March 2018 Vol. 73 No. 3

Washington Watch

INGAA Tries to Ward Off Attempt to Force Rate Cuts

Interstate gas pipelines are trying to convince the Federal Energy Regulatory Commission (FERC) to ignore pleas from gas producers and other shippers to cut the rates pipelines charge their customers to reflect lower tax rates enacted by the Tax Cuts and Jobs Act of 2017.

A number of gas shippers and producers such as Anadarko Energy Services Company, Chevron U.S.A. Inc., ConocoPhillips Company and others petitioned the FERC in January to initiate show-cause proceedings against all interstate natural gas pipelines and their storage businesses for their upcoming rate cases. The proceedings would force the pipelines to demonstrate that their existing jurisdictional rates continue to be “just and reasonable” following the passage of the new tax law. The petitioners want FERC to order an immediate rate reduction, based upon the Commission’s calculations, if a filed cost and revenue study demonstrates that revenues from services offered on the interstate natural gas pipeline or storage company’s system exceed the costs, following adjustments to account for changes implemented under the new tax cut law.

When pipelines file rate cases, they include their income tax payments as one of their expenses in arguing for rates that are “just and reasonable.” Section 13001 of the Tax Act reduced the tax imposed on corporations from as high as 35 percent, to a flat rate of 21 percent; and for owners of partnerships and other pass-through entities from as high as 39 percent, to 20 percent. The Tax Act also eliminated the alternative minimum tax for corporations.

In a Jan. 30 letter to FERC Chairman Kevin McIntyre, INGAA CEO Donald Santa called the joint petition and separate petitions filed by some of the parties contrary to both FERC policy favoring full-rate proceedings, and the law governing the freely negotiated agreements that establish the rates of many interstate pipelines. If granted, the petitions would compel FERC to open settlement agreements that may have rate moratoriums and to assign values to the cost components of black-box settlements.

Santa explained that FERC determines whether an overall rate is just and reasonable, not any individual component of the rate. If FERC were to grant the petitions and “issue a generic order compelling pipelines to adjust an individual component of their respective recourse rates,” Santa said it would not yield a just and reasonable result in many cases, due to offsetting cost increases and possible changes in a pipeline’s overall contract portfolio.

The petitioners want FERC to direct the pipelines and storage companies to do the following:
Use the most recently available, 12-month, cost and revenue data.

Adjust the income tax allowance to take into account the changes implemented under the new tax law, including the impact of the lower rate on the income tax allowance, as well as reducing and refunding the Accumulated Deferred Income Tax account.

Indicate the rate of return/capital structure assumptions.

Indicate the cost allocation and rate design methodologies that underlie the existing rates.
Include a derivation of the per unit rates.

FERC Examines Adequacy of Emergency Gas Supplies

New concerns about the adequacy of natural gas infrastructure came to the fore this winter as a result of the “bomb cyclone” cold-weather event reinforcing the urgency of the FERC’s Jan. 8, 2018, order on grid reliability. In issuing that order, FERC terminated its consideration of a proposal from Energy Secretary Rick Perry that FERC subsidize energy generators using coal and nuclear as a means of slowing down the retirement, especially of coal-dependent utilities. The FERC order will look at the resiliency of regional and independent transmission organizations (RTOs/ISOs), which are responsible for insuring the adequacy of electricity via pricing in various regions of the U.S.

The FERC order endorses the underlying concern of the Perry proposed rule, but does not go so far as to endorse the need for “out-of-market” payments that RTOs and ISOs can make to generators to ensure supply in extreme weather. However, FERC will certainly consider pricing reforms, which could benefit pipelines.

In comments on the Perry proposal, which it opposed, the association stated that “INGAA agrees that there is an opportunity to build a more reliable and resilient grid, and urges the Commission to determine how to value and incentivize reliable and resilient performance attributes on a market-based, fuel-neutral basis in keeping with its precedent.” INGAA has argued in the past that too-few, gas-fired generators – particularly in the Northeast, where pipeline capacity is limited – have contracted for primary, firm contracts, the lack of which help create natural gas supply interruptions during severe weather.

The Order that FERC issued on Jan. 8, 2018, showed a split among commissioners, with Neil Chatterjee alone making it clear he would like to see quick action to determine whether interim measures are needed to avoid near-term bulk power system resilience challenges. He wanted each RTO/ISO to either submit tariff revisions to provide interim compensation for existing generation resources that may provide necessary resilience attributes and are at risk of retirement, or show cause why it should not be required to do so. But Chatterjee appeared to be on the losing side of that issue, as the other four commissioners appeared to be less sympathetic to the view that the bulk power system was in immediate danger of becoming unreliable.

FERC has been concerned about the reliability of the power grid for some years now, and has worked with the North American Electric Reliability Corporation (NERC) on its reliability standards, including its continued work on Critical Infrastructure Protection standards to protect the system against cybersecurity and physical security threats. Pipeline cybersecurity efforts came up at hearings in the Senate Energy and Natural Resources Committee on Jan. 23, 2018, where reliability of the bulk power system and FERC’s setting aside of Energy Secretary Perry’s request for coal and nuclear subsidies was the topic du jour. There, PJM President and CEO Andrew Ott highlighted what he implied were weaker cybersecurity standards for the natural gas industry, compared to the electric industry, when he testified before the Senate Energy and Natural Resources Committee a year earlier. PJM Interconnection is the largest RTO in the U.S.

The electric industry is subject to mandatory physical and cybersecurity standards, ultimately  determined and enforced by FERC. The natural gas pipeline industry is subject to different, high-level voluntary guidelines issued by the Transportation Security Administration, augmented with yet a different level of regulation by the Pipeline and Hazardous Materials Safety Administration.

“I say this not to impugn work that the pipelines have done in this area but to point out that the two industries face vastly different compliance obligations, particularly in the area of cybersecurity,” Ott explained. “By definition, these dichotomies will inevitably hinder an optimal integrated and coordinated approach to common threats from both physical and cyberattack. Whether or not we need to change the regulatory structures around physical and cybersecurity between these two industries is an issue I will leave for you as policymakers.”

Responding to Ott’s comments, Cathy Landry, INGAA spokesperson, said, “The Transportation Security Administration, in close collaboration with industry and the Industrial Control System Cyber Emergency Response Team, (part of the Department of Homeland Security), is in the process of updating the current version of the TSA Pipeline Security Guidelines. This new version is anticipated for release sometime during the first half of this year. It will include a new section for cybersecurity which will align with the NIST Cybersecurity Framework. It was developed with specific input from ICS-CERT.” ICS-CERT is the Industrial Control Systems Cyber Emergency Response Team.

The Senate hearings also featured testimony from Gordon van Welie, president and CEO of ISO-NE. “We’ve known for several years that when it gets cold, New England does not have sufficient natural gas supply infrastructure to meet demand for both home heating and power generation,” he said. “Constrained pipelines resulted in substantially higher natural gas prices which led to much older and less efficient oil- and coal-fired power plants running ‘in merit.’ The deployment of oil inventories creates a number of problems which regions like to avoid whenever possible.”

Sen. Lisa Murkowski (R-Alaska), chairman of the Senate Energy and Natural Resources Committee, also voiced her concern about the insufficiency of natural gas pipeline infrastructures.

PJM’s Ott pleaded for some of the pricing reforms FERC will be considering as comments come in on the Order it issued in January. Of course, neither the Senate nor the House can do anything about FERC’s using of “out-of-market” pricing to avoid cold-weather fuel shortages. But Ott was raising the issue because new FERC Chairman Kevin McIntyre was sitting within close earshot.

Ott said current FERC rules limit the ability of certain generating units to set prices in a given hour. The DOE analysis, which undergirded the Perry proposed rule the FERC set aside, included recommended pricing reforms having to do with clearing prices that can be too low during extreme weather events to incentivize some suppliers to make energy available.

He specifically referred to the “out-of-market payments” PJM and other wholesalers pay to generators for their costs to run when an RTO or ISO calls on them for reliability purposes. These costs are not currently reflected in PJM’s energy pricing, which hurts the RTO’s flexibility and leverage during harsh weather occurrences.

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