Immediate Acceptance of Rate Decrease Affirmed

Trailblazer Unsuccessfully Argued for Simultaneous Implementation of Rate Decreases and Increases
Mark Reishus
July 5, 2019 at 13:56:22 ET
Image

On July 2, 2019, the Federal Energy Regulatory Commission (FERC, or the Commission) ruled on requests for rehearing and clarification of Trailblazer Pipeline Co. LLC, Order Accepting and Suspending Tariff Records, Subject to Refund, and Establishing Hearing and Settlement Judge Procedures, 164 FERC ¶61,074 (2018) [Docket No. RP18-922-000] (July 2018 Hearing Order). Among other things, FERC denied rehearing of its decision to immediately implement decreased rates on Trailblazer Pipeline Co. LLC’s (Trailblazer) Expansion System. Trailblazer argued that this decision unfairly forces it to immediately implement the decreased costs on one portion of its system while disallowing recovery of offsetting cost increases on another part of its system. FERC explained that its “ordinary practice is to accept rate decreases without suspension in order to ensure that the rate decrease goes into effect as soon as possible.”

Trailblazer's Proposals

According to FERC, Trailblazer’s interstate natural gas pipeline system “is divided into two tranches for rate purposes: the Existing System and the Expansion System. The Existing System includes 522,263 dekatherms per day (Dth/d) of capacity that existed before construction of the Expansion System, which consists of 324,000 Dth/d of additional capacity.”

On June 29, 2018, Trailblazer proposed, among other things, to increase certain rates for firm transportation service on its Existing System and to decrease the base rates for firm service on its Expansion System. Trailblazer asked for permission to place all of the proposed rate and tariff changes in effect simultaneously on Jan. 1, 2019.

In addition, Trailblazer proposed an income tax allowance after asserting that it is a non-master limited partnership (MLP) pass-through business form, owned 55 percent by Tallgrass Energy L.P., a publicly traded partnership which has elected to be taxed as a corporation and pays dividends, and 45 percent by 11 private equity funds (Private Owners).

Trailblazer also proposed a cost recovery mechanism (CRM) to recover through an additional reservation rate eligible costs incurred for system safety, integrity, reliability, environmental, and cybersecurity issues.

Protests were filed, including one by the Trailblazer Shipper Group, consisting of Concord Energy LLC, Tenaska Marketing Ventures, and Mieco Inc. The Trailblazer Shipper Group urged FERC to rejected Trailblazer’s CRM proposal outright, without setting it for hearing.

July 2018 Hearing Order

In the July 2018 Hearing Order, issued on July 31, 2018, FERC accepted and suspended, subject to refund, the proposed tariff records for service on the Existing System, effective Jan. 1, 2019, but accepted the proposed tariff records that decrease rates for service on the Expansion System without suspension, effective Aug. 1, 2018. FERC accepted all of the tariff records subject to the outcome of a paper hearing regarding the proposed income tax allowance and an evidentiary hearing regarding all other issues, including the CRM.

Requests for Rehearing

On Aug. 30, 2018, Trailblazer filed a request for rehearing of the July 2018 Hearing Order. “Initially, Trailblazer asks that the Commission correct a misstatement … that Trailblazer’s parent company, Tallgrass Energy …, did not elect to be taxed as a corporation until 2018, as [it] has in fact been taxed as a corporation since 2015 .… Additionally, Trailblazer requests rehearing of the Commission’s decision to bifurcate the implementation of its rates, and in the alternative, clarification that Trailblazer may make a single compliance filing to implement any reallocation of costs ordered by the Commission in this proceeding under [Natural Gas Act (NGA)] section 5. Finally, Trailblazer requests rehearing of the Commission’s decision to set Trailblazer’s income tax allowance for a separate paper hearing, and in the alternative, clarification that Trailblazer will be required to implement any decision made in the paper hearing proceeding at the conclusion of the entire rate case, together with any other rate revisions resulting from this proceeding.”

Also on Aug. 30, 2018, the Trailblazer Shipper Group filed a request for rehearing of the July 2018 Hearing Order. “The Commission erred … by failing to reject outright the [CRM] proposed by Trailblazer … and by instead lumping that proposal in with all of the other proposals that were set for hearing.”

Paper Hearing Order

On Feb. 21, 2019, FERC issued Trailblazer Pipeline Co. LLC, Order on Paper Hearing and Ordering Further Administrative Law Judge Proceedings, 166 FERC ¶61,141 (2019) [Docket No. RP18-922-000] (Paper Hearing Order), in which it made preliminary determinations about Trailblazer’s proposed tax allowance.

Specifically, FERC preliminarily found that: (1) a double recovery appears to result from permitting an income tax allowance for the income tax liability attributable to certain private ownership shares in Trailblazer in addition to a discounted cash flow (DCF) return on equity (ROE); and (2) no such double recovery appears to result from permitting an income tax allowance for the corporate income tax liability attributable to Tallgrass Energy’s ownership share in Trailblazer in addition to a DCF ROE.

FERC explained that these preliminary determinations were subject to change based upon subsequent evidence and argument, and that the ongoing evidentiary hearing established by the July 2018 Hearing Order should fully litigate all income tax allowance issues.

Separate Hearings

FERC dismissed Trailblazer’s request for rehearing to the extent is relates to the decision to establish the paper hearing to examine its proposed income tax allowance.

FERC explained that its procedural Rule 713 “permits requests for rehearing ‘of any final decision or other final order in a proceeding.’ A final order is one that imposes an obligation, denies a right, or fixes some legal relationship as a consummation of the administrative process. In the July 2018 Hearing Order, however, the Commission did not make any final determinations regarding the proposed income tax allowance. The Commission merely established additional procedures to further examine the proposed income tax allowance — an ‘issue of first impression.’ Where, as here, Commission action is not final and will be succeeded by further Commission action, a request for rehearing may be dismissed.”

Timing of Tax Election

FERC dismissed as moot Trailblazer’s argument concerning FERC’s statement that Tallgrass Energy elected to be taxed as a corporation in 2018, rather than 2015.

FERC noted that the Paper Hearing Order “directed that the income tax allowance issue be incorporated into the ongoing evidentiary hearing, as Trailblazer requests.”

Single Compliance Filing

FERC also dismissed as moot Trailblazer’s request for clarification that it may implement any decision on the paper hearing in a single compliance filing after the general rate case proceeding.

According to FERC, “the Paper Hearing Order emphasized that all of the Commission’s income tax allowance findings were preliminary, and the parties remain free to fully litigate those issues in the evidentiary hearing in this proceeding.”

CRM Issue

FERC dismissed the Trailblazer Shipper Group’s request for rehearing, which concerned FERC’s decision to set the proposed CRM for hearing, rather than rejecting it outright.

“Similar to the July 2018 Hearing Order’s treatment of the income tax allowance, the Commission also did not make any final determinations concerning the CRM. Rather, the Commission established hearing and settlement judge procedures to further examine the issues raised by Trailblazer’s filing. The Commission has the discretion and flexibility to decide when and where to evaluate an issue.” In the July 2018 Hearing Order, FERC “determined that an evidentiary hearing was necessary to ‘explore the other issues arising from the filing,’ including the proposed CRM.”

To the extent the Trailblazer Shipper Group “believes that it is aggrieved by the Commission’s decision to establish hearing and settlement judge procedures, we emphasize that participating in an agency hearing does not amount to aggrievement; it is simply a consequence of doing business in a regulated industry.”

Accordingly, because it determined that an evidentiary hearing was necessary to resolve contested issues, FERC “need not address the merits of the CRM at this time. Additionally, arguments regarding consistency with the Policy Statement on Cost Recovery Mechanisms should be addressed in the evidentiary hearing.”

Bifurcated Implementation of Rates

FERC denied Trailblazer’s request for rehearing of the decision to make the proposed rate decreases effective immediately, while suspending the proposed rate increases for five months. “The Commission has broad discretion to determine the length of the suspension period. The Commission’s ordinary practice is to accept rate decreases without suspension in order to ensure that the rate decrease goes into effect as soon as possible.”

FERC found unpersuasive Trailblazer’s attempts to distinguish this case from Transcontinental Gas Pipe Line LLC, Order Accepting and Suspending Tariff Records Subject to Refund and Establishing Hearing Procedures, 140 FERC ¶61,251 (2012) [Docket No. RP12-993-000] (Transco), and Northeast Energy Assocs. v. FERC, 158 F.3d 150 (D.C. Cir. 1998) (Northeast Energy Associates).

In the July 2018 Hearing Order, after observing that NGA section 4(e) only permits the Commission to require pipelines to refund proposed rate increases above the level of the pipeline’s prior rates, FERC cited Transco to support its position that, “where a pipeline proposes a rate decrease for a service, the Commission cannot order refunds, and no point would be served by a rate suspension.”

Trailblazer argued on rehearing that Transco is inapplicable given the fundamental distinctions between Trailblazer’s circumstances and those present in Transco. “Specifically, Trailblazer contends that Transco involved ‘immediate implementation of rate decreases on incrementally priced facilities,’ and that, unlike in Transco, the Expansion System is not merely a lateral facility.”

Trailblazer also cited Northeast Energy Associates as another example of a case concerning transportation on incrementally priced lateral and other pipe-based expansion facilities provided under separate rate schedules. According to Trailblazer, the court “rejected an argument that incremental facilities were integrated with the mainline system such that all rates on the system should be implemented together, finding that there was no reason why ‘some unspecified allocated costs’ required decreased incremental rates for two laterals to be implemented at the same time as increased rates on the rest of the system.”

Finally, Trailblazer cited Tennessee Gas Pipeline Co., Order Accepting and Suspending Tariff Records Subject to Refund and Establishing Hearing Procedures and a Technical Conference, 133 FERC ¶61,266 (2010) [Docket No. RP11-1566-000] (Tennessee), to support its contention that Commission precedent requires implementation of all of Trailblazer’s rates at the same time. “In Tennessee … the pipeline proposed a fuel cost tracker, under which its fuel retention rate would decrease, while its overall transportation rates would increase. The Commission explained that ‘[t]his is a situation where, since the settlement of [the pipeline’s] last rate case, some components of the cost of service allocated among all services have gone up, while other components have gone down by a lesser amount.’ ‘In such circumstances,’ the Commission stated, ‘it is appropriate that all such changes in the cost of service be reflected in [the pipeline’s] rates at the same time.’ ”

According to FERC, in Transco and Northeast Energy Associates, “the Commission either accepted, without suspension, proposed rates that included overall rate decreases for separate services, or was reversed on appeal for not doing so in circumstances that are similar to those present here. Here, the Commission determined that the Expansion System tariff records and the Existing System tariff records propose rates for ‘separate services subject to separate rate schedules.’ Trailblazer does not rebut this determination, but instead echoes its earlier reliance on Tennessee, arguing that there are changes to the ‘components of the cost of service allocated among all services’ and that some components have increased while others have decreased by a lesser amount, so all changes should be reflected in rates at the same time. The Commission rejected this argument in the July 2018 Hearing Order, and we again find it unpersuasive.”

Unlike Trailblazer’s proposal, FERC explained, “in Tennessee the pipeline did not propose an overall rate decrease for any service; rather, it proposed a substantial increase in the non-fuel rates for all services. By contrast, the facts at issue in this case are analogous to those considered by the court in Northeast Energy Associates. Specifically, as with the pipeline in that case, Trailblazer has proposed an increase to its overall cost of service, but has proposed decreases to other, incremental rates (i.e., for the Expansion System). Furthermore, the proposed decreases for the Expansion System are also due to the costs of service for the relevant facilities having decreased, not because of a proposed reallocation of costs among services or a change in rate design, as Trailblazer contends. Accordingly, because Trailblazer’s proposed tariff records for the Expansion System and the Existing System involve separate services subject to separate rate schedules, the July 2018 Hearing Order appropriately directed Trailblazer to implement the decreased rates on the Expansion System without suspension.”

Single Compliance Filing

Trailblazer requested clarification that, if FERC were to determine under NGA section 5 that costs currently allocated to the Existing System should be reallocated to the Expansion System, the Commission would permit Trailblazer to implement any resulting increases and decreases in the rates of the two systems in a single compliance filing at the conclusion of this proceeding, rather than requiring it to file a separate NGA section 4 rate case in order to implement the Expansion System rate increase. Trailblazer expressed concern about the delay resulting from a separate section 4 rate case.

FERC granted this request for clarification. “[W]hen the Commission orders a change in a pipeline’s existing rate design or cost allocation method pursuant to NGA section 5, with the result that the rates of some customers decrease and the rates of other customers increase, the Commission may require the pipeline to implement the offsetting rate increases and decreases simultaneously in a single compliance filing.”

For More Information

See ¶501: Cost-Based Rates for more information on the suspension of proposed rates.

Trailblazer Pipeline Co. LLC, Order on Rehearing and Clarification, 168 FERC ¶61,005 (2019) [Docket No. RP18-922-001].