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Zone of Reasonableness

Coping with rising profitability, a decade after restructuring.

Fortnightly Magazine - July 2011

the ability of FERC to ensure that shippers of natural gas on interstate pipelines pay just and reasonable rates. Absent legislative changes to broaden FERC authority under NGA Section 5, however, it will take significant collective shipper efforts, and a determined FERC, to assure that gas transportation rates remain just and reasonable.



1. See: Ozark Gas Transmission LLC, 133 FERC ¶ 61,158 (2010); Kinder Morgan Interstate Gas Transmission LLC, 133 FERC ¶ 61,157 (2010), reh’g granted in part and denied in part, 134 FERC ¶ 61,061 (2011); Natural Gas Pipeline Co., 129 FERC ¶ 61,158 (2009), reh’g denied, 130 FERC ¶61,133 (2010); Northern Natural Gas Co., 129 FERC ¶ 61,159 (2009), reh’g denied, 130 FERC ¶ 61,134 (2010); Great Lakes Gas Transmission Limited Partnership, 129 FERC ¶ 61,160 (2009), reh’g denied, 130 FERC ¶ 61,132 (2010).

2. See: Permian Basin, 390 U.S. at 797, 88 S.Ct. 1344; Pub. Serv. Comm’n of Ky., 397 F.3d at 1009.

3. See: “Policy Statement on Determination of Need,” 1902-AB86, FERC Docket No. PL-3-000.

4. Many variables determine a pipeline’s cost of service. The passage of time doesn’t always lead to a decline in the cost of service for certain contracted capacity, particularly for pipelines requiring major capital improvements to existing infrastructure. In addition, some pipelines may seek to levelize their rates over a given time period, which would affect year-by-year ROE calculations.

5. 59 FERC ¶ 61,030, 18 CFR Part 284 (Order No. 636), April 8, 1992.

6. 90 FERC ¶ 61,109, CFR Parts 154, 161, 250, and 254 (Order No. 637), Feb. 9, 2000.

7. See: “Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines,” 74 FERC ¶ 61076, 1996.

8. “Koch has not met the requirements of the Policy Statement and has not shown that it lacks market power.” Docket No. RM-95-6-000, Order Reversing Initial Decision, p. 23.

9. The data for this study were obtained through SNL Financial. Form 2 data for Accounts 117.1, 117.2, 283, “Fuel Recoveries and Commercial and Industrial Sales,” weren’t available through SNL and are excluded from the analysis.

10. This assumption is consistent with the commission’s representative ruling in Ingleside Energy Center, rejecting the use of a 70 percent equity ratio proposed by the developer and required that a 50/50 debt-to-equity capital structure be used for ratemaking purposes. See 112 FERC ¶ 61101, 2005.

11. This 14 percent return on equity was allowed for greenfield pipelines with substantial financial leverage such as Colorado Interstate Gas Co (Docket No. CP03-7), AES Ocean Express (Docket No. CP02-90), Sonora Pipeline LLC (Docket No. CP07-74), Trans-Union Interstate Pipeline (Docket No. CP01-37) and Tractebel Calypso Pipeline (Docket No. CP01-409).

12. The Commission has found that “a large equity ratio is more costly to ratepayers, since equity financing is typically more costly than debt financing, and also because the interest on indebtedness is tax deductible.” See Ingleside Energy Center , 112 FERC ¶ 61101, 2005.

13. See, e.g., Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 302 (1988) (“Thus, FERC exercises its ratemaking authority to limit the burden on ratepayers of