April 22, 2020
 
When a natural gas pipeline seeks to increase its rates under Section 4 of the Natural Gas Act (NGA), FERC can suspend the rate increase for up to five months, but then the increase goes into effect, subject to refund if the case ultimately results in a lower rate. Conversely, when FERC initiates a rate investigation under Section 5 of the NGA to reduce a pipeline’s rates, the new rates do not go into effect until the case concludes and a determination is made that the prior rates were unjust and unreasonable. In such cases, FERC is unable to grant the shippers any refunds for the period while the case was pending.
 
A bipartisan bill was introduced in Congress earlier this year that seeks to change this result. The “Protecting Natural Gas Consumers from Overcharges Act of 2020” would require FERC to set a refund date when it commences a Section 5 investigation, which can be no earlier than the date of the publication by FERC of the proceeding and no later than five months after that date.
 
Today we look at the history over the last five years of Section 5 investigations by FERC with a view towards understanding the type of pipelines against which FERC brings such actions, how long these proceedings typically take and whether the refund issue is a real one. As we discuss below, most of these cases eventually settle -- and usually fairly quickly. But the two cases that have not settled, involving Northern Natural Gas Company (Northern Natural) and Panhandle Eastern Pipe Line Company (PEPL), were used as examples in testimony before Congress to illustrate why a change in the law is needed. While most cases settle, an amendment to the NGA amendment could impact the dynamics of those settlement discussions.

History of Section 5 Cases

FERC does not often use its authority under Section 5. Since January 1, 2015, FERC has initiated only thirteen such cases and has not initiated any so far this year. Set forth below is a summary of some key characteristics of the pipelines against which FERC has used this power.
 
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As seen above, the cases that FERC has initiated in recent years do not involve any company that reported more than $700 million or less than $27 million in revenue for the year on which FERC based its investigation. This could be because those are the only pipelines that had ROEs above the lowest ROE used to justify such an investigation, PEPL’s 14.2%. But it could also be a reflection of FERC’s limited resources. The larger pipeline structures become very complex and it would be more difficult to build a case against them, and there are almost one hundred reporting companies that earned less than $27 million in 2018, which may mean FERC has some limit beneath which it is simply not worthwhile for FERC to expend its resources. Those smaller companies make up less than 2% of the industry’s total revenue for 2018, the last year available, and the pipeline companies earning between $27 million and $700 million represent almost 50% of the total revenue.
 
The percentage of a pipeline’s revenue from tariff services is generally at least 25%, with only the tariff revenue of Stagecoach Pipeline & Storage Company being less than that. The FERC-calculated ROE used to justify the initiation of an investigation has ranged from a low of 14.20% to a high of 24.90%.

Most Cases Settle Within One Year Even With Substantial Shipper Interest

Of the thirteen cases FERC has initiated since January 1, 2015, eleven of them were settled. The only two that have not yet settled were the ones against Northern Natural and PEPL, which we discuss further below. For the other eleven, all of them were resolved through settlements within one year of FERC initiating the investigation. Set forth below is a chart showing the number of entities that sought to intervene in these cases.
 
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Some shippers intervene in almost every proceeding involving a pipeline on which they are a shipper, but often those interventions are done using FERC’s form which simply requires the completion of a template, a so-called Doc-less intervention. More substantive interventions are typically made through an actual filing in the proceeding, which is why we count these two classes of interventions separately in the chart above. While Northern Natural and PEPL did not have the highest total of interventions, they did have the highest number of the more formal variety, 23 and 25, respectively.

The Perceived Problem With FERC’s Lack of Refund Authority Under Section 5

The bill introduced in Congress to grant FERC the authority to order refunds in Section 5 cases would allow FERC, at the conclusion of a Section 5 case, to order refunds for up to fifteen months following the refund effective date it initially set, and even longer if the case is not resolved within that fifteen month period and FERC determines the delay in the case’s resolution was caused primarily by the “dilatory behavior” of the pipeline company.
 
In testimony provided to the House Committee considering the legislation, former Commissioner LaFleur explained why she thought a change in the law was needed. She explained that in the Federal Power Act’s companion sections to Sections 4 and 5 of the NGA, FERC has the authority to grant refunds under both sections, but that section 5 of the NGA does not allow FERC to set a refund date. Thus, if the rate is not just and reasonable, it is not decreased until the end of the proceeding, which can be lengthy. In her view, this gives the pipelines the “incentive to prolong litigation, resist settlement, and make the process as expensive and slow as possible to avoid reducing rates, and to discourage” the filing of cases in the first place.
 
The testimony by the American Public Gas Association cited both the Northern Natural and PEPL cases as real-world examples of another problem created by the lack of a refund authority under Section 5, namely the filing by the pipeline of a countering Section 4 proceeding. As the APGA explained, FERC commenced an NGA Section 5 case against Northern Natural in January 2019 after it estimated that Northern’s ROE was 17.3 percent. However, before that case was resolved, Northern filed, on July 1, 2019, its own case under Section 4 and its revised rates went into effect on January 1, 2020, subject to refund. Similarly, FERC launched its investigation into PEPL’s rates in January 2019, and FERC’s trial staff then filed testimony supporting a $54 million reduction in the pipeline’s cost of service. However, on August 30, 2019, PEPL filed to increase its rates under Section 4 and FERC could only suspend those rates until March 1, 2020.
 
In a motion filed last week by PEPL, the company moved to dismiss the Section 5 proceeding because, as it explained in its motion, that entire proceeding was now moot because that proceeding was “commenced to examine the preexisting rates that were superseded on March 1, 2020 and are no longer in effect.” In addition, because no action was taken in the Section 5 proceeding before the March 1 date, the Section 5 proceeding cannot establish a refund date that is any earlier than the refund date of March 1, fixed in the suspension order issued by FERC in the Section 4 case.
 
According to the APGA’s testimony, it is for this reason that a number of other trade associations, including the Natural Gas Supply Association, American Public Power Association, National Rural Electric Cooperative Association and Industrial Energy Consumers of America, support the proposed legislation.

The Pipeline Industry Opposes Granting FERC Refund Authority Under NGA Section 5

At the same hearing, the General Counsel for Boardwalk Pipelines testified on behalf of the Interstate Natural Gas Pipeline Association of America. In his testimony, he asserted that amending Section 5 of the NGA to include a refund provision would disrupt the rate stability provided by the NGA, increase overall costs for both pipeline companies and consumers, inhibit the construction of pipeline infrastructure and limit the ability of U.S. consumers to realize the benefits of the country’s domestic energy abundance. Using statistics like those above, he noted that all but two of the cases FERC has launched under Section 5, PEPL and Northern Natural, have either been dismissed with no rate change or resulted in a settlement.
 
In addition, he noted that these settlements occurred quickly after the proceeding was initiated. This, he argued, means that Congress should avoid disturbing the balance created by the existing ratemaking provisions of the NGA. He further advised that a refund authority would introduce an additional level of rate uncertainty for interstate pipelines and their investors. This rate uncertainty would likely cause an increase in the cost of capital and therefore not provide any benefit to shippers, but might actually drive up overall costs.
 
While the data certainly supports the testimony by the industry, a change in the refund authority could impact the settlement dynamics in future cases. Given the rare bipartisan support of the legislation and broad support among the shipper community, we could see this legislation advancing even in the current partisan atmosphere in Congress. We will continue to follow this issue and will provide data similar to the above about recent rate cases filed under Section 4 of the NGA, including by Northern Natural and PEPL.