On November 19, 2009, the Federal Energy Regulatory Commission (“FERC” or “Commission”) announced the launch of investigations into the interstate natural gas pipeline rates for Northern Natural Gas Company (“Northern Natural”), Great Lakes Gas Transmission LP (“Great Lakes”), and Natural Gas Pipeline Company of America LLC (“NGPL”) to determine if the pipelines are over-recovering cost of service, causing unjust and unreasonable rates under section 5 of the Natural Gas Act. 

Northern Natural operates 15,141 miles of pipeline from the Permian Basin of Texas to the Midwest.  Great Lakes operates a 2,100 mile system through Minnesota, Wisconsin, and Michigan.  NGPL has a 9,700-mile system interconnecting the Amarillo and Gulf Coast pipelines that run to Chicago.

In March 2008, the Commission issued Order No. 710 which changed the forms and reporting requirements for interstate natural gas pipelines.  Order No. 710 created new reporting requirements for natural gas pipelines aimed at improving financial transparency and current market and cost information.  The changes also included reporting about the acquisition and disposition of fuel use and lost and unaccounted for gas in a revised annual FERC Form 2.  Pipelines were required to use the revised Form 2 when making their annual report for 2008.

Based on the 2008 numbers, FERC became concerned about earnings substantially exceeding actual cost of service, including a reasonable return on equity.  The Commission developed a cost of service using a 12 percent return on equity (“ROE”), but the Form 2 data according to FERC allegedly showed that Northern Natural yielded an estimated 24.36 percent ROE, Great Lakes yielded an estimated 20.83 percent ROE , and NGPL yielded an estimated 24.5 percent ROE.

The Commission also stated that NGPL appears to be substantially over-recovering fuel and lost and unaccounted for gas from its customers.  In 2008, NGPL received 55,276,754 Dth of gas in-kind from its customers, more than twice the amount of fuel use and lost and unaccounted for gas on Natural’s system.  Based on the first quarter filings for 2009 and the 2008 Form 2, NGPL received revenues from the sale of excess gas totaling $59.6 million in the fourth quarter of 2008 and $48.7 million in the first quarter of 2009.

Commissioner Marc Spitzer offered a concurring opinion stating a settlement proceeding may be a more expeditious route.  He also stated these investigations should not disrupt the competitive markets for natural gas pipelines post-Order No. 636.  He notes that pipelines are not required to file periodic rate cases, and the Commission is not requiring the three pipelines to file rate cases in the future.  Commissioner Spitzer preferred to hold the hearing in abeyance for a short period pending settlement discussions pursuant to FERC regulations.

The Commission has ordered a presiding Administrative Law Judge to convene a prehearing conference within thirty days, and all pipelines have forty-five days to submit a full cost and revenue study.  Due to a risk of further over-recovery, FERC expedited the hearing by establishing a date for an initial decision to be forty-seven weeks from designating an administrative law judge.  The expedited process is also due to the fact FERC lacks refund authority for section 5 proceedings.

The Commission’s orders are available at: http://www.ferc.gov/whats-new/comm-meet/2009/111909/G-3.pdf (NGPL); http://www.ferc.gov/whats-new/comm-meet/2009/111909/G-4.pdf (Northern Natural), and http://www.ferc.gov/whats-new/comm-meet/2009/111909/G-5.pdf (Great Lakes).