What’s the issue?
After the passage of the Tax Cut and Jobs Act of 2017 in December of 2017, there was pressure placed on gas pipelines to adjust their rates to take into account the reduction in the corporate tax rates. However, most of the major pipelines did not do so because they asserted that, even after the tax cut, they were not earning an allowed rate of return.
Why does it matter?
Since 2017 pipelines with total annual revenues equal to about half of the entire industry have filed full rate cases in which they actually sought to increase their rates. Almost all of those have settled over the last few years, though some are still pending and more are on the horizon.
What’s our view?
The major pipelines appear to have been correct in asserting that they should not have lowered their rates following passage of the Tax Cut and Jobs Act of 2017 because in their subsequent rate cases they received substantial increases in their tariff rates. The most recent settlement by Columbia Gas Transmission continues the trend, but not every filing results in a rate increase, as evidenced by the settlement recently filed by Florida Gas Transmission.
After the passage of the Tax Cut and Jobs Act of 2017 in December of 2017, there was pressure placed on gas pipelines to adjust their rates to take into account the reduction in the corporate tax rates. However, most of the major pipelines did not do so because they asserted that, even after the tax cut, they were not earning an allowed rate of return. Since then, pipelines with total annual revenues equal to about half of the entire industry have filed full rate cases in which they actually sought to increase their rates. Almost all of those have settled over the last few years, though some are still pending and more are on the horizon.
The major pipelines appear to have been correct in asserting that they should not have lowered their rates following passage of the Tax Cut and Jobs Act of 2017 because in their subsequent rate cases they received substantial increases in their tariff rates. The most recent settlement by Columbia Gas Transmission continues the trend, but not every filing results in a rate increase, as evidenced by the settlement recently filed by Florida Gas Transmission.
Section 4 Rate Cases after 2017
To give some perspective on the relative size of the rate cases that are being filed, it is helpful to understand the total size of the revenue generated by the natural gas pipelines regulated by FERC. Based on the 2020 annual reports, which are the most recent available, the total industry reported just slightly more than $28 billion in revenue. Since 2017, twenty pipelines have filed and settled twenty-one rate cases under Section 4 of the Natural Gas Act, and collectively those pipelines’ annual revenue is just slightly less than $9 billion. There are another six cases still pending by pipelines with annual revenues of slightly more than $4 billion, which means that almost half of the entire industry has filed a rate case since 2017.
By looking at the cases that have settled, it is possible to determine whether, in fact, the industry was underearning even after taking into account the reduced tax liability that arose following the Tax Cut and Jobs Act of 2017.
As seen above, most of the pipelines were able to convince their shippers that they were entitled to a rate increase, with two-thirds of all cases resulting in an increase in the primary firm tariff rate for that pipeline. On a weighted basis, the average increase seen across these twenty-one cases was almost eighteen percent.
The most recently settled cases are consistent with this pattern. In October of last year, Columbia Gas Transmission settled its rate case with a primary tariff rate that increased over 30%, and Kinetica Energy Express settled its rate case just last week for a rate increase of almost 40%. However, earlier this month Florida Gas Transmission filed a settlement that resulted in a slight decrease of its rate by just over 3%.
Pending Cases
The pending cases involve some of the largest pipelines in the country, including three with annual revenues in excess of $750 million each: Eastern Gas Transmission and Storage, Texas Eastern Transmission and ANR Pipeline Company. All are seeking substantial rate increases. Almost all cases filed eventually settle and only one case filed since 2017 appears headed to a fully litigated resolution, Panhandle Eastern Pipe Line. That case concluded last March when the Administrative Law Judge issued the initial decision in the case and all open issues were fully briefed by the parties in filings that were made last July. All that is needed is a decision by the Commission. In Even Adverse Decision in Panhandle Eastern Rate Case May be Favorable for Industry, we discussed how that case may impact the entire industry because FERC uses the last fully litigated return on equity rate for other purposes.
By looking at the time it took the twenty-one cases to settle, we can see that it is likely all of these pending cases will be resolved within this year.
As seen above, most of the cases settle within one year after they are filed, so even the case just filed by ANR Pipeline on January 28, 2022 is likely to be resolved this year.
But There Is Still More to Come
Given the fact that almost half of the entire industry has filed rate cases since 2017, one might expect there to be a decrease in such cases going forward. But, as part of most settlements, there are periods during which neither the shippers nor the pipelines can seek rate changes, referred to as moratoriums. Similarly, many rate case settlements require the pipeline to file a new rate case by a date certain, referred to as a comeback. Our data for such moratoriums and comebacks show that there are twenty pipelines that have either moratoriums or comebacks that end this year. The annual revenue of those twenty companies is over $8 billion. So it is certainly possible that by the end of this year, 75% of the entire industry will have filed a rate case since 2017. That is truly a remarkable event.