Oil Pipeline Rate Challenges - The DC Gridlock Might be Easing, but Who will Benefit?

FERC has been grappling with rate-related issues for the entities it regulates, including public utilities, natural gas pipelines and oil or liquids pipelines. While a number of the oil issues have been recently resolved at FERC, a new one arose just last week when FERC issued decisions in a number of cases seeking declaratory orders. As we discuss below, FERC’s “new” position on this issue could impact the financial underpinnings of some of the oil pipeline projects, especially those in which the anchor shippers are affiliates of the pipeline.

Also, the denial of an income tax allowance (ITA) for SFPP that led to the wholesale reshaping of the MLP marketplace has moved from FERC to the U.S. Courts of Appeal, and any court decision will impact both oil and gas pipelines. Complaints about Colonial Pipeline’s rates have only grown, but there are now new, seemingly serious, efforts to resolve the disputes through a settlement. Finally, a contract dispute between Oxy and Bridgetex has been resolved, but hanging over all of this is FERC’s inaction on its Magellan decision, from over a year ago, that roiled the oil pipeline community.

Each of these issues takes a while to be resolved, but each one needs to be on the radar so that surprises are minimized.

FERC Approves (Sort of) Some Pending Petitions for Declaratory Order

In FERC Delays Oil Pipelines - Is EPIC Alon e? on February 22, we noted an unusual delay in FERC’s processing of what are customarily routine petitions for declaratory orders (PDO) filed by oil pipelines. As we noted at that time, there were 16 projects that would provide an additional 2,719,500 barrels per day of capacity awaiting approval of the petitions. Fifteen of those projects, including Epic Crude, had no opposition to their PDO application. On March 11, FERC issued orders in three of the 16 projects (Magellan Pipeline’s West Leg Expansion, Targa NGL Pipeline’s Oklahoma to Mont Belvieu pipeline and Enterprise Products TE System expansion), and may have provided a clue as to what was holding up at least some of the orders.

In all three of the orders issued on March 11, the applicants had requested a determination that the rates for service agreed to by their anchor shippers could be used as the basis for setting the initial rates of service for the expansion capacity. All three applicants asserted in their petitions that such a process had been previously approved by FERC in at least three cases. While FERC granted all three of the petitions, it denied this one request in each petition. According to the orders, there are only two ways to establish an initial rate for new capacity: (1) file a cost-of-service calculation supporting the initial rate; or (2) file an affidavit that the rate is agreed to by a nonaffiliated shipper that intends to use the service. Thus, the use of the anchor shipper contract is only allowed if it is with an unaffiliated shipper and the pipeline files the required affidavit.

FERC found that in two of the cases the denial of the requested waiver was inconsequential. In the case filed by Enterprise Products, the pipeline had already filed its initial rates and had included a sworn affidavit that the rate was agreed to by at least one non-affiliated shipper. In the case involving Magellan, Magellan had stated that at least one shipper was not an affiliate. Therefore, FERC directed Magellan, when it files its initial rates, to provide a sworn affidavit that the rate was agreed to by at least one non-affiliated shipper that intends to use the service. The solution is not so obvious for Targa. According to the order in that case, Targa stated that its only anchor shipper is an affiliate. FERC conditionally granted Targa’s petition but required that, when it files its initial rates, it must file either: (1) a cost-of-service calculation supporting the initial rate; or (2) an affidavit that the rate is agreed to by a nonaffiliated shipper that intends to use the service. Given that there is no nonaffiliated shipper, it appears Targa will be required to file a cost-of-service calculation to support its initial rates.

The request that FERC allow the use of an anchor shipper contract to establish the initial rates for a project was made in eight of the remaining thirteen cases still pending, including Epic’s case. What is not clear from these petitions is whether the projects have an unaffiliated shipper. If the project has an unaffiliated shipper, FERC’s change would be inconsequential, other than requiring a simple affidavit. However, if there is no unaffiliated shipper, as in Targa’s case, the initial rate will need to be established using cost-of-service principles. This change could be significant, in that the contracts with the affiliated shipper may have to be amended and because the cost-of-service rate will be available to uncommitted shippers and could be lower than the pipeline had anticipated when it calculated its return on the project.

The following eight projects all requested this treatment, but because we do not know if there is an unaffiliated anchor shipper, we will likely not know the impact on each project until it actually files to establish its initial rates.

Buckeye Pipe Line and its affiliate, Laurel Pipe Line, joint expansion project
Enterprise Crude Pipeline New Mexico System expansion
Cactus II Pipeline Project
White Cliffs Pipeline proposed joint pipeline project involving DCP Wattenberg Pipeline and DCP Southern Hills Pipeline
Plantation Pipe Line’s Baton Rouge, Collins and Pascagoula expansion
Sunoco Pipeline Mariner East C3+ project
EPIC Crude Pipeline project
EnLink Delaware Crude Pipeline’s new pipeline project

MLP and ITA

Since FERC’s announcement last March that it would no longer allow an ITA for pipelines owned by master limited partnerships, FERC has been clarifying its policy in specific cases. Two of those cases, in which FERC affirmed its decision denying an ITA to SFPP and Enable Mississippi River Transmission, are now pending before the DC Circuit and have been consolidated by that court into a single proceeding. The oral argument has yet to be scheduled, but the decision will be crucial to both of the companies and the industry as a whole.

Resolution is a Good Thing, But Not Everyone Can Agree

In October of last year, we provided an update regarding the complaints against the Colonial and Bridgetex pipelines in Back on the Radar -- Colonial and BridgeTex Rate Cases Move Forward. At that time, we noted that in September, FERC Staff supported Bridgetex’s motion to dismiss the complaint on the basis that the contract between Oxy and BridgeTex does not protect Oxy from lower rates or from tranched pro-rationing. Late last week, the chief administrative law judge (ALJ) at FERC terminated the proceeding based on a statement from Oxy that it was withdrawing its complaints because it had reached a final settlement agreement resolving its claims.

In September of last year, FERC set a collection of claims challenging Colonial Pipeline’s entire rate structure for hearing before an ALJ. However, those parties have been in serious settlement discussions and are scheduled for another settlement conference on April 30. In the meantime, three additional complaints were filed in November of last year against Colonial by a consortium of shippers, including BP Products North American, Chevron Products Company, Epsilon Trading, Phillips 66, Southwest Airlines, Trafigura Trading, United Aviation Fuels, and Valero Marketing and Supply, in addition to two other similar complaints filed by TransMontaigne Product Services and CITGO Petroleum Corporation. All three of the complaints concern a notice that Colonial sent to its shippers on October 31, in which it increased a charge assessed to every shipper to compensate the pipeline for loss of product that occurs during the transportation. The increases were only a few cents per barrel but still generated three separate complaints. Colonial has moved to dismiss these complaints as being already included within the prior proceedings that are pending.

All Quiet on the Magellan Front

In Is FERC Ignoring the Pleas of Oil Pipeline Shippers?, we noted that FERC had surprised the oil industry at the end of 2017 with its decision in a proceeding initiated by Magellan Midstream Partners. 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. FERC issued a tolling order in January 2018 and has since gone silent. Our view regarding the decision remains unchanged-- that the Magellan order will be modified. However, there is no requirement that FERC take any action or that it act within any specific time frame.

Market Based Rate Petition

In White Cliffs Market Based Rate Ruling Could be a Juggernaut , we discussed the case filed by White Cliffs seeking to obtain market-based rate authority for transportation between the DJ Basin and Cushing, Oklahoma. The pre-hearing briefs that the parties filed in late February were consistent with our discussion of the case, focusing on how to define the product and the region for purposes of calculating White Cliffs’ market power. The outcome of the case will likely turn on whose expert the ALJ finds most persuasive. We still expect that White Cliffs will be granted the market-based rate authority it is seeking.

In late December, MPLX Ozark Pipe Line LLC (MPLX Ozark) filed an application for authorization to charge market-based rates for the transportation of crude oil originating in the state of Oklahoma for delivery to the St. Louis, Missouri markets. Not much has happened with this case since then, other than the filing of a joint protest by Husky Marketing & Supply Company and Phillips 66 Company. As in the White Cliffs case, the objection here is that MPLX Ozark has defined the market too broadly and that if MPLX Ozark is given market-based rate authority, it will be able to dictate the price for transportation services in the markets it serves.

Insights Coming Soon

Detailed project costs (labor and materials) by inch/mile
Midship update