In re Five-Year Review of the Oil Pipeline Index
| Decision Date | 20 January 2022 |
| Docket Number | RM20-14-001 |
| Citation | 178 FERC ¶ 61, 023 |
| Parties | Five-Year Review of the Oil Pipeline Index |
| Court | Federal Energy Regulatory Commission |
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Before Commissioners: Richard Glick, Chairman; James P. Danly, Allison Clements, Mark C. Christie, and Willie L. Phillips.
Kimberly D. Bose, Secretary.
1. On December 17, 2020, the Commission issued an order establishing an oil pipeline index level of Producer Price Index for Finished Goods plus 0.78% (PPI-FG+0.78%) for the five-year period beginning July 1, 2021.[1] On January 19, 2021, Joint Commenters, [2] Liquids Shippers Group (Liquids Shippers), [3] the Canadian Association of Petroleum Producers (CAPP) (together with Joint Commenters and Liquids Shippers, Shippers), the Association of Oil Pipe Lines (AOPL), and Designated Carriers[4] (together with AOPL, Pipelines) requested rehearing or clarification of the December 2020 Order.
2. As discussed below, we grant the requests for rehearing, in part, and deny the requests for rehearing, in part. As a result, we adopt an index level of PPI-FG-0.21%. This departure from the December 2020 Order results from: (a) trimming the data set to the middle 50% of cost changes, as opposed to the middle 80%; (b) incorporating the effects of the Commission's 2018 policy change requiring Master Limited Partnership (MLP)-owned pipelines to eliminate the income tax allowance and previously accrued Accumulated Deferred Income Taxes (ADIT) balances from their page 700 summary costs of service (Income Tax Policy Change);[5] and (c) correcting the index calculation to rely upon updated page 700 cost data for 2014.
3. In addition, as discussed below, we direct oil pipelines to recompute their ceiling levels for July 1, 2021 through June 30, 2022, based upon an index level of PPI-FG-0.21%. Consistent with § 342.3(e) of the Commission's regulations, [6] any oil pipeline with a filed rate that exceeds its recomputed ceiling level for July 1, 2021 through June 30, 2022 must file to reduce that rate to bring it into compliance with the pipeline's recomputed ceiling level. We direct such pipelines to submit these filings to be effective March 1, 2022.
4. The Commission reviews the oil pipeline index level[7] every five years.[8]Beginning in Order No. 561 and in each ensuing five-year review, the Commission has adjusted the index level using the Kahn Methodology, which calculates each pipeline's cost change on a per barrel-mile basis over the prior five-year period (e.g., 2014-2019 in this proceeding) based upon FERC Form No. 6, page 700 summary cost-of-service data. In order to remove statistical outliers and spurious data, the Kahn Methodology trims the data set by removing an equal number of pipelines at the top and bottom of the data set.[9] The Kahn Methodology then averages three measures of the trimmed data sample's central tendency (the median, mean, and weighted mean) to determine a composite central tendency and compares this average to the changing value of PPI-FG over the same five-year period. The index level is set at PPI-FG plus (or minus) this differential. Historically, the index has ranged from PPI-FG-1% to PPI-FG+2.65%, and in 2015, the Commission set the index level at PPI-FG+1.23%.
5. On June 18, 2020, the Commission issued a Notice of Inquiry (NOI) proposing to adopt an index level of PPI-FG+0.09%.[10] The NOI proposed to calculate the index level by (1) trimming the data set to the middle 50% and (2) incorporating the effects of the Income Tax Policy Change upon pipeline cost changes over the 2014-2019 period.[11] The Commission explained that commenters could address issues including, but not limited to, different data trimming methodologies and whether, and if so how, the Commission should reflect the effects of cost-of-service policy changes in the index calculation.[12] 6. Ten commenters filed comments in response to the NOI.[13] Pipelines urged the Commission to use the middle 80%, as opposed to the middle 50%, and proposed to adjust the reported page 700 data for 2014 to eliminate the effects of the Income Tax Policy Change. Shippers, by contrast, argued that the Commission should continue using the middle 50% and reject Pipelines' proposed adjustments to the data set. In addition, Liquids Shippers proposed to replace the weighted mean in the Kahn Methodology's calculation of central tendency with the weighted median and to replace the returns on equity (ROE) reported on page 700 for 2014 and 2019 with standardized, industry-wide ROEs for both years. CAPP argued that negotiated rate contracts have served to reduce pipelines' risks and urged the Commission to require pipelines to provide their page 700 workpapers to investigate whether the reported page 700 ROEs reflect these effects.
7. The December 2020 Order established an index level of PPI-FG+0.78%.[14] The Commission adopted Pipelines' proposed adjustments to remove the effects of the Income Tax Policy Change from the index calculation[15] and to use the middle 80%, [16] and declined to adopt Liquids Shippers' and CAPP's proposals.[17] On January 19, 2021, Shippers filed requests for rehearing challenging these determinations and Pipelines requested rehearing or clarification to correct minor errors in the workpapers underlying the December 2020 Order.
8. Prior to the December 2020 Order, the Commission committed in the 2018 Income Tax Policy Statement to "incorporate the effects of [the Income Tax Policy Change] on industry-wide oil pipeline costs in the 2020 five-year review. . . ."[18] Through the Income Tax Policy Change, the Commission altered its policies so that natural gas and oil pipelines organized as MLPs could not recover the same tax costs twice in their rates.[19] Although the Commission acted immediately to address this double recovery in natural gas pipeline rates, [20] the Commission deferred action regarding oil pipeline rates and emphasized that oil pipeline rates "will be addressed in due course" during the 2020 five-year index review.[21] The Commission explained that by acting in the 2020 five-year review, the Commission would "ensure that the industry-wide reduced costs are incorporated on an industry-wide basis. . . ."[22]
9. However, when the 2020 five-year review arrived, the Commission reversed course. In the December 2020 Order, the Commission declined to incorporate the effects of the Income Tax Policy Change into the 2020 five-year review index calculation. Accordingly, the December 2020 Order adopted Designated Carriers' proposal to eliminate the effects of the Income Tax Policy Change from the index calculation by adjusting the reported page 700 data for all pipelines that were MLPs in 2014 to reduce the 2014 income tax allowance to zero and to revise the 2014 return on rate base to reflect the removal of ADIT.[23] 10. The Commission determined that although the index aims to reflect changes in recoverable costs, alterations to the Opinion No. 154-B methodology[24] are distinct from the annual changes to pipeline costs that are input into that methodology.[25] The Commission stated that the index is not a true-up designed to remedy over- or under-recoveries resulting from past cost-of-service policy changes, but instead simply allows for incremental rate adjustments to enable recovery of future cost changes.[26] The Commission also determined that it was not clear that the double recovery of MLP pipelines' income tax costs was ever incorporated into the index or that MLP pipelines benefitted from the Commission's prior policy permitting them to recover an income tax allowance.27[]
11. Shippers argue that the Commission's decision to adjust reported page 700 data to remove the effects of the Income Tax Policy Change contravenes established precedent and rests upon flawed reasoning. First, Shippers contend that both the D.C. Circuit and the Commission have found that the index aims to track changes in recoverable pipeline costs consistent with the Opinion No. 154-B methodology.28[] Shippers argue that the Income Tax Policy Change changed pipelines' recoverable costs by requiring MLP pipelines to remove the income tax allowance and ADIT balances from their costs of service. Thus, Shippers contend that the index should reflect this policy change.29[]
12. Second, Shippers state that the December 2020 Order contradicts the Commission's statement in the 2018 Income Tax Policy Statement that it would ...
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