Most observers have expressed the opinion that the net effect of further unbundling, the movement to straight fured-variable (SFV) rate design, and other changes is that pipeline risks are decreased. These observers believe that the risk will actually shift to the local distribution companies served by the pipelines. The predecessor of Orders 6361636-A, the Mega-NOPR, even proposed a 25-basispoint reduction adjustment to return on equity for pipelines that use SFV.
Many issues are perceived by anaiysts to be double-edged swords. It will be lefp to pipeline andLDC management to transform these issues into their advantages or disadvantages.
Underlying the risk-reduction premise is the argument that, under a modified fixed-variable (MFV) rate design method, the greater reliance on the commodity rate to recover costs leads to a greater variability in return. Under SFV, more costs are recovered through demand charges, and hence, less costs are recovered from throughput. This allegedly reduces the variability of return. As the logic follows, the appropriate response to this reduced risk to earnings is a corresponding reduction in awarded return.
In light of little quantitative support, the exclusion of the 25-basis-point adjustment in Orders 6361636-Acame as no surprise. Nevertheless, many parties' comments favor reinstatement of the adjustment, and they continue to pursue this in restructuring proceedings. The Commission's response to objections of Order 636's exclusion is that financial markets have already adjusted for this phenomenon. Order 636-A states that return will be determined on a case-by-case basis and parties should pursue any adjustments in their restructuring proceedings.