Rule2022-23343
Standard Applied to Complaints Against Oil Pipeline Index Rate Changes
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
October 28, 2022
Issuing agencies
Energy DepartmentFederal Energy Regulatory Commission
Abstract
In this Policy Statement, the Federal Energy Regulatory Commission (Commission) provides guidance regarding how it will evaluate complaints against oil pipeline index rate increases. Specifically, the Commission replaces the Substantially Exacerbate Test with the Percentage Comparison Test as the preliminary screen for determining whether to investigate complaints against index rate increases.
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 208 (Friday, October 28, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 208 (Friday, October 28, 2022)]
[Rules and Regulations]
[Pages 65163-65175]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-23343]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 343
[Docket No. AD20-10-000]
Standard Applied to Complaints Against Oil Pipeline Index Rate
Changes
AGENCY: Federal Energy Regulatory Commission.
ACTION: Policy statement.
-----------------------------------------------------------------------
SUMMARY: In this Policy Statement, the Federal Energy Regulatory
Commission
[[Page 65164]]
(Commission) provides guidance regarding how it will evaluate
complaints against oil pipeline index rate increases. Specifically, the
Commission replaces the Substantially Exacerbate Test with the
Percentage Comparison Test as the preliminary screen for determining
whether to investigate complaints against index rate increases.
DATES: October 28, 2022.
FOR FURTHER INFORMATION CONTACT:
Evan Steiner (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street NE, Washington,
DC 20426, (202) 502-8792, <a href="/cdn-cgi/l/email-protection#541122353a7a0720313d3a312614323126377a333b22"><span class="__cf_email__" data-cfemail="c782b1a6a9e994b3a2aea9a2b587a1a2b5a4e9a0a8b1">[email protected]</span></a>
Monil Patel (Technical Information), Office of Energy Market
Regulation, Federal Energy Regulatory Commission, 888 First Street NE,
Washington, DC 20426, (202) 502-8296, <a href="/cdn-cgi/l/email-protection#034e6c6d6a6f2d536277666f43656671602d646c75"><span class="__cf_email__" data-cfemail="7934161710155729180d1c15391f1c0b1a571e160f">[email protected]</span></a>
SUPPLEMENTARY INFORMATION:
1. On March 25, 2020, the Commission issued a Notice of Inquiry \1\
seeking comments regarding its proposal to replace the Substantially
Exacerbate Test as the preliminary screen for determining whether to
investigate complaints against index rate increases for oil pipelines
and to instead evaluate such complaints using the Percentage Comparison
Test, which historically has applied to protests of index rate
increases. The Commission also sought comment on whether it should
apply the Percentage Comparison Test's existing 10% threshold to
complaints.\2\
---------------------------------------------------------------------------
\1\ Standard Applied to Complaints Against Oil Pipeline Index
Rate Changes, 85 FR 21420 (Apr. 17, 2020), 170 FERC ] 61,252 (2020)
(NOI).
\2\ Id. P 14.
---------------------------------------------------------------------------
2. As discussed below, we provide guidance regarding how the
Commission will evaluate complaints against index rate increases.\3\
Specifically, we adopt the proposal to apply the Percentage Comparison
Test with its existing 10% threshold as the preliminary screen in both
protest and complaint challenges to index rate increases.
---------------------------------------------------------------------------
\3\ This policy statement does not establish a binding rule or
precedent but instead provides guidance by notifying entities of the
course of action the Commission intends to follow in future
adjudications. See Pac. Gas & Elec. Co. v. FPC, 506 F.2d 33, 38
(D.C. Cir. 1974).
---------------------------------------------------------------------------
I. Background
A. The Indexing Methodology
3. The Commission regulates oil pipeline rates pursuant to the
Interstate Commerce Act's (ICA) just and reasonable standard.\4\ In
accordance with the Energy Policy Act of 1992 (EPAct 1992),\5\ the
Commission adopted indexing to provide a simplified and generally
applicable ratemaking methodology for oil pipelines and create
streamlined procedures related to oil pipeline rates.\6\ Indexing
allows oil pipelines to change their tariff rates so long as those
rates remain at or below applicable ceiling levels, which change every
July 1 based upon an index that tracks industry-wide cost changes. When
the Commission adopted indexing, it also added page 700 to FERC Form
No. 6 to provide cost, revenue, and throughput information so that the
Commission and the industry can monitor pipelines' indexed rates.\7\
---------------------------------------------------------------------------
\4\ 49 U.S.C. app. 1(5).
\5\ Public Law 102-486 1801(b), 106 Stat. 3010 (Oct. 24, 1992).
\6\ See Revisions to Oil Pipeline Reguls. Pursuant to Energy
Pol'y Act of 1992, Order No. 561, 58 FR 58753 (Nov. 4, 1993), FERC
Stats. & Regs. ] 30,985 (1993) (cross-referenced at 65 FERC ]
61,109), order on reh'g, Order No. 561-A, 59 FR 40243 (Aug. 8,
1994), 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 v. FERC).
\7\ Cost-of-Service Reporting & Filing Requirements for Oil
Pipelines, Order No. 571, 59 FR 59137 (Nov. 16, 1994), FERC Stats. &
Regs. ] 31,006 (cross-referenced at 69 FERC ] 61,102), order on
reh'g and clarification, Order No. 571-A, 60 FR 356 (Jan. 4, 1995),
FERC Stats. & Regs. ] 31,012 (1994) (cross-referenced at 69 FERC ]
61,411), aff'd sub nom. AOPL v. FERC, 83 F.3d 1424 (D.C. Cir. 1996);
see also Revisions to & Elec. Filing of the FERC Form No. 6 &
Related Unif. Sys. of Accts., Order No. 620, 65 FR 81335 (Dec. 26,
2000), FERC Stats. & Regs. ] 31,115 (2000) (cross-referenced at 93
FERC ] 61,262), reh'g denied, Order No. 620-A, 94 FERC ] 61,130
(2001); Revisions to Page 700 of FERC Form No. 6, Order No. 783, 78
FR 44424 (July 24, 2013), 144 FERC ] 61,049, at PP 29-40 (2013),
reh'g denied, Order No. 783-A, 148 FERC ] 61,235 (2014). All
jurisdictional oil pipelines are required to file page 700,
including pipelines exempt from filing the full Form No. 6. 18 CFR
357.2(a)(2)-(3) (2021).
---------------------------------------------------------------------------
4. In adopting indexing, the Commission established a procedure to
allow shippers to challenge rate increases that, while in compliance
with the applicable ceiling, are substantially in excess of the actual
cost changes that the pipeline incurred. Section 343.2(c)(1) of the
Commission's regulations provides that a protest or complaint against
an index rate increase must allege ``reasonable grounds'' that the
index rate increase is ``so substantially in excess of the actual cost
increases incurred by the carrier that the rate is unjust and
unreasonable.'' \8\ The Commission reviews protests and complaints
against annual index rate increases by (1) applying a preliminary
screen based on data from the pipeline's page 700 and (2) if the
preliminary screen is satisfied, investigating the rate increase at a
hearing.\9\
---------------------------------------------------------------------------
\8\ 18 CFR 343.2(c)(1).
\9\ Such challenges to annual index rate increases are distinct
from complaints on a cost-of-service basis against a pipeline's
total rate. See BP W. Coast Prods. LLC v. SFPP, L.P., 121 FERC ]
61,243, at PP 8-10 (2007) (distinguishing complaints against annual
index rate increases from complaints against the pipeline's base
rate).
---------------------------------------------------------------------------
5. Under the Commission's current policy, the preliminary screen
differs for protests and complaints. When a proposed index rate
increase is protested, the Commission applies the Percentage Comparison
Test and will investigate the protested increase if there is a more
than 10 percentage-point differential between (1) the index rate
increase and (2) the change in the prior two years' total cost-of-
service data reported on page 700, line 9.\10\ By contrast, when a
complaint against an index rate increase is filed, the Commission
considers ``a wider range of factors beyond the Percentage Comparison
Test,'' including the Substantially Exacerbate Test.\11\ Under the
Substantially Exacerbate Test, the Commission will investigate a
complaint against an index rate increase if the complaint shows that
(1) the pipeline is substantially over-recovering its cost of service
(first prong) and (2) the index rate increase so exceeds the actual
increase in the pipeline's costs that the resulting rate increase would
substantially exacerbate the pipeline's over-recovery (second
prong).\12\
---------------------------------------------------------------------------
\10\ E.g., SFPP, L.P., 168 FERC ] 61,043, at P 4 (2019) (citing
Calnev Pipe Line, L.L.C., 130 FERC ] 61,082, at PP 10-11 (2010));
see also Appendix (depicting Percentage Comparison Test formula).
The Commission has explained that there is an exception to the
Percentage Comparison Test whereby the Commission will not
investigate a protest if the pipeline's costs exceed its revenues.
SFPP, L.P., Opinion No. 527-A, 162 FERC ] 61,230, at P 20 (2018)
(citing Shell Pipe Line Co., 102 FERC ] 61,350, order on reh'g, 104
FERC ] 61,021 (2003)) (``[W]hen a pipeline is under-recovering its
costs, the Commission permits a pipeline to receive the index
increase. In these circumstances, the index increase (even if it
exceeds the pipeline's cost changes) is not likely to lead to a rate
that is `unjust and unreasonable.' '').
\11\ E.g., Calnev, 130 FERC ] 61,082 at P 11 (citing BP W. Coast
Prods. LLC v. SFPP, L.P., 121 FERC ] 61,243 at PP 8-9; BP W. Coast
Prods., LLC v. SFPP, L.P., 121 FERC ] 61,141, at P 7 (2007) (BP West
Coast II)).
\12\ BP West Coast II, 121 FERC ] 61,141 at P 10; see also
Appendix (depicting Substantially Exacerbate Test formulas).
---------------------------------------------------------------------------
B. Procedural History
6. In Southwest Airlines Co. v. FERC, the U.S. Court of Appeals for
the District of Columbia Circuit vacated and remanded Commission orders
applying the Substantially Exacerbate Test to complaints against index
rate increases by SFPP, L.P. (SFPP).\13\ The court held
[[Page 65165]]
that the Commission had departed from its prior policy by considering
post-rate-increase data in evaluating the complaints.\14\ The court
vacated and remanded the Commission's orders dismissing the complaints.
The court emphasized the general principle that the Commission must
``explain its action in a way that coheres with the rest of its
indexing scheme'' and ``provide a reasoned explanation that treats like
cases alike.'' \15\ These complaint proceedings subsequently
settled.\16\
---------------------------------------------------------------------------
\13\ Sw. Airlines Co. v. FERC, 926 F.3d 851, 856 (D.C. Cir.
2019) (Southwest Airlines). In the vacated orders, the Commission
addressed complaints filed in 2014 against SFPP's index rate
increases for the 2012 and 2013 index years. The Commission
dismissed the complaints for failing the second prong of the
Substantially Exacerbate Test. HollyFrontier Ref. & Mktg. LLC v.
SFPP, L.P., 157 FERC ] 61,186, at P 8 (2016) (December 2016 Order),
reh'g denied, 162 FERC ] 61,232, at P 14 (2018). The Commission
explained that notwithstanding the challenged rate increases, page
700 data that became available after SFPP implemented the rate
increases and before the complaints were filed (post-rate-increase
data) showed that the difference between SFPP's costs and revenues
declined between 2011 and 2013. December 2016 Order, 157 FERC ]
61,186 at P 9.
\14\ Southwest Airlines, 926 F.3d at 858.
\15\ Id. at 859.
\16\ SFPP, L.P., 178 FERC ] 61,019 (2022); SFPP, L.P., 173 FERC
] 61,295 (2020).
---------------------------------------------------------------------------
7. Following the remand in Southwest Airlines, the Commission
issued the NOI and sought comment upon its proposal to eliminate the
Substantially Exacerbate Test as the preliminary screen applied to
complaints against index rate increases and to instead evaluate such
complaints by applying the Percentage Comparison Test.\17\ The NOI
outlined the Commission's concerns regarding the Substantially
Exacerbate Test: that the test lacks clear standards, suffers from an
inherent mechanical flaw that yields irrational results, and is
inconsistent with the purpose of indexing and the Commission's
regulations.\18\ The Commission sought comment addressing the merits of
the proposal, including whether the Commission should apply the
Percentage Comparison Test's existing 10% threshold to complaints and
whether and how the Commission should consider additional factors
beyond the Percentage Comparison Test in evaluating complaints against
index rate increases.\19\
---------------------------------------------------------------------------
\17\ NOI, 170 FERC ] 61,252 at P 14. The Commission first
described this proposal in an order on remand following Southwest
Airlines. HollyFrontier, 170 FERC ] 61,133 at P 21; see also NOI;
170 FERC ] 61,252 at P 14 (soliciting public comment on the
Commission's proposal).
\18\ NOI, 170 FERC ] 61,252 at P 9.
\19\ Id. P 14.
---------------------------------------------------------------------------
C. Comments
8. Initial and reply comments on the NOI were submitted by Joint
Complainants,\20\ the Liquids Shippers Group (Liquids Shippers),\21\
SFPP, the Canadian Association of Petroleum Producers (CAPP), and the
Liquid Energy Pipeline Association (LEPA).\22\
---------------------------------------------------------------------------
\20\ Joint Complainants are the complainants from the
HollyFrontier proceedings: American Airlines, Inc.; Chevron Products
Company; HollyFrontier Refining & Marketing LLC; Southwest Airlines
Co.; and Valero Marketing and Supply Company.
\21\ Liquids Shippers are 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, Ovinitiv Marketing Inc., and Pioneer Natural
Resources USA, Inc.
\22\ At the time its comments were filed, LEPA was known as the
Association of Oil Pipe Lines.
---------------------------------------------------------------------------
9. SFPP and LEPA generally support the proposal in the NOI, arguing
that the Percentage Comparison Test is well-founded in precedent and
aligns with the Commission's goals of streamlined and simplified index-
based ratemaking.\23\ Liquids Shippers, CAPP, and Joint Complainants
oppose the proposal and also propose alternatives to the Percentage
Comparison Test.
---------------------------------------------------------------------------
\23\ E.g., LEPA Initial Comments at 4-5; SFPP Initial Comments
at 13-19.
---------------------------------------------------------------------------
II. Discussion
10. In this policy statement, we adopt the proposal set forth in
the NOI to use the Percentage Comparison Test as the preliminary screen
for both protests and complaints against annual index rate increases
and to eliminate the Substantially Exacerbate Test. As explained below,
we conclude that: (1) the Substantially Exacerbate Test should be
eliminated; (2) the Percentage Comparison Test provides a preferable
alternative for evaluating complaints against index rate changes; (3)
the Percentage Comparison Test's 10% threshold is supported; (4)
commenters' alternative proposals are incompatible with the indexing
scheme; (5) the Commission intends to generally limit its consideration
to the Percentage Comparison Test in evaluating complaints against
index rate changes but will address other arguments as they arise in
specific cases; and (6) proposals to adopt broader changes to the
Commission's oil pipeline ratemaking methodologies are beyond the scope
of this proceeding.
A. The Substantially Exacerbate Test Should Be Eliminated
11. As discussed below, we are ending our use of the Substantially
Exacerbate Test because it (1) lacks clear standards, (2) suffers from
an inherent mechanical flaw, and (3) does not effectively implement the
Commission's regulations.
1. The Substantially Exacerbate Test Lacks Clear Standards
12. The Substantially Exacerbate Test lacks clear standards for
evaluating complaints. Consistent with EPAct 1992's mandate for a
simplified and streamlined ratemaking methodology, we conclude that the
preliminary screen used to determine whether to investigate a complaint
against an annual index rate increase would benefit from clear
percentage thresholds to avoid complex case-specific analysis. Also,
clear percentage thresholds facilitate ``treat[ing] like cases alike,''
as the D.C. Circuit emphasized in Southwest Airlines.\24\
---------------------------------------------------------------------------
\24\ Southwest Airlines, 926 F.3d at 859. Although the court
made this statement while specifically addressing the Commission's
use of post-rate-increase data in evaluating the complaints in
HollyFrontier, we find the general principle instructive that like
cases must be treated similarly and that the Commission's indexing
policies must be internally coherent. See id.
---------------------------------------------------------------------------
13. However, in establishing the Substantially Exacerbate Test, the
Commission did not set clear percentage thresholds of over-recovery and
exacerbation for using the test to determine whether to set a complaint
for hearing.\25\ Since 2007, only a small number of shipper complaints
have invoked the Substantially Exacerbate Test. Among the six sets of
proceedings in which complainants sought relief pursuant to the
Substantially Exacerbate Test,\26\ the Commission applied the
Substantially Exacerbate Test to establish a hearing on only one
occasion. However, in that case, the Commission did not establish a
minimum percentage threshold that could be applied going forward in
other cases.\27\ The five other complaint
[[Page 65166]]
proceedings likewise did not specify the thresholds for establishing a
substantial over-recovery or substantial exacerbation.\28\ As a result,
the Substantially Exacerbate Test lacks clear standards on which
parties may rely in bringing or defending against index increase
complaints or which the Commission may apply in deciding whether to
investigate such complaints at a hearing. Comments in response to the
NOI, addressed below, do not persuade us to reach a different
conclusion. Rather, as discussed in the following section, clear
standards are difficult to develop due to the Substantially Exacerbate
Test's mechanical flaws, and we are unpersuaded by Joint Complainants'
argument that such thresholds are unnecessary.\29\
---------------------------------------------------------------------------
\25\ HollyFrontier, 170 FERC ] 61,133 at PP 22-23; see also
supra P 5 (explaining that the Substantially Exacerbate Test
considers whether (1) the pipeline is substantially over-recovering
its cost of service and (2) the index rate increase so exceeds the
actual increase in the pipeline's costs that the resulting rate
increase would substantially exacerbate the pipeline's over-
recovery).
\26\ These six proceedings include (1) Docket Nos. OR07-08 and
OR07-11, (2) Docket No. OR07-16, (3) Docket No. OR07-20, (4) Docket
No. OR09-18, (5) Docket Nos. OR14-35 and OR14-36, and (6) Docket
Nos. OR19-21, OR19-33, and OR19-37. Moreover, although the
Commission has received index filings from over 200 pipelines
annually in recent years, these complaints were all against either
SFPP or its affiliate Calnev Pipe Line, L.L.C.
\27\ In Docket Nos. OR07-08 and OR07-11, the Commission
established a hearing to investigate complaints alleging that SFPP
was over-recovering its cost of service by $16 million and that the
challenged index rate increase would have ``represented an increase
in SFPP's return of some 25%.'' BP West Coast II, 121 FERC ] 61,141
at P 8. The complaints resulted in settlement. See ExxonMobil Oil
Corp. v. SFPP, L.P., 122 FERC ] 61,129, at P 1 (2008) (setting
complaints for hearing); BP W. Coast Prods., LLC v. SFPP, L.P., 125
FERC ] 61,138, at P 2 (2008) (approving uncontested settlement
resolving complaints).
\28\ The Commission found in three of these proceedings that the
complaint failed the Substantially Exacerbate Test because the
challenged index rate increases were smaller than the actual changes
in the pipelines' costs. See Tesoro Ref. & Mktg. Co. v. Calnev Pipe
Line, L.L.C., 121 FERC ] 61,142, at P 7 (2007) (OR07-16); BP W.
Coast Prods. LLC v. SFPP, L.P., 121 FERC ] 61,243 at P 4 (OR07-20);
SFPP, L.P., 129 FERC ] 61,228, at P 41 (2009) (OR09-18). The fourth
set of proceedings involved the complaints at issue in Southwest
Airlines. As discussed above, the Commission held that these
complaints failed the Substantially Exacerbate Test's second prong
because post-rate-increase page 700 data showed that SFPP's cost-
revenue divergence decreased after SFPP implemented the challenged
increases. Supra note 13. Finally, the fifth set of proceedings
involved complaints addressed in the Commission's order on remand
following Southwest Airlines, HollyFrontier, 170 FERC ] 61,133
(OR19-21, OR19-33, OR19-37), and these complaints ultimately
settled. SFPP, 178 FERC ] 61,019; SFPP, 173 FERC ] 61,295.
\29\ See infra PP 14-19.
---------------------------------------------------------------------------
2. The Substantially Exacerbate Test Is Mechanically Flawed
14. The Substantially Exacerbate Test suffers from an inherent
mechanical flaw that makes developing analytically sound percentage
thresholds unworkable. For example, as a pipeline's over-recovery
increases, an index rate increase will exacerbate the over-recovery by
a lower percentage; thus, if a pipeline has a relatively high over-
recovery, even a relatively large index increase will lead to a minimal
exacerbation.\30\ Conversely, applying the same index rate increase to
a lower level of over-recovery will result in a higher degree of
exacerbation.\31\ This relationship between the Substantially
Exacerbate Test's two prongs causes the Substantially Exacerbate Test
to yield results whereby complaints against pipelines with higher over-
recoveries are less likely to be investigated because a large index
increase will lead to minimal exacerbation.\32\
---------------------------------------------------------------------------
\30\ HollyFrontier, 170 FERC ] 61,133 at P 24.
\31\ Id. This flaw was illustrated in HollyFrontier with a table
presenting results of the Substantially Exacerbate Test over a range
of over-recovery and index levels. Id. P 25. For example, if a
pipeline's revenues exceed its costs by 50%, a 3% index increase
leads to an exacerbation of 9%. Id. In contrast, if a pipeline's
revenues exceed its costs by only 5%, that same 3% index increase
leads to an exacerbation of 63%. Id.
\32\ Id. P 24; see also supra P 5 (explaining that the
Substantially Exacerbate Test considers whether (1) the pipeline is
substantially over-recovering its cost of service and (2) the index
rate increase so exceeds the actual increase in the pipeline's costs
that the resulting rate increase would substantially exacerbate the
pipeline's over-recovery).
---------------------------------------------------------------------------
15. Moreover, there appears to be no combination of threshold
levels for these two prongs of the test that would consistently yield
reasonable results, such that the test fails to provide a workable
standard for evaluating complaints against index rate increases.\33\
This phenomenon is demonstrated in the table below, which presents
results of the Substantially Exacerbate Test over a relevant range of
over-recovery and index levels.\34\ The table shows that the
Substantially Exacerbate Test is driven by (1) the extent of the
pipeline's over-recovery and (2) the level of the index rate increase.
---------------------------------------------------------------------------
\33\ Id. PP 24, 26.
\34\ Since its inception in 1995, the oil pipeline index has
ranged from approximately -2.0% to 8.7%. Because the Substantially
Exacerbate Test would not apply to an index that is less than zero
(a negative index), the range of index levels presented in the
columns of the table encompasses only the positive historical levels
of the oil pipeline index.
---------------------------------------------------------------------------
Table--Exacerbation Percentages at Various Over-Recovery-Index
Combinations
[GRAPHIC] [TIFF OMITTED] TR28OC22.002
16. The table shows that at low levels of over-recovery, a modest
index rate increase exacerbates the over-recovery by a large
percentage. For example, the second line of the table indicates that
applying a 4% index rate increase to an over-recovery of 10% will
exacerbate the over-recovery by 44%. In comparison, the same increase
would only exacerbate a 50% over-recovery by 12%. This leads to a
result whereby a complaint against the pipeline with the 50% over-
recovery is less likely to be set for hearing under the Substantially
Exacerbate Test than a complaint against the pipeline with the 10%
over-recovery due to the lower degree of exacerbation. Due to this
mechanical flaw, there is no combination of threshold levels that would
consistently yield reasonable results. Accordingly, the Substantially
Exacerbate Test fails to provide a workable standard for the Commission
to evaluate complaints under Sec. 343.2(c)(1).
17. We disagree with Joint Complainants' argument that the
[[Page 65167]]
Substantially Exacerbate Test does not produce irrational results
because it is not meant to provide an absolute mathematical threshold,
but rather provides information to help the Commission determine, in
its judgment, whether a substantial over-recovery would be
substantially exacerbated.\35\ As discussed above, we find that, to
further the goals of streamlining and simplifying the ratemaking
process, the preliminary screen used to determine whether to
investigate a complaint against an index rate increase benefits from
clear thresholds. Furthermore, a clearly established threshold also
facilitates ``treat[ing] like cases alike'' consistent with Southwest
Airlines.\36\
---------------------------------------------------------------------------
\35\ E.g., Joint Complainants Reply Comments at 13.
\36\ 926 F.3d at 859; see also supra note 24.
---------------------------------------------------------------------------
18. Similarly, we disagree with Joint Complainants' argument that
the Commission could apply the Substantially Exacerbate Test on a case-
by-case basis using a ``pragmatic quantitative and qualitative
analysis'' similar to the analysis used in full cost-of-service rate
cases.\37\ The purpose of indexing is to avoid the complexity of cost-
of-service litigation,\38\ and therefore we view clear thresholds as a
means to effectuate the streamlining and simplification required by
EPAct 1992.\39\ Finally, Joint Complainants do not explain how their
``pragmatic quantitative and qualitative analysis'' would function as a
workable standard for evaluating complaints in the indexing regime.
---------------------------------------------------------------------------
\37\ Joint Complainants Initial Comments at 26 (arguing that
clear thresholds are unnecessary and that the Commission could use a
``pragmatic quantitative and qualitative analysis'' similar to the
analysis used in full cost-of-service rate cases).
\38\ See, e.g., Order No. 561, FERC Stats. & Regs. ] 30,985 at
30,948 (explaining that indexing avoids ``the need of strict
regulatory review of the pipeline's individual cost of service, thus
saving regulatory manpower, time and expense'').
\39\ We also find that using, as a screen for complaints against
index rate increases, the same analytical approach that the
Commission uses in base-rate proceedings could exacerbate the
protracted length of complaint proceedings, about which Joint
Complainants also express concern. Joint Complainants Initial
Comments at 19-20.
---------------------------------------------------------------------------
19. We are also not persuaded by Joint Complainants' reliance upon
the Commission's prior statement in Order No. 561-A that precise
thresholds are not feasible for reviewing challenges to index rate
changes.\40\ Our experience since Order No. 561-A, including applying
the Percentage Comparison Test's 10% threshold,\41\ has demonstrated
that precise thresholds are feasible, and in fact preferable, in this
setting.
---------------------------------------------------------------------------
\40\ Id. at 22 (citing Order No. 561-A, FERC Stats. & Regs. ]
31,000 at 31,103).
\41\ E.g., SFPP, L.P., 168 FERC ] 61,043, at P 21 (2019)
(declining to investigate protested index rate increase where
differential under Percentage Comparison Test was less than 10%);
N.D. Pipeline Co., 163 FERC ] 61,235, at P 11 (2018) (setting
protested index rate increase for hearing where Percentage
Comparison Test differential exceeded 10%).
---------------------------------------------------------------------------
3. The Substantially Exacerbate Test Does Not Effectively Implement the
Commission's Regulations
20. The Substantially Exacerbate Test does not effectively
implement Sec. 343.2(c)(1)'s ``substantially in excess'' requirement.
Section 343.2(c)(1) provides that complaints ``must allege reasonable
grounds for asserting . . . that the rate increase is so substantially
in excess of the actual cost increases incurred by the carrier that the
rate is unjust and unreasonable.'' \42\ When the Commission first
established the Substantially Exacerbate Test, it concluded that
complaints applying that test did not need to satisfy the regulation's
``substantially in excess'' requirement.\43\ On rehearing, recognizing
the Commission could not wholly disregard this part of its regulation,
the Commission sought to rectify the error by explaining that the
complainant applying the Substantially Exacerbate Test needed to show
that the rate change substantially exceeded the cost change (``in
dollar amounts'' or percentages) as part of its demonstration that the
rate change substantially exacerbated the prior over-recovery.\44\
---------------------------------------------------------------------------
\42\ 18 CFR 343.2(c)(1) (emphasis added).
\43\ BP West Coast I, 119 FERC ] 61,241 at PP 10-11.
\44\ BP West Coast II, 121 FERC ] 61,141 at P 9. However, the
Commission has provided limited guidance regarding how this would be
applied. First, in establishing the Substantially Exacerbate Test,
the Commission concluded that a $4 million additional return
resulting from the index rate increase satisfied the ``substantially
in excess'' standard. Second, in other cases, the Commission stated
that it would reject index rate increases where the dollar increase
in costs exceeded the projected dollar increase in revenues. SFPP,
L.P., 129 FERC ] 61,228 at P 41 & n.74. Moreover, along the same
lines, the Commission also rejected complaints where the pipeline's
percentage cost change exceeded the percentage index rate increase.
See BP W. Coast Prods. LLC v. SFPP, L.P., 121 FERC ] 61,243 at P 4;
Tesoro Ref. & Mktg. Co. v. Calnev Pipe Line, L.L.C., 121 FERC ]
61,142 at PP 4, 7.
---------------------------------------------------------------------------
21. Upon further consideration, we now conclude that the
Substantially Exacerbate Test does not effectively implement the
regulation. As discussed above, this is because the Substantially
Exacerbate Test primarily considers pre-existing over-recoveries and
the exacerbation of those over-recoveries. As discussed below, the
Substantially Exacerbate Test provides inadequate consideration to
whether the annual rate increase is ``substantially in excess'' to the
annual cost increase, which is the standard provided in the regulation.
22. First, in applying the Substantially Exacerbate Test, the
Commission stated that ``dollar amounts'' could be used to satisfy the
regulation's ``substantially in excess'' requirement. However, we find
that defining ``substantially in excess'' in dollar terms hinders the
development of consistent and transparent standards for implementing a
simplified and streamlined ratemaking regime. This is because the
relative significance of a certain dollar value varies greatly between
large and small pipelines. For example, an over-recovery of $1 million
would likely be insignificant for a large pipeline with substantial
costs and revenues, but it could be significant for a smaller pipeline
with lower costs and revenues. Thus, this approach is in tension with
the goals of the Commission's indexing regime.\45\
---------------------------------------------------------------------------
\45\ 926 F.3d at 859.
---------------------------------------------------------------------------
23. Second, conversely, using percentages instead of dollar amounts
would be redundant of the Percentage Comparison Test. To the extent the
Substantially Exacerbate Test simply compares the pipeline's percentage
cost change with the percentage index rate change, this duplicates the
calculation already used in the Percentage Comparison Test.\46\ Thus,
the Substantially Exacerbate Test's application of the regulation's
``substantially in excess'' requirement either (a) undercuts the goals
of simplified and streamlined ratemaking (relying upon dollar terms) or
(b) is redundant (relying upon percentages, which uses the same
standard as the Percentage Comparison Test). We disagree with Joint
Complainants' arguments that the Substantially Exacerbate Test is
consistent with the Commission's indexing regulations because (1) Sec.
343.2(c)(1) requires that index rate changes must produce rates that
are just and reasonable under the ICA and (2) the Commission can only
determine whether an index rate change will produce an unjust and
unreasonable rate by considering whether the pipeline's revenues exceed
its costs.\47\ Joint Complainants'
[[Page 65168]]
arguments do not explain how the Substantially Exacerbate Test
effectively implements Sec. 343.2(c)(1), which requires comparing the
proposed rate increase to the amount of cost increases the pipeline has
incurred.
---------------------------------------------------------------------------
\46\ As discussed above, under the Percentage Comparison Test, a
rate change is ``substantially in excess'' of the cost change when
the cost change exceeds the percentage index rate by 10 percentage
points. See supra P 5. No commenter has advanced a viable proposal
for differentiating this aspect of the Substantially Exacerbate Test
from the Percentage Comparison Test. Thus, the Substantially
Exacerbate Test is redundant of the Percentage Comparison Test and,
to the extent it differs, simply imposes a burden on shippers to
show a preexisting over-recovery, a requirement that is not
supported by the regulation.
\47\ Joint Complainants Initial Comments at 28-29, 32-33, 35;
see also 18 CFR 343.2(c)(1) (requiring that protests or complaints
against index rate changes ``allege reasonable grounds for asserting
that the rate is so substantially in excess of the actual cost
increase incurred by the carrier that the rate is unjust and
unreasonable'') (emphasis added). Joint Complainants further argue
that the Commission's proposal ignores the fact that Sec.
343.2(c)(1) resulted from Order Nos. 561 and 561-A, which expressly
envisioned an evaluation of over-recovery of costs and the proposed
rate increase's impact on that over-recovery. Joint Complainants
Initial Comments at 33 (citing Order No. 561-A, FERC Stats. & Regs.
] 31,000 at 31,103; BP West Coast, 121 FERC ] 61,141 at P 10).
---------------------------------------------------------------------------
24. For the same reason, Joint Complainants' reliance on the
Commission's statement in Opinion No. 527-A that ``a comparison between
revenues and costs can be relevant'' under Sec. 343.2(c)(1) is
inapposite.\48\ The fact that consideration of revenues can be relevant
under the regulation does not demonstrate that the Substantially
Exacerbate Test effectively implements the regulation requiring a
comparison between the ``rate increase'' and the ``cost increases.''
\49\
---------------------------------------------------------------------------
\48\ Joint Complainants Initial Comments at 35 (quoting SFPP,
L.P., Opinion No. 527-A, 162 FERC ] 61,230, at P 20 (2018)).
\49\ 18 CFR 343.2(c)(1). Further, in Opinion No. 527-A, the
Commission allowed for the consideration of revenue as ``tied to the
language of the regulation'' in the context of the Percentage
Comparison Test at the hearing stage. Opinion No. 527-A, 162 FERC ]
61,230 at P 20. Thus, the Percentage Comparison Test responds to
both parts of the regulation by comparing the index rate change with
the pipeline's cost changes and considering whether the divergence
renders the pipeline's rate ``unjust and unreasonable.'' 18 CFR
343.2(c)(1).
---------------------------------------------------------------------------
25. We find unpersuasive Joint Complainants' contention that the
Substantially Exacerbate Test should be retained because indexing is
designed to allow recovery of historical costs and not prospective
costs. In particular, they argue that indexing is designed to allow
recovery of historical costs and not prospective costs based on (1) the
Commission's statement in Order No. 561 that indexing ``merely
preserves the value of just and reasonable rates in real economic
terms'' and (2) the Commission's practice of solely considering data
preceding the index increase in cases challenging index rate
changes.\50\ The quoted language in Order No. 561 does not support
Joint Complainants' contention. Rather, annual index rate increases
preserve the economic value of pipeline rates by allowing them to keep
pace with industry-wide cost changes so that rates will be sufficient
to recover future years' costs.\51\ Although the Commission considers
page 700 data from the preceding two years in evaluating a challenged
index rate increase, index rate changes simply adjust a pipeline's
existing rate so that it does not lose ground relative to industry-wide
cost changes going forward.\52\ Indexing is not a true-up to account
for prior-period over- or under-recoveries; rather, it is a permanent
change in the pipeline's rate to recover future costs.
---------------------------------------------------------------------------
\50\ Joint Complainants Initial Comments at 29-31, 33-34
(quoting Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,950).
\51\ HollyFrontier, 170 FERC ] 61,133 at P 27. Each prior year's
inflation sets a new industry-wide cost level and inflationary
changes compound in future years. Thus, if inflation is 10% each
year and the cost level is $100 in Year 1, then in Year 2 the cost
level will be $110 and in Year 3 will be $121. Indexing allows
pipeline rates to increase accordingly.
\52\ Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,950;
Ass'n of Oil Pipe Lines v. FERC, 83 F.3d at 1430.
---------------------------------------------------------------------------
26. Therefore, the concerns outlined above support eliminating the
Substantially Exacerbate Test as the preliminary screen applied to
index increase complaints.
B. The Percentage Comparison Test Offers a Preferable Alternative for
Evaluating Complaints Against Index Rate Increases
27. We find that the Percentage Comparison Test provides a more
consistent way to evaluate complaints against index rate changes than
the Substantially Exacerbate Test.\53\ As discussed below, (1) the
Percentage Comparison Test lacks the same analytical flaws as the
Substantially Exacerbate Test, (2) the Percentage Comparison Test
conforms to the Commission's regulations, and (3) it is preferable to
evaluate challenges to index rate changes, whether via protest or a
complaint, using a single test. As discussed below, the comments do not
dissuade us from adopting this alternative approach.
---------------------------------------------------------------------------
\53\ NOI, 170 FERC ] 61,252 at PP 10-12 (citing HollyFrontier,
170 FERC ] 61,133 at PP 32-35, 39, 42-45).
---------------------------------------------------------------------------
1. The Percentage Comparison Test Lacks the Analytical Flaws of the
Substantially Exacerbate Test
28. We find that the Percentage Comparison Test is preferable to
the Substantially Exacerbate Test.
29. We disagree with the Joint Complainants' and Liquids Shippers'
objections that the Percentage Comparison Test must be rejected because
it is also mechanically flawed. They argue that the Percentage
Comparison Test improperly compares percentages with different
bases.\54\ We recognize that in other situations the Commission may
seek to avoid comparisons of percentages with two different bases, but
that concern is not persuasive here. Joint Complainants and Liquids
Shippers neither cite evidence that the difference in bases leads to a
distortion nor have they provided a workable alternative for comparing
the pipeline's cost change to the index rate change that does not
involve different bases. In fact, the Percentage Comparison Test has
been workably applied to protests of index rate increases.\55\ Applying
this simplified and streamlined formula is appropriate within the
simplified and streamlined indexing regime, and Joint Complainants and
Liquids Shippers do not propose any adjustment to the Percentage
Comparison Test or viable alternative method for performing the rate-
change to cost-change comparison that Sec. 343.2(c)(1) requires.
---------------------------------------------------------------------------
\54\ Joint Complainants Initial Comments at 20, 40-41 (citing
Am. W. Airlines, Inc. v. Calnev Pipe Line, L.L.C., 121 FERC ]
61,241, at P 8 (2007) (``[I]t is incorrect to use the sum of the
changes in two percentages as a measure of absolute change when the
percentages have different bases.'')); Liquids Shippers Initial
Comments at 34-35. For example, when considering an index increase
filed on July 1, 2022, the Percentage Comparison Test compares the
rate change (new rate/prior rate) to the cost change ((2021 costs--
2020 costs)/(2020 costs)). Because one denominator is the ``prior
rate'' and the other denominator is the ``2020 costs,'' Joint
Complainants and Liquids Shippers assert that the Percentage
Comparison Test compares percentages with ``different bases.''
\55\ See, e.g., SFPP, 163 FERC ] 61,232 at PP 13, 20; SFPP,
L.P., 135 FERC ] 61,274, at P 11 (2011); Calnev Pipe Line, 130 FERC
] 61,082 at P 10; Calnev Pipe Line L.L.C., 115 FERC ] 61,387, at PP
10-11 (2006).
---------------------------------------------------------------------------
30. We also reject Joint Complainants' and Liquids Shippers'
argument that the Percentage Comparison Test does not ensure just and
reasonable rates because it permits pipelines with over-recoveries and
declining costs to implement index rate increases.\56\ As an initial
matter, we emphasize that index rate increases are limited to the
industry-wide index level and do not recover a pipeline's cost changes
in excess of that amount. At the same time, the Commission implemented
the indexing methodology with the understanding that some individual
pipelines' revenues could potentially exceed their costs under the
scheme and that some individual pipelines' annual rate changes could
also exceed their annual cost changes.\57\ By permitting revenues to
exceed costs to some degree, indexing encourages pipelines to operate
efficiently by allowing them to benefit from their cost
[[Page 65169]]
savings.\58\ Likewise, denying index rate increases whenever a
pipeline's costs decline could discourage pipelines from operating
efficiently.\59\ Thus, while indexing allows some pipelines to increase
their rates above their individual cost changes, indexed rate changes
are below other pipelines' cost changes. Accordingly, denying an index
rate increase whenever a pipeline's revenues exceed its costs, even
slightly, and/or the pipeline's costs decline would make indexing a
lopsided methodology in which pipelines are presented with a
significant risk of under-recovery without commensurate potential for
benefits for operating efficiently.
---------------------------------------------------------------------------
\56\ Joint Complainants Initial Comments at 46; Liquids Shippers
Initial Comments at 34-35; see also CAPP Initial Comments at 14.
\57\ See Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,949.
\58\ See HollyFrontier, 170 FERC ] 61,133 at P 42. Moreover,
tying indexed rates to pipeline-specific costs would reduce the
efficacy of the indexing scheme as a streamlined, simplified
ratemaking methodology, counter to the Commission's goals in Order
No. 561. See Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,949.
\59\ This also leads to irrational results. For instance, if the
index increase in any given year is 3%, it would be illogical to
deny a pipeline whose costs declined by 0.01% (or less) an index
rate increase whereas a pipeline whose costs increased by 0.01%
would receive the full 3% index increase.
---------------------------------------------------------------------------
31. We are unpersuaded by Liquids Shippers' argument that the
Commission should expand the scope of indexing proceedings to include a
review of the pipeline's underlying base rate.\60\ Shippers can
challenge a pipeline's base rate at any time. The choice of whether to
challenge a pipeline's index rate increase or its base rate belongs to
the complaining shipper.\61\ Since indexing's inception, the Commission
has limited its review of index rate increase challenges to the
proposed incremental rate change and rejected arguments to expand these
proceedings to encompass challenges to the pipeline's base rate.\62\
Although Liquids Shippers contend that the rationale for this policy no
longer applies,\63\ they do not explain how enlarging indexing
proceedings to include a full cost-of-service review of the pipeline's
base rate would cohere with streamlined and simplified ratemaking or
conform to the limited scope of Sec. 343.2(c)(1).
---------------------------------------------------------------------------
\60\ Liquids Shippers argue that the Percentage Comparison Test
improperly focuses on the incremental change (both in costs and
separately in rates) rather than the entirety of the pipeline's
underlying base rate. Liquids Shippers Initial Comments at 2-3, 27-
33; Liquids Shippers Reply Comments at 15-16.
\61\ If a shipper is concerned that an index rate increase
substantially exceeds the pipeline's cost changes, it can file a
complaint against the index rate increase. If successful, such a
complaint would eliminate or reduce the index rate increase. On the
other hand, if a shipper is concerned that a pipeline's base rates
may be substantially over-recovering the pipeline's costs, it can
file a cost-of-service complaint against the base rates. If
successful, such a complaint against the base rates would eliminate
the pipeline's over-recovery.
\62\ E.g., SFPP, L.P., 107 FERC ] 61,334, at P 10 (2004); Calnev
Pipe Line, L.L.C., 96 FERC ] 61,350, at 62,304 (2001) (explaining
that the Commission ``is not subject to a statutory duty to examine
the whole rate when an indexed change is proposed''); Order No. 561-
A, FERC Stats. & Regs. ] 31,000 at 31,104; see also SFPP, L.P., 140
FERC ] 61,016, at P 34 (2012) (``Indexing cases are intended to be
streamlined proceedings that do not delve into cost-of-service
issues.''); Order No. 561, FERC Stats. & Regs. ] 30,985, at 30,952-
53 (finding that requiring protests under Sec. 343.2(c)(1) to
compare the proposed incremental rate change to the pipeline's cost
changes, while permitting complaints against the pipeline's base
rates, achieves an adequate balance between competing interests).
\63\ Liquids Shippers Initial Comments at 28-29.
---------------------------------------------------------------------------
2. The Percentage Comparison Test Conforms to Commission Regulations
32. We find that the Percentage Comparison Test effectively
implements the Commission's regulations. As discussed above, Sec.
343.2(c)(1) requires protests and complaints against index rate
increases to show that the rate increase is ``substantially in excess''
of the pipeline's actual cost changes.\64\ Unlike the Substantially
Exacerbate Test, the Percentage Comparison Test more closely conforms
to this language by comparing the challenged index rate change to the
pipeline's already incurred cost changes and relying upon this
comparison to determine whether the rate increase was, in fact,
``substantially in excess'' of the cost changes.
---------------------------------------------------------------------------
\64\ 18 CFR 343.2(c)(1); see also supra P 20.
---------------------------------------------------------------------------
33. Joint Complainants and Liquids Shippers contend that the
Percentage Comparison Test is inconsistent with the Commission's
regulations because Sec. 343.2(c)(1) inquires whether a challenged
index rate increase substantially exceeds the pipeline's ``actual cost
increases,'' thereby limiting index rate increases to pipelines that
experienced cost increases and excluding pipelines that experienced
cost decreases.\65\ We disagree with these arguments. First, the
regulatory language that Joint Complainants and Liquids Shippers cite
describes when shippers can challenge an index rate change, not whether
a pipeline can implement such a change. To the extent that this
language could be construed as only allowing challenges to rate
increases where a pipeline's costs have increased, this would not
prohibit a pipeline from implementing a rate increase when its costs
have decreased.
---------------------------------------------------------------------------
\65\ Joint Complainants Initial Comments at 47-48 (quoting 18
CFR 343.2(c)(1) (emphasis in original)); Liquids Shippers Initial
Comments at 34 (same); Liquids Shippers Reply Comments at 15.
---------------------------------------------------------------------------
34. Second, Joint Complainants' and Liquids Shippers'
interpretation of the regulation is inconsistent with the Commission's
indexing precedent. Although the regulation discusses comparing rate
increases to ``actual cost increases'' and rate decreases to ``actual
cost decreases,'' \66\ the Commission has consistently interpreted this
regulation as requiring a comparison of the challenged rate change to
the pipeline's cost change, whether positive or negative.\67\
---------------------------------------------------------------------------
\66\ 18 CFR 343.2(c)(1).
\67\ See, e.g., SFPP, L.P., 139 FERC ] 61,267, at PP 9-10
(2012), reh'g denied, 143 FERC ] 61,140 (2013).
---------------------------------------------------------------------------
35. Third, as discussed above, interpreting the regulation as Joint
Complainants and Liquids Shippers propose would undermine indexing's
cost-efficiency incentives. Indexing aims to provide pipelines ``with
the incentive to cut costs aggressively,'' \68\ but denying index rate
increases to pipelines that succeed in reducing costs would undermine
that goal.\69\ In contrast, adopting the Percentage Comparison Test
appropriately triggers investigations where an index rate change
diverges markedly from the pipeline's recent reported cost changes.
---------------------------------------------------------------------------
\68\ Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,949 n.37.
\69\ For example, if reducing costs by 1% precludes a pipeline
from implementing a 5% index rate increase it could obtain if its
costs instead increased by 1%, the pipeline's incentives to reduce
costs would diminish.
---------------------------------------------------------------------------
3. It Is Preferable To Evaluate Challenges to Index Rate Changes Using
a Single Test
36. Based on the record in this proceeding, we conclude that it is
preferable to evaluate protests and complaints against index rate
changes using the same preliminary screen.\70\ The court in Southwest
Airlines instructed the Commission to evaluate complaints against index
rate increases in a manner that coheres with the rest of its indexing
scheme and ``treats like cases alike.'' \71\ Section 343.2(c)(1)
requires protests and complaints to make the same showing: that the
challenged rate increase ``is so substantially in excess of the actual
cost increases incurred by the carrier that the rate is unjust and
unreasonable.'' \72\ Given that the same standard applies to all
challenges to index rate changes regardless of form, we conclude that
evaluating protests and complaints using a single test conforms to the
structure of the regulation and will better ensure that similar cases
are not treated differently.
---------------------------------------------------------------------------
\70\ HollyFrontier, 170 FERC ] 61,133 at P 37.
\71\ Southwest Airlines, 926 F.3d at 859.
\72\ 18 CFR 343.2(c)(1).
---------------------------------------------------------------------------
37. We acknowledge that the Commission has previously found in BP
[[Page 65170]]
West Coast II that it is not arbitrary to interpret Sec. 343.2(c)(1)
differently depending upon whether the challenge to the index rate
change takes the form of a protest or a complaint.\73\ In making this
finding, the Commission reasoned that the different procedural
frameworks for protest and complaint proceedings warranted applying
different interpretations of Sec. 343.2(c)(1) to these pleadings and
that applying the same standard in both types of proceedings ``would
effectively deprive shippers of any opportunity to question the rate
levels and the returns resulting from the pipeline's annual index-based
rate filings based on changes in the dollar yield from the rate
index.'' \74\
---------------------------------------------------------------------------
\73\ BP West Coast II, 121 FERC ] 61,141 at P 7.
\74\ Id.; see also supra P 22 (discussing why the use of the
dollar yield is not appropriate).
---------------------------------------------------------------------------
38. Upon review of the record in this proceeding, we now conclude
that it is preferable to evaluate protests and complaints under Sec.
343.2(c)(1) using a single test. The considerations identified in BP
West Coast II do not compel evaluating complaints against index rate
increases differently than protests. While different procedural
frameworks may justify different kinds of evidence that the Commission
would consider in evaluating complaints as compared to accelerated
protest proceedings, the different procedural frameworks here--where
our regulations set forth the requirement for filing protests and
complaints against index rate adjustments in the same sentence under a
single standard--do not warrant applying different tests. Here, as
discussed above, we find the Percentage Comparison Test to be superior
to the Substantially Exacerbate Test and, given the flaws in the
Substantially Exacerbate Test, we conclude that it is preferable to
apply the Percentage Comparison Test to both protests and complaints.
39. In addition, shippers will be able to challenge index rate
increases by demonstrating that such increases are disallowed under the
Percentage Comparison Test. Thus, contrary to commenters'
arguments,\75\ we disagree that shippers are effectively precluded from
challenging proposed index rate increases. The Percentage Comparison
Test provides an effective preliminary screen that enables shippers to
challenge index rate increases that substantially diverge from the
pipeline's cost changes.\76\
---------------------------------------------------------------------------
\75\ Joint Complainants Initial Comments at 19, 39; Liquids
Shippers Initial Comments at 20-23; see also CAPP Initial Comments
at 14; CAPP Reply Comments at 2-3.
\76\ Dr. Webb's analysis demonstrates that for each year between
2001-2018, a significant segment of oil pipelines filing cost-of-
service information would have failed the Percentage Comparison
Test's 10% threshold had they attempted to take a full index rate
increase. SFPP Reply Comments, Ex. B at 7-8 (Affidavit of Michael J.
Webb). In most years, the 10% threshold would have screened all
pipelines in the upper quartile of all pipelines from implementing a
full index rate increase. Id.
---------------------------------------------------------------------------
40. Furthermore, although the Percentage Comparison Test does not
permit shippers to raise existing over-recoveries to challenge index
rate increases,\77\ this is consistent with the plain language of the
Commission's regulations and with the purpose of annual index rate
increases. As discussed above, Sec. 343.2(c)(1) requires a complainant
to show that the pipeline's cost change substantially exceeds its rate
change, not to evaluate pre-existing over-recoveries.\78\ In addition,
indexing allows annual pipeline rate increases to reflect industry-wide
cost changes during the prior year to ensure that the pipeline's rate
is sufficient to recover future years' costs. Consistent with this
purpose, the Commission has previously held that the only relevant
information in reviewing index rate increases is the change in the
pipeline's costs over the two years preceding the increase.\79\
Applying the Percentage Comparison Test to both protests and complaints
would bring the standard applied to complaints in line with this
precedent by limiting the inquiry in index increase complaint
proceedings to the relationship between the rate increase and the
pipeline's prior changes in cost.
---------------------------------------------------------------------------
\77\ Liquids Shippers Initial Comments at 20-23; see also CAPP
Initial Comments at 14; CAPP Reply Comments at 2-3.
\78\ 18 CFR 343.2(c)(1).
\79\ E.g., SFPP, L.P., 140 FERC ] 61,016 at P 34 (finding that
``[t]he only relevant evidence in indexing cases'' is the change in
the pipeline's cost of service in the two years preceding the index
rate increase).
---------------------------------------------------------------------------
41. Moreover, even a successful complaint challenging an index rate
increase based upon the Substantially Exacerbate Test would merely
prevent the index increase at issue; it would not address any pre-
existing over-recoveries. Regardless of the standard applied to
complaints against individual index rate increases, shippers concerned
that a pipeline may be substantially over-recovering may file a cost-
of-service complaint challenging the pipeline's rates that have
historically been indexed. If successful, such a complaint would
eliminate the pipeline's over-recovery.
C. The Percentage Comparison Test's 10% Threshold Is Reasonable
42. We reaffirm our continued use of a 10% threshold in the
application of the Percentage Comparison Test.\80\ This record does not
support a different threshold, and we find the 10% threshold continues
to be reasonable. As an initial matter, the 10% threshold fulfills the
Commission's regulations by denying index rate increases where the rate
increase significantly exceeds the pipeline's cost changes.\81\ In
contrast, imposing a lower threshold (such as a 5% threshold) could
prevent a majority or near-majority of the industry from taking full
index rate increases.\82\ This would undercut the purpose of indexing
by precluding large portions of the industry from adjusting their rates
to reflect industry-wide cost changes.
---------------------------------------------------------------------------
\80\ The Percentage Comparison Test's 10% threshold developed
gradually through the adjudication of protests to index rate
increases. HollyFrontier, 170 FERC ] 61,133 at P 41. The Commission
made this threshold explicit a decade ago in 2012. SFPP, L.P., 139
FERC ] 61,267 at P 10.
\81\ An analysis of page 700 data indicates that the 10%
threshold generally excludes pipelines in the top 30% of industry-
wide cost changes from implementing index rate increases. Moreover,
between 2017-2020, an average of 32 pipelines per year (or
approximately 12% of pipelines filing page 700) experienced a
divergence of 10% or more between their annual percentage change in
cost of service and the full index rate increase. See also SFPP
Reply Comments, Ex. B at 8, Figure 2 (Affidavit of Dr. Michael J.
Webb) (illustrating that in most years between 2001-2018, the 10%
threshold would have excluded pipelines in the top 30% of industry-
wide cost changes reported on page 700 from implementing full index
rate increases).
\82\ Id. at 8-9.
---------------------------------------------------------------------------
43. Moreover, the 10% threshold preserves indexing's cost-
efficiency incentives and encourages pipelines to control costs.
Indexing allows for some gap between an individual pipeline's rates and
its costs, and allowing rates to exceed costs by a modest degree
encourages pipelines to operate efficiently by permitting them to
retain a portion of their cost savings while also placing downward
pressure on the industry-wide index level through the five-year review
process.\83\ Setting the threshold at 10% provides a reasonable gap
between rate increases and cost changes above a de minimis level so
that pipelines have the incentive to control costs and reap the
benefits of efficiency gains.
---------------------------------------------------------------------------
\83\ HollyFrontier, 170 FERC ] 61,133 at P 42 (citing Order No.
561, FERC Stats. & Regs. ] 30,985 at 30,949). The Commission
recalculates the index based upon industry-wide cost changes over
the prior five-year period; therefore, any cost savings over that
prior period will tend to reduce the index level.
---------------------------------------------------------------------------
44. Conversely, setting the threshold below 10% could undermine
these efficiency incentives. Industry-wide cost data illustrate this
point. The average of the annual index levels from 2004 to 2019 is
approximately 4.10%. In 10 of those 16 years, the index level exceeded
[[Page 65171]]
4.10%. Moreover, in five of those years, the index level exceeded 5%,
reaching as high as 8.6%. If the threshold is only slightly higher than
the index level for a given year, pipelines would have little incentive
to reduce costs because a slight cost reduction could render the
pipeline unable to implement a full index rate increase.\84\ Moreover,
a threshold equal to \85\ or lower than \86\ the index level for a
given year would create incentives for pipelines to maintain or
increase costs in order to implement an index rate increase. As a
result, a threshold at or slightly above the index level could weaken
pipelines' incentive to reduce costs which, in turn, could inflate the
index adder for future years.\87\ Accordingly, we find that the
existing 10% threshold balances indexing's efficiency incentives
without shielding unreasonable rate increases from scrutiny.
---------------------------------------------------------------------------
\84\ For example, if the threshold is set at 5%, pipelines that
reduce costs by 1% over the prior two years may be unable to
implement a full index rate increase at the 4.10% average. An index
level exceeding 4.10% would further diminish a pipeline's incentive
to reduce costs.
\85\ If, for instance, the index level for a given year is 6%,
and the Percentage Comparison Test threshold is set at 6%, pipelines
would have little incentive to reduce their costs because even a 1%
cost reduction would result in the pipeline's cost change diverging
from the 6% index level by more than the 6% threshold.
\86\ If the index level is 7% and the Percentage Comparison Test
threshold is 6%, pipelines could be incentivized to increase their
costs to bring the gap between their cost change and the index level
within 7%, thereby undermining indexing's cost efficiency
incentives.
\87\ HollyFrontier, 170 FERC ] 61,133 at P 43.
---------------------------------------------------------------------------
45. Further, the potential that a threshold below 10% could yield
distorted outcomes is amplified by the high annual volatility in oil
pipeline cost and volume data.\88\ Because a pipeline's cost changes
may vary significantly from year to year, the pipeline's ability to
implement an annual index rate increase in a given year may likewise
vary. Depending upon the magnitude of the pipeline's cost increases or
decreases, the level of divergence between cost changes and index rate
increases permitted under the Percentage Comparison Test can impact
pipelines' ability to recover costs over time. For example, a 5% cost
decline in one year, which could lead to the denial of an index rate
increase, may be followed by a 15% cost increase in the next year,
which would likely significantly exceed the permitted index rate
increase. In this way, a low threshold that does not account for annual
shifts in pipeline costs could cause pipelines to under-recover their
costs over time.\89\ Along similar lines, a low threshold could also
unfairly differentiate between a pipeline with sizable one-year cost
declines and a pipeline whose costs decline at a more consistent pace:
the former may be barred from implementing an index rate increase while
the latter is not, even where the former's cost changes deviate less
from the index level than the latter's.\90\
---------------------------------------------------------------------------
\88\ Because oil pipelines are common carriers, throughput can
change significantly from year to year. For example, using page 700
data, the median annual change in throughput was 14% from 2017-2018.
Significant changes in throughput can produce significant changes in
pipeline costs and revenues.
\89\ This potential distortion would be magnified by the sheer
number of pipelines that would lose index increases under a
threshold lower than 10% as discussed above.
\90\ HollyFrontier, 170 FERC ] 61,133 at P 44. For example, if
the threshold is set at 8%, Pipeline A with 3% cost decreases in
year one and year two would be permitted to implement index rate
increases at the 4.10% average for both years. However, Pipeline B
with no cost changes in year one and a 5% cost decrease in year two
would be unable to implement a full 4.10% index rate increase for
year two, despite the fact that Pipeline B's costs deviated less
from the index level over two years than the costs of Pipeline A (by
5% instead of 6%).
---------------------------------------------------------------------------
46. Joint Complainants have not persuaded us to lower the 10%
threshold.\91\ Joint Complainants observe that the Commission
previously stated that the index should not be set so ``sufficiently
high and generous to encompass even the most extraordinary costs.''
\92\ As discussed above, however, the 10% threshold would not encompass
extraordinary costs and imposing a 5% threshold could prevent a
majority or near-majority of the industry from taking full index rate
increases.\93\ This result would fail to account for pipeline cost- and
throughput-volatility and risk, creating a lopsided ratemaking
methodology that deprives pipelines an appropriate opportunity for
sufficient cost recovery.\94\
---------------------------------------------------------------------------
\91\ Joint Complainants Initial Comments at 42-44.
\92\ Id. at 49-50 (quoting Order No. 561-A, FERC Stats. & Regs.
] 31,000 at 31,097).
\93\ Id. at 8-9.
\94\ HollyFrontier, 170 FERC ] 61,133 at P 44.
---------------------------------------------------------------------------
47. We find misplaced Joint Complainants' argument that pipelines
have cost-efficiency incentives even without the possibility of an
index rate increase. If a pipeline risks losing a future index increase
because it reduces costs, then the pipeline's incentive to reduce those
costs will erode.\95\ As noted above, we remain concerned setting the
threshold for the Percentage Comparison Test too low would undermine
pipelines' incentives to control costs. The 10% threshold reasonably
balances that concern with the need to constrain index rate increases
that are substantially in excess of pipelines' cost changes.\96\
---------------------------------------------------------------------------
\95\ For example, if a pipeline is considering steps that could
reduce its costs by 5% but this would cause the pipeline to lose a
5% index increase in the next year, then the pipeline will not have
an incentive to implement the cost reduction.
\96\ HollyFrontier, 170 FERC ] 61,133 at P 43. Furthermore,
reducing costs often requires pipelines to invest in cost-saving
measures, such as more efficient pumps. A stringent Percentage
Comparison Test threshold that places pipelines at risk of losing
all or part of an index rate increase when the pipeline modestly
controls its costs could discourage pipelines from making such
investments.
---------------------------------------------------------------------------
48. We are similarly unpersuaded by Joint Complainants' argument
regarding how a threshold slightly above or below the index level in a
given year could impact pipelines' incentives to reduce costs.
Specifically, Joint Complainants claim that even if pipelines could
forecast the next year's index level, it is highly unlikely that they
could precisely calibrate their cost changes to take the index level
into account.\97\ Although Joint Complainants are correct that
pipelines likely cannot precisely calibrate their costs to account for
an index level to be published the following year, this misses the
point. Even if pipelines cannot calibrate their costs with such
exactitude or anticipate future index levels, losing all or part of an
index rate increase due to an overly stringent Percentage Comparison
Test threshold could erode pipelines' incentives to control costs going
forward. This erosion can become pronounced at thresholds less than
10%. For example, if the threshold is set at 5% and the index level is
4.1%, a pipeline whose costs declined by more than 1% could lose at
least a portion of any index rate increase for that year.\98\ Because
this slight cost reduction caused the pipeline to lose an index rate
increase in a year with an average index level, a 5% threshold could
weaken the pipeline's incentive to reduce costs going forward.
---------------------------------------------------------------------------
\97\ Joint Complainants Initial Comments at 51 (citing
HollyFrontier, 170 FERC ] 61,133 at P 43, nn.77, 78, & 79; Brattle
Report at PP 21-24).
\98\ HollyFrontier, 170 FERC ] 61,133 at P 43 n.77.
---------------------------------------------------------------------------
49. Joint Complainants' remaining contentions are also without
merit. Their argument that the 10% threshold can produce large
disparities between pipeline revenues and costs lacks support because
the examples that Joint Complainants provide assume without basis that
pipelines' revenues will increase in future periods while their costs
and throughput will remain unchanged.\99\ Joint Complainants also
provide no evidence that the application of the Percentage Comparison
Test and the 10% threshold to protested index
[[Page 65172]]
rate increases has in fact lead to significant over-recoveries.
---------------------------------------------------------------------------
\99\ Joint Complainants Initial Comments at 52.
---------------------------------------------------------------------------
50. Similarly, we disagree with Joint Complainants' claim that
indexing only weakly reflects industry-wide cost changes because it
lacks a recurring requirement to reset industry-wide oil pipeline rates
on a cost-of-service basis (``rebasing'' mechanism).\100\ As an initial
matter, it is not clear whether a rebasing mechanism would increase
pipeline incentives to operate efficiently.\101\ Moreover, this
proposal is beyond the scope of this proceeding. As discussed above,
the Commission established indexing as a simplified, streamlined
ratemaking methodology in response to EPAct 1992's mandate to develop
an alternative to complex, costly, and lengthy cost-of-service rate
proceedings. Periodically resetting oil pipeline rates to cost-of-
service levels as Joint Complainants propose could be contrary to that
mandate,\102\ requiring the Commission to resolve a large number of
cost-of-service rate cases on a recurring basis and imposing
substantial burdens on shipper, pipeline, and Commission
resources.\103\ Joint Complainants do not explain how a recurring
rebasing mechanism would be consistent with simplified and streamlined
ratemaking.
---------------------------------------------------------------------------
\100\ Id. at 52-53.
\101\ Regularly reducing the pipeline's rates to the cost-of-
service level would reduce pipeline incentives to operate
efficiently. Moreover, even pipelines that are already earning
revenues above their costs have an incentive to control costs in
order to further increase the return to investors.
\102\ See Ass'n of Oil Pipe Lines v. FERC, 281 F.3d 239, 244
(D.C. Cir. 2002) (AOPL II) (quoting EPAct 1992, Pub. L. 102-486
1801(a)) (finding that ``a regime based in large part on [cost-of-
service proceedings] would be inconsistent with Congress's mandate
under the EPAct for FERC to establish `a simplified and generally
applicable ratemaking methodology' '').
\103\ In establishing indexing, the Commission explicitly
declined to undertake a periodic review of individual pipeline costs
and the D.C. Circuit affirmed this decision. Order No. 561-A, FERC
Stats. & Regs. ] 31,000 at 31,104-05, aff'd, AOPL v. FERC, 83 F.3d
at 1437.
---------------------------------------------------------------------------
51. Liquids Shippers likewise fail to adequately challenge the
Percentage Comparison Test's 10% threshold. While Liquids Shippers
claim that the threshold is arbitrary and unsupported,\104\ it has in
fact been developed over time through several proceedings.\105\
Although Liquids Shippers argue that the Commission has not justified
setting the threshold at 10% as opposed to a slightly lower level,\106\
we find, based on our experience with its application and the record
before us, that the 10% threshold strikes an appropriate balance
between upholding the indexing methodology's cost-efficiency incentives
and ensuring just and reasonable rates.\107\ Moreover, the Commission
has considerable discretion in setting numerical thresholds,\108\ and
Liquids Shippers have not demonstrated that the 10% threshold is so
objectionable as to be ``patently unreasonable.'' \109\
---------------------------------------------------------------------------
\104\ Liquids Shippers Initial Comments at 35.
\105\ The 10% threshold evolved through orders in which the
Commission initiated investigations when the divergence between a
pipeline's cost increases and the proposed rate increase was more
than 10% and declined to initiate investigations where such
divergence was less than 10%. Compare SFPP, 139 FERC ] 61,267 at P
10 (rejecting protests where divergence was 9.88%), with Calnev
Pipeline L.L.C., 115 FERC ] 61,387 at PP 10-11 (setting protest for
hearing based upon 10.95% divergence), and SFPP, L.P., 139 FERC ]
61,266, at P 7 (2012) (setting protest for hearing where divergence
was 13.1%).
\106\ Liquids Shippers Reply Comments at 18 (arguing that the
Commission has not justified setting the threshold at 10% rather
than 9.88%).
\107\ See HollyFrontier, 170 FERC ] 61,133 at PP 41-44. In
addition, Liquids Shippers' argument that the 10% threshold allows
for improper gamesmanship is unconvincing. Liquids Shippers support
this claim by citing an example where a pipeline, faced with a
shipper protest, withdrew a proposed index rate increase that
exceeded the 10% threshold and refiled a lower rate increase that
fell below the threshold. Liquids Shippers Initial Comments at 36
(citing Buckeye Pipe Line Transportation LLC, Tariff Filing, Docket
No. IS15-352-000 (filed May 28, 2015)). However, rather than
undermine the Percentage Comparison Test, this example illustrates
how the 10% threshold can constrain pipelines from implementing rate
increases that diverge considerably from their cost changes.
\108\ E.g., ExxonMobil Gas Mktg. Co. v. FERC, 297 F.3d 1017,
1085 (D.C. Cir. 2002) (quoting AT&T Corp. v. FCC, 220 F.3d 607, 627
(D.C. Cir. 2000)) (``FERC `has wide discretion to determine where to
draw administrative lines.' ''); Mo. Pub. Serv. Comm'n v. FERC, 215
F.3d 1, 4 (D.C. Cir. 2000). Courts will generally uphold an agency's
threshold if ``the figure selected by the agency reflects its
informed discretion, and is neither patently unreasonable nor `a
dictate of unbridled whim.' '' Vonage Holdings Corp. v. FCC, 489
F.3d 1232, 1242 (D.C. Cir. 2007) (quoting WJG Tel. Co. v. FCC, 675
F.2d 386, 388-89 (D.C. Cir. 1982)).
\109\ Vonage Holdings Corp. v. FCC, 489 F.3d at 1242.
---------------------------------------------------------------------------
52. Accordingly, we will apply the 10% threshold when using the
Percentage Comparison Test to evaluate complaints. Although Joint
Complainants and Liquids Shippers criticize the 10% threshold, they do
not persuade us that an alternative Percentage Comparison Test
threshold better satisfies our statutory obligations. As discussed
above, the Commission possesses significant discretion in setting
numerical thresholds. We find no reason based upon the record here to
depart from our proposal in the NOI and our prior precedent.\110\
---------------------------------------------------------------------------
\110\ See, e.g., SFPP, L.P., 140 FERC ] 61,106 (2012), order on
reh'g, 143 FERC ] 61,141 (2013); SFPP, L.P., 143 FERC ] 61,297, at P
11 (2013), order on reh'g, 147 FERC ] 61,012 (2014); SFPP, 163 FERC
] 61,232 at PP 13, 20.
---------------------------------------------------------------------------
D. The Alternative Proposals Presented Are Inconsistent With the
Indexing Scheme
53. Several commenters suggest alternatives to the Percentage
Comparison Test they assert would provide superior means for evaluating
complaints against index rate increases. As discussed below, these
proposals are the ``cost-decrease test'' and the ``revenues test.'' We
disagree that these alternatives are superior to the Percentage
Comparison Test. Moreover, both proposals are inconsistent with the
Commission's regulations requiring that a challenge to an index
increase be assessed based on whether the increase is substantially in
excess of the pipeline's cost increases.\111\ Accordingly, we decline
to adopt these proposals here.
---------------------------------------------------------------------------
\111\ 18 CFR 343.2(c).
---------------------------------------------------------------------------
1. Cost-Decrease Test
a. Proposal
54. Joint Complainants propose that the Commission deny index rate
increases where (i) the pipeline's revenues exceed its costs and (ii)
the pipeline's costs have decreased for the relevant index period
(cost-decrease test).\112\ Joint Complainants argue that granting an
index rate increase in such circumstances would negate the cost basis
of the index rate increase by allowing the pipeline to double-recover
the industry-wide cost changes that the rate increase seeks to address.
Joint Complainants further assert that Opinion No. 511-A supports this
proposal.\113\
---------------------------------------------------------------------------
\112\ Joint Complainants Initial Comments at 56.
\113\ Id. at 57 (citing SFPP, L.P., Opinion No. 511-A, 137 FERC
] 61,220, at P 407 (2011)).
---------------------------------------------------------------------------
b. Commission Determination
55. We decline to adopt Joint Complainants' proposed cost-decrease
test. The proposal is fundamentally flawed. First, the cost-decrease
test is inconsistent with the Commission's regulations because it may
permit challenges to index rate increases even though the rate change
is not substantially in excess of the pipeline's costs changes as
required by Sec. 343.2(c)(1). For instance, if a pipeline's total
costs decrease by 0.01% and the index increase is only 0.1%, it is not
the case that the rate increase is substantially in excess of the cost
change.
56. Second, the cost-decrease test is also conceptually flawed. As
discussed above, some gap between revenues and costs must be permitted
to preserve indexing's efficiency incentives.\114\
[[Page 65173]]
Likewise, Joint Complainants' proposal would make indexing a lopsided
methodology in which pipelines face significant risk of under-recovery
without commensurate potential for benefits for operating
efficiently.\115\ Finally, Joint Complainants' proposal includes no
flexibility for the annual fluctuations in a pipeline's costs and
revenues.\116\
---------------------------------------------------------------------------
\114\ See supra P 43.
\115\ See supra P 30.
\116\ Because oil pipelines are common carriers, throughput can
change significantly from year to year and this significantly
affects oil pipeline revenues.
---------------------------------------------------------------------------
57. Third, we are not persuaded by Joint Complaints' arguments in
support of the cost-decrease test. In seeking to justify this proposal,
Joint Complainants mischaracterize the purpose of indexing. Joint
Complainants argue that index rate increases are designed to recover a
pipeline's past costs, and therefore to avoid a double-recovery index
rate increases should not be extended to pipelines whose rates already
recover these costs.\117\ Contrary to Joint Complainants' assertions,
and as noted above, an index rate change is not a true-up to account
for prior period over- or under-recoveries. Rather, indexing allows
pipeline rates to increase (or decrease) to keep pace with annual
industry-wide cost changes so that the pipeline can recover its costs
in future years.\118\ Likewise, indexing does not address a pipeline's
base costs as in a cost-of-service rate case.\119\ Thus, to the extent
that a pipeline's rates generate revenues sufficient to recover the
pipeline's base costs as reported on its page 700, this does not
necessarily indicate that those rates also recovered the annual
industry-wide cost changes that indexing is designed to recover. As a
result, adjusting a pipeline's rate to account for industry-wide cost
changes, even where the pipeline's cost of service has declined, does
not negate the cost basis for the rate increase.\120\
---------------------------------------------------------------------------
\117\ Joint Complainants Initial Comments at 57.
\118\ See discussion supra P 25.
\119\ SFPP, L.P., Opinion No. 522-B, 162 FERC ] 61,229, at P 16
n.25 (2018).
\120\ Applying the Percentage Comparison Test as the preliminary
screen for both protests and complaints under Sec. 343.2(c)(1)
provides an additional safeguard by triggering investigations where
an index rate change diverges markedly from the pipeline's recent
reported cost changes.
---------------------------------------------------------------------------
58. Moreover, we disagree with Joint Complainants' assertion that
Opinion No. 511-A supports the cost-decrease test. Opinion No. 511-A
involved different circumstances than those under consideration here.
As explained in Opinion No. 511-A, the Commission has rejected index
rate increases following a new cost-of-service rate filing where the
increase addressed prior-period inflationary cost changes that were
already incorporated into the test period data used to determine the
pipeline's cost-of-service rate.129F \121\ Opinion No. 511-A involved
situations where the test period for setting cost-of-service rates and
the time period for measuring industry-wide cost changes reflected in
the index rate increase overlapped, in total or in part. In that cost-
of-service rate case, the Commission correctly found that the
pipeline's new cost-of-service rates already reflected the prior-period
cost changes (i.e., the costs in the test period) that would have been
reflected in the proposed index rate increase. Because that proceeding
involved new base rates set at the pipeline's cost-of-service level,
there was no need to adjust those rates to account for inflationary
industry-wide costs that took place during the cost-of-service test
period. By contrast, under the indexing regime, it is appropriate as a
general matter for pipelines to adjust their rates to account for
industry-wide cost changes where the Commission did not set the rate
using cost data from the period covered by the index rate change.\122\
---------------------------------------------------------------------------
\121\ Opinion No. 511-A, 137 FERC ] 61,220 at P 407 (citing
SFPP, L.P., 117 FERC ] 61,271 (2006), reh'g denied, 120 FERC ]
61,245 (2007). For instance, in Opinion No. 511-A, the Commission
allowed SFPP to implement one-quarter of an index rate increase for
2008 where cost data from the first nine months were reflected in a
Commission order approving new cost-of-service rates for SFPP.
Opinion No. 511-A, 137 FERC ] 61,220 at PP 405, 409-411.
\122\ In these circumstances, the industry-wide cost changes
that the index rate change is designed to recover are not already
incorporated into the pipeline's underlying rate. Thus, the mere
fact that the pipeline's revenues exceed its cost of service does
not establish that its rates have already recovered the cost changes
that indexing seeks to recover.
---------------------------------------------------------------------------
2. Revenues Test
a. Proposal
59. Joint Complainants, Liquids Shippers, and CAPP propose versions
of a revenues test, wherein the Commission would grant challenges to an
index rate increase where the pipeline's page 700 revenues exceeded its
page 700 cost of service by a certain percentage for two consecutive
years. Joint Complainants propose a 7.5% threshold,\123\ Liquids
Shippers propose a 5% threshold,\124\ and CAPP proposes a 10%
threshold.\125\ Joint Complainants explain that over-recovering by 7.5%
would contribute a 25% impact on the pipeline's return on equity (ROE),
which Joint Complainants argue is a reasonable threshold and is
consistent with the Commission's existing framework for rate
evaluation, including the evaluation of grandfathered rates.\126\
Liquids Shippers submit that a 5% threshold is appropriate because it
translates to a real ROE of 12.3%, which they claim approximates the
top of the zone of reasonableness as determined by the discounted cash
flow (DCF) analysis in recent pipeline cost-of-service rate cases.\127\
CAPP argues that there are numerous reporting pipelines whose revenues
exceed its proposed 10% threshold, which in turn represents an
unwarranted over-recovery that cannot be reconciled with the just and
reasonable rate standard.\128\
---------------------------------------------------------------------------
\123\ Joint Complainants Initial Comments at 59.
\124\ Liquids Shippers Initial Comments at 36-37.
\125\ CAPP Initial Comments at 14-16.
\126\ Joint Complainants Initial Comments at 61 (citing Order
No. 783, 144 FERC ] 61,049 at P 5). EPAct 1992 ``grandfathered,'' or
deemed just and reasonable, rates that were in effect for the 365-
day period ending on the date of enactment of EPAct 1992, or that
were in effect on the 365th day preceding enactment, and which were
not subject to a protest, complaint, or an investigation during this
365-day period. These grandfathered rates can be challenged under
certain limited conditions, including where the complainant
establishes that ``a substantial change has occurred after the date
of the enactment of'' EPAct 1992 in ``the economic circumstances . .
. which were the basis for the rate.'' EPAct 1992 1803(b)(1). The
Commission has interpreted that test to require a complainant to
demonstrate that the ROE earned on the rate at issue has increased
by at least 25% over the ROE embedded in the grandfathered rate and
that the increase has occurred since the passage of EPAct in 1992.
See, e.g., Tesoro Ref. & Mktg. Co. v. Calnev Pipe Line LLC, 134 FERC
] 61,214, at PP 17-18, 60 (2011).
\127\ Liquids Shippers Initial Comments at 38 (citing Revisions
to Indexing Policies & Page 700 of FERC Form No. 6, 157 FERC ]
61,047, at n.25 (2016) (2016 ANOPR), withdrawn, 170 FERC ] 61,134
(2020); El Paso Nat. Gas Co., Opinion No. 528-A, 154 FERC ] 61,120,
at P 215 (2016); Seaway Crude Pipeline Co., Opinion No. 546, 154
FERC ] 61,070, at P 194 (2016)).
\128\ CAPP Initial Comments at 14.
---------------------------------------------------------------------------
b. Commission Determination
60. We are not persuaded to adopt the proposed revenues tests. As
an initial matter, a revenues test is inconsistent with the regulations
because it evaluates existing over-recovery, while the regulations
require a comparison of cost changes to rate changes.\129\ While
commenters are correct that the Commission proposed a similar revenues
test in the 2016 ANOPR, the Commission ultimately declined to adopt
such a test.\130\
---------------------------------------------------------------------------
\129\ See 18 CFR 343.2(c)(1).
\130\ See Revisions to Indexing Policies & Page 700 of FERC Form
No. 6, 170 FERC ] 61,134 at P 11.
---------------------------------------------------------------------------
61. Moreover, this record does not provide support for a workable
application of a revenues test. For example, we conclude that the
proposed revenues test thresholds lack support. Joint Complainants
criticize the 2016 ANOPR's 15% threshold as arbitrary
[[Page 65174]]
and capricious,\131\ but they fail to provide substantive support for
their proposed 7.5% threshold.\132\ Liquids Shippers similarly fail to
justify their proposed 5% threshold.\133\ In addition, we are concerned
that the proposed 5% and 7.5% thresholds are inconsistent with a
streamlined, generally applicable ratemaking methodology, because they
could necessitate the use of cost-of-service rate filings for many
pipelines where the pipeline's revenues slightly exceed costs over a
short period but not necessarily in the long term.\134\ Moreover, such
narrow thresholds risk making indexing a one-sided methodology in which
pipelines face significant risk of under-recovery without commensurate
potential for benefits for operating efficiently.\135\
---------------------------------------------------------------------------
\131\ Joint Complainants Initial Comments at 60.
\132\ Joint Complainants justify this threshold on the basis
that a 1992 oil pipeline rate is ``de-grandfathered'' if the
pipeline's ROE has increased by 25% over the grandfathered level.
Joint Complainants Initial Comments at 60-61 (citing Tesoro, 134
FERC ] 61,214 at PP 53, 60-62). Joint Complainants assert that a gap
between revenues and costs of 7.5% equates to a 25% increase in ROE
over the industry-wide average reported on page 700. Joint
Complainants Initial Comments at 61-62 (citing Brattle Report at PP
41-47 & Figures 7-9). However, the threshold for de-grandfathering
rates serves the different purpose of measuring a ``substantial
change in economic circumstances'' since a specific point in time.
E.g., Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,944. The
issue when evaluating an index rate increase is not a change in
economic circumstances, but, rather, whether the annual index
increase ``is so substantially in excess of the actual cost
increases'' that the resulting rate is unjust and unreasonable. 18
CFR 343.2(c)(1).
\133\ We are not persuaded by Liquids Shippers' claim that the
Commission should investigate index increases when revenues are 105%
of costs, arguing that this approximates the top of the zone of
reasonableness (an ROE of 12.3%) as determined by the discounted
cash flow (DCF) analysis in recent oil pipeline cost-of-service
cases. This argument fails because the just and reasonable return
permitted by a rate case is not equivalent to the return permitted
by indexing. Indexing permits efficient pipelines to recover more
(earn a higher return) than they would under a cost-of-service
model. Likewise, inefficient pipelines recover less than they would
under a cost-of-service model (earning a lower return). By capping
the return at a cost-of-service level, Liquids Shippers' proposal
would deny the benefit that indexing is meant to provide to
efficient pipelines while continuing to subject less efficient
pipelines to the downsides of indexing.
\134\ See AOPL II, 281 F.3d at 244 (quoting EPAct 1992, Pub. L.
102-486 1801(a)) (``[A] regime based in large part on [cost-of-
service proceedings] would be inconsistent with Congress's mandate
under the EPAct for FERC to establish `a simplified and generally
applicable ratemaking methodology.' ''). Such narrow thresholds fail
to account for variability of costs and revenues from year to year.
Over- and under-recovery can vary widely from year to year. For
example, in 2020 and considering the data set of all pipelines, the
median variation from the prior year's recoveries was by 37.03
percentage points. Although a pipeline's revenues resulting from
indexed rates may track its costs, this is not necessarily true over
the short term. If such a pipeline's recoveries fluctuate around
zero but with significant annual variations, denying the pipeline
index rate increases in those years when revenues modestly exceed
costs would, over time, cause the pipeline to under-recover its
costs in the long term. To avoid such under-recoveries, the pipeline
would need to file a cost-of-service rate increase.
\135\ See supra P 30. For instance, if a pipeline's revenues
exceed its costs by 5%, the pipeline would be denied an index rate
increase under Liquids Shippers' 5% revenues-test threshold. On the
other hand, if a pipeline's costs exceeded its revenues by 5%, then
the pipeline would only receive that year's index rate increase,
which may be insufficient for the pipeline to eliminate the under-
recovery.
---------------------------------------------------------------------------
E. Consideration of Additional Factors in Complaint Proceedings
1. Comments
62. The NOI invited comment on how and whether the Commission
should consider additional factors in evaluating complaints against
index rate increases.\136\ SFPP objects to the Commission's proposal,
arguing that introducing undefined ``additional factors'' would create
ambiguity and regulatory uncertainty, which would impede the gains
achieved by eliminating the Substantially Exacerbate Test as well as
undermine the goal of creating streamlined procedures that reduce
litigation.\137\ Therefore, SFPP requests that the Commission clarify
that it will not consider additional factors beyond the Percentage
Comparison Test.
---------------------------------------------------------------------------
\136\ NOI, 170 FERC ] 61,252 at P 14.
\137\ SFPP Initial Comments at 21.
---------------------------------------------------------------------------
2. Commission Determination
63. We decline to clarify that the Commission will not consider
additional factors beyond the Percentage Comparison Test when
evaluating complaints to an index rate increase. While our intention,
based upon this record in this proceeding, is to generally limit our
consideration of challenges to index rate increases to the Percentage
Comparison Test, we recognize that the Commission must address specific
arguments as they arise in specific cases.
F. Whether To Adopt Broader Changes to the Commission's Oil Pipeline
Ratemaking Methodologies
1. Comments
64. Liquids Shippers claim that the indexing methodology allows for
significant over-recovery and should be reexamined, referring to
arguments they made in support of the 2016 ANOPR.\138\
---------------------------------------------------------------------------
\138\ See Liquids Shippers Initial Comments at 21-22.
---------------------------------------------------------------------------
65. CAPP contends that the Commission should perform a
comprehensive review of the indexing regime to ensure that shipper and
pipeline interests are appropriately balanced and to determine whether
the regime can be improved.\139\ CAPP further argues that because the
current cost-of-service ratemaking process is cumbersome, costly, and
time-consuming, the Commission should consider overhauling the cost-of-
service ratemaking process rather than using its flaws as justification
for increased reliance on the indexing system.\140\
---------------------------------------------------------------------------
\139\ CAPP Initial Comments at 9-13.
\140\ Id. at 9, 17-18; CAPP Reply Comments at 1-3.
---------------------------------------------------------------------------
2. Commission Determination
66. We reject Liquids Shippers' and CAPP's arguments that the
Commission should reexamine the indexing methodology and cost-of-
service ratemaking process as outside the scope of this proceeding. The
NOI requested comment on the Commission's proposal for evaluating
complaints against index rate increases under Sec. 343.2(c)(1).\141\
Because Liquids Shippers' and CAPP's arguments exceed the scope of this
inquiry, we decline to address their proposals.
---------------------------------------------------------------------------
\141\ NOI, 170 FERC ] 61,252 at P 14.
---------------------------------------------------------------------------
III. Document Availability
67. In addition to publishing the full text of this document in the
Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
internet through the Commission's Home Page (<a href="http://www.ferc.gov">http://www.ferc.gov</a>).
68. From the Commission's Home Page on the internet, this
information is available on eLibrary. The full text of this document is
available on eLibrary in PDF and Microsoft Word format for viewing,
printing, and/or downloading. To access this document in eLibrary, type
the docket number excluding the last three digits of this document in
the docket number field.
69. User assistance is available for eLibrary and the Commission's
website during normal business hours from the Commission's Online
Support at (202) 502-6652 (toll free at 1-866-208-3676), via email at
<a href="/cdn-cgi/l/email-protection#ef898a9d8c80818386818a9c9a9f9f809d9baf898a9d8cc1888099"><span class="__cf_email__" data-cfemail="85e3e0f7e6eaebe9ecebe0f6f0f5f5eaf7f1c5e3e0f7e6abe2eaf3">[email protected]</span></a>, or from the Public Reference Room at (202)
502-8371, TTY (202) 502-8659. Email the Public Reference Room at
<a href="/cdn-cgi/l/email-protection#9aeaeff8f6f3f9b4e8fffcffe8fff4f9ffe8f5f5f7dafcffe8f9b4fdf5ec"><span class="__cf_email__" data-cfemail="d5a5a0b7b9bcb6fba7b0b3b0a7b0bbb6b0a7babab895b3b0a7b6fbb2baa3">[email protected]</span></a>.
By the Commission. Commissioner Danly is not participating.
[[Page 65175]]
Issued: October 20, 2022.
Kimberly D. Bose,
Secretary.
Appendix: Percentage Comparison Test and Substantially Exacerbate Test
Formulas
BILLING CODE 6717-01-P
[GRAPHIC] [TIFF OMITTED] TR28OC22.003
[FR Doc. 2022-23343 Filed 10-27-22; 8:45 am]
BILLING CODE 6717-01-C
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on October 28, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.