Zone of Reasonableness: Coping with Rising Profitability a Decade after Restructuring

Fri Jul 01 20:24:38 UTC 2011
By Dr. Jeff D. Makholm and Kurt Strunk

The level of earned returns achieved by some companies in the pipeline sector today calls for more rate scrutiny and additional activity before the FERC. Over the past three years, the Federal Energy Regulatory Commission (FERC) has initiated five investigations into the justness and reasonableness of interstate gas pipeline rates. Under the Natural Gas Act of 1938, the FERC has a statutory obligation to assure that such pipelines rates are just and reasonable. Case precedent makes clear that no single just and reasonable rate exists for a given pipeline at a given time--rather, they must remain within a zone of reasonableness. The FERC initiated the examination of these five pipelines' rates precisely because their financial data appeared to indicate excessive profitability falling outside that zone. In this article from Public Utilities Fortnightly, NERA Senior Vice President Dr. Jeff D. Makholm and Vice President Kurt Strunk discuss how earned returns are assessed, why returns have increased, and the measures being undertaken by the FERC to remedy pipeline rates that are deemed too high. The authors explain that, when prima facie indicators suggest that rates are outside the zone of reasonableness for interstate pipelines, the customers of those pipelines can press the FERC to act to protect the public interest and engage the pipelines in detailed rate reviews.