FERC has rejected a request by the American Public Gas Association (APGA) to rehear or reconsider a policy statement that allows oil and natural gas pipelines to use master limited partnerships (MLP) in proxy groups to determine their returns on equity (ROE) for ratemaking purposes.

The APGA, which represents municipal gas utilities, took issue with the Federal Energy Regulatory Commission’s (FERC) decision in its April policy statement not to cap the cash distributions used to determine an MLP’s return under the discounted cash flow (DCF) methodology for an MLP’s reported earnings (see NGI, April 21). This decision was a significant departure from FERC’s proposed policy statement in July 2007 in which it recommended capping the cash distributions of MLPs (see NGI, July 23, 2007).

“APGA asserts that the use of MLPs in the DCF analysis will improperly increase ROEs for interstate pipelines at the expense of natural gas consumers. Among other things, it argues that the Commission erred in allowing an MLP’s full distributions to be used in the DCF model without any adjustment to exclude distributions in excess of the MLP’s book earnings,” the order said [PL07-2].

FERC responded that the “policy statement…conveyed the Commission’s intent to evaluate specific proxy group and ROE proposals based on the facts relevant to a particular pipeline and to address any concerns regarding the policy statement on a case-by-case basis.” As such, “the policy statement is not a final action of the Commission but an expression of policy intent,” the order said.

“Therefore, the Commission declines to address the issues APGA has raised in its request for rehearing or reconsideration, but will consider such issues in the context of the specific cases in which they apply. The Commission notes that it has set a number of proceedings for expedited paper hearing that will afford the interested parties that opportunity.”

The new policy statement, which pipelines widely support, responds to the decline in publicly traded companies with substantial pipeline assets and the rise of MLPs in the pipe sector.

Interstate gas pipelines have repeatedly called on FERC to recognize the growing role of MLPs in the pipeline industry, and the need to include them in proxy groups to determine pipe ROEs. The exclusion of MLPs from proxy groups triggers wide shifts in ROEs that can affect the profits pipelines make each year and their ability to attract investors for projects, they said.

The new policy statement governs all gas and oil rate proceedings involving the establishment of a ROE that are currently pending before either the Commission or an administrative law judge (ALJ), according to FERC.

The issue of MLPs in proxy groups came to the forefront in 2006 in a Kern River Gas Transmission rate case. A FERC ALJ recommended a 9.34% ROE for the Wyoming-to-California pipeline, significantly below what it had requested, based largely on the exclusion of MLPs from its proxy group. In October 2006 FERC voted to increase Kern River’s ROE to 11.2%, but it ruled that the pipeline had not met the burden to support its proposal to include MLPs in its proxy group (see NGI, Oct. 23, 2006).

Kern River’s proposed proxy group included Enterprise Products Partners, GulfTerra Energy Partners LP, Kinder Morgan Energy Partners, the former publicly traded Kinder Morgan Inc. and Northern Border Partners. But the proxy group ultimately adopted by FERC was composed of companies with a relatively low proportion of pipeline businesses and substantial distribution operations.

The Commission has granted rehearing on Kern River’s ROE so appropriate MLPs can be included in the composition of the proxy group [RP04-274-006]. The agency set for paper hearing the issue of the makeup of Kern River’s proxy group, the DCF analysis of the proxy group firms and related issue of risk.

©Copyright 2008Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.