The first wave of Form 501G filings Thursday, October 11th, which included filings from about one-fourth of the pipeline companies required to file the Form 501G by the end of this year. From the first wave, three of the 27 companies received extensions by stating that they were in serious discussions with their shippers to reduce their rates. Of the remaining 24 filers, four filed limited Section 4 rate cases, one filed a proposed settlement agreement and two stated that they were also in settlement discussions with their shippers. As we predicted in Risks From Filing Form 501G – How the Major Pipelines Stack Up, the two key indicators of whether a pipeline would adjust its rates were a post-tax cut ROE in excess of 16% and an Indicated Rate Reduction higher than 8%.
In summary, based on our analysis of all wave 1 filings, shippers awaiting a rate reduction were likely disappointed in the results, with 17 of the 27 pipelines deciding not to adjust their rates. Time will tell whether shippers or FERC initiate a rate investigation, which would likely be driven, in part, by the pipeline’s post-tax cut ROE and Indicated Rate Reduction, which we’ve captured below. On the other hand, investors were probably relieved by that same news, as top-line revenue was generally not impacted. Today, we look at the first wave results, and in an upcoming Insights, we will look forward to wave 2, which are to be filed on November 8.
Those Pipelines Reducing Rates Shared Some Common Characteristics
In Risks From Filing Form 501G – How the Major Pipelines Stack Up, we provided a graph that showed how the major pipelines were arranged along a risk graph based on the calculation of their post-tax cut ROE and their Indicated Rate Reduction under our proforma Form 501Gs that we created for each pipeline. We used two key dividing lines in that graph, a post-tax cut ROE of 16%, and an Indicated Rate Reduction of 8%. We use that same graph below for the 24 pipelines who filed Form 501G in the first wave using their as filed results.
We have added a key feature to this graph to show which option each pipeline picked when it filed its Form 501G. FERC had indicated that the pipelines should choose among the following four options:
- Simultaneously file a limited Section 4 rate case to reduce tariff rates by the Indicated Rate Reduction in Form 501G;
- Agree to file a full Section 4 rate case or an uncontested settlement by December 31;
- Explain why the pipeline’s rates should not be adjusted;
- Do none of the above.
Some key lessons can be gleaned from the chart:
- When you include data from the LawIQ proforma Form 501Gs for the three pipelines that began negotiating with their customers to avoid filing their Form 501G, six of the eight pipelines (75%) in our high-risk category filed to adjust their rates.
- None of the pipelines in our low-risk category filed to adjust their rates.
- Of the 13 pipelines that were in our two mixed-risk categories, because they either had an indicated rate reduction of less than 8% or had a post-tax ROE lower than 16%, only four of them (about 30%) filed to reduce their rates.
- The four pipelines in the mixed risk categories that filed to reduce their rates all had a post-tax cut ROE greater than 16%.
Rate Cuts Have Limited Real-World Impact
Five of the companies announced their rate cuts, and a quick look shows that the overall impact from these cuts will be minimal for three of the five companies, for two key reasons — because either the cut itself is small or the extent of the pipeline’s revenue to which it applies is small.
Kern River’s rate reduction is based on a settlement with its shippers and not a limited Section 4 filing. We would expect the other settlements that are to be filed, for Gas Transmission Northwest, Hardy Storage Company, Equitrans, Southern Star Central Gas Pipeline, and White River Hub LLC to be similar in size and impact to the Kern River settlement and less like the limited Section 4 proceedings filed by the other four pipelines in the above table.
For everyone else that was waiting for a rate reduction or trying to gauge the revenue impact from the Form 501G, the remaining filers in this first wave have, at least for now, avoided making any changes. We will need to wait to see whether FERC or one of their shippers will come after them.
We list below each of those other pipeline’s post-tax cut ROE and Indicated Rate Reduction, as filed, so that you can make your own assessment of the risk to them of doing nothing at this point.