

[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
