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Kern River Files Request for Rehearing with FERC.

Commission's Rate Order Leaves Kern River Unable to Earn Its Authorized Return on Equity of 11.2 Percent

SALT LAKE CITY -- Kern River Gas Transmission Company today filed a Request for Rehearing on the Federal Energy Regulatory Commission's October 19, 2006, order on the company's 2004 rate case, Docket No. RP04-274. The pleading requests the Commission to reconsider several aspects of the order the company believes are either legally incorrect or improperly addressed by the Commission.

While the Commission did improve upon the Administrative Law Judge's recommended rate of return on equity from 9.34 percent to 11.2 percent, the totality of the Commission's order will make the 11.2 percent return on equity structurally unachievable. The company believes the Commission's order is grossly inadequate and cannot be defended on policy or legal grounds.

Although the Commission acknowledges that Kern River shippers deserve the "benefit of their bargain," it clearly chose not to provide Kern River with the benefit of its bargain by selectively dismantling the long-standing Commission approved levelization methodology through the elimination of the integral 3 percent inflation adjustment factor and the 95 percent load factor for calculation of billing determinants on Kern River's original system. Without these components, the balance achieved by the levelization methodology is dramatically shifted with a result that leaves Kern River unable to earn a return on equity greater than 9.88 percent. FERC precedent upheld these factors in prior rate cases related to optional certificate proceedings.

"The Commission's order falls well short of providing Kern River a realistic opportunity to earn a reasonable return on its investment," said Kern River president Kirk Morgan. "The Commission seemingly overlooks the fact that Kern River was able to complete the 2003 Expansion Project after MidAmerican Energy Holdings Company acquired the pipeline and accepted considerable risk. Had MidAmerican not stepped to the plate to guarantee completion of this $1.2 billion project and relied on the Commission's history of approving returns on equity that fairly reflect actual business risks, this critical infrastructure would not have been built."

A key point raised in the Request for Rehearing is the fact that the Commission's 11.2 percent return on equity is more than 200 basis points below the return on equity of 13.25 percent the Commission allowed for Kern River's 2003 Expansion Project. The project was placed in service on schedule, under budget and financed at rates providing immediate benefits to shippers less than two years after the worst energy crisis in the nation's recent history.

"The Commission's recent order is clearly a 'bait and switch'," said Morgan.

"The Commission's selected return on equity of 11.2 percent is unfair and unreasonable in the circumstances of this case," Morgan said. "The Commission has made no attempt to reconcile its proposed return for nearly new pipeline facilities, like Kern River's 2003 Expansion Project. The 11.2 percent return is also less than returns the Commission has approved for jurisdictional electric utilities and less than many returns recently approved by state commissions for regulated gas distribution companies. Simply put, the order is inconsistent with the Commission's acknowledgement that Kern River faces significant business risks."

Other key issues raised in the Request for Rehearing include the Commission's decision to default to a proxy group of largely local distribution enterprises, which produced a return on equity for Kern River more than 240 basis points less than that of the only legitimate gas pipeline among the Commission's selected proxies; an unjustified reduction in debt cost; the unlawful change in the design of Kern River's rate for interruptible and authorized overrun services; and the adoption of an erroneous calculation of the proper depreciation rate for Kern River's compressor engines.

Kern River's Request for Rehearing seeks relief from these and other errors.

Rate case background:

* On April 30, 2004, Kern River made the original filing of its 2004 rate case, Docket RP04-274, pursuant to Section 4 of the Natural Gas Act.

* On Nov. 1, 2004, rates became effective subject to refund.

* From Aug. 17-26, 2005, the rate case hearing was held in Washington, D.C.

* On March 2, 2006, the FERC Administrative Law Judge issued the initial decision on Kern River's 2004 rate case.

* On Oct. 19, 2006, the Commission issued its Opinion No. 486.

Kern River Gas Transmission Company owns and operates a 1,679-mile interstate natural gas pipeline between southwestern Wyoming and Southern California. With headquarters in Salt Lake City, Kern River currently delivers more than 1.7 billion cubic feet per day of natural gas to expanding markets in Utah, Nevada and California. Kern River is a subsidiary of MidAmerican Energy Holdings Company. Company information is available at www.kernrivergas.com.

MidAmerican Energy Holdings Company, based in Des Moines, Iowa, is a global provider of energy services. Through its energy-related business platforms - PacifiCorp, MidAmerican Energy Company, CE Electric UK, Kern River Gas Transmission Company, Northern Natural Gas Company and CalEnergy - MidAmerican provides electric and natural gas service to more than 6.7 million customers worldwide. Information on MidAmerican is available on the Internet at www.midamerican.com.
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Publication:Business Wire
Date:Nov 20, 2006
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