Energy Advisor.pdf

Here are the 5 key takeaways from FERC's Panhandle Eastern Pipe Line Company, LP Order:

1. New "last litigated ROE" is 11.25%: FERC set the pipeline's ROE at 11.25%, which is the median return generated from a Discounted Cash Flow analysis and a Capital Asset Pricing Model analysis. This is an increase of 70 basis points from the previous "last litigated ROE" of 10.55%.

2. Ratemaking uncertainty due to United Airlines v. FERC: The decision continues to grapple with the precedent initiated with the United Airlines decision, which prohibited pipelines organized as pass-through entities from collecting an income tax allowance in their rates.

3. Arguments about the future of natural gas use may be unavailing for ratemaking purposes: FERC set depreciation rates based on a 35-year economic life, rejecting calls for a longer economic life based on abundant natural gas supply. However, this decision sets up a marker for rate case litigants to argue for shorter economic lives based on public policies and market preferences.

4. Treatment of ADIT and EDIT: FERC followed its precedent that permitted the removal of ADIT from rate base and held that the maintenance of a rate base account for EDIT as a regulatory liability did not violate the rule against retroactive ratemaking.

5. Impact on pipeline rates and industry: The decision may change the calculation made by pipelines and shippers when considering whether to litigate a rate case proceeding or agree to a black box settlement without a stated ROE. The new "last litigated ROE" and the treatment of ADIT and EDIT may also impact pipeline rates and the industry as a whole.