The Federal Energy Regulatory Commission is moving forward with a high-profile investigation that has broad-reaching implications for shippers on Northern Natural Gas Company (Northern Natural) and Natural Gas Pipeline of America LLC (Natural). For the first time in 20 years, FERC is using its broad powers under Section 5 of the Natural Gas Act to investigate the rates of both pipelines. This is a rare use of such authority and represents a newly aggressive investigative approach by FERC.

"Protecting consumers against unjust and unreasonable rates is a fundamental responsibility of the Commission under the Natural Gas Act," said FERC Chairman Jon Wellinghoff when the orders were issued November 19, 2009. "Launching these investigations is important to the Commission fulfilling that responsibility." Moreover, FERC's actions are consistent with its more aggressive monitoring, over the last five years, of the markets and the companies that it regulates.

These proceedings could result in significant rate reductions. FERC concluded that based on 2008 costs and a 12% return on equity, the pipelines' current rates result in an over recovery of between $150 million (Natural) and $170 million (Northern Natural) annually and an estimated return on equity, net of income taxes, of almost 25%.

All aspects of the pipelines' rates will be open for scrutiny, including possibly the allocation of costs between customers. Fuel and unaccounted for gas will be part of the Natural investigation because the Commission said that Natural "appears to be substantially over recovering fuel and lost and unaccounted for gas from its customers."

Given that any rate reduction will be prospective only—no refunds will be available at the conclusion of the proceeding—these proceedings could take a significant amount of time before any rate reduction is achieved. Recognizing this, in lieu of lengthy litigation, the respective parties may work toward settlement.

Interventions in both the Northern Natural and the Natural investigation proceedings are due December 21, 2009, and prehearing conferences have been scheduled for mid-January in both cases.