Which Pipelines Are at Risk of a Rate Case in 2020?
As we discussed in Risky Rate Business - 2019 Will Go Down as the Year of the Rate Case , 2019 has been the year of the rate case as a result of FERC requiring almost all interstate natural gas pipelines and storage companies to file a Form 501G in 2018 that calculated each company’s post-tax cut return on equity (ROE). Many companies opted to modify their rates either through a rate case filed under Section 4 of the Natural Gas Act or by reaching an agreed settlement with their shippers. Other companies took the option offered in the 501G process to reduce their rates through a limited Section 4 proceeding. But most companies chose to do nothing except file the required Form 501G. This led FERC to launch a limited number of rate investigations under Section 5 of the Natural Gas Act -- but for the vast majority of those companies, FERC simply determined that the companies had complied with the Form 501G filing requirement and formally closed that proceeding.
With all of this behind us, the question is who may be on FERC’s radar, if it chooses to launch a limited number of Section 5 proceedings in 2020. Shippers with expiring contracts will want to know if the pipeline is at risk for a rate reduction because they may not want to sign a negotiated rate agreement and then have the tariff rate drop. Today, we look at the likely candidates based on a number of factors, and while some major pipelines remain at risk for a rate investigation, the more likely candidates would be smaller pipelines with a higher percentage of recourse rate revenue.
Narrowing the Field of Likely Candidates for a Section 5 Proceeding
As the old story goes, you don’t have to run faster than the lion to get away, you just have to run faster than the guy next to you. In this case, you don’t have to have the lowest ROE to avoid FERC filing a Section 5 against you, but you may want to avoid being in the top five, based on the assumption (based on historical precedent) that FERC will likely not file more than five cases in a single year. However, it is also not as simple as just ranking all of the pipelines based on the ROE that FERC calculates each year because there are a number of other factors that will eliminate pipelines from being considered as candidates for a Section 5 proceeding.
There are 135 companies against which FERC has the ability to file a Section 5 rate case (although a decision issued yesterday, which we discuss below, reduced that number to 134). So staying out of the top five is not difficult. The first factor that appears to almost completely eliminate the risk of having a Section 5 filed against you is to have previously entered into a settlement that includes a moratorium against rate changes by both the pipeline and its shippers. That factor alone eliminates 35 companies, including some fairly large (by total revenue) ones, such as Columbia Gas Transmission, El Paso Natural Gas, and Tennessee Gas Pipeline.
Almost as good as a moratorium is having previously entered into a settlement that requires the pipeline company to file a Section 4 rate case in the near future. While not a guarantee against having FERC launch a rate investigation, FERC would have to see a substantial benefit in bringing a case early to overcome the burden it has to bear in a Section 5 case versus the shift of that burden to the pipeline in the mandatory Section 4 case. But looking at those pipelines with mandatory comebacks before the end of 2020 only eliminates six additional companies, whittling our list down to 94 companies.
Another likely elimination factor is having been in a rate proceeding in 2019, including those in settlement talks with their customers, or having filed a recent amendment to a previous settlement, even if it didn’t include a new moratorium. This factor eliminates 15 more companies, including major pipelines such as Transcontinental, Texas Eastern and Algonquin, which reduces the candidates down to 79.
Factors That Further Reduce the Likelihood of a FERC Rate Investigation
While FERC does not specifically state that it will not launch a Section 5 proceeding against a pipeline that derives a substantial portion of its revenue from negotiated and discount rate contracts, it did cite that factor as a reason for not bringing one against Guardian Pipeline following the filing of its Form 501G. In the face of objections to the form filed by Guardian, FERC noted Guardian’s statement that “at least 93 percent of its transportation revenues are from negotiated rate contracts.” In addition, Guardian reports that “an additional four percent of transportation revenues are derived from discounted rate contracts.” Based on those facts and because only between three percent and seven percent of Guardian’s transportation revenues might be subject to a rate reduction, FERC exercised its “discretion not to institute such an investigation at this time.”
If we eliminate from consideration those companies with less than seven percent of their revenue from recourse rate contracts, that eliminates 26 more companies, including some major pipelines such as Rockies Express and Ruby Pipeline. This leaves us with only 53 companies under consideration for a Section 5 investigation.
Calculating an ROE for the Remainder
We are now ready to look at the ROE for the remaining pipelines. Based on the 501G forms they filed last year, only seven of these remaining pipelines reported a post-tax cut ROE above 16%, which we have considered as the threshold for being at risk of a rate investigation.
One company, ANR Storage, would have been included in the graphic above, until yesterday. In a decision issued yesterday in response to a decision issued by the U.S. Court of Appeals for the District of Columbia Circuit (DC Circuit), FERC reversed a 2014 decision and granted ANR Storage the authority to charge market-based rates for its storage services. With its almost 22% post-tax cut ROE on its form 501G, ANR Storage would have likely been a leading candidate for a rate investigation. But now that FERC has granted it the authority to charge market-based rates, that risk is essentially eliminated because its rates will no longer be cost-based.
As can be seen in the chart above, while Gulfstream Natural Gas was not eliminated by our filter for those pipelines with less than seven percent of its revenue generated from recourse rate contracts, it is not much above that number and so seems an unlikely candidate for an investigation. The other two big companies on the chart, Kern River and Great Lakes may be an interesting study of FERC’s decision-making process. Kern River filed a settlement agreement that it reached with its shippers as part of the 501G process last year, and FERC approved that settlement, but the settlement contained neither a moratorium or a comeback provision. Great Lakes filed a limited Section 4 in conjunction with its filing of the Form 501G and reduced its rates by two percent. FERC accepted that reduction in rates, but noted that the decision did not limit FERC’s ability to launch a section 5. However, with the reduction in rates, Great Lakes maintained that its ROE dropped to only 13.1%. Based on the fact that both of these cases have these additional complexities, we do not see FERC filing a Section 5 against either of them. Therefore, the more likely targets would be the smaller companies with a greater percentage of recourse rate revenue, which may mean that Gulf Shore, Central Kentucky Transmission, and Chandeleur are the more likely candidates.
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