On October 20, 2016, the Federal Energy Regulatory Commission (FERC) issued an advanced notice of proposed rulemaking (“ANOPR”) seeking comments on potential revisions to (1) the Commission’s policies for evaluating oil pipeline indexed rate changes; and (2) the reporting requirements for page 700 of FERC Form No. 6, Annual Report of Oil Pipeline Companies.  The ANOPR may prove to be another substantial step forward for FERC in its efforts to enhance transparency in the utility rate-setting and rate review processes. 

Initial Comments are due 45 days after the ANOPR is published in the Federal Register, and Reply Comments are due 90 days after publication. 

Background

The rates charged by oil pipelines are governed by the Interstate Commerce Act (“ICA”), which prohibits “unjust and unreasonable” rates and permits shippers and the Commission to challenge existing and newly-filed rates.  In response to the Energy Policy Act of 1992’s mandate to create a simplified ratemaking methodology and to streamline procedures in oil pipeline rate proceedings, FERC established an indexing methodology whereby oil pipelines may change their rates subject to certain ceiling levels, rather than making cost-of-service filings.¹  The ceiling levels change every year with an index based on industry-wide changes in cost.  FERC also added a page 700 to FERC Form No. 6, which reflects a pipeline’s cost-of-service and revenues on a total-company basis. 

Currently, the Commission relies on two policies to evaluate challenges to an indexed rate change filing.  For protests, the Commission uses the “percentage comparison test,” comparing (a) the change in the prior two years’ total cost-of-service data reported on page 700 against (b) the proposed indexed rate change, and investigating the protested index filing if the differential is greater than ten percent.  When evaluating complaints, on the other hand, the Commission considers a wider range of factors, including a “substantially exacerbate test” that queries whether (a) a pipeline is already “substantially over-recovering” and (b) the pipeline has filed an index increase that would “substantially exacerbate” that over-recovery.  Under both tests, if the Commission determines to investigate an index rate change filing, it may set a matter for hearing before an administrative law judge (“ALJ”).

Potential Modifications

The Commission is considering revisions to its policies for evaluating challenges to indexed rate changes.  According to the Commission, these revisions further streamline and simplify oil pipeline ratemaking procedures by providing clearer standards for when an indexed rate filing should be investigated.  The revisions are intended to ensure that oil pipeline rates are just and reasonable by reducing the likelihood that an oil pipeline’s rates substantially deviate from its costs through the application of indexed rate increases.  The ANOPR proposes a two-part evaluation that would apply in the case of a protest, a complaint, or the Commission’s sua sponte review of an indexed filing:

• The first part of the evaluation involves a new “exacerbate” test that would deny any ceiling level increase or indexed rate increases for pipelines in which a pipeline’s page 700 revenues exceed page 700 total costs by 15 percent for both of the prior two years.

• The second part of the evaluation involves a new “percentage comparison test” that would deny a proposed increase to a pipeline’s rate or ceiling level greater than 5 percent of the barrel-mile cost changes reported on page 700.

The ANOPR also considers whether to require pipelines to make an annual filing showing changes in their ceiling levels, which would also be subject to challenge using the new exacerbate and percentage comparison tests.

In addition to the proposed policy revisions, the ANOPR sets forth additional page 700 reporting requirements aimed at enhancing the ability of shippers and the Commission to monitor oil pipeline rates.  These potential changes include:

• Disaggregating the page 700 data (which currently only reflects total-company cost-of-service and revenues) by requiring that pipelines file supplemental page 700s for (a) crude pipelines and product pipeline systems, (b) non-contiguous systems, and (c) certain major pipeline systems. This supplemental data is intended to permit FERC to evaluate indexed rate changes based on costs and revenues more closely related and relevant to the proposed change.

• Requiring pipelines to report additional information on page 700 and supplemental page 700s relating to (a) cost allocations used on the supplemental page 700s and (b) separate revenues for cost-based rates (g., index rates), non-cost-based rates (e.g., market-based rates), and other jurisdictional revenues (e.g., penalties).

Request for Comment

The Commission is seeking comments on the potential modifications to its indexing policy and oil pipeline reporting requirements, including:

• To the extent commenters believe there may be circumstances in which the new exacerbate test and percentage comparison tests when applied to page 700 or the proposed supplemental page 700s would not provide a reasonable basis for accepting or rejecting an indexed filing, commenters should (a) identify those circumstances and (b) specifically discuss how those circumstances could be addressed for evaluating indexed rate changes in a simplified and streamlined ratemaking process.

• Comments on the sufficiency of the additional information proposed on page 700 and supplemental page 700 in evaluating index filings and conducting preliminary evaluations of a pipeline’s rates prior to bringing a cost-of-service challenge.

• Comments addressing the potential costs (including both implementation and ongoing compliance costs) of the ANOPR’s proposals.

^{1   In addition to indexing, FERC’s regulations provide for other rate changing methodologies (i.e. traditional cost-of-service filings, market-based rates, or settlement rates).  See 18 C.F.R. § 342.4.}