Our Experience

Industries Petroleum Natural Gas Chemicals Electronics Pharmaceuticals, Medical Devices, & Biotech Retail/Consumer Goods Technology Transportation Local/State Government School Districts Other Industries

Functional Areas Antitrust & Competition Analysis of Damages Forensic Economics Intangibles/IP Labor Economics Regulatory Economics & Finance Transfer Pricing Taxation Valuation Fiscal Impact Analysis Demographic Analysis Public Policy Analysis

 

Regulatory Economics and Finance

Government intervention in the marketplace in the form of regulation often forces businesses to alter their decision making. IIC, Inc. provides both policy makers and business leaders with the tools, experience, and insight to understand how regulation influences markets as a whole and individual firm’s behavior. In addition, IIC, Inc. has worked with clients in markets that have been deregulated recently and assisted policy makers and others to determine how markets may respond to deregulation and how firms will compete in an open, competitive environment.

We have substantial experience analyzing complex regulatory issues facing pipeline shippers in regulatory proceedings before federal and state agencies. We apply advanced economic, finance and accounting techniques to help our clients prepare regulatory filings and documents to help determine fair and reasonable shipping rates. We provide our clients with clear, concise, defensible and accurate analyses.

Cost Allocation Methods

On a matter before the Maine Public Utilities Commission, IIC, Inc. studied ridership patterns and rate structures to determine the competitive advantages realized by a large partially regulated ferry service provider vis-à-vis small private tour and charter companies. We developed and analyzed an extensive database containing ferry service trip logs that showed fleet capacity utilization as well as the rates charged for ferry service compared with the rates charged for private tours and charters. We critiqued the cost allocation method employed by the regulated ferry service and proposed alternative methods of allocating costs that more properly reflected the division of costs between the regulated and unregulated portions of the business to demonstrate that the large ferry company had an unfair competitive advantage in providing unregulated tour and charter service.

Cost Allocation and Pricing of Non-Core Assets

Deregulation has caused confusion over the role of a formerly regulated company’s treatment of “non-core” assets that are used in competition with other companies. IIC, Inc. has analyzed the proper treatment of such assets from a cost allocation and pricing perspective. We have found that companies frequently are not prepared to set up accounting systems to allocate costs on a distributed cost basis and consequent pricing in competitive (non-core) markets often penalizes other competing firms because such prices do not recover fully allocated costs. We have helped identify such situations involving a gas utility and also formulate reasonable cost allocation methodologies to ensure that costs are fully distributed and prices are not unfair or unreasonable to competing firms.

Cost of Service Analysis

Regulation of oil and natural gas pipelines falls under the aegis of the Federal Regulatory Commission (FERC) and many rates and proposed rate increases are still justified based on traditional rate making cost of service analysis. IIC, Inc. provides expert economic and financial analysis of pipeline rate-making methodologies, cost of service analysis, and evaluates the justification for market-based rates. Recently, IIC, Inc. has been instrumental in obtaining highly favorable settlements for several shippers involved in various rate proceedings before FERC by demonstrating that the rates being charged were unjust and unreasonable. IIC, Inc. has provided in-depth analysis of cost of service filings and associated cost allocation models, as well as detailed knowledge and understanding of the financial theory underlying these models.

Return on Equity and Master Limited Partnerships

IIC, Inc. recently assisted a client by analyzing the FERC preferred method for computing return on equity in ratemaking procedures. We performed an in-depth analysis of a hypothetical proxy group composed solely of master limited partnerships. Using our knowledge of economic, financial and accounting issues, we presented our findings to our client and filed comments before FERC regarding the proposed treatment of master limited partnerships in determining the appropriate return on equity to use in oil pipeline ratemaking procedures.

Assessment of Reasonableness of Rates

Assessing the reasonableness of rates and whether shippers can ship on a non-discriminatory basis is a cornerstone of the Federal Energy Regulatory Commission’s regulation of oil and gas pipelines. Such work requires a thorough understanding of recent changes in ratemaking methodologies including Order 154, rate indexation, and market-based rates. IIC, Inc. has assisted a number of clients to determine whether rates being charged are fair and reasonable and whether other terms and conditions are appropriate.

Rate Design and Cost Allocation

In several engagements, IIC, Inc. analyzed the extensive inputs into the rate design and cost allocation of several large petroleum pipelines in the United States. Proposed pipeline rate increases depend on accurately portraying the cost of service. A key input into the cost of service calculation is cost allocation, where pipelines allocate specific operational costs across different pipeline segments. Our principals examine the reasonableness of proposed rate increases and assist our clients in navigating the complex nature of pipeline rate design and cost allocation.

In one recent engagement, we investigated the appropriate nature of cost allocation under two different methods. The first, the Massachusetts method, involved the allocation of operating costs between operating segments based on gross revenue, gross property, and payroll. Appropriate cost allocation requires justification for each element across all appropriate segments (in the case of a large integrated pipeline system). During our investigation we isolated the appropriate and relevant operating overhead costs and allocated each using a sophisticated cost allocation model. The second, the KN method, involved allocating costs based on the proportion of direct and indirect costs associated with gross property and direct labor. IIC, Inc. has extensive knowledge and experience in rate design and cost allocation, with the ability to provide clients detailed and knowledgeable analysis.

Cost allocation is only one component of rate design. In several other engagements, IIC, Inc. has helped clients develop stand-alone models of cost rate design. Each of these engagements involved a review of facility-specific data and assumptions, including assessment of key market supply and demand factors. Relying on our knowledge of the industry and rate design specifications, we were able to provide our clients with easy to understand and defensible stand-alone models.

Expert Testimony

IIC, Inc. provided expert testimony in numerous regulatory finance proceedings before state and federal regulatory agencies. In a recent engagement, we filed expert testimony on behalf of a pipeline shipper before the California Public Utilities Commission (CPUC). We thoroughly investigated potential rate issues pertaining to intrastate shipments of petroleum products on a specific pipeline segment. Incorporating our extensive knowledge of the industry and market conditions, we provided our client with the resources to challenge exorbitant rate increases. We performed a detailed analysis of the underlying rate issues, including an assessment of market factors and conditions pertaining to movements of pipeline products in the relevant California markets.

In a separate engagement, we provided expert testimony before FERC on a wide variety of rate issues, including the appropriate return on equity, use of an industry proxy group, cost allocation of corporate overhead expenses, environmental remediation expenses, litigation expenses and additional elements that comprise the cost of service of the specific pipeline. We provided our client with a detailed and comprehensive expert report, supported by our testimony in the litigation proceedings. Each project is unique and different, but IIC, Inc. is able to leverage our experience in regulatory proceedings to provide our clients with clear and concise analysis of the pertinent issues.

Indexation

A key concept in rate design involves indexation — where pipeline companies adjust rates based on a FERC-prescribed indexation methodology. IIC, Inc. performed several in-depth analyses designed to shed light on the appropriate nature of the indexation methodology. In particular, we analyzed historical costs of all regulated interstate pipelines to determine the appropriate index to use in the future. We recently provided testimony to FERC regarding our findings and recommendations.