Change in FERC Leadership Could Impact Oil Pipelines First

In conjunction with its open meeting on December 17, FERC issued a key decision on the rate to be used for the next five years for all liquids pipelines that have indexed rates. On the same day, FERC also withdrew an earlier proposal on which it had requested comments that would have provided guidance to liquids pipelines proposing rates and terms justified by affiliate contracts. Commissioner Glick dissented from both of these actions and the newest commissioner at that time, Commissioner Clements, did not participate. On Monday of this week, FERC was restored to its full membership when Commissioner Christie was sworn in. Following his inauguration, President Biden is expected to demote Chairman Danly and appoint either Commissioner Glick or Commissioner Clements as chair. It is very likely that FERC’s December 17 decisions may be our first indication of how these personnel changes at the Commission will impact its views.

As we discuss in more detail below, both of the decisions were considered to be favorable to the pipeline industry. Commissioner Glick’s dissents make it clear that he would not be as favorably inclined in either of the two cases, and so the decisions that were made in December may not be close to final. We fully expect a Democratic-led Commission to revisit both decisions following the elevation of either Democrat to the chair position, and so the industry’s supposed wins in both cases may be short-lived.

The Issues Involved

FERC regulates the interstate pipelines that transport oil and refined products under the Interstate Commerce Act (ICA). As noted by the Association of Oil Pipe Lines (AOPL), FERC’s regulatory authority under the ICA is “far narrower” than under FERC’s two other primary statutes, the Natural Gas Act and the Federal Power Act. In addition, in the 1992 Energy Policy Act, Congress sought to further simplify regulation of the oil pipelines under the ICA. However, as Commissioner Glick noted in his dissents, FERC is still charged under the ICA to “ensure that oil pipeline transportation rates are just and reasonable and not unduly discriminatory or preferential.” While acknowledging that FERC’s responsibilities under the ICA don’t always get the same attention from the public as some of its other proceedings, he expressed his “hope that proceedings like today’s lead interested parties everywhere to more closely scrutinize the Commission’s oil orders so that these multi-billion-dollar handouts do not become a matter of course.”

Index Rates

The first issue on which FERC acted is essentially a mandatory proceeding under FERC’s own policies, which we previewed in Oil Pipelines Press for Major Increase in Rates and the Impact of New Commissioners. The 1992 Energy Policy Act required FERC to establish a “simplified and generally applicable” ratemaking methodology for oil pipelines. Pursuant to that directive, FERC adopted its indexing policy which essentially allows oil pipelines to change their rates, subject to certain ceiling levels, as opposed to making cost-of-service filings. Every five years, FERC reviews the index that the pipelines will be allowed to use for the coming five-year period. FERC issued a notice in June 2020 proposing to continue using the PPI-FG index with an adder of .09% for each year in the coming five years, beginning in July 2021. In our preview of the issues, we provided the following chart with the key issues and our projected impact on the adder:

FERC essentially adopted all of the changes except for the last two, which, in combination, resulted in the adder increasing from the proposed 0.09% to 0.78% each year for the coming five-year period.

The first two changes in the table above were not controversial. The next three in the chart, though, were the most significant and were the main focus of Commissioner Glick’s dissent. First, the Commission went against almost 30 years of precedent and chose to only use the middle 80% of all pipelines in the data set, and abandoned all use of the middle 50%. Second, the Commission modified the as-filed data for the first year of the test period using a less than rigorous method to try to account for its change in the income tax policy for master limited partnerships. As described by Commissioner Glick in his dissent, these last two decisions were not only “arbitrary and capricious” but were a “complete abdication of [FERC’s] statutory responsibility to protect consumers.”

Affiliated Contracts to Support Pricing and Terms of Service

FERC has been struggling with the issue of affiliated contracts for oil pipelines for at least three years following a decision it issued in response to a request filed by Magellan Midstream Partners that we discussed in Magellan v. Occidental – Playing Devil’s Advocate?. This past October, FERC issued a notice of intent to adopt a policy statement concerning affiliate contracts and the information that a liquids pipeline should provide to FERC to support a finding that proposed rates and terms pursuant to an affiliate contract are just, reasonable, and not unduly discriminatory under the ICA.

On December 14, the comments on the proposed guidance were due and AOPL, along with others in the pipeline industry, essentially suggested that the Commission simply withdraw the proposal. Three days later, the Commission did just that in an order that simply stated it was withdrawing the proposed guidance and terminating the proceeding “based on our determination that providing additional guidance in this proceeding is not necessary.” In his dissent, Commissioner Glick noted that under the ICA, FERC still has the statutory mandate to ensure that oil pipeline transportation rates are just and reasonable and not unduly discriminatory or preferential. He thought that the proposed policy statement would have aided the Commission in carrying out this responsibility, while also providing greater regulatory certainty and ultimately decreasing the burden of making the long-term investments necessary for oil pipeline expansions. He noted that, in his mind, the Commission must still apply a heightened level of scrutiny to an affiliate contract because the ICA’s nondiscrimination requirements demand nothing less.

How the Changes at the Commission May Impact These Decisions

Many expect that one of President Biden’s first acts following his inauguration will be to demote Chairman Danly and appoint one of the two Democrats, Glick or Clements, as the chair of the Commission. Also, on Monday of this week, Commissioner Christie was sworn in. While Commissioner Christie is a Republican, he is the only current commissioner with extensive experience as a utility regulator and may bring a very different perspective with him to the Commission.

The order adopting the new index rate for liquids pipelines will almost certainly be the subject of rehearing requests by the shipper community. Those requests need to be filed by January 19, which is the same day as FERC’s next open meeting. That open meeting will undoubtedly be Chairman Danly’s last as chair, and so any decision on the rehearing requests will be left to a Democratic-led Commission. As we identify in the chart above, many of the decisions made by FERC in that order are at a substantial risk of reversal if they are appealed to the courts. However, those aspects of the order may not survive the rehearing process. Rehearing requests are normally met with a resounding “No” — but the changing makeup of the Commission may lead to a very different result in this case. First, we have the scathing dissent by Commissioner, and potentially future Chairman, Glick. Second, the other Democrat, Commissioner Clements, did not participate in the decision because she had only recently joined the Commission. We would expect her to participate in the rehearing decision. Third, Commissioner Christie will also likely participate in the rehearing process. So the two commissioners who voted for the order on December 17 could well be a minority by the time the rehearing process concludes.

With regard to the second matter, there is no opportunity for a rehearing. However, if Commissioner Glick is appointed Chairman, we may very well see him restart the process, given the substantial benefits he saw from the proceeding before it was summarily terminated.