Kern River redux

Pipeline & Gas Journal, Jan, 2007

Pipelines, gas producers and electric generators all want the Federal Energy Regulatory Commission to reconsider its Oct. 19 decision in the Kern River rate case. The gas transmission industry was unhappy with FERC's decision to award Kern River a 11.2% return on equity (ROE) as part of a 2004 rate case for its expansion project. The pipeline industry felt that ROE, if it carries over to other rate cases, is insufficient to convince them to build new infrastructure.

Kern River itself entered the flay with a request for rehearing which argued that the 11.2% ROE, because of the complex peculiarities of the levelization formula used by FERC, will be "structurally unachievable." Instead, its ROE will end up at 9.88%.

The 11.2% ROE approved by FERC on Oct. 19 is more than 200 basis points below the return on equity of 13.25% the Commission allowed for Kern River's 2003 expansion project. Kern River asked for a 15.1% ROE when it filed the rate case in 2004. "The Commission's selected return on equity of 11.2% is unfair and unreasonable in the circumstances of this case," says KR President Kirk Morgan.

Shippers have their own complaints with FERC's Oct. 19 decision. BP Energy Production Company had pressed FERC to approve traditional rates for Kern River, not the levelized rates Kern asked for, and the Commission granted, albeit with some tweaks that Kern is now criticizing. BP is arguing that the levelization methodology results in shippers paying the pipeline $500 million more in depreciation than is necessary. Frederick T. Kolb, a BP official, says, "There is no assurance that the $500 million will be returned to the shippers that paid the $500 million or to any shippers, ever."