By - Jon Brown

Cost of Service, Cost Allocation & Rate Design for FERC Regulated Natural Gas Interstate Pipeline Companies
June 20-21, 2019 | Denver, CO

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Overview

Laws govern all regulations regarding the establishment of rates that natural gas pipelines may charge and set forth in their tariffs. Regulations and FERC policies continue to change in response to revisions in the laws, economic and financial conditions, gas supply modifications, and market demands. These courses provide attendees a detailed view of natural gas industry, the development of rates and the computation of the cost of service, while providing real world experience applying the pertinent regulations and principles.

Please note, exercises using Microsoft Office and PDF files will be used in class. Therefore, it is requested you bring a laptop computer with Microsoft Office and Adobe Reader software to the class.

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Learning Outcomes

  • Discuss the history of the natural gas industry, laws, and regulations pertaining to rate regulation and related processes
  • Develop expertise pertaining to the regulatory principles and processes followed by natural gas pipeline companies to propose and support just and reasonable rates, terms and conditions
  • Review the economic principles affording an opportunity to earn fair profits on FERC regulated natural gas pipelines
  • Discuss the concepts of functionalized costs, the difference between fixed and variable costs, the allocation and classification of costs to different functions and different classes of service
  • Evaluate and apply principles used to develop and calculate an overall cost of service, which includes; rate base, capital structure and cost of capital, income tax allowance (Post 2017 Tax Cut and Jobs Act Impacts), operating expenses (depreciation, administrative and general, operating and maintenance, taxes other than income), regulatory adjustments (FERC’s 2018 MLP Decisions)
  • Evaluate and apply principles used to allocate costs to different services or different classes of service and develop a proper rate design and calculate rates
  • Discuss the principles utilized to achieve regulatory goals, including techniques used to achieve favorable judgments for FERC related litigation and “Black-Box” settlements
  • Analyze FERC regulatory trends and the implications of those developments on stakeholders involved in FERC’s natural gas pipeline regulation

Credits

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EUCI has been accredited as an Authorized Provider by the International Association for Continuing Education and Training (IACET).  In obtaining this accreditation, EUCI has demonstrated that it  complies with the ANSI/IACET Standard which is recognized internationally as a standard of good practice. As a result of their Authorized Provider status, EUCI is authorized to offer IACET CEUs for its programs that qualify under the ANSI/IACET Standard.

EUCI is authorized by IACET to offer 1.5 CEUs for this event.

 

Instructional Methods

  • This program will use PowerPoint Presentations, group and panel discussions, as well as active participation
  • Please note, exercises using Microsoft Office and PDF files will be used in class. Therefore, it is requested you bring a laptop computer with Microsoft Office and Adobe Reader software to the class

Requirements For Successful Completion Of Program

  • Participants must sign in/out each day and be in attendance for the entirety of the conference to be eligible for continuing education credit.

Agenda

Thursday, June 20, 2019

Cost of Service for Natural Gas Interstate Pipeline Companies

8:00 – 8:30 a.m. :: Registration and Continental Breakfast

8:30 a.m. – 5:00 p.m. :: Course Timing

12:00 -1:00 p.m. :: Group Luncheon


Course Overview and Introduction

  • Course objectives
  • The regulated natural gas industry
    • Natural Gas Act
    • Natural gas industry structure
    • FERC – purpose, organization, website, funding mechanism o Federal regulations, historical decisions, and market responses
    • Code of Federal Regulations -pertinent sections
    • FERC Uniform System of Accounts

FERC Standards for Rate Review

  • Just and Reasonable standard
  • Public Interest standard

Types of Rate and Regulatory Filings and Timelines

  • Section 7 Initial Rates-Incremental Facility Rate Development
  • NGA Section 4 general rate case filings
  • NGA Section 5 rate filings
  • Other proceedings/filings (fuel trackers, modernization trackers, Negotiated Rate Contracts, FERC Form 2, etc.)

Cost of Service Computation Steps

  • Purpose of computing cost of service
  • Source data and documents (FERC Form 2 Review)
  • Concepts of base, test and adjustment periods
  • Concepts of regulatory adjustments
  • Rate base formula, concepts and requirements
    • Gross plant investment
    • Accumulated depreciation and amortization
    • Reserve for negative salvage (Cost of removal, interim retirements, etc.)
  • Asset retirement obligations
  • Working capital components
  • Regulatory assets/liabilities
  • Accumulated deferred income taxes (Impacts of the Tax Cuts and Jobs Act and FERC’s 2018 MLP Decisions)
  • Cost of service formula
  • Operation and maintenance
    • Labor costs
    • Gas costs – Fuel for compressors
    • Material and other costs
    • Fixed and variable costs
  • Administrative and general (directly assigned and/or allocated) (Massachusetts Formula & Kansas-Nebraska (KN) Formula)
  • Taxes other than income
  • Recovery of investment vs. return on investment
  • Depreciation expense
  • Derivation of depreciation and amortization rates
  • Depreciation studies
    • Objectives and methods
    • Interim retirement costs
    • Negative salvage – final system abandonment costs
  • Calculation of return on rate base
  • Capital structure, cost of capital, weighted average cost of capital
  • Actual or imputed capital structure
  • Calculation of the cost of debt and overall rate of return
  • Estimating the cost of common equity, available methods (impacts of current FERC policy review)
  • FERC’s DCF methodology under review (Remand of Opinion No. 531)
    • Proxy group selection–Risk comparisons – placement within the range
    • The DCF formula (One-step to Two-Step)
    • Risk Premium Analysis
    • Capital-Asset Pricing Model
    • Expected Earnings Analysis
  • Calculating the pre-tax rate of return
  • The income tax allowance (Impacts from the Tax Cuts and Jobs Act & FERC 2018 MLP Orders
    • Flow through vs. normalized
    • The effective income tax rate (35% vs. 21%) (Corporation vs. MLP vs. Disregarded Entity)
    • The income tax gross-up and before-tax factors
    • Deferred and current income taxes
    • The composite state income tax rate
    • Income tax adjustments
      • Equity AFUDC as it affects rate base and the tax allowance
      • South Georgia, reverse South Georgia adjustments
      • Other adjustments
    • Other revenue credits

Models and Presentation Requirements for Cost of Service Statements and Schedules

  • Overview of required statements and schedules for cost of service filings
  • Model design considerations
  • Requirements for incremental facilities
  • Cost recovery models
    • Traditional -declining rate base model
    • Levelized cost of service model
    • Usage considerations

Calculating Cost of Service Exercises-Excel Based Modeling Exercise


Current Cost Recovery Issues

  • Cost recovery for safety, integrity and other mandated compliance matters
  • Appropriate depreciation and amortization rates
  • Tax Cuts and Job Act Impacts
  • FERC’s 2018 MLP Orders
  • FERC’s return on equity review (Remand Order 10/18/18)

Questions & Answers Session


Friday, June 22, 2019

Rate Design for Natural Gas Interstate Pipeline Companies

8:00 – 8:30 a.m. :: Continental Breakfast

8:30 a.m. – 5:00 p.m. :: Course Timing

12:00 -1:00 p.m. :: Group Luncheon


Course Overview and Introduction

  • Course objectives
  • Reference materials – course evaluations, CPE/CLE credit
  • Rate design course overview of key outcomes
    • Rate design–terminology and history
    • Determining cost inputs for the rate design process
    • Developing/Reviewing rate design billing determinants
    • Proper rate design development for configured natural gas pipeline systems
    • Rate design case study (Excel based cost allocation and rate design)

Rate Design Principles and Objectives

  • Changing market realities, gas flows, and government policies
  • FERC’s rate objectives
  • Rate refund floor concept – last found Just & Reasonable rate
  • Stated maximum rates vs. discount rates vs. negotiated rates
  • Achieving market-oriented pricing in a regulated environment

Developing Rate Design Billing Determinants – from the G to J Schedules

  • Detailed revenue and billing determinant data for base and test periods
  • Determination of billing determinant contract and quantity adjustments
  • Adjustment methods to recognize discounting impacts
  • Policies concerning treatment of negotiated rate contracts
  • Calculating imputed demand units

Rate Design Cost Factors

  • Cost functionalization, cost classification, cost allocation
  • Functionalizing storage, transmission, and incremental costs
    • Direct and indirect costs
    • KN methodology
  • Classifying costs between fixed or variable
  • Cost allocation to services and zones
  • Allocating costs to peak and non-peak services
  • Developing the statement and schedules required

Rate Calculations

  • Reservation/demand rates
  • Volumetric/usage rates
  • Daily vs. monthly rates
  • Load factor adjusted, “effective” rates
  • 100% load factor rates for IT service
  • Proving the proposed rates generate the revenue requirement

Rate Design Alternatives

  • Postage stamp rates vs. zoned rates
  • Distance-based costs vs. system access costs
  • Distance-based rate designs
    • Mileage-based rates
    • Zone rates
    • Zone matrix rates
    • Zone gate rates
  • Storage rate design

Pipeline Rate Design Case Study and Participant Questions Other Rate Design Issues

  • Term differentiated, seasonal, and short-term rates
  • Park and loan and other service rates
  • Fuel factor rate designs
  • Surcharges
  • Negotiated rates, market-based rates and non-conforming contracts
  • Roll-in rate studies

Additional Rate Design and Tariff Considerations

  • The impact of rate design changes on customers
  • Implementation process for rate design changes
  • Tariff provisions and commission policies

Ratemaking Process

  • Timelines and strategy development
  • Expert witnesses
  • Due diligence process
  • Settlement process – alternatives to achieve agreement among the parties
  • Litigation and hearing

Questions & Answers Session

Instructor

Kenneth A. Sosnick / Senior Director / FTI Consulting

Prior to joining FTI Consulting, Mr. Sosnick spent over five years as a consultant, extensively engaged in the natural gas, crude/product and electricity markets. His work included analysis of natural gas pipeline and crude/product pipeline cost of service rates, levelized rates, market-based rates, discounted and negotiated rates, incremental vs. rolled-in project costs, initial certificate rates, allocation of corporate overhead costs, master-limited partnership income taxes, throughput/system rate design quantities, fuel recover mechanisms, NGA Section 5 rate complaints, return on equity calculations under the discounted cash flow/risk premium/capital asset pricing model/expected earnings methods, depreciation rate and negative salvage rate calculations, asset retirement obligations, FERC Form 1 and 2 filing requirements as well as being proficient in the application of FERC’s uniform system of accounts.

Mr. Sosnick has prepared expert testimony for proceedings at FERC, prepared expert reports assessing and quantifying damages in civil litigation, conducted strategic analysis for a large energy company considering alternatives for its existing pipeline and storage portfolio, written a whitepaper on the impacts of the Tax Cuts and Jobs Act on FERC regulated assets as well as a whitepaper on the impacts of FERC Orders in SFPP, LP Docket No. IS08-390 related to Master Limited Partnerships and other pass-through entities income tax allowance. In addition, he has conducted confidential buy-side valuations and assessments of regulated electric and natural gas utilities in the U.S.

Before working as a consultant, Mr. Sosnick spent 10 years at FERC and spent two years as an auditor in the Office of Enforcement and eight years as an expert witness and a lead technical staff negotiator on major electric utility, interstate natural gas pipeline and crude/product pipeline proceedings in the Office of Administrative Litigation. Mr. Sosnick’s insights were incorporated into the revision of the FERC Form 2 in Docket No. RM07‐9‐000, which lead to the FERC-initiated Section 5 natural gas pipeline proceedings from 2009 to today.

Mr. Sosnick currently teaches an executive FERC Natural Gas 101 course for EUCI and previously taught Practical and Regulatory Training for the Natural Gas Interstate Pipeline Industry at the New Mexico State University Center for Public Utilities, specifically addressing FERC requirements for determining “just and reasonable” rates. Mr. Sosnick holds a B.S. in Accounting from the Indiana University of Pennsylvania. He is a member of the Energy Bar Association, FERC Liquids Committee, FERC Natural Gas Pipeline Committee and FERC Practice Committee.

Location

EUCI Office Building Conference Center

4601 DTC Blvd, B-100

Denver CO, 80237

 

Suggested Hotel

Hyatt Place Denver Tech Center
8300 E. Crescent Parkway
Greenwood Village, CO 80111
0.9 miles away
Nightly Rate for EUCI Attendees: $168.00 (Hot Breakfast included and Free Shuttle to and from EUCI)

Click on the following booking link: Hyatt Place Denver Tech Center – EUCI and use Group Code: EUCI or

Call Central Reservations at 888-492-8847 and ask for the EUCI rate of $168 under the corporate/group code EUCI

Other Nearby Hotels

Hyatt Regency Denver Tech Center
7800 E Tufts Ave
Denver, CO 80237
Phone: 303-779-1234
0.3 miles away

Hilton Garden Inn Denver Tech Center
7675 E Union Ave
Denver, CO 80237
Phone: 303-770-4200
0.6 miles away

Denver Marriott Tech Center
4900 S Syracuse St
Denver, CO 80237
Phone: 303-779-1100
0.7 miles away

Register

Please Note: Confirmed speakers do not need to register and are encouraged to participate in all sessions of the event. If you are a speaker and have any questions please contact our offices at 1.303.770.8800

EventEarly Bird Before
Friday, May 31, 2019
Standard RateAttendees
Cost of Service, Cost Allocation & Rate Design for FERC Regulated Natural Gas Interstate Pipeline CompaniesUS $ 1295.00 US $ 1495.00

Register 3 Send 4th Free!

Any organization wishing to send multiple attendees to these conferences may send 1 FREE for every 3 delegates registered. Please note that all registrations must be made at the same time to qualify.

Cancellation Policy

Your registration may be transferred to a member of your organization up to 24 hours in advance of the event. Cancellations must be received on or before May 17, 2019 in order to be refunded and will be subject to a US $195.00 processing fee per registrant. No refunds will be made after this date. Cancellations received after this date will create a credit of the tuition (less processing fee) good toward any other EUCI event. This credit will be good for six months from the cancellation date. In the event of non-attendance, all registration fees will be forfeited. In case of conference cancellation, EUCIs liability is limited to refund of the event registration fee only. For more information regarding administrative policies, such as complaints and refunds, please contact our offices at 303-770-8800

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