FERC Juggles Proxy Group In Kern River; Pipeline And Shipper Rebuffed; Wellington Acting Head

March 2009 Vol. 236 No. 3

Stephen Barlas, Washington Editor

In one of the longer-running gas transmission rate dramas in memory, FERC rejected new rates agreed to by Kern River Gas Transmission and almost all of its customers, except Southwest Gas Corp. and BP Energy Co., the latter Kern River’s most dogged antagonist.

The new rates would have been based on 12.5% return of equity (ROE) for Kern River, based on costs of a 2002 expansion project which went into service in 2003. Kern originally filed for a rate adjustment based on 15.1 ROE in 2004. That 2004 rate case has bounced around FERC ever since.

The FERC decision was noteworthy because it was the first time the commission applied a 2008 policy allowing master limited partnerships (MLPs) to be included in proxy groups, transmission companies of like characteristics whose own ROEs are compared to those of a company like Kern asking for new rates. Interstate transmission companies backed their inclusion, although the end result, here in the Kern case, may not have yielded the result Kern was looking for.

John Dushinske, vice president, marketing and regulatory affairs, Kern River Gas Transmission, says the company is disappointed with FERC’s action. “We had hoped they would have found a way to accept the settlement, which 93% of our customers supported.” He adds that Kern is still mapping out its next step.

Joan Dreskin, INGAA’s general counsel, says the FERC action doesn’t imply anything either negative or positive – from the industry’s standpoint – about the commission’s view of proxy groups in upcoming rate cases. “It was a very fact-specific decision based on the MLPs which were around in 2004.”

The proxy group FERC settled on included two corporations, KMI and National Fuel, and three MLPs, Northern Border, TC Pipelines, and KMEP. Kern had suggested a different proxy group and opposed inclusion of TC and National Fuel. BP had pressed for inclusion of Questar and Equitable.

In rejecting the 12.5% ROE and knocking it down to 11.55%, FERC ended up very close to the 11.2% ROE it established for Kern in 2006 in Order 486, before a Supreme Court ruling upset those calculations, forcing FERC to establish a new ROE policy on April 17, 2008. Its chief modification over the previous ROE policy was that it allowed, for the first time, MLPs to be included in proxy groups. Northern Border’s ROE of 11.55% was the median of the five, which is why FERC selected it for Kern.

In Order 486, where FERC established the 11.2% ROE, it had given Kern an extra 50 basis points to compensate for its higher risk profile, compared to the other members of the proxy group. In rejecting the KR settlements and settling on a 11.55% ROE, FERC rejected adding any basis points to that median return, arguing its latest iteration of a proxy group included companies at approximately the same risk level as Kern.

Wellinghoff Named Acting Chairman Of FERC

Industry execs with good luck in Vegas might want to put some money down on President Obama eventually eliminating the “acting” adjective he put in front of the title of new FERC “Chairman” Jon Wellinghoff. Obama named a number of acting chairmen at federal regulatory agencies a few weeks after occupying the White House, probably because there hadn’t been enough time to vet them yet, so there was nothing particularly peculiar about Wellinghoff’s acting designation.

There is precedent. President Clinton appointed Betsy Moeller as acting chairman of FERC in 1992 and then made her permanent chairman. Odds are good Wellinghoff will become permanent FERC chairman for two reasons. First, he is a Nevadan and was sworn in as a FERC commissioner by Senate Majority Leader Harry Reid (D-NV). That gives him a tremendous leg up over any other contender for the permanent chairmanship. He is well known as an advocate of a Renewable Portfolio Standard (RPS), where electric utilities must generate increasing amounts of electricity from wind, solar and other alternative sources. That dovetails with Obama’s drive to quickly inject a heavy dose of “green-power” into the U.S. economy.

Wellinghoff is best known for promoting renewable energy generation. He has a much narrower profile on natural gas issues, except for LNG, where he has carved a role as FERC’s Dr. No. Wellinghoff was the only commissioner to vote in September against the Bradwood Landing LNG facility in Oregon. Back then, he jangled the nerves of the natural gas industry by suggesting that wind and solar might be more environmentally preferred to natural gas.

He again showed his antipathy for LNG on Jan. 15 when he cast a lonely “no” against the AES Sparrows Point LNG Terminal & Mid-Atlantic Express Pipeline. That project would consist of an LNG import terminal on the Chesapeake Bay in Baltimore County, MD and 88 miles of pipeline that would interconnect the terminal with three existing interstate pipelines.

An industry source suggests Wellinghoff used his Sparrows Point dissent as a way to reassure the natural gas industry it was mistaken if it thought Bradwood made him an enemy of natural gas. In Sparrows Point, Wellinghoff said it made more sense to get additional gas to the South and mid-Atlantic by tapping gas from the Marcellus shale which extends through much of the Appalachian basin. The effective delivery of Marcellus shale gas could be accomplished with expansion of pipeline and storage infrastructure in the region. For example, Columbia Gas proposes to expand its storage in Ohio, in part to facilitate access to increased production in the Appalachian basin.

“He was doing a savvy thing in Sparrows Point,” says the industry source. “He was saying ‘Let me be clear about what I meant in Bradwood Landing.’”

FERC Penalizes Marketers for Violation Of Open Season Bidding Rules

FERC forced some major natural gas marketing companies to pay big penalties for violating the commission’s apparent rules on open season bidding. But the settlements were clouded a bit by the dissent of the two Republican commissioners, who argued FERC’s rules on the matter are unclear. The penalties were in conjunction with bidding for natural gas transportation capacity on the Cheyenne Plains Natural Gas Company pipeline owned by El Paso. Bidding for capacity on the Colorado Interstate Gas Co. and Northern Natural pipelines were somewhat of a side issue.

Commissioner Marc Spitzer, in his dissent, argued that FERC, in previous cases such as Pacific Gas Transmission Co and Trailblazer Pipeline Co., allowed multiple-affiliate bidding. “The mixed messages sent to the regulated community by the commission raise subjective uncertainty in reasonable minds on the propriety of those practices,” wrote Spitzer.

In its enforcement action involving Cheyenne, FERC charged Tenaska Marketing Ventures, LLC and its affiliates, ONEOK Energy Services Co. and its affiliates and some smaller traders with submitting bids from multiple affiliates with the intent to defeat Cheyenne’s pro rata allocation mechanism used in conjunction with its open season notice for unsubscribed capacity.

Tenaska and ONEOK cooperated with the FERC investigation and neither admitted guilt while agreeing to pay civil penalties and disgorgements of $3 million/$1.97 million (Tenaska) and $787,000/$1.1 million (ONEOK).

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