On Thursday, FERC issued an order rejecting a contested settlement to give Kern River Gas Transmission Company (“Kern River”) a 12.5 percent return on equity (“ROE”) because it was excessive and would result in unjust and unreasonable rates. Instead, FERC determined that Kern River’s ROE should be 11.55 percent.

In 2004, Kern River filed a general rate case under section 4 of the Natural Gas Act (“NGA”). On October 16, 2006, the Commission issued an order (“Opinion No. 486”), which determined that Kern River’s ROE should be 11.20 percent for its rates on interstate natural gas transportation service, based on a four-company proxy group. On April 18, 2008, the Commission issued an order (“Opinion No. 486-A”), which denied all requests for rehearing and ordered a paper hearing regarding the composition of Kern River’s proxy group. Around the same time, the Commission issued a policy statement which allowed proxy groups used to determine gas and oil pipelines’ ROE to include master limited partnerships (see April 25, 2008 edition of the WER). On September 30, 2008, Kern River filed an Offer of Settlement and Stipulation (“Settlement”) to set Kern River’s ROE at 12.5 percent. Several parties including BP Energy Company, Southwest Gas Corporation and the Commission’s Trial Staff contested the Settlement.

Thursday’s order addressed the paper hearing, denied a rehearing request, and rejected Kern River’s Settlement offer. The Commission held that a ROE of 11.55 percent is appropriate because it is the median ROE of a revised proxy group which includes both master limited partnerships and corporations. The Commission’s order marks the first time that a pipeline proxy group included both master limited partnerships and corporations as allowed for in the 2008 Policy Statement.

FERC further ordered Kern River to cancel its interim rates filed with the settlement, which were effective October 1, 2008 and to make a revised compliance filing within 45 days. Comments are due 75 days after the issuance of Thursday’s order and reply comments are due in 90 days.

The Commission’s order is available at: http://www.ferc.gov/whats-new/comm-meet/2009/011509/G-1.pdf.