Is FERC Ignoring the Pleas of Oil Pipeline Shippers?
Oil pipelines (FERC parlance for pipelines transporting crude and other liquids) have not been under the microscope this year, unlike their natural gas counterparts, which have lately been the object of numerous FERC actions. When FERC announced its tax decisions in March, most observers breathed a sigh of relief when it appeared that FERC's actions would not impact oil pipelines until 2021, when the index used for such pipelines' rates is scheduled to be revisited.
However, a recent case shows there is some risk before then to pipelines that appear to be over-earning. Also, while other key issues, such as marketing affiliate rules, the BridgeTex/Oxy tariff fight, and a claim that Colonial is over-earning may be on the back burner, the timing of FERC decisions on policy issues can be difficult to predict, as last week's tax announcement by FERC suggests.
Today, we review the status of these major issues impacting liquids pipelines that are pending before FERC.
Standards for Launching Rate Cases Against Liquids Pipelines
Following the tax cut last December, the Liquids Shippers Group filed a petition seeking certain expedited actions to address the impact of the federal tax rate cut before pipelines would be allowed to increase their rates at the beginning of this month, as discussed in our Breaking: Tax Cut Issues Raised by Liquids Pipeline Shippers. In March though, when FERC issued its related tax announcements, it did almost nothing for the shippers on oil pipelines, Special Report: Tax Changes - What to Expect for Oil Pipelines. In fact, the only step FERC took immediately was to require MLP oil pipelines to eliminate any tax allowance from both calendar year 2016 and 2017 on the page 700s they filed this past April.
A consequence of this action may have been to allow a number of pipelines that could have been the subject of a rate investigation to perhaps escape that scrutiny, since any shipper wishing to protest an index increase would have needed to file its protest by July 1, 2018, when the index took effect. SInce no shippers took advantage of this opportunity (with the exception of North Dakota Pipeline, described below), liquids pipelines seemed to have escaped any immediate adverse impacts stemming from the FERC's actions.
North Dakota Pipeline filed to implement a 4.41% index rate increase, as permitted by FERC's indexing regulations, on May 30, 2018. Hess Trading Corporation and ConocoPhillips Company filed a joint protest against the index increase. FERC has stated it will investigate a protested indexed rate change if there is "10 percent or more differential between (a) the proposed indexed rate change and (b) the change in the prior two years' total cost-of-service data reported on page 700, line 9." On its page 700 filed this April, North Dakota Pipeline reported that its cost of service decreased from $195,572,437 in 2016 to $165,256,572 in 2017, a 15.5% reduction. When this reduction is combined with the proposed 4.41% index increase, the differential rises to 19.91%, which is greater than the 10% threshold. Consequently, FERC set the case for hearing, which means that the final rate the pipeline collects will be determined down the road.
Interestingly, the sole reason the cost reduction was only 15.5% is because of FERC's direction that MLPs must eliminate their income tax allowance for both years in the page 700 that they filed in April. When it filed its page 700 for calendar year 2016, in April of 2017, North Dakota reported its cost of service as being $223,584,886, which, when compared to its 2017 cost of service reported in 2018, would have resulted in a 26.09% decrease. The following table shows some of the larger pipelines that appear to have similarly benefited from this FERC directive.
Marketing Affiliate Rules
At the end of last year, FERC surprised the industry with its decision in a proceeding initiated by Magellan Midstream Partners. As we stated at the time, Special Report: Magellan, Plains, Among Others, Request Marketing Affiliate Clarification, Magellan's petition requested authority to conduct certain affiliate transactions which were similar to ones common in the industry. But Magellan crafted its petition so as to obtain a negative decision to create uncertainty about these common industry practices undertaken by its competitors. The decision was issued before Chairman McIntyre and Commissioner Glick joined the Commission, and there was a flurry of rehearing requests and interventions filed following the decision. In a somewhat related proceeding, two trade groups, Airlines for America and the National Propane Gas Association, filed a petition in which it asked FERC to apply the affiliate marketing rules applicable to gas pipelines to the liquids pipelines that it regulates.
In the Magellan case, FERC issued a tolling order in January of this year and has since gone silent. In response to the petition filed by the trade groups, FERC issued a notice in February seeking comments on the proposal. Those comments were filed in March, but there has been no response from FERC. Our view following the decision remains -- that under Chairman McIntyre, the Magellan order will be modified in that proceeding or through the proceeding commenced by the trade groups. However, there is no requirement that FERC take any action or that it act within any specific time frame.
In the case of its Revised Income Tax Policy, FERC took over a year to rule after it had received all of the comments. Given the significance of any action in the regulations concerning affiliate conduct, a similar time period before the next word from FERC would not be surprising.
Oxy/BridgeTex Dispute
BridgeTex Pipeline Company LLC, which is a Magellan joint venture, was also deeply involved in a customer dispute with Occidental Energy Marketing (Oxy) at the end of last year, as we described in Magellan v. Occidental - Playing Devil's Advocate?,concerning the rates and allocation rules related to BridgeTex's 100,000 bpd expansion. FERC issued an order in that case in January of this year which simply sent the case to an administrative law judge to develop a full record through a trial-like process. The parties briefly appeared to be in the mood to settle the case, but quickly reached an impasse. The outcome could dictate not only the rates that Oxy and other shippers are required to pay, but also decide whether Oxy can get access to the expansion capacity during times of allocation. The current schedule doesn't call for an initial decision by the administrative law judge until April 30, 2019.
Allegations That Colonial Pipeline is Over-earning
At the end of last year, Epsilon Trading, Chevron Products, and Valero Marketing and Supply filed a formal petition with FERC in which they asserted that Colonial Pipeline was substantially over-earning its cost of service based on its page 700 for calendar year 2016. Since then, three additional cases have been filed by BP Products North America, Trafigura Trading, TCPU, TransMontaigne Product Services and CITGO Petroleum. These cases essentially make the same arguments based on Colonial's 2016 page 700.
Colonial has answered each of these complaints and asserted that the 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 asserts is 25%. Colonial's 2017 page 700 shows that it over-earned by 8% in 2017. Despite these numerous objections by Colonial's customers, to date, FERC has taken no action in response to the complaints. While FERC is not required to act on such matters, in 2014, in a similar situation involving Colonial, FERC issued an order sending the matter to an administrative law judge for hearing. However, that matter was ultimately settled.
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