The Daley Note: November 2, 2023
TC Energy’s (TRP) Gas Transmission Northwest (GTN) has proposed a new rate design that could significantly raise future revenue for the pipeline, according to East Daley estimates.
In September, GTN initiated a Section 4 rate case at the Federal Energy Regulatory Commission (FERC) to change the pipeline’s rate structure for shippers in California and the Pacific Northwest. GTN is proposing to move from a rate system currently based on shipping distance (per dth/mile) to a zone-based rate structure.
The proposed zones include a northern zone that runs from Kingsgate, ID to Stanfield, OR, and a southern zone that runs from Stanfield to Malin, OR at the California border (see pipeline map in in Energy Data Studio). Transportation between points within the North zone would be billed at $0.1468/dth, and transportation between points within the South zone would be billed at $0.1525/dth. Shippers moving gas between the North and South zones would pay $0.2705/dth under the GTN proposal.
Using East Daley’s Shipper Contract screen in Energy Data Studio, we can analyze the contracts currently in effect on GTN (see chart). EDA estimates 72% of volumes on GTN would be billed at the inter-zonal rate of $0.2705/dth, while only 14% and 15% of volumes would be billed at the much lower intra-south and intra-north rates, respectively.
We estimate GTN would generate 21% more revenue under the proposal vs the current pipeline rate structure. The effective change would begin in April 2024 if the new rates are approved (see chart).
Several shippers have filed complaints in protest of the proposal, claiming that the rate design is “unjust and unreasonable and, therefore, unlawful.”
FERC determines the reasonable tariff rate for pipelines based on ROE calculations. GTN discloses that the current ROE of the pipe is 10.26%, which falls on the low side of the 8%-18% ROE that FERC has historically allowed pipelines to earn. Rate case testimony indicates that the targeted ROE after the change in tariff structure is 12.95%.
The average remaining contract duration on GTN is 6.5 years, according data in the Shipper Contract screen. If the new rate structure is approved by FERC, GTN would have a significant volume of contracts locked in at higher rates for the medium term.
Once contracts begin to roll off, shippers may seek contracts that ship gas through Stanfield, as the delivery point is classified as a neutral point within both the North and South zones. This incentive could create upside for WMB’s Northwest Pipeline, which interconnects with GTN at Stanfield. However, Northwest Pipeline is already fully contracted and runs full from Canada during the peak winter demand seasons, so the pipeline would need to expand to see gains. - Zach Krause Tickers: TRP, WMB.
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