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Court denies industry challenge, upholds FERC's approach to oil pipeline rates

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Essential Energy Insights - October 2021


Court denies industry challenge, upholds FERC's approach to oil pipeline rates

A federal court dismissed industry challenges to a Federal Energy Regulatory Commission change to cost calculations for oil pipeline rates.

FERC, which sets an annual index for pipeline rate maximums, in 2015 set out to revise its approach to calculating how much a pipeline operator can increase its rates and ultimately chose to use data representing the middle 50% of pipeline cost changes, rather than the middle 80%, as had been used in the past.

That data set resulted in FERC adopting an index for the maximum rate change equal to the producer price index for finished goods plus 1.23 percentage points.

The Association of Oil Pipe Lines, or AOPL, found that if FERC had continued using the middle 80% of pipelines' cost change, the end result would have been the producer price index for finished goods plus 2.45 percentage points. The AOPL argued that FERC's new methodology eliminated valuable data and did not use the most robust sample to devise the index.

The AOPL's in February 2016 petition for review of FERC's 2015 order was dismissed Nov. 28 by the U.S. court of Appeals for the District of Columbia Circuit.

"AOPL offers no convincing rebuttal to FERC's decision," the court said in its decision. "The simple point here is that neither legal nor policy considerations precluded FERC from relying solely on the middle 50 percent of the pipelines' cost-change data."

Pointing to precedent, the court concluded that FERC is not required to show that the reasons for changing its methodology are better than those for the previous approach — only that there are good reasons for the new policy and that agency believes the change is an improvement.

FERC justified the change in part by noting that using the middle 50% and not the middle 80% helps exclude pipelines that have anomalous cost changes. Narrowing the range achieves that goal without having to go through the complexity and "distorting effects" of using more subjective manual data trimming.

The commission-set index is used to calculate pipeline-specific rate ceilings, and pipelines can increase their rates without needing FERC the approval so long as the increase does not exceed the index-based annual limit, with a few exceptions.

The pipeline group in its petition for review also objected to FERC changing the data source for calculating the index. The court concluded that FERC had adequately and reasonably laid out its rationale, though. The switch was intended to better suit the index's goal of measuring changes to recoverable costs, eliminate the need for imperfect proxies and remove intrastate pipeline data from the mix, among other things.

"The commission carefully addressed the issues, acknowledged its departure from prior decisions, provided extensive explanation for its technical and policy choices, considered the principal alternatives, and responded to petitioner's arguments," the court said. "Nothing more was required."