The following post is an excerpt from a report by Regulatory Research Associates (RRA), a group within S&P Global Market Intelligence. To learn more about the full report, please request a call.
Recently, various factors have focused increasing attention on natural gas pipelines, including the continued rapid growth of gas production in the Marcellus and Utica shale regions, the rising demand for natural gas in New England to serve gas heating and power generation load, and the need to replace or modernize aging pipeline infrastructure. RRA notes that the gas pipeline industry is taking on even greater importance as gas prices remain low, spurring the use of natural gas in various non-traditional applications, and expanding the use of natural gas for electric power generation.
In light of this heightened attention, RRA undertook a review and analysis of certain publicly available data related to the Federal Energy Regulatory Commission and gas pipeline infrastructure for the years 2007 through 2016, and published a report March 9 summarizing its findings. The new report includes a brief history of FERC regulation, a description of how new gas projects are analyzed and approved by FERC, and how the authorized ROE is established for new gas pipeline projects. During this analysis, RRA noted certain trends, which are highlighted below.
In 2016, FERC approved 38 "major" gas pipeline projects in the U.S., representing 1,111 miles of new pipe, 13,815 MMcf/d of new capacity, and approximately $9.1 billion in new investment. FERC determines which projects qualify as "major," and these are posted on the commission's website.
The 38 projects approved in 2016 were located in 23 different states, predominately in the eastern third of the country, with a particular concentration in the Marcellus and Utica shale states of Pennsylvania, West Virginia, Ohio and New York. Nine of the projects are located at least in part in Pennsylvania. The Southeast and Gulf Coast regions were also well represented by new pipeline projects in 2016, with seven of the 10 largest projects, as measured by estimated cost, in whole or in part in the states of Alabama, Florida, Georgia, Louisiana, North Carolina, Texas and Virginia.
During the 2007 through 2016 period, FERC approved 234 "major" gas pipeline projects in the U.S., representing 10,250 miles of new pipe, 121,317 MMcf/d of new capacity, and approximately $51.2 billion in new investment. From 2007 through 2010, the total estimated costs for projects approved by FERC ranged from $6 billion to $8 billion annually. A steep decline in total dollar volume began in 2011, and by 2013 the total estimated costs for approved projects reached only about $1.4 billion. That downward trend sharply reversed beginning in 2014, with total approved project costs rising through 2016, ultimately reaching the $9.1 billion annual figure mentioned above.
FERC sets rates for interstate gas pipeline services in a number of different types of proceedings:
- A pipeline's request to increase its rates is made in a filing with FERC under Section 4 of the Natural Gas Act of 1938, or NGA.
- Under Section 5 of the NGA FERC may require prospective changes in the rates charged by a gas pipeline when it can be demonstrated that the rates are no longer just and reasonable.
- When a company files for Certificate of Public Convenience and Necessity to construct a new pipeline or to expand existing facilities in order to offer new or additional services. This is the most common method FERC uses.
FERC has historically used the two-step discounted cash flow, or DCF, methodology in establishing a gas pipeline's authorized ROE. The two-step DCF analysis incorporates both short-term and long-term growth measures, and FERC has used Gross Domestic Product, or GDP, as the long-term growth rate. The FERC typically uses the median ROE resulting from the DCF analysis.
When analyzing initial rates for new greenfield pipeline projects in recent years, FERC has frequently approved an ROE of 14%, as long as the equity component of the project's capital structure is no more than 50%. However, in an early-2017 case, FERC approved a 13% ROE and a capital structure of 50% debt, 50% equity for one company. When setting incremental rates for expansions of existing pipeline systems, FERC's general policy is to use the rate of return components, including the authorized ROE, approved in the pipeline's last general rate case proceeding.
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