The rates regulators set for transporting natural gas on interstate pipelines are all-important. They determine how much it costs to get gas from A to B, whether new capacity can be funded, and serve as the bedrock of regional gas price relationships around the nation’s pipeline grid. But the process for establishing those rates can seem opaque and is often misunderstood — it’s one of those things you need to be directly involved in to fully grasp. Well, RBN’s Advisory Practice lives and breathes gas pipeline rate cases month in, month out, and we thought it would be interesting — and kind of fun — to take you behind the curtain and explain how rate cases at the Federal Energy Regulatory Commission (FERC) really play out.
In observance of today’s holiday, we’ve given our writers a break and are revisiting a recently published blog on Gas Pipeline Rates. If you didn’t read it then, this is your opportunity to see what you missed! Happy New Year!
Don’t worry, this won’t be a deep dive on how to become a rate analyst. Instead, it will be a straightforward explanation of how all the parties in a gas pipeline rate case — the pipeline owner, consumer representatives, FERC staff, the commission itself and others — find their way to a quick and fair resolution of the issues at hand. Maybe we’ve been doing this too long, but we can argue there’s a certain beauty to it.
From the outside, you might think that a FERC rate-setting procedure is as cut-and-dried as a three-day-old Christmas turkey, a process in which the pipeline owner files reams of financial data, a plethora of FERC accountants audit the filing and crunch the numbers, and the commissioners vote to approve rates based on that auditing and number-crunching. (The photo below illustrates this view of how things must happen.)
But au contraire. Sure, filings are made, numbers are crunched, and FERC does ultimately approve or reject the rates. However, the process leading up to that decision usually involves a very complicated and dynamic negotiated interaction among all the parties. As we’ll discuss next, it starts with the formal stuff, but evolves into an informal and confidential resolution, the so-called “settlement process.”
First, we’ll quickly describe the formal process you see in public, then we’ll explain how the informal, behind-the-scenes settlement process works and the many reasons it’s a heck of a lot better than a bevy of lawyers, accountants and experts duking it out in front of a judge. (As we said up front, we know a lot about how this process works from the work we do in FERC rulemakings, rate case filings, litigation and settlement negotiation, along with the fundamental market analysis needed to support regulatory pleadings and civil litigation in both federal and state courts. For more on the RBN Advisory Practice, click here.)
THE FORMAL PROCESS
Rates Based on Costs
It’s true that pipeline rates are based on accounting costs, which is how FERC has always interpreted the Natural Gas Act (NGA) mandate that pipeline tariff rates be “just and reasonable.” But in determining those costs, there typically is an enormous amount of disagreement about which customer groups ought to be paying what, and how much risk the pipeline ought to be responsible for in its recovery of those costs. For example, some costs, like depreciation and the cost of capital, are matters of expert opinion, and there are a whole lot of experts out there willing to offer their opinions for a fee.
When a pipeline owner wants to change — almost always increase — its tariff rates, it files a rate case with the FERC. The pipeline is generally allowed to place its proposed new rates into effect six months after they’re filed, with a condition that any part of the increase that’s not ultimately approved by FERC will be refunded to customers with interest based on the prime rate. So if it takes two or three years to finish a formal case, customers can end up paying elevated rates for all that time, holding out hope for future refunds but in the meantime paying rates they typically believe to be too high. It can be frustrating all around.
Figure 1. Typical Timeline for FERC’s Formal Rate Process. Source: RBN Advisory Practice
Figure 1 shows the basic steps in the process and the typical minimum timeline of a formal FERC rate case, based on a recent, relatively simple case. Yes, 25 months — two years-plus! And it can take a lot longer.
We can discuss what’s in all those steps of the formal process some other time. Today we’re here to talk about the second-track settlement process that’s really used to set most gas pipeline rates.
THE SETTLEMENT PROCESS
Rates Based on Reasonable Agreement
Ultimately, the whole…
Read More: Let’s Make a Deal, Encore Edition – How Gas Pipeline Rates Are Really Set and