FERC ignores pipelines, proceeds with rule to make rate challenges easier

Pipeline & Gas Journal, Nov, 2007

The Federal Energy Regulatory Commission (FERC) ignored pleas from interstate pipelines and proceeded with a rulemaking which, if finalized, will require transmission companies to report more financial data to the commission on Form 2, which shippers use as the basis of complaints about unfair pipeline rates. The shipper community has argued that Form 2 information is insufficient and now FERC has agreed with them.

The commissioners believe that the lack of data is preventing some shippers from challenging pipeline rates, some of which have not been reviewed in a decade. INGAA has pushed back, arguing in its comments to a February notice of inquiry that shippers have plenty of information available elsewhere outside Form 2. FERC did not buy that argument. In its proposed role issued in September, FERC said, "We do not believe that users should have to piece together and interpret from myriad sources information that is readily available to the pipeline and can, without a substantial increase in burden, be incorporated into Forms 2 and 2-A. Also, much of the information cited by INGAA is not coterminous with Form 2 data and cannot be used for purposes of comparison."

The proposed rule would require, among other things, natural gas companies to (1) submit additional revenue information, including reporting revenue from shipper-supplied gas, (2) identify the costs associated with affiliate transactions, and (3) provide additional information on incremental facilities and discounted and negotiated rates. The changes would be effective Jan. 1, 2008. Accordingly, companies subject to the new requirements would file theft new Forms 2 and 2-A in 2009 for calendar year 2008.

"In my view, it is essential that public information suffice as a foundation for a section 5 complaint;' said FERC Chairman Joseph Kelliher on Sept. 20 in announcing the proposed rule.

However, FERC did not go nearly as far as some shippers wanted it to go. The Commission rejected a request that pipelines not using the rate of return on equity approved in the pipeline's last rate case provide the calculation and derivation of the return used at present, as well as additional information on capital structure used for ratemaking purposes.

But that may have been the only silver lining in the proposal as far as the interstate pipelines are concerned. Elsewhere in the proposed rule, FERC rubbed additional salt into their wounds by deciding to open up a separate rulemaking designed to explore a separate but related issue: the adequacy of information reported in the Form No. 2 concerning gas retained, used for compression, and lost and unaccounted-for.

Pipeline companies now have two options for recovering these costs. The first is to establish a fixed-fuel retention percentage in a general section 4 rate case and leave that percentage unchanged until the pipeline files its next general section 4 rate case. The second allows the pipeline to include in its tariff a mechanism permitting periodic changes in its fuel retention percentage outside of a general section 4 rate case.

Pipeline customers have expressed concerns that in-kind gas retained by pipelines for fuel and unaccounted-for gas requirements is excessive and provides pipelines with significant profits. The Commission's review of information filed by pipelines in their 2005 Form 2 filings indicates that major pipelines appear to have retained or carried over in their accounts a net sum of over 97 Bcf in fuel beyond what was consumed, lost, or unaccounted-for. At average 2005 prices, this represents over $711 million in value.

The FERC seems to think that option one--the fixed fuel percentage which accounted for the lion's share of that $711 million--is the potential problem. Moreover, it implied that pipelines are claiming those excessive fuel costs when they could be reducing their use of fuel by building new or revamping existing compressor stations by taking actions such as minimizing pressure drops and changing motors. The Commission floated the idea that if it were to adopt incentive provisions to encourage pipelines to reduce fuel use and lost and unaccounted-for gas, one option would be a mechanism for sharing between the pipeline and its shippers any fuel cost recoveries and/or under-recoveries.