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Pipelines Try to Dispel Charges of Over-Recovering Cost of Service

Three interstate natural gas pipelines -- Natural Gas Pipeline Company of America (NGPL), Northern Natural Gas and Great Lakes Gas Ltd. Partners -- submitted cost and revenue studies with FERC last Thursday in an attempt to dispel the Section 5 charges that they may be significantly over-recovering their cost of service, which would render their rates unjust and unreasonable.

In its study, MidAmerican Energy's Northern Natural Gas reported a cost of service of $597 million and operating revenue of $534 million for the 12-month period ending in October 2009, for an under-recovery of $62.9 million and estimated return of equity (ROE) of 7.99%.

This contrasted with the Federal Energy Regulatory Commission staff's preliminary investigation that Northern Natural Gas, based on financial information submitted by the pipeline, had a cost of service of $558.7 million and operating revenue of $726 million during 2008, for an over-recovery of $167 million and ROE of 24.36%. While FERC's estimates were for 2008, the agency's November order initiating a Section 5 investigation of the three pipelines directed them to provide data for the 12-month period ending Oct. 31, 2009 (see NGI, Nov. 23, 2009).

The major difference between the two time periods is that Northern Natural's contracted and throughput volumes during 2008 were at an all-time high compared to 2009, said spokesman Mike Loeffler. Utilization of Northern Natural's system, particularly the field area system, has declined significantly since then and continues to fall, he noted.

In effect, Loeffler said the Commission's study was based on an non-representative anomaly and did not take into consideration the current market environment.

The cost and revenue study submitted by Northern Natural not only supports the pipeline's "currently effective rates," it "reflects the need for a rate increase," Northern Natural told FERC [RP10-148]. "Without a rate increase, Northern's return on equity would be approximately 8%, well below the 12% underlying the currently effective rates. The 8% return shown for the test period contrasts sharply with the alleged 24.36% shown in the Commission's analysis of Northern's 2008 Form 2 data," the MidAmerican pipeline subsidiary said.

NGPL filed two cost and revenue studies that the pipeline claims show it under-recovered its cost of service for the 12-month period ending in October 2009. One of the studies reported an overall cost of service of $928.1 million for the 2009 period. At its current rates NGPL would under-collect its cost of service by $316.1 million, the pipeline told FERC. The second cost and revenue study resulted in an overall cost of service of $2.03 billion. "At current rates [NGPL] would under-collect its cost of service by $1,418.6 million absent an upward rate adjustment," it said.

The latter of the two studies made an adjustment to NGPL's cost of service to "reflect the difference between the price paid in February 2008 by Myria Holdings to acquire an 80% interest in [NGPL] and [NGPL's] depreciated original cost as of Feb. 15, 2008," NGPL said. Myria Holdings, an investment holding company, purchased 80% of NGPL from Kinder Morgan Inc. in February 2008.

The Commission staff's preliminary investigation of financial information submitted by the pipelines for 2008 indicated that NGPL may have had an over-recovery of $149 million in 2008 based on a ROE of 24.5%.

Because NGPL's "costs exceed revenues by $316.1 million under the Appendix A study and $1,418.6 million under the Appendix B study, there is no basis for the Commission to order any change in [NGPL's} currently effective rates for its jurisdictional services," the pipeline argued [RP10-147].

Great Lakes filed a cost and revenue as well, citing a cost of service of $262.78 million based on a ROE of 10.44% during the 12-month period in 2009, but it was not immediately clear in the 97 pages of numerical tables whether the pipeline under- or over-recovered its operating revenue during that period. Calls to company officials and to major interest holder and operator, TransCanada, were not returned by press time. According to FERC, Great Lakes' adjusted revenue was $290 million in the 2008 period, and the cost of service calculated by the Commission was $233 million indicating an over recovery of $56 million for 2008 [RP10-149].

According to a list compiled by the Natural Gas Supply Association ranking pipeline ROEs, NGPL holds the No. 1 spot with a five-year ROE of 34%. Great Lakes was No. 6 with an average ROE of 20%, and Northern Natural had an average of 14%. FERC probably would deem an acceptable ROE at 12% or less.

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