[Federal Register: December 5, 2007 (Volume 72, Number 233)]
[Notices]
[Page 68578-68580]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05de07-45]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. PL07-2-000]
Composition of Proxy Groups for Determining Gas and Oil Pipeline
Return on Equity; Notice of Technical Conference and Request for
Additional Comments
Issued November 15, 2007.
Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G.
Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.
1. On July 19, 2007, the Commission issued a proposed policy
statement, concerning the composition of the proxy groups used to
determine gas and oil pipelines' return on equity (ROE) under the
Discounted Cash Flow (DCF) method.\1\ Initial and reply comments were
due on August 30 and September 19, 2007 respectively. In this notice,
the Commission is requesting additional
[[Page 68579]]
comments on or before December 14, 2007, solely on the issue of master
limited partnership growth rates. The Commission is also establishing a
technical conference for further consideration of that one issue. The
technical conference will be held on January 8, 2008. The technical
conference will be organized around panels whose members will be
selected from among the parties who file comments. However, all parties
and the public are invited to attend. Additional comments on the growth
rate issue discussed at the technical conference will be due on January
25, 2008.
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\1\ Composition of Proxy Groups for Determining Gas and Oil
Pipeline Return on Equity, 120 FERC ] 61,068 (2007).
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I. Background
2. The Commission uses a DCF financial model to develop a range of
returns earned on investments in companies with corresponding risks for
determining the ROE for natural gas and oil pipelines. In the proposed
policy statement, the Commission proposed to modify its current policy
regarding the composition of the proxy group used in its DCF analysis
to allow master limited partnerships (MLPs) to be included in the proxy
group. The proposed policy statement found that cost of service
ratemaking requires that firms in the proxy group be of comparable risk
to the firm whose ROE is being determined in a particular rate
proceeding. The proposed policy statement found that expanding the
proxy group to include MLPs whose business is more narrowly focused on
pipeline activities would help provide a more representative proxy
group. The Commission proposed to cap the cash distribution used to
determine an MLP's return under the DCF method at the MLP's reported
earnings. The Commission found that this was necessary to exclude that
portion of an MLP's distributions constituting return of equity. The
Commission also proposed to require a showing that the MLP has had
stable earnings over a multi-year period, so as to justify a finding
that it will be able to maintain the current level of cash
distributions in future years. The proposed policy statement found that
these requirements should render the MLP's cash distribution comparable
to a corporation's dividend for purposes of the DCF analysis. Under the
proposed policy, the Commission would leave to individual cases the
determination of which specific MLPs and corporations should be
included in the proxy group.
3. Interested parties filed some twenty-two initial comments and
fourteen reply comments, which focused on three issues: (1) Whether
MLPs should be included in the gas pipeline proxy group at all; (2)
whether the proposed cap on the MLP cash distributions used in the DCF
analysis is necessary or adequate; and (3) whether the short and long
term growth component of the DCF model should be modified given the
financial practices of MLPs. Other points include the potential
distorting effects of MLP tax treatment, the payouts by MLPs, the
general partner's incentive distributions, and the relative returns to
the limited and general partners. One party requested a technical
conference to discuss the issues.
4. Based on its review of the comments to date, the Commission
believes that there is adequate material in the record to address most
issues without additional comments or addressing them at the technical
conference. These include: (1) Whether the Commission should permit
MLPs to be included in the proxy group for both gas and oil pipelines;
(2) the proposed earnings cap on the MLPs' distributions; and (3)
whether the Commission should explore other means of determining the
equity cost of capital at this time.
5. However, the Commission concludes that the current record is
inadequate for deciding how an MLP's growth should be projected for
purposes of the DCF analysis. Currently, the Commission projects growth
in dividends based on an average of short- and long-term growth
projections, with two-thirds weight given to the short-term growth
forecast and one-third weight given to the long-term growth forecast.
The Commission uses the five-year growth forecasts published by the
Institutional Brokers Estimate System (IBES) for the short-term growth
forecast; long-term growth is based on forecasts of the growth of the
economy as a whole, as reflected in Gross Domestic Product (GDP). The
commenters generally agree that MLPs will have lower growth potential
than corporations, because of their distributions in excess of
earnings. However, the existing record is insufficient for the
Commission to determine (1) whether its current method of projecting
growth adequately reflects the lower growth potential of MLPs,
particularly over the long term,\2\ and (2) if not, what alternative
method should be used to project the growth of MLPs.
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\2\ See MLPs: Safe to Come Back into the Water, Wachovia Capital
Markets, LLC, Equity Research Department, at 9-10 (August 20, 2007),
attached to the initial comments of Enbridge Energy Partners, L.P.
and cited to in the reply comments of NYPSC at 5, using a projected
MLP long term annual growth rate of 2.5 percent. Currently, GDP is
projected to grow at a rate of approximately 4.5 percent.
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6. Therefore, the Commission has determined that the current record
must be supplemented before the Commission can resolve the issue of how
to project MLP growth rates, if the Commission ultimately decides to
permit the use of MLPs in the proxy group. In addition, the Commission
recognizes that the various components of the DCF model interact with
one another, with the result that the appropriate growth projection for
MLPs necessarily depends to some extent on whether the Commission caps
the distributions used to determine an MLP's dividend yield. Parties
should focus their comments and discussion at the technical conference
on the issue of the appropriate MLP growth projection and, in
particular, the appropriate growth projection if the Commission, as
recommended by certain parties, does not cap the distributions used to
determine dividend yield. In order to adequately consider the issue of
whether to cap such distributions, the Commission needs a more complete
record on the issue of growth projections.
II. Request for Comments and Notice of Technical Conference
7. The Commission requests that the parties submit additional
comments on the issue of the appropriate growth component to be used in
the Commission's DCF model in the context discussed above, when
determining the equity cost of capital for an MLP. The comments must be
filed on or before December 14, 2007.
8. The Commission is also establishing a staff led technical
conference to discuss the MLP growth issue to be held on Tuesday,
January 8, 2008. This conference is intended to be a working session
focused solely on the appropriate growth component to be used in the
Commission's DCF model when determining the equity cost of capital for
an MLP. It is, therefore, not appropriate to discuss at this technical
conference how the other components of the DCF model should be applied
in determining the equity cost of capital of an MLP. The conference
will be organized into a limited number of panel discussions.
9. Parties interested in serving on a panel should so indicate in
their comments. To ensure that all points of view are represented and
to help the conference move expeditiously, the Commission encourages
parties sharing the same position to coordinate their efforts and
designate one speaker to represent their shared position.
[[Page 68580]]
10. The Commission emphasizes that industry growth rates are a
highly technical, if critical issue. For this reason the Commission
strongly urges any party filing comments, or participating in a panel,
to provide technical analyses and utilize a speaker at the conference
who can respond to technical questions from the staff. The list of
prospective panel members will be announced in a later notice.
11. All parties, whether or not selected to participate in a panel,
may file post-conference comments on or before January 25, 2008. The
post-conference comments should address only the MLP growth projection
issue discussed at the conference. For more information about the
conference or participation in panels, please contact John Robinson by
e-mail at john.robinson@ferc.gov or by phone at 202-502-6808.
III. Procedure for Comments
12. The comments requested by this notice must refer to Docket No.
PL07-2-000, and must include the commentor's name, the organization it
represents, if applicable, and its address. To facilitate the
Commission's review of the comments, commentors are requested to
provide an executive summary of their position. Additional issues the
commentors wish to raise should be identified separately. The
commentors should double space their comments.
13. Comments may be filed on paper or electronically via the
eFiling link on the Commission's Web site at http://www.ferc.gov. The
Commission accepts most standard word processing formats and commentors
may attach additional files with supporting information in certain
other file formats. Commentors filing electronically do not need to
make a paper filing. Commentors that are not able to file comments
electronically must send an original and 14 copies of their comments
to: Federal Energy Regulatory Commission, Office of the Secretary, 888
First Street, NE., Washington, DC 20426.
14. All comments will be placed in the Commission's public files
and may be viewed, printed, or downloaded remotely as described in the
Document Availability section below. Commentors are not required to
serve copies of their comments on other commentors.
IV. Document Availability
15. In addition to publishing the full text of this document in the
Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
Internet through the Commission's Home Page (http://www.ferc.gov) and
in the Commission's Public Reference Room during normal business hours
(8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A,
Washington DC 20426.
16. From the Commission's Home Page on the Internet, this
information is available in the Commission's document management
system, eLibrary. The full text of this document is available on
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or
downloading. To access this document in eLibrary, type the docket
number (excluding the last three digits) in the docket number field.
17. User assistance is available for eLibrary and the Commission's
Web site during normal business hours. For assistance, please contact
the Commission's Online Support at 1-866-208-3676 (toll free) or 202-
502-6652 (e-mail at FERCOnlineSupport@ferc.gov or the Public Reference
Room at 202-502-8371, TTY 202-502-8659 (e-mail at
public.referenceroom@ferc.gov).
By the Commission.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. E7-23552 Filed 12-4-07; 8:45 am]
BILLING CODE 6717-01-P