Shemin V. Proctor, G. Michael O'Leary and Gia V. Cribbs
Consequences for Compliance, Business Strategy and Due Diligence. Requests for clarification and/or rehearing filed on December 22, 2017, signal that the Federal Energy Regulatory Commission (the “Commission”) will have an opportunity to revisit its order issued on November 22, 2017 (“Declaratory Order”), which appears on its face to prohibit certain marketing affiliate transactions. Specifically, the Declaratory Order found certain of the proposed transactions described by Magellan Midstream Partners, L.P. (“Magellan”) would violate the prohibitions on rebates under the Interstate Commerce Act (“ICA”). As a result:
- Compliance. While the requests for rehearing are pending, marketers engaged in affiliate transactions, counterparties to such transactions, pipeline affiliates and any potential seller or purchaser of such companies should be reviewing the terms of existing arrangements to confirm compliance with the Declaratory Order.
- Review. In connection with M&A due diligence and proposed transactions, industry participants should consider the strategic and economic impact of the Declaratory Order and the issues that may be addressed by the Commission on rehearing.
Requests for Clarification and/or Rehearing. On December 22, 2017, Magellan and three other parties filed requests for clarification and/or requests for rehearing of the Declaratory Order.
- Magellan. Magellan’s request raised additional issues, including a request that the Commission expressly state that the Declaratory Order would apply equally to liquids pipelines and crude oil pipelines and, therefore, have broader application within the industry than the petition initially proposed.
- Other Parties. Clarification and/or rehearing requests filed by other parties seek to limit applicability of the Declaratory Order to marketing affiliate transactions when the price differential is less than the affiliate pipeline’s filed tariff rate and the pipeline subsidizes those losses through an actual payment by the pipeline to the marketing affiliate.
Magellan’s Petition for Declaratory Order. On November 14, 2016, Magellan filed a petition for declaratory order at the Commission requesting that the Commission rule that Magellan’s proposal to establish a marketing affiliate to buy, sell and ship crude oil on Magellan’s pipeline system (“Marketing Affiliate”) would not violate any provisions of the ICA or the Elkins Act, in particular the prohibitions against rebates.1 As described by Magellan, a Marketing Affiliate would buy and sell crude oil at origins and destinations on Magellan’s subsidiaries’ and affiliates’ pipeline systems and then ship those volumes on the affiliated pipelines at the applicable tariff rates on file with the Commission.2 In addition, Magellan requested that the Commission determine that the Marketing Affiliate would be permitted to enter into three types of affiliate agreements not involving the purchase or sale of crude oil:
- Partial Assignment of Capacity Obtained by Marketing Affiliate Through an Open Season. If the Marketing Affiliate has entered into a transportation service agreement (“TSA”) with an affiliated pipeline company through a pipeline’s open season, during which the pipeline offers available capacity to all interested parties through a non-discriminatory, widely publicized process, it may partially assign its rights under the TSA to third-party producers and marketers and these third parties may pay a rate to the Marketing Affiliate that differs from the committed shipper rate in the TSA, provided the Marketing Affiliate pays the committed shipper rate to the affiliated pipeline company.
- Marketing Affiliate Ships While Third Parties Retain Title. The Marketing Affiliate may enter into agreements with third-party producers and marketers to ship their crude oil in the Marketing Affiliate’s name, while the third parties retain title to the crude oil and pay the Marketing Affiliate an amount different from the filed tariff rate, provided the Marketing Affiliate pays the filed tariff rate to the affiliated pipeline company.
- Similar Arrangements. The Marketing Affiliate may enter into any similar arrangements with third-party producers and marketers that provide for the actual transportation of the third party’s crude oil or provides the third party the financial benefit of the transportation of crude oil at amounts different from the filed tariff rate, provided the Marketing Affiliate pays the filed tariff rate to the affiliated pipeline company.3
Parties’ Comments Split in Response to Magellan Petition
- Parties in Support: Parties State Purchase and Sale of Crude Oil Is Not within Commission’s Jurisdiction. Several parties, including common carrier oil pipelines and marketers and shippers of crude oil, filed comments in support of Magellan’s petition. These parties asserted that Magellan’s proposed Marketing Affiliate transactions are consistent with the ICA and Commission precedent, particularly given that the ICA does not govern the purchase and sale of crude oil.
- Parties in Opposition: Parties Claim Numerous Violations, Including Prohibition on Rebates. Other parties, including producers, marketers and shippers of crude oil and trade associations representing end-use consumers, marketers, wholesalers and shippers of petroleum products and natural gas liquids, filed comments expressing concerns or protesting Magellan’s petition. These concerns included the potential for undue discrimination or preference by a common carrier in favor of a Marketing Affiliate, the risk of disclosure of confidential shipper information, the potential for violation of prohibitions on offering transportation rebates, and the potential that the proposed Marketing Affiliate transactions would circumvent both ICA and Commission regulations regarding oil pipeline rates and terms of service.
- Parties Express Preference for Rulemaking. Several parties, both supporting and opposing Magellan’s petition, requested that the Commission take action via a rulemaking proceeding, with notice and comment procedures, rather than in response to a petition for declaratory order. These parties stated that the matters addressed in Magellan’s petition are of industry-wide concern and Commission action on such matters could have wide-ranging consequences for all oil pipeline industry participants.
Current Status: Commission’s Declaratory Order Finds Transactions Violate ICA. On November 22, 2017, the Commission issued the Declaratory Order denying Magellan’s petition for declaratory order.4 Specifically, the Commission held that while the creation of a Marketing Affiliate by an oil pipeline in itself is permissible under the ICA, taken together, the transactions Magellan proposed would violate various provisions of the ICA, primarily the prohibition on rebates contained in ICA Sections 2 and 6(7).5 The Commission noted that while the Marketing Affiliate would pay its affiliated pipeline’s filed tariff rate, the fact the Marketing Affiliate would sell that capacity for less than that tariff rate would yield a net profit to the integrated company, and the Supreme Court has consistently ruled that such transactions violate the ICA’s prohibition on rebates.6 Specifically, the Commission:
- Considered the “Entire Transaction.” The Commission found that the fact that the Marketing Affiliate paid the filed tariff rate to the pipeline was not relevant if the “entire transaction” includes payments back to the shipper because the ICA prohibits all means that result in a rebate from the filed tariff rate.7
- Considered Auxiliary and Non-Jurisdictional Services. The Commission stated that the prohibition on rebates extends to auxiliary and non-jurisdictional services, such as furnishing warehouse space, and therefore determined it “likewise” applied to access to interstate transportation capacity.8
- Found That a Price Differential Less than Tariff Rate Violates the ICA. The Commission concluded that the prohibitions on rebates prevent Marketing Affiliates from shipping if the price differential is less than the tariff rate and the pipeline effectively subsidizes those losses. However, the ICA would not prevent Marketing Affiliates from shipping if the price differential equals or exceeds the filed tariff rate.9
Moreover, the Commission held that the transactions as proposed in Magellan’s proposal appeared to violate other provisions of the ICA because the transactions as described:
- Establish Different Rates, Terms, Conditions and Service for Affiliates. As described, the proposed transactions would provide different rates, terms and conditions to Magellan’s affiliates, and would provide service different from that offered in its tariff. Accordingly, these transactions would violate the requirement of ICA Section 1(5) that all rates must be subject to review by the Commission for a determination of whether the rates are just and reasonable, and the ICA Section 3(1) anti-discrimination provisions.10
- Exclude an Affiliate’s Rate from Public Filing Requirements. As understood by the Commission, Magellan would not be required to publish the arrangements between the pipeline and affiliate. If so, the proposal would violate ICA Section 6(1), which requires that all transportation service rates be on file with the Commission and available for public inspection, and Section 6(3), which requires that any changes in rates be publicly posted for inspection.11
Current Status: Pending Requests for Clarification and/or Rehearing of the Declaratory Order. Several parties filed requests for clarification and/or rehearing on December 22, 2017.12 Magellan’s clarification request did not focus on the denial of its petition. Rather, Magellan generally asked the Commission to more broadly and more specifically address issues in the Declaratory Order. For example, Magellan sought clarification as follows:
- Exemption. That a marketing affiliate that executes a TSA with its pipeline affiliate in an open season is not exempt from the Commission’s finding that the ICA prohibits a marketing affiliate from buying and selling crude oil to and from third parties and shipping on its pipeline affiliate if the differential is below the tariff rate.13
- Applicable Tariff Rate. With respect to the tariff rate, whether the applicable tariff rate is the lowest rate available to the marketing affiliate under the TSA or the then applicable uncommitted transportation rate.14
- Discounts. That the ICA does not permit a discount to any shipper on non-jurisdictional service that is provided in connection with pipeline transportation and is not offered to all shippers in a filed rate.15
- Application to Liquids Pipelines. That the Declaratory Order applies to all liquids pipelines regulated under the ICA and not only crude oil pipelines.16
Additional Claims and Requests for Clarification and/or Rehearing. Two common carrier oil pipelines filed requests for clarification and/or rehearing. Each pipeline claimed the Commission lacks jurisdiction over marketing affiliates and that such shippers are protected from discrimination relative to unaffiliated marketers and must be treated in a non-discriminatory fashion under the ICA.17 Specifically, these pipelines assert:
- Prohibition Applies When Pipeline Pays Marketing Affiliate. The prohibition on rebates under the ICA prevents a marketing affiliate from shipping where the price differential is less than the filed tariff rate and the pipeline subsidizes those losses through an actual payment by the pipeline to the marketing affiliate.18
- Inadequate Record. There is an absence of sufficient factual record and a lack of clarity in the Declaratory Order.19
- Magellan’s Proposed Transactions Are Atypical. The substance of Magellan’s petition was overly simplistic and did not reflect the breadth and complexity of typical marketing affiliate transactions, which may be undertaken for a host of legitimate business reasons.20 In addition to the claims by the pipelines, a marketer similarly asserted that the Declaratory Order should be limited to the facts raised by Magellan.21 The marketer offered sworn testimony identifying several different types of transactions a marketer might be willing to undertake for less than the filed tariff rate, e.g., transactions that have legitimate business reasons.22
Finally, one pipeline expressly requested that the Commission find the Declaratory Order have only prospective effect.23
Continuing Uncertainty. The Commission’s rules permit a petition for declaratory order to be filed to remove uncertainty. Many industry participants expected (and indeed some requested) that the Commission dismiss Magellan’s petition for declaratory order for lack of any controversy or uncertainty. However, the Declaratory Order has certainly increased the uncertainty surrounding marketing affiliate transactions. It is unclear whether the limitation advocated by some, an actual payment by the pipeline to the marketing affiliate, will be upheld on rehearing. It is possible that the Commission may broaden the scope of the Declaratory Order on rehearing to cover liquids pipelines as well as crude oil pipelines.
Declaratory Order in Effect. There is no requirement that the Commission substantively address the rehearing and clarification requests by a date certain. Therefore, the uncertainty may continue for some time. What is certain is that the Declaratory Order has not been stayed. Therefore, all industry participants are well advised to consider the Commission’s analysis of rebates and transactions with marketing affiliates.