The US Federal Energy Regulatory Commission has launched investigations into whether four interstate natural gas pipelines are substantially over-recovering their cost of service.
The reviews, approved by commissioners at their open meeting Thursday, mark the first such rate investigations under Section 5 of the Natural Gas Act in over two years.
The probes will look into the revenues and cost of service of Columbia Gulf Transmission, Iroquois Gas Transmission System, Empire Pipeline and Tuscarora Gas Transmission.
The investigations follow a staff review of data submitted by about 129 interstate gas pipelines for calendar years 2013 and 2014 to determine whether revenues were exceeding an estimated cost of service on a consistent basis. FERC staff also looked at such factors as whether current rates resulted from settlements, the length of time since a pipeline had adjusted its rates, as well as infrastructure investments that may have bearing on the rates.
James Sarikas of FERC's Office of Energy Regulation said the staff analysis indicated that Columbia Gulf had a calculated return on equity of 17.3% and 18.2% for 2013 and 2014, respectively; Iroquois had an ROE of 16.2% for 2013 and 16.3% for 2014; Empire had and ROE of 15.8% and 20.2%; and Tuscarora had an ROE of 23.6% and 24.9%.
"These estimated levels of returns lead staff to believe that these four pipelines are over-recovering their costs of service and may be charging rates that are no longer just and reasonable," Sarikas said in a presentation before the commission Thursday.
"In addition, none of these pipelines have an existing settlement with its customers that places a currently effective moratorium on existing rates or require it to file a new general Section 4 rate case in the future," he said.
In response to questions following the meeting, FERC staff said the industry average rate of return is slightly more than 12%, and that the last litigated case before FERC calculated a reasonable rate of return of 10.55%. The reasonableness of rates is decided on a case-by-case basis, relying on the most recent financial information and appropriate comparisons, a FERC staff member said.
FERC commissioners stressed the importance of the investigations in ensuring fair rates.
"As the nation's use of natural gas for direct consumer use, for industrial processes and increasingly for electric generation continues to grow, it's essential that rates charged for pipeline transportation remain just and reasonable," said Commissioner Cheryl LaFleur.
Commissioner Tony Clark said he has fielded questions from stakeholders over the last year or two about whether the commission had changed its policy to quit doing Section 5 rate reviews. The staff each year reviews the rates, and while there may be a year or two that staff may decide not to pursue a case, "we were actively engaged," he said.
The Natural Gas Supply Association welcomed the FERC investigation into earnings. "Natural gas suppliers and other pipeline customers look to FERC for protection from excessive pipeline charges and we are gratified that FERC has chosen to initiate these Section 5 investigations," said Dena Wiggins, president of NGSA.
She added that legislation to reform Section 5 to give FERC power to award refunds to shippers would further enhance consumer protections.
"Now that FERC has adopted a new modernization surcharge policy that grants interstate pipelines new opportunities to recover costs outside of a general rate case, Section 5 reform is more important than ever," she said.
Each of the four orders approved by FERC sets a hearing and requires the pipeline to file a cost and revenue study within 75 days.
A spokesman for Columbia Gulf said the company was reviewing the order and will fully cooperate.
"Columbia Gulf's current rates were established in a recent rate case (RP11-1435), which was settled in 2011. Because of this recent rate review, we believe that Columbia Gulf's existing rates are reasonable, particularly in light of the changing market conditions," he said.
A spokeswoman for TransCanada, which operates Tuscarora, also said that pipeline "will respond to FERC's request for cost and revenue data, as requested."
Iroquois was not surprised by the investigation given that FERC periodically examines pipeline rates, a spokesman said, adding that the company would respond to the commission's inquiry in a timely fashion.
Empire did not respond to a request for comment.
