Five-Year Review of Oil Pipeline Index, 121715 FERC, RM15-20-000

Docket Nº:RM15-20-000
Party Name:Five-Year Review of the Oil Pipeline Index
Judge Panel:Before Commissioners: Norman C. Bay, Chairman; Cheryl A. LaFleur, Tony Clark, and Colette D. Honorable. Nathaniel J. Davis, Sr., Deputy Secretary.
Case Date:December 17, 2015
Court:Federal Energy Regulatory Commission
 
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153 FERC ¶ 61, 312

Five-Year Review of the Oil Pipeline Index

No. RM15-20-000

United States of America, Federal Energy Regulatory Commission

December 17, 2015

Five-Year Review of the Oil Pipeline Index (Issued December 17, 2015)

AGENCY: Federal Energy Regulatory Commission.

ACTION: Order Establishing Index Level.

SUMMARY: The Federal Energy Regulatory Commission (Commission) issues this Final Order concluding its five-year review of the index level used to determine annual changes to oil pipeline rate ceilings. The Commission establishes an index level of Producer Price Index for Finished Goods plus 1.23 percent (PPI-FG+1.23) for the five-year period commencing July 1, 2016.

FOR FURTHER INFORMATION CONTACT: Andrew Knudsen (Legal Information) Office of the General Counsel 888 First Street, NE Washington, DC 20426 (202) 502-6527

Monil Patel (Technical Information) Office of Energy Market Regulation 888 First Street, NE Washington, DC 20426 (202) 502-8296

SUPPLEMENTARY INFORMATION:

Before Commissioners: Norman C. Bay, Chairman; Cheryl A. LaFleur, Tony Clark, and Colette D. Honorable.

ORDER ESTABLISHING INDEX LEVEL

1. On June 30, 2015, the Commission issued a Notice of Inquiry initiating its five-year review to establish the oil pipeline index level for the July 1, 2016 to June 30, 2021 time period.1 The June 2015 NOI requested comment regarding (a) a proposed index level between Producer Price Index for Finished Goods (PPI-FG)+2.0 percent and PPI-FG+2.4 percent2 and (b) any alternative methodologies for calculating that index level.

2. For the reasons discussed below, the Commission adopts an index level of the PPI-FG+1.23 percent. The departure from the June 2015 NOI results from (a) the use of FERC Form No. 6 page 700 (page 700) data that directly measures changing pipeline costs as opposed to the estimates previously used to calculate the index level3 and (b) updated Form No. 6 filings and other corrections to the data set. The Commission's indexing calculations and other data analysis are contained in Attachment A to this order. As discussed below, the Commission rejects other changes to the index calculation proposed by commenters.

I. Background

A. Establishment of the Indexing Methodology ]

3. The Energy Policy Act of 1992 (EPAct 1992) required the Commission to establish a "simplified and generally applicable" ratemaking methodology4 that also was consistent with the just and reasonable standard of review of the Interstate Commerce Act (ICA).5 To implement EPAct 1992's mandate, the Commission issued Order No. 5616 establishing an indexing methodology that allows oil pipelines to change their rates subject to certain ceiling levels as opposed to making cost-of-service filings.7

4. In Order No. 561, the Commission committed to review the index level every five years to ensure that it adequately reflects changes to industry costs.8 The Commission conducted such reviews in 2000, 9 2005, 10 and 2010.11 In the 2010 five-year review, the Commission established the index level of PPI-FG+2.65, to be effective for the five-year period commencing July 1, 2011. The index level established herein results from the Commission's fourth five-year review of the index level.

B. The Kahn Methodology

5. In Order No. 561 and each successive index review, the Commission has calculated the index level based upon a methodology developed by Dr. Alfred E. Kahn.12The Kahn Methodology uses pipeline data from the prior five year period to determine an adjustment to be applied to a current year PPI-FG. The calculation is as follows. Each pipeline's cost change on a per barrel-mile basis over the prior five-year period (e.g., the years 2009-2014 in this proceeding) is calculated. In order to remove statistical outliers and spurious data, the resulting data set is trimmed to those pipelines in the middle 50 percent of cost changes. The Kahn Methodology then calculates three measures of the middle 50 percent's central tendency: the median, the mean, and a weighted mean.13The Kahn Methodology calculates a composite by averaging these three measures of central tendency and measures the difference between the composite and the PPI-FG index data over the prior five year period. The index level is then set at PPI-FG plus (or minus) this differential, which tracks the relationship over the last five years between PPI-FG and oil pipeline costs.

C. The 2015 Proceeding

6. The Commission initiated this proceeding on June 30, 2015, with the issuance of a Notice of Inquiry initiating its five-year review to establish the oil pipeline index level for the July 1, 2016 to June 30, 2021 time period.14 The June 2015 NOI proposed a range for the index level of between Producer Price Index for Finished Goods (PPI-FG)+2.0 percent and PPI-FG+2.4 percent. The June 2015 NOI included a range as opposed to a specific index level because some pipelines had yet to report FERC Form No. 6 data for 2014. Importantly, the NOI sought comment not only on the proposed level but also any alternative methodologies for calculating that index level. To facilitate the development of the new index and gain an understanding of the positions of the parties in advance of the filed comments, the Commission announced plans to hold a technical conference. That conference occurred on July 30, 2015.

II. Comments

7. Initial Comments filed in response to the June 2015 NOI and technical conference were due on August 24, 2015, and reply comments were due on September 21, 2015. Comments were filed by the Association for Oil Pipelines (AOPL), 15 APV Shippers, 16 Liquids Shippers Group (Liquids Shippers), 17 Suncor Energy Marketing Inc. (Suncor), Canadian Association of Petroleum Producers (CAPP), 18 HollyFrontier/Western Refining, the Pipeline Safety Trust, and the Pipeline and Hazardous Materials Safety Administration (PHMSA). On October 16, 2015 AOPL filed supplemental reply comments. On October 21, 2015, APV Shippers also filed supplemental reply comments. 8. The commenters raised a number of issues related to the index range proposed by the Commission in the June 2015 NOI and possible alternatives for calculating the index level. The commenters advocated varying index levels, including AOPL's proposal of PPI-FG+2.47, APV Shippers' proposal of PPI-FG+0.5, and Liquids Shippers' proposal of PPI-FG+0.23.19 These proposed index levels were based upon various modifications to the Kahn Methodology, as discussed in greater detail below.

III. Discussion

9. The Commission adopts an index level of PPI-FG+1.23 percent for the five-year period commencing July 1, 2016. The Commission adopts APV Shippers' proposal to use page 700 data that directly measures changing pipeline costs as opposed to the previously used Form No. 6 accounting data. The Commission rejects other modifications proposed by industry comments, including: (a) various manual data trimming methodologies, (b) the consideration of the middle 80 percent in addition to the middle 50 percent of the cost changes in the data set, (c) separate index levels for product and crude pipelines, and (d) Liquids Shippers' proposals to temporarily set the index level at PPI-FG while initiating a proceeding to revise the Commission's indexing regulations.

A. Form No. 6 Page 700

1. Comments

10. APV Shippers propose calculating the index level based upon page 700 total cost-of-service data as opposed to the Form No. 6 accounting data used in the June 2015 NOI and prior five-year review proceedings.20 APV Shippers state that page 700 data is superior because page 700 data provides a direct measure of changing pipeline barrel- mile costs.21 In reply comments, HollyFrontier/Western Refining, CAPP and Liquids Shippers support APV Shippers' proposal.

11. AOPL opposes the use of page 700 data to calculate the index. Among other assertions, AOPL argues that page 700 data should not be used because the page 700 total cost-of-service incorporates returns on equity (ROEs) that may be volatile due to industry-wide fluctuations in the equity markets.22 AOPL also argues that page 700 cost-of-service data may include allocations that distort the index calculation.23

2. Discussion

12. The Commission will update its calculation of the five-year oil pipeline index to use page 700 data to measure changing barrel-mile costs. Page 700 provides a summarized total cost-of-service and a pipeline's interstate barrel-miles. Page 700 did not exist when the Kahn Methodology was first developed in Order No. 561, and, as a result, the Commission estimated pipeline total cost changes using accounting data from elsewhere on Form No. 6. Now that page 700 is available, the Commission concludes that page 700 data provides a superior data source for use in the Kahn Methodology.24

13. Using page 700 data provides four primary benefits. First, the index is meant to reflect changes to recoverable pipeline costs, and, thus, the calculation of the index should use data that is consistent with the Commission's cost-of-service methodology.25In contrast to the accounting data historically used in the Kahn Methodology as a proxy for this information, page 700 includes actual total cost-of-service data.

14. Second, using page 700 data eliminates the need to use proxies to measure capital costs and income tax costs. Because direct measures of these costs were not available when the index was first established, 26 the Kahn Methodology used net carrier property as a proxy for capital costs and income taxes. At that time, the Commission acknowledged the net carrier property proxy was "highly unsatisfactory" and "imperfect."27 Although net carrier property measures changes to the book value...

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