Rule2022-01544
Five-Year Review of the Oil Pipeline Index
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 28, 2022
Issuing agencies
Energy DepartmentFederal Energy Regulatory Commission
Abstract
The Federal Energy Regulatory Commission (Commission) addresses arguments raised on rehearing of the December 17, 2020 Order Establishing Index Level concluding the Commission's five-year review of the index level used to determine annual changes to oil pipeline rate ceilings (December 2020 Order). The December 2020 Order established an index level of Producer Price Index for Finished Goods plus 0.78% (PPI-FG+0.78%) for the five-year period commencing July 1, 2021. In this order, the Commission grants rehearing of the December 2020 Order, in part, denies rehearing, in part, and establishes an index level of PPI-FG-0.21%.
Full Text
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[Federal Register Volume 87, Number 19 (Friday, January 28, 2022)]
[Rules and Regulations]
[Pages 4476-4498]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-01544]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 342
[Docket No. RM20-14-001]
Five-Year Review of the Oil Pipeline Index
AGENCY: Federal Energy Regulatory Commission.
ACTION: Order on rehearing.
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SUMMARY: The Federal Energy Regulatory Commission (Commission)
addresses arguments raised on rehearing of the December 17, 2020 Order
Establishing Index Level concluding the Commission's five-year review
of the index level used to determine annual changes to oil pipeline
rate ceilings (December 2020 Order). The December 2020 Order
established an index level of Producer Price Index for Finished Goods
plus 0.78% (PPI-FG+0.78%) for the five-year period commencing July 1,
2021. In this order, the Commission grants rehearing of the December
2020 Order, in part, denies rehearing, in part, and establishes an
index level of PPI-FG-0.21%.
DATES: This order is applicable beginning January 20, 2022.
FOR FURTHER INFORMATION CONTACT:
Evan Steiner (Legal Information), Office of the General Counsel, 888
First Street NE, Washington, DC 20426, (202) 502-8792
Monil Patel (Technical Information), Office of Energy Market
Regulation, 888 First Street NE, Washington, DC 20426, (202) 502-8296
SUPPLEMENTARY INFORMATION:
Order on Rehearing
(Issued January 20, 2022)
1. On December 17, 2020, the Commission issued an order
establishing an oil pipeline 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.\1\ On January 19, 2021, Joint Commenters,\2\
Liquids Shippers Group (Liquids Shippers),\3\ the Canadian Association
of Petroleum Producers (CAPP) (together with Joint Commenters and
Liquids Shippers, Shippers), the Association of Oil Pipe Lines (AOPL),
and Designated Carriers \4\ (together with AOPL, Pipelines) requested
rehearing or clarification of the December 2020 Order.
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\1\ Five-Year Rev. of the Oil Pipeline Index, 86 FR 9448 (Feb.
16, 2021), 173 FERC ] 61,245 (2020) (December 2020 Order).
\2\ Joint Commenters include: The Airlines for America; Chevron
Products Company; the National Propane Gas Association; and Valero
Marketing and Supply Company.
\3\ Liquids Shippers include: Apache Corporation; Cenovus Energy
Marketing Services Ltd.; ConocoPhillips Company; Devon Gas Services,
L.P.; Equinor Marketing & Trading US Inc.; Fieldwood Energy LLC;
Marathon Oil Company; Murphy Exploration and Production Company--
USA; Ovintiv Marketing, Inc.; and Pioneer Natural Resources USA,
Inc.
\4\ Designated Carriers include: Buckeye Partners, L.P.;
Colonial Pipeline Company; Energy Transfer LP; Enterprise Products
Partners L.P.; and Plains All American Pipeline, L.P.
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2. As discussed below, we grant the requests for rehearing, in
part, and deny the requests for rehearing, in part. As a result, we
adopt an index level of PPI-FG-0.21%. This departure from the December
2020 Order results from: (a) Trimming the data set to the middle 50% of
cost changes, as opposed to the middle 80%; (b) 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); \5\ and (c) correcting the index calculation to rely
upon updated page 700 cost data for 2014.
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\5\ Inquiry Regarding the Commission's Policy for Recovery of
Income Tax Costs, 162 FERC ] 61,227, at P 8 (2018 Income Tax Policy
Statement), reh'g denied, 164 FERC ] 61,030, at P 13 (2018), request
for clarification dismissed, 168 FERC ] 61,136 (2019), petitions for
review dismissed sub nom. Enable Miss. River Transmission, LLC v.
FERC, 820 F. App'x 8 (2020).
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3. In addition, as discussed below, we direct oil pipelines to
recompute their ceiling levels for July 1, 2021 through June 30, 2022,
based upon an index level of PPI-FG-0.21%. Consistent with Sec.
342.3(e) of the Commission's regulations,\6\ any oil pipeline with a
filed rate that exceeds its recomputed ceiling level for July 1, 2021
through June 30, 2022 must file to reduce that rate to bring it into
compliance with the pipeline's recomputed ceiling level. We direct such
pipelines to submit these filings to be effective March 1, 2022.
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\6\ 18 CFR 342.3(e).
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I. Background
A. The Kahn Methodology
4. The Commission reviews the oil pipeline index level \7\ every
five years.\8\ Beginning in 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 (e.g., 2014-2019 in
this proceeding) based upon FERC Form No. 6, page 700 summary cost-of-
service data. In order 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.\9\ The Kahn
Methodology then averages three measures of the trimmed data sample's
central tendency (the median, mean, and weighted mean) to determine a
composite central tendency and compares this average to the changing
value of PPI-FG over the same five-year period. The index level is set
at PPI-FG plus (or minus) this differential. Historically, the index
has ranged from PPI-FG-1% to PPI-FG+2.65%, and in 2015, the Commission
set the index level at PPI-FG+1.23%.
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\7\ Pursuant to the indexing methodology, pipelines may increase
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.'' 18 CFR 342.3(d)(1). The Commission
publishes an annual index figure every May in a notice issued in
Docket No. RM93-11-000.
\8\ Revisions to Oil Pipeline Regulations Pursuant to Energy
Policy Act of 1992, Order No. 561, FERC Stats. & Regs. ] 30,985, at
30,941 (1993) (cross-referenced at 65 FERC ] 61,109), order on
reh'g, Order No. 561-A, FERC Stats. & Regs. ] 31,000 (1994) (cross-
referenced at 68 FERC ] 61,138), aff'd sub nom. Ass'n of Oil Pipe
Lines v. FERC, 83 F.3d 1424 (D.C. Cir. 1996) (AOPL I).
\9\ In Order No. 561 and the 2015 and 2010 five-year reviews,
the Commission relied solely upon the middle 50% of the data set.
Five-Year Rev. of the Oil Pipeline Index, 153 FERC ] 61,312, at PP
42-44 (2015) (2015 Index Review), aff'd sub nom. Ass'n of Oil Pipe
Lines v. FERC, 876 F.3d 336 (D.C. Cir. 2017) (AOPL III); Five-Year
Rev. of the Oil Pipeline Pricing Index, 133 FERC ] 61,228, at P 60
(2010) (2010 Index Review), reh'g denied, 135 FERC ] 61,172 (2011)
(2010 Index Rehearing Order); Order No. 561-A, FERC Stats. & Regs. ]
31,000 at 31,096-097. In the 2005 and 2000 five-year reviews, the
Commission averaged the middle 50% with the middle 80% but did not
justify or address its consideration of the middle 80%. 2010 Index
Review, 133 FERC ] 61,228 at P 60. In addition, in the 2000 review,
considering the middle 80% did not alter the index calculation. Id.
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B. Notice of Inquiry and Comments
5. On June 18, 2020, the Commission issued a Notice of Inquiry
(NOI) proposing to adopt an index level of
[[Page 4477]]
PPI-FG+0.09%.\10\ The NOI proposed to calculate the index level by (1)
trimming the data set to the middle 50% and (2) incorporating the
effects of the Income Tax Policy Change upon pipeline cost changes over
the 2014-2019 period.\11\ The Commission explained that commenters
could address issues including, but not limited to, different data
trimming methodologies and whether, and if so how, the Commission
should reflect the effects of cost-of-service policy changes in the
index calculation.\12\
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\10\ Five-Year Rev. of the Oil Pipeline Index, 171 FERC ] 61,239
(2020) (NOI).
\11\ Id. PP 9-10.
\12\ Id.
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6. Ten commenters filed comments in response to the NOI.\13\
Pipelines urged the Commission to use the middle 80%, as opposed to the
middle 50%, and proposed to adjust the reported page 700 data for 2014
to eliminate the effects of the Income Tax Policy Change. Shippers, by
contrast, argued that the Commission should continue using the middle
50% and reject Pipelines' proposed adjustments to the data set. In
addition, Liquids Shippers proposed to replace the weighted mean in the
Kahn Methodology's calculation of central tendency with the weighted
median and to replace the returns on equity (ROE) reported on page 700
for 2014 and 2019 with standardized, industry-wide ROEs for both years.
CAPP argued that negotiated rate contracts have served to reduce
pipelines' risks and urged the Commission to require pipelines to
provide their page 700 workpapers to investigate whether the reported
page 700 ROEs reflect these effects.
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\13\ Comments were filed by AOPL, Designated Carriers, Kinder
Morgan, Inc., Colonial, Joint Commenters, Liquids Shippers, CAPP,
the Energy Infrastructure Council, the Pipeline Safety Trust, and
the Pipeline and Hazardous Materials Safety Administration (PHMSA).
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C. December 2020 Order and Requests for Rehearing
7. The December 2020 Order established an index level of PPI-
FG+0.78%.\14\ The Commission adopted Pipelines' proposed adjustments to
remove the effects of the Income Tax Policy Change from the index
calculation \15\ and to use the middle 80%,\16\ and declined to adopt
Liquids Shippers' and CAPP's proposals.\17\ On January 19, 2021,
Shippers filed requests for rehearing challenging these determinations
and Pipelines requested rehearing or clarification to correct minor
errors in the workpapers underlying the December 2020 Order.
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\14\ December 2020 Order, 173 FERC ] 61,245 at P 2.
\15\ Id. PP 16-20.
\16\ Id. PP 25-32.
\17\ Id. PP 36-40, 45-50, 52-53.
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II. Discussion
A. 2018 MLP Income Tax Policy Change
1. December 2020 Order
8. Prior to the December 2020 Order, the Commission committed in
the 2018 Income Tax Policy Statement to ``incorporate the effects of
[the Income Tax Policy Change] on industry-wide oil pipeline costs in
the 2020 five-year review . . . .'' \18\ Through the Income Tax Policy
Change, the Commission altered its policies so that natural gas and oil
pipelines organized as MLPs could not recover the same tax costs twice
in their rates.\19\ Although the Commission acted immediately to
address this double recovery in natural gas pipeline rates,\20\ the
Commission deferred action regarding oil pipeline rates and emphasized
that oil pipeline rates ``will be addressed in due course'' during the
2020 five-year index review.\21\ The Commission explained that by
acting in the 2020 five-year review, the Commission would ``ensure that
the industry-wide reduced costs are incorporated on an industry-wide
basis. . . .'' \22\
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\18\ Income Tax Policy Statement, 162 FERC ] 61,227 at P 8.
\19\ From 2005 to 2018, the Commission allowed MLP pipelines to
claim a full income tax allowance in their costs of service. Inquiry
Regarding Income Tax Allowances, 111 FERC ] 61,139, at P 32 (2005)
(2005 Income Tax Policy Statement). In a series of orders beginning
in 2016, the Commission and the U.S. Court of Appeals for the
District of Columbia Circuit (D.C. Circuit) found that allowing MLP
pipelines to recover both an income tax allowance and an ROE
determined using the Discounted Cash Flow (DCF) model results in an
impermissible double recovery of tax costs. The Commission rectified
the double recovery through the Income Tax Policy Change in 2018,
finding that MLP pipelines could no longer recover an income tax
allowance and could eliminate previously accumulated ADIT balances
from their costs of service. The D.C. Circuit affirmed the
Commission's decisions in 2020. See United Airlines, Inc. v. FERC,
827 F.3d 122 (D.C. Cir. 2016) (United Airlines), order on remand,
SFPP, L.P., Opinion No. 511-C, 162 FERC ] 61,228, at P 22 (2018),
(remanding the Commission's application of the 2005 policy), reh'g
denied, Opinion No. 511-D, 166 FERC ] 61,142, at PP 90-95 (2019),
aff'd, SFPP, L.P. v. FERC, 967 F.3d 788, 793-97, 801-03 (D.C. Cir.
2020) (SFPP); see also Income Tax Policy Statement, 162 FERC ]
61,227, reh'g denied, 164 FERC ] 61,030, request for clarification
dismissed, 168 FERC ] 61,136; petitions review dismissed sub nom.
Enable Miss. River Transmission, LLC v. FERC, 820 F. App'x 8.
\20\ Interstate & Intrastate Nat. Gas Pipelines, Order No. 849,
164 FERC ] 61,031, at P 30 (2018), reh'g denied, Order No. 849-A,
167 FERC ] 61,051 (2019).
\21\ Income Tax Policy Statement, 162 FERC ] 61,227 at P 46.
\22\ Id. P 8.
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9. However, when the 2020 five-year review arrived, the Commission
reversed course. In the December 2020 Order, the Commission declined to
incorporate the effects of the Income Tax Policy Change into the 2020
five-year review index calculation. Accordingly, the December 2020
Order adopted Designated Carriers' proposal to eliminate the effects of
the Income Tax Policy Change from the index calculation by adjusting
the reported page 700 data for all pipelines that were MLPs in 2014 to
reduce the 2014 income tax allowance to zero and to revise the 2014
return on rate base to reflect the removal of ADIT.\23\
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\23\ December 2020 Order, 173 FERC ] 61,245 at P 16. Because the
2014 page 700 data reflected the old policy whereas the 2019 data
reflected the new policy, a straightforward application of the
longstanding Kahn Methodology would have incorporated the cost
reductions caused by the Income Tax Policy Change. AOPL's and
Designated Carriers' proposals for eliminating the effects of the
Income Tax Policy Change differed. AOPL proposed to (1) eliminate
the 2014 income tax allowance for all pipelines that reduced their
income tax allowance from a positive number to zero in response to
the 2018 Income Tax Policy Statement and continued reporting zero
income tax allowance for the remainder of the 2014-2019 period, and
(2) adjust these pipelines' 2014 return on rate base to reflect the
elimination of their ADIT balances. Designated Carriers supported
AOPL's adjustments and proposed to extend them to all pipelines that
were owned by MLPs in 2014, including those that later converted to
business forms eligible to recover an income tax allowance. No
entity challenges on rehearing the Commission's decision not to
adopt AOPL's proposal.
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10. The Commission determined that although the index aims to
reflect changes in recoverable costs, alterations to the Opinion No.
154-B methodology \24\ are distinct from the annual changes to pipeline
costs that are input into that methodology.\25\ The Commission stated
that the index is not a true-up designed to remedy over- or under-
recoveries resulting from past cost-of-service policy changes, but
instead simply allows for incremental rate adjustments to enable
recovery of future cost changes.\26\ The Commission also determined
that it was not clear that the double recovery of MLP pipelines' income
tax costs was ever incorporated into the index or that MLP
[[Page 4478]]
pipelines benefitted from the Commission's prior policy permitting them
to recover an income tax allowance.\27\
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\24\ The Opinion No. 154-B methodology is the cost-of-service
ratemaking methodology that the Commission uses for oil pipelines.
Williams Pipe Line Co., Opinion No. 154-B, 31 FERC ] 61,377, order
on reh'g, Opinion No. 154-C, 33 FERC ] 61,327 (1985). The Opinion
No. 154-B methodology is based upon trended original costs, whereby
the inflationary component of the nominal return is placed in
deferred earnings and recovered as a part of rate base in future
years. E.g., BP W. Coast Prods., LLC v. FERC, 374 F.3d 1263, 1282-83
(D.C. Cir. 2004).
\25\ December 2020 Order, 173 FERC ] 61,245 at P 17 (stating
that ``the purpose of indexing is to allow the indexed rate to keep
pace with industry-wide cost changes, not to reflect alterations to
the Commission's Opinion No. 154-B cost-of-service methodology'').
\26\ Id. P 18.
\27\ Id. P 19 & n.37.
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2. Rehearing Requests
11. Shippers argue that the Commission's decision to adjust
reported page 700 data to remove the effects of the Income Tax Policy
Change contravenes established precedent and rests upon flawed
reasoning. First, Shippers contend that both the D.C. Circuit and the
Commission have found that the index aims to track changes in
recoverable pipeline costs consistent with the Opinion No. 154-B
methodology.\28\ Shippers argue that the Income Tax Policy Change
changed pipelines' recoverable costs by requiring MLP pipelines to
remove the income tax allowance and ADIT balances from their costs of
service. Thus, Shippers contend that the index should reflect this
policy change.\29\
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\28\ Joint Commenters Request for Rehearing at 43-45 (quoting
2015 Index Review, 153 FERC ] 61,312 at P 13) (citing AOPL III, 876
F.3d at 345-46); Liquids Shippers Request for Rehearing at 17
(quoting AOPL III, 876 F.3d at 345; 2015 Index Review, 153 FERC ]
61,312 at P 13).
\29\ Joint Commenters Request for Rehearing at 42-46; Liquids
Shippers Request for Rehearing at 16-19.
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12. Second, Shippers state that the December 2020 Order contradicts
the Commission's statement in the 2018 Income Tax Policy Statement that
it would ``incorporate the effects'' of the Income Tax Policy Change in
this five-year review.\30\ Shippers assert that they relied upon this
statement and, as a result, lost their ability to seek rehearing or
judicial review of the 2018 Income Tax Policy Statement and forewent
opportunities to challenge oil pipeline rates.\31\ Shippers further
claim that the Commission's continued inaction on eliminating the MLP
income tax double recovery from oil pipeline rates, as contrasted with
its actions to eliminate that double recovery from natural gas pipeline
rates, raises due process concerns for oil pipeline shippers.\32\ In
addition, Shippers disagree with the December 2020 Order's conclusion
that reflecting the Income Tax Policy Change would convert the index
into a true-up designed to remedy a prior over-recovery.\33\
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\30\ 2018 Income Tax Policy Statement, 162 FERC ] 61,227 at P
46; Joint Commenters Request for Rehearing at 41-42, 56; Liquids
Shippers Request for Rehearing at 15.
\31\ Joint Commenters Request for Rehearing at 57; CAPP Request
for Rehearing at 11-13; see also Liquids Shippers Request for
Rehearing at 15-16.
\32\ Joint Commenters Request for Rehearing at 59-60.
\33\ Id. at 46-47.
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13. Third, Shippers maintain that adjusting reported page 700 data
is unprecedented and departs from the Commission's consistent practice
of calculating the index level using unadjusted data.\34\ Shippers
state that the Commission has previously rejected proposals to make
targeted adjustments to the data set by removing pipelines with cost
changes resulting from specific factors because such proposals failed
to identify other factors that could render a pipeline's data non-
comparable.\35\ Shippers contend that the Commission should likewise
reject Pipelines' adjustments because they fail to consider other
factors or policy changes.\36\
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\34\ Id. at 46.
\35\ Id. at 51 (quoting 2015 Index Review, 153 FERC ] 61,312 at
P 34).
\36\ Id.
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14. Fourth, Shippers state that regardless of whether prior index
calculations directly incorporated the Commission's prior policies
allowing MLP pipelines to recover an income tax allowance, the MLP
income tax allowance became integrated into the industry's recoverable
costs and thus came to be reflected in the index.\37\ Shippers also
argue that MLP pipelines did, in fact, benefit from these policies
because they allowed MLPs to report higher costs on their page 700s,
which helped to insulate their annual index rate increase filings from
challenge under the Commission's Percentage Comparison Test.\38\
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\37\ Id. at 53.
\38\ Id. at 53-55. Under the Percentage Comparison Test, the
Commission will investigate a protested index rate increase filing
if the pipeline's page 700 revenues exceed its costs and there is a
more than a 10 percentage-point differential between the index rate
increase and the change in the prior two years' total cost-of-
service data reported on page 700, line 9. E.g., HollyFrontier
Refin. & Mktg. LLC v. SFPP, L.P., 170 FERC ] 61,133, at P 5 (2020).
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15. Fifth, Liquids Shippers argue that the December 2020 Order
further distorts the index calculation by adjusting the page 700 data
of pipelines that were MLPs in 2014 and converted to C-Corporations
after the 2018 Income Tax Policy Change. Liquids Shippers contend that
because these pipelines were eligible as C-Corporations to report a
positive income tax allowance on page 700 for 2019, reducing their 2014
income tax allowance to zero fabricates an erroneous cost increase
between 2014 and 2019.\39\
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\39\ Liquids Shippers Request for Rehearing at 18-19.
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3. Commission Determination
16. We grant rehearing of the December 2020 Order to calculate the
index level using unadjusted page 700 data that reflects the effects of
the Income Tax Policy Change upon recoverable pipeline costs.
a. The Income Tax Policy Change Should be Incorporated Into the Index
Calculation
17. The index must reflect the Income Tax Policy Change in order to
produce just and reasonable oil pipeline rates. Prior to the 2018
Income Tax Policy Change, MLP pipelines' rates could recover the same
investor-level tax costs twice, once in an income tax allowance and
again in an ROE.\40\ The D.C. Circuit and the Commission both concluded
that this led to an impermissible double recovery of investor-level tax
costs and produced unjust and unreasonable rates.\41\ The Income Tax
Policy Change eliminated this double recovery by prohibiting MLP
pipelines from recovering an income tax allowance. However, oil
pipeline rates have yet to incorporate this policy change.\42\ Thus,
the impermissible double-recovery has not been eliminated from oil
pipeline rates. Because indexing is the Commission's primary oil
pipeline ratemaking methodology and because indexed oil pipeline rates
must be just and reasonable, we conclude that the index calculation
must now address the Income Tax Policy Change.
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\40\ 2005 Income Tax Policy Statement, 111 FERC ] 61,139 at P
32.
\41\ SFPP, 967 F.3d at 795-97; United Airlines, 827 F.3d at 136;
Income Tax Policy Statement, 162 FERC ] 61,227 at PP 8, 45. MLP
pipelines do not incur income taxes at the entity level, but the
Commission justified permitting them to recover an income tax
allowance on the basis that their investors pay taxes on their
allocated share of the MLP's taxable income. Because the D.C.
Circuit and the Commission concluded that the MLP pipeline's DCF ROE
already included investor-level income tax costs, a double recovery
resulted from permitting an income tax allowance that recovered
those same tax costs. Opinion No. 511-C, 162 FERC ] 61,228 at P 22.
\42\ Pipelines identify only one MLP oil pipeline, SFPP, L.P.
(the pipeline whose rates were the subject of United Airlines), that
has adjusted its rates in response to the Income Tax Policy Change.
AOPL Initial Comments at 27-28; Designated Carriers Initial Comments
at 11, 14.
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18. The index was always intended to reflect changes to Opinion No.
154-B costs such as the elimination of the double recovery via the
Income Tax Policy Change. The Opinion No. 154-B methodology defines the
costs that oil pipelines can recover in rates and the index is the
primary means for recovering those costs.\43\ Accordingly, the
Commission and the D.C. Circuit have long recognized that the index
should reflect changes in costs recoverable under the Opinion No. 154-
[[Page 4479]]
B methodology,\44\ and the Commission uses the Opinion No. 154-B
methodology cost data reported on page 700 to calculate the index
level.\45\ Here, the adoption of the Income Tax Policy Change altered
those costs by barring MLP pipelines from recovering in 2019 income tax
costs that they were permitted to recover in 2014. By comparing the
2014 data reported on page 700 under the Commission's previous policy
with the 2019 data reported under its revised policy, this index
calculation will accurately capture the effects of the Income Tax
Policy Change on costs recoverable under Opinion No. 154-B.\46\
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\43\ As explained above, the Opinion 154-B methodology is the
Commission's cost-of-service ratemaking methodology for oil
pipelines. See supra note 24.
\44\ AOPL III, 876 F.3d at 345 (finding that the Commission
``has consistently treated the index as a measure of normal
industry-wide cost-of-service changes''); 2015 Index Review, 153
FERC ] 61,312 at P 13, aff'd, AOPL III, 876 F.3d at 345-46 (``[T]he
index is meant to reflect changes to recoverable pipeline costs,
and, thus, the calculation of the index should use data that is
consistent with the Commission's [Opinion No. 154-B] cost-of-service
methodology.''); see also Order No. 561-A, FERC Stats. & Regs. ]
31,000 at 31,096 (lamenting that the then-existing Form No. 6
provided a ``highly unsatisfactory'' measure of capital cost changes
because it did ``not contain the information necessary to compute a
trended original cost (TOC) rate base or a starting rate base''
under the Opinion No. 154-B methodology).
\45\ 2015 Index Review, 153 FERC ] 61,312 at PP 12-13 (adopting
use of page 700 data to measure oil pipeline cost changes because,
among other reasons, page 700 data is consistent with the Opinion
No. 154-B methodology).
\46\ In contrast, adjusting the data set to remove the effects
of this policy change would maintain a divergence between indexed
rates and Opinion No. 154-B recoverable costs.
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19. We also find that adjusting page 700 data to remove the Income
Tax Policy Change's effects conflicts with the Commission's historical
practice. The Commission has not previously adjusted the reported data
used to derive the index level. Order Nos. 561 and 561-A ``opted for a
purely historical analysis'' \47\ for measuring pipeline cost changes
based upon documented cost experience, and in each subsequent index
review the Commission has calculated the index level using reported
Form No. 6 data without adjustment.\48\ Thus, modifying MLP pipelines'
reported income tax allowances and returns on rate base would depart
from the purely historical analysis on which the Commission has
consistently relied since establishing the indexing regime.
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\47\ Ass'n of Oil Pipe Lines v. FERC, 281 F.3d 239, 247 (D.C.
Cir. 2002) (AOPL II) (citing Five-Year Rev. of Oil Pipeline Pricing
Index, 93 FERC ] 61,266, at 61,855 (2000) (2000 Index Review), aff'd
in part and remanded, AOPL II, 281 F.3d 239, order on remand, 102
FERC ] 61,195 (2003); Order No. 561, FERC Stats. & Regs. ] 30,985 at
30,951).
\48\ Although the Commission has curtailed the amount of data it
considers in calculating the index level via statistical data
trimming to the middle 50%, it has never modified the specific
inputs that pipelines have recorded in their Form No. 6 filings.
Similarly, while the Commission adjusts the data set to account for
pipeline mergers and divestitures that occurred during the five-year
review period, these steps are distinguishable from the adjustments
to omit the effects of the Income Tax Policy Change adopted in the
December 2020 Order based upon Pipelines' proposals. Where pipelines
filed separate page 700 data for the first year of the review period
(e.g., 2014) and merged later in the review period, the Commission
adds the separate costs that the pipelines reported for the first
year and compares this sum to the newly combined company's page 700
costs reported for the last year of the data set (e.g., 2019). 2015
Index Review, 153 FERC ] 61,312 at P 38. Conversely, in the case of
divestitures, the Commission adds the separate costs the pipelines
reported for the last year of the data set and compares this sum to
the formerly combined company's page 700 costs reported for the
first year. Unlike Pipelines' proposed adjustments, which alter a
specific cost item that pipelines reported on page 700, this step
simply combines the total costs that the pipelines reported as
separate entities at one endpoint of the review period to mirror
their status as a combined entity at the other endpoint.
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20. In addition, incorporating the Income Tax Policy Change into
the index complies with the Energy Policy Act of 1992's (EPAct 1992)
dual mandate for just and reasonable rates and for simplified and
streamlined ratemaking.\49\ As stated above, the D.C. Circuit and the
Commission have previously held that an impermissible double recovery
results from granting MLP pipelines an income tax allowance.\50\ Thus,
as the Commission's Opinion No. 154-B methodology evolves, oil pipeline
rates adjusted via indexing must 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 only
alternative method of reflecting the elimination of the MLP income tax
double recovery in rates would be through cost-of-service rate
litigation.\51\ We find that implementing cost-of-service policy
changes in this fashion would hinder the statutory goals of efficient
and simplified ratemaking embodied in EPAct 1992.\52\
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\49\ Public Law 102-486, 1801(a), 106 Stat. 2776, 3010 (1992)
(codified at 42 U.S.C. 712 note).
\50\ See supra note 19.
\51\ Importantly, this proceeding presents the sole opportunity
for addressing the MLP income tax double recovery in indexed rates
via the simplified and streamlined five-year review process. As
discussed above, the Kahn Methodology calculates the index level
based upon the change in industry-wide page 700 costs from the first
year of the review period to the last year. Accordingly, it is only
possible to reflect the Income Tax Policy Change in the instant
index calculation, which measures cost changes from 2014 (when MLP
pipelines reported a positive income tax allowance) to 2019 (when
MLP pipelines reported zero income tax allowance). Capturing this
decrease in recoverable income tax costs from 2014 to 2019 will
reduce the index level to incorporate the elimination of the MLP
income tax double recovery. In contrast, the 2025 five-year review
will reflect no change in MLP income tax costs because MLP pipelines
will report zero income tax allowance for both the first and last
years of the 2019-2024 period.
\52\ See AOPL II, 281 F.3d at 244 (holding that an oil pipeline
ratemaking regime based in large part upon cost-of-service rate
proceedings ``would be inconsistent with Congress's mandate under
the EPAct for FERC to establish `a simplified and generally
applicable ratemaking methodology.' '' (quoting EPAct 1992, at
1801(a))).
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21. Finally, our holding on rehearing honors the Commission's
assurances in the 2018 Income Tax Policy Statement. There, the
Commission committed to ``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.\53\ Whereas the
Commission acted immediately to eliminate the MLP income tax double
recovery from natural gas pipeline rates,\54\ the Commission deferred
adjusting oil pipeline rates until the 2020 five-year index review.
Failure to act here would leave oil pipeline rates unaddressed
indefinitely. While Pipelines urge the Commission to disregard our
assurances from the 2018 Income Tax Policy Statement, they offer no
alternative remedy.\55\ Moreover, we recognize that
---------------------------------------------------------------------------
\53\ Income Tax Policy Statement, 162 FERC ] 61,227 at P 8; see
also Inquiry Regarding the Effect of the Tax Cuts and Jobs Act on
Commission-Jurisdictional Rates, 162 FERC ] 61,223, at P 4 (2018)
(``The Commission must ensure that the rates, terms, and conditions
of jurisdictional services under the Federal Power Act (FPA), the
Natural Gas Act (NGA), and the Interstate Commerce Act are just,
reasonable, and not unduly discriminatory or preferential.''); id. P
8 (directing oil pipelines to report on page 700 an income tax
allowance consistent with the Income Tax Policy Change and the Tax
Cuts and Jobs Act. As opposed to initiating cost-of-service
complaints against oil pipelines, deferring action until the 2020
five-year index review best fulfilled EPAct 1992's dual mandate for
simplified oil pipeline ratemaking and just and reasonable rates.
See supra P 20 & note 51.
\54\ Specifically, the Commission required natural gas pipelines
to submit a one-time filing for the purpose of evaluating the impact
of the Income Tax Policy Change and the Tax Cuts and Jobs Act upon
the pipeline's revenue requirement. Order No. 849, 164 FERC ] 61,031
at P 30. This process allowed for MLP natural gas pipelines to
voluntarily reduce their rates in response to the Income Tax Policy
Change and for the Commission to initiate rate investigations
pursuant to section 5 of the Natural Gas Act where the pipeline
appeared to be over-recovering its cost of service as a result of
the policy change. E.g., Stagecoach Pipeline & Storage Co., 166 FERC
] 61,199 (2019); N. Nat. Gas Co., 166 FERC ] 61,033 (2019). In
contrast to MLP natural gas pipelines, Pipelines identify only one
MLP oil pipeline, SFPP, L.P. (the pipeline whose rates were the
subject of United Airlines), that has adjusted its rates in response
to the Income Tax Policy Change. See supra note 42.
\55\ We recognize that the 2018 Income Tax Policy Statement
provided non-binding guidance regarding the Commission's future
intentions. Accordingly, in the NOI initiating this proceeding, the
Commission invited the commenters to address this issue. NOI, 171
FERC ] 61,239 at P 10. Our determination here is based upon the full
consideration of the extensive record developed in this proceeding.
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[[Page 4480]]
shippers relied upon our assurances in considering whether to bring
challenges to oil pipeline rates following the Income Tax Policy
Change.\56\
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\56\ Joint Commenters Request for Rehearing at 57; CAPP Request
for Rehearing at 11-13; see also Liquids Shippers Request for
Rehearing at 15-16.
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b. Reconsidering the December 2020 Order
22. As discussed below, we reject the reasons provided by the
December 2020 Order for excluding the Income Tax Policy Change from the
index calculation.
23. First, there is no meaningful distinction between changes to
the Opinion No. 154-B methodology and changes to the costs that
pipelines input into that methodology.\57\ Rather, changes to the
Opinion No. 154-B methodology produce corresponding changes to the
costs that pipelines can recover. Thus, for purposes of determining the
index, any meaningful measure of changes to recoverable costs between
2014 and 2019 must reflect the Income Tax Policy Change. The December
2020 Order's adjustments to the page 700 data omit the effects of the
Income Tax Policy Change--as though MLP pipelines did not receive an
income tax allowance in 2014.\58\ Given the purpose of the indexing
regime to adjust rates for changes to Opinion No. 154-B recoverable
costs, a true ``apples-to-apples'' comparison involves comparing the
recoverable costs in 2014 with the recoverable costs in 2019--if
companies received an income tax allowance in 2014 but did not in 2019,
the index must reflect that reality.
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\57\ December 2020 Order, 173 FERC ] 61,245 at P 17 (stating
that ``the purpose of indexing is to allow the indexed rate to keep
pace with industry-wide cost changes, not to reflect alterations to
the Commission's Opinion No. 154-B cost-of-service methodology'').
\58\ In the December 2020 Order, the Commission stated that
``[j]ust as a business must account for changes to its accounting
policies when comparing costs over two different periods, we must
make a similar adjustment to the reported page 700 data here to
derive an `apples-to-apples' comparison of pipeline cost changes.''
Id. This analogy to accounting methods is misplaced. Whereas an
accounting methodology simply involves the method of recording
costs, as explained above, the Income Tax Policy Change directly
affected the costs that MLP pipelines can recover under the Opinion
No. 154-B methodology.
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24. Second, contrary to the statements in the December 2020 Order,
we find that reflecting the Income Tax Policy Change does not
effectuate a true-up for prior-period over-recoveries.\59\ Consistent
with the purposes of the five-year review, incorporating the effects of
the Income Tax Policy Change in the index calculation will 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 December 2020 Order would cause future indexed rates to become
estranged from future recoverable costs.
---------------------------------------------------------------------------
\59\ Id. P 18.
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25. Third, we disagree with the December 2020 Order's reasoning
that ``[b]ecause no prior index calculation incorporated the [2005
policy] 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.'' \60\ This statement
disregards indexing's purpose and oversimplifies the Commission's
historical 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.\61\ Now, the Commission uses
page 700 data that directly measures income tax costs. The Commission
should not disregard this data when calculating the index level.
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\60\ Id. P 19.
\61\ Before the 2015 Index Review when the Commission began
using page 700 data, the Commission estimated pipeline cost changes
using a rough proxy based upon Form No. 6 accounting data. This
accounting data did not directly measure changes in the income tax
costs recoverable under Opinion No. 154-B. December 2020 Order, 173
FERC ] 61,245 at P 19; see also 2015 Index Review, 153 FERC ] 61,312
at PP 14-15 (describing this proxy and its deficiencies). The
Commission relied upon this proxy because direct measures of capital
costs and income tax costs were not available when the index was
first established. 2015 Index Review, 153 FERC ] 61,312 at P 14.
Before page 700 was created, the Commission lamented that ``the
measure of the capital cost component of the cost of service is
highly unsatisfactory'' because Form No. 6 did ``not contain the
information necessary to compute a trended original cost . . . rate
base or a starting rate base as allowed for in Order No. 154-B.''
Order No. 561-A, FERC Stats. & Regs. ] 31,000 at 31,096.
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26. Moreover, the facts here undercut Pipelines' claim that MLP
income taxes have not been incorporated into pipeline rates.\62\ Prior
to the 2005 income tax policy change, MLP pipelines were eligible to
include at least a partial income tax allowance in their costs of
service.\63\ To the extent that prior index calculations did not
incorporate the 2005 income tax policy directly, pipeline rates did
substantially come to reflect that policy over time.\64\ To explain
further, as the number of pipelines in the Commission's data set
expanded,\65\ all initial rates and non-indexing rate changes would
have reflected MLPs 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, we know that the 2005 policy change plainly affected oil
pipeline rates over the last 15 years.\66\ Furthermore, Pipelines'
argument ignores how MLP pipelines' ability to claim an income tax
allowance under the previous 2005 policy shielded those pipelines'
rates from challenge.\67\ Therefore, we are not persuaded by arguments
based upon the 2005 policy change that the Commission must remove the
2018 Income Tax Policy Change from this index calculation.
---------------------------------------------------------------------------
\62\ Designated Carriers Initial Comments at 17-20; see also
December Order, 173 FERC ] 61,245 at P 19.
\63\ Lakehead Pipe Line Co., L.P., Opinion No. 397, 71 FERC ]
61,338, at 62,314-15 (1995), reh'g denied, Opinion No. 397-A, 75
FERC ] 61,181 (1996) (permitting partnership entities like MLP
pipelines to recover an income tax allowance for income attributable
for corporate partners, but not for income attributable to
individuals or other non-corporate partners); see also Riverside
Pipeline Co., L.P., 48 FERC ] 61,309, at 62,018 (1989) (applying
pre-Lakehead policy permitting partnership pipelines to recover a
full income tax allowance as if they were corporations).
\64\ Consistent with EPAct 1992's mandate for a simplified and
streamlined ratemaking regime, the Commission does not scrutinize
the costs underlying each individual pipeline's rates when
developing the industry-wide index. Rather, the Commission reaches
its determinations based upon what is appropriate on balance for the
industry as a whole.
\65\ Notably, 164 of the 277 total oil pipelines in the
Commission's data set, or 59%, have been added since the 2005 five-
year review.
\66\ In urging the Commission to adopt the adjustment to the
reported page 700 data to eliminate the effects of the Income Tax
Policy Change, neither AOPL nor Designated Carriers account for the
extent to which the Commission's prior income tax policies
permitting MLPs to recover an income tax allowance were incorporated
into pipelines' existing rates.
\67\ Specifically, the Commission evaluates cost-of-service
complaints and challenges to annual index rate increases based upon
the differential between costs and revenues on page 700. To the
extent that an MLP pipeline's page 700 revenues exceeded its costs,
the ability to report an income tax allowance as a cost on page 700
would have reduced the gap between revenues and costs. This lower
cost-revenue differential would have reduced the pipeline's exposure
to cost-of-service rate complaints and challenges to index rate
changes.
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27. Fourth, the adjustments adopted in the December 2020 Order lead
to incongruous and unreasonable results because they enable pipelines,
including those with an existing double recovery, to increase their
rates above the levels that would have resulted absent the D.C.
Circuit's and the Commission's double-recovery findings. The Commission
adopted the Income Tax Policy Change in response to findings by the
D.C. Circuit and the Commission that MLP pipeline rates
[[Page 4481]]
were double recovering those pipelines' income tax costs.\68\ Absent
the D.C. Circuit's and the Commission's holdings prohibiting MLP
pipelines from recovering an income tax allowance in their costs of
service, MLP pipelines, like corporate pipelines, would have reported a
reduction in their income tax allowances as a result of the Tax Cuts
and Jobs Act. However, by treating MLP pipelines' income tax liability
as zero for both 2014 and 2019, Pipelines' adjustments eliminate the
downward effect the Tax Cuts and Jobs Act would have exerted upon MLP
pipelines' recoverable income tax costs during the 2014-2019
period.\69\ Thus, not only do Pipelines' adjustments eliminate the
reduction in industry-wide recoverable costs resulting from the Income
Tax Policy Change, but they also diminish the separate reduction in MLP
pipelines' recoverable costs that would have resulted from the Tax Cuts
and Jobs Act had that policy change not occurred. As a result,
incorporating Pipelines' adjustments in the cost-change analysis would
produce a higher index level than what would have resulted absent the
Income Tax Policy Change eliminating the MLP income tax double
recovery. Therefore, we decline to adopt Pipelines' adjustments given
this incongruous and unreasonable result and instead calculate the
index level using unadjusted page 700 data.
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\68\ 2018 Income Tax Policy Statement, 162 FERC ] 61,227 at P 8.
\69\ All commenters agree that the index should reflect the
decrease resulting from the Tax Cuts and Jobs Act to the income tax
allowance recoverable by pipelines organized as corporations.
December 2020 Order, 173 FERC ] 61,245 at P 10 n.20.
---------------------------------------------------------------------------
c. Pipelines' Remaining Arguments Are Unpersuasive
28. We are unpersuaded by Pipelines' remaining arguments for
removing the effects of the Income Tax Policy Change from the index
calculation. Regarding their claim that the policy change should be
excluded because it did not affect pipelines' actual income tax
costs,\70\ we find that this argument misconstrues the cost changes
that the index is designed to measure. As discussed above, ``the index
is meant to reflect changes to recoverable pipeline costs'' measured
under the Opinion No. 154-B methodology.\71\ Thus, the index is
designed to track changes in the income tax costs that pipelines can
recover under the Commission's cost-of-service ratemaking methodology.
In arguing that the Income Tax Policy Change only modified the
ratemaking treatment of MLP income tax costs without affecting actual
costs,\72\ Pipelines overlook that changes in ratemaking treatment
produce the very Opinion No. 154-B cost-of-service changes that the
index calculation seeks to measure.\73\
---------------------------------------------------------------------------
\70\ E.g., AOPL Initial Comments at 29-31; AOPL Reply Comments
at 11; Designated Carriers Initial Comments at 7, 9-12; see also
Kinder Morgan Initial Comments at 3-4.
\71\ 2015 Index Review, 153 FERC ] 61,312 at P 13 (citing Order
No. 561-A, FERC Stats. & Regs. ] 31,000 at 31,096). In fact, the
Commission updated its calculation of the index level to rely upon
page 700 because it includes actual total cost-of-service data
consistent with Opinion No. 154-B. Id. PP 13-14.
\72\ AOPL Initial Comments at 30 (quoting Shehadeh Initial Decl.
at 14); Designated Carriers Initial Comments at 3, 7-8, 10-11.
\73\ AOPL III, 876 F.3d at 345 (``[N]either Order No. 561 nor
the subsequent index review orders indicate that the index was
intended to measure something distinct from the costs measured under
its cost-of-service methodology. Rather, the Commission has
consistently treated the index as a measure of normal industry-wide
cost-of-service changes . . . .'').
---------------------------------------------------------------------------
29. Moreover, the income tax costs that pipelines can recover under
Opinion No. 154-B are distinct from the actual tax costs that pipelines
have paid to the taxing authority. Instead, as the D.C. Circuit has
recognized, income tax costs recoverable under the Commission's cost-
of-service methodology are not equivalent to ``actual taxes paid.''
\74\ Accordingly, because recoverable income tax costs do not
correspond to taxes paid, we reject Pipelines' claim that the index
should only reflect changes in actual income tax costs.
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\74\ City of Charlottesville v. FERC, 774 F.2d 1205, 1213-15
(D.C. Cir. 1985) (Scalia, J.). As then-Judge Scalia explained:
[T]he imprecision of the ``actual taxes paid'' formulation is
exceeded only by the name of the Holy Roman Empire: two out of the
three words are wrong. Taxes, yes. But not necessarily actual taxes,
since inexact estimations are often allowed, e.g., a nationwide tax
allowance applied to all individual utilities . . . . And not
necessarily taxes paid, since tax liability incurred by current
activities but in fact not paid currently can be charged to present
ratepayers, e.g., taxes deferred by reason of accelerated
depreciation but passed on to current ratepayers through
normalization. So the principle should be expressed `actual or
estimated taxes paid or incurred'--whereupon it ceases to constrain
the Commission with regard to taxes any more than the Commission is
constrained with regard to its treatment of other expenses. Which is
as it should be.
Id. at 1215 (emphasis in original) (citing Pub. Sys. v. FERC,
709 F.2d 73, 81-82 (D.C. Cir. 1983); Tenneco Oil Co. v. FERC, 571
F.2d 834, 844 (5th Cir. 1978)).
---------------------------------------------------------------------------
30. We also reject AOPL's assertion that the Income Tax Policy
Change should be excluded because it represents an extraordinary, one-
time event that is not representative of likely future cost
experience.\75\ As discussed above, the Kahn Methodology calculates the
index level based upon historical cost changes, and does not address
speculative assertions about future developments.\76\ Consistent with
this approach, the Commission has previously rejected similar requests
to adjust the data set for one-time cost changes resulting from events
that were unlikely to reoccur in the future. For example, in the 2000
Index Review, the Commission rejected a proposed adjustment to address
one-time cost savings resulting from the establishment of the indexing
methodology and its associated cost efficiency incentives.\77\ The D.C.
Circuit affirmed this decision, finding that the Commission reasonably
adhered to its purely historical analysis and ``declined to embroil
itself in the complexity and iffiness of'' a forward-looking
methodology.\78\ Similarly, in the 2010 Index Review, the Commission
rejected shipper proposals to manually trim the data set to remove
pipelines that reported one-time cost increases attributable to
expansions or major rate base changes.\79\ Just as the Commission
declined to adjust the data sets in those proceedings to eliminate the
effects of one-time events, we likewise decline to adjust the data set
here to eliminate the effects of the Income Tax Policy Change.\80\
---------------------------------------------------------------------------
\75\ AOPL Reply Comments at 13-14.
\76\ See 2000 Index Review, 93 FERC at 61,855 (``The purpose of
our indexing methodology is to permit adjustment to ceiling rates
based on historical not anticipated cost changes over some future
period.'').
\77\ Id.; see also id. (rejecting proposed adjustment based upon
anticipated future cost increases due to increased environmental and
safety regulations).
\78\ AOPL II, 281 F.3d at 247.
\79\ 2010 Index Review, 133 FERC ] 61,228 at PP 48-55.
\80\ Furthermore, we find that AOPL's arguments are internally
inconsistent. AOPL's reasoning for excluding the Income Tax Policy
Change because it is an extraordinary, one-time policy change would
apply equally to the Tax Cuts and Jobs Act, yet AOPL does not oppose
reflecting the Tax Cuts and Jobs Act's effects in the index
calculation. AOPL Initial Comments at 25-26; AOPL Reply Comments at
10.
---------------------------------------------------------------------------
31. We disagree with AOPL's contention that the Income Tax Policy
Change renders the page 700 data not ``consistent enough,'' and,
therefore, that the page 700 data must be adjusted to remove the
effects of the Income Tax Policy Change.\81\ This argument relies upon
a passage in AOPL III stating that the Commission, in adopting the use
of page 700 data to measure pipeline cost changes, determined in the
2015 Index Review that ``the assumptions [required by page 700] should
reflect established ratemaking practices and
---------------------------------------------------------------------------
\81\ AOPL Reply Comments at 13-14.
---------------------------------------------------------------------------
thus should be consistent enough to accurately calculate the
index.'' \82\ The D.C. Circuit's use of ``consistent'' refers to
pipelines' consistent compliance with
[[Page 4482]]
the Commission's prevailing policies in their page 700 filings, not, as
AOPL argues, that the index level cannot reflect policy changes that
occur during the five-year review period.\83\ Moreover, as discussed
above, the index should reflect industry-wide changes to recoverable
costs such as those caused by the Income Tax Policy Change--thus, it is
appropriate for the 2014 page 700 data to include income tax allowances
for MLPs while the 2019 page 700 data does not.
---------------------------------------------------------------------------
\82\ AOPL III, 876 F.3d at 345 (citing 2015 Index Review, 153
FERC ] 61,312 at P 18).
\83\ AOPL III, 876 F.3d 345; see also 2015 Index Review, 153
FERC ] 61,312 at P 18 (``The allocation methodologies used by
pipelines on page 700 should reflect established ratemaking
practices, and thus these allocation methodologies should be
sufficiently robust to calculate the index. . . . [T]o the extent a
pipeline's page 700 ratemaking assumptions change over a period of
time, pipelines are obligated to note them on their page 700.'').
Pipelines that were MLPs consistently claimed an income tax
allowance in 2014 and consistently did not claim an income tax
allowance in 2019.
---------------------------------------------------------------------------
32. Finally, we reject Designated Carriers' remaining claims as
irrelevant, unsupported, or without merit. Designated Carriers
incorrectly claim that income tax allowance costs should be removed
from the 2014 page 700 data for MLP pipelines because the Commission
has previously found that partnership investors' income tax costs are
not properly considered costs in a partnership pipeline's regulated
cost of service.\84\ To the contrary, the Commission and the D.C.
Circuit have concluded that MLP pipelines incur investor-level income
tax costs that are already reflected in the pipeline's DCF ROE, such
that including an income tax allowance in the pipeline's cost of
service alongside the ROE results in an impermissible double
recovery.\85\ Accordingly, the issue in this proceeding is whether the
index level and the resulting pipeline rates should reflect the
elimination of that double recovery. As discussed above, we find that
by adjusting the data set to eliminate MLP pipelines' 2014 income tax
allowances, Designated Carriers' proposal would allow the income tax
double recovery to persist in pipeline rates.
---------------------------------------------------------------------------
\84\ Designated Carriers Initial Comments at 10-11 (citing
Opinion No. 511-C, 162 FERC ] 61,228 at P 28; Webb Initial Aff. P
8).
\85\ Opinion No. 511-C, 162 FERC ] 61,228 at P 22, aff'd, SFPP,
967 F.3d at 795-97; see also United Airlines, 827 F.3d at 136.
Moreover, Designated Carriers misconstrue the applicable law.
Neither the D.C. Circuit nor the Commission have held that these
costs are not properly included in a partnership pipeline's cost of
service. Rather, both United Airlines and the 2018 Income Tax Policy
Statement concluded that partnership investors' income tax costs are
already recovered by the ROE and that allowing partnership pipelines
to recover an income tax allowance in addition to that ROE would
impermissibly double recover those costs. United Airlines, 827 F.3d
at 135-37; 2018 Income Tax Policy Statement, 162 FERC ] 61,227 at PP
8-9, 45.
---------------------------------------------------------------------------
33. Designated Carriers misconstrue Commission precedent in arguing
that Pipelines' proposed adjustments accord with the Commission's
actions applying the Income Tax Policy Change retroactively in the 2018
Income Tax Policy Statement and in Docket Nos. IS08-390 and IS09-
437.\86\ In the 2018 Income Tax Policy Statement, issued on March 15,
2018, the Commission applied the policy change prospectively by
directing pipelines to report their income tax costs in accordance with
its revised policy in their upcoming Form No. 6 filings due for
submission on April 18, 2018, which would include cost-of-service data
for 2017 and 2016.\87\ The Commission did not apply the new policy
retroactively to periods before the years encompassed by those
impending filings. In Docket Nos. IS08-390 and IS09-437, the Commission
applied its revised income tax allowance policy in pending cost-of-
service rate proceedings to the time periods at issue,\88\ which
predated the 2018 Income Tax Policy Change.\89\ Contrary to Designated
Carriers' claim, applying the Commission's new policy to a pipeline
whose rates were the subject of pending proceedings involving earlier
time periods does not support applying that policy retroactively to
revise the reported cost-of-service data of pipelines whose rates were
not the subject of ongoing litigation.
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\86\ Designated Carriers Initial Comments at 9, 11-12, 14-15
(citing SFPP, L.P., 162 FERC ] 61,229, at P 8 (2018); Opinion No.
511-C, 162 FERC ] 61,228 at PP 28, 54-57; 2018 Income Tax Policy
Statement, 162 FERC ] 61,227 at PP 8, 46, n.83; Webb Initial Aff. PP
9, 11). AOPL echoes this argument in its reply comments. AOPL Reply
Comments at 18-19.
\87\ 2018 Income Tax Policy Statement, 162 FERC ] 61,227 at P 46
n.83.
\88\ See SFPP, L.P., Opinion No. 435, 86 FERC ] 61,022, at
61,093-94 (1999) (``Commission practice is to base its decision on
the policy in effect in the year a regulatory decision is made, and
then apply that decision to the time frame to which the case
applies.''); see also Consol. Edison Co. of N.Y. v. FERC, 315 F.3d
316, 323-24 (D.C. Cir. 2003) (explaining that an agency may apply a
new substantive rule to decide a pending proceeding).
\89\ The Docket No. IS08-390 proceeding addressed SFPP's West
Line rates to be effective August 1, 2008. Opinion No. 511-C, 162
FERC ] 61,228 at P 4. The Docket No. IS09-437 proceeding addressed
SFPP's East Line rates to be effective January 1, 2010. SFPP, L.P.,
Opinion No. 522-B, 162 FERC ] 61,229 at P 8.
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34. Designated Carriers' claim that reflecting the Income Tax
Policy Change in the index calculation would constitute retroactive
ratemaking likewise lacks merit.\90\ The rule against retroactive
ratemaking ``prohibits the Commission from adjusting current rates to
make up for a utility's over- or under-collection in prior periods.''
\91\ By contrast, the five-year review uses past cost changes to
calculate the index adjustment that pipelines can use to adjust their
future rates. Accounting for reduced recoverable costs in calculating
the prospective index adjustment does not modify current rates to
account for prior period over- or under-recoveries and therefore does
not contravene the bar against retroactive ratemaking.
---------------------------------------------------------------------------
\90\ Designated Carriers Initial Comments at 16.
\91\ SFPP, 967 F.3d at 801 (quoting Old Dominion Elec. Coop. v.
FERC, 892 F.3d 1223, 1227 (D.C. Cir. 2018)).
---------------------------------------------------------------------------
35. Designated Carriers also do not provide support for their
contention that incorporating the Income Tax Policy Change in the index
would negatively impact MLP pipelines twice, such as SFPP, whose cost-
of-service rates have already been revised to remove the income tax
allowance and ADIT balances.\92\ As discussed above, Designated
Carriers have only identified one pipeline (out of 240 pipelines filing
page 700 with the Commission) whose rates have been lowered to reflect
the Income Tax Policy Change and thus have not shown that this alleged
harm would affect any pipeline besides SFPP.\93\ More generally, the
Commission calculates the index level based upon normal industry-wide
cost changes, without regard to the particular experiences of
individual pipelines. To do otherwise would produce nonsensical
results, as indexing would cease to function as a generally applicable
ratemaking methodology if the index was adjusted to account for
[[Page 4483]]
the particular cost changes of each individual pipeline.
---------------------------------------------------------------------------
\92\ Designated Carriers Initial Comments at 15 (citing Webb.
Aff. P 14).
\93\ Moreover, even as to SFPP, it is unclear that incorporating
the Income Tax Policy Change in the index calculation would produce
the adverse effects that Designated Carriers describe. First, after
the Commission adopted the Income Tax Policy Change, SFPP converted
to a Schedule-C Corporation eligible to recover an income tax
allowance and defended their rates on that basis in their East Line
rate case in Docket No. OR16-6-000. Second, SFPP's implementation of
the Income Tax Policy Change (before its conversion to a C-
Corporation) actually produced an increase to its rates on its West
Line system. In response to Opinion No. 511-C, SFPP removed the
income tax allowance and previously accumulated ADIT balances from
its West Line cost-of-service rates. Opinion No. 511-D, 166 FERC ]
61,142 at P 59. As a result, SFPP's West Line rates increased to
levels above the rates established following Opinion No. 511-B,
which included an income tax allowance and ADIT balances. Compare
SFPP, Compliance Filing, Docket No. IS08-390-011, Tab A, COS Summary
at 2 (filed May 14, 2018) (rates filed in response to Opinion No.
511-C), with SFPP, Compliance Filing, Docket No. IS08-390-008, Tab
A, COS Summary at 2 (filed Apr. 6, 2015) (rates filed in response to
Opinion No. 511-B). Because reflecting the Income Tax Policy Change
in SFPP's West Line rates resulted in a rate increase, we are
unconvinced that incorporating this policy change in the index
calculation would somehow adversely impact SFPP for a second time as
Designated Carriers allege.
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36. Finally, to the extent that Designated Carriers argue that the
Commission should have ``trued up'' prior index levels in the 2015
Index Review to account for the impact of the 2005 income tax policy
change upon recoverable costs, this argument is unsupported.\94\
Designated Carriers do not specify the type of analysis they believe
the Commission should have performed in the 2015 Index Review \95\ and
fail to quantify the impact of this analysis upon pipelines'
recoverable costs. Furthermore, any arguments concerning the
Commission's actions in previous index reviews are outside the scope of
this proceeding.
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\94\ Designated Carriers Initial Comments at 17-20 (citing Webb
Aff. PP 19-22).
\95\ To the extent that Designated Carriers argue the Commission
should have retroactively revised previously established index
levels to allow pipelines to recover for prior under collections in
excess of their then-effective rates, this would conflict with both
indexing's purpose and the filed rate doctrine. E.g., Ark. La. Gas
Co. v. Hall, 453 U.S. 571, 577 (1981) (explaining that the filed
rate doctrine ``forbids a regulated entity to charge rates for its
services other than those properly filed with the appropriate
federal regulatory authority'' (citation omitted)). Alternatively,
if they argue that the Commission should adjust the going-forward
index level upward because prior index calculations did not
incorporate the 2005 policy change, they have not demonstrated that
the multiple income tax policy changes the Commission has adopted
since it established the indexing regime, including Lakehead and the
2005 policy change, caused pipelines to under-recover their costs on
a systematic basis.
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B. Statistical Data Trimming
1. December 2020 Order
37. In the December 2020 Order, the Commission departed from its
prior practice established in the 2010 and 2015 Index Reviews of using
the middle 50%.\96\ Instead, for the first time, the Commission relied
solely upon the middle 80%. The Commission decided that it would
consider more data in measuring industry-wide cost changes because
using a broader sample should enhance the Commission's calculation of
the central tendency of industry cost experience.\97\ The Commission
further stated that ``normal'' cost changes are best defined by using
the inclusive data sample embodied in the middle 80% in order to
accurately identify the central tendency of industry-wide cost
changes.\98\
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\96\ See supra note 9.
\97\ December Order, 173 FERC ] 61,245 at P 26.
\98\ Id. P 27.
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38. Additionally, the Commission held that ``mere generalized
concerns'' about outlying data do not justify excluding the experiences
of pipelines included in the middle 80% but not the middle 50% (i.e.,
the incremental 30%) from the Commission's review of industry cost
changes.\99\ The Commission stated that unlike in prior index reviews,
the record here does not contain ``detailed analyses'' showing that
pipelines in the incremental 30% experienced anomalous cost changes
that would skew the index.\100\
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\99\ Id. P 28.
\100\ Id.
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2. Rehearing Requests
39. Shippers argue that the December 2020 Order conflicts with
precedent and fails to justify departing from the Commission's
established practice of trimming the data set to the middle 50%. They
first contend that using the middle 80% contravenes the Commission's
findings in the 2015 and 2010 Index Reviews that the index aims to
reflect normal cost changes and that the middle 50% more effectively
excludes anomalous cost data than the middle 80%, which includes
pipelines further removed from the median whose cost changes may result
from idiosyncratic circumstances rather than ordinary pipeline
operations.\101\ According to Shippers, the December 2020 Order fails
to distinguish those findings and instead attempts to redefine
``normal'' cost changes to encompass the widest possible range of data,
regardless of whether that data reflects typical experience. Shippers
argue that the middle 80% in this proceeding includes pipelines with
anomalous cost changes and that the central tendency of a data sample
that includes such unrepresentative data fails to reflect normal
industry-wide cost changes.\102\ In addition, Shippers dispute the
December 2020 Order's conclusion that the presence of anomalous data in
the middle 50% in prior reviews supports using the middle 80% in this
proceeding. Shippers argue that the December 2020 Order does not
demonstrate that the middle 50% includes unrepresentative data and,
even if it did, this would not justify using a larger sample that
likely includes more idiosyncratic data.\103\
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\101\ Joint Commenters Request for Rehearing at 23-26 (citing
2015 Index Review, 153 FERC ] 61,312 at PP 23, 42-44; 2010 Index
Review, 133 FERC ] 61,228 at P 61); Liquids Shippers Request for
Rehearing at 37-38 (citing 2015 Index Review, 153 FERC ] 61,312 at
PP 42-44; 2010 Index Review, 133 FERC ] 61,228 at PP 60-63 & n.36).
\102\ Joint Commenters Request for Rehearing at 26-27; Liquids
Shippers Request for Rehearing at 44-45.
\103\ Joint Commenters Request for Rehearing at 32.
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40. Similarly, Shippers state that the December 2020 Order ignores
the Commission's findings in 2015 and 2010 that trimming to the middle
50% provides a simplified and objective method for removing
unrepresentative data that minimizes the need to scrutinize individual
pipeline data or engage in manual data trimming.\104\ Shippers assert
that expanding the data sample to the middle 80% discards this
simplified and effective tool for removing outliers without an adequate
replacement.\105\
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\104\ Id. at 34 (citing 2015 Index Review, 153 FERC ] 61,312 at
P 42). In both the 2015 and 2010 Index Reviews, shipper commenters
proposed manual data trimming methodologies in which they carefully
reviewed the costs for each of the 150-200 pipelines in the data set
to remove those pipelines with cost changes resulting from specific
factors not broadly shared across the industry, such as large rate
base expansions. See 2015 Index Review, 153 FERC ] 61,312 at PP 19-
21 (describing manual data trimming proposals); 2010 Index Review,
133 FERC ] 61,228 at PP 34-47 (same).
\105\ Joint Commenters Request for Rehearing at 33 (citing AOPL
II, 281 F.3d at 245 (vacating and remanding the Commission's
determination in the 2000 Index Review to decline to engage in
statistical data trimming as unjustified departure from prior
practice of trimming to the middle 50%)).
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41. Shippers next argue that the record in this proceeding does not
support this departure from established practice and in fact provides a
stronger basis for using the middle 50% than in prior index reviews. In
particular, Shippers state that the middle 50% represents a greater
percentage of barrel-miles subject to the index (82.2% in the NOI data
set) than in 2015 (56%) or 2010 (76%),\106\ whereas the middle 80% is
more widely dispersed than in 2015 or 2010 and includes outlying cost
increases that are not offset by comparable cost decreases.\107\
Moreover, Shippers assert that the December 2020 Order acknowledged
that ``the record contains no evidence addressing whether the more
dispersed cost changes in the incremental 30% resulted from pipeline-
specific factors rather than from broadly shared circumstances
representative of ordinary pipeline operations.'' \108\ Given the
Commission's previous findings that the middle 80% more likely includes
pipelines with idiosyncratic and outlying data, Shippers argue that
this lack of evidence supports continued use of the middle 50%.\109\
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\106\ Id. at 30; Liquids Shippers Request for Rehearing at 41-
42.
\107\ Joint Commenters Request for Rehearing at 30; Liquids
Shippers Request for Rehearing at 43, 46-47.
\108\ Joint Commenters Request for Rehearing at 38 (quoting
December 2020 Order, 173 FERC ] 61,245 at P 29).
\109\ Id. at 38-39.
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42. Shippers further contend that the December 2020 Order
erroneously places the burden upon shipper commenters to justify
continued use of the middle 50% by faulting them for
[[Page 4484]]
failing to present detailed analyses of the incremental 30%.\110\
Shippers state that the Commission discouraged commenters from
submitting such evidence by declining to consider similar analyses in
the 2015 and 2010 Index Reviews.\111\ Moreover, Shippers assert that it
is not incumbent upon commenters to justify continued application of
the Commission's existing policy. Rather, they argue that the agency
attempting to depart from a well-established practice bears the burden
of explaining why the reasoning underlying that practice should no
longer control.\112\ Similarly, Shippers claim that it was incumbent
upon Pipelines, as the proponents of a change in Commission policy, to
justify the change by demonstrating that the incremental 30% does not
contain outlying data. Shippers argue that Pipelines failed to make
this showing and that the limited evidence in the record analyzing the
incremental 30% indicates that it contains anomalous data that skews
the index calculation.\113\ According to Shippers, this evidence was
sufficient to justify using the middle 50% consistent with established
practice.\114\
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\110\ Id. at 35-39; Liquids Shippers Request for Rehearing at
51-52.
\111\ Joint Commenters Request for Rehearing at 35, 37. Liquids
Shippers observe, moreover, that the Commission did not rely upon
such analyses when it declined to use the middle 80% in the 2015 and
2010 Index Reviews. Liquids Shippers Request for Rehearing at 51
(citing 2015 Index Review, 153 FERC ] 61,312 at P 43; 2010 Index
Review, 133 FERC ] 61,228 at P 61).
\112\ Joint Commenters Request for Rehearing at 35-36 (citing
Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2126 (2016); FCC
v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009); Balt.
Gas & Elec. Co. v. FERC, 954 F.3d 279, 286 (D.C. Cir. 2020); Air
All. Houston v. EPA, 906 F.3d 1049, 1066 (D.C. Cir. 2018)); Liquids
Shippers Request for Rehearing at 52 (citing FCC v. Fox Television
Stations, Inc., 556 U.S. at 515-16).
\113\ Joint Commenters Request for Rehearing at 38; Liquids
Shippers Request for Rehearing at 45-51.
\114\ Joint Commenters Request for Rehearing at 38; Liquids
Shippers Request for Rehearing at 52-53.
---------------------------------------------------------------------------
3. Commission Determination
43. We are persuaded by Shippers' arguments on rehearing and grant
rehearing of the December 2020 Order to calculate the index level based
upon the middle 50%, consistent with the Commission's practice in the
2015 and 2010 Index Reviews.\115\ We conclude that the record in this
proceeding does not justify departing from the Commission's established
practice of calculating the index level based solely upon the middle
50%.
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\115\ 2015 Index Review, 153 FERC ] 61,312 at PP 42-44, aff'd,
AOPL III, 876 F.3d at 342-44; 2010 Index Review, 133 FERC ] 61,228
at PP 60-63. Although the Commission averaged the middle 50% with
the middle 80% in the 2000 and 2005 five-year reviews, it did not
justify or address its consideration of the middle 80%. 2010 Index
Review, 133 FERC ] 61,228 at P 60. Moreover, the Commission has
never relied upon the middle 80% alone and provided a detailed
explanation in the 2015 and 2010 Index Reviews why it would not
consider the middle 80%. As the D.C. Circuit explained, ``[n]othing
in any of the Commission's past index review orders bound the agency
to use the middle 80% of pipelines' cost-change data in any later
proceeding.'' AOPL III, 876 F.3d at 353.
---------------------------------------------------------------------------
a. The Record in This Proceeding Supports Using the Middle 50% To
Calculate the Index Level
44. As an initial matter, the objective of the index is to reflect
the cost experience of a typical pipeline during ordinary pipeline
operations.\116\ The index is not designed to recover extraordinary
cost changes, including those resulting from atypical or idiosyncratic
circumstances.\117\ These extraordinary cost changes are recovered
using the Commission's alternate ratemaking methodologies rather than
through indexing.\118\ In addition, the presence of such extraordinary
cost changes in the data set can inflate the index level.\119\
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\116\ E.g., 2010 Index Review, 133 FERC ] 61,228 at P 61; Order
No. 561-A, FERC Stats. & Regs. ] 31,000 at 31,097 (``The role of an
index is to accommodate normal cost changes.'').
\117\ The Commission has held, and the D.C. Circuit has
affirmed, that use of an index sufficiently high to encompass
extraordinary costs ``would provide windfalls to many oil pipelines
by allowing rate changes substantially above cost changes'' and
``effectively abdicate [the Commission's] responsibilities for rate
regulation under the ICA.'' Order No. 561-A, FERC Stats. & Regs. ]
31,000 at 31,097, aff'd, AOPL I, 83 F.3d at 1434; see also 2010
Index Review, 133 FERC ] 61,228 at P 54 (interpreting the use of
``extraordinary'' in Order Nos. 561 and 561-A as referring to
``pipelines experiencing changed per barrel-mile costs that were
greater than the changing costs experienced by other pipelines
regardless of the causes underlying any particular pipeline's cost
changes.'').
\118\ Order No. 561-A, FERC Stats. & Regs. ] 31,000 at 31,097
(``Extraordinary costs can be recovered through either of the
alternate rate change means--cost of service or settlement rates--as
provided in [Order No. 561].'').
\119\ Such cost changes would impact the composite central
tendency of the data sample through the weighted mean and unweighted
mean, which, unlike the median, reflect the cost experiences of all
pipelines in the sample, including those at the upper and lower
bounds.
---------------------------------------------------------------------------
45. To avoid inflating the index, the Commission excludes pipelines
with extraordinary or idiosyncratic cost changes from the analysis.
Along these lines, 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.\120\ The
Commission also concluded that pipelines in 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.\121\ 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 laborious and subjective manual data trimming
methodologies.\122\ Following the 2015 Index Review, the D.C. Circuit
affirmed the Commission's decision to trim the data set to the middle
50% instead of the middle 80%.\123\
---------------------------------------------------------------------------
\120\ 2010 Index Review, 133 FERC ] 61,228 at P 61; 2015 Index
Review, 153 FERC ] 61,312 at P 43 (``[B]y definition, costs at the
top (or bottom) of the middle 80 percent deviate significantly from
the cost experience of other pipelines''); id. P 44 (``Pipelines in
the middle 80 percent, as opposed to the middle 50 percent, are more
likely to have outlying cost changes which could result from
idiosyncratic factors particular to that pipeline.'').
\121\ 2010 Index Review, 133 FERC ] 61,228 at P 61.
\122\ 2015 Index Review, 153 FERC ] 61,312 at P 42 (citing 2010
Index Review, 133 FERC ] 61,228 at PP 60-63).
\123\ AOPL III, 876 F.3d at 342 (explaining that the court had
``little difficulty in finding that the Commission adequately and
reasonably justified its decision not to consider the middle 80
percent of pipelines' cost-change data'' in that proceeding).
---------------------------------------------------------------------------
46. Upon reconsideration of the December 2020 Order, we find that
the record in the instant proceeding does not justify a different
result. The scatter plot below \124\ demonstrates that the middle 80%
in this data set includes several pipelines near its upper bound that
are considerably removed from the other pipelines in the sample.
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\124\ This scatter plot modifies a similar chart submitted by
Joint Commenters. Joint Commenters Reply Comments, Brattle Group
Report at 19, Figure 3 (scatter plot illustrating dispersion of the
middle 50% and middle 80% in the unadjusted 2020 data set). The
modifications reflect the adjustments adopted herein to the page 700
data set.
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[[Page 4485]]
[GRAPHIC] [TIFF OMITTED] TR28JA22.000
47. Furthermore, the pipelines at the upper bound of the middle 80%
exert an outsized influence that inflates the index calculation.\125\
The difference between the middle 50% and the middle 80% results
primarily from 8 pipelines at the upper bound of the middle 80%.
Namely, expanding the data sample from the middle 50% to the middle
70%, which omits the top and bottom 8 pipelines in the middle 80%, only
increases the composite central tendency by 3 basis points, from -0.21%
to -0.18%.\126\ By contrast, expanding the sample to include these 16
pipelines increases the composite central tendency by an additional 29
basis points, from -0.18% to 0.11%.\127\ In contrast to their outsized
effect on the index, the 8 pipelines at the upper bound of the middle
80% account for only 2.10% of total barrel-miles.
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\125\ AOPL's calculations demonstrate that using the middle 80%
would increase the cost change calculation by 41 basis points while
only expanding the number of barrel-miles in the analysis by
approximately 14%. Shehadeh Initial Decl., Exhibit A11 (calculating
that the composite central tendency of the cost change data, when
incorporating AOPL's proposed adjustments to remove the effects of
the Income Tax Policy Change, increases from 0.90% to 1.31% when
expanding from the middle 50% to the middle 80%); Shehadeh Initial
Decl., Exhibit A12 (stating that the middle 50% and middle 80%
contain 81.9% and 95.8%, respectively, of total barrel-miles in 2014
subject to the index).
\126\ As discussed above, the Kahn Methodology calculates a
composite central tendency by averaging the data sample's median,
weighted mean, and unweighted mean. See supra P 4.
\127\ Attach. A, Exhibit 14. The outsized impact these pipelines
exert upon the index calculation undermines the conclusion in the
December 2020 Order that the dispersion of the middle 80% is not
relevant because it results from ``just a few pipelines at the top
of the middle 80%.'' December 2020 Order, 173 FERC ] 61,245 at P 29.
Furthermore, this analysis rebuts the statement in the December 2020
Order that the record did not contain a ``detailed showing'' that
using the additional data in the middle 80% would distort the index
calculation. Id.
---------------------------------------------------------------------------
Not only does the middle 80% include pipelines at its upper bound
that diverge considerably from the other pipelines in the sample, but
the record further establishes that the middle 80% as a whole is even
more dispersed than in 2015 or 2010,\128\ as illustrated in the bar
chart below.\129\
---------------------------------------------------------------------------
\128\ When the data sample is highly dispersed, data at the
outer bounds of the middle 80% are further removed from the
remaining data and thus can have an outsized and distorting effect
if used to measure the central tendency.
\129\ The bar chart modifies a similar chart submitted by Joint
Commenters. Joint Commenters Reply Comments, Brattle Group Report at
18, Figure 2 (bar chart illustrating dispersion of middle 50% and
middle 80% in 2010, 2015, and the unadjusted 2020 data sets). The
modifications reflect the adjustments adopted herein to the page 700
data set.
[GRAPHIC] [TIFF OMITTED] TR28JA22.001
[[Page 4486]]
48. Additionally, AOPL has presented no evidence that the middle
80% in this proceeding lacks the type of atypical and idiosyncratic
cost changes observed in the middle 80% in the 2015 and 2010 Index
Reviews.\130\ To the contrary, the record demonstrates that the
additional data included in the incremental 30% contains pipelines with
idiosyncratic cost changes resulting from circumstances that are not
broadly shared across the industry. For example, Joint Commenters
identify 7 pipelines in the incremental 30% whose reported cost changes
resulted from irregular circumstances or specific factors not broadly
shared across the industry, such as temporary shutdowns or pipeline
ruptures.\131\
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\130\ AOPL, the proponent of changing the Commission's policy to
use the middle 80% instead of the middle 50%, had the opportunity to
provide such evidence in its initial comments and reply comments.
See 5 U.S.C. 556(d) (``Except as otherwise provided by statute, the
proponent of a rule or order has the burden of proof.''); P.R. v.
Fed. Mar. Comm'n, 468 F.2d 872, 881 (D.C. Cir. 1972) (``Ultimately,
the rule requiring the proponent of an order to sustain the burden
of its justification rests on the policy of requiring a person
seeking a change from the status quo to take on the burden of
justifying the change.''); see also S. Ga. Nat. Gas Co., 73 FERC ]
61,354, at 62,106 (1995) (``[W]here there is a `settled practice,'
the proponent of a change to that practice has the burden of
proof.'').
\131\ Joint Commenters Reply Comments, Brattle Group Report at
13-17. For example, PMI Services North America, Inc., reported an
inflated 2019 cost of service per barrel-mile due to a temporary
shutdown of one of its pipeline segments and Mobil Pipe Line Company
experienced a pipeline rupture in 2013 that distorted its 2014 cost-
of-service data. Id. at 15-17.
---------------------------------------------------------------------------
49. In sum, the record demonstrates that the middle 80% in this
proceeding includes pipelines with extraordinary cost changes that are
not reflective of ordinary pipeline operations. Accordingly, we find
that for purposes of calculating the index level in this proceeding,
using the more tailored data sample embodied by the middle 50% produces
a more accurate measure of ``normal'' cost changes and minimizes the
risk that the index will be distorted by pipelines with
unrepresentative cost experiences. Pipelines have not demonstrated why
the instant record is distinguishable from the 2015 and 2010 Index
Reviews such that the Commission should depart from the data trimming
methodology it employed in those proceedings.
b. Reconsidering the December 2020 Order
50. We believe the reasons given in the December 2020 Order for
using the middle 80% in this proceeding to be in error.
51. First, the mere fact that the middle 80% includes additional
data does not support departing from the middle 50%.\132\ The middle
50% already includes 81% of industry-wide oil pipeline barrel-
miles,\133\ which is significantly more than the barrel-miles used in
prior index reviews.\134\ Moreover, the middle 80% only incorporates an
additional 15% more of the industry's barrel-miles. Thus, although
using the middle 50% excludes 48 pipelines from the cost-change
analysis,\135\ omitting these pipelines does not deprive the Commission
of a robust data sample. Moreover, any benefits of considering the
larger data sample do not outweigh the risk, discussed above, that this
additional data will distort the measurement of normal cost changes.
---------------------------------------------------------------------------
\132\ See AOPL III, 876 F.3d at 343 (noting the Commission has
``rejected the precise principle'' that the middle 80% is preferable
because it includes a larger number of pipelines) (citing 2010 Index
Review, 133 FERC ] 61,228 at PP 57, 61); 2015 Index Review, 153 FERC
] 61,312 at P 44 (rejecting argument that ``the middle 80 percent
should be used merely because it contains more barrel-miles'').
\133\ Attach. A, Exhibit 1.
\134\ In the 2015 and 2010 Index Reviews, the Commission
concluded that it was ``unnecessary to include the middle 80 percent
to obtain a representative sample of the data'' where the middle 50%
included 56% and 76%, respectively, of total barrel-miles subject to
the index. 2010 Index Review, 133 FERC ] 61,228 at P 63; see also
2015 Index Review, 153 FERC ] 61,312 at P 44 n.85 (concluding that
the fact that the middle 50% included a lower percentage of barrel-
miles than in 2010 ``is not a sufficient basis to risk including
more outlying data''), aff'd, AOPL III, 876 F.3d at 344.
\135\ December Order, 173 FERC ] 61,245 at P 26.
---------------------------------------------------------------------------
52. Second, we disagree with the December 2020 Order and find that
for purposes of this proceeding, ``normal'' cost changes are best
measured using a more tailored data sample that excludes the anomalous
and idiosyncratic data in the middle 80%.\136\ For the reasons
discussed above,\137\ this record demonstrates that ``including data
from the middle 80% distorts our measurement of the industry-wide
central tendency [used to calculate the index level].'' \138\ Rather,
using the middle 50% is more consistent with the index's purpose of
allowing recovery for normal cost changes, not extraordinary costs.
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\136\ We disagree with the statement in the December 2020 Order
that using the middle 80% is appropriate because the index average
will be significantly below the relatively high cost changes at the
upper bound. Id. PP 27, 32. Even if the index average is not set at
the upper bound of the data sample, including the upper bound of the
middle 80% nonetheless produces an index average inflated by
anomalous cost experience. See 2010 Index Review, 133 FERC ] 61,228
at P 61 (``Using the middle 50[%] ensures that pipelines with
relatively large cost increases or decreases do not distort the
index.'').
\137\ See supra PP 46-50.
\138\ December 2020 Order, 173 FERC ] 61,245 at P 27. The
December 2020 Order erroneously implied that entities supporting
continued use of the middle 50% must provide a ``compelling
showing'' that using the middle 80% would distort the calculation of
the index level. Id. Although the record here provides such a
compelling showing, we clarify that entities advocating for a
departure from the Commission's practice of using the middle 50%
bear the burden of justifying that change. See supra note 129.
---------------------------------------------------------------------------
53. Third, in the December 2020 Order, the Commission sought to
distinguish the 2010 and 2015 Index Reviews on the basis that, unlike
in the instant review, commenters in those proceedings ``presented
detailed analyses demonstrating that the incremental 30% contained
anomalous cost changes . . . .'' \139\ However, we no longer find this
reasoning persuasive because, as in prior reviews, the present record
demonstrates the middle 80% includes outlying cost increases, reflects
significant dispersion, and includes pipelines with idiosyncratic cost
changes. Although shippers submitted more detailed analyses in 2010 and
2015, they presented this evidence to support manual data trimming
proposals that required a labor-intensive pipeline-by-pipeline analysis
of page 700 data. Finding manual data trimming to be highly subjective,
the Commission rejected this approach because ``[a]ny potential
improvement from manual data trimming is outweighed by the increase in
the potential for error or manipulation.'' \140\ Rather, the Commission
concluded that, instead of manual data trimming, using the middle 50%
more effectively addressed those same issues in a manner that was more
consistent with simplified and streamlined ratemaking.\141\ We conclude
that it would be incongruous to reject such manual data trimming while
at the same time requiring commenters to present similar analyses to
justify continued use of the middle 50%.\142\
---------------------------------------------------------------------------
\139\ December 2020 Order, 173 FERC ] 61,245 at P 28.
\140\ 2015 Index Review, 153 FERC ] 61,312 at P 34; see also id.
PP 36, 42; 2010 Index Review, 133 FERC ] 61,228 at P 62.
\141\ 2015 Index Review, 153 FERC ] 61,312 at PP 36, 42; 2010
Index Review, 133 FERC ] 61,228 at P 62.
\142\ In any case, the December 2020 Order overstates the
absence of evidence regarding anomalous data among the 48 pipelines
in the incremental 30%. Acknowledging that Shippers identified 7
pipelines, the December 2020 Order stated that for the remaining 41
there is no evidence of anomalous data. December 2020 Order, 173
FERC ] 61,245 at P 28. However, this ignores the chart above that
examined the entire middle 80% and showed how those pipelines at the
top of the middle 80% were inflating the index level.
---------------------------------------------------------------------------
c. AOPL's Remaining Arguments Are Not Persuasive
54. We reject AOPL's remaining arguments in support of using the
[[Page 4487]]
middle 80% as unpersuasive. First, AOPL erroneously claims that the
Commission should use the middle 80% based upon its previous
recognition that ``it is preferable to apply the larger data set when
the additional data is available using the Kahn Methodology.'' \143\
However, the D.C. Circuit rejected this exact argument following the
2015 Index Review, finding that the quoted language ``addressed FERC's
approach to selecting the pool of pipelines whose costs should be
measured at all--not the portion of the resulting data to trim before
calculating the normal industry change in costs.'' \144\ Further, the
court explained that the Commission had in fact rejected the argument
that it is preferable to use a larger data sample merely because
additional data is available. Instead, the Commission concluded that
the middle 50% more appropriately adjusts the index level for normal
cost changes, notwithstanding the fact that it contains less data than
the middle 80%.\145\ We reject AOPL's argument for the same reasons
here.
---------------------------------------------------------------------------
\143\ AOPL Initial Comments at 19-20 (quoting 2010 Index
Rehearing Order, 135 FERC ] 61,172 at P 41).
\144\ AOPL III, 876 F.3d at 343 (citing 2010 Index Rehearing
Order, 135 FERC ] 61,172 at P 41 & n.38).
\145\ Id. (citing 2010 Index Review, 133 FERC ] 61,228 at PP 57,
61).
---------------------------------------------------------------------------
55. Second, we dismiss AOPL's claim that the middle 80% provides a
more accurate measure of industry cost changes merely because it
resembles a lognormal distribution.\146\ As the Commission found in the
2015 Index Review and as the D.C. Circuit affirmed, to the extent that
the middle 80% data conforms to a lognormal distribution, outlying cost
increases per barrel-mile will not be offset by similarly outlying cost
decreases.\147\ This concern is illustrated in the instant record,
where the middle 80% includes multiple pipelines with cost increases
above 100% and no pipelines with cost decreases of negative 100%.\148\
Thus, using the middle 80% would skew the index upward based upon these
outlying cost increases, which is contrary to the index's objective of
reflecting normal cost changes.\149\
---------------------------------------------------------------------------
\146\ AOPL Initial Comments at 20-21; AOPL Reply Comments at 8-9
(citing Shehadeh Initial Decl. at 24). A lognormal distribution is a
continuous probability distribution of a random variable whose
logarithm is normally distributed.
\147\ 2015 Index Review, 153 FERC ] 61,312 at P 43 (``using the
middle 80 percent would skew the index upward based upon these
outlying cost increases, which is contrary to the objective of the
index to reflect normal industry-wide cost changes''), aff'd, AOPL
III, 876 F.3d at 344.
\148\ See Liquids Shippers Reply Comments at 24 (citing Crowe
Reply Aff. at 4-5).
\149\ We also question the mathematical reasoning underlying
AOPL's argument. Specifically, a lognormal distribution occurs when
performing a natural logarithm transformation of a data set produces
a normal distribution. However, it is not possible to take the
natural logarithm of negative numbers. Id. at 24-25. Because the
data set here contains negative numbers, it cannot be lognormally
distributed.
---------------------------------------------------------------------------
56. Third, AOPL misconstrues Commission precedent in claiming that
reliance on the middle 50% is only appropriate where there are concerns
of erroneous data.\150\ Although use of the middle 50% in Order No. 561
was based in part upon concerns about erroneous data, the Commission
has relied upon the middle 50% to exclude not only inaccurate data, but
also extraordinary data that is unrepresentative of normal cost
experience.\151\ As the D.C. Circuit explained when upholding the
Commission's continued use of the middle 50% in the 2015 Index Review,
the Commission provided extensive justification for its ongoing
reliance on the middle 50% in both the 2010 and 2015 Index
Reviews.\152\ Thus, even where the reported page 700 data is accurate,
it remains necessary to use the middle 50% to avoid including outlying
data that exerts a disproportionate impact on the index calculation.
---------------------------------------------------------------------------
\150\ AOPL Initial Comments at 21-22 (citing Shehadeh Initial
Decl. at 21-22).
\151\ See 2010 Index Review, 133 FERC ] 61,228 at P 61 (``Even
when accurate data is reported, pipelines in the middle 80, as
opposed to the middle 50, are more likely to have cost changes
resulting from factors particular to that pipeline, such as a rate
base expansion, plant retirement, or localized changes in supply and
demand.'').
\152\ See AOPL III, 876 F.3d at 343 (rejecting AOPL's argument
that the Commission was precluded from excluding the middle 80% when
``that data is available and accurate''); id. at 339 (``[C]ontrary
to AOPL's assertion, nothing in any of FERC's past index review
orders bound the agency to use the middle 80 percent of pipelines'
cost-change data.'').
---------------------------------------------------------------------------
57. In sum, we conclude that the evidence does not support
departing from the Commission's established practice of trimming the
data set to the middle 50%. Pipelines have presented the same arguments
that the Commission rejected in the 2010 Index Review and that the
Commission and the D.C. Circuit rejected in the 2015 Index Review.
Pipelines also presented no evidence demonstrating that the middle 80%
contains fewer pipelines with idiosyncratic cost changes than in 2010
and 2015. Moreover, as articulated above, the record in this proceeding
provides less support for using the middle 80% than in 2015 or 2010
because the middle 50% includes a considerably higher percentage of
industry-wide barrel-miles (81% in 2020 versus 76% in 2010 and 56% in
2015) and the middle 80% of this data set is more dispersed. We
therefore grant Shippers' requests for rehearing to calculate the index
level using the middle 50%.\153\
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\153\ Consistent with the Commission's historical practice,
nothing in this order precludes commenters from proposing
modifications to the Kahn Methodology, including different data
trimming methodologies, in future five-year reviews based upon the
records in those proceedings. See NOI, 171 FERC ] 61,239 at P 8
(``We invite interested persons to submit comments regarding . . .
any alternative methodologies for calculating the index level for
the five-year period commencing July 1, 2021. Commenters may address
issues that include, but are not limited to, different data trimming
methodologies . . . .'').
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C. Liquids Shippers' Proposal To Calculate the Composite Measure of
Central Tendency Using the Weighted Median
58. Liquids Shippers argued in their comments that the weighted
mean of the data set in this proceeding accords undue weight to two
pipelines, Colonial and Enbridge Energy, L.P. (Enbridge). Liquids
Shippers asserted that these pipelines are substantial outliers in
terms of barrel-miles and cost changes \154\ and that both reported
inaccurate page 700 data for 2014 and 2019.\155\ Because the weighted
mean affords these pipelines significant weight, Liquids Shippers
argued that using it to calculate the composite measure of central
tendency will skew the index upwards and fail to track normal industry-
wide cost changes.\156\ To remedy this issue, Liquids Shippers proposed
to replace the weighted mean in the index calculation with the median
of the barrel-mile weighted cost changes in the middle 50% (weighted
median), as calculated by their witness Elizabeth H. Crowe.
Alternatively, if the Commission decides not to replace the weighted
mean with the weighted median, Liquids Shippers proposed reducing the
weighting afforded to the weighted mean in the Kahn Methodology from
33.3% to 20% or 10%.\157\
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\154\ Liquids Shippers Initial Comments at 13-15.
\155\ Id. at 17-19.
\156\ Id. at 16-19.
\157\ Id. at 20 n.45; Crowe Initial Aff. at 8-9.
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1. December 2020 Order
59. The December 2020 Order declined to adopt Liquids Shippers'
proposals. First, the Commission found that removing the weighted mean
from the index calculation would conflict with longstanding Commission
precedent relying upon the weighted mean and with Dr. Kahn's testimony
in the Order No. 561 rulemaking proceeding endorsing its use.\158\
Second, the Commission explained that the index aims to track cost
changes among
[[Page 4488]]
pipelines of all sizes and that discarding the weighted mean or
reducing the weighting it receives in the analysis would upset the
balance between large and small pipelines that the Kahn Methodology
achieves.\159\ Third, the Commission determined that Liquids Shippers'
calculation of the weighted median was methodologically flawed and did
not provide a useful measure of central tendency for purposes of
calculating the index.\160\ Fourth, the Commission concluded that
Liquids Shippers' challenges to Colonial's and Enbridge's page 700 data
are misplaced and unavailing on the merits.\161\
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\158\ December 2020 Order, 173 FERC ] 61,245 at P 36.
\159\ Id. P 37.
\160\ Id. PP 38-39.
\161\ Id. P 40.
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2. Rehearing Request
60. Liquids Shippers renew their arguments that Colonial and
Enbridge are outliers in terms of cost changes \162\ and barrel-miles
\163\ and that these pipelines reported inaccurate page 700 data for
2014 and 2019.\164\ As a result, Liquids Shippers argue that using the
weighted mean in this proceeding skews the index level upwards, fails
to reflect industry-wide cost changes, and increases the likelihood
that inaccurate or erroneous page 700 data will distort the index
calculation.\165\ Liquids Shippers argue that the December 2020 Order
failed to address their evidence that Colonial and Enbridge are
outliers in terms of barrel-miles or acknowledge the errors in those
pipelines' page 700 data. Although the Commission has previously
declined to consider challenges to individual pipelines' page 700
inputs, Liquids Shippers state that this proceeding is distinct because
of the substantial weight the weighted mean accords to Colonial and
Enbridge.\166\
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\162\ Liquids Shippers Request for Rehearing at 56-57. Liquids
Shippers assert that Enbridge and Colonial reported annual cost
changes of 3.1% and 4.3%, respectively, both of which exceed the
median of the data set (0.05%), the unweighted mean of the middle
80% (1.45%), and the unweighted mean of the middle 50% (0.29%). Id.
(citing December 2020 Order, 173 FERC ] 61,245 at Workpapers,
Exhibit 5 Tab, Column P, Lines 21 and 35; id. at Workpapers, Exhibit
1 Tab, Column F, Lines 11-12; id. at Workpapers, Exhibit 5 Tab,
Column Q, Line 184).
\163\ Specifically, Liquids Shippers state that Colonial and
Enbridge represent 40% of the total barrel-miles in the untrimmed
data set of 160 pipelines and 48% of the total barrel-miles in the
middle 50% sample used in the NOI. Liquids Shippers Request for
Rehearing at 54-55.
\164\ Id. at 65-66.
\165\ Id. at 58, 65-67. Liquids Shippers state that removing
Enbridge and Colonial from the data set would cause the index level
proposed in the NOI to decrease from PPI-FG+0.09% to PPI-FG-0.34%.
Id. at 57 (citing Liquids Shippers Initial Comments at 15-16; Crowe
Initial Aff. at 6-7). Given this effect, Liquids Shippers argue that
affording these pipelines significant weight will skew the index
upward. Id. at 58.
\166\ Id. at 67.
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61. Liquids Shippers further argue that the December 2020 Order
erred in relying upon earlier index proceedings to justify using the
weighted mean in this case. Liquids Shippers contend that this
proceeding is distinguishable from prior five-year reviews because the
weighted mean is heavily influenced by just two pipelines and a
commenter has demonstrated that two outlying pipelines skew the
weighted mean.\167\ Furthermore, Liquids Shippers state that there is
limited judicial and Commission precedent addressing use of the
weighted mean and that existing precedent supports only the use of some
weighted measure of central tendency.\168\ Liquids Shippers maintain
that they do not object to the Commission taking pipeline size into
account or according additional weight to larger pipelines when
calculating the index level, so long as two pipelines like Colonial and
Enbridge are not permitted to skew the result.\169\
---------------------------------------------------------------------------
\167\ Id. at 64, 67.
\168\ Id. at 62-63 (quoting AOPL II, 281 F.3d at 241).
\169\ Id. at 63.
---------------------------------------------------------------------------
62. In addition, Liquids Shippers object to the December 2020
Order's suggestion that shippers should challenge the inputs in a
particular pipeline's page 700 by filing a complaint.\170\ Liquids
Shippers state that a cost-of-service complaint against a pipeline's
base rates is unlikely to result in changes to its page 700 and that
there would be no commercial benefit for a shipper to file a complaint
for the sole purpose of challenging the pipeline's page 700
inputs.\171\ Liquids Shippers argue that by requiring shippers to
challenge page 700 inputs in a complaint or litigated rate proceeding,
the Commission is insulating pipelines' page 700 data from meaningful
review.\172\
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\170\ Id. at 68 (citing December 2020 Order, 173 FERC ] 61,245
at P 40 n.87).
\171\ Id. at 68-69.
\172\ Id. at 69.
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3. Commission Determination
63. We are unpersuaded by Liquids Shippers' arguments and deny
rehearing. As the December 2020 Order explains, replacing the weighted
mean in the calculation of the composite central tendency would
contravene longstanding Commission practice dating to the rulemaking
proceeding that established the indexing regime.\173\ As discussed
below, although no commenter has previously challenged the use of the
weighted mean in the Kahn Methodology, we find that Liquids Shippers
have not justified departing from the Commission's well-established
policy.\174\
---------------------------------------------------------------------------
\173\ December 2020 Order, 173 FERC ] 61,245 at P 36.
\174\ See supra note 129.
---------------------------------------------------------------------------
64. As an initial matter, Liquids Shippers acknowledge that the
Kahn Methodology appropriately relies upon a weighted measure of
central tendency \175\ but fail to propose a credible alternative to
the weighted mean. As discussed above, the December 2020 Order rejected
Liquids Shippers' proposed weighted median calculation as
methodologically flawed. The Commission explained that the established
statistically appropriate method for calculating the weighted median,
as applied to pipeline cost changes, is to order the pipelines by cost-
change percentage, compute each pipeline's share of total barrel-miles,
and identify the pipeline whose share of total barrel-miles causes the
cumulative share to reach 50%.\176\ However, rather than identify the
pipeline that causes the cumulative share of total barrel-miles
represented in the sample to reach 50%, Ms. Crowe derives the median
value of the weighted cost-change percentages for 2019 without regard
to the barrel-miles represented above and below that cost change.\177\
Unlike the correct calculation of the weighted median, Ms. Crowe does
not order pipelines by cost changes, and instead orders them by cost
change times barrel-miles.\178\ The Commission found that under this
approach, it is unclear whether the median pipeline of a given sample
reported (a) relatively high cost changes and low barrel-miles or (b)
relatively low cost changes and high barrel-miles.\179\ The Commission
also observed that a small shift in the data sample's median would
produce significant and multidirectional changes in the calculation's
result.\180\ Thus, the
[[Page 4489]]
Commission determined that this calculation produces ``haphazard
results'' that ``do not reflect a convergence towards a central
tendency of industry-wide cost changes.'' \181\ The Commission further
explained that Ms. Crowe's methodology would ``nullify the influence of
larger pipelines upon the index calculation and thereby defeat the
purpose of relying upon a weighted measure of central tendency.'' \182\
On rehearing, Liquids Shippers do not address these findings or attempt
to rectify the identified flaws in Ms. Crowe's weighted median
calculation. Thus, even if we were inclined to replace the weighted
mean with a different weighted measure of central tendency, Liquids
Shippers present no credible alternative.
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\175\ Liquids Shippers Request for Rehearing at 63.
\176\ December 2020 Order, 173 FERC ] 61,245 at P 38 (citing
Shehadeh Reply Decl. at 11 & App. B, Ex. 1). In fact, as explained
in the December 2020 Order, the pipeline reflecting the weighted
median using such a calculation would be Enbridge (which as
discussed below, Liquids Shippers allege should be removed as an
outlier from the data set). Id. P 40.
\177\ Id. P 39.
\178\ Id.
\179\ Id. n.84.
\180\ For example, a median reflecting the pipeline with the
next lowest weighted percentage change (Wildcat Liquids Caddo LLC)
would reduce Ms. Crowe's result from 0.57% to -1.74% (a decrease of
over 200%), whereas a median reflecting the next highest weighted
percentage change (reported by Wesco Pipeline, LLC) would reduce the
result by an even greater amount, from -0.57% to -2.28% (a decrease
of 400%). Id. n.85.
\181\ Id.
\182\ Id. n.86 (citing AOPL II, 281 F.3d at 241). Specifically,
the Commission explained that because Ms. Crowe orders the pipelines
by barrel-mile cost change times barrel-miles, a pipeline with high
barrel-miles would likely only lie near the median of the data
sample if it reported extremely low cost changes. Id.
---------------------------------------------------------------------------
65. In addition, we remain unpersuaded by Liquids Shippers' claims
that the weighted mean needs to be modified or replaced because two
large pipelines, Colonial and Enbridge, allegedly skew the index
calculation. First, the December 2020 Order found that the record
indicates that neither Colonial nor Enbridge reported outlying cost
changes,\183\ and Liquids Shippers do not refute these findings on
rehearing.\184\ Although both Colonial and Enbridge reported barrel-
mile cost changes above the median in the middle 50%, this does not
make them outliers in terms of cost changes.\185\ Second, the fact that
the weighted mean in this proceeding ascribes additional weight to two
pipelines with high barrel-miles does not support removing this measure
of central tendency or reducing its weighting in the Kahn Methodology.
Rather, the Kahn Methodology includes the weighted mean in the
calculation of central tendency specifically to provide appropriate
weight to large pipelines like Colonial and Enbridge whose cost changes
are highly reflective of industry cost experience.\186\ This additional
weighting is necessary to ensure that ``minor firms do not skew the
result.'' \187\ Because unweighted measures of central tendency weight
all cost changes equally without regard to pipeline size, failing to
incorporate a weighted measure would allow the cost experiences of
small pipelines to obscure the experiences of pipelines that represent
a much larger share of the industry's barrel-miles. In this proceeding,
for instance, three small pipelines representing 0.00073% of the
barrel-miles in the middle 50% influence the sample's unweighted mean
by the same degree as Colonial and Enbridge, which represent 50.04% of
the barrel-miles in the middle 50%.\188\ Thus, the fact that the
weighted mean accords significant weight to Colonial and Enbridge is
fully consistent with its role in the index calculation and does not
skew the index calculation as Liquids Shippers allege.\189\ To the
extent that Liquids Shippers oppose use of the weighted mean in this
proceeding because it provides significant weighting to the two largest
pipelines,\190\ we find that this concern does not justify eliminating
the weighted mean from the index calculation in the absence of a
credible alternative.\191\
---------------------------------------------------------------------------
\183\ The Commission observed that both Colonial and Enbridge
are included in the middle 50% of cost changes, which indicates that
their cost experiences did not diverge significantly from industry
norms. December 2020 Order, 173 FERC ] 61,245 at P 40.
\184\ See Liquids Shippers Request for Rehearing at 65-66
(acknowledging the Commission's findings but arguing that they do
``not respond to [Liquids Shippers'] evidence or [their] concerns
that Enbridge Energy and Colonial skew the index due to being
extreme outliers in terms of barrel-miles . . . .'').
\185\ The 2014-2019 cost changes in the middle 50% ranged from -
32.23% to 28.97%. Colonial's cost change of 23.72% lies well within
the middle 50%'s upper bound, while Enbridge's cost change of 3.43%
lies close to the median of the sample.
\186\ December 2020 Order, 173 FERC ] 61,245 at P 37.
\187\ AOPL II, 281 F.3d at 241.
\188\ Whereas removing the cost changes of Colonial and Enbridge
would reduce the unweighted mean by 7 basis points (from -0.20% to -
0.27%), removing the cost changes of Wesco Pipeline LLC, Hilcorp
Pipeline Company, LLC, and Black Bear Liquids LLC increases the
unweighted mean by the same magnitude of 7 basis points (from -0.20%
to -0.13%). Attach. A, Exhibit 13.
\189\ December 2020 Order, 173 FERC ] 61,245 at P 37.
\190\ Liquids Shippers Request for Rehearing at 63, 65-66.
\191\ As discussed above, although Liquids Shippers contend that
another approach to weighting pipeline cost changes may achieve a
better balance between large and small pipelines, they have not
justified an alternative to the weighted mean.
---------------------------------------------------------------------------
66. Moreover, we continue to find that Liquids Shippers' challenges
to the reported page 700 data of Colonial and Enbridge are outside the
scope of this proceeding. As the December 2020 Order explains, indexing
proceedings are not an appropriate forum for challenging specific
pipelines' page 700 inputs.\192\ In the five-year review, the
Commission must review pipeline cost changes on an industry-wide basis
to establish the generic index that pipelines may use to adjust their
rates going forward. Allowing commenters to litigate individual
pipelines' page 700 inputs would risk expanding this review into a
wide-ranging rate proceeding involving complex cost-of-service issues
that would require significant time to resolve. Given that the
Commission must consider industry-wide cost changes based upon data for
over 160 pipelines and must complete each five-year review in order to
establish the index level for use in index filings to be effective on
July 1 of the following year,\193\ it would be unworkable to permit
challenges to individual pipeline page 700 inputs in this proceeding.
---------------------------------------------------------------------------
\192\ December 2020 Order, 173 FERC ] 61,245 at P 40; see also
AOPL I, 83 F.3d at 1437 (holding that the Commission did not err in
Order No. 561 by declining to periodically review individual
pipeline costs and instead requiring shippers to challenge
individual pipeline rates via protests or complaints); Calnev Pipe
Line L.L.C., 127 FERC ] 61,304, at P 5 (2009) (``[T]he Commission
has made quite clear that it will not review allegations regarding
the appropriateness of a pipeline's cost of service or the accuracy
of its accounting in an index proceeding. Such allegations must be
included in a complaint once the index-based filing becomes
effective.'' (citing SFPP, L.P., 123 FERC ] 61,317 (2008); BP W.
Coast Prods. LLC v. SFPP, L.P., 121 FERC ] 61,243 (2007))).
\193\ NOI, 171 FERC ] 61,239 at P 11.
---------------------------------------------------------------------------
67. Furthermore, we are not persuaded by Liquids Shippers' claim
that reporting errors by Colonial and Enbridge are skewing the index
level upwards by 43 basis points.\194\ Regarding Enbridge, this
argument is particularly unpersuasive. First, removing Enbridge from
the middle 50%, while retaining Colonial in that sample, actually
increases the index level rather than decreasing it as Liquids Shippers
imply.\195\ Second, correcting Enbridge's alleged reporting errors only
marginally influences the index calculation. Liquids Shippers claim
that the 12.71% ROE that Enbridge reported on page 700 for 2019 exceeds
both the 9.84% ROE that it reported for 2014 and the 10.85% ROE that
many pipelines reported on page 700 for 2019. However, adjusting
Enbridge's 2019 page 700 ROE from 12.71% to 9.84% or 10.85% would only
impact the index level by 2 basis points.\196\
---------------------------------------------------------------------------
\194\ Liquids Shippers allege that when using the data set
underlying the NOI proposal, removing Enbridge and Colonial from the
middle 50% reduces the index level by 43 basis points (from PPI-
FG+0.09% to PPI-FG-0.34%). Liquids Shippers Request for Rehearing at
57 (citing Liquids Shippers Initial Comments; Crowe Initial Aff. at
6-7). Similarly, removing those pipelines from the middle 50% of the
data set adopted in the instant order would reduce the index level
by 44 basis points, from PPI-FG-0.21% to PPI-FG-0.65%. Attach. A,
Exhibit 8.
\195\ Removing Enbridge from the middle 50% but not Colonial,
increases the index level from PPI-FG-0.21% to PPI-FG-0.14%. Attach.
A, Exhibit 9.
\196\ Lowering Enbridge's page 700 ROE from 12.71% to either
9.84% or 10.85% would reduce the index level from PPI-FG-0.21% to
PPI-FG-0.23%. Attach. A, Exhibit 10.
---------------------------------------------------------------------------
[[Page 4490]]
68. Similarly, although Colonial accounts for most of the 44 basis-
point shift in the index calculation that results from removing
Colonial and Enbridge from the middle 50%, correcting Colonial's
alleged reporting errors produces only a de minimis change in the index
level. Liquids Shippers argue that Colonial reported in its 2014 and
2019 page 700 filings that it is 92% financed by equity, but reported
on its balance sheet and in an ongoing rate proceeding that it is 100%
financed by debt.\197\ However, adjusting Colonial's capital structure
to 50% equity and 50% debt produces a mere one-basis-point change to
the index level.\198\ Accordingly, given these relatively minor
effects, we are unpersuaded by Liquids Shippers' claim that using the
weighted mean in this proceeding increases the likelihood that page 700
reporting errors will skew the index calculation.
---------------------------------------------------------------------------
\197\ Liquids Shippers Request for Rehearing at 59-60 (citing
Crowe Initial Aff. at 5-6).
\198\ Using the data set adopted in this proceeding, adjusting
Colonial's capital structure to 50% equity and 50% debt while
preserving the composition of the middle 50% increases the index
level by one basis point, from PPI-FG-0.21% to PPI-FG-0.20%. Attach.
A, Exhibit 11.
---------------------------------------------------------------------------
69. Furthermore, we find that requiring shippers to challenge page
700 inputs outside of the five-year review process does not present an
infeasible approach. First, Liquids Shippers' argument that a cost-of-
service complaint is unlikely to result in a change to the pipeline's
page 700 reporting is without merit. For example, if the Commission
determines in a cost-of-service rate proceeding that a pipeline set its
rates based upon an inaccurate capital structure, the pipeline would be
required to implement this determination in its subsequent page 700
reporting.\199\ Second, we are unpersuaded by Liquids Shippers' claim
that a complaint challenging a pipeline's page 700 inputs would bring
shippers ``no commercial benefits.'' \200\ Where a shipper believes
that a pipeline may have reported inaccurate or erroneous information
on its page 700, initiating a complaint proceeding provides the parties
and the Commission with a full opportunity to develop an evidentiary
record that would allow for a meaningful review of the challenged page
700 inputs. If the complaint is successful, the Commission would direct
the pipeline to revise its page 700 to correct any errors or
inaccuracies. These revisions, in turn, could alter the cost and
revenue data on which shippers and the Commission rely in evaluating
cost-of-service complaints against the pipeline's rates and challenges
to the pipeline's annual index rate changes. Thus, although we
recognize the burden and expense associated with filing a complaint, we
disagree with Liquids Shippers' claim that there would be no commercial
benefits to filing a complaint against a pipeline's page 700 inputs.
---------------------------------------------------------------------------
\199\ The instructions on page 700 require pipelines to
determine their page 700 inputs consistent with the Opinion No. 154-
B cost-of-service methodology. To comply with this instruction, a
pipeline must adhere to the Commission's application of the Opinion
No. 154-B methodology in proceedings involving the pipeline's rates.
\200\ Liquids Shippers Request for Rehearing at 84.
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D. Liquids Shippers' Proposal To Adopt Standardized ROEs for 2014 and
2019
70. Liquids Shippers argued in their comments that the reported
page 700 ROEs conflict with the Commission's cost-of-service ratemaking
methodology because they are self-reported and vary substantially.\201\
In addition, Liquids Shippers maintained that uncertainty surrounding
the Commission's oil pipeline ROE policy at the time pipelines
submitted their page 700 filings for 2019 undermined the reliability of
the reported ROEs for 2019.\202\ Thus, Liquids Shippers urged the
Commission to replace pipelines' reported page 700 ROEs for 2014 and
2019 with standardized ROEs for purposes of calculating the index
level. For 2014, Liquids Shippers proposed a standardized ROE of
10.29%, which 54 pipelines reported in their 2014 page 700
filings.\203\ For 2019, Liquids Shippers proposed to use the 10.02% ROE
that Trial Staff proposed in an ongoing Colonial rate proceeding based
upon data for the six-month period ending in November 2019.\204\
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\201\ Liquids Shippers Initial Comments at 21-23.
\202\ Id. at 25-28. In support of this argument, Liquids
Shippers contend that two pipelines submitted updated Form No. 6
filings in July 2020 indicating that the page 700 ROEs they reported
in April 2020 did not comply with the Commission's then-applicable
policy relying solely upon the DCF model. Liquids Shippers Request
for Rehearing at 76-77 (citing Liquids Shippers Initial Comments at
25-28) (referring to updated Form No. 6 filings of Plains Pipeline,
LP, and Rocky Mountain Pipeline System LLC).
\203\ Ms. Crowe stated that 45 pipelines reported a 10.29% ROE
on their page 700s for 2014. Crowe Initial Aff. at 11-12. However,
based upon a review of Form No. 6 filings submitted in 2016, the
Commission found in the December 2020 Order that 54 pipelines
reported this ROE for 2014 in the column on page 700 for previous
year data. December 2020 Order, 173 FERC ] 61,245 at P 43 n.97.
\204\ Liquids Shippers Initial Comments at 30-31; Crowe Initial
Aff. at 11 (citing Trial Staff, Exhibit S-00057 (Direct and
Answering Cost-Based Rate Testimony of Commission Trial Staff
Witness Robert J. Keyton), Docket Nos. OR18-7-002 et al. (filed Jan.
14, 2020)).
---------------------------------------------------------------------------
1. December 2020 Order
71. The December 2020 Order declined to adopt standardized ROEs for
2014 and 2019 and concluded that Liquids Shippers have not demonstrated
that the reported page 700 ROEs are unreliable or inconsistent with
Commission policy.\205\ First, the Commission rejected Liquids
Shippers' argument that page 700 ROEs are unreliable simply because
they are self-reported, reasoning that the instructions on page 700
required pipelines to determine ROE consistent with the Commission's
then-applicable policy of relying solely upon the DCF model.\206\
Second, the Commission found that variation among page 700 ROEs does
not indicate that this data is unreliable and that such variation may
result from differences in proxy group composition and relative
risk.\207\ Third, the Commission rejected Liquids Shippers' contention
that pipelines were uncertain as to the Commission's oil pipeline ROE
policy when they submitted their 2019 Form No. 6 filings. The
Commission found that pipelines had adequate notice of the prevailing
policy through the page 700 instruction requiring pipelines to
determine ROE consistent with the then-current Opinion No. 154-B
methodology.\208\ Fourth, the Commission found that Liquids Shippers
have not supported their proposed standardized ROEs.\209\ Finally, the
Commission concluded that determining standardized ROEs would
complicate the five-year review process and undermine indexing's
purpose as a simplified and streamlined ratemaking regime.\210\
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\205\ December 2020 Order, 173 FERC ] 61,245 at P 45.
\206\ Id. P 46.
\207\ Id. P 47.
\208\ Id. P 48.
\209\ Id. P 49.
\210\ Id. P 50.
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2. Rehearing Request
72. Liquids Shippers contend that the December 2020 Order erred by
failing to replace the reported 2014 and 2019 page 700 ROEs with
Liquids Shippers' proposed standardized ROEs. They repeat their
argument that the reported page 700 ROEs cannot be consistent with the
Commission's cost-of-service methodology because they vary
substantially.\211\ Liquids Shippers
[[Page 4491]]
emphasize that these ROEs were selected by the pipelines themselves.
Furthermore, Liquids Shippers contend that the page 700 ROEs fail to
accurately capture changing market conditions between 2014 and 2019
because some pipelines reported a 2019 page 700 ROE that was
significantly higher than their 2014 page 700 ROE, while other
pipelines reported a 2019 ROE that was significantly lower than their
2014 ROE.\212\ Liquids Shippers state that to the extent there is
limited evidence addressing whether the page 700 ROEs conflict with the
Commission's policy, the absence of more concrete evidence ``does not
give rise to a negative inference that such evidence does not exist.''
\213\
---------------------------------------------------------------------------
\211\ Liquids Shippers Request for Rehearing at 70-72 (citing El
Paso Nat. Gas Co., Opinion No. 528, 145 FERC ] 61,040, at P 592
(2013)). For instance, Liquids Shippers state that among the 160
pipelines in the untrimmed data set, the reported page 700 ROEs for
2019 range from 0.9% to 22.3%. Among the pipelines in the middle
50%, Liquids Shippers state that the 2019 page 700 ROEs range from
7.2% to 18.8%. Id.
\212\ Id. at 73 (citing Liquids Shippers Initial Comments at 23-
24; Crowe Initial Aff. at 9-10).
\213\ Id. at 78.
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73. Liquids Shippers also challenge the Commission's finding that
variations in the reported page 700 ROEs could result from differences
in proxy group composition and relative risk. Liquids Shippers claim
that the December 2020 Order cites no evidence for this conclusion,
despite the fact that the Commission has access to the workpapers
underlying pipelines' page 700 ROE calculations.\214\ In addition,
Liquids Shippers contend that the Commission overstates the degree of
variation that can result from these factors. Regarding proxy group
composition, Liquids Shippers state that there is a small number of
eligible oil pipeline proxy group members, such that there is limited,
if any, potential for variation in the proxy group that may be used
from pipeline to pipeline.\215\ Regarding differences in risk, Liquids
Shippers contend that the Commission has recognized that most pipelines
fall within the same broad range of average risk, such that the median
of the proxy group results is sufficient to compensate most pipelines
for their investments.\216\
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\214\ Id. at 81 (citing December 2020 Order, 173 FERC ] 61,245
at PP 46-47; Revisions to & Electronic Filing of the FERC Form No. 6
& Related Uniform Sys. of Accounts, Order No. 620, FERC Stats. &
Regs. ] 31,115, at 31,959-60 (2000) (cross-referenced at 93 FERC ]
61,262), reh'g denied, Order No. 620-A, 94 FERC ] 61,130 (2001)).
\215\ Id. at 82-83 (citing Opinion No. 528, 145 FERC ] 61,040 at
P 595; AOPL, Comments, Docket No. PL19-4-000, at 15 (filed June 26,
2019)).
\216\ Id. at 83 (citing Opinion No. 528, 145 FERC ] 61,040 at P
592; Composition of Proxy Groups for Determining Gas and Oil
Pipeline Return on Equity, 123 FERC ] 61,048 (2008) (Proxy Group
Policy Statement)).
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74. Furthermore, Liquids Shippers reiterate their earlier argument
that uncertainty surrounding the Commission's oil pipeline ROE
methodology in April 2020 undermines the reliability of the reported
page 700 ROEs for 2019.\217\ Liquids Shippers dispute the Commission's
finding that pipelines received adequate notice of the Commission's
prevailing ROE policy through the page 700 instruction requiring
pipelines to determine ROE consistent with the then-current Opinion No.
154-B methodology.\218\ They argue that the ``mere existence of a rule
does not guarantee compliance with that rule'' and that the Commission
had an affirmative obligation to investigate whether ambiguities in its
prevailing ROE policy affected the 2019 page 700 ROEs.\219\
---------------------------------------------------------------------------
\217\ As discussed in the December 2020 Order, Liquids Shippers
assert that the Commission initiated a review of its ROE policy in
Docket No. PL19-4-000 on March 21, 2019, but did not clarify its
policy until it issued a policy statement revising its ROE
methodology for natural gas and oil pipelines on May 21, 2020. Id.
at 74-75 (citing Inquiry Regarding the Commission's Policy for
Determining Return on Equity, 171 FERC ] 61,155 (2020) (ROE Policy
Statement); Inquiry Regarding the Commission's Policy for
Determining Return on Equity, 166 FERC ] 61,207 (2019)). Because oil
pipelines were required to submit page 700 cost-of-service data for
2019 in April 2020, Liquids Shippers allege that pipelines were not
certain of the Commission's prevailing policy when pipelines
reported their 2019 ROEs. Id. at 75-76.
\218\ Id. at 85-86 (citing December 2020 Order, 173 FERC ]
61,245 at P 48).
\219\ Id. at 86.
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75. In addition, Liquids Shippers contend that the Commission
applied an unreasonably strict standard in rejecting their proposed
standardized ROEs. Liquids Shippers state that in order to determine an
ROE that ``accurately measures the investor-required cost of equity for
all pipelines in the data set,'' \220\ Liquids Shippers would need to
provide evidence establishing the financial and business risks for more
than 100 pipelines.\221\
---------------------------------------------------------------------------
\220\ December 2020 Order, 173 FERC ] 61,245 at P 49.
\221\ Liquids Shippers Request for Rehearing at 87.
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76. Liquids Shippers also disagree with the Commission's conclusion
that replacing reported page 700 ROEs with standardized ROEs would
improperly complicate the five-year review. Liquids Shippers state that
because standardized ROEs would only serve as benchmarks for measuring
pipeline cost changes,\222\ ``establishing a standardized ROE may not
require the same rigor as, e.g., determining an allowable ROE to be
included in an oil pipeline's just and reasonable rates.'' \223\
Liquids Shippers contend, moreover, that determining standardized ROEs
in each five-year review would not be a prohibitive undertaking.
Because most pipeline ROEs would fall at the median of the oil proxy
group, Liquids Shippers state that the Commission would not have to
perform an individualized analysis of every oil pipeline to determine a
standardized ROE.\224\ Additionally, Liquids Shippers observe that
Commission Trial Staff regularly develops proposed ROEs in cost-of-
service rate proceedings. Finally, Liquids Shippers contend that it is
inconsistent for the Commission to reject their proposal to adopt
standardized ROEs as incompatible with simplified and streamlined
ratemaking while also adopting Pipelines' proposals to adjust the
reported page 700 data to remove the effects of the Income Tax Policy
Change.\225\
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\222\ Id. at 88-89.
\223\ Id. at 89.
\224\ Id. at 89-90.
\225\ Id. at 90-91.
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3. Commission Determination
77. We deny rehearing and sustain the Commission's determination in
the December 2020 Order. We continue to find that Liquids Shippers have
not adequately demonstrated that the reported page 700 ROEs for 2014
and 2019 are unreliable or inconsistent with Commission policy such
that the Commission should revise the Kahn Methodology to replace those
figures with standardized ROEs.\226\
---------------------------------------------------------------------------
\226\ As discussed, Liquids Shippers, as the proponent of a
change to the Kahn Methodology, bears the burden of justifying that
change. See supra note 129.
---------------------------------------------------------------------------
78. As an initial matter, Liquids Shippers fail to present usable
alternatives to the ROEs that pipelines reported on page 700. As the
Commission concluded in the December 2020 Order, we find that Liquids
Shippers have not supported their proposed standardized ROEs.\227\
Regarding their proposed industry-wide 2014 ROE, Liquids Shippers'
arguments on rehearing do not explain why an ROE figure that only 29%
of pipelines reported for that year accurately measures the investor-
required cost of equity for all pipelines in the data set.\228\
Likewise, for the 2019 ROE, we reject Liquids Shippers' proposal to use
an ROE that one participant proposed in an ongoing hearing for use in
Colonial's rates. Neither the Presiding Judge nor the Commission have
opined on this
[[Page 4492]]
ROE proposal.\229\ Moreover, this proposal was challenged by the other
litigants in that proceeding and Liquids Shippers have presented no
evidence that this particular ROE was more appropriate than the other
litigants' proposed ROEs.\230\ In addition, even if the Commission had
adopted a proposed ROE for Colonial in that rate case, the December
2020 Order explains that given the diversity of the oil pipeline
industry, we cannot simply assume that any single ROE could reflect the
investor-required return for all pipelines in the data set.\231\
---------------------------------------------------------------------------
\227\ Not only do Liquids Shippers fail to justify their
proposed standardized ROEs, but they also fail to correctly
incorporate those ROEs into pipelines' page 700 cost-of-service
calculations. Because ROE forms part of the return on rate base for
which non-MLP pipelines may recover an income tax allowance, any
adjustment to the page 700 ROEs should include corresponding changes
to the pipeline's page 700 income taxes. However, in adjusting the
reported page 700 ROEs, Ms. Crowe fails to reflect the resulting
income tax changes in pipelines' page 700 cost-of-service
calculations. See Crowe Initial Aff. at App. 4.
\228\ December 2020 Order, 173 FERC ] 61,245 at P 49.
\229\ Id. The initial decision addressing Colonial's cost-based
rates, including its just and reasonable ROE, is scheduled to issue
by April 29, 2022. Epsilon Trading, LLC v. Colonial Pipeline Co.,
Docket No. OR18-7-002 (Dec. 2, 2021).
\230\ Although this figure was proposed in the ongoing hearing
by Commission Trial Staff, Trial Staff are non-decisional employees
for purposes of that proceeding. 18 CFR 385.2201(c)(3) (2021)
(defining ``decisional employee'' to exclude ``an employee
designated as part of the Commission's trial staff in a
proceeding''); Separation of Functions, 101 FERC ] 61,340, at P 7
(2002) (``A `non-decisional employee' is a member of the
Commission's trial staff in a proceeding . . . .'').
\231\ December 2020 Order, 173 FERC ] 61,245 at P 49.
---------------------------------------------------------------------------
79. We conclude, moreover, that Ms. Crowe determines her proposed
standardized ROEs using an inconsistent approach that deflates the
index level. Ms. Crowe asserts that the Commission should adopt 10.29%
as the standardized ROE for 2014 because 54 of 184 filing pipelines
reported that figure on page 700. Liquids Shippers also acknowledge
that an even greater percentage of filing pipelines reported a 10.85%
ROE on page 700 for 2019.\232\ However, rather than adopt this widely
reported figure as the standardized ROE for 2019, Ms. Crowe instead
proposes to use an untested 10.02% ROE that remains subject to
Commission evaluation in the ongoing Colonial rate proceeding. This
unexplained inconsistency materially affects the index level: Whereas
using a 10.85% ROE for 2019 with the proposed 10.29% ROE for 2014 would
reduce the index level by 11 basis points, using a 10.02% ROE for 2019
as Ms. Crowe proposes with the same ROE for 2014 would reduce the index
level by 55 basis points.\233\ Liquids Shippers neither acknowledge
these effects nor justify their proposal to use a widely reported ROE
as the standardized ROE for 2014 but not for 2019.\234\
---------------------------------------------------------------------------
\232\ Whereas approximately 29% of filing pipelines reported a
10.29% ROE for 2014 (54/184 = 0.293), Liquids Shippers state that 69
of 160, or approximately 43%, of filing pipelines reported a 10.85%
ROE for 2019. Liquids Shippers Request for Rehearing at 80 (citing
Liquids Shippers Initial Comments at 29-32; Crowe Initial Aff. at
10-11)).
\233\ Using the 10.85% ROE for 2019 with the 10.29% ROE for 2014
reduces the index from PPI-FG-0.21% to PPI-FG-0.32%, whereas using
the 10.02% ROE for 2019 with the same ROE for 2014 reduces the index
level from PPI-FG-0.21% to PPI-FG-0.76%. Attach. A, Exhibit 12.
\234\ Ms. Crowe states that the widely reported 10.85% ROE
should not be used as the standardized ROE for 2019 because it ``is
unsupported by any explanation or derivation, and there is no
evidence this ROE was derived in a manner consistent with Commission
policy.'' Crowe Initial Aff. at 11. It is unclear, however, why this
critique would not apply with equal force to the 10.29% ROE that she
proposes to use for 2014. To the extent that Ms. Crowe proposes to
use a widely reported ROE for 2014 on the understanding that Trial
Staff had not proposed an ROE based upon 2014 data in an oil
pipeline rate proceeding, this understanding is incorrect. To the
contrary, in a rate proceeding involving SFPP, L.P., in Docket No.
OR16-6-000, Trial Staff proposed an ROE of 10.24% based upon 2014
data. Trial Staff, Exhibit S-24 (Direct and Answering Testimony of
Commission Trial Staff Witness Robert J. Keyton), Docket No. OR16-6-
000, at 61:15-17 (filed Sept. 14, 2016).
---------------------------------------------------------------------------
80. In addition, we reject Liquids Shippers' claim that the
Commission applied an unreasonably strict standard in requiring them to
demonstrate that their proposed standardized ROEs ``accurately measure[
] the investor-required cost of equity for all pipelines in the data
set.'' \235\ As Liquids Shippers acknowledge,\236\ ROE is a major
component of the page 700 summary cost of service and therefore
significantly affects the Commission's measurement of industry-wide
cost changes in the five-year review. Thus, where a commenter proposes
to replace the reported page 700 ROEs of every pipeline in the data set
with standardized, industry-wide figures, it is not unreasonable to
require commenters to demonstrate that those standardized figures
accurately measure the cost of equity for all pipelines in the data
set. Otherwise, a standardized ROE that does not accurately reflect the
costs of equity of pipelines in the data set could skew the index
calculation by distorting the measurement of those pipelines' per
barrel-mile equity cost changes during the review period. To the extent
that satisfying this standard would impose significant evidentiary
burdens, this supports maintaining the Commission's simplified approach
of measuring equity cost changes using reported page 700 ROEs.
---------------------------------------------------------------------------
\235\ December 2020 Order, 173 FERC ] 61,245 at P 49.
\236\ Liquids Shippers Initial Comments at 24.
---------------------------------------------------------------------------
81. Liquids Shippers' remaining arguments for replacing the
reported page 700 ROEs with standardized ROEs are unavailing. Contrary
to Liquids Shippers' argument, we again conclude that the fact that
page 700 ROEs are self-reported (like all other page 700 data used in
this proceeding) does not demonstrate that this data is unreliable or
fails to capture the returns that investors demand in the market. As
the December 2020 Order explains, the instructions on page 700 required
pipelines to determine their ROE for each year during the 2014-2019
period using the DCF model. Pipelines submitted page 700 under oath and
subject to sanction if there were purposeful errors in their reported
data.\237\ Moreover, the Commission's five-year review process reduces
the incentive or ability for pipelines to report inaccurate data in an
effort to skew the index calculation. The Commission calculates the
index level based upon changes in cost over the applicable review
period, rather than total costs in a given year. Because the last year
of any particular review period (e.g., 2014-2019) is the first year of
the next review period (e.g., 2019-2024), an attempt by pipelines to
distort the index calculation by reporting inflated cost data in the
last year of one period would harm their interests by establishing a
higher cost baseline in the first year of the next period.\238\ Given
these facts, we continue to find that Liquids Shippers have not
demonstrated that the reported page 700 ROE data is unreliable merely
because pipelines self-reported.\239\
---------------------------------------------------------------------------
\237\ December 2020 Order, 173 FERC ] 61,245 at P 46 (citing BP
W. Coast Prods. LLC v. SFPP, L.P., 121 FERC ] 61,243, at P 9
(2007)).
\238\ Id. n.103. Along similar lines, reporting overly low cost
data in the last year of one review period in an effort to skew the
index calculation downward would similarly harm pipelines' interests
by establishing a lower cost baseline in the first year of the next
period.
\239\ Id. P 46.
---------------------------------------------------------------------------
82. We also remain unpersuaded that variation among page 700 ROEs
indicates that the reported ROE data is unreliable. As an initial
matter, it is not clear from the record that the level of a pipeline's
page 700 ROE correlates with that pipeline's annualized cost changes
such that variations in ROE would materially affect the index
calculation.\240\ In any event, however, the D.C. Circuit has
recognized that ``the zone of reasonableness creates a broad range of
potentially lawful ROEs rather than a single just and reasonable ROE.''
\241\ Thus, mere variation in the page 700 ROEs does not establish that
those ROEs are not just and reasonable. Rather, as the Commission found
in the December 2020 Order, multiple factors can cause the DCF model to
yield different results for different
[[Page 4493]]
pipelines.\242\ Contrary to Liquids Shippers' claim, we disagree that
the December 2020 Order overstates the degree to which pipeline ROEs
may vary as a result of differences in proxy group composition. In
forming proxy groups, the Commission applies specific criteria to
ensure that the proxy group members are risk-appropriate and comparable
to the pipeline whose rate is being determined.\243\ Although the
number of companies satisfying the Commission's historical proxy group
criteria in pipeline proceedings has declined in recent years,\244\
this does not support the conclusion that a single proxy group would be
appropriate for every oil pipeline. Rather, the Commission has
explained that it will apply its proxy group criteria flexibly
depending upon the particular record in each proceeding when necessary
to form a proxy group of sufficient size.\245\ Thus, even under current
market conditions, the appropriate proxy group can vary from pipeline
to pipeline based upon the specific facts in the proceeding. Any
difference in proxy group composition can cause the DCF model to
produce different results for different pipelines.\246\
---------------------------------------------------------------------------
\240\ See Shehadeh Reply Decl. at 18-19 (comparing annualized
cost changes of pipelines in middle 80% that reported 10.85% ROE for
2019 and pipelines that reported ROEs other than 10.85% and
concluding that ``cost change and ROE are not positively
correlated'').
\241\ Emera Maine v. FERC, 854 F.3d 9, 26 (D.C. Cir. 2017).
\242\ Id. P 47. For instance, in a recent oil pipeline cost-of-
service rate proceeding, the potential proxy group member companies
included three pipelines with DCF returns near 10%, one pipeline
with a DCF return of 21.17%, and one pipeline with a DCF return of
51.14%. Chevron Prods. Co. v. SFPP, L.P., Opinion No. 571, 172 FERC
] 61,207, at P 152 (2020).
\243\ Historically, the Commission has required that each proxy
group company satisfy the following criteria. First, the company's
stock must be publicly traded. Second, the company must be
recognized as an oil pipeline company and its stock must be
recognized and tracked by an investment information service such as
Value Line. Third, pipeline operations must constitute at least 50%
of the company's assets or operating income over the most recent
three-year period (50% standard). E.g., ROE Policy Statement, 171
FERC ] 61,155 at P 58 (citing Proxy Group Policy Statement, 123 FERC
] 61,048 at P 8). In addition to these criteria, the Commission has
historically declined to include Canadian companies in pipeline
proxy groups. Id. (citing Opinion No. 528, 145 FERC ] 61,040 at P
626; Kern River Gas Transmission Co., Opinion No. 486-B, 126 FERC ]
61,034 at P 60, order on reh'g and compliance, Opinion No. 486-C,
129 FERC ] 61,240 (2009)).
\244\ Id. PP 60, 65.
\245\ The Commission maintains a flexible approach to forming
natural gas and oil pipeline proxy groups. For example, the
Commission retains the discretion to enforce or relax the 50%
standard based upon the record in each proceeding. Id. PP 64-65.
Similarly, the Commission has explained that it will consider
proposals to include Canadian companies in pipeline proxy groups on
a case-by-case basis. Id. P 66. Furthermore, given the ongoing
difficulties in forming pipeline proxy groups of sufficient size,
the Commission has stated that it ``will consider adjustments to
[its] ROE policies where necessary.'' Id. P 64.
\246\ For example, in Opinion No. 571, the Commission adopted a
proxy group of Buckeye Partners LP, Magellan Midstream Partners LP,
Enterprise Products Partners, LP, and Enbridge Energy Partners, LP,
which produced a median DCF result of 10.54%. Opinion No. 571, 172
FERC ] 61,207 at P 52. However, substituting Kinder Morgan Inc. in
the place of Enbridge would have reduced the median DCF result to
10.195%, a difference of over 30 basis points. See id.
---------------------------------------------------------------------------
83. Similarly, we continue to find that variation among page 700
ROEs may result from differences in relative risk. The December 2020
Order explains that although the Commission typically sets an oil
pipeline's real ROE at the median of the DCF results, it may set the
ROE above or below the median where the record demonstrates that the
pipeline faces anomalously high or low risks.\247\ Thus, even when
using an identical proxy group, the appropriate placement of a
pipeline's ROE within the proxy group results turns upon an
individualized, fact-specific analysis of its business and financial
risks relative to the risk profiles of the proxy group members. Because
oil pipelines' risk levels may differ based upon factors such as
location, size, and business model, it is unsurprising that ROEs would
vary to some degree across the oil pipeline industry.\248\ Contrary to
Liquids Shippers' argument, this variation does not demonstrate that
the page 700 ROEs are inaccurate or inconsistent with Commission
policy. In addition, to the extent a particular pipeline's per barrel-
mile equity cost changes departed substantially from industry norms,
that pipeline would not be among the middle 50% used to calculate the
index level.\249\
---------------------------------------------------------------------------
\247\ December 2020 Order, 173 FERC ] 61,245 at P 47 (citing BP
Pipelines (Alaska) Inc., Opinion No. 502, 123 FERC ] 61,287 at P
195, order on reh'g and compliance, 125 FERC ] 61,215 (2008), reh'g
denied, 127 FERC ] 61,317 (2009), aff'd sub nom. Flint Hills Res.
Alaska, LLC v. FERC, 726 F.3d 881 (D.C. Cir. 2010)).
\248\ This is particularly true where, due to the declining
number of proxy group companies, it may become necessary for the
Commission to include Canadian companies or companies that do not
satisfy the 50% standard to form a proxy group of sufficient size.
Including these more diverse companies in the proxy group could
necessitate setting the subject pipeline's ROE above or below the
median due to differences in risk.
\249\ December 2020 Order, 173 FERC ] 61,245 at P 47 (citing
2015 Index Review, 153 FERC ] 61,312 at P 17).
---------------------------------------------------------------------------
84. We conclude, moreover, that Liquids Shippers' have not
supported their argument that the Commission should have audited
pipelines' page 700 workpapers to review their ROE calculations. As the
December 2020 Order explains, the Commission does not scrutinize the
inputs underlying individual pipelines' page 700 data.\250\ Thus,
analyzing individual pipeline page 700 workpapers would depart from the
Commission's established practice.
---------------------------------------------------------------------------
\250\ Id. P 53.
---------------------------------------------------------------------------
85. Furthermore, we reject Liquids Shippers' claim that the page
700 ROEs fail to capture changing market conditions because some
pipelines reported ROE increases from 2014 to 2019 while other
pipelines reported ROE decreases. As discussed above, oil pipelines
have diverse business models and risk levels that can cause page 700
ROEs to vary from pipeline to pipeline. Merely because two entities are
part of the same industry does not dictate that they will experience
market changes in similar ways such that their ROEs will shift in the
same direction over a given five-year period. Accordingly, we are not
persuaded that the page 700 ROEs fail to adequately track changing
market conditions over the review period simply because some pipelines'
ROEs increased from 2014 to 2019 while other pipelines' ROEs decreased.
86. In addition, we remain unpersuaded by Liquids Shippers'
assertion that pipelines were uncertain as to the Commission's
prevailing oil pipeline ROE methodology when they submitted their 2019
Form No. 6 filings in April 2020. Because the Commission had not yet
revised its longstanding policy of determining ROE using only the DCF
model at the time of those filings, the Form No. 6 instructions
requiring pipelines to complete page 700 in accordance with the then-
applicable Opinion No. 154-B methodology provided pipelines with
adequate notice of the requirement to determine their 2019 ROEs using
only the DCF model.\251\ We again conclude that the fact that two
pipelines (out of 254 pipelines that submitted Form No. 6 filings in
2020) later indicated that they did not adhere to the page 700
instructions in developing their ROEs does not present sufficient
evidence of widespread uncertainty regarding the Commission's
applicable policy that would undermine our confidence in the
reliability of the data set.\252\
---------------------------------------------------------------------------
\251\ December 2020 Order, 173 FERC ] 61,245 at P 48. As
discussed above, we find that the Commission's five-year review
process reduces the incentive or ability for pipelines to report
inaccurate data in an effort to skew the index calculation. See
supra P 82.
\252\ December 2020 Order, 173 FERC ] 61,245 at P 48.
---------------------------------------------------------------------------
87. Finally, Liquids Shippers' arguments on rehearing do not refute
the Commission's finding that replacing reported page 700 ROEs with
standardized ROEs would improperly complicate and prolong the five-year
review process in violation of EPAct 1992's mandate for simplified and
streamlined ratemaking.\253\ We are
[[Page 4494]]
unpersuaded by Liquids Shippers' claim that determining a standardized
ROE may not require the ``same rigor'' as determining an ROE in a
litigated cost-of-service rate proceeding. Liquids Shippers do not
describe what this less rigorous determination would resemble or how it
would differ from the ROE analysis the Commission performs using the
Opinion No. 154-B methodology. In addition, the fact that Trial Staff
regularly performs ROE analyses in litigated rate proceedings has no
bearing on whether it would be appropriate or feasible for the
Commission to do so for every pipeline whose page 700 data is examined
in the five-year review. Accordingly, Liquids Shippers do not
persuasively rebut the Commission's finding that determining a just and
reasonable ROE on an industry-wide basis would be a complex and fact-
intensive inquiry that could require considerable time and resources to
resolve.\254\ Moreover, we reject as irrelevant Liquids Shippers'
comparison of their standardized ROE proposal to Pipelines' proposal to
adjust the data set to remove the effects of the Income Tax Policy
Change, as we decline on rehearing to adopt Pipelines' proposed
adjustments.
---------------------------------------------------------------------------
\253\ Id. P 50 (citing NOI, 171 FERC ] 61,239 at P 11).
\254\ Id.
---------------------------------------------------------------------------
E. CAPP's Argument Regarding Negotiated Rate Contracts
88. CAPP argued in its comments that the Commission should quantify
the effects of negotiated rate contracts upon oil pipelines' reported
costs of equity. CAPP stated that these contracts typically contain
provisions such as shipper volume commitments that serve to transfer
risk from the pipeline to its shippers and that failing to reflect
pipelines' reduced risks in the page 700 data could improperly inflate
the index calculation. CAPP recognized that the Commission found in the
2015 Index Review that the page 700 total cost of service would reflect
any reduction in the pipeline's risk. However, CAPP argued that the
page 700 data in this proceeding does not indicate whether this
occurred over the 2014-2019 period. To provide increased transparency,
CAPP requested that the Commission require pipelines to provide
shippers with the workpapers underlying their page 700
calculations.\255\
---------------------------------------------------------------------------
\255\ CAPP Initial Comments at 2-5.
---------------------------------------------------------------------------
1. December 2020 Order
89. The December 2020 Order rejected CAPP's arguments as
unpersuasive. First, the Commission reiterated its conclusion in the
2015 Index Review that ``[t]o the extent that volume commitments in
[negotiated rate] agreements have reduced the pipeline's risk, the page
700 total costs of service would reflect this reduction in the embedded
costs of equity and costs of debt.'' \256\ The Commission explained
that these effects would tend to reduce pipeline costs and thereby
produce a lower index level, rendering CAPP's concerns unfounded. The
Commission further determined that CAPP provided no basis for the
Commission to conclude that the reported page 700 data fails to
adequately account for pipelines' risks in measuring changes in cost of
equity and cost of debt.\257\ Second, the Commission found that CAPP
had not supported its request for the Commission to review individual
pipeline data to evaluate the effects of contract rates on the
pipeline's risk.\258\ In addition, the Commission found that such a
review would exceed the scope of the five-year review and conflict with
streamlined and simplified ratemaking.\259\
---------------------------------------------------------------------------
\256\ December 2020 Order, 173 FERC ] 61,245 at P 52 (quoting
2015 Index Review, 153 FERC ] 61,312 at P 28).
\257\ Id.
\258\ Id. P 53.
\259\ Id.
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2. Rehearing Request
90. CAPP challenges the Commission's determination in the December
2020 Order in several respects. First, CAPP asserts that the Commission
cited no evidence to support its conclusion that reduced pipeline risks
resulting from negotiated rate contracts are embedded in the reported
page 700 data.\260\ CAPP argues that the December 2020 Order
acknowledged that differences in risk can produce variations in ROE but
nonetheless declined to investigate whether pipelines' reported page
700 ROEs appropriately reflect their risks.\261\ CAPP further states
that without reviewing the page 700 workpapers, the Commission cannot
evaluate pipelines' reported capital structures, identify the proxy
group companies used to determine each pipeline's page 700 ROE, or
evaluate the placement of the pipeline's ROE within the DCF
results.\262\ CAPP claims that it would not be complicated for the
Commission to verify whether the reported ROEs accurately reflect
reduced pipeline risks. Thus, CAPP states that its request to require
pipelines to provide their page 700 workpapers is modest.\263\
---------------------------------------------------------------------------
\260\ CAPP Request for Rehearing at 24-25.
\261\ Id. at 21. CAPP argues that the Commission has recognized
in other proceedings that negotiated rate contracts with shipper
volume commitments have become more prevalent in the oil pipeline
industry and serve to transfer risk from the pipeline to its
shippers and reduce the pipeline's cost of equity. Id. at 23-24
(quoting Enbridge Pipelines (S. Lights) LLC, 144 FERC ] 61,044, at P
71 n.209 (2013) (``[T]here is no disagreement that most of the
business and financial risks of the Southern Lights Pipeline have
been transferred to the Committed Shippers through the TSAs during
their term.'')). Thus, CAPP argues that the impacts of negotiated
rate contracts upon pipeline risks are a documented reality and
warrant investigation in the five-year review. Id. at 26.
\262\ Id. at 22-23.
\263\ Id. at 24-25.
---------------------------------------------------------------------------
91. Second, CAPP asserts that the range of the reported page 700
ROEs during the 2014-2019 period exceeds the range of a reasonable DCF
analysis. CAPP maintains that this disparity in reported ROEs provides
a sufficient basis for the Commission to investigate how pipelines
determined these figures.\264\ In addition, CAPP argues that the fact
that ROEs may vary due to differences in proxy group composition and
relative risk supports its proposal.\265\ Regarding proxy group
composition, CAPP argues that if a pipeline charges contract rates, its
page 700 ROE would only reflect the pipeline's reduced risk if the
proxy group it uses to perform the DCF analysis includes pipelines that
also charge contract rates.\266\ Because page 700 does not disclose the
proxy group that the pipeline used to determine its reported ROE, CAPP
argues that the Commission should examine the page 700 workpapers to
determine whether pipelines construed their DCF proxy groups in
accordance with Commission policy. Along similar lines, CAPP states
that if the Commission believes that variation in reported ROEs results
from differences in relative risk, the Commission should investigate
how pipelines' risk levels are affecting their page 700 data.\267\ CAPP
states, moreover, that credit ratings of oil pipelines do not reflect a
wide divergence of risks.\268\
---------------------------------------------------------------------------
\264\ Id. at 28.
\265\ Id. at 31.
\266\ Id. at 31-32.
\267\ Id.
\268\ Id. at 32.
---------------------------------------------------------------------------
92. Third, CAPP objects to the Commission's finding that CAPP
provided no basis for determining that the reported page 700 data fails
to adequately account for pipelines' risks. CAPP states that because
page 700 does not include information necessary to evaluate the
pipeline's ROE analysis, CAPP cannot make this showing without access
to pipelines' page 700 workpapers.\269\ CAPP states that to the extent
the December 2020 Order suggests that shippers should attempt to
[[Page 4495]]
perform DCF analyses of pipelines known to charge contract rates and
compare the results with those pipelines' reported ROEs, it would be
more efficient for the Commission to investigate the reported ROEs as
part of the five-year review.\270\
---------------------------------------------------------------------------
\269\ Id. at 21-22.
\270\ Id. at 28.
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93. Finally, CAPP challenges the Commission's conclusion that
investigating pipelines' page 700 ROEs would conflict with Commission
precedent declining to scrutinize the inputs underlying individual
pipelines' page 700 data.\271\ CAPP contends that this argument is
inconsistent with the Commission's decision to adjust MLP pipelines'
reported page 700 data to remove the effects of the Income Tax Policy
Change.\272\
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\271\ Id. at 33 (citing December 2020 Order, 173 FERC ] 61,245
at P 50).
\272\ Id. at 30, 33.
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3. Commission Determination
94. We deny rehearing. First, CAPP provides no basis for altering
the Commission's conclusion that ``[t]o the extent that volume
commitments in [negotiated rate] agreements have reduced the pipeline's
risk, the page 700 total cost of service would reflect this reduction
in the embedded costs of equity and costs of debt.'' \273\ Although
CAPP emphasizes that variation in the page 700 ROEs indicates that
``something may be amiss'' with this data,\274\ we again conclude that
such variation may result from legitimate factors such as differences
in proxy group composition and relative risk and does not demonstrate
that the reported data is inaccurate or inconsistent with Commission
policy.\275\ Accordingly, we continue to find that CAPP has not
substantiated its claim that the reported ROEs fail to adequately
account for pipelines' risks in measuring changes in costs of equity
and costs of debt.\276\
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\273\ December 2020 Order, 173 FERC ] 61,245 at P 52 (quoting
2015 Index Review, 153 FERC ] 61,312 at P 28). Reflecting these
reduced risks would tend to reduce pipeline costs and thereby
produce a lower index level, rendering CAPP's concerns unfounded.
Id.
\274\ CAPP Request for Rehearing at 28.
\275\ As discussed above, to the extent a particular pipeline's
per barrel-mile equity cost changes departed substantially from
industry norms, that pipeline would not be among the middle 50% used
to calculate the index level. Moreover, even if a pipeline with
outlying equity cost changes is included in the middle 50%, that
pipeline's cost changes would likely not significantly affect the
central tendency of that 80-pipeline sample. Finally, as discussed
above, it is not clear from the record that the level of a
pipeline's page 700 ROE correlates with that pipeline's annualized
cost changes such that variations in ROE would materially affect the
index calculation. See Shehadeh Reply Decl. at 18-19.
\276\ December 2020 Order, 173 FERC ] 61,245 at P 52.
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95. Second, in any case, CAPP has not rebutted the Commission's
conclusion that reviewing individual pipeline data would exceed the
scope of the five-year review and conflict with EPAct 1992's mandates
for simplified and streamlined ratemaking. The Kahn Methodology
measures cost changes on a generic, industry-wide basis. Thus, in
calculating the index level, the Commission does not scrutinize the
inputs underlying individual pipelines' page 700 data.\277\
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\277\ Id. P 53.
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96. Third, we continue to find that CAPP's request to review
individual pipeline data to evaluate the effects of contract rates upon
the pipeline's risk is unsupported. As CAPP acknowledges,\278\ the
Commission has declined to require pipelines to provide workpapers to
shippers \279\ and explained that the dissemination of this data would
impose considerable industry-wide costs upon pipelines \280\ and raise
potential confidentiality concerns.\281\ CAPP's arguments do not
address these issues. Accordingly, we continue to find that CAPP has
not provided a basis for the Commission to depart from existing policy
to require pipelines to provide page 700 workpapers in the five-year
review.\282\
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\278\ CAPP Initial Comments at 5.
\279\ Revisions to Indexing Policies and Page 700 of FERC Form
No. 6, 170 FERC ] 61,134, at P 6 (2020).
\280\ Id.
\281\ These potential confidentiality concerns relate to shipper
information protected by section 15(13) of the Interstate Commerce
Act and the pipeline's competitive business information. Revisions
to Indexing Policies and Page 700 of FERC Form No. 6, 157 FERC ]
61,047, at P 49 (2016).
\282\ As discussed above, the proponent of a change in
Commission policy bears the burden of justifying that change. See
supra note 129.
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97. Fourth, we are not persuaded that an intensive review of
individual pipeline page 700 data would be appropriate even if the
reported ROEs for 2014 and 2019 do not fully reflect reductions in risk
resulting from contract rates. As an initial matter, the Commission
calculates the index level based upon pipeline cost changes over the
prior five-year period, rather than pipeline costs at a particular
time. Thus, to the extent that a pipeline reported an ROE that does not
reflect the risks it faces charging contract rates in both 2014 and
2019, those errors would tend to cancel out without distorting the
measurement of industry-wide cost changes. More broadly, CAPP has not
demonstrated why the index should reflect the lower risks associated
with contract rates. The five-year review calculates the index level
used to adjust non-contract rates,\283\ and under CAPP's own argument,
pipelines with non-contract rates face higher risks than pipelines with
contract rates. Thus, we are unpersuaded that the page 700 data used to
calculate the index level should reflect the lower risks associated
with contract rates.\284\
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\283\ Negotiated committed shipper contracts only incorporate
indexing when both the pipeline and the committed shippers accept
such terms. 2015 Index Review, 153 FERC ] 61,312 at P 49 n.94.
\284\ To the extent that the index should be adjusted in light
of the reduced risks associated with contract rates, CAPP's argument
would support adopting an adder to increase the ROE of pipelines
that charge contract rates to reflect the higher risks faced by
pipelines with non-contract rates.
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F. Appropriate Source of 2014 Page 700 Data
1. Background
98. Page 700 includes columns for reporting both current-year and
previous-year summary cost-of-service data. Thus, for example,
pipelines reported cost-of-service data for 2014 in their page 700s
submitted in April 2015 (in the current-year column) and in April 2016
(in the previous-year column). The more recently filed data reported in
the previous-year column often updates the data that was filed in the
prior year. Accordingly, 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.\285\
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\285\ See Five-Year Review of Oil Pipeline Pricing Index, 114
FERC ] 61,293, at P 40 (2006) (2005 Index Review) (finding that a
witness was ``correct to use the data contained in [a] resubmitted
FERC Form No. 6'').
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2. Requests for Rehearing and Clarification
99. Pipelines assert that the December 2020 Order errs by relying
upon outdated page 700 data for 2014.\286\ Pipelines state that
although 38 pipelines filed updated 2014 page 700 data in April 2016,
the December 2020 Order erroneously relied upon those pipelines'
originally filed 2014 data as reported in April 2015.\287\ Pipelines
state that because the December 2020 Order did not discuss this
departure from past practice, the use of these pipelines' originally
filed data appears
[[Page 4496]]
to have been inadvertent.\288\ Thus, Pipelines request rehearing and/or
clarification to correct this apparent departure from past
practice.\289\
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\286\ AOPL Request for Rehearing at 2-3; Designated Carriers
Request for Rehearing at 7-8, 11.
\287\ AOPL Request for Rehearing at 2-3; Designated Carriers
Request for Rehearing at 4, 7; see also AOPL Request for Rehearing,
Shehadeh Aff. at attach. A (listing 38 pipelines that filed updated
page 700 data for 2014).
\288\ AOPL Request for Rehearing at 3; Designated Carriers
Request for Rehearing at 7-9.
\289\ AOPL Request for Rehearing at 1-3. Designated Carriers
request that the Commission clarify that it intended to calculate
the index level using updated page 700 data for 2014 as reported in
the previous-year column in page 700 filings submitted in April
2016. Designated Carriers Request for Rehearing at 1-2, 4-5. If the
Commission denies this request for clarification, Designated
Carriers request rehearing of the December 2020 Order to the extent
that it does not rely upon this updated data. Id.
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3. Commission Determination
100. We agree with Pipelines' arguments and grant rehearing to rely
upon updated page 700 data for 2014, as reported in the previous-year
column of page 700 filings submitted in April 2016. This adjustment
ensures that the index calculation reflects the most current page 700
data for 2014 and accords with the Commission's prior practice of
relying upon updated data reported in the previous-year column of the
following year's Form No. 6, where available.\290\ Accordingly, we
grant Pipelines' requests for rehearing and clarify that where a
pipeline updates its page 700 data for the first year of the index
review period in the previous-year column of the following year's Form
No. 6, it is the Commission's policy to calculate the index level using
that updated data.
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\290\ E.g., NOI, 171 FERC ] 61,239 at Workpapers, COSsort Tab,
Column C; 2015 Index Review, 153 FERC ] 61,312 at Workpapers,
COSdata Tab (noting that ``[w]here available, data for given year is
taken from the `Previous Year Amount' column of the following year's
Form 6 (e.g., 2009 data is from column (c) of the 2010 Form 6'');
2005 Index Review, 114 FERC ] 61,293 at P 40.
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G. Application of Adjustments to 2014 Page 700 Data
1. Request for Clarification or Rehearing
101. Designated Carriers assert that in adopting their proposal to
eliminate the effects of the Income Tax Policy Change from the index
calculation, the December 2020 Order failed to adjust the 2014 page 700
data for two MLP pipelines, MPLX Ozark Pipe Line LLC and Lambda Energy
Gathering, LLC.\291\ Designated Carriers state that neither of these
pipelines filed Form No. 6 in 2014 because they formed as a result of
mergers or acquisitions of MLP predecessor entities that occurred
during the 2014-2019 period.\292\ However, because these pipelines' MLP
predecessor entities filed page 700 data for 2014, Designated Carriers
assert that the Commission should have adjusted the predecessor
entities' 2014 page 700 data to remove the effects of the Income Tax
Policy Change.\293\ Designated Carriers state that the December 2020
Order does not explain why the Commission did not adjust the 2014 page
700 data for the predecessor entities as it did for all other pipelines
that were MLPs in 2014.\294\
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\291\ Designated Carriers Request for Rehearing at 18-19.
\292\ Id. at 19.
\293\ Id.
\294\ Id. at 20-21.
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102. Thus, Designated Carriers request that the Commission clarify
that it intended to adjust the 2014 page 700 data of the predecessor
entities of MPLX Ozark Pipe Line LLC and Lambda Energy Gathering, LLC,
to eliminate the 2014 income tax allowance and adjust the 2014 return
on rate base to reflect the removal of ADIT.\295\ If the Commission
denies this request for clarification, Designated Carriers request
rehearing of the December 2020 Order to the extent that it fails to
adopt the foregoing adjustments.\296\
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\295\ Id. at 4-5.
\296\ Id. at 12-14, 18-21.
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2. Commission Determination
103. We deny Designated Carriers' request for clarification or
rehearing. As discussed above, we grant rehearing of the December 2020
Order to incorporate the effects of the Income Tax Policy Change in the
index calculation using unadjusted page 700 data. Given that we do not
adopt Pipelines' proposed adjustments to the data set to remove the
effects of the Income Tax Policy Change, we deny Designated Carriers'
request to apply those adjustments to the predecessor entities of MPLX
Ozark Pipe Line LLC and Lambda Energy Gathering, LLC.
III. 2021-2026 Oil Pipeline Index
104. Based upon the foregoing, we grant rehearing of the December
2020 Order, in part, deny rehearing, in part, and establish an index
level of PPI-FG-0.21% for the five-year period beginning July 1, 2021.
IV. Interim Rate Change Filings
105. Consistent with the Commission's action in this order, oil
pipelines must recompute their ceiling levels and rates to be effective
March 1, 2022. Specifically, pipelines must revise the ceiling levels
that became effective July 1, 2021, to reflect an index level of PPI-
FG-0.21% instead of the index level adopted in the December 2020
Order.\297\ Any oil pipeline with a filed rate that exceeds its
recomputed ceiling level must file to reduce that rate to bring it into
compliance with the pipeline's recomputed ceiling level as required by
Sec. 342.3(e) of the Commission's regulations.\298\ We direct such
pipelines to submit these filings to be effective March 1, 2022.\299\
To the extent that pipelines are unable to submit these filings 30 days
in advance of the March 1, 2022 effective date, pipelines may seek
waiver of the 30-day notice requirement.\300\
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\297\ Concurrently with this order, the Commission is issuing a
Notice of Annual Change in the Producer Price Index for Finished
Goods in Docket No. RM93-11-000. Revisions to Oil Pipeline
Regulations Pursuant to the Energy Policy Act of 1992, 178 FERC ]
61,046 (2022) (Notice). As described in the Notice, oil pipelines
must recompute their ceiling levels for July 1, 2021 through June
30, 2022 by multiplying their ceiling levels for July 1, 2020
through June 30, 2021 by 0.984288. Id.
\298\ 18 CFR 342.3(e). The filing requirements of 18 CFR
342.3(e) are included in the FERC-550 information collection and
approved by the Office of Management and Budget (under OMB Control
No. 1902-0089).
\299\ Oil pipelines that filed to revise their rates effective
on or after July 1, 2021 using one of the Commission's alternative
ratemaking methodologies are not required to recompute their ceiling
levels or make an interim rate change filing. See id. 342.3(d)(5)
(``When an initial rate, or rate changed by a method other than
indexing, takes effect during the index year, such rate will
constitute the applicable ceiling level for that index year.'').
\300\ Id. 341.14.
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The Commission Orders
(A) The requests for clarification or rehearing of the December
2020 Order are granted in part and denied in part, as discussed in the
body of this order.
(B) Oil pipelines are directed to recompute their ceiling levels
for July 1, 2021 through June 30, 2022 based upon an index level of
PPI-FG-0.21%, as discussed in the body of this order.
(C) Oil pipelines with filed rates that exceed their recomputed
ceiling levels must file to reduce the rate to bring it into compliance
with the recomputed ceiling level to be effective March 1, 2022, as
discussed in the body of this order.
By the Commission. Commissioner Danly is concurring in part and
dissenting in part with a separate statement attached.
Commissioner Christie is concurring in part and dissenting in
part with a separate statement attached.
[[Page 4497]]
Issued: January 20, 2022.
Kimberly D. Bose,
Secretary.
Department of Energy
Federal Energy Regulatory Commission
Five-Year Review of the Oil Pipeline Index
Docket No. RM20-14-001
(Issued January 20, 2022)
DANLY, Commissioner, Concurring in Part and Dissenting in Part
1. Today's order grants rehearing of the December 2020 Order,\1\ in
part, denies rehearing, in part, and establishes an index level of PPI-
FG-0.21%. My separate statement focuses only on the aspects of today's
order that depart from the Commission's December 2020 Order.\2\ I
dissent from the Commission's decision \3\ to grant rehearing and
depart from the December 2020 Order by (1) trimming the data set to the
middle 50% of cost changes, as opposed to the middle 80%; 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 balances from their page 700 summary costs of service
(Income Tax Policy Change).\4\ I concur in the Commission's decision to
grant rehearing for the purpose of correcting the index calculation
based upon updated page 700 cost data for 2014.\5\
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\1\ Five-Year Rev. of the Oil Pipeline Index, 173 FERC ] 61,245
(2020) (December 2020 Order).
\2\ This does not mean that I agree with all of the reasoning
provided for the aspects of rehearing that are denied. Therefore, I
concur in the result for the parts of the Commission's decision that
deny rehearing.
\3\ Five-Year Rev. of the Oil Pipeline Index, 178 FERC ] 61,023,
at P 2 (2022) (Oil Index Rehearing Order).
\4\ Inquiry Regarding the Commission's Policy for Recovery of
Income Tax Costs, 162 FERC ] 61,227, at P 8 (2018 Income Tax Policy
Statement), reh'g denied, 164 FERC ] 61,030, at P 13 (2018), request
for clarification dismissed, 168 FERC ] 61,136 (2019); petitions for
review dismissed sub nom. Enable Miss. River Transmission, LLC v.
FERC, 820 F. App'x 8 (2020).
\5\ Oil Index Rehearing Order, 178 FERC ] 61,023 at P 2.
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2. We must ask a threshold question every time we make a decision:
Does the Commission have the legal authority to do what it is doing? In
some cases, the Commission, acting within its authority, may take any
of a number of approaches so long as it adequately explains its
decision under the Administrative Procedure Act. In such instances, a
robust record may provide substantial evidence for several legitimate
approaches and the Commission's ultimate decision then turns on a
collective judgment call. This is such a case.
3. As an initial matter, I agree that the Commission is obligated
to ensure that the pipelines charge just and reasonable rates and I
remain convinced that the December 2020 Order's decisions to trim the
data set to the middle 80% and not to incorporate the effects of the
Income Tax Policy Change would have resulted in just and reasonable
indexed rates. In my view, based on the ample record before us, the
Commission could have sustained that decision in both respects. Nothing
in parties' arguments on rehearing, or in the record compel the
Commission to find otherwise.
4. First, I dissent from the Commission's decision to trim the data
set to the middle 50% of cost changes \6\ and disagree with the
Commission's conclusion that ``the record in this proceeding does not
justify departing from the Commission's established practice of
calculating the index level based solely upon the middle 50%.'' \7\ I
would have sustained the Commission's decision to trim the data set to
the middle 80% for the reasons articulated in the December 2020 Order:
It is consistent with the purpose of the statute, when possible, to use
a ``broader sample of data [in order to] enhance the Commission's
calculation of the central tendency of industry cost experience.'' \8\
I simply do not agree with the Commission's assertion that, in order to
ensure just and reasonable rates, ``it remains necessary to use the
middle 50% to avoid including outlying data.'' \9\
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\6\ See id. PP 43-58.
\7\ See id. P 43.
\8\ December 2020 Order, 173 FERC ] 61,245 at P 26 (explaining
that the Commission's use of ``the middle 50% would exclude 48
pipelines from the Commission's review of industry-wide cost changes
over the 2014-2019 period'') (citation omitted).
\9\ Oil Index Rehearing Order, 178 FERC ] 61,023 at P 57
(emphasis added).
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5. Second, I dissent from the Commission's decision to incorporate
the effects of the Income Tax Policy Change. I would have sustained the
Commission's decision in the December 2020 Order to adopt Designated
Carriers' proposed adjustment to remove the effects of the Income Tax
Policy Change from the page 700 data used to calculate the index. I
acknowledge that the Commission previously stated that it ``will
incorporate the effects of this Revised Policy on industry-wide oil
pipeline costs in the 2020 five-year review of the oil pipeline index
level.'' \10\ A prior Commission, however, cannot bind a future
Commission's decisions.\11\ Further, I disagree with the Commission's
repeated statements in today's order that the Commission's decision to
incorporate the effects of the Income Tax Policy Change in the index is
required to ensure just and reasonable rates.\12\ In my view, the
reasons provided in the Commission's December 2020 Order remain
persuasive, including the following: (1) ``The purpose of indexing is
to allow the indexed rate to keep pace with industry-wide cost changes,
not to reflect alterations to the Commission's Opinion No. 154-B cost-
of-service methodology;'' \13\ (2) ``[t]he index allows for incremental
rate adjustments to enable pipelines to recover normal cost changes in
future years;'' \14\ (3) the index ``is not a true-up designed to
remedy prior over-or under-recoveries in pre-existing rates resulting
from cost-of-service policy changes during the prior five-year
period;'' \15\ and (4) it remains unclear ``that the double recovery of
MLP pipelines' income tax costs was ever incorporated into the index.''
\16\
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\10\ 2018 Income Tax Policy Statement, 162 FERC ] 61,227 at P 8.
\11\ My colleagues acknowledge that the ``2018 Income Tax Policy
Statement provided non-binding guidance regarding the Commission's
future intentions.'' Order Index Rehearing Order, 178 FERC ] 61,023
at P 21 n.55.
\12\ See id. P 17 (``The index must reflect the Income Tax
Policy Change in order to produce just and reasonable oil pipeline
rates.''); id. (``Because indexing is the Commission's primary oil
pipeline ratemaking methodology and because indexed oil pipeline
rates must be just and reasonable, we conclude that the index
calculation must now address the Income Tax Policy Change.''); id. P
20 (``Thus, as the Commission's Opinion No. 154-B methodology
evolves, oil pipeline rates adjusted via indexing must reflect those
changes in order to remain just and reasonable.'').
\13\ December 2020 Order, 173 FERC ] 61,245 at P 17 (footnotes
omitted).
\14\ Id. P 18.
\15\ Id.
\16\ Id. P 19.
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6. Third, I concur with the Commission's decision to grant
rehearing to correct the index calculation such that it relies on
updated page 700 cost data for 2014 and with the Commission's
clarification that ``where a pipeline updates its page 700 data for the
first year of the index review period in the previous-year column of
the following year's Form No. 6, it is the Commission's policy to
calculate the index level using that updated data.'' \17\
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\17\ See Oil Index Rehearing Order, 178 FERC ] 61,023 at P 101.
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7. While it would have been better for the Commission to reaffirm
the December 2020 Order as discussed above, it is necessary for me to
acknowledge that the Commission is acting in accordance with the law
and the majority's decision to reverse parts
[[Page 4498]]
of the December 2020 Order will likely withstand judicial review. I am
surprised, however, to see the majority's seeming vitriol over what
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amounts to a judgment call.
For these reasons, I respectfully concur in part and dissent in
part.
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James P. Danly,
Commissioner.
Department of Energy
Federal Energy Regulatory Commission
Five-Year Review of the Oil Pipeline Index
Docket No. RM20-14-001
(Issued January 20, 2022)
CHRISTIE, Commissioner, Concurring in Part and Dissenting in Part
1. I concur with most of today's order,\1\ most significantly the
restoration of the use of the middle 50% of the data set for
determining the index. As today's order notes, the December 2020
Order's move to the middle 80% was an unjustified departure from the
Commission's settled practice of relying on the middle 50%.\2\ Because
the 50% range represents the established practice over the past decade,
restoring it is more consistent with the principle of regulatory
certainty than the December 2020 Order's reliance on the 80% range
without sufficient justification.
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\1\ Five-Year Review of the Oil Pipeline Index, 178 FERC ]
61,023 (2022) (Order).
\2\ Id. P 37 & n.9.
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2. Consistent with this principle of regulatory certainty, however,
I dissent from the portion of today's order that reverses the
determination in the December 2020 order declining to incorporate the
effects of the Income Tax Policy Change into the 2020 index
calculation. In what it described as ``an issue of first impression,''
the Commission, in that order, adopted a proposal submitted by
Designated Carriers in response to a previously issued NOPR.\3\ The
December 2020 Order explained the Commission's reasoning.\4\
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\3\ December 2020 Order, 173 FERC ] 61,245 at P 16.
\4\ Id. PP 16-20.
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3. The Income Tax Policy Change presented a unique factual
circumstance that had yet to be considered by the Commission's indexing
policies. It thus constitutes a ``one-off.'' It fell to a differently
constituted Commission to determine whether, and if so how, the index
calculation must be adjusted to address the Income Tax Policy Change.
That Commission made its decision. I was not on the Commission in
December 2020. I
[…truncated; see source link]Indexed from Federal Register on January 28, 2022.
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