Liquids Pipeline Rates and Terms of Service – Unlocking the Black Box

Natural Gas Projects
October 14, 2016

During the past year, interstate liquids pipelines, or crude oil and petroleum product pipelines, have been the subject of various high stakes proceedings before the FERC, as well as the federal courts. With the recent re-indexing of pipeline rates, looming complications from the United Airlines v. FERC decision, and the ongoing Dakota Access Pipeline saga, it has been a notably exciting time in liquids pipeline operation and project development. But has anything really changed in the pipeline space? And from a regulatory standpoint, what are the most important distinctions between gas and liquids pipelines?

The operations and financial opportunities of gas and liquids pipelines are shaped by their long history of regulation. And each has a distinctly different dynamic. Most simply, natural gas pipelines and liquids pipelines are governed by two different statutes, the Natural Gas Act (NGA) and Interstate Commerce Act (ICA), respectively. The result: liquids pipelines are considered common carriers governed by a regulatory scheme different than the scheme for natural gas pipelines. Thus, rather than seeking a Certificate of Public Convenience and Necessity from FERC to construct a new pipeline, liquids pipelines must pursue siting approval from each affected state (as well as certain federal agencies).  

When it comes to rate treatment for a new pipeline, however, both liquids and gas pipelines are held to the same standard, “just and reasonable,” and must obtain FERC approval of the rate, but they do so through different processes. For gas pipelines, pipeline operators must initiate rate proceedings to obtain an Order approving rates for new facilities, or “initial rates,” until a Section 4 rate proceeding is conducted. But liquids pipelines file a Petition for Declaratory Order, which contains a robust source of project details (see LawIQ’s customized Alerts for these details), such as DAPL’s expected in-service date. Another distinction is that, while gas pipeline operators are required to file information identifying the shippers on the line, among other details, liquids pipeline operators are banned under the ICA from disclosing their shippers. (Note: One exception to this rule allows, but does not require, liquids shippers to state that they are shipping on a specific pipeline. Liquids shippers oftentimes disclose in legal/regulatory cases that they are shippers, which we utilized to develop the only database of such information.)

While the rates of both gas and liquids pipelines are subject to FERC review, the standards for FERC’s review vary, widely. Rate methodology can be grouped into a few general categories: market-based, cost-based, and indexed. Most simply, natural gas pipelines are subject to market and cost-based rates, while liquids pipelines have the additional option to take advantage of indexed rates, which applies to  80% of operators. The FERC established an indexing methodology that it revisits every five years, which allows liquids pipelines to change rates subject to certain ceiling levels, as opposed to allowing the pipeline operators to make cost-of-service filings.

The indexing methodology has led to various concerns, including claims that the method can systematically result in overcollection or undercollection of rates because there is little oversight of the rates an operator charges on any given segment of its system. But liquids pipelines may be subject to FERC-initiated, as well as shipper-initiated, rate investigations, although FERC’s practice for liquids pipelines has been to rely upon shippers to mount rate challenges. In a manner similar to how FERC determines whether to initiate a rate investigation for gas pipelines, FERC relies on an analogous annual pipeline filing (Form No. 6) to obtain the data necessary to determine if the liquids pipelines’ rates are just and reasonable. The primary distinction between the annual filings is that many liquids pipeline filings, especially those for crude oil and petroleum product operations, report aggregated cost and revenue system (e.g., SFPP, Marathon).

The aggregated pipeline reporting  issue came to a head last year when the Liquids Shippers Group (a consortium of the country’s largest producer-shippers), Airlines for America, and others petitioned the FERC to begin a formal rulemaking. They called for a revision to Page 700 of FERC Form No. 6, the Annual Cost Of Service Based Analysis Schedule (note: called, “Complete Financials Summary” in the LawIQ Platform), to further enhance crude oil and petroleum product pipeline financial reporting transparency; and to make carrier Page 700 workpapers available to shippers and interested parties upon request. The proceeding has fallen dormant, with almost no activity for about a year, except for one recent comment suggesting that the availability of work papers would be a solution to the United Airlines v. FERC decision by providing enough detail to determine if price discrimination among shippers existed.

Nearly a year ago, in December of 2015, the FERC concluded its 5-year review of indexing, providing for a new ceiling in the coming years. Rates vary widely based on location as you can see below. But questions regarding the transparency of financial filings and the ability to identify price discrimination still remain. If one thing is clear, it is that the FERC will need to modify its reporting requirements for liquids pipelines in the near future.

Liquids Pipeline Rates