Back on the Radar -- Colonial and BridgeTex Rate Cases Move Forward
In Is FERC Ignoring the Pleas of Oil Pipeline Shippers?, we explained that the tariff battle involving BridgeTex pipeline owners, Plains All American, Magellan Midstream, and OMERS Infrastructure, a Canadian pension plan, and Occidental (Oxy), and claims that Colonial is over-earning, appeared to be off FERC's radar. In late September, both of those cases came back on the radar and it is now looking like the final decisions could have a significant impact on the industry at large.
In particular, any shipper contracting for capacity on the new pipelines being built to bring Permian production to market will want to watch the BridgeTex/Oxy fight, because shippers on newly constructed pipelines may need to include specific language in their contracts to protect themselves against future shippers that support cheaper expansions getting a better rate. As for Colonial, all market participants, including shippers, investors, and owners of liquids pipelines, will want to watch how that case is resolved, because other pipelines may be in danger of similar challenges.
What Will the BridgeTex/Oxy Riff Mean for Anchor Shipper Contracts?
The BridgeTex/Oxy dispute concerns BridgeTex's 130,000 bpd expansion (BridgeTex II). As we have previously reported, FERC issued an order in that case in January of this year which sent the case to an administrative law judge (ALJ) to develop a full record through a trial-like process. In March, BridgeTex moved for summary disposition, but FERC Staff opposed that motion on the basis that there had been no discovery to allow the development of a factual record, which was the reason for FERC's referral for a trial.
The original BridgeTex pipeline system began operation in September 2014 as a 300,000 bpd system, Oxy was an anchor shipper on the new pipeline under a transportation service agreement (TSA) for 200,000 bpd for a ten-year term. The TSA included a pro-rationing policy applicable to the BridgeTex original system. The BridgeTex II Expansion added 130,000 bpd of capacity along the entire BridgeTex trunkline and a new receipt point at Midland, Texas. BridgeTex held two open seasons in 2017 for contracted service on the BridgeTex II Expansion. The transportation rates paid by the shippers that signed agreements for the BridgeTex II expansion are lower than what Oxy is paying for an almost identical path. In addition, BridgeTex adopted a pro-rationing policy that is applied to the two shipper groups (original and expansion) in separate tranches.
Oxy's complaint focuses on the fact that, as an anchor shipper that built the "expensive" original pipeline capacity, it is being harmed economically by the "cheaper" expansion capacity being sold to its competitors at a lower rate. Oxy claims that it is "subsidizing" this cheaper capacity because, without the infrastructure built using Oxy's contract, the cheaper expansion capacity would not be possible. Oxy maintains that a contract provision in its original contract protects it from an expansion shipper paying a lower rate and from the pro-rationing policy being separate for the two tranches of capacity.
Following the filing of testimony and substantial discovery in the case, BridgeTex, on September 13, renewed its motion to have the case summarily decided. Significantly, on September 28, FERC Staff filed a response in which it fully supported BridgeTex's motion and asked the ALJ to grant BridgeTex's motion, arguing that the expansion rates and pro-rationing policy do not violate the Interstate Commerce Act, and that the contract between Oxy and BridgeTex does not protect Oxy from lower rates or from tranched pro-rationing.
If the ALJ summarily dismisses the proceeding and FERC upholds that decision, which seems likely, those shippers anchoring expansions in the Permian will be well advised to not rely on the Interstate Commerce Act to protect them from future shippers that support cheaper expansions paying less. Also, shippers on newly constructed pipelines would be well advised to include specific language in their contracts to protect themselves because, as FERC Staff found in this case, as "sophisticated parties to a contract, [Oxy] had the 'opportunity to insert terms and conditions into the pro forma TSA' to explicitly address expansions, but did not do so."
Is Colonial Pipeline Over-earning?
A number of separate complaints were filed at the end of last year and the beginning of this year by shippers on Colonial Pipeline challenging all of Colonial's rates, both indexed and market rates, and complaining about certain operational practices. Colonial answered each of these complaints and asserted that its page 700 as filed for 2016 showed that it was only over-earning by 2.5%, which is beneath the threshold for a general FERC rate investigation, which Colonial asserted is 25%.
In a similar situation in 2014, FERC issued an order sending the matter to an ALJ for a hearing, but that case was ultimately settled. On September 20, FERC followed this same path for these now consolidated complaints and sent the matter to an ALJ for settlement discussions, to be followed by an administrative hearing if those settlement discussions fail. The 40-page FERC decision in this matter, though, is significant for the issues that FERC determined should be addressed in this hearing process.
In its unanimous decision, FERC set almost all issues raised by the complainants for a hearing before an ALJ, if the parties are unable to settle the dispute. FERC found that the complaints were sufficient to show that Colonial's existing rates, as indexed, may be unjust and unreasonable and warrant an evidentiary hearing, even though Colonial's page 700 showed that it was over-earning by only 2.5%.
FERC accepted that the complainants could make adjustments to the amounts on page 700 to make their case for a hearing on the justness and reasonableness of the rates.
Some of these adjustments are specific to Colonial, such as:
- Costs associated with pipeline incidents that occurred in 2016
- Allocation methodologies between interstate and intrastate services
- Understatement of throughput and revenue for 2016
Other adjustments could be made to almost any pipeline's page 700 including:
- Adjustment of the pipeline's cost of capital calculations to make them consistent with FERC precedent
- Adjustment of the pipeline's income tax allowance to take into account the changes in the federal corporate income tax rate in the Tax Cuts and Jobs Act and presumably FERC's recent disallowance of an income tax allowance for MLPs
If successful, the complainants are asking for refunds and reparations for the two years preceding the complaints with respect to the indexed rates. With respect to any changes to the market-based rates, one complainant argued that it should be able to recover reparations totaling the difference between Colonial's initial market-based rates from 2000 and 2001 and any subsequent rate collected by Colonial that is determined to be unjust and unreasonable. Colonial claimed that reparations are not available for changes to market-based rates and FERC held that whether reparations in relation to market-based rates on oil pipelines are recoverable, and how such reparations should be calculated, is an issue of first impression. Given the novel aspect of this issue, FERC deferred the initial decision to the hearing-based proceedings.
Given the size and importance of the Colonial system, the impact of this proceeding could be significant for individual shippers. Also, if the market-wide adjustments proposed for the page 700 are allowed for purposes of re-calculating a pipeline's over-earning, a number of pipelines could be subject to similar challenges.
Insights Coming Soon
Rover retrospective - a case study on regulatory risks
Quarterly review of interstate pipeline shipper contracting trends