FERC Federal Energy Regulatory Commission : Issues Order Initiating an Investigation of Natural Gas Pipeline Company of America Pursuant to Section 5 of the NGA

158 FERC ¶ 61,044 UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Norman C. Bay, Chairman;

Cheryl A. LaFleur, and Colette D. Honorable.

Natural Gas Pipeline Company of America LLC

Docket No.

RP17-303-000

ORDER INSTITUTING INVESTIGATION AND SETTING MATTER FOR HEARING PURSUANT TO SECTION FIVE OF THE NATURAL GAS ACT

(Issued January 19, 2017)

1. As discussed in more detail below, based upon our review of publicly available information on file with the Commission, it appears that Natural Gas Pipeline Company of America LLC (Natural) may be substantially over-recovering its cost of service, causing Natural's existing rates to be unjust and unreasonable. Therefore, the Commission is initiating an investigation, pursuant to section 5 of the Natural Gas Act (NGA), to determine whether the rates currently charged by Natural are just and reasonable and setting the matter for hearing. The Commission directs Natural to file a full cost and revenue study, as modified in the order, within 75 days of the issuance of this order.

2. Background

3. Natural owns and operates approximately 9,700 miles of interstate natural gas pipelines, field system lines, storage fields and related facilities. Natural's system consists primarily of two major interconnected transmission pipelines, the Amarillo and Gulf Coast Lines, which both terminate in the Chicago, Illinois metropolitan area. The Amarillo Line originates in the West Texas and New Mexico producing areas and consists of about 4,400 miles of mainline and various small-diameter pipelines. The Gulf Coast Line originates in the Gulf Coast areas of Texas and Louisiana and consists of approximately 4,100 miles of mainline and various small-diameter pipelines. These two main pipelines are connected at points in Texas and Oklahoma by Natural's 800-mile Amarillo/Gulf Coast Line. Natural's system also includes the Louisiana Line, which extends east from Natural's Compressor Station No. 302 near New Caney, Texas to the Henry Hub in Vermilion Parish, Louisiana.1

   1 General system information was gathered from FERC Form Nos. 2, 549B,
4. On November 19, 2009, the Commission instituted a section 5 investigation into Natural's rates that resulted in a settlement2 approved on July 29, 2010.3 The 2010 Settlement provided for phased reductions to Natural's transportation and fuel rates.4 The 2010 Settlement also provided that neither Natural nor any settling parties would file to propose changes to the settlement rates before April 1, 2016. As required by the 2010 Settlement,5 Natural filed a cost and revenue study based on actual data for calendar year 2014 on June 1, 2015.6 In that study, Natural contended its revenues exceeded its costs (including a pre-tax return on equity of 14.98 percent) by only 0.5 percent. On June 15, 2015, the Indicated Shippers7 filed a request that the Commission fully examine the cost and revenue study. Natural contended that the Indicated Shippers' request violated the 2010 Settlement moratorium, and that the Commission should take no further action on the cost and revenue study. On March 30, 2016, the Commission accepted the study as adequately complying with the 2010 Settlement.8 Natural's rates have not been re- examined since the 2010 Settlement.

   II. Discussion

5. In March 2008, the Commission issued Order No. 710,9 a final rule to change the forms and reporting requirements for interstate natural gas pipelines to enhance the

   and 567.

   2 Stipulation and Agreement of Settlement and Related Appendices of Natural Gas Pipeline of America LLC, Docket No. RP10-147-000 (June 11, 2010) (2010 Settlement). 3 Natural Gas Pipeline Co. of America LLC, 132 FERC ¶ 61,082 (2010). 4 Article III of the 2010 Settlement provided that fuel would be retained based on a fixed percentage matrix and not a fuel tracker. 5 See Settlement, Article V. 6 Cost and Revenue Study of Natural Gas Pipeline Company of America LLC, Docket No. RP10-147-000 (Study). 7 The Indicated Shippers included: Anadarko Energy Services Company, Apache Corporation, Chevron U.S.A. Inc., Cross Timbers Energy Services Inc., ConocoPhillips Company, Occidental Energy Marketing, Inc., and Shell Energy North America (US), L.P. 8 Natural Gas Pipeline Co. of America. LLC, 154 FERC ¶ 61,260 (2016).

   9 Revisions to Forms, Statements, and Reporting Requirements for Natural Gas Pipelines, Order No. 710, FERC Stats. & Regs. ¶ 31,267 (2008), reh'g and clarification,

   transparency of financial reporting and better reflect current market and cost information relevant to interstate natural gas pipelines and their customers. The revised forms included FERC Form No. 2 (Form 2), the annual report for major natural gas companies, and FERC Form No. 3-Q (Form 3-Q), the quarterly financial report of natural gas companies, electric utilities, and licensees. The Commission stated that the revised forms and reporting requirements would provide, in greater detail, the information the Commission needs to carry out its responsibilities under the NGA to ensure just and reasonable rates. The Commission required major interstate pipelines to use the revised Form 2 in making their annual reports beginning in calendar year 2008.

6. The Commission has reviewed the cost and revenue information provided by Natural in its Form 2 for the years 2014 and 2015. Based upon our review of this cost and revenue information, the Commission estimates Natural's return on equity for those calendar years to be 28.5 percent and 20.8 percent, respectively. Based upon these figures, the Commission is concerned that Natural's level of earnings may substantially exceed its actual cost of service, including a reasonable return on equity. A description of how the Commission arrived at these figures is set forth below.10

7. Based upon the information provided by Natural in its Form 2 for 2014, the Commission calculated Natural's 2014 cost of service to be $357.39 million excluding

   Order No. 710-A, 123 FERC ¶ 61,278 (2008), remanded sub nom. Am. Gas Ass'n v. FERC, 593 F.3d 14 (D.C. Cir. 2010), order on remand, Order No. 710-B, 134 FERC

   ¶ 61,033, order on reh'g, Order No. 710-C, 136 FERC ¶ 61,109 (2011).

   10 Details of the Commission's derivation of the return on equity are set forth in the Appendix to this order. The Appendix, where applicable, provides a page and line reference to Natural's Form 2s for 2014 and 2015 for each item utilized by the Commission in its calculations. equity return and related income taxes.11 Next, the Commission compared this estimated cost of service to Natural's 2014 Form 2 reported revenues, as adjusted, of $634.21 million. The difference between Natural's reported adjusted revenues12 and the estimated cost of service is $276.82 million, before income taxes. After taking into consideration income taxes, Natural's equity return totals approximately $168.92 million for 2014.

   This equates to an estimated return on equity of 28.5 percent.

8. An identical analysis, based upon the cost and revenue information provided by Natural in its 2015 Form 2, generated a similar estimated return on equity. Based upon the information contained in Natural's Form 2 for 2015, the Commission calculated Natural's cost of service for 2015 to be $362.33 million, exclusive of equity return and related income taxes. Next, the Commission compared this estimated cost of service to Natural's 2015 Form 2 reported revenues, as adjusted, which total $567.56 million. The difference between Natural's reported adjusted revenues and the estimated cost of service is $205.23 million, before income taxes. After taking into consideration income taxes, Natural's equity return totals approximately $125.23 million. This equates to an estimated return on equity of 20.8 percent.

9. The Commission finds that, based upon its preliminary analysis of the information provided by Natural in its Form 2s for the calendar years 2014 and 2015, Natural's currently effective tariff rates may be unjust and unreasonable. The Commission's analysis of this information indicates that Natural's currently effective tariff rates may allow Natural to recover revenue substantially in excess of its estimated cost of service. While NGA section 4 permits Natural to seek authorization from the Commission to adjust its rates to establish just and reasonable rates, Natural does not appear to have adjusted its system's rates since the 2010 Settlement, which included a phased rate reduction and a rate case moratorium through April 1, 2016. Accordingly, the

10. 11 Because Natural listed a 100 percent equity capitalization in its Form 2, we have used a hypothetical capital structure to calculate the pipeline's cost of service. However, in this order, we make no finding as to what would constitute a just and reasonable capital structure for Natural. That is among the issues set for hearing in this order and should be decided consistent with the Commission's capital structure policies. See Transcontinental Gas Pipe Line Corp., Opinion No. 414-A, 84 FERC ¶ 61,084,

    at 61,413-15, reh'g denied, Opinion No. 414-B, 85 FERC ¶ 61,323 (1998), petition for review denied sub nom. N.C. Utils. Comm'n v. FERC, D.C. Cir. Case No. 99-1037 (Feb. 7, 2000) (per curiam).

    12 As detailed in the Appendix, for purposes of this analysis, the total Other Revenues reflected in column (f) of page 301 of the Form 2 were adjusted to include annual charge adjustment (ACA) revenues.