High Returns on Equity Are Positive If They Don’t Draw Scrutiny

Originally published for customers July 6, 2022.

What’s the issue?

Every company tries to maximize its return for its investors. But for rate-regulated entities, like natural gas pipelines, that desire must be balanced against the risk of drawing scrutiny from a pipeline’s shippers or its regulator — in this case, FERC.

Why does it matter?

Earlier this year, FERC launched investigations into the rates of two pipeline companies to determine whether they are earning an unreasonable return on their investment. Those investigations were primarily based on a FERC staff review of the data found in each pipeline’s annual Form 2 for the years 2019 and 2020.

What’s our view?

About half of the natural gas pipeline revenues reported in 2021 was reported by pipelines with returns on equity that are high enough to put them at risk for scrutiny by FERC and the pipelines’ shippers. However, to really understand the risk to a particular pipeline, it is necessary to know whether it is subject to a rate moratorium and the extent to which it has negotiated rate revenue.

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