Natural Gas Pipeline Company of America (NGPL) and Great Lakes Gas Transmission Ltd. Partnership have reached settlements in principle with their shippers to resolve Section 5 complaint allegations that they overrecovered their cost of service.

NGPL estimates that a stipulation and agreement will be filed with the Federal Energy Regulatory Commission (FERC) no later than June 15. Great Lakes Gas Transmission has until Monday (May 17) to file a settlement. The pipelines will be required to give a status report to Chief Judge Curtis L. Wagner if they fail to meet the deadlines. The settlements must be approved by the Commission.

FERC staff’s preliminary investigation of financial information submitted by the pipelines for 2008 indicated that NGPL may have achieved a return on equity (ROE ) of 24.5% based on an overrecovery of $149 million (CP10-147), while Great Lakes’ estimated ROE was 20.83% with an overrecovery of $56 million (RP10-149). A third pipeline, Northern Natural Gas Co., had an estimated ROE of 24.36% with an overrecovery of $167 million (see NGI, Nov. 23, 2009).

Details of the settlements were not immediately available, but Moody’s Investors Service Friday placed under review for possible downgrade NGPL’s “Baa3” senior unsecured debt rating based on the tentative agreement. Moody’s said, according to a Form 10-Q filed by NGPL partner and operator Kinder Morgan, Inc., the pipeline is expected to reduce future pre-interest, after-tax cash flow by approximately $25 to $70 million. “This decrease is material relative to NGPL’s reported funds flow from operations of $339 million for the last 12 months ended December 2009.”

With $3 billion in long-term debt, Moody’s estimates that NGPL’s funds flow from operations-to-debt ratio could decline significantly from the 11% in 2009 to a level that would not support an investment grade rating. The ratings agency will conclude its review after a final settlement is reached.

In related action, Indicated Shippers Friday called on FERC to reject a May 12 plea to temporarily suspend a Section 5 complaint proceeding against Northern Natural Gas until the agency acts on a prior request to terminate the proceeding entirely.

The coalition of major producers and marketers opposed a motion filed by Northern Municipal Distributors Group and the Midwest Region Gas Task Force Association to temporarily suspend the the Section 5 complaint proceeding for overrecovery of Northern Natural pipeline’s cost of service until the Federal Energy Regulatory Commission grants or rejects Northern Customer Group’s May 5 request to terminate the proceeding altogether (see NGI, May 10).

“The Commission staff, the Industrials and the Indicated Shippers all opposed the May 5 motion to terminate this case. In its answer, both staff and Indicated Shippers indicated they planned to file testimony on May 20,” the group said [RP10-148].

“[FERC trial] staff also explained how it is chronologically possible for Section 5 relief to be granted, even if Northern files a Section 4 [rate] case on May 28. However, this proposed timing is very tight, and any further delay in the current dates could jeopardize that outcome,” the group said. It urged FERC to act expeditiously to deny both the May 12 and May 5 requests.

In its May 5 request to terminate the proceeding, the Northern Customer Group said that “the goal of a Section 5 [complaint] proceeding is to determine whether rates should be reduced, prospectively…Therefore, should it become apparent at any point during a Section 5 proceeding that the end result of the process may well be a rate increase, the investigation should be brought to an end.”

For these reasons, “the customer group believes it is now readily apparent that the Section 5 investigation of Northern’s rates, if allowed to proceed, likely will result in an increase in customer rates at an earlier point in time than would be the case if the proceeding were terminated now,” the group said.

Settlement negotiations between Northern Natural Gas and its shippers reached an impasse on May 3, according to the Northern Customers Group. And the pipeline is now poised to file a Section 4 rate case on May 28, which will likely portend “substantially higher rates,” if the complaint proceeding is not terminated, it said.

Speaking at GasMart 2010 in Chicago last week, Dave Ciarlone, manager of global energy services for aluminum producer Alcoa Inc., said that while a lot has changed over the last year, the one thing that’s stayed the same is the disparity between the Natural Gas Act (NGA) and the Federal Power Act that prevents gas end-users from recouping transmission overcharges the way their counterparts do on the power side (see related story). He urged other buyers at the conference to “get involved” on making NGA reform a priority.

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