Five Ratemaking Takeaways From FERC's Panhandle Eastern Pipe Line Company, LP Order

• Published date: 27 December 2022
• Subject Matter: Energy and Natural Resources, Energy Law, Oil, Gas & Electricity
• Law Firm: Akin Gump Strauss Hauer & Feld LLP
• Author: Emily P. Mallen, Scott Johnson and John Goodgame

On December 16, 2022, the Federal Energy Regulatory Commission (FERC) issued Panhandle Eastern Pipe Line Company, LP, its first opinion and order on an initial decision in a Natural Gas Act (NGA) section 4 general rate case proceeding in nearly ten years. The last NGA section 4 general rate case to be fully litigated was El Paso Natural Gas Co., a 2013 decision that derived rates based on a test period that straddled 2010 and 2011.¹ The changes experienced by the natural gas industry since that time are immense. For example, El Paso predated market changes spurred by hydraulic fracturing that accelerated the replacement of coal with natural gas for base generation, the export of liquefied natural gas (LNG), and the general debate over the future dependence upon and use of natural gas, from proposed municipal gas bans to the blending of hydrogen into a gas stream to reduce its carbon footprint.

Yet, despite these monumental shifts in the natural gas marketplace, Panhandle often reads like an old school rate case decision, with principles expounded upon that would be familiar to any rate case lawyer practicing before FERC over the past two decades. While much of the decision is straight and narrow, a number of key themes and takeaways can be found in the text. Here are five of them:

1) The new "last litigated ROE" is 11.25 percent.

It is an axiom of regulatory law that a regulated monopoly, such as an interstate natural gas pipeline company, is permitted the opportunity to earn a reasonable return on its investments. The just and reasonable return on equity (ROE) is one of the most litigated components of any rate case because ROE can be one of the largest drivers of a rate increase or decrease. In Panhandle, FERC set the pipeline's ROE at 11.25 percent. This is the median return generated when FERC averaged the results it obtained from a Discounted Cash Flow (DCF) analysis and a Capital Asset Pricing Model (CAPM) analysis using a five-member proxy group.

FERC policy often uses the "last litigated ROE" as a proxy for just and reasonable rates when it is developing initial rates for existing facilities being acquired by a new pipeline. It has also relied upon the "last litigated ROE" in rulemaking proceedings that concerned pipeline rates. Prior to Panhandle, the last litigated ROE was the El Paso decision's 10.55 percent. Hence, Panhandle marks an increase of 70 basis points and may change the calculation made by pipelines and shippers when they consider...