Cost of Service, Cost Allocation & Rate Design for FERC Regulated Natural Gas Interstate Pipeline Companies

Live Streaming Online November 3-4 | Online

An EUCI Program

Click Here to register ($1195)


Laws govern all regulations regarding the establishment of rates that natural gas pipelines may charge and set forth in their tariffs. Regulations and FERC policies continue to change in response to revisions in the laws, economic and financial conditions, gas supply modifications, and market demands. These courses provide attendees a detailed view of natural gas industry, the development of rates and the computation of the cost of service, while providing real world experience applying the pertinent regulations and principles.

If you are a FERC employee who is interested in attending this course, our speaker will need to be aware of the project(s) you’re currently working on so he can include case studies and current examples that are not a conflict of interest. Please email the following information to Taylor Stephens ( upon your registration:

  • Name of the utility
  • Docket number
  • Any other information pertaining to a project that you would like the speaker to be aware of

Learning Outcomes

  • Discuss the history of the natural gas industry, laws, and regulations pertaining to rate regulation and related processes
  • Develop expertise pertaining to the regulatory principles and processes followed by natural gas pipeline companies to propose and support just and reasonable rates, terms and conditions
  • Review the economic principles affording an opportunity to earn fair profits on FERC regulated natural gas pipelines
  • Discuss the concepts of functionalized costs, the difference between fixed and variable costs, the allocation and classification of costs to different functions and different classes of service
  • Evaluate and apply principles used to develop and calculate an overall cost of service, which includes; rate base, capital structure and cost of capital, income tax allowance (Post 2017 Tax Cut and Jobs Act Impacts), operating expenses (depreciation, administrative and general, operating and maintenance, taxes other than income), regulatory adjustments (FERC’s 2018 MLP Decisions)
  • Evaluate and apply principles used to allocate costs to different services or different classes of service and develop a proper rate design and calculate rates
  • Discuss the principles utilized to achieve regulatory goals, including techniques used to achieve favorable judgments for FERC related litigation and “Black-Box” settlements
  • Analyze FERC regulatory trends and the implications of those developments on stakeholders involved in FERC’s natural gas pipeline regulation



1:00 – 4:30 p.m.
Course Timing

Course Overview and Introduction

  • Course objectives
  • The regulated natural gas industry
    • Natural Gas Act
    • Natural gas industry structure
    • FERC – purpose, organization, website, funding mechanism
    • Federal regulations, historical decisions, and market responses
    • Code of Federal Regulations -pertinent sections
    • FERC Uniform System of Accounts

FERC Standards for Rate Review

  • “Just and Reasonable” standard
  • “Public Interest” standard

Types of Rate and Regulatory Filings and Timelines

  • Section 7 Initial Rates-Incremental Facility Rate Development
  • NGA Section 4 general rate case filings
  • NGA Section 5 rate filings
  • Other proceedings/filings (i.e., fuel trackers, modernization trackers, Negotiated Rate Contracts, FERC Form 2, etc.)

Ratemaking Process

  • Timelines and strategy development
  • Expert witnesses
  • Due diligence process
  • Settlement process: alternatives to achieve agreement among the parties
  • Litigation and hearing

Cost of Service Computation Steps

  • Purpose of computing cost of service
  • Source data and documents (FERC Form 2 review)
  • Concepts of base, test, and adjustment periods
  • Concepts of regulatory adjustments
  • Rate base formula, concepts, and requirements
    • Gross plant investment
    • Accumulated depreciation and amortization
    • Reserve for negative salvage (cost of removal, interim retirements, etc.)
  • Asset retirement obligations
  • Working capital components
  • Regulatory assets/liabilities
  • Accumulated deferred income taxes (impacts of the Tax Cuts and Jobs Act and FERC’s 2018 MLP Decisions)
  • Cost of service formula
  • Operation and maintenance
    • Labor costs
    • Gas costs: fuel for compressors
    • Material and other costs
    • Fixed and variable costs
  • Administrative and general (directly assigned and/or allocated)
    • Massachusetts Formula & Kansas-Nebraska (KN) Formula
  • Taxes other than income
  • Recovery of investment vs. return on investment
  • Depreciation expense
  • Derivation of depreciation and amortization rates
  • Depreciation studies
    • Objectives and methods
    • Interim retirement costs
    • Negative salvage and final system abandonment costs

Questions & Answers Session


9:00 a.m. – 4:30 p.m.
Course Timing

Cost of Service Computation Steps (Continued)

  • Quick review of cost of service steps from session 1
  • Calculation of return on rate base
  • Capital structure, cost of capital, and weighted average cost of capital
  • Actual or imputed capital structure
  • Calculation of the cost of debt and overall rate of return
  • Estimating the cost of debt and overall rate of return
  • Estimating the cost of common equity and available methods (impacts of current FERC policy review)
  • FERC’s DCF methodology under review (Remand of Opinion No. 531)
    • Proxy group selection, risk comparisons, and placement within range
    • The DCF formula (one-step to two-step)
    • Risk Premium Analysis
    • Capital-Asset Pricing Model
    • Expected Earnings Analysis
  • Calculating the pre-tax rate of return
  • The income tax allowance (impacts from the Tax Cuts and Jobs ACT and FERC 2018 MLP Orders)
    • Flow through vs. normalized
    • The effective income tax rate (35% vs. 21%) (corporation vs. MLP vs. disregarded entity)
    • The income tax gross-up and before-tax factors
    • Deferred and current income taxes
    • The composite state income tax rate
    • Income tax adjustments
      • Equity AFUDC as it affects rate base and the tax allowance
      • South Georgia and reverse South Georgia adjustments
      • Other adjustments
    • Other revenue credits

Models and Presentation Requirements for Cost of Service Statements and Schedules

  • Overview of required statements and schedules for cost of service filings
  • Model design considerations
  • Requirements for incremental facilities
  • Cost recovery models
    • Traditional: declining rate base model
    • Levelized cost of service model
    • Usage considerations

Calculating Cost of Service Exercises and Excel Based Modeling Exercise

Rate Design Key Outcomes

  • Rate design: terminology and history
  • Determining cost inputs for the rate design process
  • Developing/reviewing rate design billing and determinants
  • Proper rate design development for configured natural gas pipeline systems
  • Rate design case study (Excel-based cost allocation and rate design)

Rate Design Principles and Objectives

  • Changing market realities, gas flows, and government policies
  • FERC’s rate objectives
  • Rate refund floor concept: last “clean” Just & Reasonable rate
  • State maximum rates vs. discount rates vs. negotiated rates
  • Achieving market-oriented pricing in a regulated environment

Developing Rate Design Billing Determinants: From the G to J Schedules

  • Detailed revenue and billing determinant data for base and test periods
  • Determination of billing determinant contract and quantity adjustments
  • Adjustment methods to recognize discounting impacts
  • Policies concerning treatment of negotiated rate contracts
  • Calculating imputed demand units

Rate Design Cost Factors

  • Cost functionalization, cost classification, and cost allocation
  • Functionalization storage, transmission, and incremental costs
    • Direct and indirect costs
    • KN methodology
  • Classifying costs between fixed or variable
  • Cost allocation to services and zones
  • Allocating costs to peak and non-peak services
  • Developing the statement and schedules required

Rate Calculations

  • Reservation/demand rates
  • Volumetric/usage rates
  • Daily vs. monthly rates
  • Load factor adjusted, “effective” rates
  • 100% load factor rates for IT service
  • Proving the proposed rates generate the revenue requirement

Rate Design Alternatives

  • Postage stamp rates vs. zoned rates
  • Distance-based costs vs. system access costs
  • Distance-based rate designs
    • Mileage-based rates
    • Zone rates
    • Zone matrix rates
    • Zone gate rates
  • Storage rate design

Pipeline Rate Design Case Study & Participant Questions on Other Rate Design Issues

  • Term differentiated, seasonal, and short-term rates
  • Park and loan and other service rates
  • Fuel factor rate designs
  • Surcharges
  • Negotiated rates, market-based rates, and non-conforming contracts
  • Roll-in rate studies

Additional Rate Design & Tariff Considerations

  • The impact of rate design changes on customers
  • Implementation process for rate design changes
  • Tariff provisions and commission policies

Questions & Answers Session