Tallgrass Interstate Gas Transmission (TIGT) is asking FERC for a rate hike and postage-stamp rate treatment. The pipeline cites reduced throughput due to shrinking Rocky Mountain-Midcontinent basis differentials, as well as modest prospects for market demand growth and competition from other pipelines “in virtually every market.”

It has been 17 years since the pipeline’s last Section 4 general rate case [RP98-117], and “…TIGT’s market has changed dramatically,” the pipeline told the Federal Energy Regulatory Commission [RP16-137].

Demand for long-haul off-system service, which was “previously a significant driver of TIGT’s revenues,” is down because of narrowing Rockies-Midcontinent basis, the pipeline said.

Further, “…TIGT does not anticipate substantial load growth in the largely rural areas served by its local distribution company customers or from interconnected ethanol plants,” it said. Additionally, the pipeline faces multiple competitors serving Colorado’s Front Range and the Kansas City market. “TIGT also competes with these pipelines and others to attract declining production in Wyoming and Colorado.”

Declining production from the Hugoton Field in Kansas also is a factor; third-party gas processing facilities previously connected to TIGT are now idled. Capacity release, fuel-switching and potential system bypass are other factors that are threatening throughput.

TIGT is proposing to consolidate its three rate zones into a single postage stamp rate as the current rate arrangement does “…not bear any apparent relationship” to current operations.

“Both receipts and deliveries are widely dispersed across TIGT’s reticulated system, allowing gas to travel on more than one path, including in directions away from the nominal contractually-identified delivery point,” the pipeline said. There are multiple, and intermittent, null points on the system, and distance from receipt to delivery point is not the primary determinant of cost of service on the system, it said.

Postage stamp rates would allow shippers to source gas across more supply points and interconnects without incurring additional transportation costs, which would make released capacity more attractive, TIGT said.

For example, for firm transportation from all delivery points to all receipt points, TIGT is proposing a maximum reservation rate of $20.1118, a maximum commodity rate of $0.0057 as well as a minimum commodity rate of $0.0057, according to its filed tariff sheet revisions. For authorized overruns, the maximum commodity rate would be $0.6669, and the minimum commodity rate would be $0.0057. The maximum and minimum commodity rates for interruptible transportation would be the same as for authorized overruns. The proposed postage stamp rates are substantially higher than the existing segment rates on TIGT.

The pipeline also is proposing a provision for reservation charge credits with “standards more in keeping with the industry norm.”

It would also replace its system-wide fixed fuel rate with two separate trackers, which it said are common in the industry. There would be one tracker for in-kind collection of fuel and lost and unaccounted for volumes used on its system, and another dollar-based tracker for costs of electric power used at compressor stations. TIGT also is proposing a cost recovery mechanism for pipeline integrity costs.

Finally, it would roll into TIGT rates the facilities of Pony Express Pipeline and the Kansas City Line. “Today, these assets provide essential natural gas functions integral to TIGT’s service to firm shippers,” the pipeline told FERC. “Further, the revenues from these facilities exceed their cost of service. The facilities are operated on an integrated basis with TIGT’s traditional system, and significantly enhance the flexibility and reliability of the TIGT system.

Since the 1998 rate case, TIGT said its cost of service has increased to more than $123.71 million from $109.7 million while rate base has declined to $335.65 million from $423.42 million and throughput has shrunk to 139.31 million Dth from 201.51 million Dth. A cost of service and revenue study the pipeline filed in early October showed “…that TIGT is under-recovering its annual cost of service, even without the recognition of prospective trends and related adjustments, by over $40 million.

“Subsequent to the [1998] Section 5 proceeding, there have been many changes in the natural gas marketplace resulting from the development of non-conventional natural gas resources,” TIGT said. “Such changes have included variations in the price of natural gas and a reduction in the price differentials across regions.”

For Monday’s gas day, Tallgrass gas receipts were running less than 50% of operating capacity at the majority of its receipt points, according to Patrick Rau, NGI director of strategy and research.

“Conventional producing areas such as the Wind River Basin in Wyoming and the Hugoton Basin in Kansas were no doubt once major contributors to Tallgrass,” Rau said. “But today, receipts are dominated by two areas: the Niobrara/Denver-Julesburg/Wattenberg area of Northwest Colorado, and the Powder River Basin in Wyoming. Those areas are primarily wet gas and oil-focused, with dry gas being much more of an afterthought.”

U.S. Capital Advisors LLC analyst Becca Followill, who follows the pipeline, told NGI the move by TIGT is “not terribly surprising, given that they have been earning a pretty low ROE [return on equity] for the past three years (average 4.1% over past three years, by our calculation). The trend has been [for pipelines] to eliminate fixed fuel rates with trackers, and another trend has been to implement a recovery mechanism for system reliability costs. We also have thought that over time, pipelines will make more use of postage stamp rates instead of zonal.”

TIGT, a unit of Tallgrass Energy Partners LP, operates 4,645 miles of pipeline in Colorado, Kansas, Nebraska, Missouri and Wyoming. It also owns the Huntsman gas storage facility in Cheyenne County, NE, which has 15.1 Bcf of working gas capacity. The TIGT system was previously owned by Kinder Morgan Energy Partners (see Daily GPI, Nov. 14, 2012), after Kinder acquired KN Energy in 1999 (see Daily GPI, July 12, 1999).

About two years ago, FERC allowed TIGT to sell a 432-mile segment of its mainline to affiliate Tallgrass Pony Express so it could be converted to crude service from the Bakken and Denver-Julesburg/Niobrara basins (see Shale Daily, Sept. 16, 2013).