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Notice2022-27850

Oil Pipeline Affiliate Committed Service

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Published

December 22, 2022

Issuing agencies

Energy DepartmentFederal Energy Regulatory Commission

Abstract

The Federal Energy Regulatory Commission (Commission) proposes to revise its policy for evaluating whether contractual committed transportation service complies with the Interstate Commerce Act where the only shipper to obtain the contractual committed service is the pipeline's affiliate. Specifically, in addition to those factors the Commission has considered in the past, the Commission proposes to evaluate the rate and non-rate terms offered in the open season to ensure they were not structured to favor the pipeline's affiliate and to exclude nonaffiliates.

Full Text

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<title>Federal Register, Volume 87 Issue 245 (Thursday, December 22, 2022)</title>
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[Federal Register Volume 87, Number 245 (Thursday, December 22, 2022)]
[Notices]
[Pages 78670-78679]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-27850]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. PL23-1-000]

Oil Pipeline Affiliate Committed Service

AGENCY: Federal Energy Regulatory Commission.

ACTION: Proposed policy statement.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) proposes
to revise its policy for evaluating whether contractual committed
transportation service complies with the Interstate Commerce Act where
the only shipper to obtain the contractual committed service is the
pipeline's affiliate. Specifically, in addition to those factors the
Commission has considered in the past, the Commission proposes to
evaluate the rate and non-rate terms offered in the open season to
ensure they were not structured to favor the pipeline's affiliate and
to exclude nonaffiliates.

DATES: Initial Comments are due on or before February 13, 2023, and
Reply Comments are due on or before March 30, 2023.

ADDRESSES: Comments, identified by docket number, may be filed in the
following ways. Electronic filing through <a href="http://www.ferc.gov">http://www.ferc.gov</a>, is
preferred.
<bullet> Electronic Filing: Documents must be filed in acceptable
native applications and print-to-PDF, but not in scanned or picture
format.
<bullet> For those unable to file electronically, comments may be
filed by USPS mail or by hand (including courier) delivery.
[cir] Mail via U.S. Postal Service Only: Addressed to: Federal
Energy Regulatory Commission, Secretary of the Commission, 888 First
Street NE, Washington, DC 20426.
[cir] Hand (including courier) delivery: Deliver to: Federal Energy
Regulatory Commission, 12225 Wilkins Avenue, Rockville, MD 20852.
The Comment Procedures Section of this document contains more
detailed filing procedures.

FOR FURTHER INFORMATION CONTACT:
Michaela Burroughs (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE, Washington,
DC 20426, (202) 502-8128, <a href="/cdn-cgi/l/email-protection#88c5e1ebe0e9ede4e9a6cafdfafae7fdefe0fbc8eeedfaeba6efe7fe">[email&#160;protected]</a>
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#3e7b485f50106d4a5b57505b4c7e585b4c5d10595148">[email&#160;protected]</a>
Adrianne Cook (Technical Information), Office of Energy Market
Regulation, Federal Energy Regulatory Commission, 888 First Street NE,
Washington, DC 20426, (202) 502-8849, <a href="/cdn-cgi/l/email-protection#7031140219111e1e155e331f1f1b30161502135e171f06">[email&#160;protected]</a>
Matthew Petersen (Technical Information), Office of Energy Market
Regulation, Federal Energy Regulatory Commission, 888 First Street NE,
Washington, DC 20426, (202) 502-6845, <a href="/cdn-cgi/l/email-protection#125f7366667a77653c427766776061777c52747760713c757d64">[email&#160;protected]</a>

SUPPLEMENTARY INFORMATION:
1. In this Proposed Policy Statement, we propose to revise our
policy for evaluating whether contractual committed transportation
service between oil pipelines and their affiliates complies with the
Interstate Commerce Act (ICA).\1\ As discussed below, the Commission
relies upon the pipeline's holding of a public open season followed by
an arm's-length transaction to conclude that the resulting contractual
committed service is just and reasonable and not unduly discriminatory.
However, when the only shipper to agree to a committed transportation
service is the pipeline's affiliate (Affiliate-Only Committed Service),
there is no arm's-length transaction to support a presumption of
reasonableness and nondiscrimination. Instead, the contractual service
offered in the open season may have been structured to unduly
discriminate against nonaffiliates. We are concerned that our present
policies are not sufficient to address these issues and

[[Page 78671]]

ensure that Affiliate-Only Committed Service complies with the ICA.
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\1\ 49 U.S.C. app. 1 et seq.
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2. Accordingly, we propose to change our policy for determining
whether an Affiliate-Only Committed Service is just, reasonable, and
not unduly discriminatory. In addition to those factors the Commission
has considered in the past, we propose to evaluate the rate and non-
rate terms offered in the open season to ensure they were not
structured to favor the pipeline's affiliate and to exclude
nonaffiliates. We believe that this proposal will provide guidance to
industry participants that will aid in the efficient deployment of
capital and the monitoring of transportation service provided under
long-term contracts. We seek comment on our proposal.

I. Background on Oil Pipeline Contracting Arrangements

3. Under the ICA, an oil pipeline is a common carrier that must
provide transportation to shippers upon reasonable request.\2\ A
pipeline has the burden to demonstrate that its proposed rates and
services are just, reasonable, and not unduly discriminatory or
preferential.\3\ Historically, pipelines have offered transportation
service on a walk-up basis without having contracts with shippers.
Since the mid-1990s,\4\ however, the Commission has also approved oil
pipeline transportation rates and terms of service pursuant to long-
term contracts with ship-or-pay obligations.\5\ Because committed
contract shippers are not similarly situated to uncommitted
shippers,\6\ they may receive service as defined by the contract
(contractual committed service) \7\ that differs from uncommitted
service.
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\2\ Id. at 1(4) (``It shall be the duty of every common carrier
subject to this chapter to provide and furnish transportation upon
reasonable request therefor.''); Magellan Midstream Partners, L.P.,
161 FERC ] 61,219, at P 12 (2017) (Magellan) (``By definition, a
pipeline is a common carrier, and is bound by the ICA to ship
product as long as a reasonable request for service is made by a
shipper. . . .''), order on reh'g and clarification, 181 FERC ]
61,207 (2022) (Magellan Rehearing Order).
\3\ See, e.g., Laurel Pipe Line Co., 167 FERC ] 61,210, at P 24
n.37 (2019) (oil pipelines have the burden to demonstrate that
proposed rates are just and reasonable); ONEOK Elk Creek Pipeline,
L.L.C., 167 FERC ] 61,277, at P 4 (2019) (``An oil pipeline bears
the burden of demonstrating that proposed rates and changes to its
tariff are just and reasonable.''); see also 49 U.S.C. app. 1, 2,
3(1), 5, 7, 15(1).
\4\ See Express Pipeline P'ship, 76 FERC ] 61,245 (1996)
(Express).
\5\ ``Contract'' as used in this Proposed Policy Statement
includes transportation service agreements (TSA) and any similar
contract offered by a pipeline under which an entity must make a
term commitment associated with interstate oil pipeline
transportation service subject to the Commission's jurisdiction
under the ICA. See, e.g., Saddlehorn Pipeline Co., 169 FERC ] 61,118
(2019); EnLink Del. Crude Pipeline, LLC, 166 FERC ] 61,226 (2019);
Kinder Morgan Pony Express Pipeline LLC, 141 FERC ] 61,180 (2012).
\6\ See Express, 76 FERC at 62,254 (``[Committed] shippers are
not similarly situated with uncommitted shippers because in any
given month, uncommitted shippers may choose to ship on [the
pipeline] or not. Uncommitted shippers have the maximum flexibility
to react to changes in their own circumstances or in market
conditions. Uncommitted shippers do not provide the revenue
assurances, planning assurances, and a basis for constructing the
pipeline that [committed] shippers provide.'').
\7\ The contractual committed service is defined by the rates
and terms the shipper agreed to in the contract. The Commission has
explained that different contractual terms of service (such as
tiered rates associated with different volume or term-length
commitments or different prorationing benefits) are distinct
committed services. See Seahawk Pipeline, LLC, 175 FERC ] 61,186, at
PP 12-14 (2021) (``differing terms and conditions of service . . .
creates distinct services and classes of shippers''); Medallion Del.
Express, LLC, 170 FERC ] 61,047, at P 27 (2020) (finding two
distinct services where one class of shippers made term and volume
commitments that were not required of the other class of shippers);
Medallion Midland Gathering, LLC, 170 FERC ] 61,048, at P 30 (2020)
(Medallion Midland) (same); EnLink NGL Pipeline, LP, 167 FERC ]
61,024, at P 18 n.22 (2019) (finding a distinct committed service
for expansion capacity even though the pipeline offered the same
committed rate as already in effect for its base capacity committed
service).
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4. Contractual committed service complies with the ICA's common-
carriage and nondiscrimination requirements when the same rates and
terms are offered in a public open season where all interested shippers
have an equal opportunity to obtain the committed service.\8\ When the
open season results in an arm's-length agreement, the Commission
presumes the contractual committed service is just and reasonable and
non-discriminatory.\9\ In such cases, the presence of one or more
nonaffiliated contracting shippers supports a presumption of
reasonableness and nondiscrimination because the Commission assumes
that nonaffiliated shippers are sophisticated parties that can be
relied upon to protect their own interests from those of the pipeline,
ensuring the agreement responds to competitive conditions.\10\
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\8\ Sea-Land Serv., Inc v. ICC, 738 F.2d 1311, 1317 (D.C. Cir.
1984) (``[C]ontract rates can . . . be accommodated to the principle
of nondiscrimination by requiring a carrier offering such rates to
make them available to any shipper willing and able to meet the
contract's terms.''); Express Pipeline P'ship, 77 FERC ] 61,188, at
61,756 (1996) (``The proposed term rate structure of Express does
not violate the antidiscrimination or undue preference provisions of
the [ICA] because such term rates were made available to all
interested shippers.''); Enter. Crude Pipeline LLC, 166 FERC ]
61,224, at P 11 (2019) (Enterprise Crude) (``The vital element of
the contracting arrangements . . . has been an open season that
provided all shippers equal opportunity to avail themselves of the
offered capacity''); Enter. TE Prods. Pipeline Co., 144 FERC ]
61,092, at P 22 (2013) (``The availability of discount rates to all
interested shippers is the fundamental requirement upon which
rulings approving such rate structures have been based. Contract
rates can only satisfy the principle of nondiscrimination when the
carrier offering such rates is required to make them available to
`any shipper willing and able to meet the contract's terms.' All
prospective shippers must have an equal, non-discriminatory
opportunity to review and enter into contracts for committed
service.'') (quoting Sea-Land, 738 F.2d at 1317) (emphasis in
original)); Seaway Crude Pipeline Co., 146 FERC ] 61,151, at P 37
(2014) (open season process must be ``open, transparent, and free of
the traditional contract nullifiers such as fraud''); see also Nexen
Mktg. U.S.A., Inc. v. Belle Fourche Pipeline Co., 121 FERC ] 61,235,
at PP 1, 46-49 (2007) (Nexen) (``The allocation of expansion
capacity during the open season was inconsistent with the principles
of common carriage because all shippers were not given an equal
opportunity to obtain the expansion capacity.''); White Cliffs
Pipeline, L.L.C., 148 FERC ] 61,037, at PP 47-51 (2014) (explaining
an open season must ``afford all potentially interested shippers . .
. a fair and equal opportunity to acquire the . . . capacity'' and
finding the pipeline failed to meet ``basic common carrier and anti-
discrimination obligations'' when it ``afforded an undue preference
to the shippers that contracted for [ ] capacity outside of a valid
open season process'') (emphasis in original).
\9\ E.g., Tesoro High Plains Pipeline Co., 148 FERC ] 61,129, at
P 23 (2014) (``The Commission honors the contract terms entered into
by sophisticated parties that engage in an arms-length
negotiation.''); Seaway Crude Pipeline Co., Opinion No. 546, 154
FERC ] 61,070, at PP 40-42 (2016) (holding that a proper review of a
pipeline's contractual committed rates includes investigating
whether the open season involved arm's-length negotiations); Seaway
Crude Pipeline Co., 146 FERC ] 61,151 at P 25 (``Absent a compelling
reason, it would be improper to second guess the business and
economic decisions made between sophisticated businesses when
entering negotiated rate contracts.'').
\10\ Express, 76 FERC at 62,254 (``If [contract] terms result in
lower costs or respond to unique competitive conditions, then
shippers who agree to enter into the contract are not similarly
situated with other shippers who are unwilling or unable to do
so.'') (quoting Sea-Land, 738 F.2d at 1316); see also Sea-Land, 738
F.2d at 1316 (``The core concern in the nondiscrimination area has
been to maintain equality of pricing for shipments subject to
substantially similar costs and competitive conditions, while
permitting carriers to introduce differential pricing where
dissimilarities in those key variables exist.''); Seaway Crude
Pipeline Co., 146 FERC ] 61,151 at P 28 (``When reviewing the
justness and reasonableness of a contract rate, it is not primarily
to relieve one party or another of what they deem an improvident
bargain, especially in negotiations involving sophisticated business
entities. However, contract negotiations must be held in good faith
and not involve fraud or improper conduct.'').
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II. Concerns Regarding Affiliate-Only Committed Service

5. We are concerned regarding the adequacy of our present policies
for addressing situations where, following an open season, only the
pipeline's affiliated \11\ shipper agrees to a

[[Page 78672]]

contractual committed service (Affiliate-Only Committed Service).\12\
This has arisen in several recent filings with the Commission.\13\ As
discussed below, when an open season results in an Affiliate-Only
Committed Service: (1) there may be concerns about the fairness of the
open season; (2) there is no arm's-length transaction supporting a
presumption of reasonableness; and (3) there is an inherent incentive
for the pipeline to unduly discriminate in favor of its affiliate. We
are concerned that our present policies do not adequately address these
issues to ensure fairness to nonaffiliated shippers participating in
oil pipeline open seasons.\14\
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\11\ ``Affiliate'' or ``affiliated'' as used in this Proposed
Policy Statement means an entity that, directly or indirectly,
controls, is controlled by, or is under common control with, the oil
pipeline carrier. This definition is based upon the Commission's
Standards of Conduct regulations for electric utilities and natural
gas pipelines. See 18 CFR 358.3(a); see also id. pt. 352 (defining
``affiliated companies'' in a similar manner for accounting
purposes). The Commission's Standards of Conduct regulations define
``control'' as ``the direct or indirect authority, whether acting
alone or in conjunction with others, to direct or cause to direct
the management policies of an entity'' and specify that ``[a] voting
interest of 10% or more creates a rebuttable presumption of
control.'' Id. 358.3(a)(3).
\12\ As used in this Proposed Policy Statement, ``Affiliate-Only
Committed Service'' refers to a contractual committed service that
is agreed to by only the pipeline's affiliate(s) and not any
nonaffiliated entity. As explained above, different contractual
terms of service (such as tiered rates associated with different
volume or term-length commitments, or different prorationing
benefits) are distinct committed services. See supra n.7. For
example, when a pipeline offers a contract that includes various
rate, term, and volume-commitment tiers, an Affiliate-Only Committed
Service occurs if only the pipeline's affiliate agrees to a certain
tier, notwithstanding the fact that nonaffiliated shippers may have
agreed to other tiers offered in the contract. In this example, the
Affiliate-Only Committed Service is defined by the specific rate,
volume, and term-length tier agreed to by the affiliated shipper but
no nonaffiliated shippers. In contrast, any specific tier agreed to
by an affiliate and one or more nonaffiliated shippers is not an
Affiliate-Only Committed Service.
\13\ See, e.g., Seahawk, 175 FERC ] 61,186; Medallion Pipeline
Co., 170 FERC ] 61,192, at P 7 (2020) (Medallion); Medallion Del.
Express, LLC, 163 FERC ] 61,170, at P 8 (2018); Medallion Midland,
170 FERC ] 61,048; ONEOK Elk Creek, 167 FERC ] 61,277; Blue Racer
NGL Pipelines, LLC, 162 FERC ] 61,220, at P 6 (2018) (Blue Racer);
Midstream Crude Oil Pipeline, LLC, 160 FERC ] 61,010, at P 4 (2017)
(Stakeholder); Medallion Pipeline Co., 157 FERC ] 61,075, at P 11
(2016); EnLink Crude Pipeline, 157 FERC ] 61,120, at P 4 (2016)
(EnLink Crude).
\14\ New York v. United States, 331 U.S. 284, 296 (1947) (``The
principal evil at which the Interstate Commerce Act was aimed was
discrimination in its various manifestations.''). We recognize that
the Commission issued a proposed policy statement in Docket No.
PL21-1-000 proposing guidance for oil pipelines to demonstrate that
proposed rates and terms pursuant to affiliate-only contracts comply
with the ICA. Oil Pipeline Affiliate Contracts, 173 FERC ] 61,063
(2020). The Commission withdrew that proposed policy statement
shortly after initial comments were filed. Oil Pipeline Affiliate
Contracts, 173 FERC ] 61,250 (2020). Since that time, we have
continued to consider our policies for evaluating Affiliate-Only
Committed Service. Although we recognize that the Commission
received initial comments in Docket No. PL21-1, we observe that the
proposed policy changes discussed herein differ from the proposal in
Docket No. PL21-1 in multiple respects, including modifications to:
(1) the proposed cost-of-service safe-harbor; and (2) standards for
evaluating non-rate terms. Moreover, because the Commission withdrew
the proposal in Docket No. PL21-1 before reply comments were filed,
the record in that proceeding does not include responses to
arguments raised in the initial comments.
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6. First, parties have raised concerns in various proceedings that
pipelines may be affording an undue preference to their affiliates
during the open season process for committed capacity.\15\ While
commercial circumstances may cause an affiliate to be the only shipper
to agree to a committed service, the Commission must ensure that
Affiliate-Only Committed Service is just and reasonable and does not
result from an open season that discriminates against nonaffiliates.
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\15\ See, e.g., Blue Racer, 162 FERC ] 61,220 at P 16 (protester
alleged that ``the open season and required shipper commitments
serve only to benefit [the pipeline's] affiliate''); N.D. Pipeline
Co., 147 FERC ] 61,121, at P 20 (2014) (protester alleged that
pipeline's proposed rate structure ``appears designed to confer
economic benefits on an affiliated shipper''); Shell Trading (US)
Co., Comments, Docket No. OR17-2-001, at 7 (filed Mar. 14, 2018)
(Shell Comments) (expressing concerns that ``new capacity can be
priced in a way that is uneconomical for an independently
functioning shipper but could be economical for an affiliated
marketer through direct sales of capacity at customized rates, or
through commodity transactions which have the same economic impact
as such direct sales, taking advantage of its integrated company
finances''); Magellan Midstream Partners, L.P., Request for
Rehearing, Docket No. OR17-2-001, at 5 (filed Dec. 22, 2017)
(requesting clarification regarding whether a pipeline can structure
the terms and conditions of an open season such that, due to
integrated-company economics, its marketing affiliate is the only
shipper that can enter a contract for capacity); Liquids Shippers
Grp., Comments, Docket No. OR17-2-000, at 4 (filed Dec. 14, 2016)
(expressing ``concerns regarding the potential for undue
discrimination or preference by a common carrier in favor of a
marketing affiliate''); Airlines for America and Nat'l Propane Gas
Ass'n, Petition for Rulemaking, Docket No. RM18-10-000, at 24 (filed
Feb. 1, 2018) (asserting that ``pipelines are coordinating with
their marketing affiliates to offer preferential rates and terms of
service'').
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7. Second, unlike agreements with nonaffiliates, Affiliate-Only
Committed Service does not result from arm's-length transactions.\16\
In the absence of an arm's-length transaction, the Commission lacks the
same assurance that the Affiliate-Only Committed Service reflects just
and reasonable and nondiscriminatory terms. Rather, an affiliated
shipper may be indifferent to any rate paid to its affiliated pipeline
because the expenditures and earnings of the affiliates are combined at
the parent-company level under integrated-company economics.\17\ Thus,
one way for a pipeline to provide its affiliate unduly preferential
access to capacity is to offer a contract rate in the open season that
is onerous or uneconomic for any nonaffiliated market participant.
Similarly, an affiliate may not be meaningfully bound to any onerous
terms in the contract such as deficiency or shortfall penalties because
deficiency payments and penalties may be transfer payments within an
integrated economic entity. Therefore, the potential exists for a
pipeline to unduly discriminate in favor of its affiliate by offering
onerous or uneconomic contractual rates or terms designed to prevent
nonaffiliated shippers from obtaining the contractual committed
service.\18\
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\16\ Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 771
(1984) (``A parent and its wholly owned subsidiary have a complete
unity of interest. Their objectives are common, not disparate; their
general corporate actions are guided or determined not by two
separate corporate consciousnesses, but one.''); Tapstone Midstream,
LLC, 150 FERC ] 61,016, at P 15 (2015) (``Because the shipper is an
affiliate, there is no assurance that there was an arms-length
negotiation between the entities agreeing to the rate.''); Opinion
No. 546, 154 FERC ] 61,070 at PP 92-96 (sales between affiliates are
not arm's-length because ``arm's length negotiations or transactions
are characterized as adversarial negotiations between parties that
are each pursuing independent interests''); Black's Law Dictionary
(11th ed. 2019) (defining ``arm's-length'' as ``involving dealings
between two parties who are not related or not on close terms and
who are presumed to have roughly equal bargaining power'').
\17\ See Magellan, 161 FERC ] 61,219 at P 14 (while the
marketing affiliate ``would facially pay its pipeline's filed tariff
rate, and the [m]arketing [a]ffiliate would sell that capacity for
less than that rate, the entire transaction could nevertheless yield
a net profit to the integrated company''); see also Williams Pipe
Line Co., Opinion No. 154, 21 FERC ] 61,260, at 61,587 n.115 (1982)
(``If the X Oil Company charges itself a lot of money for shipping
its own oil over its own line, that is just bookkeeping. But suppose
that X also charges Y, an unaffiliated shipper, that same high rate
for the use of its line. For Y, that high rate is very real. So we
now have something that some will undoubtedly view as undue
discrimination of a perniciously anticompetitive type.'').
\18\ This issue was raised in a request for rehearing of the
Commission's order in Magellan, 161 FERC ] 61,219, asking whether a
pipeline can structure the terms and conditions of an open season
such that, due to integrated-company economics, its marketing
affiliate is the only shipper that can enter into a contract for
capacity. The Commission denied this request for clarification as
outside the scope of that proceeding. Magellan Rehearing Order, 181
FERC ] 61,207 at P 28. A shipper also filed comments in that
proceeding raising concerns that oil pipelines are structuring open
seasons in ways that are economical only for their affiliated
shippers, which ``threatens . . . access to interstate liquids
transportation capacity by other unaffiliated shippers'' and leaves
them at a disadvantage in the marketplace. Shell Comments at 6-8.
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8. Third, the Commission has long recognized that there is an
inherent incentive for a regulated entity to unduly discriminate in
favor of an affiliate.\19\ In other contexts, the

[[Page 78673]]

Commission has found that affiliate transactions require additional
scrutiny.\20\ The Commission has adopted policies in these other
contexts to mitigate concerns that affiliates may coordinate in ways
that involve self-dealing and anti-competitive behavior to the
detriment of other customers.\21\ We believe such considerations are
appropriate here because a similar potential exists for an oil pipeline
to afford its affiliate an undue preference.\22\
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\19\ Ne. Utils. Serv. Co., 66 FERC ] 61,332, at 62,090 (1994)
(``In arm's-length transactions, assuming relatively equal
bargaining strength between the parties, the buyer will be able to
protect itself against excessive charges or unreasonable contract
provisions. . . . In the case of affiliate transactions, however,
the buyer has less incentive to bargain for the lowest possible
rates and most reasonable contract provisions, because ultimately
all provisions will benefit the common parent.''); Iowa S. Utils.
Co., 58 FERC ] 61,317, at 62,014 n.10 (``Self-dealing may arise in
transactions between affiliates because such affiliates may have
incentives to offer terms to one another which are more favorable
than those available to other market participants.''), reh'g denied,
59 FERC ] 61,193 (1992); see also Ass'n Gas Distribs. v. FERC, 824
F.2d 981, 1009 (D.C. Cir. 1987) (discounts in favor of a pipeline's
gas trading affiliate ``may carry more than the usual risk of undue
discrimination'').
\20\ E.g., Ind. Mun. Power Agency v. FERC, 56 F.3d 247, 254
(D.C. Cir. 1995) (``[T]he Commission gives `special scrutiny' to
fuel supply contracts between a utility and its subsidiary or an
affiliated company.''); Allocation of Capacity on New Merch.
Transmission Projects & New Cost-Based, Participant-Funded
Transmission Projects, 142 FERC ] 61,038, at P 34 (2013) (developer
allocating capacity for new merchant transmission project has a
``high burden to demonstrate that the assignment of capacity to its
affiliate and the corresponding treatment of nonaffiliated potential
customers is just, reasonable, and not unduly preferential or
discriminatory''); Bidding by Affiliates in Open Season Bids for
Pipeline Capacity, Order No. 894, 76 FR 72301 (Nov. 23, 2011), 137
FERC ] 61,126 (2011) (rule to prevent affiliated entities from
coordinating their open season bids to obtain a disproportionate
share of natural gas pipeline capacity at the expense of single
bidders); Ne. Utils. Serv. Co., 66 FERC at 62,089 (``The Commission
long has recognized, and the courts have agreed, that transactions
between affiliated companies require close scrutiny.''); Iowa S.
Utils. Co., 58 FERC at 62,014 (``[I]n looking at dealings between
affiliates, the Commission is presented with a different set of
concerns . . . because affiliates share common corporate goals--
profits for stockholders that own both entities--and therefore have
an incentive to engage in preferential transactions.'').
\21\ See, e.g., Bos. Edison Co. Re: Edgar Elec. Co., 55 FERC ]
61,382, at 62, 167-68 n.56 (1991) (Edgar) (``The Commission's
concern with the potential for affiliate abuse is that a utility
with a monopoly franchise may have an economic incentive to exercise
market power through its affiliate dealings.''); Order No. 894, 137
FERC ] 61,126 at P 11 (multiple affiliates bidding in natural gas
pipeline open seasons harms other entities and their customers and
has a ``chilling effect on competition''); Chinook Power
Transmission, LLC, 126 FERC ] 61,134, at P 49 (2009) (heightened
scrutiny applies where a merchant transmission developer's
affiliates are anchor customers due to ``concerns that a utility
affiliate contract could shift costs to captive ratepayers of the
affiliate and subsidize the merchant project inappropriately'');
Magellan, 161 FERC ] 61,219 at P 14 (transactions between an oil
pipeline and its marketing affiliate would violate the ICA's
prohibition on rebates).
\22\ See Revisions to Oil Pipeline Regs. Pursuant to the Energy
Pol'y Act of 1992, Order No. 561, 58 FR 58753 (Nov. 4, 1993), FERC
Stats. & Regs. ] 30,985, at 30,960 (1993) (cross-referenced at 65
FERC ] 61,109) (recognizing ``a concern . . . with allowing a
pipeline that may possess market power to control prices in a market
to establish an initial rate through negotiations'' and requiring at
least one nonaffiliated shipper to agree to a rate to ``provide some
measure of protection against a pipeline exercising market power to
dictate the rate it will charge''), order on reh'g, Order No. 561-A,
59 FR 40243 (Aug. 8, 1994), FERC Stats. & Regs. ] 31,000, at 31,106
(1994) (cross-referenced at 68 FERC ] 61,138) (``The purpose of
requiring the one shipper who must agree to the initial rate to be
unaffiliated with the pipeline is to ensure that the agreement is
based upon arms-length negotiations.''), aff'd sub nom. Ass'n of Oil
Pipe Lines v. FERC, 83 F.3d 1424 (D.C. Cir. 1996); Seaway Crude
Pipeline Co., 146 FERC ] 61,151 at P 30 (oil pipelines must show
that a nonaffiliated entity agrees to a negotiated rate due to the
``concern that potential market power could be exercised against
shippers who did not agree to the negotiated rate''); Magellan, 161
FERC ] 61,219 at P 21 (finding an oil pipeline's proposed affiliate
transactions would ``violate the ICA's anti-discrimination
provisions by offering pipeline transportation pursuant to
customized terms, conditions, and rates unavailable to shippers who
utilize [the] pipeline directly through nominating volumes under the
pipeline's published tariff'').
---------------------------------------------------------------------------

9. In light of the above, we are concerned that our current
practices may not be sufficient to ensure Affiliate-Only Committed
Service is just, reasonable, and not unduly discriminatory under the
ICA.\23\ Notwithstanding the concerns discussed above, under present
policy, the Commission has generally approved Affiliate-Only Committed
Service rates and terms without distinguishing between affiliates and
nonaffiliates or evaluating whether the pipeline afforded its affiliate
an undue preference in the open season.\24\
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\23\ We observe that Congress brought oil pipelines under the
ICA to address concerns regarding affiliate collusion and
competitive imbalances caused by integrated ownership of
transportation facilities. See United States v. Champlin Refin. Co.,
341 U.S. 290, 297-298 (1951) (``There is little doubt, from the
legislative history, that the Act was passed to eliminate the
competitive advantage which existing or future integrated companies
might possess from exclusive ownership of a pipe line.''); The
Pipeline Cases (United States v. Ohio Oil Co.), 234 U.S. 548, 559
(1914) (``Availing itself of its monopoly of the means of
transportation the Standard Oil Company refused, through its
subordinates, to carry any oil unless the same was sold to it or to
them, and through them to it, on terms more or less dictated by
itself.''); Opinion No. 154, 21 FERC at 61,582 (Standard Oil ``kept
its crude pipeline rates high, thus enabling the railroads to hold
on to business that they would have lost had Standard [Oil] passed
the lower costs of pipeline transit on to unaffiliated shippers'' in
exchange for preferential rates from the railroads).
\24\ See, e.g., Medallion, 170 FERC ] 61,192; Medallion Del.
Express, LLC, 163 FERC ] 61,170 at P 8; Stakeholder, 160 FERC ]
61,010 at P 4; Medallion Pipeline Co., 157 FERC ] 61,075 at P 11;
EnLink Crude, 157 FERC ] 61,120 at P 4.
---------------------------------------------------------------------------

III. Proposed Policy

10. Upon consideration of the issues discussed above, we propose to
revise our policy for evaluating whether an open season resulting in
Affiliate-Only Committed Service is just, reasonable, and not unduly
discriminatory under the ICA.\25\ Specifically, as discussed below, we
propose: (1) a safe-harbor mechanism pipelines may use to demonstrate
that Affiliate-Only Committed Service rates are just, reasonable, and
not unduly discriminatory; and (2) standards for evaluating whether
Affiliate-Only Committed Service non-rate terms offered in the open
season were structured to unduly discriminate against nonaffiliates.
---------------------------------------------------------------------------

\25\ 49 U.S.C. app. 1, 2, 3(1), 5, 7, 15(1); see also Tex. &
Pac. Ry. Co. v. ICC, 162 U.S. 197, 233 (1896) (explaining that the
ICA's purpose is to ``make charges for transportation just and
reasonable'' and ``forbid undue and unreasonable preferences or
discriminations''); ICC v. Balt. & Ohio R.R. Co., 145 U.S. 263, 276
(1892) (stating that the ``principal objects'' of the ICA include
``secur[ing] just and reasonable charges for the transportation''
and ``prohibit[ing] unjust discriminations in the rendition of like
services under similar circumstances and conditions'').
---------------------------------------------------------------------------

11. We emphasize that under the proposed guidance, affiliates may
continue to participate in oil pipeline open seasons and become
committed shippers on their affiliated pipelines. Where an affiliate of
the pipeline and one or more nonaffiliated shippers agree to the same
contractual committed service offered in an open season, there is less
concern that a pipeline may have unduly discriminated in favor of its
affiliate.\26\ Further, the proposed guidance is not a blanket
prohibition on oil pipelines implementing Affiliate-Only Committed
Service. The fact that no nonaffiliated shipper agrees to a contractual
committed service does not, in and of itself, provide a basis for
finding that the pipeline unduly discriminated in favor of an
affiliate.\27\ There are legitimate reasons that nonaffiliated shippers
may choose not to make a term commitment to a particular service
offered under a contract by a pipeline.\28\ Instead, the

[[Page 78674]]

Proposed Policy Statement is intended to provide guidance regarding the
policy the Commission intends to apply when evaluating Affiliate-Only
Committed Service to ensure it is just, reasonable, and not unduly
discriminatory or preferential under the ICA.
---------------------------------------------------------------------------

\26\ For instance, in the absence of a protest, the Commission's
regulations allow pipelines to justify initial rates for new service
by filing a sworn affidavit that the rate is agreed to by at least
one non-affiliated person who intends to use the service in
question. 18 CFR 342.2(b).
\27\ See Magellan, 161 FERC ] 61,219 at P 19 (explaining that
the ICA does not impose ``a blanket restriction on integrated
company financing,'' but ``[t]he issue of integrated company
finances is instead a ratemaking and accounting matter concerning
the justness and reasonableness of a carrier's rates and rate
structures'').
\28\ We also recognize that in many circumstances, a pipeline
has an incentive to obtain commitments from nonaffiliated shippers.
Securing term commitments from nonaffiliated shippers can mitigate a
pipeline's financial risk and provide the pipeline with a stable,
assured revenue stream supporting the pipeline. E.g., TransCan.
Keystone Pipeline, LP, 125 FERC ] 61,025, at P 21 (2008) (committed
rates ``support pipelines' efforts to attract shippers that will
make long-term volume commitments to support the construction of new
facilities.''); Enbridge Pipelines (S. Lights) LLC, 141 FERC ]
61,244, at P 4 (2012) (``[I]t was necessary to obtain financial
support through long-term volume commitments without which the
project could not move forward.''); Express, 76 FERC at 62,254
(``[L]onger term commitments provide greater assurances . . . and
hence more long-term revenue stability'').
---------------------------------------------------------------------------

A. Affiliate-Only Committed Service Rates

12. The Commission's evaluation of whether the open season favored
a pipeline's affiliate requires considering the contractual committed
rate that was offered in the open season. During the open season
process, a shipper must decide whether to commit to pay the contractual
committed rate, including any rate increases permitted by the contract,
over the entire term of the agreement (which may span several
years).\29\ If no nonaffiliate agrees to such a rate, the rate does not
result from an arm's-length negotiation and there can be no presumption
that the rate is just and reasonable.\30\
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\29\ See, e.g., Medallion, 170 FERC ] 61,192 at PP 7-8
(pipeline's TSA with its affiliate had a 10-year term); ONEOK Elk
Creek Pipeline, L.L.C., 167 FERC ] 61,277 at P 3 (pipeline's TSA
with its affiliate had a 20-year term).
\30\ Whereas an excessively high rate could preclude a
nonaffiliate shipper from making a commitment, an affiliated shipper
may be indifferent to any rate paid to its affiliated pipeline
because the expenditures and earnings of the affiliates are combined
at the parent-company level under integrated-company economics. See
supra P 7 (citing Magellan, 161 FERC ] 61,219 at P 14; Opinion No.
154, 21 FERC at 61,587 n.115).
---------------------------------------------------------------------------

13. To provide greater certainty about how the Commission will
evaluate proposed Affiliate-Only Committed Service rates in the absence
of this presumption, we propose a safe-harbor mechanism for a pipeline
proposing an Affiliate-Only Committed Service to show that the rate
offered in the open season is just and reasonable and not designed to
exclude nonaffiliates. Under this safe harbor, where a pipeline shows
that it offered a rate at or below the cost-of-service over the full
term of the agreement, the Commission would presume the rate offered in
the open season was just, reasonable, and not unduly discriminatory.
Because the shipper in the open season must consider the rate that
applies over the full contract term, the safe harbor similarly
considers the rate over the full contract term. We believe that it is
appropriate for the proposed safe-harbor mechanism to rely on cost-of-
service support for the Affiliate-Only Committed Service rate because
it provides a method to demonstrate the open season was not structured
to favor the pipeline's affiliate and that, on the contrary, the
Affiliate-Only Committed Service rate is just and reasonable. In fact,
the Commission has long recognized that cost-of-service ratemaking
provides one mechanism for protecting against an exercise of market
power.\31\
---------------------------------------------------------------------------

\31\ See ExxonMobil Oil Corp. v. FERC, 487 F.3d 945, 961 (D.C.
Cir. 2007) (``[T]he purpose of a cost-of-service rate . . . is to
simulate what a pipeline's economic behavior would be in a
competitive market.''); SFPP, L.P., 121 FERC ] 61,240, at P 14
(2007) (stating that ``cost-of-service rate making seeks to
replicate a competitive rate''). For this reason, Sec. 342.2(a) of
Commission's regulations requires oil pipelines to provide cost-of-
service support for initial rates where the pipeline does not
provide that at least one nonaffiliated shipper who intends to use
the service has agreed to the rate. 18 CFR 342.2. When adopting the
initial rate regulation, the Commission rejected the suggestion that
an initial rate be entitled to a presumption of lawfulness. Instead,
the Commission required initial rates to be supported by either
agreement of a nonaffiliated shipper or a cost-of-service showing to
protect against the pipeline exercising market power and potentially
charging excessive rates to nonaffiliated shippers or unduly
preferential rates to affiliated shippers contrary to the
requirements of the ICA. See Order No. 561, FERC Stats. & Regs. ]
30,985 at 30,960.
---------------------------------------------------------------------------

14. We propose two ways for satisfying the safe harbor. First, a
pipeline could: (1) provide cost-of-service support for the initial
rate; \32\ (2) provide in the contract that adjustments to the rate
over the term of the contract by the pipeline would be pursuant to the
Commission's cost-of-service and indexing regulations; \33\ (3) provide
in the contract that the committed shipper has the right to directly
challenge the committed rate on a cost-of-service basis during the
term; \34\ and (4) provide that whenever the rate is established or
changed during the contract term on a cost-of-service basis, the cost
of service will be set at a 100% load factor (or some other reasonable
limit) as described below.
---------------------------------------------------------------------------

\32\ The cost-of-service showing could be similar to the
information required under Sec. 346.2 with the exception that the
rate would need to be based upon 100% load factor or some other
reasonable throughput projection as discussed below. See 18 CFR
346.2(b).
\33\ Id. 342.3, 342.4(a).
\34\ Id. 343.2(c).
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15. Alternatively, a pipeline could: (1) provide cost-of-service
estimates to support the contract rate for the entire contract term;
\35\ (2) provide in the contract that the committed shipper may have a
one-time right to challenge such cost-of-service showing made in the
pipeline's initial filing for the service; and (3) apply a 100% load
factor (or some other reasonable limit) as discussed below.
---------------------------------------------------------------------------

\35\ The cost-of-service estimates could be similar to the
information required under Sec. 346.2 but estimating the costs over
the full term of the contract. See id. 346.2. For example, in
Express, 76 FERC ] 61,245, a pipeline provided cost-of-service
estimates for each year its proposed contract rates would be in
effect under the 15-year term of the agreement. Although the
contract rates in Express were agreed to by a nonaffiliated shipper,
commenters may address whether a similar showing could be used to
support Affiliate-Only Committed Service rates.
---------------------------------------------------------------------------

16. Regarding our proposal to require that the cost of service be
based upon a 100% load factor or some other reasonable limit to satisfy
the safe harbor, we are concerned that a cost of service that uses an
unreasonably low load factor will not provide sufficient protections to
nonaffiliated shippers. For instance, using actual throughput for any
rate adjustments during the term of the agreement may place all of the
risk for reductions in the pipeline's throughput on the committed
shipper, which could deter participation by nonaffiliates.\36\
Additionally, a cost of service based on a new pipeline's initially low
throughput as it ramps up service may lead to a rate that is
significantly above a cost of service over the full term of the
contract.\37\
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\36\ In particular, revising a contract rate using a cost of
service that contains a reduced load factor could result in the rate
increasing significantly during the contract term. Transportation
rates are derived by dividing the pipeline's total costs by the
pipeline's throughput; thus, using a reduced load factor (i.e.,
reducing the throughput in the denominator) would result in a higher
rate. Stipulating in the contract that any rate adjustments during
the contract's term will use a 100% load factor or some other
reasonable limit would safeguard shippers against this risk.
\37\ See White Cliffs Pipeline, L.L.C., 126 FERC ] 61,070, at P
32 (2009) (requiring cost of service for a new pipeline to be
calculated based on design capacity rather than initial projected
throughput and noting the use of design capacity results in a
considerably lower rate); Enbridge Energy Co., Inc., 110 FERC ]
61,211, at PP 44-46 (2005) (rejecting proposal to calculate cost of
service using a projected throughput based only on initial volume
commitments (excluding volume commitment ramp-ups and any
uncommitted volumes), instead of design capacity).
---------------------------------------------------------------------------

17. We recognize that using a 100% load factor may not be
appropriate in all circumstances.\38\ However, we propose that when a
pipeline establishes or adjusts a contract rate on a cost-of-service
basis, the cost of service should use either a 100% load factor or an

[[Page 78675]]

alternative load factor that reasonably approximates the pipeline's
expected throughput over the life of the contract.
---------------------------------------------------------------------------

\38\ For example, a pipeline transporting crude oil from a
production field with declining output may experience commensurate
declines in throughput that justify using a load factor below 100%.
Alternatively, pipelines transporting products with seasonal demand
may operate at or near full capacity during certain periods and
below capacity in other periods, which could make using a 100% load
factor inappropriate.
---------------------------------------------------------------------------

18. As we consider this proposal, we recognize that Sec. 342.2(a)
of the Commission's existing regulations requires a pipeline to provide
a cost of service when filing an initial rate.\39\ However, the
initial-rate filing requirement in Sec. 342.2(a) does not incorporate
the full set of rate-related issues the Commission must consider prior
to concluding that the open season rate offering was consistent with
the ICA and accepting tariff records implementing an Affiliate-Only
Committed Service. As discussed above, the evaluation of the open
season requires consideration of the contractual committed rate over
the full term of the contract, not merely the initial rate at the time
the committed service begins. The contractual committed rate may
include escalation clauses \40\ or, alternatively, the cost of service
when the pipeline initiates service may not meaningfully correspond to
the cost of service over the life of the agreement.\41\ Therefore,
filing requirements under Sec. 342.2(a) for supporting initial rates
with cost-of-service data are not sufficient to ensure that a
pipeline's open season leading to an Affiliate-Only Committed Service
is just, reasonable, and not unduly discriminatory.
---------------------------------------------------------------------------

\39\ 18 CFR 342.2(a); see also Targa NGL Pipeline Co., 166 FERC
] 61,179 (2019), reh'g denied, 181 FERC ] 61,210 (2022).
\40\ For example, a pipeline could offer a ten-year contract in
an open season with a rate based on cost of service for the first
year of service, but drastic rate increases to unreasonable levels
for the remaining nine years in order to deter nonaffiliates from
obtaining the contractual committed service. The pipeline could
comply with Sec. 342.2(a) by filing cost-of-service workpapers
under 18 CFR part 346 that demonstrate the initial rate shown in its
tariff upon commencing the committed service is at or below a cost-
of-service ceiling level. Here, the pipeline's compliance with Sec.
342.2 is insufficient to demonstrate that the pipeline's open season
did not provide an undue preference to its affiliate.
\41\ For example, a pipeline's throughput levels often ramp-up
in the period after the pipeline begins service. As a result,
throughput levels in the first 12 months of service may be
significantly below the throughput levels over the subsequent years.
For example, if a pipeline signs a 10-year contract for committed
service and the pipeline's throughput levels in the first year are
only 25% of the throughput levels in years two through 10 of the
committed service contract, the cost of service based upon those low
throughput levels does not establish that the pipeline's rate over a
10-year period is just, reasonable, and not unduly discriminatory.
However, the initial rate regulation only considers a projection of
the first 12 months of service. See 18 CFR 346.2(a)(3) (``For a
carrier which is establishing rates for new service, the test period
will be based on a 12-month projection of costs and revenues.'').
---------------------------------------------------------------------------

19. We seek comment on the above proposed guidance for a safe
harbor when a pipeline shows that it offered a rate at or below cost of
service over the life of the contract. We recognize there may be other
ways to provide cost-of-service support for an Affiliate-Only Committed
Service rate over the full term of the contract than the approaches
proposed above and seek comment on any other methods for making such
cost-of-service showing.
20. Although we propose a cost-of-service safe harbor, we seek
comment on any other methods for demonstrating that an Affiliate-Only
Committed Service rate is not the product of undue discrimination
designed to exclude nonaffiliate shippers. Comments proposing
alternative methods for supporting Affiliate-Only Committed Service
rates should: (1) provide a detailed description of the proposed method
for justifying an Affiliate-Only Committed Service rate; (2) describe
the information a pipeline would need to provide in order to support
the proposed rate under the proposed method; (3) explain how such a
showing would support a finding that the rate is just and reasonable
and does not reflect undue discrimination towards potential
nonaffiliated shippers; and (4) address whether such method is
consistent with the Commission's regulations or, if not, changes that
would be necessary to permit such method.

B. Affiliate-Only Committed Service Non-Rate Terms

21. Where an open season results in Affiliate-Only Committed
Service, we also propose guidance and seek comment regarding the
policies the Commission should apply to evaluate whether non-rate terms
offered in the open season operated to exclude nonaffiliates from
obtaining the capacity.
22. As discussed above, the Commission honors contract rates and
terms that were agreed to in a transparent open season that involved
arm's-length negotiations among sophisticated business entities,
finding the rates and terms established by such contracts just and
reasonable and not unduly discriminatory or preferential.\42\ However,
when only an affiliated shipper agrees to a particular contractual
service, fairness cannot be inferred, and the Commission must evaluate
whether the pipeline gave an undue preference to its affiliate.\43\ As
with contract rates, a pipeline may design non-rate terms such as
minimum volume commitments,\44\ minimum term-length requirements,\45\
deficiency provisions,\46\ or duty-to-support clauses \47\ to make the
contractual committed service onerous or uneconomic for nonaffiliate
market participants. However, whereas the Commission may rely upon
cost-of-service ratemaking as a substitute for arm's-length
negotiations,\48\ no similar single proxy exists for non-rate terms.
Thus, the Commission may consider multiple factors in determining
whether non-rate terms were structured to unduly discriminate against
nonaffiliates, including whether the terms depart from industry
standards, impose excessive burdens or risk on nonaffiliates, or do not
appear reasonably tailored to further legitimate business objectives.
---------------------------------------------------------------------------

\42\ E.g., Tesoro High Plains Pipeline Co., 148 FERC ] 61,129 at
P 23 (``The Commission honors the contract terms entered into by
sophisticated parties that engage in an arms-length negotiation.'');
Opinion No. 546, 154 FERC ] 61,070 at PP 40-42 (holding that a
proper review of a pipeline's committed rates includes investigating
whether the open season involved arm's-length negotiations); Seaway
Crude Pipeline Co., 146 FERC ] 61,151 at P 25 (``Absent a compelling
reason, it would be improper to second guess the business and
economic decisions made between sophisticated businesses when
entering negotiated rate contracts.'').
\43\ New York v. United States, 331 U.S. at 296 (``The principal
evil at which the Interstate Commerce Act was aimed was
discrimination in its various manifestations.'').
\44\ See Enterprise Crude, 166 FERC ] 61,224 at P 8 (finding
that a contract offered in an open season that included a large
minimum volume requirement that was not justified by operational
requirements and only allowed pipeline to accept one committed
shipper ``had the effect of giving undue or unreasonable preference
or advantage to large shippers'').
\45\ Like minimum volume requirements, a long minimum term
commitment that departs from industry standards without any
explanation may be an indication that the pipeline intended to
unduly discriminate in favor of its affiliate. For example, an
affiliated shipper may incur no additional risk when agreeing to a
20-year contract with its affiliated pipeline, but a 20-year term
could impose significant risk on a nonaffiliated shipper that would
be required to pay the contract rate for its committed volumes (or
incur significant shortfall penalties) throughout the term.
\46\ As discussed above, an affiliate may not be meaningfully
bound to deficiency or shortfall penalties because deficiency
payments and penalties may be transfer payments within an integrated
economic entity.
\47\ See Nexen, 121 FERC ] 61,235 at PP 51-52 (finding invalid a
duty-of-support provision that ``can be interpreted in a broad
manner so as to limit a shipper's rights before the Commission'').
\48\ See supra P 13.
---------------------------------------------------------------------------

23. Furthermore, we propose to apply a rebuttable presumption that
Affiliate-Only Committed Service is unduly discriminatory and not just
and reasonable where the affiliate, any time before or shortly after
the committed service begins,\49\ remarkets the contracted capacity to
one or more nonaffiliated third parties.\50\ Given that

[[Page 78676]]

a nonaffiliated third party subsequently purchased the remarketed
capacity, a nonaffiliated third party's decision not to make a
commitment for capacity in the open season indicates that the terms
offered in the open season were less favorable. This raises concerns as
to whether the terms offered in the open season were consistent with
the terms demanded by the market in an arm's-length transaction.\51\
Moreover, the pipeline's apparent failure to offer terms in the open
season consistent with market demand raises further concerns that the
pipeline structured the open season offerings to ensure that the
affiliate would emerge from the open season process as the only
contractual committed shipper so that the affiliate could subsequently
remarket the capacity without complying with the full requirements of
the ICA that bind the pipeline itself.\52\ In this situation, we are
concerned that the open season and resulting Affiliate-Only Committed
Service may be unjust, unreasonable, and unduly discriminatory or
preferential.
---------------------------------------------------------------------------

\49\ This would include the open season and the time around the
open season.
\50\ Remarketing may include partial assignments, buy-sells,
capacity sales, or other similar arrangements involving
transportation service on the affiliated pipeline.
\51\ See Edgar, 55 FERC at 62,169 (evidence of nonaffiliated
buyers in the relevant market purchasing a similar service can be
relevant to assessing whether a regulated entity's transaction with
its affiliate was unduly discriminatory); Seahawk, 175 FERC ] 61,186
at P 15 (rejecting proposal to find an Affiliate-Only Committed
Service rate reasonable based on the affiliate's sub-assigning the
contract to a nonaffiliate under different terms).
\52\ See Magellan, 161 FERC ] 61,219 at P 6 (describing how a
pipeline's marketing affiliate could enter a contract in an open
season for the pipeline's capacity and then remarket the capacity to
third parties at different private rates and terms that would profit
the integrated company (comprised of the affiliated pipeline and
marketing arm)); see also Airlines for Am. and Nat'l Propane Gas
Ass'n, Petition for Rulemaking, Docket No. RM18-10-000, at 11 (filed
Feb. 1, 2018) (expressing concerns that ``pipelines and their
marketing affiliates appear to be engaging in the practice of
selling transportation service, on a non-transparent basis, to some
but potentially not all would-be purchasers below or above the rate
listed in the pipeline's FERC-jurisdictional tariff and thereby
selling transportation services at a loss or gain, on a
discriminatory and preferential basis, in order to benefit the
bottom line of the integrated company''); id. at 24 (expressing
concerns that pipelines are ``using their affiliate marketers to
offer discounted service on their pipeline systems at non-
transparent rates and terms unregulated by the Commission and not
necessarily available to all shippers on the subject pipeline'').
---------------------------------------------------------------------------

24. Accordingly, where a pipeline's affiliate, any time before or
shortly after the committed service begins, remarkets that capacity to
a nonaffiliate in an agreement involving transportation service,\53\ we
propose to apply a rebuttable presumption that the open season and the
ensuing Affiliate-Only Committed Service terms were unduly
discriminatory and not just and reasonable. However, we recognize that
this presumption will likely be rebuttable in some circumstances.
Relevant considerations could potentially include, but are not limited
to: (1) the affiliate's business purpose at the time of the open
season; (2) whether the affiliate is acting as a marketer or simply
selling the capacity in connection with the sale of all or part of its
business; (3) whether the sale was a limited, one-time sale; and/or (4)
how much time elapsed between the date of the open season and the
affiliate's decision to sell the capacity.
---------------------------------------------------------------------------

\53\ For example, if a pipeline indicated in a petition for
declaratory order or tariff filing that the affiliate committed
shipper intends to or has already entered an agreement with a
nonaffiliate prior to the end of the open season, then such facts
would lead to a rebuttable presumption that the open season and
resulting Affiliate-Only Committed Service were unduly
discriminatory and not just and reasonable.
---------------------------------------------------------------------------

25. We seek comment on this proposed presumption as well as the
considerations that could rebut the presumption.\54\ Moreover,
commenters may address situations in which a nonaffiliated party may
prefer to access capacity via a transaction with the pipeline's
affiliate as opposed to entering a contract for committed-shipper
service in the open season from the pipeline or requesting uncommitted
service offered in the pipeline's tariff. In addition, we seek comments
explaining whether any Commission policies or pipeline practices and
tariffs present disadvantages or impediments that create incentives for
entities to transact with a pipeline's affiliate rather than seek
committed or uncommitted service directly from the pipeline. For any
issues identified, we seek comment on potential actions that the
Commission could take to alleviate such disadvantages or impediments
while remaining consistent with our obligations under the ICA.
---------------------------------------------------------------------------

\54\ For instance, commenters could consider whether the
presumption could be rebutted where the affiliate: (i) remarkets the
capacity upon exiting the business several years after the open
season concludes; (ii) intermittently sells relatively small amounts
of excess capacity; or (iii) moves a third-party shipper's product
as part of a larger transaction involving processing that product at
the affiliate's processing facility.
---------------------------------------------------------------------------

IV. Conclusion

26. We seek input on the above proposals or any other approaches
for oil pipelines to demonstrate that Affiliate-Only Committed Service
is just and reasonable and not the result of undue discrimination to
exclude potential nonaffiliated committed shippers. We also invite
comments on any other issues or factors related to affiliate
preferences or affiliated shippers' activities on the secondary market
that the Commission should consider for inclusion in the policy
statement.

V. Comment Procedures

27. The Commission invites comments on this Proposed Policy
Statement by February 13, 2023, and Reply Comments by March 30, 2023.
Comments must refer to Docket No. PL23-1-000, and must include the
commenter's name, the organization they represent, if applicable, and
their address in their comments. All comments will be placed in the
Commission's public files and may be viewed, printed, or downloaded
remotely as described in the Document Availability section below.
Commenters on this proposal are not required to serve copies of their
comments on other commenters.
28. The Commission encourages comments to be filed electronically
via the eFiling link on the Commission's website at <a href="http://www.ferc.gov">http://www.ferc.gov</a>. The Commission accepts most standard word processing
formats. Documents created electronically using word processing
software must be filed in native applications or print-to-PDF format
and not in a scanned format. Commenters filing electronically do not
need to make a paper filing.
29. Commenters that are not able to file comments electronically
may file an original of their comment by USPS mail or by courier-or
other delivery services. For submission sent via USPS only, filings
should be mailed to: Federal Energy Regulatory Commission, Office of
the Secretary, 888 First Street NE, Washington, DC 20426. Submission of
filings other than by USPS should be delivered to: Federal Energy
Regulatory Commission, 12225 Wilkins Avenue, Rockville, MD 20852.

VI. Information Collection Statement

30. The collection of information discussed in this Proposed Policy
Statement is being submitted to the Office of Management and Budget
(OMB) for review under 44 U.S.C. 3507(d) of the Paperwork Reduction Act
of 1995 (PRA) and OMB's implementing regulations.\55\ The following
estimate of reporting burden is related only to this Proposed Policy
Statement.
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\55\ 5 CFR pt. 1320.
\56\ Burden is defined as the total time, effort, or financial
resources expended by persons to generate, maintain, retain, or
disclose or provide information to or for a federal agency. See 5
CFR 1320 for additional information on the definition of information
collection burden.
\57\ Commission staff believes the industry's average hourly
cost for this information collection is approximated by the
Commission's average hourly cost (for wages and benefits) for 2022,
or $91.00/hour.

[[Page 78677]]

Estimated Annual Burden \56\ Due to Docket No. PL23-1
[Figures may be rounded]
----------------------------------------------------------------------------------------------------------------
Average burden Total annual
Number of Annual number of Total number of hours & cost burden hours & Cost per respondent
potential responses per responses ($) \57\ per total annual ($)
respondents respondent response cost ($)
(1) (2) (1) * (2) = (3) (4)............ (3) * (4) = (5) (5) / (1) = (6)
----------------------------------------------------------------------------------------------------------------
20 1 20 10 hrs.; $910.. 200 hrs.; $910
$18,200.
----------------------------------------------------------------------------------------------------------------

Title: FERC-550A, PL23-1-000, Oil Pipeline Affiliate Committed
Service.
Action: Proposed information collection.
OMB Control No.: 1902-NEW.
Respondents: Oil pipelines.
Frequency of Information Collection: On occasion.
Necessity of Voluntary Information Collection: The information
collected pursuant to this Proposed Policy Statement would help the
Commission in evaluating whether contractual committed transportation
service complies with the Interstate Commerce Act where the only
shipper to obtain the contractual committed service is the pipeline's
affiliate.
Internal Review: The opportunity to file the information conforms
to the Commission's need for efficient information collection,
communication, and management within the energy industry. The
Commission has assured itself, by means of its internal review, that
there is specific, objective support for the burden estimates
associated with the opportunity to file the information.
31. Interested persons may provide comments on this information-
collection by one of the following methods:
Electronic Filing (preferred): Documents must be filed in
acceptable native applications and print-to-PDF, but not in scanned or
picture format.
USPS: Federal Energy Regulatory Commission, Office of the
Secretary, 888 First Street NE, Washington, DC 20426.
Hard copy other than USPS: Federal Energy Regulatory Commission,
Office of the Secretary, 12225 Wilkins Avenue, Rockville, Maryland
20852.
32. Interested persons may obtain information on the reporting
requirements by contacting Ellen Brown, Office of the Executive
Director, Federal Energy Regulatory Commission, 888 First Street NE,
Washington, DC 20426.
33. Please send comments concerning the collection of information
and the associated burden estimates to OMB through <a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>, Attention: Federal Energy Regulatory Commission Desk
Officer. Please identify the OMB Control Number 1902-NEW in the subject
line.
34. Instructions: OMB submissions must be formatted and filed in
accordance with submission guidelines at: <a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>; using the search function under the ``Currently Under Review
field,'' select Federal Energy Regulatory Commission, click ``submit,''
and select ``comment'' to the right of the subject collection.

VII. Document Availability

35. 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>).
36. 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.
37. 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) or email at
<a href="/cdn-cgi/l/email-protection#f69093849599989a9f989385838686998482b690938495d8919980">[email&#160;protected]</a>, or 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#a3d3d6c1cfcac08dd1c6c5c6d1c6cdc0c6d1cccccee3c5c6d1c08dc4ccd5">[email&#160;protected]</a>.

By direction of the Commission. Commissioner Danly is dissenting
with a separate statement attached. Commissioner Christie is
concurring with a separate statement attached.

Issued: December 16, 2022.
Debbie-Anne A. Reese,
Deputy Secretary.

UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION

Oil Pipeline Affiliate Committed Service

Docket No. PL23-1-000
DANLY, Commissioner, dissenting:
1. I dissent from today's order.\1\ I would normally not oppose a
proposed policy statement. There is often nothing wrong with seeking a
record to consider reforms. I am also generally skeptical of affiliate
transactions and think that the Commission should apply a heightened
review as compared to non-affiliate transactions.
---------------------------------------------------------------------------

\1\ Oil Pipeline Affiliate Committed Service, 181 FERC ] 61,206
(2022 Policy Statement).
---------------------------------------------------------------------------

2. However, this proposal is, for the most part, not new. This is
not a genuine request for comment. The policies proposed today
(particularly the safe harbor) are nearly identical to those proposed
two years ago in the policy statement on Oil Pipeline Affiliate
Contracts,\2\ which was withdrawn two days after the expiration of the
initial comment deadline.\3\ Were one unfamiliar with the Commission's
oil docket one would not know this if all one had to rely upon was
today's order. While that proceeding is mentioned in a footnote nearly
a third of the way through the order,\4\ there is ``nothing [in the
order] so much as an acknowledgement of the views expressed.'' \5\ The
majority chooses to

[[Page 78678]]

omit (and presumably ignore) comments that exposed profound weaknesses
that counseled a more deliberate approach in that (and now this)
proposed policy.
---------------------------------------------------------------------------

\2\ Compare Oil Pipeline Affiliate Contracts, 173 FERC ] 61,063
(2020) (2020 Policy Statement) with 2022 Policy Statement, 181 FERC
] 61,206 at PP 14-15. Other proposals also appear similar to the
2020 Policy Statement. For example, the 2022 Policy Statement
proposes to consider whether the non-rate terms ``depart from
industry standards'' and ``impose excessive burdens or risk on
nonaffiliates,'' id. P 22, which are similar to the 2020 Policy
Statement's request for comment on ``proposed guidance for a carrier
seeking to implement rates and terms pursuant to an Affiliate
Contract to demonstrate that it did not unduly discriminate in favor
of an affiliate by offering excessively burdensome or uneconomic
contract terms,'' 173 FERC ] 61,063 at P 35.
\3\ Oil Pipeline Affiliate Contracts, 173 FERC ] 61,250 (2020)
(Order Withdrawing 2020 Policy Statement).
\4\ 2022 Policy Statement, 181 FERC ] 61,206 at P 5 n.14.
\5\ Order Withdrawing 2020 Policy Statement, 173 FERC ] 61,250
(Glick, Comm'r, dissenting at P 1).
---------------------------------------------------------------------------

3. For example, commenters in the original proceeding alleged that
there was (there still is) no record evidence supporting the
Commission's premise that its policies--or the complaint mechanisms
afforded by the statute--are inadequate to the task of preventing or
remediating affiliate abuse in settlement rate negotiations, or for
that matter, that such affiliate abuse even exists commonly enough to
justify this proceeding at all.\6\ One comment stated that of the 140
petitions for declaratory order that had been approved by the
Commission from 2010 through 2020, ``only one . . . arguably included
allegations of undue affiliate preference'' \7\ and even in that case,
``the crux of the shipper's challenge did not hinge on affiliate
concerns.'' \8\ Another comment questioned the entire proceeding,
explaining that the proceeding was based on a fundamental
misapprehension as to how the business operates, stating that
presumably other midstream companies ``invest significant capital in
order to attract shippers, not keep shippers away.'' \9\
---------------------------------------------------------------------------

\6\ See, e.g., Indicated Carriers December 14, 2020 Initial
Comments, Docket No. PL21-1-000, at 1 (``[T]he Proposed Policy does
not present any evidence demonstrating that the types of undue
affiliate preferences that the Proposed Policy purportedly seeks to
prevent are more than just a theoretical possibility.'') (Indicated
Carriers Comments); Targa Resources Corp. December 14, 2020 Initial
Comments, Docket No. PL21-1-000, at 8-9 (Targa Comments) (``An
underlying predicate of the Proposed Policy Statement seems to be
that carriers set rates at artificially high levels that only an
affiliate would agree to pay in an effort to keep third-party
shippers off of the pipeline. Targa does not believe that there is
any evidence that this occurs in the marketplace. The idea that
carriers set rates above the level that the market will support in
order to keep third-parties from a given pipeline system simply does
not make commercial sense.'') (footnote omitted).
\7\ Indicated Carriers Comments at 10 (emphasis added).
\8\ Id. 10 n.13.
\9\ Enterprise Products Partners L.P. Initial Comments December
14, 2020 Docket No. PL21-1-000 at 4 (Enterprise Products Comments).
---------------------------------------------------------------------------

4. The majority does not acknowledge the comments from the earlier
proceeding that state that there may not be a problem at all nor does
it ask about whether there is a problem. Instead, the majority insists
that ``parties have raised concerns,'' \10\ citing the very complaint
proceeding that commenters in the earlier docket explained does not
support the majority's position,\11\ a complaint proceeding where the
Commission found no affiliate abuse.\12\ The order also cites comments
in other proceedings that simply ask hypotheticals \13\ and express
shippers' ``belie[f] this problem . . . exists.'' \14\ In order to
justify embarking on a new generic proceeding that proposes burdensome
intrusions into the business of regulated entities, there must be some
evidence that there is an actual problem to solve. And should this or
any other policy be finalized, there must be at least substantial
evidence. The Commission must eventually do more than ``[p]rofess[ ]
that an order ameliorates a real industry problem'' \15\ or cite
parties' ``belie[f] that [a] problem . . . exists'' \16\ in order to
meet the statutory requirement of basing its decisions on substantial
evidence or the APA's requirement to base orders on reasoned decision-
making.
---------------------------------------------------------------------------

\10\ 2022 Policy Statement, 181 FERC ] 61,206 at P 6.
\11\ Id. P 6 n.15 (citing Blue Racer NGL Pipelines, LLC, 162
FERC ] 61,220 (2018)).
\12\ Id. (citing N.D. Pipeline Co., 147 FERC ] 61,121 (2014)).
\13\ Id. (citing Magellan Midstream Partners, L.P., Request for
Rehearing, Docket No. OR17-2-001, at 5 (filed Dec. 22, 2017)
(Magellan Rehearing); Airlines for America and National Propane Gas
Association, Petition for Rulemaking, Docket No. RM18-10-000, at 24
(filed Feb. 1, 2018) (referencing the Magellan Rehearing)).
\14\ Shell Trading (US) Company, Comments, Docket No. OR17-2-
001, at 7 (filed Mar. 14, 2018) (Shell Comments); see also 2022
Policy Statement, 181 FERC ] 61,206 at P 6 n.15 (citing Shell
Comments at 7; Liquid Shippers Group, Comments, Docket No. OR17-2-
000, at 4 (filed Dec. 14, 2016) (for purposes of this filing the
Liquid Shippers Group includes ConocoPhillips Company, Cenovus
Energy Marketing Services Ltd., Devon Gas Services, L.P., Marathon
Oil Company, and Statoil Marketing & Trading, Inc.).
\15\ Nat'l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 843
(D.C. Cir. 2006); see also id. (``FERC has cited no complaints and
provided zero evidence of actual abuse between pipelines and their
non-marketing affiliates. FERC staked its rationale in part on a
record of abuse, but that record is non-existent.'') (emphasis in
original).
\16\ 2022 Policy Statement, 181 FERC ] 61,206 at P 6 n.15
(citing Shell Comments at 7); Shell Comments at 7 (expressing
``belie[f] that [a] problem . . . exists'').
---------------------------------------------------------------------------

5. Commenters in the original docket identified other fatal
weaknesses. The plain terms of the safe harbor, materially the same as
that proposed today, contravenes the Commission's regulations by
limiting the methodologies by which pipelines can adjust rates \17\ and
by requiring the use of a 100% load factor for cost-of-service-based
rate adjustments.\18\ This is an evident infirmity--agencies cannot
amend their regulations without undergoing the notice-and comment
procedures required by the Administrative Procedure Act (APA).\19\
---------------------------------------------------------------------------

\17\ See Tallgrass Pony Express Pipeline, LLC December 14, 2020
Initial Comments, Docket No. PL21-1-000, at 4-5.
\18\ See Targa Comments at 16 & n.25 (citing 18 CFR 346.2).
Section 346.2 of the Commission's regulations requires that a cost-
of-service summary schedule contain ``[t]hroughput for the test
period in both barrels and barrel-miles.'' 18 CFR 346.2 (emphasis
added).
\19\ 5 U.S.C. 553; see also Shell Offshore Inc. v. Babbitt, 238
F.3d 622, 629 (5th Cir. 2001) (``[T]he APA requires an agency to
provide an opportunity for notice and comment before substantially
altering a well established regulatory interpretation.'').
---------------------------------------------------------------------------

6. Although not a threat to the proposal's legal durability,
commenters also stated that, if implemented, the safe harbor proposal
would result in the Commission ``interjecting itself into commercial
negotiations,'' \20\ ``imposing contractual terms that would otherwise
not find themselves in contracts negotiated at arms' length between
third parties.'' \21\ Specifically, they explained that ``carriers and
contract shippers typically do not agree to a contract rate while also
providing a unilateral right to try to change the rate,'' \22\ and that
``[m]ost carriers will be unwilling to invest hundreds of millions of
dollars in new infrastructure if their rates--which are the sole means
by which the carrier may recoup its investment--may be reduced at any
time during the contract term pursuant to a cost-of service
challenge.'' \23\
---------------------------------------------------------------------------

\20\ Targa Comments at 10.
\21\ Enterprise Products Comments at 2.
\22\ Targa Comments at 15.
\23\ Indicated Carriers Comments at 33; see also id. at 3
(stating the safe harbor policy ``has the very real potential to
discourage such carriers from investing in new pipeline
infrastructure'').
---------------------------------------------------------------------------

7. Despite this evidence that was brought before the Commission in
the earlier docket, the majority does even mention it, let alone change
course, continuing to propose a safe harbor policy that requires
carriers to allow shippers to unilaterally challenge a rate.\24\ Given
the evidence already adduced in an earlier proceeding, one would be
justified in having skepticisms of the majority's claim that this
proposed policy ``will provide guidance to industry participants that
will aid in the efficient deployment of capital.'' \25\
---------------------------------------------------------------------------

\24\ 2022 Policy Statement, 181 FERC ] 61,206 at P 14 (providing
that one way a pipeline could satisfy the safe harbor by
``provid[ing] in the contract that the committed shipper has the
right to directly challenge the committed rate on a cost-of-service
basis during the term'' along with the three other factors); id. P
15 (providing an alternative way a pipeline could satisfy the safe
harbor by ``provid[ing] in the contract that the committed shipper
may have a one-time right to challenge such cost-of-service showing
made in the pipeline's initial filing for the service'' along with
two other factors).
\25\ Id. P 2. A majority has made similar claims before. See,
e.g., Consideration of Greenhouse Gas Emissions in Nat. Gas
Infrastructure Project Revs., 178 FERC ] 61,108, P 80 (2022) (``We
believe that such clarity ultimately benefits both the regulated
community and public by ensuring certainty regarding the
Commission's process for reviewing applications for natural gas
infrastructure.'').
---------------------------------------------------------------------------

8. Perhaps worst of all, commenters offered alternative approaches
for the Commission's consideration which the

[[Page 78679]]

majority declined to consider or, in fact, even mention. For example,
one party suggested the imposition of a requirement that pipelines
demonstrate that affiliate rates are aligned with those of competing
pipelines or other modes of transportation.\26\ Why not include
seemingly reasonable alternatives for comment if you persist in your
belief--despite the lack of evidence--that affiliate abuses are
widespread in the industry? If the Commission is concerned that a
carrier is offering non-market rates to its affiliate, a showing that
the rate is consistent with market would seem to address the concern
and do so far less invasively and without violating our own
regulations.
---------------------------------------------------------------------------

\26\ Association of Oil Pipelines December 14, 2020 Initial
Comments, Docket No. PL21-1-000, at 33.
---------------------------------------------------------------------------

9. It is a mistake for the majority to repropose a policy shown to
have irremediable vulnerabilities under the APA and a near certain
chilling effect on investment. The Commission has the benefit of an
existing record. Rather than ignoring it, the Commission should have
made use of that record to determine whether there is a problem at all
and, if there is, use it to determine what additional evidence needs to
be gathered, what policy goals it seeks to achieve, and what is the
best, least invasive, and most defensible course of action. The
Commission should not rush a policy only to have go back and fix known
errors.

For these reasons, I respectfully dissent.

James P. Danly,

Commissioner.

UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION

Oil Pipeline Affiliate Committed Service

Docket No. PL23-1-000
CHRISTIE, Commissioner, concurring:
1. I concur in order to put this draft policy statement out for
further review and comment.
2. I fully agree that transactions between corporate affiliates are
not arms-length transactions. In the regulated energy and utility
field, such transactions raise a distinct threat of the exercise of
market power. So affiliate transactions certainly require a higher
level of scrutiny than those between unaffiliated entities.
3. That is a simple proposition, but this draft statement is not
simple, and takes many pages and paragraphs to describe what it is
requiring of regulated entities and affiliates, what and which degrees
of scrutiny will be applied, when and where, and how the safe-harbor
mechanisms will work. The devil is always in the details and whether
this lengthy proposed new policy statement has got all the details
right remains to be seen, as well as whether a new policy statement is
even necessary or preferable to a case-by-case approach. I take
seriously the points raised in Commissioner Danly's dissent,
particularly on the history of this policy statement and its apparent
predecessors.
4. I am willing, however, to put it out for comment and look
forward to the comments that may come in from affected parties,
including pipeline operators and shippers both affiliated and
unaffiliated.
For these reasons, I respectfully concur.

Mark C. Christie,

Commissioner.
[FR Doc. 2022-27850 Filed 12-21-22; 8:45 am]
BILLING CODE 6717-01-P

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