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Zone of Reasonableness

Coping with rising profitability, a decade after restructuring.

Fortnightly Magazine - July 2011

FERC also allows the pipeline to propose adjustments to the historical data. 17 The absence of clear guidance disadvantages a pipeline customer, as it invites complication in the development of an evidentiary record and gives the pipeline the opportunity to provide evidence on costs and revenues from different time periods to justify existing rates. Overall, there are many FERC-regulated pipelines that are earning rates of return well in excess of that which would be allowed in a litigated proceeding, and yet they haven’t been subject to any investigation under Section 5. The inherent obstacles associated with pursuing rate reductions under NGA Section 5 help to explain why.

There are only two instances within the last 10 years in which a complaint was filed by customers or a state commission that prompted the FERC to initiate a Section 5 investigation into the existing rates of a pipeline—one against National Fuel Gas Supply 18 and the other against Southwest Gas Storage. 19 In both instances, the FERC granted the request of the complainant to initiate an investigation by directing the pipeline to file a cost and revenue study for the most recent 12-month period. However, in both proceedings, customers were significantly disadvantaged by the limitations of Section 5.

In National Fuel , the FERC rejected a request by customers to reduce immediately the fuel retention factor of the pipeline, based on an argument that the existing fuel factor had over-recovered fuel by substantial amounts based on pipeline-supplied data for a recent 12-month period. 20 Customers eventually achieved a settlement that reduced in substantial part the over-recovery of fuel, but left the non-fuel (or “base rate”) elements of the pipeline’s rates unchanged.

In Southwest Storage , the commission rejected a motion for waiver of the administrative law judge’s initial decision and motions for an immediate, interim reduction in rates. 21 Customers negotiated a settlement that provided for no change in any of the pipeline’s rates.

Ultimately, the FERC seems to have the power to order interim relief in particular cases. But such Section 5 relief sought by gas distributors, state commissions or the FERC itself requires evidence and argument on the part of those parties asking for relief that must compete with counter-evidence and argument brought by pipelines. In contrast, the timing of Section 4 relief for pipeline companies is automatic. Given the perceived shortcomings of Section 5, Congress faces pressure to amend it and allow for refunds on a retrospective basis. 22

Zone of Reasonableness

When prima facie indicators suggest that rates are outside the zone of reasonableness for interstate pipelines, the customers of those pipelines should press the FERC to act to protect the public interest and engage the pipelines in detailed rate reviews. The level of earned returns for the pipeline sector today calls for more rate scrutiny and additional activity before the FERC.

The lack of periodic Section 4 rate cases, as in the old days before regulatory restructuring for this industry, means that shippers and the FERC must more be diligent in monitoring pipelines’ financial results. Legislative changes would improve