MidAmerican Energy’s Northern Natural Gas pipeline Thursday reported that it significantly under-recovered its cost of service during a 12-month period ended in October 2009 compared to the 2008 period on which FERC based its Section 5 charges that Northern Gas and two other interstate natural gas pipelines — Natural Gas Pipeline Company of America (NGPL) and Great Lakes Gas Transmission Ltd. Partners — over-recovered their cost of services by more than 20% (see Daily GPI, Nov. 20, 2009).

In a cost-and-revenue study filed at the Federal Energy Regulatory Commission, Northern Natural Gas reported a cost of service of $597 million and operating revenue of $534 million for the 12-month period ended in October 2009, for an under-recovery of $62.9 million and estimated return of equity (ROE) of 7.99%.

This contrasted with FERC staff’s preliminary investigation that Northern Natural Gas, based on information submitted by the pipeline, had a cost of service of $558.7 million and operating revenue of $726 million during 2008, for an over-recovery of $167 million and ROE of 24.36%.

The major difference between the two time periods is that Northern Natural’s contracted and throughput volumes during 2008 were at an all-time high compared to 2009, said spokesman Mike Loeffler. Utilization of Northern Natural’s system, particularly the field area system, has declined significantly since then and continues to fall, he noted.

In effect, Loeffler said the Commission’s study was based on an non-representative anomaly and did not take into consideration the current market environment.

The cost and revenue study submitted by Northern Natural not only supports the pipeline’s “currently effective rates,” it “reflects the need for a rate increase,” Northern Natural told FERC [RP10-148]. “Without a rate increase, Northern’s return on equity would be approximately 8%, well below the 12% underlying the currently effective rates. The 8% return shown for the test period contrasts sharply with the alleged 24.36% shown in the Commission’s analysis of Northern’s 2008 Form 2 data,” the MidAmerican pipeline subsidiary said.

In late November, FERC initiated formal Natural Gas Act (NGA) Section 5 investigations of Northern Natural, NGPL and Great Lakes based on preliminary studies that indicated the three may be over-recovering their cost of service with returns of more than 20%. If so, their rates would no longer be just and reasonable. This was the first time since Order 636 laid out open access transportation that FERC called on the pipeline industry to account, accusing the trio of pipelines of potentially over-recovering.

While FERC’s cited a 24.36% ROE for Northern Natural in 2008, a list of pipelines and their rates of return compiled by the Natural Gas Supply Association showed Northern Natural was well down the list with a five-year average ROE of 14% for the period ending in 2007.

The staff’s preliminary investigation of financial information submitted by the pipelines for 2008 indicated that NGPL may have achieved a ROE of 24.5% based on an over-recovery of $149 million, while Great Lakes’ ROE was 20.83% with a FERC-estimated over-recovery of $56 million (RP10-149). NGPL and Great Lakes have yet to file their cost and revenue studies.

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