do is almost as interesting as what they are seeking. As we discussed in Enbridge’s Quiet $4 Billion Spat With Its Shippers , Enbridge has requested an accounting ruling from FERC that would allow it to completely eliminate the ADIT and Excess ADIT balances from the books of any of its subsidiaries that are subsidiaries of its master limited partnership (MLP), Spectra Energy Partners. Enbridge sought such an accounting ruling even though it has announced that it will complete a corporate restructure later this year that will eliminate the MLP. However, in the rate case, TETCO was not that aggressive, but the company is still seeking a substantial rate increase that will impact its traditional tariff shippers very differently -- varying from a rate decrease of almost 9% to a rate increase of almost 80%.
TETCO’s shippers have not yet weighed in on what they think of the proposed increases, but our initial review indicates that, as with the earlier case filed by Williams’ Transcontinental Gas Pipeline Company (Transco), there will be plenty to fight about. As in the Transco case, we fully expect that FERC will suspend the proposed rate increases until June 1, 2019 and direct that a full evidentiary hearing be held on the justness and reasonableness of the new rates.
Whether you are a TETCO shipper, an Enbridge investor, or a shipper on a competitor pipeline, you need to follow this proceeding, as it will impact TETCO’s revenue, shippers’ costs, the use of competing pipelines, and future growth project plans. The case will likely unfold over the next five months, with battles over some key issues discussed below, including Return on Equity (ROE), allocation methodologies, depreciation rates and negative salvage, and the Income Tax Allowance (ITA) - all of which we will help our customers dissect.
The Rate Increases
TETCO explains in its application that the rate increase it is seeking is designed to increase revenues by almost $365 million, which would represent an approximately 26% increase in its 2017 transportation revenue. However, the increase in the tariff reservation rates is not across the board and varies widely, depending on the service being provided and the zone in which a shipper transports gas. TETCO provides three traditional tariff services:
- Comprehensive Delivery Service (CDS), which is a form of no-notice service customarily held by local distribution companies
- Firm Transportation Service (FT-1), a traditional firm service that does not include a no-notice right
- Small Customer Transportation Service (SCT), which is for customers with no more than approximately 6,000 dth/day of firm contracts with TETCO under these three traditional services.
TETCO has traditionally provided service transporting gas from the onshore Texas, onshore Louisiana, and Gulf of Mexico production areas located in TETCO’s Access Area zones to various markets, including city-gates, municipalities, end-users, and downstream pipelines located in TETCO’s Market Area zones.
Source: https://linkwc.spectraenergy.com/SystemMaps/TESystemMap.pdf
As explained by TETCO in its application, the “key driver” of the rate case is the significant growth in its rate base due to the growth in system net plant as depicted in the chart below:
Issues Are Still Ripe for Debate
As stated above, we expect FERC will issue an order by month’s end that suspends all of the rate changes for the maximum period through June 1, 2019, and sets the case for a full evidentiary hearing. We see the following as some of the more significant issues that will be examined in that hearing:
- ADIT and Enbridge’s Reorganization. TETCO notes in its application that Enbridge intends to complete a corporate simplification transaction by the end of this year, whereby Enbridge subsidiaries will acquire all of the outstanding equity securities of its MLP that currently owns 100% of TETCO. As a result of that transaction, TETCO will be wholly-owned indirectly by C corporations. Therefore, TETCO asserts that it is entitled to an Income Tax Allowance under FERC’s new policy. TETCO notes that its accounting request would serve to completely eliminate both ADIT and Excess ADIT balances from its books. While TETCO includes about 83% of those balances for purposes of calculating the rates in this case, it also asserts that, if it receives approval to eliminate those balances from its books, it “reserves the right to reflect the removal of these balances in the calculation of rates that it files in future rate cases.” TETCO’s reduction of those balances by 16.9% represents the 16.9% public unit-holder ownership in the MLP that Enbridge subsidiaries are purchasing as part of its restructuring transaction. While this is certainly a better result for shippers than they were probably anticipating, there could still be a battle over the elimination of the 16.9% of Excess ADIT, since that is a regulatory liability and may not be resolved by the tax treatment of the restructuring transaction.
- ROE. TETCO states in its application that the capital structure it is using in this case, 66.22% equity and 33.78% debt, is consistent with FERC precedent and is based on TETCO’s actual capital structure. TETCO also provided expert testimony to support an ROE of 14.5% for the equity portion of its return. While this is certainly lower than the 16.4% return on equity that Transco requested in its recently filed case, we would still expect this rate to be contested.
- Allocation Methodologies. TETCO has proposed various methodologies for allocating costs between the various categories of tariff services it provides. One methodology that will likely be contested in this case is the use of mileage to allocate costs between services under the three traditional rate schedules and services being provided under incrementally priced expansion projects. For instance, both the NJ-NY Expansion and Adair Southwest Expansion projects required less than 25 miles of new pipeline, and created more than 600,000 dth/day of capacity. Yet, the tariff rates for using these two facilities are both dropping by over 25%.
- Depreciation Rates and Negative Salvage. TETCO is proposing an increase in its depreciation rates for its onshore transmission assets from 1.22% to 2.36%, and is also proposing to include a negative salvage rate of 0.77% for the first time. Both of these changes drive up the cost of service, especially given the net plant increase that TETCO indicates is the key driver for the filing of the rate case.
All of these issues will be subject to conflicting evidence and expert opinions. The best way to view this case at this early stage is as TETCO’s opening bid in a negotiation that almost certainly will result in it receiving something less.
Insights Coming Soon
- Gulf LNG Infrastructure Review
- Washington Update