Cost of Service, Cost Allocation & Rate Design for FERC Regulated Natural Gas Interstate Pipeline Companies

Cost of Service, Cost Allocation & Rate Design for FERC Regulated Natural Gas Interstate Pipeline Companies

November 3-4, 2021 | Online :: Central Time

“Great speakers! A great crash course on the FERC rate setting process!” –Supervisor, Audit, Continental Resources, Inc.

“Enjoyed learning about the topic and felt they made it interesting.” –Staff Project Manager, Williams

“Very well-spoken and was able to present material in a way that was very understandable.” –Manager of Operation, Williams

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.

If you are a FERC employee who is interested in attending this course, our speaker will need to be aware of the project(s) you’re currently working on so he can include case studies and current examples that are not a conflict of interest. Please email the following information to Taylor Stephens ([email protected]) upon your registration:

  • Name of the utility
  • Docket number
  • Any other information pertaining to a project that you would like the speaker to be aware of

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


Wednesday, November 3, 2021 : Central Time

12:45 – 1:00 p.m.
Log In

1:00 – 4:30 p.m.
Course Timing

Course Overview and Introduction

  • Course objectives
  • The regulated natural gas industry
    • Natural Gas Act
    • Natural gas industry structure
    • FERC – purpose, organization, website, funding mechanism
    • 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 (i.e., fuel trackers, modernization trackers, Negotiated Rate Contracts, FERC Form 2, etc.)

Ratemaking Process

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

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 and final system abandonment costs

Questions & Answers Session

Thursday, November 4, 2021 : Central Time

8:45 – 9:00 a.m.
Log In

12:30 – 1:15 p.m.
Lunch Break

9:00 a.m. – 4:30 p.m.
Course Timing

Cost of Service Computation Steps (Continued)

  • Quick review of cost of service steps from session 1
  • Calculation of return on rate base
  • Capital structure, cost of capital, and 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 debt and overall rate of return
  • Estimating the cost of common equity and available methods (impacts of current FERC policy review)
  • FERC’s DCF methodology under review (Remand of Opinion No. 531)
    • Proxy group selection, risk comparisons, and placement within 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 and 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 and 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 and Excel Based Modeling Exercise

Rate Design Key Outcomes

  • Rate design: terminology and history
  • Determining cost inputs for the rate design process
  • Developing/reviewing rate design billing and 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 “clean” Just & Reasonable rate
  • State 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, and cost allocation
  • Functionalization 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 & Participant Questions on 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 & Tariff Considerations

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

    Questions & Answers Session


    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, and master-limited partnership income taxes. He also specializes in 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.

    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 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.

    Drew Cayton, Director, FTI Consulting

    Drew Cayton is a Director in the Power and Utilities practice as a regulatory subject matter expert advising clients in power and gas industries in jurisdictions throughout North America. Mr. Cayton has industry expertise in regulatory policy and rate making with more than 10 years of investigation, litigation, and negotiation experience in matters set before the Federal Energy Regulatory Commission (FERC) and various state commissions.

    Prior to joining FTI, Mr. Cayton spent three years as a consultant advising commercial, industrial, municipal, and utility clients on regulatory impacts at both the state and federal level. His work included investigating and analyzing utility and pipeline cost-of-service, cost allocation and rate design, depreciation, rate of return, and billing determinants.

    Mr. Cayton spent seven years as an Energy Industry Analyst (Litigation) in FERCs Office of Administrative Litigation. As a technical case team leader, Mr. Cayton managed diverse teams tasked with executing extensive investigations into the propriety of various rate and tariff proposals before the FERC. He developed sound positions incorporating relevant Commission precedents, policies, rules, and regulations and then defended those positions in settlement and litigation proceedings. Mr. Cayton was awarded the Commission’s Merit Award for his work leading the FERC Annual Form No. 2 Study. Since 2009, this study has been used at the basis for setting FERC jurisdictional natural gas pipeline rates for review under section 5 of the Natural Gas Act.

    Online Delivery

    We will be using Microsoft Teams to facilitate your participation in the upcoming event. You do not need to have an existing Teams account in order to participate in the broadcast – the course will play in your browser and you will have the option of using a microphone to speak with the room and ask questions, or type any questions in via the chat window and our on-site representative will relay your question to the instructor.

    • IMPORTANT NOTE: After November 30 you will not be able to join a Teams meeting using Internet Explorer 11. Microsoft recommends downloading and installing the Teams app if possible. You may also use the Edge browser or Chrome.
    • You will receive a meeting invitation will include a link to join the meeting.
    • Separate meeting invitations will be sent for the morning and afternoon sessions of the course.
      • You will need to join the appropriate meeting at the appropriate time.
    • If you are using a microphone, please ensure that it is muted until such time as you need to ask a question.
    • The remote meeting connection will be open approximately 30 minutes before the start of the course. We encourage you to connect as early as possible in case you experience any unforeseen problems.


    Please Note: This event is being conducted entirely online. All attendees will connect and attend from their computer, one connection per purchase. For details please see our FAQ

    If you are unable to attend at the scheduled date and time, we make recordings available to all registrants for three business days after the event

    Event Standard RateAttendees
    Single Connection - Cost of Service, Cost Allocation & Rate Design for FERC Regulated Natural Gas Interstate Pipeline CompaniesUS $ 1195.00
    Pack of 5 connectionsUS $ 4,780.00
    Pack of 10 ConnectionsUS $ 8,365.00
    Pack of 20 ConnectionsUS $ 14,340.00
    Call us at 303.770.8800 if you have any specific questions on the volume discounts
    * all other discounts do not apply to license packs

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    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 October 01, 2021 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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    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 1.0 CEUs for this event.

    Instructional Methods

    PowerPoint presentations, interactive group exercise, and group discussion will be used during this course.

    Requirements For Successful Completion Of Program

    Participants must log in each day and be in attendance for the entirety of the course to be eligible for continuing education credit.

    Upon successful completion of this event, program participants interested in receiving CPE credits will receive a certificate of completion.

    Course CPE Credits: 12.0
    There is no prerequisite for this Course.
    Program field of study: Specialized Knowledge
    Program Level: Beginner/Intermediate
    Delivery Methood: Group-Live
    Advanced Preperation: None

    CpeEUCI is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit.

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