On August 30, INGAA filed comments in Docket No. PL07-2 responding to the Commission’s Proposed Policy Statement in which it proposed to include MLPs in the proxy group used to determine a pipeline’s ROE (return on equity) under two conditions: (1) that MLPs cap the distribution used in the DCF analysis at the level of the pipeline’s earnings, and (2) that companies provide a multiyear analysis of earnings to demonstrate sustainability. INGAA retained economist, Dr. J. Stephen Gaske, of Zinder Companies to prepare a report, The Use of MLPs In DCF Analyses Of Interstate Natural Gas Pipeline Companies, attached as an affidavit to INGAA’s comments.
INGAA disagreed with the Commission’s posture that including MLP distributions in the DCF analysis without a cap would result in double recovery of a pipeline’s depreciation expense. The proposal to cap distributions at earnings would add to the ROE dilemma rather than improve it — resulting in an under-recovery of ROE. INGAA argued that the Commission cannot alter one DCF variable (i.e., capping the distribution) without modifying the other variables in the formula (growth (g), and unit price). Further, INGAA stated the Commission should not distort the DCF model by imposing adjustments that are contrary to the market-based decisions on which the model is based.
With respect to sustainability, INGAA argued that neither financial theory nor historical experience suggests that MLP distributions are not sustainable; the burden should be on those opposing inclusion of an MLP in the proxy group to demonstrate that a particular MLP’s distributions are not sustainable.
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