March 2019 Vol. 74 No. 3
Washington Watch
Washington Watch
By Stephen Barlas | Washington Editor
GAO Highlights Potential Cyber Security Threats
The Government Accountability Office (GAO) criticized the Department of Homeland Security (DHS) over its oversight of cybersecurity protection at interstate pipelines. The report essentially said the DHS’s Transpor- tation Security Administration’s (TSA) Pipeline Security Guidelines, initially issued in 2011 and revised in March 2018, were unclear and that TSA reviews of pipeline facilities were infrequent in good part because of insufficient staffing.
The GAO report, issued last December, alarmed key members of Congress, including Rep. Frank Pal- lone (D-N.J.), chairman of the House Energy & Commerce Committee, and Sen. Maria Cantwell (D-Wash.), ranking member of the Senate En- ergy and Natural Resources. A letter they sent to DHS Secretary Kirstjen Nielsen called for her to take urgent action to protect America’s pipelines from cyber attack.
Pipeline operators are supposed to self-identify the critical facilities within their system and report their critical facilities to the TSA. The TSA’s Pipeline Security Branch then reviews the critical facilities that pipeline operators have identified. Because of the inadequate TSA guidelines, the GAO found that at least 34 of the top 100 critical pipeline systems deemed highest risk indicated that they had no critical facilities.
There have been no “terrorist” attacks on pipeline facilities though there have been a couple of incidents of domestic fringe groups damaging pipelines such as in March 2017 when activists used blowtorches to cut holes in empty portions of the Dakota Access Pipeline in two states.
FERC Begins a Likely String of Mandatory Rate Cases
The Federal Energy Regulatory Commission’s (FERC) initiation of what amounts to a wholesale review of interstate pipeline rates threatens to shake up the industry and maybe its customers. The Commission is in the early stages of reviewing the rates of about 130 pipeline and storage companies to see if they should lower their rates because of the 2017 tax cut enacted by Congress and a couple of other subsequent agency actions. On Jan. 16, 2019, FERC announced the results of the first tranche of 12 reviews and initiated three Section 5 rate cases against two interstate pipelines and one storage company contending their current rates are “unjust and unreasonable.”
Extrapolating those early results means perhaps 30 companies could be subject to Section 5 rate cases, an unprecedented step by FERC. One industry observer who works with pipeline companies on rates and asks not to be identified, says, “This has never happened before.” He points out that it is possible that while FERC can force companies to lower rates, some companies, rather than subject themselves to a FERC-ordered Section 5 process, might instead voluntarily and peremptorily decide to file a Section 4 rate case. “The FERC process could have the perverse effect of pipelines arguing in Section 4 cases that they should raise their rates,” the industry observer said.
That is exactly what Northern Natural Gas has done. It was one of the two big pipelines slapped with Section 5 cases in January. Northern disputed FERC’s calculation of its return on equity (DOE) as affected by the December 2017 tax cut and filed a motion on Jan. 28 asking FERC to terminate its order subjecting Northern to a Section 5 rate review or, in the alternative, to hold the proceeding in abeyance pending Northern’s filing of its FERC Form No. 2 in April 2019.
This is not the first time that the Commission has pursued a Section 5 action against Northern based on erroneous support. “In 2009, FERC initiated a Section 5 against Northern that concluded with a request from customers to terminate the proceeding with no rate change,” says Mark Hewett, president and CEO of BHE Pipeline Group, which includes Northern. The company says from a purely financial perspective, the issuance of a section 5 action is expected to produce positive results for Northern because the section 5 action will accelerate Northern’s filing of a Section 4 rate increase to allow Northern to recover the significant investment required to modernize its pipeline system. BHE is Berkshire Hathaway’s pipeline subsidiary, which also includes Kern River, which agreed to a settlement, based on the tax cut.
Besides Northern Natural, FERC on Jan. 16 announced Section 5 cases against Bear Creek Storage Company and Panhandle Eastern Pipe Line Company LP. FERC is basing its rates review on an analysis of the Form 501-Gs all companies have filed which were required of all jurisdictional pipelines as a result of Order 849 issued by FERC on July 18, 2018.
Panhandle is an approximately 6,009-mile natural gas pipeline that extends from sources of supply in the states of Texas, Kansas and Oklahoma and runs through Missouri, Illinois, Indiana and Ohio to its northern termini in Michigan and at the International Boundary between the United States and Canada. Bear Creek is owned 50 percent each by Southern Natural Gas Company and Tennessee Gas Pipeline Company, both subsidiaries of Kinder Morgan. Bear Creek’s corporate parent, Kinder Morgan, did not respond to requests for comment.
In each of these initial Section 5 cases, pipeline customers, whether local distribution companies or industrials such as U.S. Steel, are clamoring for FERC to reduce the company’s rates.
Northern is an approximately 14,700-mile natural gas pipeline that provides natural gas services to markets from Texas to Michigan’s Upper Peninsula. Northern reports that it has over 200 shippers. FERC, in moving forward with a Section 5 rate case, said that based on its 501-G Northern has a 17.3 percent return on equity. The commission added that based on that number it is “concerned that Northern’s current rates may be unjust and unreasonable.” If it moves forward, the investigation will look at Northern’s costs and revenues for most of 2018 and for part of 2019.
Northern argues no investigation is necessary because FERC made mistakes in its ROE calculation.
In its Jan. 28 motion, Northern stated its return on equity (ROE) is really 13.7 percent.
The 12 companies identified on Jan. 19 by FERC—the three Section 5 cases plus nine given a pass—account for 12 of the pipelines in Group 1, which has 29 companies. Group 1 companies had the earliest deadline for filing 501-Gs. Group 2 has 30 companies and Group 3 has 66 companies. If three of the first 12 companies examined by the FERC were found to have unreasonable rates, that means 30 or more companies out of the 130 could find themselves in Section 5 territory before all is said and done.
Order No. 849 required all inter- state natural gas companies, with cost-based stated rates, that filed a 2017 FERC Form No. 2 or 2-A, to file a FERC Form No. 501-G informational filing. Using the data in the pipelines’ 2017 FERC Form Nos. 2 and 2-A, the form estimates the percentage reduction in the pipeline’s cost of service resulting from the Tax Cuts and Jobs Act and the Revised Policy Statement, and the pipeline’s current ROE before and after the reduction in corporate income taxes and the elimination of income tax allowances for MLP pipelines. •
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