PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT This memorandum is protected from disclosure by the attorney-client privilege and/or the work product doctrine. It is intended solely for the use of the named recipients and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
CALDERWOOD & HARKNESS LLP 1601 K Street NW, Suite 900 Washington, DC 20006 Telephone: (202) 555-7400 Facsimile: (202) 555-7401
MEMORANDUM
FROM: George Trujillo, Responsible Partner, Energy & Infrastructure Practice Group, Calderwood & Harkness LLP Brett Callahan, Lead Associate, Energy & Infrastructure Practice Group, Calderwood & Harkness LLP
TO: Patricia Dunmore, Founder & Chairperson, Dunmore Energy Holdings Ltd. James K. Winfield, CEO & President, Ridgeline Midstream Services LLC Angela Moretti, VP, Finance & Treasurer, Ridgeline Midstream Services LLC Dr. Natasha Orlov, Director of Rates & Regulatory, Ridgeline Midstream Services LLC
CC: David Stanton, Working Associate, Calderwood & Harkness LLP
DATE: May 15, 2023
RE: Tariff Redesign Strategy and Comprehensive Work Plan — FERC Docket Nos. RP22-847-000 (Rate Case) and RP22-847-001 (Interconnection); Ridgeline Midstream Services LLC
C&H Matter No.: 1016-00005
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I. Executive Summary
The purpose of this memorandum is to set forth the comprehensive strategy and detailed work plan for the redesign of Ridgeline Midstream Services LLC's ("Ridgeline" or the "Company") FERC Gas Tariff, Original Volume No. 1 (the "Tariff"), as necessitated by the Deficiency Letter issued on January 19, 2023, by the Federal Energy Regulatory Commission's ("FERC" or the "Commission") Office of Energy Market Regulation ("OEMR"), authored by Dr. Miriam Okafor, Lead Economic Analyst, in connection with Docket Nos. RP22-847-000 (Rate Case) and RP22-847-001 (Interconnection) (collectively, the "Proceeding").
The Deficiency Letter identified fourteen (14) discrete deficiencies in Ridgeline's initial tariff filing of May 12, 2022, spanning a range of rate design, operational, compliance, and policy issues. These deficiencies, taken together, present a substantial impediment to the Commission's approval of the Tariff and, by extension, to the establishment of recourse rates for interstate natural gas transportation service on the Ridgeline Pipeline System. Ridgeline filed a partial response to the Deficiency Letter on March 15, 2023, addressing eight of the fourteen items — specifically, Items 1 through 4 and Items 7 through 10. Six items remain outstanding: Items 5, 6, 11, 12, 13, and 14. Each of the outstanding items requires the development of entirely new tariff provisions or the preparation of detailed analytical work that was not included in the original filing.
The Proceeding has been stayed since February 6, 2023, pursuant to an order issued by Administrative Law Judge Clara Whitfield, pending completion of Ridgeline's response to the Deficiency Letter. On April 28, 2023, Ridgeline moved for a 120-day extension of time to complete the tariff redesign for the remaining six items. On May 10, 2023, Judge Whitfield granted the extension, establishing a new deadline of August 28, 2023, for the filing of Ridgeline's complete response.
Calderwood & Harkness LLP ("C&H") has coordinated with Braswell Energy Consulting Group LLC ("Braswell" or "BEC"), engagement number BEC-2023-0041, engaged by Dunmore Energy Holdings Ltd. ("DEH") on April 15, 2023, under the direction of Dr. Raymond Braswell (former FERC economist), to serve as the tariff redesign consultant. Dr. Braswell brings substantial expertise in FERC rate design and has previously served as a testifying expert on behalf of Ridgeline in this Proceeding (as discussed in greater detail in Sections II.F and V.C below). The Braswell engagement encompasses the full scope of the tariff redesign, including a revised cost-of-service model, updated return on equity ("ROE") analysis, and development of a modified fixed-variable rate methodology.
This memorandum addresses the following topics in detail:
(a) Background and current procedural posture of the Proceeding, including a description of the Ridgeline Pipeline System, the initial tariff filing, interventions and protests, the hearing phase, the Deficiency Letter, and the engagement of Braswell;
(b) A thorough analysis of each of the fourteen deficiency items, distinguishing between those previously addressed in the partial response and those remaining outstanding;
(c) The proposed strategic approach to the tariff redesign, including the shift to a modified fixed-variable rate methodology at a 75% load factor and a reduced ROE;
(d) The coordination framework with Braswell Energy Consulting Group, including engagement scope, division of responsibilities, and communication protocols;
(e) The impact of the redesign on rate design, cost of service, and the overall economics of the Ridgeline Pipeline System;
(f) Interconnection agreement revisions and the status of negotiations with Appalachian Trunk Pipeline Company, LLC ("ATPC");
(g) The interface between the tariff redesign and ongoing settlement discussions before Settlement Judge Howard Margolis;
(h) Lender and noteholder considerations arising from the extended proceeding timeline;
(i) A detailed milestone timeline and deliverable schedule, organized in three phases;
(j) Resource allocation and budget considerations for the redesign phase; and
(k) Specific recommendations and action items requiring management and Board-level decisions.
We respectfully request that the recipients of this memorandum review its contents carefully and provide any feedback, corrections, or additional direction at the earliest opportunity. Given the August 28, 2023 deadline established by Judge Whitfield — which, as discussed herein, we anticipate will need to be extended — timely action on the recommendations set forth in Section XI is essential.
II. Background and Current Procedural Posture
A. The Ridgeline Pipeline System
The Ridgeline Pipeline System (the "System") is a 187-mile, 24-inch-diameter high-pressure natural gas pipeline extending from the Wetzel County Interconnect in Wetzel County, West Virginia (approximate coordinates 39.6120° N, 80.7540° W) to the Waynesburg Compressor Station in Greene County, Pennsylvania (approximate coordinates 39.8965° N, 80.1810° W). The System traverses the productive core of the Appalachian Basin, providing critical transportation infrastructure for natural gas produced from the Marcellus and Utica shale formations.
The System has a certificated design capacity of 1.2 billion cubic feet per day ("Bcf/d"), equivalent to 1,200,000 dekatherms per day ("Dth/d") at a heat content of 1,000 British Thermal Units per cubic foot ("BTU/cf"). Current throughput on the System is approximately 680 million cubic feet per day ("MMcf/d"), representing a utilization rate of approximately 56.67% of design capacity. This throughput level, while reflective of the System's early operational phase and ongoing ramp-up, is a significant consideration in the tariff redesign, particularly with respect to billing determinant assumptions, as discussed in greater detail in connection with Deficiency Item 4 below.
The System is supported by three compressor stations:
(i) Wetzel Station — located at the receipt-point terminus of the pipeline at the Wetzel County Interconnect;
(ii) Mannington Station — located at an intermediate point along the pipeline corridor; and
(iii) Waynesburg Station — located at the delivery-point terminus at the Waynesburg Compressor Station.
The three compressor stations provide an aggregate installed compression of 45,000 horsepower ("HP"), which is sufficient to support throughput at or near the System's design capacity under normal operating conditions.
The System was placed in service on October 1, 2021. Original construction costs totaled $587.2 million, inclusive of pipeline, compression, measurement, SCADA, and ancillary facilities. The System was financed through a combination of senior secured debt, second lien notes, and equity contributed by DEH, as described in greater detail in Section VIII below.
Ridgeline Midstream Services LLC is a Delaware limited liability company and the owner and operator of the System. Ridgeline is a wholly owned subsidiary of Dunmore Energy Holdings Ltd. ("DEH"), a Cayman Islands exempted company (Company Registration No. CR-381204). Ridgeline's principal office is located at 700 Kanawha Boulevard East, Suite 1400, Charleston, West Virginia 25301. The Company's registered agent in Delaware is Capitol Filings Inc., 1209 Orange Street, Wilmington, Delaware 19801. Ridgeline's Employer Identification Number is 87-4231956, and its FERC Code is 960442.
B. The Initial Tariff Filing
On May 12, 2022, Ridgeline filed its initial tariff application with FERC in Docket Nos. RP22-847-000 (rate case) and RP22-847-001 (interconnection). The filing sought approval of Ridgeline's initial tariff rate for interstate transportation of natural gas pursuant to Sections 4 and 7 of the Natural Gas Act ("NGA"), 15 U.S.C. §§ 717c and 717f, and the Commission's regulations at 18 C.F.R. Parts 154, 157, and 284. The tariff was structured as a Part 284, Subpart G open-access transportation tariff, consistent with the requirements of FERC's open-access regime established under Order Nos. 436 and 636 and their progeny.
The key parameters of the original tariff filing were as follows:
The billing determinant calculation was derived by multiplying the design capacity of 1,200,000 Dth/d by 365 days per year and applying a 100% load factor assumption, yielding 438,000,000 Dth/yr. The proposed recourse rate of $0.2265/Dth was therefore calculated by dividing the total cost of service of $97.36 million by the billing determinants of 438,000,000 Dth/yr.
The filing also sought authorization for the physical interconnection of the Ridgeline Pipeline System with the Appalachian Trunk Pipeline Company, LLC ("ATPC," FERC Code 840117) pipeline system at the Wetzel County Interconnect, located at ATPC Milepost 412.6. The total estimated cost of the interconnection facilities was $22.3 million, and Ridgeline proposed a cost allocation of 34.1% to Ridgeline ($7.6 million) and 65.9% to ATPC ($14.7 million). This allocation reflected Ridgeline's position that ATPC, as the larger system with greater capacity to benefit from the interconnection, should bear a proportionally greater share of the facilities cost.
C. Interventions and Protests
FERC issued a Notice of Filing on June 14, 2022, establishing an intervention and protest deadline of August 15, 2022. Three parties intervened in the Proceeding, each raising distinct concerns.
Mountainside Gas Producers Coalition ("MGPC"). MGPC is an unincorporated association of fourteen independent natural gas producers operating in the Marcellus and Utica shale formations in the Appalachian Basin. Calvin Dreyer serves as the Coalition's Executive Director. MGPC filed its notice of intervention on July 28, 2022. The Coalition's intervention reflected a generally supportive posture toward the interconnection component of Ridgeline's filing, recognizing that additional takeaway capacity from the Appalachian Basin serves the interests of its producing members. However, MGPC opposed the proposed recourse rate as excessive. In settlement discussions to date, MGPC has advocated for a rate no higher than $0.2560/Dth, which its members view as the ceiling for economic viability of transportation commitments on the System. MGPC is represented by Rebekah Montague of Whitmore & Sable LLP, 1200 New Hampshire Avenue NW, Suite 600, Washington, DC 20036.
Clearwater Municipal Gas Authority ("CMGA"). CMGA is a municipal gas utility serving residential and commercial customers in northeastern Pennsylvania. Dennis Ott serves as CMGA's General Manager. CMGA filed its notice of intervention on August 1, 2022. CMGA's principal concern is the potential for rate increases on the ATPC system that might result from the interconnection and from the allocation of interconnection costs to ATPC. CMGA has aligned with ATPC on the cost allocation question, supporting ATPC's position that the costs should be allocated on a 50/50 basis. CMGA is represented by Stephen Greer of Fordham Municipal Law Group PC, 312 Adams Avenue, Suite 100, Scranton, Pennsylvania 18503.
Appalachian Trunk Pipeline Company, LLC ("ATPC"). ATPC filed both a protest and a motion to intervene on August 15, 2022, the deadline for interventions. ATPC is the operator of a 30-inch-diameter natural gas pipeline system traversing the Appalachian region. ATPC's protest raised two principal objections: first, that the proposed interconnection configuration and cost allocation are improper, with ATPC arguing that the $14.7 million cost shift to its system is unjustified and that costs should instead be allocated on a 50/50 basis ($11.15 million each); and second, that the metering station design proposed by Ridgeline for the Wetzel County Interconnect is inadequate to ensure measurement accuracy and operational safety. ATPC's officers include Marcus R. Alderman (CEO) and Sandra K. Fenton (VP Regulatory Affairs). ATPC is a subsidiary of Tidewater Infrastructure Partners LP, of which Harrison J. Alderman serves as Chairman. ATPC is represented by William Pratt, Senior Partner, Kellner, Royce & Dillard LLP ("KRD"), One PPG Place, Suite 2800, Pittsburgh, Pennsylvania 15222.
The Commission granted all three interventions on September 22, 2022, and established a Track II procedural schedule for the Proceeding. At the same time, the Commission appointed Settlement Judge Howard Margolis to oversee settlement discussions among the parties.
D. Hearing Phase and Testimony
Administrative Law Judge Clara Whitfield was appointed to preside over the hearing phase of the Proceeding on November 14, 2022. A prehearing conference was held the same date, at which Judge Whitfield established a schedule for the filing of pre-filed direct and answering testimony.
On December 5, 2022, Ridgeline filed the direct testimony and supporting exhibits of seven witnesses:
(1) James K. Winfield, CEO & President — policy testimony regarding the need for the Ridgeline Pipeline System, the benefits of the interconnection with ATPC, and the public interest served by the proposed tariff;
(2) Angela Moretti, VP, Finance & Treasurer — cost-of-service testimony supporting Ridgeline's rate base, capital structure, cost of debt, depreciation, operating expenses, and revenue credits;
(3) Thomas Greaves, VP, Engineering & Operations — engineering testimony regarding the System's design, construction, and operational characteristics, including compression, metering, and SCADA systems;
(4) Dr. Natasha Orlov, Director of Rates & Regulatory — rate design testimony supporting the tariff provisions, proposed rate structure (reservation and usage charges), and billing determinant assumptions;
(5) Dr. Raymond Braswell, Braswell Energy Consulting Group LLC — economic testimony supporting the proposed 14.00% ROE based on a discounted cash flow ("DCF") proxy group analysis, and the 55% equity / 45% debt capital structure;
(6) Margaret Sullivan, Manager of Gas Control & Scheduling — operational testimony regarding scheduling, nomination, and flow management procedures; and
(7) Kevin O'Malley, Director of Environmental, Health & Safety — testimony regarding the environmental compliance and safety record of the System and the appropriateness of the proposed operational flow order provisions.
Answering testimony was filed on January 9, 2023, by ATPC, MGPC, and CMGA. Of particular significance, MGPC's rate expert, Dr. Eleanor Vasquez, filed testimony proposing an ROE of 11.25% based on her own DCF proxy group analysis, which she argued more accurately reflected the risk profile of a single-asset midstream pipeline company with limited operational history. ATPC's testimony, filed through Sandra K. Fenton and an external economic consultant, proposed an ROE of 10.75%, the lowest among the parties' positions.
E. The Deficiency Letter and Stay
On January 19, 2023, the FERC Office of Energy Market Regulation, through Dr. Miriam Okafor, Lead Economic Analyst, issued the Deficiency Letter (the "Letter") identifying fourteen discrete deficiencies in Ridgeline's initial tariff filing. The Letter covered a wide range of issues, from the adequacy of cost-of-service support for the proposed ROE to the absence of provisions addressing emerging policy matters such as greenhouse gas emission cost recovery and FERC Order No. 2222 distributed energy resource aggregation.
On February 6, 2023, Judge Whitfield issued an order staying the procedural schedule pending Ridgeline's full response to the Deficiency Letter. The stay suspended all deadlines for rebuttal testimony, discovery, and hearing, effectively pausing the Proceeding in its entirety.
On March 15, 2023, Ridgeline filed a partial response to the Deficiency Letter, addressing eight of the fourteen items — specifically, Items 1 through 4 and Items 7 through 10. The partial response provided varying levels of detail for each item, as described in Section III.A below. The partial response was accompanied by a letter to Judge Whitfield advising that Ridgeline intended to address the remaining six items (Items 5, 6, 11, 12, 13, and 14) through a comprehensive tariff redesign.
On April 28, 2023, Ridgeline filed a motion requesting a 120-day extension of time to complete the tariff redesign for the remaining six items. The motion set forth good cause for the requested extension, including the complexity of the outstanding deficiency items, the engagement of Braswell Energy Consulting Group as the tariff redesign consultant, and the need to coordinate the redesign with ongoing interconnection negotiations with ATPC. On May 10, 2023, Judge Whitfield granted the first extension, establishing a new deadline of August 28, 2023.
FERC Trial Staff for the Proceeding consists of Jonathan Briggs, Lead Trial Attorney in the Office of General Counsel, and Dr. Miriam Okafor, who serves in a dual capacity as both the author of the Deficiency Letter and the lead FERC Staff economist assigned to the case.
F. Engagement of Braswell Energy Consulting Group LLC
On April 15, 2023, DEH engaged Braswell Energy Consulting Group LLC ("Braswell" or "BEC") under engagement number BEC-2023-0041 to serve as the tariff redesign consultant. The engagement was structured as a direct engagement between DEH and Braswell, with C&H providing legal oversight and coordination. Dr. Raymond Braswell, a former FERC economist with extensive experience in natural gas rate design and cost-of-service proceedings, serves as the lead consultant for the engagement. Braswell's offices are located at 8300 Greensboro Drive, Suite 450, McLean, Virginia 22102.
It is important to note that Dr. Braswell previously filed pre-filed direct testimony on December 5, 2022, on behalf of Ridgeline, supporting the 14.00% ROE and the 55/45 capital structure. His engagement as the tariff redesign consultant is a separate engagement from his earlier role as a testifying expert. Potential considerations regarding Dr. Braswell's dual role — as both a prior testifying expert who sponsored the 14.00% ROE and the current consultant who is developing a revised ROE in the range of 12.00%–13.00% — have been analyzed by C&H and addressed in a separate privilege memorandum. In brief, Dr. Braswell's testimony was based on data available at the time of filing, and his revised analysis will reflect updated market conditions, including changes in interest rates and equity market parameters, that justify a lower ROE. Any supplemental testimony filed by Dr. Braswell in connection with the redesign will directly address the basis for the change in his recommendation.
The scope of the Braswell engagement encompasses a full revision of the FERC Gas Tariff, Original Volume No. 1, to address all fourteen deficiency items identified in the January 19, 2023 Deficiency Letter. The engagement specifically includes the development of a new rate design using a modified fixed-variable rate methodology, an updated DCF proxy group analysis, a revised cost-of-service model, and supporting workpapers and schedules. The full scope of Braswell's deliverables is set forth in Section V.A below.
III. Analysis of the 14 Deficiency Items
This section provides a detailed analysis of each of the fourteen deficiency items identified in the Deficiency Letter. The analysis is organized into two subsections: Section III.A addresses the eight items that were the subject of Ridgeline's partial response filed March 15, 2023, while Section III.B addresses the six outstanding items that remain to be fully resolved through the tariff redesign.
A. Items Previously Addressed in March 15, 2023 Partial Response (Items 1–4 and 7–10)
The following eight items were addressed in Ridgeline's partial response. However, it is important to note that the partial response provided preliminary or framework-level responses to several of these items, and further refinement and finalization will be necessary as part of the overall tariff redesign. Each item is discussed in turn below.
Item 1: Inadequate Cost-of-Service Support for Proposed 14.00% ROE
The Deficiency Letter identified the proposed 14.00% ROE as lacking adequate cost-of-service support. Specifically, Dr. Okafor noted that Ridgeline's DCF proxy group analysis relied on historical dividend yields and growth rates that were not sufficiently current, and that the proxy group selection methodology did not adequately justify the inclusion of certain companies with operational profiles materially different from Ridgeline's.
Ridgeline's partial response included updated proxy group data through year-end 2022, incorporating more recent dividend yields and consensus analyst growth rate estimates. The partial response acknowledged that interest rate increases since the original May 2022 filing had affected the equity cost of capital landscape, but maintained that a return in excess of 13.00% was justified given the risk profile of a single-asset pipeline with limited operating history and below-capacity throughput.
It is our assessment, shared by Dr. Braswell, that the 14.00% ROE proposed in the original filing is likely unsustainable before FERC in the current interest rate and regulatory environment. The Commission's recent precedent in rate proceedings involving comparable midstream assets suggests that approved ROEs have trended downward, with most approvals and settlements clustering in the 10.50% to 13.00% range. Braswell will prepare a fully updated DCF proxy group analysis using the most current available data. Preliminary indications suggest that a revised ROE in the range of 12.00% to 13.00% is supportable, with Braswell's initial modeling pointing toward a central estimate of approximately 12.50%. However, as of May 2023, the analysis remains in development, and the final recommendation will depend on updated proxy group data, market conditions, and the outcome of Braswell's multi-stage DCF modeling.
The ROE question has significant strategic dimensions. ATPC has proposed an ROE of 10.75%, and MGPC has proposed 11.25%. Ridgeline must position its revised ROE proposal competitively — that is, at a level high enough to maximize return to DEH and its investors, but low enough to be defensible before the Commission and to narrow the gap with intervenor positions in settlement discussions. The difference between 12.00% and 13.00% on a $612.40 million rate base at 55% equity translates to approximately $3.37 million in annual return (i.e., 1.00% × $612.40M × 55% = $3.37M), which, divided by the revised billing determinants at 75% load factor, equates to approximately $0.01/Dth. This is not an insignificant amount and warrants careful deliberation by DEH and Ridgeline management.
Item 2: Failure to Include FL&U Tracker Mechanism
The Deficiency Letter identified the absence of a fuel-use and lost-and-unaccounted-for gas ("FL&U") tracker mechanism as a deficiency. Modern FERC-approved tariffs for compressor-intensive pipeline systems routinely include FL&U tracker provisions that allow the pipeline to recover actual fuel use and lost-and-unaccounted-for gas costs, with periodic true-up adjustments to ensure that actual costs are borne by shippers rather than absorbed by the pipeline or resulting in over-recovery.
Ridgeline's partial response outlined a conceptual framework for an FL&U tracker, including the general principles of tracker operation, the proposed frequency of true-up filings, and the categories of costs to be tracked (compressor fuel consumption, measurement losses, and operational venting). However, the partial response did not include detailed tariff language, specific formulas for calculation of FL&U percentages, or the procedural mechanics of the annual true-up process.
Detailed tariff language and annual true-up procedures for the FL&U tracker must be drafted as part of the tariff redesign. This is a technically complex undertaking given the three-compressor-station configuration of the Ridgeline System and the variable nature of compressor fuel consumption at different throughput levels. Dr. Orlov's team will need to provide actual operational data on fuel consumption and gas losses for the period since the System's October 1, 2021 in-service date. A separate memorandum on FL&U tracker design is forthcoming and is currently scheduled for delivery in July 2023.
Item 3: Missing Interruptible Transportation (IT) Rate Derivation
The Deficiency Letter noted that the original tariff filing did not include a complete derivation of the interruptible transportation ("IT") rate or a standalone IT rate schedule. While the original filing focused on firm transportation ("FT") service under Rate Schedule FT-1, the Commission's open-access requirements mandate that pipelines offer IT service and include a fully developed IT rate schedule in their tariffs.
Ridgeline's partial response provided a preliminary IT rate derivation framework, identifying the FT-1 rate as the basis for the IT rate and describing the general approach to IT rate construction. However, the response did not include a complete Rate Schedule IT-1, specific IT rate calculations, or a fully articulated IT revenue crediting methodology.
The redesigned tariff must include a complete Rate Schedule IT-1, with a fully derived IT rate that bears a rational relationship to the firm FT-1 rate. The IT rate must comply with FERC policy on IT rate floors, which generally require that the IT rate be set no lower than the variable cost of providing IT service. The IT revenue crediting methodology — i.e., the mechanism by which IT revenues are credited against the cost of service to reduce firm shippers' rates — must also be fully specified. Braswell will deliver an IT rate derivation framework, and C&H will draft the corresponding tariff language.
Item 4: Insufficient Support for 100% Load Factor Billing Determinant Assumption
This item represents one of the most consequential deficiency items and a pivotal strategic question in the tariff redesign. The Deficiency Letter questioned the adequacy of support for the 100% load factor assumption used to calculate billing determinants in the original filing.
Ridgeline's partial response sought to justify the 100% load factor by reference to contractual commitments from anchor shippers. However, the current throughput on the System of approximately 680 MMcf/d — representing only 56.67% of design capacity — substantially undermines the credibility of a 100% load factor assumption. Dr. Okafor's letter specifically noted this throughput figure and questioned whether the contractual commitments cited by Ridgeline are firm, unconditional, and of sufficient term to support a 100% load factor over the period in which the tariff rates will be in effect.
Dr. Braswell has recommended that Ridgeline move to a 75% load factor assumption. This is a major strategic decision with significant rate implications. The impact on billing determinants and per-unit rates is illustrated below:
The move to 75% load factor will result in a higher per-unit rate because the total cost of service will be recovered over a smaller volume of billing determinants. However, Braswell's assessment — which we share — is that the 75% load factor is more defensible and conservative than the original 100% assumption, particularly in light of the current throughput levels and the competitive dynamics of the Appalachian Basin takeaway market. The intervenors have advocated for a load factor of 85% or higher, and this divergence between the parties' load factor assumptions will be a significant issue in settlement discussions and, if necessary, at hearing.
We recommend adopting the 75% load factor as the basis for the redesigned tariff. This recommendation requires DEH Board approval given the material impact on the per-unit rate and, consequently, on the competitive positioning of the Ridgeline System in the marketplace.
Item 7: Missing EBB Posting Requirements
The Deficiency Letter identified the absence of electronic bulletin board ("EBB") posting requirements in the tariff. Under 18 C.F.R. Part 284 and FERC's open-access regulations, interstate pipelines must maintain an EBB that provides shippers and potential shippers with timely information regarding available capacity, scheduled and actual flows, operational conditions, and other matters.
Ridgeline's partial response included draft EBB provisions that set forth the general categories of information to be posted and the frequency of posting. These provisions must be finalized and fully conformed to the Commission's current requirements, including any updates or clarifications issued by FERC since the partial response. Braswell's NAESB compliance review (discussed in connection with Item 6 below) will encompass the EBB requirements, and C&H will prepare final tariff language.
Item 8: Inadequate Shipper-Must-Have-Title Provisions
The Deficiency Letter noted that the tariff's shipper-must-have-title provisions were inadequate to comply with FERC's requirements. The shipper-must-have-title policy requires that shippers transporting gas on an interstate pipeline hold title to the gas at the time of nomination and throughout the transportation process.
Ridgeline's partial response included revised shipper-must-have-title language drafted in consultation with C&H. The revised language addressed the principal deficiencies identified in the Letter, including the requirement for affirmative shipper representations regarding title, the pipeline's right to require documentation of title, and the consequences of shipper non-compliance. The final provisions need to be integrated into the General Terms and Conditions ("GT&C") of the redesigned tariff and cross-referenced in the relevant rate schedules.
Item 9: Interconnection Agreement Not Filed as a Rate Schedule
The Deficiency Letter identified a procedural deficiency in that the Ridgeline-ATPC Interconnection Agreement was not filed as a FERC rate schedule. Under the Commission's regulations, interconnection agreements between interstate pipelines must be filed as rate schedules within the pipeline's tariff, ensuring that the terms and conditions of the interconnection are subject to FERC review and approval.
Ridgeline's partial response acknowledged this deficiency and committed to filing the Interconnection Agreement as a rate schedule in the redesigned tariff. In connection with this commitment, Version 3.0 of the Draft Interconnection Agreement was prepared in April 2023, incorporating revisions necessary to conform the agreement to the requirements for a FERC rate schedule. The finalization of the Interconnection Agreement remains subject to the outcome of ongoing negotiations with ATPC, as discussed in Section VI below.
Item 10: No Penalty Revenue Crediting Mechanism
The Deficiency Letter identified the absence of a penalty revenue crediting mechanism. Under FERC policy, pipelines that assess penalties on shippers for operational infractions (such as scheduling deviations, unauthorized overruns, or operational flow order non-compliance) must credit the penalty revenues back to non-offending shippers rather than retaining them as additional pipeline income.
Ridgeline's partial response included proposed penalty revenue crediting language that established the general framework for the crediting mechanism, including the method of calculation, the timing of credits, and the categories of penalty revenues subject to crediting. This language must be finalized and integrated into the GT&C of the redesigned tariff. C&H will prepare final tariff provisions consistent with current FERC precedent on penalty revenue crediting.
B. Outstanding Deficiency Items Requiring Full Redesign (Items 5, 6, 11, 12, 13, 14)
The following six items were not addressed in the partial response and require the development of entirely new tariff provisions as part of the redesign. These items represent the bulk of the remaining work and are the primary drivers of the extended timeline discussed in this memorandum.
Item 5: No Capacity Release Provisions in General Terms and Conditions
The Deficiency Letter identified the complete absence of capacity release provisions in the tariff's GT&C as a significant deficiency. Capacity release is a fundamental element of the Commission's open-access regime, enabling firm shippers to release all or a portion of their contracted capacity to other parties through a transparent, non-discriminatory process administered through the pipeline's EBB.
The redesigned tariff must include comprehensive capacity release provisions fully compliant with the Commission's regulations at 18 C.F.R. § 284.8. These provisions must address, at a minimum, the following elements:
(a) The rights and obligations of releasing shippers, including the process for initiating a capacity release, specifying the terms and conditions of the release, and posting the release on the EBB;
(b) The rights and obligations of replacement shippers, including the process for bidding on released capacity, the evaluation criteria for competing bids, and the requirements for creditworthiness of replacement shippers;
(c) The mechanics of prearranged deals between releasing shippers and pre-identified replacement shippers, including the obligation to post such deals on the EBB and the right of other shippers to submit competing bids;
(d) Bidding procedures, including minimum bid requirements, bid evaluation criteria, and the timeline for the bidding process;
(e) Recall rights, including the conditions under which a releasing shipper may recall previously released capacity, the notice requirements for recall, and the impact of recall on the replacement shipper's rights; and
(f) Revenue crediting for capacity release transactions and the treatment of discounted releases.
Dr. Braswell has agreed to provide model capacity release provisions drawn from comparable recently-approved FERC tariffs for interstate pipelines of similar scale and configuration. C&H will use these model provisions as the foundation for drafting Ridgeline-specific capacity release language that is tailored to the operational characteristics of the System.
Item 6: Incomplete NAESB Standards Compliance in Operational Flow Order Provisions
The Deficiency Letter identified non-compliance with the North American Energy Standards Board ("NAESB") Wholesale Gas Quadrant ("WGQ") standards in the tariff's operational flow order ("OFO") provisions. FERC has incorporated the NAESB WGQ standards into its regulations and requires interstate pipelines to conform their tariffs to these standards, including provisions governing scheduling, nomination, imbalance management, and operational balancing.
A comprehensive gap analysis is required against the current NAESB WGQ Version 3.2 standards. This analysis must identify every instance in which the original tariff's OFO provisions, operational balancing agreement provisions, and imbalance resolution procedures deviate from or fail to address the requirements of the NAESB standards. The gap analysis will serve as the roadmap for revising the affected tariff provisions.
In addition to the OFO provisions, the NAESB compliance review will encompass nomination cycle timelines, confirmation procedures, allocation methodologies, and the interface between Ridgeline's gas control function and the EBB. A separate NAESB compliance checklist memorandum will be prepared by C&H and circulated to Braswell and the Ridgeline Rates & Regulatory team for review and input.
Item 11: Inadequate Creditworthiness Provisions
The Deficiency Letter identified the tariff's creditworthiness provisions as inadequate. The Commission requires interstate pipelines to include comprehensive, non-discriminatory creditworthiness provisions in their tariffs to protect the pipeline and its shippers from the risk of non-payment by counterparties.
The redesigned tariff must include fully developed creditworthiness provisions addressing the following elements:
(a) Credit rating thresholds — minimum investment-grade credit ratings (e.g., BBB- from S&P, Baa3 from Moody's) required for shippers to receive unsecured credit;
(b) Unsecured credit limits — maximum dollar amounts of unsecured credit available to shippers based on their credit ratings, financial condition, and historical payment performance;
(c) Collateral requirements — the types of collateral acceptable to the pipeline, including irrevocable standby letters of credit from approved financial institutions, cash deposits, and parent or affiliate guarantees, together with the terms and conditions governing each form of collateral;
(d) Material adverse change provisions — the pipeline's right to demand additional collateral or reduce unsecured credit limits upon a material adverse change in a shipper's creditworthiness;
(e) Dispute resolution — procedures for shippers to challenge creditworthiness determinations; and
(f) Non-discrimination — assurances that creditworthiness standards are applied uniformly to all shippers and potential shippers.
The creditworthiness provisions must comply with applicable FERC precedent, including the Commission's policy statements and orders addressing non-discriminatory credit practices. C&H will analyze relevant FERC precedent and prepare a separate creditworthiness provision design memorandum for circulation in connection with the first draft of the redesigned tariff.
Item 12: Missing Segmentation and Flexible Receipt/Delivery Point Provisions
The Deficiency Letter identified the absence of provisions allowing shippers to segment firm capacity and designate flexible receipt and delivery points. Under the Commission's open-access policies, pipelines are generally required to allow shippers to use their firm capacity in segments, rather than requiring full-path transportation from the primary receipt point to the primary delivery point. Similarly, FERC encourages pipelines to provide flexible receipt and delivery point options where operationally feasible.
The System presents a somewhat unique configuration for segmentation purposes, as it currently has a single receipt point (Wetzel County Interconnect) and a single delivery point (Waynesburg Compressor Station), with no intermediate receipt or delivery points. However, the three compressor stations — Wetzel Station, Mannington Station, and Waynesburg Station — provide potential intermediate locations at which segmentation and flexible point services could be offered. The Mannington Station, located at an intermediate point along the 187-mile pipeline corridor, is the most logical candidate for an intermediate receipt and/or delivery point.
The redesign must evaluate the system design implications of offering segmentation and flexible point services, including the impact on operational scheduling, flow management, capacity allocation, and measurement requirements. Dr. Orlov's team and Mr. Greaves's engineering group will need to assess whether the existing facilities at Mannington Station (or other locations) are adequate to support flexible point service, or whether capital modifications would be required.
Item 13: No Provisions Addressing Greenhouse Gas Emission Cost Recovery
The Deficiency Letter raised the question of greenhouse gas ("GHG") emission cost recovery as an emerging policy area. Although there is no established FERC precedent for GHG cost recovery mechanisms in midstream pipeline tariffs, Dr. Okafor's letter noted that the Commission is increasingly attentive to the environmental dimensions of natural gas infrastructure and that Ridgeline's tariff should include provisions addressing the recovery of costs associated with present and future GHG regulatory obligations.
This is a novel and sensitive issue. The Ridgeline Pipeline System operates in two states — West Virginia and Pennsylvania — with differing regulatory approaches to GHG emissions. West Virginia has not adopted a comprehensive GHG regulatory framework, while Pennsylvania has taken steps toward participation in the Regional Greenhouse Gas Initiative ("RGGI"), although the legal status of Pennsylvania's RGGI participation remains contested in the courts. At the federal level, the Environmental Protection Agency's regulations under the Clean Air Act impose certain reporting and monitoring obligations on sources of GHG emissions, including compressor stations, but do not currently impose emission reduction mandates on natural gas pipelines.
The tariff redesign should propose a GHG cost tracker and passthrough mechanism that would allow Ridgeline to recover from shippers the costs of compliance with present and future GHG regulations, including emission monitoring and reporting costs, carbon allowance or tax costs (if applicable), and the costs of operational modifications required by GHG regulations. The tracker should be designed to be flexible and adaptable, accommodating regulatory developments at both the federal and state levels without requiring a new tariff filing each time the regulatory landscape changes.
It is also worth noting that DEH has a 250 MW wind portfolio under development, which may have relevance to the GHG cost recovery discussion. While the wind portfolio is not directly related to the Ridgeline Pipeline System, DEH may wish to explore whether the integration of renewable energy into its broader corporate profile has any bearing on the GHG cost recovery provisions or on the Commission's assessment of Ridgeline's environmental posture.
A separate memorandum on GHG cost recovery provisions will be prepared by C&H, with input from Braswell, and is currently scheduled for delivery in March 2024. This timeline reflects the novelty of the issue and the need for thorough analysis of the evolving regulatory landscape.
Item 14: Failure to Address Order No. 2222 Distributed Energy Resource Aggregation Implications
The Deficiency Letter raised the question of whether FERC Order No. 2222, which addresses the participation of distributed energy resource aggregations in organized wholesale electric markets, has implications for the Ridgeline Pipeline System. This is an unusual deficiency item for a natural gas pipeline tariff proceeding, as Order No. 2222 is principally an electric market rule directed at regional transmission organizations ("RTOs") and independent system operators ("ISOs").
However, Dr. Okafor's letter noted that the Commission is interested in understanding whether the Ridgeline Pipeline System has any interface with distributed energy resources, renewable energy facilities, or hybrid gas-electric facilities that might implicate the principles of Order No. 2222. This inquiry appears to be driven, at least in part, by the Commission's awareness of DEH's 250 MW wind portfolio under development, which was referenced in the policy testimony of Mr. Winfield.
C&H must analyze the applicability of Order No. 2222 to the Ridgeline Pipeline System and, if applicable, draft responsive tariff provisions addressing the aggregation of distributed energy resources at or near the System. If Order No. 2222 is determined not to be directly applicable to a natural gas pipeline tariff — which is the most likely conclusion — the response should nonetheless address the question raised by the Deficiency Letter and explain the basis for Ridgeline's position. A separate memorandum on Order No. 2222 implications will be prepared and is currently scheduled for delivery in May 2024.
IV. Proposed Strategic Approach to the Tariff Redesign
A. Overarching Strategy
The proposed strategy calls for a complete redesign of FERC Gas Tariff, Original Volume No. 1, addressing all fourteen deficiency items identified in the January 19, 2023 Deficiency Letter. The redesign is not merely an incremental revision of the original tariff but rather a fundamental restructuring of the rate design methodology, accompanied by the development of numerous new tariff provisions that were absent from the original filing.
The three foundational elements of the redesign strategy are as follows:
First, the rate design methodology will shift from the original 100% load factor straight fixed-variable approach to a modified fixed-variable rate methodology at a 75% load factor. This shift is the single most consequential change in the redesign. As discussed in connection with Item 4 above, the 100% load factor assumption is not defensible given the current throughput levels on the System, and a 75% load factor produces a more conservative and supportable basis for rate calculations.
Second, the proposed ROE will be reduced from 14.00% toward a more defensible level. Braswell is conducting an updated DCF proxy group analysis, and the preliminary range under consideration is 12.00% to 13.00%. The final ROE recommendation will depend on market data and regulatory precedent analysis that is still in progress.
Third, the tariff will be comprehensively revised to include all provisions identified as missing or deficient in the Deficiency Letter, including capacity release provisions, NAESB compliance, creditworthiness standards, segmentation and flexible points, GHG cost recovery, and Order No. 2222 analysis.
The redesign will be an iterative process. We anticipate that four drafts of the revised tariff will be produced, with progressive incorporation of Braswell's economic and rate design recommendations, NAESB compliance revisions, stakeholder feedback, and internal Ridgeline review. Each successive draft will build upon its predecessor, with redline comparisons provided to facilitate review by all members of the project team.
B. Rate Design Methodology
The original tariff filing employed a 100% load factor straight fixed-variable approach, under which the entire cost of service was allocated to firm shippers based on the assumption that the pipeline would operate at full design capacity for every day of the year. This approach, while simple, produced a per-unit rate that was based on an aggressive and, as it has transpired, unsupported assumption about the System's utilization.
The redesigned tariff will employ a modified fixed-variable rate methodology at 75% load factor. Under this approach, the cost of service is divided into fixed and variable components, with the fixed component (largely consisting of the return on rate base, depreciation, and fixed operating expenses) recovered through reservation charges paid by firm shippers, and the variable component (consisting primarily of variable operating expenses and fuel costs) recovered through usage charges paid by all shippers, including interruptible shippers. The reservation charge is calculated by dividing the fixed cost component by the billing determinants, while the usage charge is calculated by dividing the variable cost component by projected throughput volumes.
The preliminary impact of the redesign on the per-unit rate is significant and is summarized below:
The increase in the total cost of service from $97.36 million to an estimated $103.00 million reflects the net effect of several factors. On the upward side, updated operating and maintenance ("O&M") expenses, administrative and general ("A&G") expenses, and income tax allowances are expected to be higher than those in the original filing, reflecting actual operating costs incurred since the System's in-service date and general inflationary pressures. Additionally, revenue credits — which reduce the cost of service — may be lower than the $16.10 million assumed in the original filing. On the downward side, the lower ROE (and therefore lower return on rate base) will partially offset these increases. The precise figures will depend on the finalized ROE and all cost inputs, which Braswell is currently developing in the revised cost-of-service model.
The revised per-unit rate of approximately $0.31/Dth, while significantly higher than the original $0.2265/Dth, is based on more conservative and defensible assumptions. The higher rate reflects the reality that the System's current throughput does not support a 100% load factor and that recovering the pipeline's costs over a smaller denominator of billing determinants necessarily produces a higher per-unit charge.
The impact of the redesign on settlement posture is noteworthy. The intervenors' current settlement position envisions a rate ceiling of approximately $0.2560/Dth. Under the redesigned tariff, Ridgeline's per-unit rate would be approximately $0.31/Dth, resulting in a gap of approximately $0.054 to $0.058/Dth between the parties' positions. This gap is wider than the gap under the original filing ($0.2560 − $0.2265 = $0.0295/Dth), but the dynamics are different: under the redesign, Ridgeline's position is more defensible on the deficiency items, particularly ROE and cost-of-service support, while the load factor dispute becomes the primary battleground.
C. Cost-of-Service Redesign
The cost-of-service redesign will maintain the original filing's rate base of $612.40 million, which was calculated using the same test year as the initial filing and has not been challenged by any party. The composition of the rate base remains as follows:
• 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 capital structure will be maintained at 55% equity and 45% debt, consistent with the original filing and with the actual capital structure of Ridgeline. The cost of debt will remain at 5.25%, representing the weighted average cost of the Company's two debt instruments:
• Senior Secured Credit Facility: $400 million term loan, bearing interest at SOFR plus 325 basis points. The credit facility was arranged and syndicated by Pinnacle National Bank, N.A. (Richard Calvert, managing director), with a syndicate consisting of Pinnacle (40%), Granite Trust Company (30%), and Lakeshore Capital Bank (30%). The facility also includes a $75 million revolving credit line. Maturity date: October 1, 2028. The credit facility agreement is dated September 15, 2021.
• Second Lien Notes: $150 million principal amount, bearing interest at 7.875% per annum, due 2030. The notes were issued in a private placement to Harborview Capital Management LLC (Samantha Hu, portfolio manager) and Sentinel Ridge Fund LP (Peter Nowicki, managing partner). Issuance date: September 22, 2021.
The ROE will be revised downward from 14.00%. As discussed above, Braswell is preparing an updated DCF proxy group analysis. The WACC will be recalculated based on the revised ROE. By way of illustration, if the ROE is revised to 12.50%, the WACC would be calculated as follows: (55% × 12.50%) + (45% × 5.25%) = 6.875% + 2.3625% = 9.2375%, and the return on rate base would be $612.40M × 9.2375% = approximately $56.57 million, compared to $61.62 million under the original filing's 10.0625% WACC. This represents a reduction in the return on rate base of approximately $5.05 million.
Depreciation expense will be maintained at $14.68 million, based on a 2.5% annual straight-line depreciation rate applied to the original plant in service. This depreciation rate and methodology have not been challenged by any party.
O&M and A&G expenses will be updated to reflect current costs, including actual staffing levels, contract service costs, compressor maintenance and overhaul reserves, pipeline integrity management expenditures, insurance premiums, and corporate overhead allocations. These updated figures will be prepared by Ms. Moretti and her finance team, with Braswell providing analytical support and benchmarking against comparable pipeline systems.
The income tax allowance will be recalculated at the revised ROE, using an effective income tax rate of approximately 26.13%, which reflects the combined impact of the 21% federal corporate income tax rate and the 6.5% West Virginia state income tax rate (calculated on a composite basis). The calculation of the income tax allowance also requires consideration of Ridgeline's organizational form — as a limited liability company, Ridgeline is a pass-through entity for federal income tax purposes, and the availability of an income tax allowance for pass-through entities in the cost of service has been the subject of extensive FERC policy development following the Commission's decisions in Sterling Reach Holdings, Inc. v. FERC and the Revised Policy Statement on Treatment of Income Taxes. Ridgeline's position on this issue must be carefully developed in the redesigned tariff.
Revenue credits will be reevaluated. The original filing included $16.10 million in revenue credits, principally consisting of projected IT revenues and other non-jurisdictional revenues. Depending on the revised IT rate derivation and actual IT volumes since in-service, the revenue credits may be lower than originally projected, which would increase the net cost of service. These offset effects must be carefully modeled.
D. Tariff Document Architecture
The redesigned FERC Gas Tariff, Original Volume No. 1, will be organized to include the following principal components, each of which addresses one or more of the fourteen deficiency items:
1. Rate Schedule FT-1 (Firm Transportation): Revised reservation and usage charges reflecting the modified fixed-variable rate methodology at 75% load factor and the revised ROE. This is the core rate schedule of the tariff.
2. Rate Schedule IT-1 (Interruptible Transportation): New rate schedule providing a complete derivation of the IT rate and all terms and conditions of IT service. (Deficiency Item 3)
3. General Terms and Conditions: Substantially revised to address Deficiency Items 5, 6, 7, 8, 10, 11, 12, 13, and 14. The GT&C will include, at a minimum:
• Capacity Release Provisions (Item 5)
• NAESB-compliant Operational Flow Order and Balancing Provisions (Item 6)
• EBB Posting Requirements (Item 7)
• Shipper-Must-Have-Title Provisions (Item 8)
• Penalty Revenue Crediting Mechanism (Item 10)
• Creditworthiness Provisions (Item 11)
• Segmentation and Flexible Receipt/Delivery Point Provisions (Item 12)
• GHG Cost Recovery Tracker (Item 13)
• Order No. 2222 / Renewable Interconnection Provisions or Discussion (Item 14)
4. Form of Service Agreement: Updated to conform to the revised rate schedules and GT&C.
5. Interconnection Agreement: To be filed as a FERC rate schedule, incorporating the finalized terms of the Ridgeline-ATPC Interconnection Agreement. (Deficiency Item 9)
6. FL&U Tracker: New mechanism establishing the procedures for tracking and recovering fuel-use and lost-and-unaccounted-for gas costs. (Deficiency Item 2)
Each of these components will be drafted by C&H, with economic and rate design input from Braswell and operational input from Ridgeline's engineering and rates teams.
V. Coordination Framework with Braswell Energy Consulting Group LLC
A. Engagement Scope and Deliverables
The Braswell engagement (engagement number BEC-2023-0041) encompasses the following specific deliverables, each of which corresponds to one or more aspects of the tariff redesign:
(1) Updated DCF Proxy Group Analysis: A comprehensive discounted cash flow analysis using an updated proxy group of comparable publicly traded pipeline companies, reflecting current market data on dividend yields, analyst growth rate estimates, equity risk premiums, and risk-free rates. The analysis will support a revised ROE recommendation.
(2) Revised Cost-of-Service Model: A complete cost-of-service model for the Ridgeline Pipeline System, incorporating the revised ROE, updated O&M and A&G expenses, recalculated income tax allowance, and revised revenue credits. The model will produce the reservation and usage charges for Rate Schedule FT-1.
(3) Modified Fixed-Variable Rate Design: Development of the rate design methodology, including the allocation of costs between fixed and variable components, the derivation of reservation and usage charges, and the calculation of billing determinants at 75% load factor.