Supplemental Review of the Oil Pipeline Index Level

SUPPLEMENTARY INFORMATION:

1. On December 17, 2020, the Commission issued an order in the 2020 five-year review of the oil pipeline index (Initial Order) establishing an index level of Producer Price Index for Finished Goods plus 0.78% (PPI-FG+0.78%) for the five-year period beginning July 1, 2021 (Initial Index). On January 20, 2022, the Commission issued an order granting rehearing (Rehearing Order) and establishing an index level of PPI-FG-0.21% (Rehearing Index). In Liquid Energy Pipeline Association v. FERC ( LEPA v. FERC ), the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) held that the Commission violated the Administrative Procedure Act (APA) by amending the Initial Index without providing notice and an opportunity to comment. Accordingly, the court vacated the Rehearing Order and ordered the Commission to reinstate the Initial Order. In compliance with this directive, the Commission reinstated the Initial Order by order issued September 17, 2024.

2. As discussed below, we remain concerned that the Commission erred in establishing the Initial Index. Thus, following LEPA v. FERC, we propose to amend the Initial Index prospectively by adopting a revised index level of PPI-FG-0.21% for the remainder of the five-year period that began on July 1, 2021. We seek comment on this proposal and encourage commenters to address all issues related to the appropriate index level following LEPA v. FERC.

I. Background

A. Indexing and the Kahn Methodology

3. The Commission adopted the indexing methodology in compliance with the Energy Policy Act of 1992 (EPAct 1992), which required the Commission to streamline its procedures related to oil pipeline rates and establish “a simplified and generally applicable ratemaking methodology for oil pipelines.” Indexing streamlines and simplifies ratemaking procedures by allowing oil pipelines to change their rates subject to certain ceiling levels, as opposed to making cost-of-service filings. Under this methodology, pipelines may adjust their ceiling levels effective every July 1 by “multiplying the previous index year's ceiling level by the most recent index published by the Commission.”

4. The Commission reviews the index level every five years. Beginning with Order No. 561 and in each ensuing five-year review, the Commission has adjusted the index level using the Kahn Methodology, which calculates each pipeline's cost change on a per barrel-mile basis over the prior five-year period based on FERC Form No. 6, page 700 summary cost-of-service data. To remove statistical outliers and spurious data, the Kahn Methodology trims the data set by removing an equal number of pipelines at the top and bottom of the data set. Then, the Kahn Methodology averages the median, mean, and weighted mean to determine a composite central tendency, which is compared to the changing value of PPI-FG over the relevant five-year period. The index level is set at PPI-FG plus (or minus) this differential.

B. 2020 Five-Year Review

5. On June 18, 2020, the Commission initiated the 2020 five-year review. The Commission proposed to calculate the index level by (1) trimming the data set to the middle 50% and (2) incorporating the effects of the Commission's 2018 policy change requiring Master Limited Partnership (MLP)-owned pipelines to eliminate the income tax allowance and previously accrued Accumulated Deferred Income Taxes (ADIT) balances from their page 700 summary costs of service (Income Tax Policy Change). Ten commenters filed comments addressing the Commission's proposal. LEPA, Designated Carriers, and Kinder Morgan, Inc. (collectively, Pipelines) supported trimming the data set to the middle 80%, rather than the middle 50%, and adjusting the reported page 700 data to eliminate the effects of the Income Tax Policy Change from the index calculation. By contrast, Joint Commenters, Liquids Shippers Group, and CAPP (collectively, Shippers) argued that the Commission should continue using the middle 50% and reject Pipelines' proposed adjustments to the data set.

6. In the Initial Order, the Commission established the Initial Index of PPI-FG+0.78%. The Commission adopted Pipelines' proposals to use the middle 80% and to remove the effects of the Income Tax Policy Change from the index calculation. On January 19, 2021, Shippers filed requests for rehearing challenging the Commission's determinations, and Pipelines requested rehearing or clarification to correct minor errors in the workpapers underlying the Initial Order.

7. In the Rehearing Order, the Commission granted rehearing in part and adopted the Rehearing Index of PPI-FG-0.21%. The Commission granted Shippers' requests to calculate the index level using the middle 50% and unadjusted page 700 data that reflects the effects of the Income Tax Policy Change. The Commission found that the middle 50% produces a more accurate measure of normal pipeline cost changes than the middle 80%, which includes pipelines with extraordinary cost changes that were unrepresentative of ordinary pipeline operations. Furthermore, the Commission found that the index calculation must incorporate the Income Tax Policy Change to produce just and reasonable rates. The Commission also granted Pipelines' request to calculate the index level using updated page 700 data for 2014 where available.

8. The Commission directed oil pipelines to recompute their ceiling levels to reflect the Rehearing Index and to reduce their rates in accordance with those ceiling levels effective March 1, 2022. Thereafter, Pipelines filed petitions for review of the Rehearing Order with the D.C. Circuit, and Joint Commenters filed a request for rehearing or clarification, which the Commission denied by order issued May 6, 2022.

C. LEPA v. FERC and Reinstatement Order

9. In LEPA v. FERC, the D.C. Circuit granted Pipelines' petitions and held that the Commission violated the APA by altering the Initial Index on rehearing without providing additional notice and an opportunity for comment. The court found that the Commission adhered to the APA's notice-and-comment requirements when it adopted the Initial Index. However, the court explained that once an agency's rule “carrie[s] legal consequences,” the APA generally requires the agency to follow notice-and-comment procedures before amending the rule. The court found that the Initial Index became “sufficiently final” by July 1, 2021, “to require that any amendment undergo notice-and-comment procedures.” Because the Commission amended the Initial Index without engaging in additional notice-and-comment procedures, the court vacated the Rehearing Order and ordered the Commission to reinstate the Initial Order.

10. On September 17, 2024, the Commission issued an order reinstating the Initial Order in compliance with the court's decision.

II. Commission Proposal

11. Following the vacatur of the Rehearing Order in LEPA v. FERC, we remain concerned that the Initial Order improperly calculated the index level by using the middle 80%, removing the effects of the Income Tax Policy Change, and using outdated page 700 data for 2014 for certain pipelines. Accordingly, we initiate notice-and-comment procedures to consider whether to amend the Initial Index on a prospective basis.

12. As discussed below, we propose to adopt a revised index level of PPI-FG-0.21% for the remainder of the five- year period that began on July 1, 2021. This proposal is based on the Kahn Methodology as applied to page 700 data from 2014-2019 and results from (1) relying solely on the middle 50%, (2) using unadjusted page 700 data that reflects the effects of the Income Tax Policy Change, and (3) using updated page 700 data for 2014, where available. We seek comments on our proposal and encourage commenters to address all issues related to the appropriate index level following LEPA v. FERC, including those issues discussed below. Commenters should also renew any arguments raised in requests for rehearing or clarification of the Initial Order that they would like for the Commission to consider.

A. Statistical Data Trimming

13. We propose to amend the Initial Index by calculating a revised index level relying solely on the middle 50%. As discussed below, we are concerned that the Commission's use of the middle 80% in the Initial Order departed from established practice and that the record in the 2020 five-year review did not support this change.

14. As an initial matter, the index aims to reflect the cost experience of a typical pipeline during ordinary pipeline operations. The index is not designed to recover extraordinary cost changes, including those resulting from atypical or idiosyncratic circumstances, and the presence of extraordinary cost changes in the data set can inflate the index level.

15. To avoid inflating the index, the Commission excludes pipelines with extraordinary or idiosyncratic cost changes from its analysis. In the 2010 and 2015 Index Reviews, the Commission found that the middle 50% more appropriately adjusts the index level for normal cost changes than the middle 80%, which, by definition, includes pipelines relatively far removed from the median of the data set. The Commission also concluded that pipelines included in the middle 80% but not the middle 50% ( i.e., the incremental 30%) are more likely to have cost changes resulting from idiosyncratic factors, such as a rate base expansion, plant retirement, or localized changes in supply and demand, that do not reflect normal industry-wide experience. Thus, the Commission found that the middle 50%, more effectively than the middle 80%, trims pipelines with anomalous cost changes from the data set while avoiding the complexities and distorting effects of manual data trimming methodologies. Following the 2015 Index Review, the D.C. Circuit affirmed the Commission's decision to calculate the index level based solely upon the middle 50%.

16. As discussed above, in the Initial Order, the Commission departed from its prior practice by using the middle 80%, as opposed to the middle 50%. We are concerned, however, that the page 700 data set for the 2014-2019 period does not support this change. The scatter plot below indicates that the middle 80% in this data set includes several pipelines near its upper bound that differ considerably from the other pipelines in the sample.

17. Moreover, these pipelines, particularly those at the upper bound of the middle 80% range, exert an outsized influence that inflates the index calculation. The difference between the middle 50% and the middle 80% results primarily from eight pipelines at the upper bound of the middle 80%.

18. Furthermore, the page 700 data set indicates that the middle 80% is even more dispersed than in 2015 or 2010, as illustrated by the bar chart below.

19. In addition, the incremental 30% appears to include pipelines with extraordinary cost changes that are not reflective of ordinary pipeline operations. For example, in the 2020 five-year review, Joint Commenters identified seven pipelines in the incremental 30% whose reported cost changes resulted from irregular circumstances, such as pipeline ruptures or temporary shutdowns.

20. Although the Initial Order identified three reasons for using the middle 80% instead of the middle 50%, we no longer find this reasoning persuasive. First, the mere fact that the middle 80% contains more data does not support departing from the middle 50%. The middle 50% here includes 81% of industry-wide oil pipeline barrel-miles, and thus provides a more representative sample than in 2015 or 2010, when the Commission relied solely on the middle 50%. In particular, the middle 50% in the 2015 and 2010 Index Reviews contained 56% and 76%, respectively of total barrel-miles subject to the index. Thus, omitting the additional pipelines included in the incremental 30% would not deprive the Commission of a robust data sample. Furthermore, we are concerned that any benefits of considering the larger sample in the middle 80% would not outweigh the risk that this additional data will distort the measurement of normal cost changes.

21. Second, contrary to the Initial Order, it is not clear that using the middle 80% would provide a better measure of “normal” cost changes in this proceeding. Rather, as discussed above, the middle 80% appears to include anomalous data that would distort the measurement of the central tendency used to calculate the index level. This suggests that the more tailored data sample in the middle 50% provides a superior method of measuring normal cost changes, as opposed to extraordinary or idiosyncratic costs.

22. Third, the Initial Order sought to distinguish the 2015 and 2010 Index Reviews on the basis that, unlike in the 2020 review, commenters in those proceedings “presented detailed analyses demonstrating that the incremental 30% contained anomalous cost changes . . . .” However, as in those prior reviews, the record in the 2020 review indicates that the middle 80% includes outlying cost increases, reflects significant dispersion, and includes pipelines with idiosyncratic cost changes. To the extent that shippers submitted more detailed analyses in 2015 and 2010, they presented this evidence to support manual data trimming proposals, which the Commission rejected in favor of trimming the data set to the middle 50%. We are concerned that it would be incongruous to reject manual data trimming while at the same time requiring commenters to present similar analyses to justify continued use of the middle 50%.

23. For these reasons, we are no longer persuaded by the Commission's reasoning in the Initial Order for using the middle 80%. Accordingly, we propose to calculate a revised index level using the middle 50% and seek comment on this proposal.

B. Income Tax Policy Change

24. We are concerned that removing the Income Tax Policy Change from the index calculation could result in oil pipeline rates that are unjust and unreasonable. Thus, we propose to revise the index level prospectively by using unadjusted page 700 data that reflects the effects of the Income Tax Policy Change on pipeline cost changes from 2014-2019.

25. Several considerations support this proposal. The D.C. Circuit and the Commission have concluded that allowing MLP pipelines to recover an income tax allowance in addition to a return on equity (ROE) determined using the Discounted Cash Flow (DCF) model results in an impermissible double recovery of investor-level tax costs and produces unjust and unreasonable rates. Although the Income Tax Policy Change eliminated this double recovery by prohibiting MLP pipelines from recovering an income tax allowance, oil pipeline rates have not incorporated this policy change into going forward rates following the vacatur of the Rehearing Order. Because indexing is the Commission's primary ratemaking methodology for oil pipelines and because indexed oil pipeline rates must be just and reasonable, we believe that the index calculation should address the Income Tax Policy Change.

26. Furthermore, the index is intended to reflect changes in costs recoverable under the Opinion No. 154-B methodology, such as the Income Tax Policy Change. The Commission and the D.C. Circuit have long recognized that the index should reflect changes in costs recoverable under the Opinion No. 154-B methodology. The index is the primary means for adjusting rates to recover those costs, and the Commission uses the Opinion No. 154-B methodology cost data reported on page 700 to calculate the index level. Here, the Income Tax Policy Change altered pipelines' recoverable costs by barring MLP pipelines from recovering in 2019 income tax costs that they were permitted to recover in 2014. Thus, by comparing the 2014 data reported on page 700 under the Commission's previous policy with the 2019 data reported under its changed policy, the index calculation will accurately capture the effects of the Income Tax Policy Change on costs recoverable under Opinion No. 154-B.

27. In addition, we believe that incorporating the Income Tax Policy Change into the index complies with EPAct 1992's dual mandates for just and reasonable rates and simplified and streamlined ratemaking. As the Commission's Opinion No. 154-B methodology evolves, oil pipeline rates adjusted via indexing should reflect those changes in order to remain just and reasonable. If the Commission omits the effects of the Income Tax Policy Change from the index calculation, the alternative method for reflecting the elimination of the MLP income tax double recovery in rates would be through cost-of-service litigation. We are concerned that implementing cost-of-service policy changes in this manner would frustrate the statutory goals of efficient and simplified ratemaking embodied in EPAct 1992.

28. We are also concerned that adjusting page 700 data to remove the effects of the Income Tax Policy Change conflicts with the Commission's historical practice. Before the Initial Order, the Commission had not previously adjusted the reported Form No. 6 data used to derive the index level. Rather, Order Nos. 561 and 561-A “opted for a purely historical analysis” for measuring pipeline cost changes based on documented cost experience, and in subsequent five-year reviews, the Commission calculated the index level using reported Form No. 6 data without adjustment. Thus, modifying MLP pipelines' reported page 700 data in the Initial Order departed from the purely historical analysis on which the Commission has consistently relied since establishing the indexing regime.

29. Moreover, our proposal would honor the Commission's assurances in the 2018 Income Tax Policy Statement that it would “incorporate the effects of [the Income Tax Policy Change] . . . in the 2020 five-year review” so that oil pipeline rates would reflect these reduced costs. Whereas the Commission acted promptly to eliminate the MLP income tax double recovery from natural gas pipeline rates, the Commission deferred adjusting oil pipeline rates until the 2020 five-year review. Failure to incorporate the Income Tax Policy Change into the index level would leave MLP oil pipeline rates unaddressed indefinitely. Furthermore, we recognize that shippers relied upon the Commission's assurances in considering whether to bring challenges against oil pipeline rates following the Income Tax Policy Change.

30. We are no longer persuaded by the reasoning provided in the Initial Order for excluding the Income Tax Policy Change from the index calculation. Contrary to the Initial Order, we do not believe there is a meaningful distinction between changes to the Opinion No. 154-B methodology and changes to the costs that pipelines input into that methodology and end up reported on page 700. Rather, changes to the Opinion No. 154-B methodology produce corresponding changes to the costs that pipelines can recover. Accordingly, for purposes of determining the index, any meaningful measure of changes to recoverable costs between 2014 and 2019 should reflect the Income Tax Policy Change.

31. Additionally, in contrast to the Initial Order, we do not believe that reflecting the Income Tax Policy Change would effectuate a true-up for prior-period over-recoveries. Consistent with the purposes of the five-year review, incorporating the effects of the Income Tax Policy Change in the index calculation would align pipelines' future rates with their future costs recoverable under Opinion No. 154-B. By failing to reflect the Income Tax Policy Change in the calculation of the prospective index, the approach adopted in the Initial Order would cause future indexed rates to become estranged from future recoverable costs.

32. We likewise question the Initial Order's reasoning that “[b]ecause no prior index calculation incorporated the [Commission's 2005 policy change] allowing MLP pipelines to recover an income tax allowance, it is not necessary to reflect the policy change denying those pipelines an income tax allowance in the calculation here.” This statement disregards indexing's purpose and oversimplifies historical Commission practice. Indexed rates have always served as a means for recovering pipeline income tax costs. Accordingly, the five-year review index calculation was always intended to incorporate changes in pipeline income tax costs, even if the Commission previously measured those costs using an imperfect estimate. Now that the Commission uses page 700 data that directly measures income tax costs, we believe that the Commission should not disregard this data when calculating the index level.

33. Moreover, contrary to the findings in the Initial Order, MLP income taxes have been reflected in oil pipeline rates. Before the 2005 income tax policy change, MLP pipelines could include at least a partial income tax allowance in their costs of service. To the extent that prior index calculations did not incorporate the 2005 policy change allowing MLP pipelines to recover a full income tax allowance, we believe that pipeline rates substantially came to reflect that policy over time. In particular, as the number of pipelines in the Commission's data set expanded, all initial rates and non-indexing rate changes would have reflected MLP pipelines' ability to recover a full income tax allowance under the previous 2005 policy. Although we recognize that prior index reviews imperfectly captured the 2005 income tax policy change, the 2005 policy change affected oil pipeline rates over the last 15 years. Thus, we do not believe that the arguments based on the 2005 income tax policy change require excluding the Income Tax Policy Change from the index calculation.

34. For these reasons, we propose to revise the index level prospectively by using unadjusted page 700 data that incorporates the effects of the Income Tax Policy Change on pipeline recoverable costs between 2014 and 2019. We invite comments on this proposal.

C. Appropriate Source of 2014 Page 700 Data

35. Page 700 includes columns for reporting summaries of cost-of-service data for both the current year and previous year. The more recently filed data reported in the previous-year column often updates the data that was filed in the prior year. As a result, for the first year of the index review period in the five-year review, the Commission uses updated page 700 data filed in the following year's Form No. 6, where available.

36. In the Initial Order, the Commission inadvertently departed from its prior practice by using outdated page 700 data for 2014. Although 38 pipelines filed updated 2014 data in April 2016, the Initial Order erroneously relied on those pipelines' originally filed 2014 data as reported in April 2015. Accordingly, we propose to calculate a revised index level using updated 2014, page 700 data, where available, as reported in the previous-year column in the Form No. 6 filings submitted in April 2016. This adjustment would ensure that the index calculation reflects the most current page 700 data for 2014 in accordance with prior Commission practice.

D. Calculating Prospective Ceiling Levels

37. We propose that pipelines recalculate their ceiling levels on a prospective basis as though the revised index level was effective throughout the five-year period. This approach will set the going-forward oil pipeline indexed rates at the proper level in future years. Furthermore, this approach will ensure that future rates reflect the appropriate use of the middle 50% (not the distortions caused by the adoption of the middle 80%) as well as the elimination of the MLP income tax allowance. We also believe that this approach is appropriate given the circumstances of this case resulting from the flaws in the Initial Order, the timely concerns raised by shippers, and the procedural holdings of LEPA v. FERC. Additionally, this approach would conform to the Commission's practice in the 2000 five-year review, where it adopted a revised index level following a judicial remand. We seek comment upon this proposal. Moreover, commenters may address whether, in the alternative, pipelines' ceiling levels should only reflect a revised index level as of July 1, 2025, rather than for the full five-year period.

III. Request for Comments

38. We invite comments on the Commission's proposal to calculate a revised index level, as described above. Commenters may address any issues regarding the appropriate index level following LEPA v. FERC, including, but not limited to, whether the Commission should amend the Initial Index by relying solely upon the middle 50%, incorporating the Income Tax Policy Change, and using updated page 700 data for 2014. Commenters may address the calculation of the revised index level. In addition, commenters should renew any arguments raised in requests for rehearing or clarification of the Initial Order that they would like for the Commission to consider in determining the index level for this five-year review period.

39. In their initial comments, commenters may also describe any additional remedial steps not discussed herein that they believe the Commission should take following the vacatur of the Rehearing Order in LEPA v. FERC. Commenters may also address any potential action that the Commission should take regarding the period between (a) the March 1, 2022 effective date of tariff records filed pursuant to the Rehearing Order and (b) September 17, 2024, when the Commission reinstated the Initial Order.

40. We acknowledge that the Commission has not previously undertaken a supplemental rulemaking to consider revisions to the index level outside of the five-year review process established in Order No. 561. However, in the present circumstances, we believe that it is appropriate to initiate new notice-and-comment procedures given the D.C. Circuit's holdings in LEPA v. FERC and our ongoing concerns with the Commission's determinations in the Initial Order. Commenters may address any issues or concerns associated with the proposal to revise the index level during the five-year period.

IV. Comment Procedures

41. Initial comments are due November 26, 2024. Reply comments are due December 20, 2024. Comments must refer to Docket No. RM25-2-000, and must include the commenter's name, the organization they represent, if applicable, and their address. All comments will be placed in the Commission's public files and may be viewed, printed, or downloaded remotely as described in the Document Availability section below. Commenters on this proposal are not required to serve copies of their comments on other commenters.

42. The Commission encourages comments to be filed electronically via the eFiling link on the Commission's website at http://www.ferc.gov. The Commission accepts most standard word processing formats. Documents created electronically using word processing software must be filed in native applications or print-to-PDF format and not in a scanned format. Commenters filing electronically do not need to make a paper filing.

43. Commenters that are not able to file comments electronically may file an original of their comment by USPS mail or by courier-or other delivery services. For submission sent via USPS only, filings should be mailed to: Federal Energy Regulatory Commission, Office of the Secretary, 888 First Street NE, Washington, DC 20426. Submission of filings other than by USPS should be delivered to: Federal Energy Regulatory Commission, 12225 Wilkins Avenue, Rockville, MD 20852.

V. Document Availability

44. In addition to publishing the full text of this document in the Federal Register , the Commission provides all interested persons an opportunity to view and/or print the contents of this document via the internet through the Commission's Home Page ( http://www.ferc.gov ).

45. From the Commission's Home Page on the internet, this information is available on eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft Word format for viewing, printing, and/or downloading. To access this document in eLibrary, type the docket number excluding the last three digits of this document in the docket number field.

46. User assistance is available for eLibrary and the Commission's website during normal business hours from FERC Online Support at (202) 502-6652 (toll free at 1-866-208-3676) or email at ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-8371, TTY (202) 502-8659. Email the Public Reference Room at public.referenceroom@ferc.gov.

[FR Doc. 2024-24518 Filed 10-22-24; 8:45 am]

BILLING CODE 6717-01-P