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Kern River Requests Oral Argument on Low ROE Decision

Kern River Gas Transmission Co. filed a request with FERC that it convene an oral argument on an administrative law judge's (ALJ) recent decision to set a low return on equity (ROE) for the pipeline company at 9.34%, compared to its request of 15.1%.

Kern River, which operates a 1,679-mile pipeline from Opal, WY, to Bakersfield, CA, said the "unreasonably low" ROE determination was inconsistent with a Commission policy that is designed to encourage investment in energy infrastructure in the United States.

"Kern River recognizes an oral argument is an unusual request, yet I believe the extraordinary initial decision by the administrative law judge presents fundamental policy issues that should be discussed in front of the full Commission," said Kern River President Kirk Morgan. "An oral argument would provide the Commission with the opportunity to fully evaluate the effect the judge's initial decision would have, if accepted by the Commission, on the future of our nation's energy policy."

FERC ALJ Charlotte J. Hardnett recommended an ROE of 9.34% for Kern River, considerably below the pipeline's current ROE of 13.25%. Hardnett adopted the ROE based on a proxy group of companies suggested by a witness for BP Energy, a shipper on the Kern River system (see NGI, March 27).

The decision drew the attention of not only Kern River officials but also other pipeline company representatives. "We are concerned about it becoming a trend" for interstate gas pipelines, said Martin Edwards, vice president of legislative affairs for the Interstate Natural Gas Association of America, which represents interstate gas pipes. The ROE proposed for Kern River "is lower in many cases than what LDCs [local distribution companies] get," he noted.

Wide shifts in ROEs can affect the profits that pipelines make each year and their ability to attract investors for projects, according to Edwards. He said the Federal Energy Regulatory Commission (FERC) over the past five to six years generally has approved higher ROEs for gas pipelines that show they have reinvested a large portion of their profits in new pipeline facilities. He pointed out that MidAmerican Energy subsidiary Kern River has done just that, doubling its capacity in the past couple of years to respond to the energy crisis in California.

Kern River's general rate case dates back to May 2004, when FERC accepted and suspended for five months a $40.1 million rate hike on Kern River's system. In addition to the rate hike, the pipeline sought an ROE of 15.1%.

The pipeline, which began service in 1992, had an initial transportation capacity of 700 MMcf/d. A $1.2 billion expansion in 2003 more than doubled its firm capacity to 1.7 Bcf/d.

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