FERC opened an investigation and ordered a hearing to determine if Southwest Gas Storage Co. may be substantially over-recovering its cost of service, resulting in unjust and unreasonable rates. FERC also found that twenty gas companies have complied with the filing requirements of Order No. 849 and terminated their FERC Form 501-G proceedings without any further action, finding their rates to be just and reasonable. In July 2018, FERC issued Order No. 849 which required each interstate natural gas pipeline to file a one-time report (Form No. 501-G) and provide a rough estimate of its return on equity before and after passage of the Tax Cuts & Jobs Act of 2017 and changes to the Commission’s income tax allowance policies in response to rulings by the D.C. Circuit.
The investigation and hearing on Southwest will determine whether the existing rates are just and reasonable in accordance with section 5 of the Natural Gas Act (NGA). The Commission has not yet determined a just and reasonable return on equity for Southwest Gas Storage, and therefore set this issue, among others, for hearing before FERC’s administrative law judges. FERC directed the company to file a cost and revenue study for the latest available 12-month period within 75 days of the issuance of its order.
The 20 companies whose FERC Form 501-G proceedings were terminated without further action (RP19-274-000 et al.) are: American Midstream (AlaTenn); Big Sandy Pipeline, LLC; Bison Pipeline LLC; Black Hills Shoshone Pipeline, LLC; Centra Pipelines Minnesota Inc.; Central Kentucky Transmission Company; Chandeleur Pipe Line, LLC; Discovery Gas Transmission LLC; Dominion Energy Questar Pipeline; Elba Express Company, L.L.C.; Fayetteville Express Pipeline LLC; Garden Banks Gas Pipeline, LLC; Gulf Shore Energy Partners, LP; Gulf States Transmission LLC; KPC Pipeline, LLC; Lake Charles LNG Company, LLC; MarkWest New Mexico, L.L.C.; PGPipeline LLC; Southern LNG Company, L.L.C.; and Western Gas Interstate Company.
Recently FERC has issued orders directing TOs to eliminate the two-step approach for addressing ADIT in formula rates with projections. Previously, many TOs believed that the IRS required, for projecting ADIT balances, use of its proration methodology and then, in addition, use of the conventional 13-month averaging to that proration result. TOs thought the averaging was necessary in order to meet the IRS’ consistency requirements. In April 2017, the IRS issued a Private Letter Ruling (PLR) in which it clarified that the averaging, in addition to the proration methodology, was unnecessary. Thus TOs have been making filings to eliminate the averaging from the ADIT projection.
For the True-up calculation, all TOs have held that the IRS proration requirement does not apply to the calculation of the revenue to which the utility would have been entitled had it based its projected rate computation on what turned out to be the actual results for that period. The result is to ignore proration in the True-up calculation and reverse the impact of the application of the proration requirement embedded in the projected rate calculation (i.e., the true-up would be to a revenue number that did not reflect any proration). However, in the PLR, the IRS said that to make proration matter, the freedom from proration can only apply to the variations in the changes in the ADIT balance used in the True-Up component, not to the entire change in the ADIT balances used in that computation. The IRS stated that the True-Up component is determined by reference to a purely historical period and, accordingly, there is no need to use the proration formula to calculate the differences between projected ADIT balance and the actual ADIT balance during the period. In calculating the True-Up, proration applies to the original projection amount, but the actual amount added to the ADIT over the test year is not modified by application of the proration formula.
ATC proposed to FERC in EL18-157 not to apply the proration formula to the variances in the monthly ADIT balances but, instead, to apply its “normal” regulatory convention (a 13-month average) to those variances. ATC proposed to add the result of this calculation to the ADIT balance originally used in the calculation of the projected rate – that is, the prorated balance. In this way, ATC would preserve the effect of the proration requirement embedded in the projected rate, avoid applying proration to the differences between projected and actual ADIT balances and comply with the consistency rule with respect to those variances.
GridLiance and Certain MISO TOs take a different and more complicated approach in the True-up calculation. The differences attributable to over-projection of ADIT in the annual projection will result in a proportionate reversal of the projected prorated ADIT activity to the extent of the over-projection. The differences attributable to under-projection of ADIT in the annual projection will result in an adjustment to the projected prorated ADIT activity by the difference between the projected monthly activity and the actual monthly activity. However, when projected monthly ADIT activity is an increase and actual monthly ADIT activity is a decrease, actual monthly ADIT activity will be used. Likewise, when projected monthly ADIT activity is a decrease and actual monthly ADIT activity is an increase, actual monthly ADIT activity will be used.
Please contact Dumais Consulting if you want to see examples of both approaches.
In ER19-303, FERC awarded Duquesne the Abandonment Incentive and CWIP in rate base for a PJM project named the Beaver Valley Deactivation Transmission Project. The Project is part of a suite of projects needed to address reliability violations resulting from FirstEnergy’s intent to deactivate about 4,000 MW of nuclear generation between May 31, 2020 and October 31, 2021 (four generation facilities are expected to be deactivated, including Davis-Besse Unit 1, Beaver Valley Unit 1, Beaver Valley Unit 2, and the Perry Unit). The Beaver Valley Units 1 and 2 are located within Duquesne’s service territory in southwestern Pennsylvania. The Project consists of constructing a new Elrama 135 kV substation, connecting seven 138 kV transmission lines to the new substation, reconductoring several transmission lines, establishing a new circuit, and constructing transmission tie lines from the new Elrama substation to a FirstEnergy substation. Duquesne estimates that the Project will cost $38.4 million and has a projected in-service date of June 1, 2021.
In ER19-297, FERC awarded Mid-Atlantic Interstate Transmission, LLC (MAIT) and West Penn Power Company (West Penn) the Abandonment Incentive for transmission upgrades, which comprise the Generator Deactivation Project, a PJM project needed to address reliability violations resulting from the same nuclear retirements described above. The Generator Deactivation Project is estimated to cost $144.4 million and will include three transformer replacements, construction of a new substation and transmission lines, and reconductoring of existing transmission lines and terminal equipment enhancements. The Generator Deactivation Project has a projected in-service date of June 1, 2021.
FERC also confirmed that both Duquesne and MAIT and West Penn are eligible to seek recovery of 50 percent of their portion of prudently-incurred abandonment costs, net of the closing out of the transaction and sale of associated assets, for both projects expended prior to the date of issuance of this order. However, such recovery, along with any recovery pursuant to the Abandonment Incentive, is subject to a future filing establishing the justness and reasonableness of including such costs in rates.
Duquesne did not propose accounting procedures to ensure that customers will not be charged for both capitalized AFUDC and corresponding amounts of CWIP proposed to be included in rate base and must do so on compliance.
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates.