Government: Shippers Press for Pipeline Rate Reviews and Refunds

December 2015 Vol. 242, No. 12

Natural gas consumers led by the Industrial Energy Consumers of America (IECA) have begun a campaign to encourage the Federal Energy Regulatory Commission (FERC) to get tough on pipeline rates. It is a two-pronged attack. One path seeks to persuade FERC to resume mandatory three-year reviews of interstate natural gas pipeline rates. The other aims to persuade Congress to amend Section 5 of the Natural Gas Act to provide FERC with refund authority.

The letter sent to Congress states that FERC Chairman Norman Bay and past Chairs Cheryl LaFleur, Jon Wellinghoff and Joseph Kelliher openly acknowledged the problem of pipeline overcharges and the need for Congress to pass legislation to address it. Wellinghoff, in an email, acknowledges the accuracy of that statement.

Tamara Young-Allen, FERC spokesperson, said the commission, which must ensure that pipeline rates are “just and reasonable,” has made no decision on whether it will respond to the letter. The agency has authority to file rate cases independently and has done so in the past. In a letter former FERC Chairman Wellinghoff sent leaders of the Senate Energy Committee in 2013, he said the agency had done 10 rate reviews between 2009 and 2013. In seven of those instances pipelines signed consent decrees committing to lower rates.

“At that rate, pipeline rates would get reviewed every 10 years,” complained Paul Cicio, IECA president. Shippers can file rate cases themselves but that can be a costly process, and FERC’s inability to order refunds for past overcharges serves as a double disincentive, he added.

Cathy Landry, spokeswoman for the Interstate Natural Gas Association of America (INGAA), said if FERC were able to order refunds, a pipeline could be punished for charging the rate FERC had previously approved.

“Such a change in long-standing law would introduce significant financial uncertainty for regulated pipelines,” she said. “From the start of a Section 5 proceeding until its completion at some undetermined date, a pipeline would no longer know its FERC-approved rate, and would be unable to calculate its revenues with certainty. This significant level of business risk and uncertainly would ultimately be reflected in the cost of capital across the entire pipeline sector, leading ironically to higher rates for service.”

There seems little groundswell in Congress favoring pro-refund legislation. No bill has been introduced. Dan Schneider, press secretary to the House Energy and Commerce Committee, home to Chairman Fred Upton (R-MI), one of the recipients of the letter, said no legislation has been introduced there.

The IECA and its allies believe FERC needs to crack down on pipeline rates based on a recent report from the Natural Gas Supply Association (NGSA) which analyzed the cost recovery of 32 major interstate natural gas pipelines representing 80% of the market. The study showed from 2009-13 pipelines over-collected $3 billion more than they would have collected on an average 12% return on equity allowed by FERC.

Landry responded, “As NGSA notes in the 2015 report, there has been a downward trend in the overall average return of the pipelines reviewed, to 12.6% in 2013, the most recent year reflected in the analysis. Seven of the pipelines had rates of return below 10% in 2013, including two below 5%.”

The NGSA did not sign onto the IECA letters to FERC Chairman Bay and Energy Committee chairmen and ranking members in Congress.

“We support reviews of pipelines’ rates when the data suggests they are over-earning,” said Daphne Magnuson, spokeswoman for the NGSA. “FERC can use Form 2s to help monitor the data and use that information as a guidepost to determine if there is a need to initiate a review.”

She added, “NGSA is also interested in establishing a refund-effective date when FERC determines that there has indeed been overearning, since currently there are no refunds, just a change in rate going forward. Interestingly, there are refunds on the electric side – it’s just a gas thing that we don’t get refunds.”

FERC usually likes to see pipeline rates earn around 12% return on equity. But a pipeline’s return on equity (ROE) can fluctuate over time, based on changing conditions such as higher or lower costs, or higher or lower volumes. Higher ROEs are not the result of price gouging. However, critics argue that pipelines are quick to file a rate case when their ROEs fall below 12%.

Oil Export Bill Moving Forward

House passage of a bill allowing oil exports for the first time in 40 years puts pressure on the Senate to follow suit. The House bill (H.R. 702) narrowly focuses on the export issue. Senate bill (S. 2011), awaiting action, is broader and encompasses provisions on oil and gas leases from the Outer Continental Shelf and construction on Indian lands. H.R. 702 repeals Section 103 of the Energy Policy and Conservation Act that allows the president to restrict exports of petroleum products, natural gas, petrochemical feedstocks, and coal in the event of unforeseen circumstances to protect the national interest.

The House passed its Bill 261-159 on Oct. 9 with support of 27 Democrats. The Senate Energy Committee passed its bill, 12-10, along partisan lines on Sept. 9. However, there are at least two Democrats in the Senate who do support the bill.

Democratic support will be important since President Obama indicated he would likely veto the bill. After the House bill passed, the administration issued a Statement of Policy, which said it “strongly opposes” the bill. It said the president’s advisors would recommend a veto.

Democrats are loath to end the embargo because some business and consumer groups fear it would result in higher oil and gasoline prices. Carlos Pascual, senior vice president of IHS, a consulting firm and a fellow at the Center on Global Energy Policy at Columbia University, said, “The risk most feared is increasing the domestic price of gasoline.”

He cited two IHS studies and others which argue “on firm economic grounds that this risk is misplaced. The price of gasoline should decrease.”

The business community is clearly split. The National Association of Manufacturers supports ending the ban. The Industrial Energy Consumers of America (IECA) opposed H.R. 702 because it wants to retain the president’s ability to restrict exports. However, the IECA said it is not opposed to oil exports as long as the volume of exports is in the public and national interest.