What’s the issue?
Tennessee Gas Pipeline’s current tariff rates were fixed in a pre-arranged rate case settlement that was filed on April 4, 2019. In that settlement, the pipeline and its shippers agreed to four successive rate reductions, an 8.5% reduction effective on November 1, 2019, an additional 2% reduction effective on November 1, 2020, an additional 2% reduction effective on November 1, 2021, and a final 1% reduction effective on November 1, 2022. The settlement also contained a rate moratorium through November 1, 2022 and required the pipeline to file a cost and revenue study on November 1, 2023.
Why does it matter?
The need to file a cost and revenue study can often encourage discussions between a pipeline and its shippers about the potential for another pre-arranged rate case settlement. Also in recent years, FERC has sometimes initiated a Section 5 investigation of a pipeline’s rates following the filing of such cost and revenue studies. Therefore, as the date for the filing of a cost and revenue study comes nearer, there is an increasing likelihood that the pipeline may change its rates either through a pre-arranged settlement or due to the filing of a rate investigation.
What’s our view?
Our estimate of Tennessee Gas Pipeline’s overall return on equity shows that it is currently earning a higher rate of return than that typically allowed in a rate case. A key issue in any rate case though is the extent to which that over-earning comes from recently completed incrementally-priced projects, the costs and income of which are excluded from a calculation of the rates for the pipeline’s traditional system. However, even when we exclude those costs and revenues it appears that the pipeline is still over-earning on its traditional system and may need to reduce its rates.
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