Thorough Preparation Makes Its Own Luck - Section 4 Rate Cases

On this day in 2017, the Federal Energy Regulatory Commission (FERC) announced that it would conduct investigations of two natural gas pipelines under Section 5 of the Natural Gas Act (Section 5 cases). These investigations were intended to determine if the Kinder Morgan companies, Natural Gas Pipeline Company of America LLC (NGPL) and Wyoming Interstate Company, L.L.C. (WIC), were substantially over-recovering their costs, resulting in unjust and unreasonable rates. So far, in 2018, FERC has been silent concerning any Section 5 cases. But this is not a novelty. The FERC has opted against Section 5 investigations at various periods historically (see chart below). 

FERC Section 4 and Section 5 Cases (2004-2016)

FERC may be hesitant to increase its rate case workload for 2018, as this year promises to be a very busy one for FERC's rate staff for three reasons. First, there are a number of major cases that will be filed by the pipelines themselves under Section 4 of the Natural Gas Act. Second, as we've discussed in past customer notes, because of the corporate tax cut, there will be substantial pressure on FERC to force pipelines to pass the savings from reduced taxes on to their shippers by reducing their tariff rates. Third, as we have noted, FERC must still address its policy of allowing master limited partnerships to include taxes in their cost of service, even though, as pass through entities, they do not pay any federal taxes directly.

The Natural Gas Act also allows pipelines to seek a change in their tariff rates, typically an increase in rates to accommodate changes in operating conditions (Section 4 cases). These Section 4 cases can be initiated by a pipeline at any point, and require the pipeline to demonstrate that the proposed rates are just and reasonable. While Section 4 allows the pipeline to file a rate case whenever appropriate, many pipelines have agreed in prior settlements of either Section 4 or Section 5 cases to not file a rate case before a certain date in the future (a "moratorium" on filing), or have agreed to file a rate case by no later than a certain date (a "comeback" requirement). If the pipeline is subject to a comeback requirement, the Section 4 filing may actually result in a reduction in its rates and its revenues.

From past settlements and our database of case specifics, we know that the following seven pipelines will be required to file Section 4 cases this year:

Most Section 4 rate cases are either settled before they are even filed, or shortly after being filed. Very few Section 4 cases are ever actually contested to the end. For example, on December 4, 2017, Northern Border, a jointly owned TransCanada and ONEOK asset, filed its proposed settlement of the Section 4 rate case well before its January 1, 2018 required filing date. In that proposed settlement, Northern Border is proposing a rate reduction of approximately 5%.

Why are stakeholders interested? Investors in pipelines and their owners want to know which pipelines have obligated themselves to "comeback" in for rate cases as an early warning about future revenue reductions for the pipeline. Shippers want to be aware of such comeback requirements before committing to a long term negotiated rate agreement for a rate lower than the existing rate, but potentially higher than the tariff rate following a comeback. All industry participants should watch how FERC addresses the tax cut issue because any pipeline subject to a current moratorium will argue that it should not be required to reduce its rates until that moratorium ends, allowing the pipeline to retain the benefits from paying reduced taxes until the rate is adjusted. How quickly FERC takes action will also determine how quickly the pipeline tariffs that are not the subject of a moratorium will need to be reduced.

For those seeking more detail, LawIQ will host a webinar, "Profit or Loss? The Financial Risks of Tax Cuts to Gas Pipelines", with leading industry and legal partners on February 07, 2018, in conjunction with an in-depth white paper providing a quantitative analysis of the recent tax cut for key pipelines -- so stay tuned.

In the meantime, LawIQ's alerting lets you know when a pipeline has initiated a Section 4 proceeding, or when FERC decides to launch a Section 5 case.