FERC commissioners voted Thursday to initiate Natural Gas Act Section 5 investigations of the rates charged by two Kinder Morgan Inc. (KMI) interstate natural gas pipelines -- Natural Gas Pipeline Company of America LLC (NGPL) [RP17-303] and Wyoming Interstate Co. LLC (WIC) [RP17-302] -- to determine if they are just and reasonable.
By a 3-0 vote, the Federal Energy Regulatory Commission said it would investigate the rates of both pipelines, directed the companies to file cost and revenue studies within 75 days, and set each case for evidentiary hearings before a FERC administrative law judge.
The investigations follow reviews by FERC staff of cost and revenue information provided by the companies in their filings of Form No. 2, the Annual Report for Major Natural Gas Companies, and Form No. 2-A, Annual Report for Non-Major Natural Gas Companies, for 2014 and 2015. Using that data, staff calculated a cost of service for each pipeline and determined what each pipeline's revenues were for those years.
"Our analysis indicates that the first pipeline, Natural Gas Pipeline Company of America, has a calculated return on equity of 28.5% for calendar year 2014 and 20.8% for calendar year 2015," said Seong-Kook Berry of FERC's Office of Energy Market Regulation. "The second pipeline, Wyoming Interstate Co., has a calculated return on equity of 17.7% for calendar year 2014 and 19.0% for calendar year 2015.
"These estimated levels of return lead staff to believe that these two pipelines are over-recovering their costs of service and may be charging rates that are no longer just and reasonable. In addition, none of these pipelines have an existing settlement with their customers that places a currently effective moratorium on existing rates, or requires them to file a new general Section 4 rate case in the future."
"This work is an important aspect of the Commission's responsibility under the Natural Gas Act to ensure that rates are just and reasonable," said FERC Chairman Norman Bay. "It is also important to recognize that this is the first step in the process, and that we don't pre-judge any of these cases. I look forward to the record being developed in each of these cases."
But FERC's action "represents a flawed approach to the regulatory process," according to KMI, which owns WIC and 50% of NGPL. NGPL and WIC fully expect the evidence to show that the rates they charge "have been and continue to be just and reasonable,"according to KMI, which said it is confident the outcomes will not be material to the company.
"The FERC has chosen to interject itself in an unwarranted and unfair manner in the productive relationships between the companies and their customers," said Tom Martin, president of KMI’s Natural Gas Pipelines segment. "FERC is launching this effort based on stale data in a rapidly evolving environment, and without a full understanding of the facts and the changing market conditions faced by the pipelines that could have been gained through engagement with the companies prior to taking any action."
WIC settled a prior Section 5 proceeding in 2013, according to KMI, and NGPL's debt ratings were hobbled in 2010 following FERC's approval of a settlement of allegations that NGPL over-recovered its cost of service.
Since 2009, FERC has initiated 14 Section 5 proceedings to determine if pipeline revenues significantly exceed their annual cost of service, Berry said. Twelve of the proceedings ended with settlement agreements and two proceedings were terminated.
Last January, FERC opened investigations into the rates of four interstate natural gas pipeline companies -- Tuscarora Gas Transmission Co. [RP16-299], Empire Pipeline [RP16-300], Iroquois Gas Transmission System [RP16-301] and Columbia Gulf Transmission [RP16-302]. Those investigations eventually led to uncontested settlements with Tuscarora and by Columbia in September and with Iroquois and Empire in October.