Oil Pipeline Rate Regulation under Review by FERC – Is There a Place for the Consumer Voice?

Oil pipeline rates must be just and reasonable and may be challenged by their customer shippers and the Federal Energy Regulatory Commission (FERC) under the Interstate Commerce Act (ICA). FERC has observed through monitoring that some oil pipelines continue to receive rate increases under the primary process used to adjust oil pipeline rates – the index ratemaking methodology – although these pipelines have revenues that far exceed their reported costs. FERC currently is considering modifying the indexing methodology, which was born from the Energy Policy Act of 1992 requirement that FERC establish a generally applicable and simplified way to determine oil pipeline rates as an alternative to the traditional company-specific cost-of-services method. Under the indexing method, oil pipelines may adjust their rates in line with certain ceiling levels based on the Producer Price Index for Finished Goods (PPI-FG) instead of making detailed cost-of-service filings. As part of indexing, pipelines file information reflecting their total company-wide costs and revenues on Form No. 6, page 700. While several additional rate-setting methods still are available and recognized by FERC (e.g., cost of service rates, market- based rates, and settlement rates), the indexing method is the primary method used.

In 2015, several groups of shippers petitioned FERC seeking access to additional information regarding pipeline costs to enable them to assess whether to challenge indexed rates that are set. Subsequently, FERC held a technical conference during its five-year review of the oil pipeline index, and FERC issued an Advanced Notice of Proposed Rulemaking (Docket No. RM17-1-000) (ANOPR) in October 2016 seeking comment regarding proposed revisions to the index ratemaking method. FERC’s stated goal for the ANOPR is “to ensure that oil pipeline rates under the ICA are just and reasonable by reducing the likelihood that an oil pipeline’s rates substantially deviate from its costs through the application of indexed rate increases.” Whether there is a place in the oil pipeline rate setting process for the voice of the individual end consumer is a question that has been posed to FERC more than once and most recently in this ANOPR proceeding.

The ANOPR – Elevating the Utility of Page 700

FERC currently utilizes Form No. 6, page 700 as the first step in the process of evaluating any protests or complaints regarding indexed rate changes that substantially exceed an oil pipeline’s cost changes. In the current protest/complaint process, information reported on page 700 is applied by FERC in two different tests to determine whether an administrative ALJ hearing is warranted. For protests, FERC compares the change in the prior two years’ total cost-of-service data reported on page 700 with the proposed indexed rate change to determine whether an investigation via administrative hearing is warranted (the “percentage comparison test”). FERC has stated that historically a differential of 10% or more has been investigated, while, in the agency’s discretion, a less than 10% differential has not warranted investigation. For complaints, FERC determines whether reasonable grounds have been provided to substantiate that a pipeline’s index increase will substantially exacerbate the pipeline’s existing over-recovery, thereby warranting a hearing (the “substantially exacerbates” test).

The ANOPR proposes several changes to the indexing process that would elevate page 700 from a preliminary screening tool to a determinative resource that would (a) eliminate the need for an administrative hearing in some cases and (b) would provide more detail regarding pipeline costs more closely associated with the proposed index rates. Key points of the ANOPR proposal include:

1. A new “substantially exacerbates” test setting a definitive percentage of over-recovery that warrants denial of a rate increase: FERC proposes to deny index increases for any pipeline whose Form No. 6, page 700 revenues exceed costs by 15 percent for both of the prior two years;
2. Lowering the acceptable differential for the “percentage comparison” test: FERC proposes to deny index increases that exceed the cost changes reported on page 700 by 5% or more; and
3. Requiring supplemental page 700s that breakout (a) crude pipelines and product pipelines, (b) non-contiguous systems, and (c) major pipeline systems from the total company-wide costs and revenues currently reported on page 700.

FERC anticipates that these changes will improve the index ratemaking process by maintaining a system that is based on industry-wide cost changes while minimizing the chance that a pipeline’s rates will take an unreasonable departure from its costs, by limiting the potential differential each year between a pipeline’s costs and revenues, and by providing the agency with more relevant cost and revenue data to evaluate proposed index rate changes.

Seeking Comments – The Consumer Voice?

Are oil pipelines and their shipper customers (including crude oil or natural gas liquids producers, airlines, and propane industry companies) the only voices to be heard with respect to the setting of oil pipeline rates? What of the ultimate end-user – the consumer – who arguably holds a cognizable interest in pipeline rates? These questions have been raised most recently in the ANOPR via motion filed by R. Gordon Gooch, former general counsel of FERC’s predecessor, in his capacity as a consumer.

Despite statutory and regulatory language permitting any “person” and the “public” to either file complaints or comments, Mr. Gooch maintains that his efforts to participate in oil pipeline ratemaking proceedings have been rejected unjustifiably by the agency and the courts. Gooch cited Colonial Pipeline, FERC Docket No. OR12-24, as one instance in which his complaint filed under the ICA was rejected because he was not an eligible person and, on appeal, the U.S. Court of Appeals for the D.C. Circuit held that he lacked constitutional standing to challenge the transportation rates of interstate pipelines because he could not prove monetary damages (Gooch v. FERC, Case No. 13-1148). Having been denied the opportunity to file a complaint against a specific oil pipeline’s rates and having been denied the opportunity to petition for rulemaking and for redress of grievances in connection with an oil pipeline tariff, Mr. Gooch states that he filed this procedural motion seeking acknowledgment and “restoration” of several rights, including the rights to (1) submit comments in the ANOPR docket and all FERC rulemaking dockets, (2) file complaints against oil pipeline rates pursuant to the ICA, (3) file petitions for rulemakings before FERC and (4) file comments in rulemakings initiated by FERC or other persons.

Gooch notes several consumer interests in his motion, which he asserts are confirmed by the oil industry and the Association of Oil Pipe Lines (AOPL), including the price of gasoline, home heating, medicines, plastics, and other products produced from petroleum products, as well as the manufacturing jobs dependent upon them. Gooch also asserts that the pass through of transportation costs on consumers is of lesser concern than the negative impact that permitting excess recovery has on incentives to expand pipeline capacity. Gooch argues that permitting excess recovery through indexed rates “undermines, if not destroys, the incentive to expand capacity to meet demand,” given that net income is supposed to be tied to investment in infrastructure in the “paradigm of public utility regulation.”

As a consumer, Gooch “believe[s] that excess revenues in any amount should trigger an investigation and the pipeline be summarily ordered to reduce rates to just and reasonable levels based on the pipeline’s own sworn Page 700.” Whether this or other consumer perspectives will be heard and considered by FERC as part of this proceeding seeking to modify the index ratemaking methodology remains to be seen. Per request by AOPL, FERC extended the ANOPR comment deadline to January 19, 2017 and the reply comment deadline to March 17, 2017. Gooch’s motion has not been ruled upon.