UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION
SUPPLEMENTAL PRE-FILED DIRECT TESTIMONY OF DR. NATASHA ORLOV ON BEHALF OF RIDGELINE MIDSTREAM SERVICES LLC
Draft — Prepared for Filing on February 21, 2025
Prepared by:
Calderwood & Harkness LLP 1601 K Street NW, Suite 900 Washington, DC 20006
George Trujillo, Responsible Partner Brett Callahan, Lead Associate David Stanton, Working Associate
C&H Matter No. 1016-00005
TABLE OF CONTENTS
I. INTRODUCTION AND QUALIFICATIONS
A. Witness Identification
Q. Please state your full name, title, and business address.
A. My name is Dr. Natasha Orlov. I am the Director of Rates & Regulatory at Ridgeline Midstream Services LLC ("Ridgeline" or the "Company"). My business address is 700 Kanawha Boulevard East, Suite 1400, Charleston, West Virginia 25301.
Q. Please describe Ridgeline Midstream Services LLC.
A. Ridgeline is a Delaware limited liability company and a wholly-owned subsidiary of Dunmore Energy Holdings Ltd. ("DEH"), a Cayman Islands exempted limited company registered with the Cayman Islands Registrar of Companies under Registry Number CR-381204. Ridgeline owns and operates the Ridgeline Pipeline System, which is a 187-mile, 24-inch-diameter high-pressure natural gas pipeline with a design capacity of 1.2 billion cubic feet per day ("Bcf/d"), equivalent to 1,200,000 dekatherms per day ("Dth/d") at an assumed heat content of 1,000 British thermal units per cubic foot ("BTU/cf"). The Ridgeline Pipeline System is an interstate natural gas pipeline subject to the jurisdiction of the Federal Energy Regulatory Commission ("FERC" or the "Commission") under the Natural Gas Act ("NGA"). Ridgeline's FERC Code is 960442, and its Employer Identification Number ("EIN") is 87-4231956. Ridgeline provides transportation services pursuant to its FERC Gas Tariff, Original Volume No. 1.
Q. Have you previously testified in this proceeding?
A. Yes. I submitted pre-filed direct testimony on behalf of Ridgeline on December 5, 2022, as part of Ridgeline's initial round of direct testimony in Docket Nos. RP22-847-000 and RP22-847-001. My prior testimony addressed, among other things, the original tariff design, the proposed rate structure, and the general terms and conditions of the FERC Gas Tariff, Original Volume No. 1, as initially filed on May 12, 2022.
B. Professional Background and Qualifications
Q. Please summarize your educational background and professional qualifications.
A. I hold a Doctor of Philosophy (Ph.D.) in Energy Economics and Regulatory Policy from the George Washington University, conferred in 2011. My doctoral dissertation analyzed optimal rate design methodologies for new-entrant interstate natural gas pipelines in deregulated market environments. I also hold a Master of Science (M.S.) in Applied Economics from the Johns Hopkins University, conferred in 2007, and a Bachelor of Arts (B.A.) in Economics, summa cum laude, from the University of Virginia, conferred in 2005.
Prior to joining Ridgeline in March 2020, I served as a Senior Regulatory Economist at the American Gas Association from 2015 to 2020, where I was responsible for analyzing FERC rate proceedings, developing rate policy positions, and advising member companies on tariff design, cost-of-service methodology, and compliance with Commission orders and regulations. From 2011 to 2015, I was an Associate Economist at Dunmore Management Consulting (now Tarrant Consulting Group), where I provided consulting services to interstate natural gas pipelines and local distribution companies on matters related to rate design, cost allocation, load profiling, and regulatory strategy before FERC and state public utility commissions. During my time at Tarrant Consulting Group, I supported rate filings for several FERC-jurisdictional pipelines, including the preparation of cost-of-service studies, billing determinant analyses, and expert testimony.
I have been involved in more than twenty FERC rate proceedings in various capacities, including as an expert witness, consulting advisor, and policy analyst. I am a member of the American Economic Association and the International Association for Energy Economics. I have published articles in Pinnacle Corporation, Natural Gas & Electricity, and Energy Policy, and I have presented at conferences sponsored by the American Bar Association's Section of Environment, Energy, and Resources, the Energy Bar Association, and FERC's technical conferences on rate design and tariff reform.
Q. What are your responsibilities at Ridgeline?
A. As Director of Rates & Regulatory, I am responsible for the oversight and management of all aspects of Ridgeline's rate design, tariff administration, and regulatory filings before FERC. My responsibilities include the development and implementation of the Company's FERC Gas Tariff, the preparation and filing of rate cases and other regulatory applications, compliance with FERC orders and regulations (including the Commission's open-access transportation requirements under Part 284 of the Commission's regulations), and compliance with the North American Energy Standards Board ("NAESB") Wholesale Gas Quadrant ("WGQ") business practice standards. I also serve as Ridgeline's primary point of contact with FERC's Office of Energy Market Regulation on tariff and rate matters and coordinate with the Company's external legal counsel, Calderwood & Harkness LLP, on all regulatory proceedings.
In addition, I oversee Ridgeline's compliance with the Commission's reporting requirements, including the filing of FERC Form No. 2 annual reports, the preparation of informational filings and tariff sheet updates, and the maintenance of Ridgeline's electronic bulletin board ("EBB"). I report directly to the Vice President of Regulatory and Commercial Operations and serve on the Company's Regulatory Compliance Committee.
C. Purpose of Supplemental Testimony
Q. What is the purpose of your supplemental testimony?
A. This supplemental testimony is filed in response to the Deficiency Letter issued by the Commission's Office of Energy Market Regulation ("OEMR") on January 19, 2023. The Deficiency Letter, prepared under the direction of Dr. Miriam Okafor, Lead Economic Analyst within OEMR, identified fourteen (14) specific deficiency items in Ridgeline's initial tariff filing of May 12, 2022, in Docket Nos. RP22-847-000 and RP22-847-001.
Q. What was the nature of the deficiency items identified in the January 19, 2023 Deficiency Letter?
A. The Deficiency Letter identified a broad range of substantive and procedural deficiencies in Ridgeline's initial FERC Gas Tariff, Original Volume No. 1, as filed on May 12, 2022. Specifically, the Deficiency Letter identified the following fourteen items requiring correction or supplementation:
1. Inadequate cost-of-service support for the proposed 14.00% return on equity ("ROE");
2. Absence of a fuel-use and lost-and-unaccounted-for gas ("FL&U") tracker mechanism;
3. Failure to include an interruptible transportation ("IT") rate derivation;
4. Insufficiently supported 100% load factor billing determinant assumption;
5. Absence of capacity release provisions in the General Terms and Conditions ("GT&Cs");
6. Incomplete compliance with NAESB WGQ standards in the operational flow order ("OFO") provisions;
7. Omission of electronic bulletin board ("EBB") posting requirements;
8. Inadequate shipper-must-have-title provisions;
9. Failure to file the Interconnection Agreement between Ridgeline and Appalachian Trunk Pipeline Company, LLC ("ATPC") as a FERC rate schedule;
10. Absence of a penalty revenue crediting mechanism;
11. Inadequate creditworthiness provisions;
12. Missing segmentation and flexible receipt/delivery point provisions;
13. Absence of greenhouse gas ("GHG") emission cost recovery provisions; and
14. Failure to address FERC Order No. 2222 distributed energy resource ("DER") aggregation implications.
Q. Did Ridgeline previously respond to any of the deficiency items?
A. Yes. Ridgeline filed a partial response on March 15, 2023, which addressed eight of the fourteen deficiency items — specifically, Items 1 through 4 and Items 7 through 10. However, the partial response did not fully resolve all issues raised by OEMR with respect to those items, and the remaining six items (Items 5, 6, 11, 12, 13, and 14) were not addressed in the partial response at all. This supplemental testimony now comprehensively addresses all fourteen deficiency items through the presentation of a completely redesigned FERC Gas Tariff, Original Volume No. 1, which supersedes the tariff as originally filed on May 12, 2022, and as partially amended through the March 15, 2023 response.
Q. Was any outside assistance retained in connection with the redesign of the tariff?
A. Yes. Ridgeline engaged Braswell Energy Consulting Group LLC ("Braswell") on April 15, 2023, under engagement number BEC-2023-0041, to assist with the comprehensive redesign of the FERC Gas Tariff and the preparation of supporting analyses. The lead consultant on this engagement is Dr. Raymond Braswell, who is the founder and managing member of Braswell Energy Consulting Group LLC. Dr. Braswell is a former FERC economist who served in the Commission's Office of Energy Market Regulation from 1998 to 2014, where he was responsible for, among other things, the evaluation of natural gas pipeline rate filings, cost-of-service analyses, and rate design methodologies. Braswell's offices are located at 8300 Greensboro Drive, Suite 450, McLean, Virginia 22102.
Dr. Braswell's firm performed the updated discounted cash flow ("DCF") proxy group analysis supporting the revised ROE of 12.50%, assisted with the development of the FL&U tracker mechanism, prepared the interruptible transportation rate derivation, performed the load factor analysis, and provided advisory services on the remaining tariff provisions. The results of Dr. Braswell's analyses are reflected throughout this testimony and in the attached exhibits.
Q. Does your testimony also address changed circumstances since the original filing?
A. Yes. In addition to addressing the fourteen deficiency items, this supplemental testimony addresses material changes in circumstances that have occurred since the original filing date of May 12, 2022. These changes include: (i) updated cost-of-service components reflecting current capital costs, operating expenses, and tax obligations; (ii) a revised rate design methodology, specifically the transition from a straight fixed-variable approach to a modified fixed-variable approach; (iii) a reduced proposed ROE from 14.00% to 12.50%, based on an updated DCF proxy group analysis as of the third quarter of 2024; and (iv) emerging regulatory requirements, including potential federal and state greenhouse gas compliance obligations affecting midstream natural gas pipeline operations in West Virginia and Pennsylvania. These changes are discussed in detail throughout the testimony and are supported by the attached exhibits.
D. Summary of Testimony and List of Exhibits
Q. Please provide a summary of the major topics addressed in your supplemental testimony.
A. My supplemental testimony is organized as follows. Following this introductory section, Section II provides an overview of the redesigned tariff, including its structure, key changes from the original filing, and relevant system characteristics. Sections III through XVI address each of the fourteen deficiency items identified in the January 19, 2023 Deficiency Letter, in numerical order, describing the deficiency identified, the Company's proposed resolution, and the supporting analysis and tariff language. Section XVII presents the revised rate design methodology, including the transition to the modified fixed-variable approach and a detailed rate derivation summary. Section XVIII provides a comprehensive summary of all tariff changes with cross-references to specific tariff sections and redline versions. Section XIX responds to the answering testimony filed by the three intervenor parties — ATPC, the Mountainside Gas Producers Coalition ("MGPC"), and the Clearwater Municipal Gas Authority ("CMGA") — on January 9, 2023. Section XX presents Ridgeline's conclusion and prayer for relief.
Q. What exhibits are attached to your supplemental testimony?
A. Fifteen exhibits are attached to this supplemental testimony, designated as Exhibit NKO-S1 through Exhibit NKO-S15. Each exhibit corresponds to one or more of the deficiency items or to the revised rate derivation. A complete list of exhibits is provided at the end of this testimony. I have reviewed each exhibit and can attest that the data, analyses, and proposed tariff language contained therein are true and accurate to the best of my knowledge, information, and belief.
Q. Are there other supplemental testimonies being filed concurrently?
A. Yes. Companion supplemental testimony is being filed concurrently by Ms. Angela Moretti, Ridgeline's Manager of Financial Planning and Analysis, addressing the updated cost of service, rate base, and billing determinants underlying the revised rate design. My testimony cross-references Ms. Moretti's supplemental testimony at several points, particularly with respect to the detailed cost-of-service components, depreciation expense calculations, and the derivation of the income tax allowance. Together, Ms. Moretti's testimony and my testimony provide a comprehensive record supporting the redesigned FERC Gas Tariff, Original Volume No. 1.
E. Procedural Background
Q. Please summarize the procedural history of this proceeding.
A. Ridgeline filed its original application on May 12, 2022, in Docket Nos. RP22-847-000 and RP22-847-001, pursuant to Sections 4 and 7 of the Natural Gas Act, 15 U.S.C. §§ 717c and 717f, and the Commission's regulations at 18 C.F.R. Parts 154, 157, and 284. The filing included Ridgeline's initial FERC Gas Tariff, Original Volume No. 1, a certificate application for authorization to provide open-access firm and interruptible transportation services on the Ridgeline Pipeline System, and an application for authorization to construct and operate interconnection facilities at the Wetzel County Interconnect in Wetzel County, West Virginia.
The Commission published notice of the filing, and three parties filed timely motions to intervene and/or protests:
(a) Mountainside Gas Producers Coalition ("MGPC") — filed its motion to intervene on July 28, 2022. MGPC is a trade association representing fourteen member companies engaged in the production of natural gas in the Marcellus and Utica shale formations in West Virginia and Pennsylvania. Calvin Dreyer serves as Executive Director of MGPC. MGPC is represented by Whitmore & Sable LLP, with Rebekah Montague serving as lead counsel. MGPC's address of record is 1200 New Hampshire Avenue NW, Suite 600, Washington, DC 20036 (care of counsel).
(b) Clearwater Municipal Gas Authority ("CMGA") — filed its motion to intervene on August 1, 2022. CMGA is a municipal gas distribution authority serving the Borough of Clearwater, Pennsylvania, and surrounding areas. Dennis Ott serves as General Manager of CMGA. CMGA's principal office is located at 455 Market Street, Clearwater, PA 15330. CMGA is represented by Fordham Municipal Law Group PC, with Stephen Greer serving as lead counsel, at 312 Adams Avenue, Suite 100, Scranton, PA 18503.
(c) Appalachian Trunk Pipeline Company, LLC ("ATPC") — filed its protest and motion to intervene on August 15, 2022. ATPC is a Pennsylvania limited liability company that owns and operates an interstate natural gas pipeline system interconnecting with Ridgeline at the Wetzel County Interconnect. ATPC's FERC Code is 840117, and its principal office is at 2200 Penn Center West, Suite 300, Pittsburgh, PA 15276. ATPC is a subsidiary of Tidewater Infrastructure Partners LP, a Delaware limited partnership. Marcus R. Alderman serves as Chief Executive Officer of ATPC, and Sandra K. Fenton serves as Vice President of Regulatory Affairs. ATPC is represented by Kellner, Royce & Dillard LLP, with William Pratt serving as lead counsel, at One PPG Place, Suite 2800, Pittsburgh, PA 15222.
Q. What procedural actions were taken by the Commission and the presiding officers following the filing of interventions?
A. The Commission issued an order on September 22, 2022, granting the motions to intervene filed by MGPC, CMGA, and ATPC, and establishing a Track II procedural schedule for the rate case and interconnection proceedings. Concurrent with the intervention order, the Commission appointed Settlement Judge Howard Margolis to explore the possibility of settlement among the parties.
On November 14, 2022, Administrative Law Judge Clara Whitfield was appointed to preside over the hearing phase of this proceeding. A prehearing conference was held before ALJ Whitfield shortly thereafter, at which the parties discussed discovery schedules, hearing procedures, and the anticipated scope of testimony.
Ridgeline filed its initial round of direct testimony on December 5, 2022, consisting of the pre-filed direct testimony of seven witnesses, including my own direct testimony and the direct testimony of Ms. Angela Moretti, among others.
On January 9, 2023, all three intervenor parties — ATPC, MGPC, and CMGA — filed answering testimony. ATPC's answering testimony included testimony from its counsel, William Pratt of Kellner, Royce & Dillard LLP, and a witness statement from Sandra K. Fenton, ATPC's Vice President of Regulatory Affairs. MGPC's answering testimony included the expert testimony of Dr. Eleanor Vasquez, a rate expert retained by MGPC through Whitmore & Sable LLP. CMGA's answering testimony supported ATPC's positions on cost allocation and the interconnection agreement.
Q. Please describe the circumstances surrounding the issuance of the Deficiency Letter and subsequent procedural developments.
A. On January 19, 2023, FERC's Office of Energy Market Regulation issued the Deficiency Letter identifying fourteen items requiring correction or supplementation in Ridgeline's initial tariff filing. The Deficiency Letter was prepared under the direction of Dr. Miriam Okafor, Lead Economic Analyst, and transmitted to Calderwood & Harkness LLP on behalf of Ridgeline.
On February 6, 2023, ALJ Whitfield issued an order staying the procedural schedule pending Ridgeline's resolution of the deficiency items. The ALJ's order noted that it would be premature to proceed to hearing on the existing record given the significant gaps in the tariff identified by OEMR.
Ridgeline filed its partial response on March 15, 2023, addressing eight of the fourteen deficiency items (Items 1 through 4 and Items 7 through 10). The partial response included preliminary revisions to certain tariff sections and supporting workpapers, but did not include the comprehensive tariff redesign that is the subject of this supplemental testimony.
Q. Were extensions of time granted to Ridgeline?
A. Yes. Due to the complexity of the remaining deficiency items and the scope of the tariff redesign effort, Ridgeline sought and was granted three extensions of time to complete its response:
(i) On May 10, 2023, ALJ Whitfield granted Ridgeline's first motion for extension, establishing a deadline of August 28, 2023.
(ii) On September 8, 2023, ALJ Whitfield granted Ridgeline's second motion for extension, establishing a revised deadline of February 23, 2024. In connection with this extension, the proceeding was deemed "dormant" by the Commission's Office of Administrative Law Judges, reflecting the extended period of inactivity in the hearing phase.
(iii) On March 4, 2024, ALJ Whitfield granted Ridgeline's third and final motion for extension, establishing the current deadline of February 21, 2025. As a condition of this final extension, the ALJ ordered Ridgeline to file quarterly status reports updating the ALJ and the parties on the progress of the tariff redesign and Ridgeline's anticipated filing date.
Q. Did Ridgeline file the required quarterly status reports?
A. Yes. Ridgeline filed three quarterly status reports as ordered:
• First Quarterly Status Report: filed June 15, 2024;
• Second Quarterly Status Report: filed September 14, 2024; and
• Third Quarterly Status Report: filed December 13, 2024.
Each status report described the progress of the tariff redesign effort, the status of the engagement with Braswell Energy Consulting Group LLC, and Ridgeline's continued expectation of meeting the February 21, 2025 filing deadline. No party objected to any of the quarterly status reports.
Q. Were settlement discussions conducted during this period?
A. Yes. Four settlement conferences were held before Settlement Judge Margolis during the course of this proceeding:
• First Settlement Conference: November 30, 2022;
• Second Settlement Conference: March 8, 2023;
• Third Settlement Conference: July 12, 2023; and
• Fourth Settlement Conference: January 18, 2024.
Despite good-faith efforts by all parties, no settlement was reached. As of the most recent settlement conference on January 18, 2024, the parties remained separated by a gap of approximately $0.058 per Dth between Ridgeline's proposed recourse rate (as updated in this supplemental testimony, $0.3140/Dth) and the settlement position advanced by MGPC (approximately $0.2560/Dth). ATPC and CMGA generally aligned with MGPC's rate position for settlement purposes, although each intervenor maintained distinct positions on certain discrete issues, such as interconnection cost allocation and load factor assumptions. Given the magnitude of the remaining gap and the number of contested issues, the parties agreed that the proceeding should proceed to hearing following the completion of Ridgeline's supplemental filing.
II. OVERVIEW OF THE REDESIGNED TARIFF
A. Tariff Structure — Revised FERC Gas Tariff, Original Volume No. 1
Q. Please describe the structure of the redesigned FERC Gas Tariff, Original Volume No. 1.
A. The redesigned FERC Gas Tariff, Original Volume No. 1, is structured as a Part 284, Subpart G open-access transportation tariff, consistent with the Commission's regulations governing open-access transportation by interstate natural gas pipelines. The redesigned tariff is organized in accordance with 18 C.F.R. § 154.7 and contains the following principal components:
(a) Rate Schedules. The redesigned tariff includes two rate schedules:
(i) Rate Schedule FT-1 — Firm Transportation. Rate Schedule FT-1 governs the provision of firm natural gas transportation service on the Ridgeline Pipeline System. This rate schedule was included in the original tariff filing and has been substantially revised to incorporate the modified fixed-variable rate methodology, the revised recourse rates, and other changes described in this testimony.
(ii) Rate Schedule IT-1 — Interruptible Transportation. Rate Schedule IT-1 is a new rate schedule, not included in the original tariff filing, governing the provision of interruptible natural gas transportation service on the Ridgeline Pipeline System. The addition of Rate Schedule IT-1 addresses Deficiency Item 3.
(b) General Terms and Conditions ("GT&Cs"). The GT&Cs have been substantially revised to incorporate numerous new provisions addressing the deficiency items identified in the January 19, 2023 Deficiency Letter. The GT&Cs now include, among other things, comprehensive provisions governing capacity release, operational flow orders, electronic bulletin board posting requirements, shipper-must-have-title, creditworthiness, segmentation and flexible receipt/delivery points, penalty revenue crediting, FL&U tracking, greenhouse gas cost recovery, and Order No. 2222 DER aggregation. These provisions are discussed in detail in Sections IV through XVI of this testimony.
(c) Form of Service Agreement. The Form of Service Agreement has been updated to reflect the revised rate schedules, the addition of interruptible transportation service, and the new GT&C provisions. The Form of Service Agreement is consistent with Commission requirements and is tendered for filing as part of the redesigned tariff.
(d) Rate Schedule IA-1 — Interconnection Agreement. The Interconnection Agreement between Ridgeline and ATPC, governing the physical interconnection at the Wetzel County Interconnect, is now filed as a FERC rate schedule designated Rate Schedule IA-1. This change addresses Deficiency Item 9 and ensures that the terms and conditions of the interconnection are subject to Commission review and oversight as part of the tariff.
All tariff sheets are organized and designated in compliance with 18 C.F.R. § 154.7, and the redesigned tariff has been formatted for electronic filing through FERC's eTariff system.
B. Key Changes from Original Tariff Filing
Q. Please summarize the key changes between the original tariff filing of May 12, 2022, and the redesigned tariff that is the subject of this supplemental testimony.
A. The redesigned tariff incorporates numerous significant changes relative to the original tariff filing. These changes can be grouped into three categories: (i) rate design changes, (ii) cost-of-service revisions, and (iii) new tariff provisions.
Rate Design Changes. The most significant rate design changes are the transition from a 100% load factor billing determinant assumption to a 75% load factor assumption, and the shift from a straight fixed-variable ("SFV") rate methodology to a modified fixed-variable ("MFV") rate methodology. Under the original filing, Ridgeline proposed to use a 100% load factor to derive its billing determinants, resulting in annual billing determinants of 438,000,000 Dth per year (calculated as 1,200,000 Dth/d multiplied by 365 days multiplied by 100%). The Commission found this assumption insufficiently supported in light of Ridgeline's actual utilization experience and the relevant FERC precedent. The redesigned tariff uses a 75% load factor, resulting in revised annual billing determinants of 328,500,000 Dth per year (calculated as 1,200,000 Dth/d multiplied by 365 days multiplied by 75%).
The transition from SFV to MFV rate methodology better aligns cost allocation with cost causation principles by separating the total cost of service into a fixed cost component (allocated to the reservation charge) and a variable cost component (allocated to the usage charge). Under the original SFV approach, substantially all costs were allocated to the reservation charge, with only a nominal usage charge. Under the MFV approach, variable costs — primarily fuel gas costs and variable operations and maintenance expenses — are allocated to the usage charge, while all remaining costs are allocated to the reservation charge.
Cost-of-Service Revisions. The total cost of service has been revised from $97.36 million (as proposed in the original filing) to $103.15 million. This increase of approximately $5.79 million, or 5.95%, reflects the following principal components:
• Return on rate base has been reduced from $61.62 million to $56.57 million, reflecting the reduction in the proposed ROE from 14.00% to 12.50% and the corresponding reduction in WACC from 10.0625% to 9.2375%. The rate base remains unchanged at $612.40 million.
• Depreciation expense remains at $14.68 million, calculated on a 2.5% straight-line basis on gross plant.
• Operations and maintenance ("O&M") expense has been updated from the original filing level to $13.92 million, reflecting actual operating experience since the pipeline's in-service date of October 1, 2021, and current cost projections.
• Administrative and general ("A&G") expense has been updated to $5.14 million, reflecting actual experience and current staffing and overhead cost levels.
• Taxes other than income remain at $3.80 million.
• Income tax allowance has been updated to $15.04 million, calculated using a grossed-up effective combined federal and state income tax rate of approximately 26.13% (reflecting a 21% federal corporate income tax rate and the West Virginia corporate net income tax rate of 6.5%).
• Revenue credits of $6.00 million have been applied to reduce the total cost of service. Revenue credits reflect anticipated revenues from interruptible transportation service, as well as other non-jurisdictional revenues available for offset.
The detailed cost-of-service derivation is presented in the supplemental testimony of Ms. Angela Moretti and in Exhibit NKO-S15.
Revised Proposed Recourse Rate. As a result of the foregoing changes, the proposed recourse rate has been revised from $0.2265/Dth (consisting of a $0.2223/Dth reservation charge and a $0.0042/Dth usage charge under the original SFV approach) to $0.3140/Dth (consisting of a $0.3102/Dth reservation charge and a $0.0038/Dth usage charge under the MFV approach). The increase in the per-unit rate from $0.2265/Dth to $0.3140/Dth is primarily attributable to the reduction in billing determinants resulting from the transition from a 100% to a 75% load factor assumption. Although the total cost of service increased modestly (from $97.36 million to $103.15 million), the reduction in the billing determinant denominator from 438,000,000 Dth/yr to 328,500,000 Dth/yr accounts for the majority of the per-unit rate increase.
Revised ROE and WACC. As discussed in detail in Section III, Ridgeline has reduced its proposed ROE from 14.00% to 12.50%, based on an updated DCF proxy group analysis prepared by Braswell as of the third quarter of 2024. The resulting WACC has been reduced from 10.0625% to 9.2375%, reflecting the unchanged capital structure of 55% equity and 45% debt, and the unchanged weighted average cost of debt of 5.25%.
New Tariff Provisions. The redesigned tariff incorporates multiple new tariff provisions that were absent from the original filing, including:
• FL&U tracker mechanism (Deficiency Item 2);
• Rate Schedule IT-1 for interruptible transportation (Deficiency Item 3);
• Capacity release provisions (Deficiency Item 5);
• NAESB-compliant operational flow order provisions (Deficiency Item 6);
• EBB posting requirements (Deficiency Item 7);
• Shipper-must-have-title provisions (Deficiency Item 8);
• Rate Schedule IA-1 (Interconnection Agreement) (Deficiency Item 9);
• Penalty revenue crediting mechanism (Deficiency Item 10);
• Creditworthiness provisions (Deficiency Item 11);
• Segmentation and flexible receipt/delivery point provisions (Deficiency Item 12);
• Greenhouse gas cost recovery tracker (Deficiency Item 13); and
• Order No. 2222 DER aggregation and renewable interconnection provisions (Deficiency Item 14).
Each of these new provisions is discussed in detail in the corresponding sections of this testimony.
C. System Overview — Context for Tariff Provisions
Q. Please provide an overview of the Ridgeline Pipeline System to provide context for the tariff provisions discussed in this testimony.
A. The Ridgeline Pipeline System is a 187-mile, 24-inch-diameter high-pressure natural gas pipeline located in West Virginia and Pennsylvania. The pipeline originates at the Wetzel County Interconnect in Wetzel County, West Virginia, at approximate coordinates 39.6120° North latitude, 80.7540° West longitude, where it interconnects with the ATPC system. The pipeline terminates at the Waynesburg Compressor Station in Greene County, Pennsylvania, at approximate coordinates 39.8965° North latitude, 80.1810° West longitude. The system traverses portions of Wetzel, Marion, and Monongalia Counties in West Virginia and Greene County in Pennsylvania.
The Ridgeline Pipeline System includes three compressor stations: the Wetzel Station, located near the receipt point at the Wetzel County Interconnect; the Mannington Station, located at approximately the midpoint of the pipeline in Marion County, West Virginia; and the Waynesburg Station, located at the delivery point in Greene County, Pennsylvania. The three compressor stations have an aggregate installed compression capacity of 45,000 horsepower ("HP"), utilizing natural gas-fired reciprocating compressor units. The design capacity of the pipeline is 1.2 Bcf/d, equivalent to 1,200,000 Dth/d at an assumed heat content of 1,000 BTU/cf.
The Ridgeline Pipeline System was placed into service on October 1, 2021. The original construction cost of the pipeline and associated facilities was approximately $587.2 million. Current throughput is approximately 680 million cubic feet per day ("MMcf/d"), representing a utilization rate of approximately 56.67% of design capacity. The pipeline serves the growing natural gas production areas of the Marcellus and Utica shale formations in the northern Appalachian Basin, providing transportation service from production areas in West Virginia to downstream interconnects and market centers in southwestern Pennsylvania.
The Ridgeline Pipeline System currently has a single receipt point (the Wetzel County Interconnect) and a single delivery point (the Waynesburg Compressor Station). However, the redesigned tariff includes provisions permitting the future addition of secondary receipt and delivery points as the system develops and as shipper demand warrants. These segmentation and flexible receipt/delivery point provisions are discussed in Section XIV of this testimony (Deficiency Item 12).
III. DEFICIENCY ITEM 1: RETURN ON EQUITY SUPPORT
A. Deficiency Identified
Q. What deficiency did OEMR identify with respect to Ridgeline's proposed return on equity?
A. In the January 19, 2023 Deficiency Letter, OEMR found that Ridgeline had provided inadequate cost-of-service support for its proposed ROE of 14.00%. Specifically, OEMR noted that the DCF proxy group analysis submitted in support of the original ROE was based on market data from 2021, which was stale as of the filing date and did not reflect current market conditions. OEMR further noted that the proxy group composition did not adequately justify the inclusion or exclusion of particular companies, and that the analysis did not sufficiently address the reasonableness of the proposed ROE in the context of Commission precedent for new-entrant natural gas pipelines. OEMR requested that Ridgeline provide an updated DCF proxy group analysis using current market data and a more thorough explanation of the risk factors justifying any premium above the median result of the proxy group analysis.
B. Revised ROE — 12.50%
Q. Has Ridgeline revised its proposed ROE?
A. Yes. Ridgeline has reduced its proposed ROE from 14.00% to 12.50%. This revision is based on a comprehensive updated DCF proxy group analysis performed as of the third quarter of 2024, prepared by Dr. Raymond Braswell of Braswell Energy Consulting Group LLC. The updated analysis reflects current market conditions, including prevailing dividend yields, earnings growth expectations, and capital market environment as of September 30, 2024.
Q. Please describe the methodology and results of the updated DCF proxy group analysis.
A. The updated DCF analysis employs the standard two-step discounted cash flow methodology that the Commission has consistently applied in natural gas pipeline rate proceedings. Under this methodology, the cost of equity is estimated as the sum of the current dividend yield and the expected long-term growth rate in earnings or dividends for a group of comparable publicly traded companies.
Dr. Braswell assembled a proxy group consisting of comparable FERC-jurisdictional interstate natural gas pipelines and midstream master limited partnerships ("MLPs") that meet the Commission's established screening criteria. The proxy group was designed to include companies of comparable risk, size, and operational characteristics to Ridgeline. The composition of the proxy group, including the selection criteria and the justification for the inclusion or exclusion of specific companies, is set forth in detail in Exhibit NKO-S1.
The DCF analysis yielded a range of ROE estimates across the proxy group companies. The median result of the proxy group analysis was approximately 10.80%, and the mean result was approximately 11.15%. These results represent the central tendency of the cost of equity for comparable FERC-jurisdictional interstate natural gas pipeline companies as of the third quarter of 2024.
Q. Why does Ridgeline propose an ROE of 12.50%, which is above the median and mean results of the proxy group analysis?
A. Ridgeline's proposed ROE of 12.50% reflects several risk factors that are specific to the Ridgeline Pipeline System and that distinguish it from the more established pipeline companies in the proxy group. These risk factors include:
(a) New pipeline risk. The Ridgeline Pipeline System was placed into service on October 1, 2021, and has been in commercial operation for approximately three years and four months as of the date of this testimony. As a relatively new pipeline, Ridgeline faces higher risks than more established systems that have operated for decades and have a proven track record of throughput, revenue generation, and operational performance. The Commission has recognized that new-entrant pipelines may justify a premium above the median proxy group result to compensate for the incremental risks associated with a relatively short operating history.
(b) Single-system risk. Unlike many of the companies in the DCF proxy group, which own and operate multiple pipeline systems or are integrated midstream companies with diversified asset portfolios, Ridgeline owns and operates a single pipeline system. The concentration of all of Ridgeline's assets and revenues in a single system exposes the Company to risks that diversified pipeline companies can mitigate through portfolio effects. A disruption to the Ridgeline Pipeline System — whether from operational incidents, regulatory actions, market shifts, or force majeure events — would have a disproportionate impact on the Company compared to a diversified operator.
(c) Appalachian Basin market concentration. Ridgeline's pipeline is located entirely within the northern Appalachian Basin, serving production areas in the Marcellus and Utica shale formations. While these formations are prolific and productive, Ridgeline is exposed to regional market risks that are not fully captured by the proxy group analysis, including the volatility of Appalachian basis differentials, the potential for pipeline overbuild in the region, and the dependence on continued drilling activity by a concentrated group of upstream producers.
(d) Low utilization rate. As noted above, Ridgeline's current throughput is approximately 680 MMcf/d, representing a utilization rate of only 56.67% of design capacity. While Ridgeline expects utilization to increase over time as production in the Marcellus and Utica formations continues to grow, the current low utilization rate creates revenue risk and amplifies the importance of the load factor assumption used in rate design. A premium above the proxy group median is appropriate to compensate investors for the risk that actual throughput may remain below design capacity for a period of time.
Taken together, these risk factors support a proposed ROE of 12.50%, which represents a reasonable premium of approximately 170 basis points above the median proxy group result and approximately 135 basis points above the mean proxy group result. This premium is well within the range of risk adders that the Commission has approved in prior proceedings involving new-entrant or single-system pipelines.
Q. How does Ridgeline's revised proposed ROE compare to the positions of the other parties in this proceeding?
A. The three intervenor parties have advanced lower ROE proposals. In its answering testimony filed January 9, 2023, ATPC, through its counsel William Pratt of Kellner, Royce & Dillard LLP, proposed an ROE of 10.75%. MGPC, through the expert testimony of Dr. Eleanor Vasquez, proposed an ROE of 11.25%. CMGA did not file independent rate testimony but has generally supported ATPC's positions on rate design issues. Ridgeline submits that its revised ROE of 12.50% is a reasonable midpoint that appropriately reflects the unique risk profile of a new-entrant, single-system pipeline operating in the Appalachian Basin at a current utilization rate of 56.67%. The detailed analysis supporting this conclusion is provided in Exhibit NKO-S1.
C. Impact on WACC and Return on Rate Base
Q. What is the impact of the revised ROE on Ridgeline's weighted average cost of capital and return on rate base?
A. Ridgeline's capital structure remains unchanged at 55% equity and 45% debt. This capital structure is consistent with the Company's actual capitalization and has not been contested by any of the intervenor parties.
The Company's weighted average cost of debt is 5.25%, which reflects the blended cost of Ridgeline's two outstanding debt instruments:
(a) A $400 million term loan led by Pinnacle National Bank, N.A., bearing interest at a floating rate equal to the Secured Overnight Financing Rate ("SOFR") plus a spread of 325 basis points. Based on recent SOFR rates, the all-in cost of this facility is approximately 4.25% as of the date of this testimony.
(b) $150 million in aggregate principal amount of 7.875% Second Lien Senior Secured Notes, held by Harborview Capital Management LLC and Sentinel Ridge Fund LP. The fixed coupon on these notes is 7.875%.
The weighted average cost of debt across these two instruments, reflecting the relative proportions of each in Ridgeline's total outstanding debt, is 5.25%.
Applying the revised ROE of 12.50% and the unchanged cost of debt of 5.25% to the 55%/45% equity/debt capital structure yields the following revised WACC:
WACC = (0.55 × 12.50%) + (0.45 × 5.25%) = 6.875% + 2.3625% = 9.2375%
This compares to the original WACC of 10.0625%, which was calculated using the original ROE of 14.00%: (0.55 × 14.00%) + (0.45 × 5.25%) = 7.70% + 2.3625% = 10.0625%.
The revised return on rate base is calculated by applying the revised WACC to the rate base of $612.40 million:
Return on rate base = $612.40 million × 9.2375% = $56.57 million
This compares to the original return on rate base of $61.62 million ($612.40 million × 10.0625%). The reduction in return on rate base of approximately $5.05 million is entirely attributable to the reduction in the proposed ROE from 14.00% to 12.50%.
The rate base of $612.40 million is unchanged from the original filing and consists of the following components:
• Net plant in service: $563.71 million
• Working capital: $18.64 million
• Less: accumulated deferred income taxes ("ADIT"): ($12.45 million)
• Other rate base items: $42.50 million
• Total rate base: $612.40 million
The detailed rate base derivation and supporting schedules are presented in Ms. Moretti's supplemental testimony and in Exhibit NKO-S1, which also contains the complete DCF proxy group analysis and workpapers.
IV. DEFICIENCY ITEM 2: FUEL-USE AND LOST-AND-UNACCOUNTED-FOR GAS (FL&U) TRACKER MECHANISM
A. Deficiency Identified
Q. What deficiency did OEMR identify regarding fuel use and lost-and-unaccounted-for gas?
A. The January 19, 2023 Deficiency Letter noted that Ridgeline's original tariff did not include any mechanism for tracking fuel use and lost-and-unaccounted-for ("FL&U") gas on the Ridgeline Pipeline System. The Deficiency Letter stated that the absence of an FL&U tracker is inconsistent with Commission policy, which generally requires interstate natural gas pipelines to include a mechanism in their tariffs that tracks and accounts for gas consumed as fuel in compressor station operations, as well as gas that is lost or unaccounted for during the transportation process. Without such a mechanism, OEMR noted, shippers have no transparency into the volumes of gas retained by the pipeline for fuel and losses, and there is no means of ensuring that the pipeline's actual fuel retention is consistent with the levels reflected in the pipeline's rates.
B. Proposed FL&U Tracker Design
Q. Please describe the FL&U tracker mechanism that Ridgeline proposes in the redesigned tariff.
A. Ridgeline proposes to add a new section to the General Terms and Conditions of the redesigned tariff establishing a comprehensive FL&U tracker mechanism. This mechanism is designed to provide full transparency to shippers regarding fuel gas consumption and unaccounted-for gas on the Ridgeline Pipeline System, and to ensure that the FL&U retention percentage embedded in Ridgeline's rates accurately reflects the pipeline's actual fuel and loss experience over time.
The proposed FL&U tracker has the following key components:
(a) FL&U Retention Percentage. The tariff will establish an initial FL&U retention percentage, expressed as a percentage of receipts, that Ridgeline will retain from shippers' tendered gas to cover fuel consumed by the three compressor stations on the system (Wetzel Station, Mannington Station, and Waynesburg Station, with aggregate installed compression of 45,000 HP) and gas that is lost or otherwise unaccounted for during transportation. The initial FL&U retention percentage is based on engineering estimates prepared by Ridgeline's operations engineering staff and on actual operational data compiled since the pipeline's in-service date of October 1, 2021. The derivation of the initial FL&U retention percentage is set forth in Exhibit NKO-S2.
(b) Annual True-Up Mechanism. The FL&U tracker includes an annual true-up mechanism under which Ridgeline will compare its actual FL&U volumes (fuel consumed plus lost-and-unaccounted-for gas) to the volumes retained from shippers during the preceding twelve-month period. If the actual FL&U volumes differ from the retained volumes by more than a specified tolerance band, the FL&U retention percentage will be adjusted prospectively to reflect the actual experience. This true-up mechanism ensures that shippers are not over-retained or under-retained for FL&U gas on an ongoing basis.
(c) Annual FL&U Report. Ridgeline will file an annual FL&U report with the Commission within ninety (90) days following the end of each calendar year. The annual FL&U report will contain detailed information regarding actual fuel gas consumption at each compressor station, the volume of lost-and-unaccounted-for gas measured during the reporting period, the FL&U retention percentage in effect during the reporting period, the variance between retained volumes and actual FL&U volumes, and any proposed adjustment to the FL&U retention percentage for the subsequent period. The annual FL&U report will be simultaneously posted on Ridgeline's electronic bulletin board and made available to all shippers.
(d) Prospective Adjustment Mechanism. Any adjustment to the FL&U retention percentage resulting from the annual true-up will be implemented on a prospective basis, effective the first day of the calendar quarter following the filing of the annual FL&U report. Prior to implementing any adjustment, Ridgeline will provide not less than thirty (30) days' written notice to all firm and interruptible shippers, and shippers will have a fifteen (15) day comment period during which they may submit written objections to the proposed adjustment. If a shipper objects, Ridgeline will address the objection in a supplemental filing with the Commission. This notice and comment process ensures that shippers have a meaningful opportunity to review and challenge any proposed changes to the FL&U retention percentage.
(e) Metering and Measurement Standards. The FL&U tracker provisions specify that all gas measurement at the receipt and delivery points of the Ridgeline Pipeline System shall be conducted in accordance with American Gas Association ("AGA") measurement standards and the applicable NAESB WGQ business practice standards. Fuel gas measurement at each compressor station will be conducted using dedicated fuel gas meters calibrated and tested at intervals specified in the tariff.
Q. Is the proposed FL&U tracker consistent with Commission precedent?
A. Yes. The proposed FL&U tracker is consistent with the Commission's well-established policy requiring interstate natural gas pipelines to include FL&U tracking and reporting mechanisms in their tariffs. The Commission has approved similar FL&U tracker mechanisms for numerous FERC-jurisdictional pipelines, and the design of Ridgeline's proposed tracker draws on the precedent established in those proceedings. The proposed tariff language for the FL&U tracker mechanism is set forth in Exhibit NKO-S2.
V. DEFICIENCY ITEM 3: INTERRUPTIBLE TRANSPORTATION (IT) RATE DERIVATION
A. Deficiency Identified
Q. What deficiency did OEMR identify regarding interruptible transportation service?
A. The January 19, 2023 Deficiency Letter noted that Ridgeline's original tariff filing failed to include a rate schedule for interruptible transportation service or a derivation of the interruptible transportation rate. OEMR stated that under Commission policy and regulations, open-access transportation pipelines are generally required to offer both firm and interruptible transportation services and to include in their tariffs a clearly derived interruptible rate that is consistent with the firm transportation rate. The absence of an IT rate schedule and rate derivation constituted a material deficiency in the original filing.
B. IT Rate Schedule (IT-1)
Q. How has Ridgeline addressed this deficiency?
A. Ridgeline has added a new Rate Schedule IT-1 to the redesigned tariff, establishing interruptible natural gas transportation service on the Ridgeline Pipeline System. Rate Schedule IT-1 provides for the transportation of natural gas on an interruptible, as-available basis, subject to the availability of capacity not committed to firm shippers under Rate Schedule FT-1.