MoGas, Mo' Money: Court Upholds Premiums in Pipeline Case

By Casey C. Sullivan, Esq. on April 13, 2015 | Last updated on March 21, 2019

FERC properly allowed premium rates to be applied in the sale of a pipeline connecting Missouri and Illinois, the D.C. Circuit ruled this week. After MoGas, a pipeline operator, purchased a 5.6 mile natural gas pipeline running under the Mississippi River, the Federal Energy Regulatory Commission (FERC) allowed it to charge premium rates as a "benefits exception" to usual limitations.

The Missouri Public Service Commission sued, arguing that purchasing the pipeline served no public benefit and ran counter to FERC precedent. The court, however, disagreed, choosing to defer to FERC's interpretation of its own regulations.

Who Benefits from a Pipeline Sale?

FERC regulates interstate energy sales, natural gas pricing and oil pipeline rates. When a pipeline is sold, regulations prevent buyers from incorporating any premium paid to purchase the pipe into their rates by including the seller's depreciated original cost in computations. This prevents facilities from being sold at inflated prices. However, when a premium is for a public benefit, an exception applies and the purchaser may be able to pass the costs of the premium on to consumers.

For the benefits exception to apply, the pipeline must be converted to a new use and there must be "substantial, quantifiable benefits to ratepayers." Here, the pipeline had been switched from oil to natural gas. FERC also found that it would result in the increased use of an underutilized facility. Finally, the price of purchase was lower than what new construction would cost. That was enough of a benefit for the agency.

Cost Differential Can be a Public Benefit

The Missouri Public Service Commission failed to examine whether there were actual benefits to consumers from the pipeline sale. This would have, they argued, required FERC to address whether consumers opposed the sale. The court found that FERC precedent supported the finding of a public benefit. The pipeline was purchased for $1.4 million less than new construction would have cost, providing the necessary benefit. Whether or not other benefits that FERC had identified in pipeline precedents were present was not an issue.

The cost differential itself can satisfy the benefit exception's public benefit requirement, the D.C. Circuit ruled. The clearest benefit, the court found, is the likelihood that the lower cost of acquisition would be passed along to consumers in the form of lower rates, justifying the recovery of the premium.

Expect more pipeline controversy, as American energy consumption continues to switch from coal to natural gas. In the meantime, the court's ruling supports the likelihood that more existing facilities will be repurposed for new uses.

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