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FERC Investigation 'Flawed, Superficial, Incomplete,' Northern Says

FERC's analysis leading to the initiation of a Natural Gas Act Section 5 investigation into the rates of Northern Natural Gas was "flawed, superficial and incomplete," Mark Hewett, Northern Natural president, told customers last Tuesday.

The meeting of Northern Natural management and customers came last week after the Federal Energy Regulatory Commission (FERC) ordered separate investigations into the rates of Natural Gas Pipeline Co. of America (NGPL), Northern Natural and Great Lakes Gas Transmission, saying preliminary research showed that their rates might prove to be unjust and unreasonable (see NGI, Nov. 23).

"I believe the FERC's inflammatory determinations, which were paraded in the press for political gain, were based on a snapshot of incomplete data and are entirely inappropriate," Hewett continued in a transcription of the customer conference released to the media. He noted that Northern Natural Gas has the lowest transportation rates in the Upper Midwest and assumes significant risk in its current service structure.

He also pointed to the fact that Northern's current rates were the result of a rate case settlement that took effect Nov. 1, 2006, while NGPL's last rate case was 14 years ago and Great Lakes Gas Transmission had not been in a rate case for 18 years.

"Our team has worked day and night since last Thursday to review the FERC's order in this docket and to begin to prepare our response," Hewett said. "I will tell you today, and will commit to prove through this process, that the FERC's basis for this order is fundamentally flawed.

"The FERC's analysis seems to imply that it is inappropriate for both our customers and Northern Natural Gas to do well, even in times of very favorable and short-term market conditions. If it is the FERC's position that Northern Natural Gas does not have the fundamental opportunity for financial upside during favorable commercial periods, then their stance is as flawed as their analysis in this docket."

Hewett agreed that the pipeline had a good year in 2008, but he pointed out that was just one year and the market has changed materially this year.

FERC had said its investigations were initiated based on data submitted by the pipelines on a new expanded Form 2 for 2008. That investigation indicated that in 2008 NGPL may have achieved a return on equity (ROE) of 24.5% based on an overrecovery of $149 million (RP-10-147), while Northern Natural's estimated ROE was 24.36% (RP10-148) with an overrecovery of $167 million and Great Lakes ROE was 20.83% with a FERC-estimated overrecovery of $56 million (RP10-149).

A list of pipelines and their rates of return, compiled by the Natural Gas Supply Association based on five years of returns ending with 2007, showed NGPL had the highest ROE with a five-year average of 34% and Great Lakes was No. 6 with an average of 20%, while Northern Natural was further down the list at 15th with an average of 14%, which is not much above the FERC target ROE of 12%. Other pipelines with five-year averages above 20%, according to NGSA, included Kinder Morgan Interstate Gas Transmission, Panhandle Eastern Pipe Line, Dominion Transmission, Mojave Pipeline and Transwestern Pipeline. Eighteen pipelines in all had five-year average ROEs above 13%.

Hewett noted that FERC indicated its preference for a settlement, saying he looked forward to discussing "the concept of trading lower customer flexibility and shifting risks taken by Northern Natural Gas to our customers in exchange for a lower revenue level." However, the pipeline company is not interested in discussing "the notion that existing services should be provided by Northern Natural Gas, and that existing risks should be retained by Northern Natural Gas, at rates below those implemented in late 2006."

FERC last Monday tacked an extra 30 days, until Feb. 4, onto the 45 days originally allowed for the pipelines to submit cost and revenue studies. The Commission is aiming to have a settlement or an initial decision from an administrative law judge within 47 weeks.

Hewett said it normally takes six months to prepare a rate case, but the company would be working to meet the deadline.

NGPL also responded to the FERC action with a press release last Tuesday, which appeared to be mainly designed to make the point that NGPL is not -- repeat not -- owned by Kinder Morgan Energy Partners. The release said the management of NGPL is working closely with its owners, the management of Myria Holdings Inc. (80% owners) and the privately held Kinder Morgan Inc. (20% owners), to comply with any and all requests for information made by FERC in connection with the proceeding.

The Myria Holdings investment holding company, whose investors include SteelRiver Infrastructure Fund North America, Prime Infrastructure Holdings (formerly known as Babcock & Brown Infrastructure), Dutch pension fund Stichting Pensioenfonds Zorg en Welzijn and Canadian pension fund manager Public Sector Pension Investment Board, purchased 80% of NGPL from Kinder Morgan Inc. on Feb. 15, 2008, the NGPL release said.

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