Coming Back to Comebacks, a Rate Case Roundup

What’s the issue?

Pipelines just filed their annual financial reports to FERC last month, which the Commission has previously used to initiate Section 5 rate proceedings. Other potential rate case triggers are also approaching, including "comeback" or "moratorium" provisions from prior rate case settlements (which require a pipeline to file a rate case by a specified date, or bar parties from filing a rate case until a certain date has passed) and deadlines for cost and revenue studies.

Why does it matter?

Stakeholders, including investors, pipeline owners, and shippers, closely monitor pipelines’ commitments to revisit rates as signals of revenue changes. Shippers particularly want to be aware of comeback requirements before entering long-term negotiated rate agreements that may be lower than an existing rate but potentially higher than a future rate post-comeback. FERC’s handling of rate adjustments impacts tariff adjustment negotiations and industry dynamics.

What’s our view?

The number of comeback and cost and study deadlines approaching this year is relatively low historically, and while FERC’s lack of rate case initiation thus far in 2024 is not surprising given other priorities, the annual financial fillings could result in rate proceedings this fall.

Pipelines just filed their annual financial reports to FERC last month, which the Commission has previously used to initiate Section 5 rate proceedings. Other potential rate case triggers are also approaching, including "comeback" or “moratorium” provisions from prior rate case settlements (which require a pipeline to file a rate case by a specified date, or bar parties from filing a rate case until a certain date has passed) and deadlines for cost and revenue studies.

Stakeholders, including investors, pipeline owners, and shippers, closely monitor pipelines' commitments to revisit rates as signals of revenue changes. Shippers particularly want to be aware of comeback requirements before entering long-term negotiated rate agreements that may be lower than an existing rate but potentially higher than a future rate post-comeback. FERC’s handling of rate adjustments impacts tariff adjustment negotiations and industry dynamics.

The number of comeback and cost and study deadlines approaching this year is relatively low historically, and while FERC’s lack of rate case initiation thus far in 2024 is not surprising given other priorities, the annual financial fillings could result in rate proceedings this fall.

Rate Case Authority Under Sections 4 and 5 of the NGA

For a quick refresher, the Natural Gas Act (NGA) mandates that rates set by interstate natural gas pipelines must be deemed "just and reasonable." If a pipeline finds that its generated revenues aren't enough to cover costs and provide a reasonable return, it can file for a rate adjustment under Section 4 of the NGA at any time. In such cases, the burden falls on the pipeline to prove the fairness of its proposed rates. Conversely, if either the pipeline's shippers or the Commission suspect that the pipeline's revenues are more than enough to cover its costs, they can initiate a proceeding under Section 5 of the NGA to request a prospective rate change. In Section 5 cases, the party initiating the process must demonstrate that the current rates are no longer just and reasonable and propose rates that meet these criteria.

Moratoria and comeback requirements are provisions stemming from prior rate case settlements that dictate when pipelines can initiate rate cases under the Natural Gas Act. Moratoria delay rate case filings until predetermined future dates, while comeback requirements mandate pipelines to start rate cases by specific deadlines. Cost and revenue studies provide comprehensive analyses of a pipeline's financial operations, evaluating factors such as operating costs, revenue streams, investment returns, and market conditions. If a cost and revenue study indicates that a pipeline's rates may no longer be just and reasonable, it could prompt regulatory action, including the initiation of a rate case.

Rate Case Updates and Historical Cadence

Every April, natural gas pipelines must submit an annual financial report for the previous year to FERC, the most recent of which for 2023 were just filed a few weeks ago. FERC typically examines these reports to assess if any pipelines are earning more than a reasonable rate of return on their invested assets for providing regulated services. Traditionally, FERC's review process extended until the end of the year, with rate investigations commencing in the subsequent year. However, in 2022, as we discussed in FERC Launches Two Gas Pipeline Rate Cases – Are More on the Way?, FERC expedited its review process and initiated two rate investigations at its September open meeting. While FERC didn’t begin any Section 5 cases in 2023 and has not thus far in 2024, this isn't uncommon for several reasons. Historically, FERC has refrained from initiating Section 5 investigations at various points, as shown in the chart below.

Furthermore, Opinion No. 885 in the Panhandle case, which establishes the new benchmark "last litigated return on equity (ROE)" at 11.25 percent, was issued in December 2022. As we previously highlighted in February 2022 in 2022 Rate Case Settlements and the Panhandle Eastern FERC Rate Order, while the order was final, requests for rehearing and subsequent appeals were lodged at the D.C. Circuit. By April 2023, the court had granted FERC's request to consolidate and hold all appeals in abeyance while it addressed the underlying orders. Just last month, the Commission filed a status report with the court stating that the FERC proceedings were not completed and the appeal should remain in abeyance, so the Commission may be waiting for the dust to settle before initiating any Section 5 filings.

Setting litigation aside for a moment, each year we use the annual reports to assess the impacts of potential rate cases. We also track upcoming moratoria, comeback, and cost and revenue study filing dates, as well as settlement dates, and the status and result of ongoing rates proceedings. The compilation of this information allows us to track critical developments in rate cases and profile pipeline rate exposure as we did in Tennessee Gas Pipeline’s Increasing Rate Case Exposure.

As Tennessee Gas Pipeline’s (Tennessee) deadline for filing a required cost and revenue study approached, we evaluated Tennessee's assertion of underearning in Tennessee Gas Says It Is Underearning, But FERC May Be Skeptical. After calculating the ROE and comparing it to the new Panhandle benchmark, we concluded there was a high risk for a Section 5 rate proceeding. Subsequently, multiple stakeholders lodged protests and advocated for just such action. Presently, parties have reached a settlement in principle and filed interim rates, which FERC has accepted. Tennessee anticipates finalizing the settlement agreement in the first quarter of 2024.

Regarding required Section 4 filings, we know that the following four pipelines have comebacks expiring this year:

While Southern Natural Gas Company, L.L.C.,’s (Southern) comeback date is not technically until 11/1/2024, to hit that date, they had to file by March 1 due to an additional 5 months suspension period and a 30 day notice period built into the stipulation agreement. Southern hit the deadline by filing a stipulation agreement resulting from negotiations with its customers, so it looks like this case will settle before it begins.

Additionally, the Northern Border Pipeline Company, which had $301,490,803 revenue in 2023, met its 1/1/2024 comeback deadline by filing Section 4 rate case which is currently in settlement conferences. In sum, these pipelines collected over $4 billion in revenue in 2023, or about 13% percent of the industry’s revenue.

There is also one pipeline, Enable Mississippi River Transmission, LLC, that must file a cost and revenue study on 7/31/2024, which could trigger a rate case. They had a gas operating revenue of $94,142,934 in 2023.

With respect to moratoria, based on FERC’s past statements, we do not think that FERC would initiate a Section 5 rate proceeding during a moratorium period that was agreed to between a pipeline and its shippers in a prior settlement. Based on our data for existing moratoriums, that would exempt, through at least the end of this year, pipelines with about 30% of industry-wide revenues.

If you would like to see our calculations of the returns on specific pipelines, or other rate analysis, please contact us.