FERC Juggles Proxy Group In Kern River; Pipeline And Shipper Rebuffed; Wellington Acting Head

In one of the longer-running gas transmission rate dramas in memory, FERC rejected new rates agreed to by Kern River Gas Transmission and almost all of its customers, except Southwest Gas Corp. and BP Energy Co., the latter Kern River’s most dogged antagonist.

The new rates would have been based on 12.5% return of equity (ROE) for Kern River, based on costs of a 2002 expansion project which went into service in 2003. Kern originally filed for a rate adjustment based on 15.1 ROE in 2004. That 2004 rate case has bounced around FERC ever since.

The FERC decision was noteworthy because it was the first time the commission applied a 2008 policy allowing master limited partnerships (MLPs) to be included in proxy groups, transmission companies of like characteristics whose own ROEs are compared to those of a company like Kern asking for new rates. Interstate transmission companies backed their inclusion, although the end result, here in the Kern case, may not have yielded the result Kern was looking for.

John Dushinske, vice president, marketing and regulatory affairs, Kern River Gas Transmission, says the company is disappointed with FERC’s action. “We had hoped they would have found a way to accept the settlement, which 93% of our customers supported.” He adds that Kern is still mapping out its next step.

Joan Dreskin, INGAA’s general counsel, says the FERC action doesn’t imply anything either negative or positive - from the industry’s standpoint - about the commission’s view of proxy groups in upcoming rate cases. “It was a very fact-specific decision based on the MLPs which were around in 2004.”

The proxy group FERC settled on included two corporations, KMI and National Fuel, and three MLPs, Northern Border, TC Pipelines, and KMEP. Kern had suggested a different proxy group and opposed inclusion of TC and National Fuel. BP had pressed for inclusion of Questar and Equitable.

In rejecting the 12.5% ROE and knocking it down to 11.55%, FERC ended up very close to the 11.2% ROE it established for Kern in 2006 in Order 486, before a Supreme Court ruling upset those calculations, forcing FERC to establish a new ROE policy on April 17, 2008. Its chief modification over the previous ROE policy was that it allowed, for the first time, MLPs to be included in proxy groups. Northern Border’s ROE of 11.55% was the median of the five, which is why FERC selected it for Kern.

In Order 486, where FERC established the 11.2% ROE, it had given Kern an extra 50 basis points to compensate for its higher risk profile, compared to the other members of the proxy group. In rejecting the KR settlements and settling on a 11.55% ROE, FERC rejected adding any basis points to that median return, arguing its latest iteration of a proxy group included companies at approximately the same risk level as Kern.

Wellinghoff Named Acting Chairman Of FERC

Industry execs with good luck in Vegas might want to put some money down on President Obama eventually eliminating the “acting” adjective he put in front of the title of new FERC “Chairman” Jon Wellinghoff. Obama named a number of acting chairmen at federal regulatory agencies a few weeks after occupying the White House, probably because there hadn’t been enough time to vet them yet, so there was nothing particularly peculiar about Wellinghoff’s acting designation.