Today FERC issued a decision in which, for the first time, it denied an oil pipeline’s petition for a declaratory order seeking FERC’s approval of the pipeline’s proposed rate structure and terms of service, prorationing policy and preferential allocation of excess system capacity. The decision (Colonial Pipeline Co., 146 FERC ¶ 61,206 (March 20, 2014)), is attached.
The Colonial Pipeline declaratory order decision is interesting because FERC has now drawn a line in the sand when it comes to oil pipeline proposals to favor Contract Shippers – shippers who make long term ship-or-pay commitments to the pipeline in return for some form of priority service. FERC has now stated that it will not grant a declaratory order approving contract rates, special prorationing methodologies and priority access to excess capacity where the petitioning pipeline is proposing these forms of preferential treatment with respect to existing capacity that will be used to provide the same service the capacity has historically supported. FERC has also provided guidance concerning use of confidentiality provisions in oil pipeline open seasons and the appropriateness of “duty to support” clauses in oil pipeline transportation service agreements.
Noting that it “has approved contract rates with respect to new pipelines, expansion projects, or, at the very least, reversals or reconfigurations of existing pipelines in order to serve new markets or respond to changing market conditions,” id. at P 35, FERC distinguished Colonial’s petition to establish contract rates and preferential prorationing and access terms for existing capacity that would be used to provide the same service Colonial provides. FERC observed that “[i]n all of the cases approving contract rates, contractual commitments of shippers were necessary to, among other things, determine support for construction of the project, obtain financing, ensure the initial financial viability of the project, or to determine the support in new or growing markets.” Id. Seeing none of these circumstances in Colonial’s proposal, FERC concluded that “Colonial’s request to create two classes of shippers, committed and uncommitted, out of one class of shippers who are currently receiving the same service on existing capacity, is unduly discriminatory.” Id. at P 37.
FERC has also suggested that oil pipelines will need to be judicious in their use of confidentiality agreements in open seasons for oil pipeline capacity. They need to “be narrowly tailored and should not prevent potential shippers from bringing to the Commission’s attention issues arising from the open season or proposed contract provisions that may conflict with applicable law, precedent or policy.” Id. at P 31. As for “duty to support” clauses in pipeline TSAs, FERC has warned that it will “look with disfavor upon duty to support clauses that require too broad a waiver of a shipper’s statutory rights to seek redress before the Commission.” Id. at P 32. “While it appears to be reasonable for contract shippers to support the specific rates to which they agreed, requiring those shippers to also waive their statutory rights as to past rates or other rates of the pipeline to which they have not specifically agreed is likely too broad.” Id.
So, as it turns out, FERC will not sit still for oil pipeline proposals to establish contract rates and preferential capacity access conditions for service it is currently providing through existing capacity that is fully utilized. But in drawing this line, FERC seems to have reaffirmed its willingness to grant declaratory orders authorizing contract rates “in support of new infrastructure to support changing market needs.” Id. at P 39.