The Federal Energy Regulatory Commission (FERC) has issued an Advance Notice of Proposed Rulemaking (ANOPR). This ANOPR is seeking comments on potential changes to FERC’s policies for evaluating interstate oil pipeline indexed rate increases based on industry-wide cost increases, and on potential changes to required cost and revenue data reported on page 700 of FERC Form No. 6, the interstate oil pipeline annual report.

FERC initiated the ANOPR in response to (1) its observations that some pipelines continue to obtain additional indexed rate increases despite reporting on Form No. 6, page 700, revenues that significantly exceed costs, and (2) pipeline shippers’ assertions that they need more data on oil pipeline costs and revenues to enable them to challenge oil pipeline rates that may be unjust and unreasonable. According to FERC, the ANOPR’s proposed reforms are intended to improve the ability of both FERC and shippers to ensure that pipeline rates remain just and reasonable.

Background

The rates, terms and conditions charged by oil pipelines are regulated by FERC pursuant to the Interstate Commerce Act (ICA), which prohibits oil pipelines from charging rates that are “unjust and unreasonable” and allows shippers and FERC to challenge pre-existing and newly filed rates. FERC was required by the Energy Policy Act of 1992 (EPAct of 1992) to create a generally applicable rate methodology for oil pipelines. In response to this requirement, FERC created the indexing methodology, which has become the predominant mechanism for adjusting oil pipeline rates. The indexing methodology allows oil pipelines to charge rates subject to certain ceiling levels rather than make cost-of-service rate filings. FERC considers it “essential” to implementing its ICA obligations that (i) indexed rate increases do not cause pipeline revenues to unreasonably depart from oil pipeline costs, and (ii) both FERC and shippers have sufficient information to assess the relationship between oil pipeline rates and costs.

Along with creating the indexing methodology, FERC added page 700 to Form No. 6. This form serves as a preliminary screening tool to evaluate indexed rates, and reflects an oil pipeline’s cost of service and revenues on a total-company basis. Page 700 also serves as the means for an initial evaluation of protests and complaints alleging that a pipeline’s indexed rate change is “substantially in excess” of the pipeline’s cost changes.

FERC’s Proposed Changes

FERC currently evaluates indexed rate protests by applying a “percentage comparison” test. This test compares (i) the change in the prior two years’ total cost-of-service data reported on page 700 with (ii) the proposed indexed rate change. If the resulting differential exceeds 10%, FERC typically has set the challenged rate increase for evidentiary hearings.

In assessing complaints against indexed rate changes, FERC employs a “substantially exacerbates” test. Under this test, a complaint will be set for hearing if a shipper shows reasonable grounds that (i) a pipeline is already “substantially over-recovering” and (ii) the pipeline has filed an indexed rate increase that would “substantially exacerbate” that over-recovery.

FERC is considering changes to its policies for evaluating challenges to indexed rate changes. Specifically, FERC would adopt a new policy that would deny proposed index increases if:

1) A pipeline’s Form No. 6, page 700, revenues exceed the page 700 total costs by 15% for both of the prior two years—a new form of the “substantially exacerbates” test; or
2) The proposed indexed rate or ceiling level increase exceeds by 5% the barrel-mile cost changes reported on the pipeline’s most recently filed page 700—a new form of the “percentage comparison” test.

FERC anticipates applying these new tests to either accept or reject oil pipeline indexed filings without, in most cases, the need for further hearing procedures.

FERC also is considering an annual filing requirement that would show changes in a pipeline’s ceiling rate levels, whether or not the pipeline had proposed to modify its indexed rates. This ceiling rate filing would be subject to challenge using the newly proposed tests. Under the new “substantially exacerbates” test, a pipeline’s ceiling level would not increase if its revenues exceed 115% of costs. The new “percentage comparison” test would limit a pipeline’s ability to carry forward a full indexed rate increase to a future period when the increase exceeds the pipeline’s cost changes by more than 5%.

FERC also is contemplating additional page 700 reporting requirements. In that regard, the ANOPR would require pipelines to file supplemental page 700s for (a) crude pipelines and product pipelines, (b) non-contiguous systems, and (c) “major pipeline systems,” i.e., systems of more than 250 miles that serve either origin or destination markets that differ from the remainder of the pipeline’s system. A major pipeline system also could be established by a final FERC order in a litigated case. FERC expects that these supplemental page 700s would permit evaluation of indexed rate changes using data more relevant to a particular shipper’s rates than the currently reported company-wide data.

The ANOPR’s page 700 proposals would also require pipelines to report additional information concerning (a) cost allocations used on the supplemental page 700s and (b) separate revenues, barrel and barrel-mile data associated with cost-based rates (e.g., indexing), non-cost-based rates (e.g., market-based rates or settlement rates), and other jurisdictional revenues (such as penalties).

Initial comments on these proposals are due 45 days after publication in the Federal Register; reply comments are due 90 days after publication in the Federal Register.