FERC Reverses Oil Index Rate Decision — Commission Considers Accelerating Inflation and Ire between Pipes and Shippers, but Consumer Savings will be Sparing

Originally published January 28 for Insights customers

What’s the issue?

At its Open Meeting last Thursday, FERC made a controversial decision to reduce the “adder” to the oil index it put in place last year from plus .78% to minus .21%. This decision was taken at a rehearing that considered comments from long-running disputes between oil pipelines and their shipper customers, as well as the dramatic change to inflation measured by the Producer Price Index (PPI) for Fixed Goods (FG), which is the core component of the index most pipelines are required to use to calculate their rates. Commissioner Glick claims the reduction to the index will save consumers $3.7 billion over its five-year effective period.

Why does it matter?

FERC has never made a change like this after setting the index during the 30 years the current methodology has been in place. We predicted this would occur based on the positions and process driving the 2020 index decision and the increasing politicization of all Commission decisions. Was this decision needed to support “just and reasonable” rates and will it lead to more volatility and uncertainty as a precedent for more frequent adjustments?

What’s our view?

This is most notable as a significant FERC event more so than a significant market event. We don’t believe it is needed or will be impactful to markets, and it likely won’t save consumers $3.7 billion. The real driver of rates is inflation. As charted last week in What a Difference a Year Makes – FERC Set to Revisit Oil Pipeline Index Decision, the PPI-FG rose to its highest level in the last 40 years, that portends for ~9% inflation driven increase in tariff rates going into 2023, making either the plus .78% or the minus .21% adjustments de minimis. The primary impact of the decision is a lot of regulatory overhead expense as industry scrambles to quickly refile by March. And Arbo will be busy as well, updating our platform that is the most comprehensive and easily accessible source of all this data.