Transco's FERC Rate Case - A Divide at the Mason-Dixon Line

The battle lines are drawn in the rate case filed by Williams' Transcontinental Gas Pipeline Company (Transco), the operator of Williams' behemoth 10,200-mile pipeline system, with its shippers objecting to the substantial rate increases -- as high as 40% -- that Transco has proposed. Transco shippers asked FERC to suspend the proposed rate increases until March 1, 2019 and to hold a full evidentiary hearing on the justness and reasonableness of the new rates. 

We expect FERC to grant these requests and, consequently, it is unlikely that there will be a major increase in Transco's revenue or an increase in shippers' costs this winter. Whether you are a Transco shipper, a Williams' investor, or a shipper on a competitor pipeline, you need to follow this proceeding, as it will impact Transco's revenue, shippers' costs, the usage 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 the Income Tax Allowance (ITA) - all of which we will help our customers dissect.

The Battlefield Participants

Aside from Transco, who are the major participants that will likely be most impacted by this rate case, based on the percentage rate and dollar increase per year in transportation costs? By looking at the shippers reflected in Transco's filing, one can identify the major shippers and calculate how they might be impacted. Based on our review of Transco's transportation data filed, the table below identifies the major players:

Consolidated Edison noted in its protest to FERC that the proposed rate increases for both transportation and storage could cost it in excess of $26 million per year. Nonetheless, not everyone is facing a cost increase. In fact, a number of shippers will see a reduction in their overall cost of transportation service. South Carolina Electric & Gas and Santee Cooper will each see a two to three percent reduction in their contract obligations.

Zone 6 Versus the Rest of Transco's System

The pattern for these major players is consistent with the overall impact of Transco's rate increases across Transco zones. For the uninitiated, Transco was originally designed as a long-haul pipeline to transport natural gas supplies from the Gulf Coast to demand centers in the Northeast and along its route. The American shale revolution has dramatically changed how the system is used today, with substantially less need for flows from the Gulf Coast. Transco divides its system into six main zones, depicted on its system map:

Source : http://www.1line.williams.com/Transco/files/TariffSystemMaps/TranscoTariffSystem.pdf

Transco has proposed rate changes for almost every service it offers, and the changes vary widely; some proposed rates decrease by almost 20%, but most others increase by as much as 40%. There appears to be a line of demarcation along the border between zone 6 and zones to the south. For shippers with delivery points in zones 1 through 5, the weighted average rate increase is less than 6%, and for those shippers whose delivery point is in zone 6, the weighted average rate increase exceeds 18%. Similarly, the contract data provided by Transco shows how its purpose has changed. The total contract volume for flows from zone 1 to zone 6 being only 144,643,965 dth, less than 3% of its total contractual capacity commitment, as compared to the flows that are received and delivered within zone 6, which total 1,692,957,477 dth, or almost 30% of total contract commitments.

What the Proposed Rate Increase Would Mean for Transco

Williams' initial pleading should be construed as a first salvo with negotiations likely to follow. For 2017, Transco reported receiving $1,508,594,764 in revenue from its firm transportation contracts (including both reservation and usage charges). Under the filing made to support its rate case, Transco is seeking to collect $2,204,352,363 (in reservation charges) annually once the new tariff is fully effective. This represents an almost 46% increase in its top line transportation revenue, but not all of that is from its proposed rate increases. Some of the increase comes from the addition of revenue from projects that were not fully in-service in 2017, including $460 million for two projects, Gulf Connector and Atlantic Sunrise, that are still not fully in service. When you add the expected revenue from those projects to the amount reported in 2017, the result is a top line revenue increase of approximately 12%, or $235 million, with essentially the entire increase coming from Transco's traditional mainline shippers. These legacy system shippers face rate increases between 25% to 40% and averaging 36%.

The Path Forward

As stated above, we expect FERC will issue an order by month's end that puts the rate reductions into effect but suspends all of the rate increases for the maximum period through March 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:

• ROE . As stated by the North Carolina Utilities Commission, Transco's requested 16.4% return on equity is "grossly overstated." This rate is substantially higher than ones proposed in other currently pending cases of 13.57% and 14.5%.
• Allocation Methodologies . Transco has proposed various methodologies for allocating the costs it incurs between the various categories of tariff services it provides. Many of these methodologies are being challenged for shifting costs away from the recent projects Transco has built to its legacy pipeline system.
• Depreciation Rates . Transco is proposing increases in its depreciation rates, one of which, for onshore pipelines, produces an $88.2 million increase to Transco's proposed cost of service, according to the Municipal Gas Authority of Georgia.
• Impact of the Tax Cut and Jobs Act . The act, along with Williams' reorganization to continue Transco's entitlement to an ITA, will likely be contested during the hearing. In particular, Tranco's  proposal to pass back to customers $743 million in excess accumulated deferred taxes over 21.45 years will likely be at issue.

All of these issues, as well as others, will be subject to conflicting evidence and expert opinions. The best way to view this case at this early stage is as Transco's opening bid in a negotiation that almost certainly will result in it receiving something less.

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