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Shipper study finds 23 of 32 major gas pipelines over-recovered

Most major interstate natural gas pipeline companies earned revenues that exceeded a 12% return on equity, according to an analysis by the Natural Gas Supply Association that calculated a net over-collection of $4.4 billion during a five-year period.

The analysis found the average ROE rose to 15.8% in 2018 from 13.7% in 2017, marking the fifth straight year of incremental increases.

Every year, NGSA, a trade group that represents large gas suppliers that are pipeline customers, has examined major gas pipelines’ cost recovery over a five-year period to assess the actual ROE. This year it looked at 32 companies comprising about 75% of the capacity in the interstate natural gas transportation market.

For the period from 2014 through 2018, 23 of 32 pipelines studied earned revenues "in excess of what their revenues would be based on an average allowed rate of return of 12%," while seven pipelines averaged 20% or higher, according to the study.

When NGSA instead considered an 11% ROE benchmark, it concluded that 26 of the 32 would be categorized as over-earning.

The group found the over-recovery of total costs for the 23 pipelines with ROEs at or exceeding 12% over five years was $5.9 billion. When over-recovery and under-recovery was considered, NGSA calculated a net $4.4 billion in excess recovery over the five years. Nine major pipelines were cast as under-recovering.

Pipeline response

The pipeline trade group Interstate Natural Gas Association of America pushed back on the report, saying it tells only half the story about the value INGAA members provide end-users.

"The report does not mention that the market for energy transportation is highly competitive, which in many cases has resulted in discounted and negotiated rates below the level allowed by the [Federal Energy Regulatory Commission]," an INGAA spokesperson said.

Unlike market-based prices that energy producers can charge, pipeline transportation rates remain capped and subject to aggressive oversight by FERC, the spokesperson added. After FERC review of every pipeline following passage of the Tax Cut and Jobs Act, "the vast majority of rates (118 of 129) were either kept in place or reset through an uncontested settlement process," she added.

The NGSA study used a cost-of-service model based on FERC Form 2 reports. It combined three elements to determine return on equity: rate base, net revenues and total cost of service.

Tax changes

The study covered a period marked by key tax policy shifts. The study used a new, lowered 21% corporate income tax rate for 2018, and no income tax allowance was included for 2018 for pipelines owned by master limited partnerships, or MLPs, NGSA said.

The analysis also considered the fact that most MLP pipelines zeroed out their accumulated deferred income tax, or ADIT, balances from their existing cost of service, as allowed by FERC in a rehearing order on its income tax policy. NGSA said that because of the "dramatic impact" the ADIT policy change has on a pipeline's cost of service, the study in footnotes showed what the ROE calculations would have been had 2017 ADIT levels been used to reduced rate base.

The analysis came as Congress debates legislation that would give FERC new authority to call for refunds when it determines that gas pipelines have been overearning. Supporters of the legislation have highlighted the inability of FERC to order refunds in the wake of the tax cuts.