Must-know: Why government regulation stabilizes MLP cash flow » Market Realist

The FERC, or the Federal Energy Regulatory Commission, is an independent regulatory agency that (among other mandates) oversees the interstate transportation of electricity, natural gas, and oil. Given that much of energy midstream infrastructure is involved in moving oil and gas across state lines, the FERC influences many master limited partnership (MLP) assets. (To learn more about MLPs, see Master Limited Partnership (MLP) basics.)

Natural gas pipelines

For example, the FERC regulates the tariffs and rates of return on natural gas pipelines. The tariffs govern the minimum and maximum rates that pipelines can charge companies wishing to transport natural gas through their infrastructure. The FERC’s ratemaking process regulates the tariffs set. This process considers the costs of providing service, the allowed rate of return, and contract and volume throughput assumptions. It determines the allowed rate of return in each rate case. As El Paso Pipeline Partners (EPB) stated in its 10-K (an annual comprehensive summary report), “The FERC approves tariffs that establish rates, cost recovery mechanisms and other terms and conditions of service to our customers. The fees or rates established under our tariffs are a function of providing services to our customers, including a reasonable return on our invested capital.”

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Categories: Energy, Natural Gas