FERC May Regulate Master Limited Partnerships

A policy statement the Federal Energy Regulatory Commission proposed recently would make way for the commission to consider master limited partnerships as it determines what rates oil and natural gas pipelines should be allowed to charge customers. The proposal represents a significant change in the commission's rate-making policy, FERC Chairman Joseph Kelliher noted during the commission's monthly agenda meeting in Washington.

"We're reacting to ... pretty striking structural changes that have occurred in both the natural gas and oil pipeline sector in recent years," he said.

Master limited partnerships such as Boardwalk Pipelines (BWP), which supplies Citizens Gas via Texas Gas Transmission, are organizations that are publicly traded on securities exchanges but carry unique tax benefits.

Lured by those tax advantages and rising commodity prices, more and more investors are buying into energy-related MLPs.

That growth of MLPs, particularly those in the pipeline sector, is now prompting FERC to consider regulatory changes.

FERC tends to set rates based on energy companies' costs of doing business. To determine an appropriate rate a pipeline may charge customers, FERC considers a proxy group of companies within the industry to determine a reasonable range of returns on investment.

Currently, the commission requires that companies included in the proxy group are publicly traded, tracked by an investment information service and have pipeline operations as a large portion of their business. Specifically, under current rules, a company's pipeline business would need to account for at least 50% of the company's assets or operating income.

However, mergers have left the industry with fewer and fewer oil and gas companies that meet the latter requirement, FERC members said at the commission meeting.

Previously, the commission has rejected use of MLPs in the proxy group. But in light of the "shrinking proxy group," it makes sense to consider allowing MLPs to be included in gas or oil pipeline proxy groups - if their cash distributions are capped at their reported earnings, Kelliher said.

"In short, changes in both the natural gas and oil pipeline sectors have forced the commission to revise the way it constitutes a proxy group for purposes of calculating returns on equity," he added. "The reality is both sectors have increasingly adopted the MLP structure as the framework for the pipeline business."