Oil Pipelines Set to Increase Rates - Which Pipelines Are 5 to 50% Below the Ceiling?
LawIQ recently gained access to the premier database for liquids pipeline tariffs, which will enhance our ability to offer insights into the rates charged by these pipelines. On an annual basis, most liquids pipelines are permitted to increase their FERC-regulated base rates by an index published annually by FERC. On May 10, FERC issued a notice stating that these pipelines may increase their “ceiling rates” by 4.3108% for the period from July 1, 2019 through June 30, 2020. While many pipelines use the “ceiling” as the tariff rate they charge to their shippers, other pipelines may, for various reasons, charge their shippers a rate that is lower than the “ceiling.” By looking for pipelines not charging the ceiling rate, one can identify pipelines that (i) may be under pressure from shippers that have filed complaints; (ii) provide services in very competitive markets; or (iii) have delivery paths with fluctuating demand.
Oil Tariffs Are Different from Gas Tariffs
FERC’s regulatory authority over liquids pipeline tariffs is derived from the Interstate Commerce Act (ICA) and not the Natural Gas Act (NGA) which authorizes FERC to regulate the rates of natural gas pipelines. FERC’s authority under the ICA is more limited in scope and in the Energy Policy Act of 1992, Congress ordered FERC to develop a simplified and generally applicable methodology for streamlining the regulation of oil pipeline rates. As a result, FERC has taken a much lighter regulatory approach for oil pipelines than it has for gas pipelines, which means that there are more changes in the tariff rates charged by these liquids pipelines than for natural gas pipelines.
Under FERC’s indexing policy, a pipeline establishes a maximum permitted rate, called the “ceiling” rate, which is adjusted each year by an index that FERC calculates annually using an established methodology. A pipeline may charge any rate up to the ceiling rate by simply filing a new tariff with FERC, unless a shipper can demonstrate that the pipeline is earning too much at that rate as compared to the pipeline’s cost of service. Most, but not all, tariff rates that are subject to the ceiling are equal to the ceiling rate.
A Market Overview
There are over 225 pipelines that have at least one currently effective interstate tariff on file with FERC. These interstate companies are required to file annual reports with FERC that detail financial and operating data for their interstate systems. The overall interstate revenue reported by these systems for 2017 was $18.925 billion. However, approximately 50% of the total industry revenue is reported by only 14 of the largest pipeline systems. Set forth below is the market share of these 14 pipelines over the last seven years and their total revenue over that same period.
Each of these pipelines is required to file a tariff with FERC for each transportation path (origin point and destination point) for which they offer interstate service. In all, there are currently almost 10,000 of these point pairs for which a tariff has been filed at FERC. Many pipelines have only one such point pair, most have fewer than ten, but the larger pipelines often have more than one hundred --- and Magellan has over 1,000 such point pairs.
Many of the pipelines operated by the companies identified in the graph above have rates that are either not subject to a ceiling, because they are market-based rates, or have all of their rates at the ceiling level. Such pipelines include all three Enbridge pipelines, Explorer Pipeline, ExxonMobil Pipeline, Marathon Pipe Line, Seaway Crude Pipeline and Tallgrass Pony Express Pipeline. By looking at rates on pipelines that are not at the ceiling rate, one can identify pipelines and particular routes that may keep their rates lower than the maximum they are permitted to charge. As we discuss below, there are at least three categories of pipelines that may be charging less than the ceiling rate.
Pipelines Subject to Customer Complaints
As we have discussed before in Back on the Radar -- Colonial and BridgeTex Rate Cases Move Forward, Colonial Pipeline has had a number of complaints filed against it claiming that it is overearning. These complaints were filed even though Colonial is charging less than the ceiling rate for most of the route pairs on its pipeline. Many of Colonial’s rates range from 7% to 34% below the ceiling, with the average discounted tariff rate being 13% lower than the full ceiling rate.
Similarly, SFPP has been in litigation about its rate for years. Like Colonial, the rates charged for just about half of the routes under SFPP’s tariffs are lower than the ceiling rate, but the discount is far smaller, ranging from 5% to almost 8%, with the average discounted tariff rate being 7% lower than the full ceiling rate.
Competitive Markets
Marketlink is temporarily discounting its crude walk-up rate from Cushing, Oklahoma to Houston and Port Arthur, Texas at a rate that is 17% and 7% below the ceiling rates for Houston and Port Arthur, respectively. Also, TransCanada Keystone is offering a temporary discount through May 31 for crude moving from the Canadian border to Marketlink in Cushing that is less than 50% of the ceiling rate. Both pipelines will file to increase their ceiling rates, but the key will be to watch that filing and others made throughout the year to see if they are able to raise the rate they charge to one that approaches or equals the revised ceiling rate. Plains Pipeline is also offering discounts for movements from points in Kansas to Cushing that range from 9 to 23% below the ceiling.
Specialized Products
Many of the discounted rates offered by these major pipelines are for liquids other than crude. For example, Mid-America Pipeline has discounted less than 10% of its individual routes and almost all of the discounted rates are for movements of natural gas liquids from various points in Kansas to Rosemount, Minnesota. Similarly, Magellan has very few discounted routes and the ones that are most significant when compared to the ceiling rates, which are in excess of 30%, are for conventional gasoline and ultra-low sulfur diesel fuel and other petroleum products between a variety of points in Oklahoma for delivery to Aledo and Mertens, Texas, which are both in the Dallas/Fort Worth area, which is highly competitive. Buckeye Pipeline also has very limited discounted routes, but some are at a significant discount, in excess of 20% off of the ceiling rates, mainly for movements of jet fuel from Linden, New Jersey.
As we continue to analyze and integrate this premier data platform, we would like to hear from our customers regarding how information about liquid transportation rate changes, revenue projections for liquids pipelines, and transportation costs between regions could be of value to you and how we can help you analyze these issues with our access to this unique data set.
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