Recent investigations by FERC of interstate natural gas pipelines for significant over-earnings so far have been credit-neutral and the over-earnings are not likely to occur in the foreseeable future due to weaker market conditions, said Moody’s Investors Service in a new report.

“The risk of gas pipelines over-earning their allowed return on equity or ROE [has] subsided as robust market conditions that drove up ROEs in the 2008-2009 period no longer exist and are unlikely to return,” said Moody’s Vice President Mihoko Manabe, co-author of the report.

This does not rule out the possibility of more Section 5 investigations by the Federal Energy Regulatory Commission for rate over-recovery at a later date, Moody’s said. However, the large pipelines in the Moody’s-rated peer group are not likely to be affected, such as Natural Gas Pipeline Company of America (NGPL), Northern Natural Gas, Williams Gas Pipeline, El Paso Natural Gas and Southern Star Central Gas Pipeline.

NGPL and Northern Natural already have undergone Section 5 investigations, and ROEs for the peer group as a whole show a flat-to-declining trend as the industry undergoes a period of reduced opportunities for short-term gains due to a combination of weak economic growth and market-specific conditions, including developments in shale gas production and transportation, Moody’s said.

Other pipelines investigated by FERC for cost of service over-recovery in the past few years were Tuscarora Gas Transmission, Kinder Morgan Interstate Gas Transmission LLC, Ozark Gas Transmission LLC and Great Lakes Gas Transmission Ltd. Partners (see NGI, May 30, 2011). Nearly all of the cases have been resolved.

FERC is conducting ongoing investigations of ANR Storage Co., Bear Creek Storage Co. LLC and MIGC LLC to determine whether they are over-recovering their cost of service by charging rates that are unjust and unreasonable (see NGI, Nov. 21, 2011).

“Pipelines with an unusually high ROE — over 20% — are at greater risk of the FERC initiating a Section 5 proceeding,” but Moody’s research signals that the risk of future unplanned rate cases is on the wane, said Moody’s analyst Ayesha Gopal.

“Although ROE trends are anemic, cash flow metrics — more pertinent in measuring credit quality — remain robust. The regulatory risk over the next five years will lie more with pipelines requesting higher rates and modifications to rate design,” Gopal said.

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