Week Ending January 18, 2019

FERC Opens Three Section 5 Investigations, Terminates Nine 501-G Proceedings

This Article Appears as Published in Foster Report No 3232
FERC Opens Three Section 5 Investigations, Terminates Nine 501-G Proceedings

FERC issued three orders January 16, initiating Natural Gas Act Section 5 rate investigations and setting for hearing the FERC Form 501-G filings of Northern Natural Gas Co. (RP19-59),[1] Panhandle Eastern Pipe Line Co., LP (RP19-78),[2] and Bear Creek Storage Co., LLC (RP19-51).[3]

In a statement, the Commission said it was initiating the Section 5 investigations “to determine if the companies may be substantially over-recovering their costs of service, resulting in unjust and unreasonable rates.” The Commission said it is focusing on return on equity, because it is “concerned that the level of earnings for each company may exceed their actual costs of service, including” a reasonable ROE.

At the January 17 open meeting, Chairman Neil Chatterjee and commissioners commented on the orders and the process of working through the 501-G filings to review cost of service information and any tax changes in compliance with FERC’s final rule on income tax allowances stemming from the Tax Cuts and Jobs Act of 2017. “This is by no means the end of our work on this” as there are numerous 501-G filings pending that were submitted in three different groups in the fall of 2018, said Commissioner Cheryl LaFleur.

Termination of 501-G Proceedings. The Commission also issued a January 16 order[4] terminating nine Form 501-G proceedings for: ETC Tiger Pipeline, LLC (RP19-80); Gulfstream Natural Gas System, LLC (RP19-52); Horizon Pipeline Co., LLC (RP19-68); MIGC LLC (RP19-69); Millennium Pipeline Co., LLC (RP19-65); North Baja Pipeline, LLC (RP19-71); Portland Natural Gas Transmission System (RP19-70); Vector Pipeline, LP (RP19-60); and White River Hub, LLC (RP19-50).

The Commission said it determined that the nine companies had complied with the filing requirements of the final rule, Order No. 849, and Form 501-G in terminating the proceedings without any further action.

The 12 orders demonstrate progress on working through the cost and rate information filed by companies, and Chatterjee thanked FERC staff for their efforts as the work involves some of the more intricate work before the Commission.

“I remain focused on working through the numerous filings pending before us to ensure that the benefits of reduced taxes flow to consumers and to resolve these matters as swiftly as possible,” he said at the meeting.

At the media briefing following the meeting, Chatterjee was asked about the staff resources available should the Commission launch additional Section 5 proceedings and whether the reviews of the 501-G filings are being done sequentially as they were submitted, in three groups, with the third group much larger than the first two. He generally declined to speak to internal deliberations, but said the FERC staff is capable of getting through the workload presented by the 501-G information. “The process is playing out in a way that I support,” he said.

At various venues over the past six months, after Order 849 was issued in July and the Form 501-G fling process was outlined, the natural gas industry has questioned how many Section 5 investigations would be launched since in any given year, there have not been more than four or so pending at FERC. The 12 orders issued January 16 represent a small sample of rulings yet to come, and how many Section 5 investigations will be closely watched.

In her comments, LaFleur noted that the 12 decisions leave several 501-G filings to address in the first group of forms that were submitted. “In addition, there are two more batches to consider for Commission action,” she said.

Section 5 Investigations. As part of initiating the investigations, the Commission directed the three companies to file a cost and revenue study for the latest available 12-month period within 75 days of the issuance of its order.

Northern Natural. The Commission noted that it is seeking actual cost and revenue information, and said that Northern Natural must exclude any adjustments or projections that are from a test period under 18 C.F.R. §154.312.

Northern Natural can file a separate cost and revenue study to reflect adjustments for changes that Northern Natural projects will occur during the six-month adjustment period after the 12-month base period used for the study, said the Commission, and the adjustment period is limited to allow the parties to engage in discovery based on actual data for both periods.

The Commission also noted that Northern Natural doesn’t have the same burden of proof in a section 5 proceeding as it would for a section 4 proceeding.

To expedite the proceeding, the Commission directed that an initial decision must be issued within 47 weeks of the date the cost and revenue study is due, which will limit the period of potential continued overrecovery of revenues.

In response to an issue raised by a protestor – that Northern Natural shouldn’t be allowed to use its pipeline modernization program to justify not providing a rate reduction – the Commission said that if Northern Natural believes its pipeline modernization costs are a recurring cost item, then those costs can be included in the study.

In the January 16 order, the Commission determined that Northern Natural’s currently effective tariff rates might be unjust and unreasonable based on a preliminary analysis of Northern Natural’s Form 501-G, addendum, comments filed in the proceeding, and the Form No. 3-Qs for the first two quarters of 2018.

The Commission said that a review of Northern Natural’s Form 3-Qs show that Northern Natural had $115 million in additional revenue as compared to the same period in 2017, and taking into account both the proposed 2018 cost adjustments and revenue increases during the first two quarters of 2018, the Commission calculated Northern Natural’s estimated ROE for 2018 at 17.3%.

Northern Natural Protests. Northern Natural’s Form 501-G in the first round of filings in October 2018, generated protests from utilities in several states, industrial customers, municipal utilities, and NJR Energy Services Co., most of which asked the Commission to begin a Section 5 investigation. The protests noted that although the pipeline’s report showed a significant reduction in income tax expenses, it asked not to be required to adjust its rates.[5]

The 501-G showed that Northern Natural’s cost of service would be reduced by $47 million, or about 7.6%, due to the lower corporate tax rate, the Northern Municipal Distributors Group and the Midwest Region Gas Task Force Association said in their protests. FERC’s primary duty under the NGA is protection of gas consumers, and FERC should satisfy that duty by ensuring that Northern Natural’s ratepayers receive the relief of the income tax reduction in the law, the group said.

The Process Gas Consumers Group and American Forest and Paper Association asserted that the 501-G has several deficiencies, including a capital structure inconsistent with FERC’s final rule and a ROE of 16.7% that was not supported by the data.

The information in Northern Natural’s 501-G “clearly demonstrates that the pipeline is currently over-recovering its cost of service,” said Southwestern Public Service Co.

Northern Natural’s last rate case before FERC was 15 years ago, and the pipeline has maintained that it made substantial investments in pipeline integrity, maintenance and safety that has not generated revenue, deferring rate increases that otherwise would have been warranted. It claimed that by reinvesting earnings to cover those costs, it has avoided cost-recovery filings that would have affected shippers, but that is not consistent with FERC policy, Northern States Power Co. (NSP) in Wisconsin and Minnesota said in their joint protest.

“Northern Natural’s argument that its plans for increased capital spending absorb and negate its over-collection of income tax expenses does not justify the pipeline’s unilateral plan to retain all of the benefits of the TCJA reduction in federal corporate income tax rates, when all or some of the savings should be returned to customers. The conclusory assertions in the statement do not take the place of a comprehensive review of Northern Natural’s costs and revenues,” the utilities said.

Northern Natural filed an answer to the NSP utilities’ protest, asserting that the utilities seem to value traditional regulatory proceedings regardless of the outcome for customers. By seeking a rate case, the NSP utilities are dismissing the value of rate stability for their customers, since venturing into a full rate case could result in an increase due to the capital expenditures Northern Natural has made over the years, the pipeline said.

The purpose of the one-time report was not to conduct a rate proceeding but to allow a public discussion of whether FERC should exercise its discretion to launch a Section 5 investigation due to changes stemming from the tax law, Northern Natural said. The pipeline asked FERC to set aside the protest, adhere to the purpose of the final rule and Form 501-G filings and accept the Form 501-G as filed. Northern Natural on October 25 filed a similar answer to the other protests, noting that two of its largest customers, the NSP utilities and Center Point Energy Resources Corp., have opposite views regarding the need for a Section 5 investigation, with Center Point raising no objections.

The other protesting parties essentially argued that the benefits of the federal corporate tax cut should be passed through regardless of the adjustments Northern Natural made to the 2017 data in the 501-G that accurately represent the pipeline’s adjusted ROE, Northern Natural said. “Their refusal to consider the facts as to Northern’s current financial situation shows their true motivation is simply to get tax refunds,” the pipeline said.

The protests wrongly focus on 2017 data, when FERC’s statutory obligation is to ensure that pipeline rates are just and reasonable based on the individual facts and circumstances for each pipeline, Northern Natural said. In its statement supporting the 501-G, the pipeline included two adjustments that bring the ROE calculation to 11.6% for 2018 and 10.4% for 2019. The protests don’t take those adjustments into account and should be rejected, Northern Natural told FERC.

Panhandle Eastern. The Commission also found Panhandle Eastern Pipe Line’s Form 501-G filing raised questions about the appearance that Panhandle was substantially overrecovering its cost of service and directed Panhandle to file a cost and revenue study within 75 days.

Panhandle’s Form 501-G shows a total estimated ROE of 16.4% after adjustment for the corporate tax cut, said the Commission, and in its amended addendum, Panhandle calculated its total estimated ROE to be 14.2%. Panhandle argued that the 10.55% ROE in Form 501-G isn’t appropriate due to industry changes, said the Commission, and Panhandle filed a discounted cash flow analysis of a proxy group that Panhandle claimed show a “zone of reasonableness” of 11.36% to 19.03% being appropriate for current market conditions.

The Commission noted that Panhandle’s 2018 3-Qs for the first and second quarters indicate that, effective Aug. 31, 2017, a new firm transportation contract with Rover Pipeline, LLC, for 752,332 Dth/month, went into effect. The contract could significantly increase Panhandle’s jurisdictional transmission revenues above those in its 2017 financials, the Commission observed, and the information shows that Panhandle’s currently effective tariff rates could allow Panhandle to recover revenue substantially in excess of its estimated cost of service.

There is also a question of whether Panhandle has correctly stated that it is a separate tax paying entity, because Panhandle states its parent is SUG Holding Co., a corporation, but in a public posting Panhandle states it is a wholly-owned subsidiary of Energy Transfer Partners, LP, a master limited partnership, said the Commission.

The Commission noted that it is seeking actual cost and revenue information, and said that Panhandle  must exclude any adjustments or projections that are from a test period under 18 C.F.R. §154.312. Panhandle can file a separate cost and revenue study to reflect adjustments for changes that Panhandle  projects will occur during the six-month adjustment period after the 12-month base period used for the study, said the Commission, and the adjustment period is limited to allow the parties to engage in discovery based on actual data for both periods.

As it did in Northern Natural’s proceeding, the Commission told Panhandle that it is directing that an initial decision must be issued within 47 weeks of the date the cost and revenue study is due, which will  limit the period of potential continued overrecovery of revenues.

By Denise Ryan DRyan@fosterrerport.com

[1]   166 FERC ¶ 61,033.

[2]   166 FERC ¶ 61,032.

[3]   166 FERC ¶ 61,034.

[4]   166 FERC ¶ 61,028.

[5]   For more information, see, Pipeline 501-G Reports Bring Protests, Calls for Rate Reductions, Investigations, FR No. 3221, pp. 5-8.

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