In a favorable decision for Kern River Gas Transmission and interstate natural gas pipelines in general, FERC on Thursday rejected an administrative law judge’s (ALJ) recommendation of a single-digit return on equity (ROE) for the Wyoming-to-California pipeline in favor of one in the double-digit range.
The Federal Energy Regulatory Commission unanimously reversed FERC ALJ Charlotte J. Hardnett’s decision of a proposed 9.34% ROE for the MidAmerican Energy pipeline and adopted a 11.2% ROE instead (see Daily GPI, March 21). Although higher than Hardnett’s recommendation, the FERC-approved ROE was below the pipeline’s request of 15.1% and its current ROE of 13.25%. It also was below a pipeline group’s proposal of 12-14% ROE for Kern River. Nevertheless, the decision was a “step in the right direction” for the pipelines, which feared that single-digit ROEs might become the trend.
FERC said the six-company proxy group adopted by Hardnett to use as a benchmark for determining Kern River’s ROE was the “best starting point,” but it noted that El Paso Corp. and The Williams Companies should have been excluded because their financial circumstances made them inappropriate candidates for the proxy group.
The order further said that Kern River had not met the burden to support its proposal to include master limited partnerships (MLPs) in the proxy group. Kern River’s proposed proxy group, which Hardnett rejected in her March initial decision, was comprised of several MLPs — Enterprise Products Partners, GulfTerra Energy Partners LP, Kinder Morgan Energy Partners, Kinder Morgan Inc. and Northern Border Partners.
While rejecting the use of MLPs in the Kern River rate case, the order “makes clear that the Commission is not making a generic finding that MLPs cannot be considered for future proxy groups,” agency staff said.
The revised proxy group adopted in the FERC order includes “companies with a relatively low proportion of pipeline business and substantial distribution operations,” staff noted. The order approved a 50-basis point adjustment above the medium to reach the 11.2% ROE, it said.
The Hardnett decision “attracted substantial attention. Many took it as a sign that the Commission may be considering a fundamental change in policy,” said FERC Chairman Joseph Kelliher. He noted that “the calculation of pipeline rates has certainly been made more difficult by some of the changes that have occurred and are occurring within the pipeline industry,” including the consolidation of pipelines, the integration of pipelines into other businesses and the adoption of MLP business structures.
As a result, “there are relatively few pipelines that meet our historical test” today, Kelliher said. The Commission has been “adjusting its ratemaking policy to reflect the dynamic changes” in the pipeline sector.
Commissioner Suedeen Kelly said she supported the 11.2% ROE for Kern River as just and reasonable. But she stressed that “what the presiding judge did was not wrong. She followed precedent laid down by the Commission over the last 10 to 15 years. However, further consolidation of the pipeline industry has changed the playing field significantly to warrant adjustments to that precedent,” she noted.
Kelly said the order provides “extensive guidance” to future applicants on the issues that need to be address to gain acceptance of MLPs in a pipeline’s proxy group. She called the order a “roadmap for pipeline rate cases in the foreseeable future.”
Immediately following Hardnett’s decision, interstate gas pipelines said they feared that single-digit ROEs might become the norm, and would have a chilling effect on investment in pipeline facilities. Wide shifts in ROE’s can affect the profits that pipelines make each year and their ability to attract investors for projects. FERC was under pressure from pipelines and congressional lawmakers to adopt a higher ROE in the Kern River rate case.
Kern River’s pipeline system extends about 900 miles from Wyoming through Utah and Nevada to the San Joaquin Valley near Bakersfield, CA. 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 Kern River’s firm delivery capacity to 1.7 Bcf/d.
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