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US FERC ends consideration of new oil pipeline rate system

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US FERC ends consideration of new oil pipeline rate system

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Oil pipeline group says current index system keeps costs down

Shippers argue it allows rates to far exceed costs of service

FERC will consider next five-year index later this year

Washington — The US Federal Energy Regulatory Commission Thursday ended consideration of a potential overhaul of how oil pipelines set their rates, a decision welcomed by pipeline owners who want to keep the current indexing system that allows annual rate increases.

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It has been longstanding FERC policy to set a ceiling on oil pipeline rates, allowing pipelines to raise their shipping fees up to that limit and forcing shippers to bring complaints to FERC when they think the rates exceed the actual costs of service.

FERC reviews the index every five years to ensure it corresponds to industry-wide oil pipeline cost changes. The commission will consider a new index later this year for the five-year period starting July 1, 2021

Oil producers and other pipeline customers had urged the commission to adopt a cost-of-service rate structure closer to those used in the electricity and natural gas pipeline sectors.

FERC voted 2-1 to end the rulemaking, with Commissioner Richard Glick dissenting.

Andy Black, president of the Association of Oil Pipe Lines, said the current rate indexing system protects pipeline customers and provides and incentive for pipeline companies to control their costs.

Pipeline executives have said in recent fourth-quarter earnings calls that they were watching for FERC's decision on the four-year-old rulemaking.

"Pipeline companies need a way to operate their businesses efficiently and with certainty, and FERC's existing approach allows us to do so," said Mike Mears, CEO of Magellan Midstream Partners and chairman of AOPL's FERC policy committee.

In October 2016, FERC — led by three different commissioners — launched an advance notice of proposed rulemaking to investigate oil shippers' complaints and potentially modify data reporting requirements intended to help the commission ensure that oil pipeline rates better reflect costs (RM17-1).

Under the Interstate Commerce Act of 1992, Congress mandated that FERC devise a "simplified and generally applicable" ratemaking methodology for oil pipelines, and for the past two decades the commission has primarily used an index ratemaking methodology to adjust oil pipeline rates.

The methodology allows oil pipelines to change their rates in compliance with the rate ceiling, which changes every July 1 based on the index level, rather than submit cost-of-service filings.