A cost and revenue study submitted by Kinder Morgan Interstate Gas Transmission LLC (KMIGT) last month confirms that the pipeline is "materially over-recovering" fuel from its customers, contend shippers SourceGas Distribution LLC and SourceGas Energy Services Co.

The study, which covered the 12 months ending Oct. 31, 2010, revealed that KMIGT took from its shippers 6,135,666 Dth for in-kind compressor fuel but only used 1,900,663 during that period, the SourceGas companies told FERC, which in November initiated Section 5 investigations into both KMIGT and Ozark Gas Transmission LLC for allegedly over-recovering their cost of service (see Daily GPI, Nov. 19, 2010).

"What did KMIGT do with the excess gas?" The companies, which are subsidiaries of Lakewood, CO-based SourceGas LLC, maintain that KMIGT sold the excess gas for more than $34 million. "The provision of fuel is a central and essential part of efficient pipeline operations. Fuel is not and should not be a profit center," they said. The SourceGas companies called on the Federal Energy Regulatory Commission to immediately direct KMIGT to cease its alleged "excessive" fuel collections.

"SourceGas' request for an immediate change in KMIGT's currently effective and FERC-approved method of recovering fuel costs without a hearing disregards the Commission's statutory obligation" under the Natural Gas Act, KMIGT countered. The Commission "may not order an interim rate reduction without first conducting a trial-type evidentiary hearing."

In November FERC initiated the investigations based on information that indicated that KMIGT and Ozark Gas Transmission significantly over-recovered their cost of service in 2008 and 2009, potentially resulting in unjust and unreasonable rates.

Based on the cost and revenue information submitted by Kinder Morgan in its 2008 and 2009 Form 2, including the dollar value of excess fuel retained by the pipeline, FERC staff reported that KMIGT's estimated return on equity (ROE) for 2008 was 27.10% and 29.25% for 2009 -- both well above the norm for the pipeline industry. Even excluding the fuel retained by Kinder Morgan in the two years, FERC staff said, the ROE still was above the norm -- 15.69% in 2008 and 17.81 % in 2009.

Similarly, FERC staff calculated that Ozark Gas Transmission's ROE, including revenues received from the sale of shipper-supplied gas, was 27.81% in 2008 and 31.01% in 2009. Absent sales of shipper-supplied gas, the Commission estimates that Ozark Gas Transmission's ROE was 15.25% in 2008 and 25.63% in 2009.

Both pipelines were ordered to file their own full cost and revenue studies within 75 days.

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