FR 2021-03120

The Federal Energy Regulatory Commission (FERC) recently completed its five-year review of the oil pipeline index, a tool used to regulate annual adjustments in oil pipeline rates. This document sets the index for the years starting July 1, 2021, as the Producer Price Index for Finished Goods plus 0.78% (PPI-FG+0.78%). This marks a significant change from earlier proposals and has sparked various discussions and controversies.

General Summary

The document outlines the process leading to the new index. It reflects an extensive review that involved public comments and expert analyses. The adoption of PPI-FG+0.78% follows technical adjustments, such as analyzing a broader set of data points and removing specific income tax policy changes from the calculations. The FERC aims to ensure the index is reflective of broad industry costs rather than outliers.

Significant Issues and Concerns

Several issues have emerged from this document. The deviation from the proposed index of PPI-FG+0.09% is substantial, raising questions about potential biases in favor of pipeline operators. The document also shifts from using data from the middle 50% of cost changes to the middle 80%, arguably diluting the reliability of the index by including more outliers. Additionally, the Commission backtracked on a prior commitment to account for income tax policy changes, drawing criticism and concern over possible regulatory favoritism towards pipeline companies.

The methodologies and technical terms employed in the report, such as the Kahn Methodology or concepts like statistical trimming, may be challenging for the average reader to understand. The complex and dense nature of the language, punctuated with legal precedents and detailed footnotes, contributes to the difficulty. This affects the transparency and accessibility of the document, potentially alienating the general public who might wish to understand how these decisions will impact them.

Impact on the Public and Stakeholders

The public may experience mixed impacts due to the new index. On the one hand, the adjustments align with industry-wide cost trends, theoretically ensuring fair pricing over extended periods. On the other hand, concerns about the fairness of the index might lead to higher oil and gas prices, as pipelines avoid more stringent profit controls that a lower index might have imposed.

For pipeline companies, the outcome is likely positive, particularly for those whose cost increases were considered under the broader data set included. They might benefit from a more lenient ceiling on rate increases. Shippers and consumers, however, may view this as a disadvantage, leading to higher transportation costs that could be passed down the supply chain.

The document also underscores the Commission’s decision to reject proposals to standardize returns on equity (ROEs) and to forego significant treatment to mergers between smaller or varied pipeline companies. These choices could have lasting impacts on how different entities are treated, potentially favoring larger pipelines with more stable financial data.

Conclusion

Overall, while the FERC's decision aims to reflect industry realities better, concerns about fairness, methodology, and transparency persist. The document’s complexity and dense legal language may hinder overall public engagement and comprehension. Stakeholders will need to remain vigilant, understanding how these changes may affect operational costs, pricing structures, and long-term business strategies.

The document details the Federal Energy Regulatory Commission's (FERC) decision to adopt an index level of Producer Price Index for Finished Goods plus 0.78% (PPI-FG+0.78%) for determining changes to oil pipeline rate ceilings over a five-year period. This decision carries significant financial implications for both the oil pipelines and their customers.

Financial Implications of the Index Level

The adoption of an index level of PPI-FG+0.78%, as opposed to the initially proposed PPI-FG+0.09%, creates a substantial financial impact. The higher index level allows oil pipelines to adjust their rates upwards more than initially anticipated. This deviation has been a point of controversy, as it leads to concerns about the fairness and rationale behind this sudden change. The document suggests that customers, which include both companies and individuals, will ultimately bear the cost. This implies a potential increase in costs or fees that these consumers would need to pay to the pipelines, possibly amounting to "additional billions of dollars."

Retrospective Adjustments and Cost Implications

A significant financial concern arises from the decision to retroactively adjust the 2014 income tax allowance for pipelines owned by Master Limited Partnerships (MLPs). By allowing pipelines to adjust these figures, the Commission potentially inflates the perceived cost increases between 2014 and 2019, leading to a higher index value and continued higher costs for consumers. This retrospective adjustment has been critiqued for not aligning with the Commission’s prior commitments to incorporate such changes during index reviews, raising questions about fairness and consistency in financial assessments.

Exclusion of 2018 Income Tax Policy Change Effects

Earlier, the Commission had committed to incorporating the effects of the 2018 Income Tax Policy Change on pipeline costs into the index calculations. However, the document reflects a decision to exclude these effects from the calculation, which blocks a potential reduction in cost pass-throughs to customers. The Commission’s reversal on this promise leads to perceptions that the index could be biased towards maintaining higher revenues for pipelines instead of passing potential cost savings to consumers.

Conclusion

The financial decisions outlined in the FERC order demonstrate a complex interplay of regulatory measures that potentially shift significant financial burdens onto consumers. The deviation from the initially proposed index level, the handling of tax allowances, and the exclusion of specific policy change effects together suggest a scenario where customers may face increased financial pressures due to regulatory decisions. These developments highlight the critical need for transparency and consistency in regulatory financial methodologies to ensure that stakeholders clearly understand how financial impacts are determined and justified.