Kinder Morgan contends FERC rate probe at adds with fostering competition

Kinder Morgan's top executive is contending the US Federal Energy Regulatory Commission's recent probe of El Paso Natural Gas wholesale pipeline rates is "anachronistic" and runs counter to the push for a competitive market for gas transportation that the commission has fostered for decades.

"They've taken [Natural Gas Act] Section 5 action against one of the most competitive pipelines, serving one of the most competitive market areas," CEO Steve Kean said May 23 in an interview with S&P Global Commodity Insights. "By regulating it as if it were a monopoly and having a cost-of-service cap on our rates, it's created a totally asymmetric risk."

The company is seeking a rehearing of FERC's April 21 order initiating a Natural Gas Act Section 5 investigation of whether the pipeline company is over-recovering its cost of service (RP19-73).

El Paso December filed in December adjusted and unadjusted cost and revenue studies, using 12 months of data ending Sept. 30, 2021. It contended the analyses showed its maximum rates were too low for it to fully recover costs. Several shippers, including BP and Shell, protested, and among other things urged FERC to direct El Paso to submit a new unadjusted study that relies only on El Paso's actual costs, using a FERC-approved 10.55% return on equity.

FERC's April 21 order initiated the investigation, set it for hearing, and instructed the company to file a cost and revenue study for its latest 12-month period. The regulator said its review of the El Paso studies for 2019 and 2020 estimated returns on equity of 24.4% and 20.4%, respectively. FERC also said it estimated El Paso's return on equity was about 20.7% based on the unadjusted study the company submitted.

The current tariff rates may allow El Paso to "recover revenue substantially in excess of its estimated cost of service," FERC's analysis said.

'A place to make a stand'

Kean said May 23 that cost-of-service ratemaking regulation is a creature of monopolies with franchise territories and is "inapt" for El Paso, a pipeline serving California, which has multiple alternative pipelines and is trying to turn away from natural gas.

"So, this is a place to make a bit of stand and point out that this is not the way FERC should be proceeding, in our judgment," he said in an interview, stating he is hoping for a reassessment at the commissioner level of an approach that generally has relied on staff-level calculations.

"Arriving at your terms of service through litigation is really a poor way to serve the market's needs," he said, in contrast to negotiating with customers in conference rooms or on the phone.

In its May 20 rehearing request, El Paso asserted that rather than initiating a probe at the request of sophisticated shippers, FERC had acted on its own accord, on the basis of "outdated" El Paso data from 2019 and 2020, "ignoring the full slate of data" El Paso presented.

In addition, it contended FERC strayed from its Section 5 authority by requiring El Paso to prepare a cost of revenue study that includes a derivation of rates; the pipeline company argues that requirement is the equivalent to unlawfully compelling El Paso to file a general Section 4 rate case.

"The commission's errors in launching this investigation exacerbate the regulatory uncertainty and steep investment headwinds facing the natural gas pipeline industry," the rehearing request said. Kean, in the interview, said such uncertainties range from changes that make it more difficult to operate profitably and dampen investment to pressures from the activist movement trying to eliminate the use of natural gas.

Progress elsewhere

On other matters before the commission, Kean was more positive about the recent direction.

"I think it is fair to say that the commission is making good progress on getting additional Section 7(c) certificates out and getting additional infrastructure built," he said. Among a group of recent gas project approvals, FERC recently authorized two Kinder Morgan projects, including a pipeline expansion serving the New York area and another serving an LNG export facility.

While FERC rejected a novel Tennessee Gas Pipeline certified gas pooling proposal without prejudice, Kean was optimistic the revised proposal, refiled in mid-May (RP22-921), would ultimately gain approval.

FERC's order emphasized that it was primarily uncomfortable with Tennessee's proposal to have FERC weigh in on criteria for so-called responsibly sourced gas, preferring instead to allow market-driven initiatives to unfold more organically.

In response to FERC's order, the company has tweaked the proposal to post the criteria for certified gas on its website and list the certifying agencies there, rather than including that information in the tariff, as it had agreed to do in response to shipper concerns.