FERC Launches Two Gas Pipeline Rate Cases – Are More on the Way?

What’s the issue?

Each year natural gas pipelines are required to file an annual financial report with FERC. That filing is made in April for the preceding year and then FERC has typically reviewed those annual reports to determine if any pipelines appear to be earning more than an appropriate rate of return on the assets invested to provide the regulated services. In the past, this review typically was not completed until the end of the year and then FERC would commence any rate investigations early the following year.

Why does it matter?

This year FERC appears to have conducted its review on a faster schedule and started two rate investigations at its open meeting last week. In the past, those subjected to rate investigations have generally reduced their rates by about ten percent. The key question is whether the two cases started last week will be the only ones FERC commences based on the 2021 annual reports, or if this is just the beginning.

What’s our view?

Each year we also use the annual reports that are filed to perform our own calculation of the return each pipeline is earning. Our data shows that there are over forty pipelines that earned a return in 2021 that was at or above the return we calculated for the two pipelines against which FERC chose to start rate investigations. Those forty pipelines collected over $8 billion in revenue in 2021, or about thirty percent of the total industry’s revenue. Therefore, these first two cases may just be the beginning.


 

Each year natural gas pipelines are required to file an annual financial report with FERC. That filing is made in April for the preceding year and then FERC has typically reviewed those annual reports to determine if any pipelines appear to be earning more than an appropriate rate of return on the assets invested to provide the regulated services. In the past, this review typically was not completed until the end of the year and then FERC would commence any rate investigations early in the following year. This year FERC appears to have conducted its review on a faster schedule and started two rate investigations at its open meeting last week. In the past, those subjected to rate investigations have generally reduced their rates by about ten percent. The key question is whether the two cases started last week will be the only ones FERC commences based on the 2021 annual reports, or if this is just the beginning.

Each year we also use the annual reports that are filed to perform our own calculation of the return each pipeline is earning. Our data shows that there are over forty pipelines that earned a return in 2021 that was at or above the return we calculated for the two pipelines against which FERC chose to start rate investigations. Those forty pipelines collected over $8 billion in revenue in 2021, or about thirty percent of the total industry’s revenue. Therefore, these first two cases may just be the beginning.

 

FERC Starts Two Rate Investigations

At its open meeting last week, FERC issued orders that initiated rate investigations into the earnings of two interstate pipeline companies, Stagecoach Pipeline & Storage (Stagecoach) and MountainWest Overthrust Pipeline (Overthrust). In the orders that commenced these rate investigations, FERC noted that since 2011 it has undertaken an annual review of the financial reports, Form 2 and Form 2A that large and small pipelines, respectively, are obligated to file in April of each year. Based on its review of the forms filed by these two pipelines, FERC calculated that Stagecoach earned a return on its equity investment equal to 17.1% and 22.6%, in 2020 and 2021, respectively. Similarly, FERC found Overthrust's return on equity to be 34.1% and 30.5% in 2020 and 2021, respectively.

 

These Two Pipelines Are Not Alone

Each year we also use the data filed by the pipelines to calculate a rate of return for each pipeline. This calculation is more art than science because not every data point needed to calculate the return on equity is found in the annual forms. In particular, FERC noted that for both of these pipeline companies, it used a hypothetical capital structure of 50% for both debt and equity. In our methodology, we cap the equity percentage at 65% and assume that same percentage for companies where the equity percentage cannot be calculated from information found in the annual report. Based on our calculations, we determined that there are forty-five companies with returns on equity higher than our calculated rate for Stagecoach.

 

Moratoriums Need to Be Factored In

The forty-five pipelines that are included in our data earned over $8 billion in 2021, which represents about 30% of the entire industry’s earnings for that year. However, not all of those pipelines are at risk for FERC commencing a rate investigation against them. First, as we discussed in Everything Old is New Again as FERC Starts Two Section 5 Pipeline Rate Cases, FERC already has launched an investigation into the rates of two of the companies, El Paso Natural Gas and Guardian Pipeline, based on the annual reports they filed for 2020. Guardian has indicated that it has reached a preliminary settlement with its shippers, but the El Paso case is still proceeding. Another important consideration is that nine of the pipeline companies have previously entered into rate settlements that contain moratoria prohibiting rate changes before dates that extend past the end of this year. In the order commencing the case against Overthrust, FERC noted that it had settled its most recent rate proceeding and that the settlement included a rate moratorium through April 1, 2021. Our experience is that FERC typically will not disrupt a rate moratorium, and we therefore consider those pipelines with moratoriums that extend beyond the end of this year as essentially protected from a rate case based on their 2021 annual report. That leaves us with a total of thirty-four pipelines that in 2021 earned returns at or above those earned by either Stagecoach or Overthrust.

In the past, it appeared that FERC would also not begin an investigation against a pipeline with a very high percentage of non-tariff rate contracts. But the case against Stagecoach appears to rebut that assumption because in 2021 it reported that almost 98% of this revenue came from negotiated or discounted contracts, including almost half of its revenue from negotiated rate contracts that are unlikely to be impacted by any change in its rates.

 

Returns Can Be Quite High

We have divided these thirty-four pipelines into five main categories based on the return that we have calculated for each.

 

2021 ROE of pipelines at nearly equivalent to those earned by Stagecoach and Overthrust.

 

As seen above, more than half of the pipelines earned returns nearly equivalent to those earned by Stagecoach and Overthrust and generally under 30%. But, there are fifteen pipelines that we calculate as having earned a return on equity in excess of 30% for 2021. In total, these thirty-four pipelines represent about 20% of the industry’s total earnings for 2021.

 

Will FERC Start More Cases?

The key question is whether FERC will start any more rate investigations based on the 2021 data. In the past, FERC has typically announced all of the investigations it was going to commence in a single announcement. But there was no press release that accompanied the commencement of the cases and no discussion of the decisions during the open meeting. Based on the cases FERC has commenced since 2016, we can generally expect that the pipelines will reduce their rates as part of settling the cases.

 

rate reductions on pipelines commenced since 2016

 

As seen above, the cases that were filed after January 1, 2016 and have been settled resulted in a rate reduction that ranged from a low of 2% to a high of almost 26%. The median reduction was about 10%. There are two cases, however, in that time period where the pipeline launched a counteroffensive to the rate investigation by filing its own Section 4 rate case. Northern Natural took that path and eventually settled for a rate increase of almost 30%. Panhandle Eastern also commenced a Section 4 case, but has refused to settle, and that case remains pending for a final decision by FERC.

 

If you would like to see our calculation of the returns for these or other pipelines, please contact us.

 

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