80300 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Rules and Regulations 

1Five-Year Review of Oil Pipeline Pricing Index, 

75 FR 34959 (June 21, 2010), FERC Stats. & Regs. 

¶ 35,566 (2010) (NOI). 

2Public Law 102–486, 106 Stat. 3010, § 1801(a) 

(Oct. 24, 1992). The EPAct 1992’s mandate of 

establishing a simplified and generally applicable 

method of regulating oil transportation rates 

specifically excluded the Trans-Alaska Pipeline 

System (TAPS), or any pipeline delivering oil, 

directly or indirectly, into it. Id. § 1804(2)(B). 

3 49 U.S.C. app. 1 (1988). 

4Revisions to Oil Pipeline Regulations Pursuant 

to the Energy Policy Act, Order 561, FERC Stats. & 

Regs. ¶ 30,985 (1993), order on reh’g, Order No. 

561–A, FERC Stats. & Regs. ¶ 31,000 (1994), aff’d, 

Association of Oil Pipe Lines v. FERC, 83 F.3d 1424 

(D.C. Cir. 1996) (AOPL I). 

5Five-Year Review of Oil Pipeline Pricing Index, 

93 FERC ¶ 61,266 (2000) (First Five-Year Review), 

aff’d in part and remanded in part sub nom. AOPL 

v. FERC, 281 F.3d 239 (DC Cir. 2002) (AOPL II). 

6AOPL II, 281 F.3d 239. 

7Five-Year Review of Oil Pipeline Pricing Index, 

102 FERC ¶ 61,195 (2003) (First Five-Year Review 

Remand Order), aff’d sub nom. Flying J Inc. v. 

FERC, 363 F.3d 495 (DC Cir. 2004). 

8Five-Year Review of Oil Pipeline Pricing Index, 

114 FERC ¶ 61,293 (2006) (Second Five-Year 

Review). 

PART 232—REGULATION S–T— 

GENERAL RULES AND REGULATIONS 

FOR ELECTRONIC FILINGS 

■ 1. The authority citation for part 232 

continues to read, in part, as follows: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 

77s(a), 77z–3, 77sss(a), 78c(b), 78l, 78m, 78n, 

78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 80a–29, 

80a–30, 80a–37, and 7201 et seq.; and 18 

U.S.C. 1350. 

* * * * * 

■ 2. Amend § 232.312 paragraph (a) 

introductory text by removing 

‘‘December 31, 2010’’ and in its place 

adding ‘‘June 30, 2012’’ in the first 

sentence. 

By the Commission. 

Dated: December 16, 2010. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–32098 Filed 12–21–10; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF ENERGY 

Federal Energy Regulatory 

Commission 

18 CFR Part 342 

[Docket No. RM10–25–000] 

Five-Year Review of Oil Pipeline 

Pricing Index 

Issued December 16, 2010. 

AGENCY: Federal Energy Regulatory 

Commission, DOE. 

ACTION: Order establishing index for oil 

price change ceiling levels. 

SUMMARY: The Federal Energy 

Regulatory Commission (Commission) is 

issuing this Final Order concluding its 

third five-year review of the oil pricing 

index, established in Order No. 561. 

After consideration of the initial, reply 

and supplemental comments, the 

Commission has concluded that an 

index level of Producer Price Index for 

Finished Goods plus 2.65 percent (PPI– 

FG+2.65) should be established for the 

five-year period commencing July 1, 

2011. At the end of this five-year period, 

the Commission will once again initiate 

review of the index to determine 

whether it continues to measure 

adequately the cost changes in the oil 

pipeline industry. 

ADDRESSES: Secretary of the 

Commission, Federal Energy Regulatory 

Commission, 888 First Street, NE., 

Washington, DC 20426. 

FOR FURTHER INFORMATION CONTACT: 

Andrew Knudsen (Legal Information), 

Office of the General Counsel, 888 

First Street, NE., Washington, DC 

20426, (202) 502–6527; 

Michael Lacy (Technical Information), 

Office of Energy Market Regulation, 

888 First Street, NE., Washington, DC 

20426, (202) 502–8843. 

SUPPLEMENTARY INFORMATION: 

Before Commissioners: Jon Wellinghoff, 

Chairman; Marc Spitzer, Philip D. Moeller, 

John R. Norris, and Cheryl A. LaFleur. 

Order Establishing Index for Oil Price 

Change Ceiling Levels 

1. On June 15, 2010, the Commission 

issued a Notice of Inquiry (NOI),1 in 

which it proposed to continue using the 

Producer Price Index for Finished 

Goods plus 1.3 percent (PPI–FG+1.3) for 

the next five-year period beginning July 

1, 2011. The Commission applies the 

index to existing oil pipeline 

transportation rates to establish new 

annual rate ceiling levels for pipeline 

rate changes. The NOI invited interested 

persons to submit comments on the 

continued use of PPI–FG+1.3 and to 

propose, justify, and fully support, any 

alternative indexing proposals. 

Comments and reply comments were 

due August 20, 2010, and September 20, 

2010, respectively. Based upon full 

consideration of the comments and 

reply comments received, and for the 

reasons discussed below, the 

Commission finds that an index of PPI– 

FG plus 2.65 percent (PPI–FG+2.65) 

should be established for the five-year 

period commencing July 1, 2011. 

I. Background 

A. Establishment of the Indexing 

Methodology 

2. Congress in the Energy Policy Act 

of 1992 (EPAct 1992) required the 

Commission to establish a ‘‘simplified 

and generally applicable’’ ratemaking 

methodology for oil pipelines 2 that was 

consistent with the just and reasonable 

standard of the Interstate Commerce Act 

(ICA).3 On October 22, 1993, the 

Commission issued Order No. 561,4

promulgating regulations pertaining to 

the Commission’s jurisdiction over oil 

pipelines under the ICA and fulfilling 

the requirements of the EPAct 1992. In 

Order No. 561, the Commission 

developed an indexing methodology for 

the purpose of allowing oil pipelines to 

change rates without making cost-ofservice filings. The Commission found 

that the indexing methodology adopted 

in the final rule simplified and 

expedited the process of changing rates. 

The Commission further determined 

that the indexing methodology would 

ensure compliance with the just and 

reasonable standard of the ICA by 

subjecting the chosen index to periodic 

monitoring and, if necessary, 

adjustment. After extensive analysis of 

proposals from interested parties, the 

Commission adopted an index of PPI– 

FG minus 1 percent (PPI–FG–1), which 

was supported by a methodology 

developed by Dr. Alfred E. Kahn (Kahn 

Methodology) on behalf of a group of 

shippers. The Commission also 

committed to review every five years the 

continued appropriateness of the index 

in relation to industry costs. 

3. In the first five-year review, which 

established the index level for 2001– 

2006, the Commission deviated from the 

Kahn Methodology, and, based upon a 

different analysis, concluded that the 

index should be retained as PPI–FG–1.5

The U.S. Court of Appeals for the 

District of Columbia (D.C. Circuit) 

reviewed and remanded the 

Commission’s order because the 

Commission failed to justify a departure 

from the Kahn Methodology used in 

Order No. 561.6 On remand, the 

Commission used the Kahn 

Methodology to set an index level of an 

unadjusted PPI–FG for the five-year 

period beginning July 2001. This order 

on remand was upheld by the D.C. 

Circuit.7

4. In the second five-year review, the 

Commission proposed to retain the rate 

of an unadjusted PPI–FG. However, 

based upon the data presented during 

that proceeding, the Commission 

adopted an index of PPI–FG+1.3, which 

was again calculated using the Kahn 

Methodology.8

B. The Kahn Methodology 

5. The Kahn Methodology measures 

changes in operating and capital costs 


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9Specifically, this data is drawn from the Form 

No. 6: Carrier Property, page 110; Accrued 

Depreciation, page 111; Operating Revenues and 

Operating Expenses, page 114; Crude and Products 

Barrel-Miles, page 600. To the extent this 

information is incomplete, alternate data reported 

in the Form No. 6 has been substituted. 

10The ‘‘operating ratio’’ = ((Operating Expense at 

Year 1/Operating Revenue at Year 1) + (Operating 

Expense at Year 5/Operating Revenue at Year 5))/ 

2. If the operating ratio is greater than one, then it 

is assigned the value of 1 under the Kahn 

Methodology. 

11Cumulative Cost Change = (1-operating ratio) * 

net plant + operating ratio * operating expenses. 

12AOPL states that Dr. Shehadeh began his 

analysis using cost data reported by the oil 

pipelines in the Form No. 6 for the years 2004 

through 2009. According to AOPL, Dr. Shehadeh 

then removed from this data set any pipelines that 

did not report data for any year in that period, as 

well as the Trans Alaska Pipeline System carriers 

and any pipelines that had FERC Form No. 6 

reporting errors or incomplete FERC Form No. 6 

data. 

on a per barrel-mile basis using Form 

No. 6 data from the prior five-year 

period (for example, between 2004 and 

2009 in this proceeding).9 The Kahn 

Methodology does not include direct 

measures of the capital costs related to 

rate of return on investment or income 

taxes; as a proxy for this data, the Kahn 

Methodology relies upon changes over 

the five year period in net carrier 

property per barrel-mile. 

6. The Kahn Methodology assigns a 

weight to the Form No. 6 operating 

expenses relative to the net plant using 

an ‘‘operating ratio.’’ 10 The weighted 

operating expense and the weighted net 

plant are then added together to 

establish the cumulative cost change for 

each pipeline.11

7. Once these cumulative cost changes 

have been calculated for each pipeline 

with sufficient Form No. 6 data, the 

Kahn Methodology culls a data set 

consisting of pipelines with cumulative 

per-barrel-mile cost changes in the 

middle 50 percent of all pipelines. Later 

applications of the index also culled a 

data set consisting of pipelines with 

cumulative cost changes in the middle 

80 percent of all pipelines. This 

trimming is done to remove statistical 

outliers, or spurious data points that 

could bias the sample in either 

direction. 

8. For each of the two data sets (the 

middle 50 percent and the middle 80 

percent), the Kahn Methodology 

considers three different measures of 

central tendency. One measure is the 

median of each data set. Another 

measure, the weighted mean, calculates 

an average barrel-mile cost change in 

which each pipeline’s cost change is 

weighted by its barrel-miles. A third 

measure, the un-weighted average, 

calculates the simple average of the 

percentage cost change per barrel-mile 

for each pipeline. For each data set, a 

composite, is calculated by taking the 

simple average of the median, the 

weighted mean, and the un-weighted 

mean. Table 1 provides a description of 

the statistical values of central tendency 

used by parties to develop the index. 

TABLE 1 

Line Middle 80 percent Middle 50 percent 

A ........................................... Median ............................................................................. Median. 

B ........................................... Weighted Mean ............................................................... Weighted Mean. 

C ........................................... Un-weighted Mean .......................................................... Un-weighted Mean. 

D ........................................... Composite of 80 percent = (A+B+C)/3 ........................... Composite of 50 percent = (A+B+C)/3. 

In the most recent index review, the 

industry-wide cost index differential 

was calculated by averaging the middle 

50 composite and the middle 80 

composite on Line D and then 

comparing that value to the PPI–FG 

index data over the same period. The 

index level was then set at PPI–FG plus 

(or minus) this differential. 

9. The Kahn Methodology has evolved 

during the course of prior index 

reviews. In Order Nos. 561 and 561–A, 

the Commission only considered the 

middle 50 percent and did not consider 

the middle 80 percent. In the first and 

second five-year index reviews, the 

Commission considered both the middle 

50 percent and the middle 80 percent. 

Also, in Order Nos. 561 and 561–A, as 

well as the first review, the Commission 

merely cited Kahn’s Methodology to 

demonstrate that it produced index 

levels that were close, although not 

exactly the same as, the proposed index 

levels of PPI–FG–1 (in Order Nos. 561 

and 561–A) and an unadjusted PPI–FG 

(in the first review). In the second fiveyear review, the Commission used the 

Kahn Methodology itself to set the 

precise index levels by averaging the 

middle 50 and middle 80 composites 

relative to PPI–FG over the prior fiveyear period. 

II. Comments From Industry 

10. Comments were filed by the 

American Trucking Associations, 

National Propane Gas Association 

(NPGA), Tesoro Refining and Market 

Company and Sinclair Oil Corporation 

(Sinclair/Tesoro, collectively), Air 

Transport Association of America 

(ATA), Society for the Preservation of 

Oil Pipeline Shippers (SPOPS), the 

Association of Oil Pipe Lines (AOPL), 

Valero Marketing and Supply (Valero), 

and Navajo Refining Company, L.L.C. 

(Navajo). 

11. Reply Comments were filed by the 

Canadian Association of Petroleum 

Producers (CAPP), the Pipeline Safety 

Trust, Sinclair/Tesoro, Platte Pipe Line 

Company (Platte), ATA, Navajo, AOPL, 

and SPOPS. 

12. On September 24, 2010, the U.S. 

Department of Transportation, Pipeline 

and Hazardous Materials Safety 

Administration (PHMSA) filed a Motion 

for Leave to File Out-of-Time and 

Comments and NPGA filed late Reply 

Comments. 

13. On October 8, 2010, Valero filed 

Supplemental Reply Comments and on 

October 20, 2010, AOPL filed a 

Response (October 20 Response). 

A. Proposals for New Index Rates 

14. In comments and reply comments, 

several parties proposed departures 

from existing index levels. AOPL 

proposes an index of PPI–FG plus 3.64 

percent (PPI–FG+3.64) as the oil 

pipeline pricing index for the five-year 

period beginning July 1, 2011. AOPL 

states that its witness, Dr. Ramsey 

Shehadeh, applied the Kahn 

Methodology to a data set including an 

initial sample of 110 pipelines,12

calculating the following data regarding 

pipeline cost changes for the 2004–2009 

period: 

TABLE 2 13

Line Middle 80 

percent 

Middle 50 

percent 

Median .............. 4.26 4.26 

Weighted Mean 9.91 7.07 

Un-weighted 

Mean ............. 8.81 5.74 

Composite ......... 7.66 5.69 


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13Shehadeh August 20 Decl. at Exhibit A5. 

14O’Loughlin August 20 Aff. ¶ 6. Mr. O’Loughlin 

explains that he only reports data to the nearest 

tenth because, in his view, more precision is not 

useful given the wide ranging distribution of annual 

percentage cost changes experienced by the 

pipelines in the measurement group. O’Loughlin 

September 20 Aff. ¶ 5 n.3. 

15AOPL Reply Comment at 38 (quoting 

Connecticut Light and Power Co. v. Nuclear 

Regulatory Commission, 673 F.2d 525, 528 (DC 

Cir.)). 

16NOI, FERC Stats. & Regs. ¶ 35,566 at P 4. 

17The current indexing level of PPI–FG+1.3 was 

developed in the Commission’s prior five-year 

review proceeding. Second Five-Year Review, 114 

FERC ¶ 61,293. This proceeding involved extensive 

record evidence and comments from shippers, and 

the record from that proceeding remains available 

on the Commission Web site. 

15. AOPL calculated an average 

annual pipeline cost growth rate of 6.68 

percent based upon the middle 50 

composite growth rate and the middle 

80 composite growth rate. AOPL notes 

that the PPI–FG geometric mean rate of 

growth for the years 2004 through 2009 

is 3.04 percent. AOPL concludes actual 

oil pipeline cost increases during the 

years 2004 through 2009 exceeded PPI– 

FG at a rate of 3.64 percent (6.68 minus 

3.04). Thus, Dr. Shehadeh proposes an 

index rate for the five-year period 

beginning July 1, 2011, of PPI–FG+3.64. 

16. In contrast, Valero and its expert, 

Mr. Matthew O’Loughlin, contend that 

an index equal to an unadjusted PPI–FG 

more accurately reflects pipelines’ 

actual cost changes. Valero states that 

Mr. O’Loughlin applies a modified 

version of the Kahn Methodology. First, 

Mr. O’Loughlin proposes to exclude 

pipelines that experienced large rate 

base changes from the data set used to 

calculate index levels. Second, to 

determine cost changes between 2004 

and 2009, Mr. O’Loughlin measures the 

cost change per barrel-mile between 

2004 and 2009 using the ‘‘Total Cost of 

Service’’ and barrel-miles reported on 

page 700. Unlike the other Form No. 6 

data used in the Kahn Methodology, the 

page 700 data includes an interstate 

total cost of service calculated under the 

Opinion No. 154–B Methodology used 

to determine oil pipeline rates. 

Following these procedures, Mr. 

O’Loughlin derives the following data: 

TABLE 3 14

Line Middle 80 

percent 

Middle 50 

percent 

Median .............. 2.6 2.6 

Weighted Mean 4.9 3.3 

Unweighted 

Mean ............. 3.9 2.9 

Composite ......... 3.8 2.9 

17. Mr. O’Loughlin notes that the 

middle 50 composite of 2.9 percent is 

very close to the PPI–FG of 3.0 percent 

over the last five years and supports an 

index of an unadjusted PPI–FG. In Mr. 

O’Loughlin’s view, the middle 50 is the 

most appropriate for determining index 

levels, and should be used instead of the 

composite of the middle 50 and the 

middle 80. 

18. Other parties endorsed either the 

views expressed by AOPL or Valero. 

Platte states that it is a member of AOPL 

and filed to provide further support for 

AOPL’s request of an index of PPI– 

FG+3.64. On the other hand, NPGA 

states that it supports the arguments and 

recommendations espoused by Mr. 

O’Loughlin on behalf of Valero, 

including the use of a PPI–FG without 

any adjustment. Navajo states that it 

prefers Valero’s proposal to establish an 

index level of PPI–FG. 

19. Other parties also proposed 

differing index levels. In reply 

comments, CAPP and its expert Mark 

Pinney state that if AOPL’s analysis is 

reproduced using constant 2004 barrelmiles instead of the recessioninfluenced 2009 data, the annual cost 

increase between 2004 and 2009 is PPI– 

FG plus 1.62 percent (PPI–FG+1.62), 

which CAPP observes is much closer to 

the current PPI–FG+1.3 than the index 

level proposed by AOPL. SPOPS asserts 

that the index should be set at zero until 

all pipeline over-recoveries are at just 

and reasonable levels and Navajo 

proposes to deny index increases to 

pipelines that are currently overrecovering. Navajo also proposes to base 

the index upon changes in operating 

and maintenance costs and to allow 

indexed increases only to the proportion 

of the pipeline’s rate that can be 

attributed to such operating and 

maintenance costs. 

20. Other parties, as discussed below, 

without proposing particular index 

levels, urge the Commission to reassess 

the index methodology to avoid overrecoveries. Some parties also raised 

procedural concerns and argued for 

various changes to the Commission’s 

Form No. 6 reporting requirements. 

III. Discussion 

21. The Commission adopts an index 

level of PPI–FG+2.65. The Commission 

rejects the procedural challenges to the 

validity of the NOI and to consideration 

of any modifications to the Kahn 

Methodology. The Commission’s 

proposed index level of PPI–FG+2.65 is 

supported by the Kahn Methodology as 

applied by AOPL, except that the 

Commission adopts Valero’s proposal to 

calculate the index using only the 

middle 50 percent and not the middle 

80 percent of the data set. 

A. Procedural Arguments 

1. The Validity of the Notice of Inquiry 

a. Comments 

22. The American Trucking 

Association and Sinclair/Tesoro 

challenge the validity of the NOI. These 

parties state that the NOI contains no 

justification for the index of PPI–FG+1.3 

specified in the NOI. Sinclair/Tesoro 

emphasizes that an agency must reveal 

an adequate explanation of the basis for 

its proposal and that the rulemaking is 

procedurally defective and should be 

withdrawn. Sinclair/Tesoro avers that 

the Commission provided no data 

analysis or support showing that it has 

evaluated the reasonableness of PPI– 

FG+1.3 as the appropriate index for 

determining rate ceilings. 

23. AOPL asserts that these criticisms 

of the NOI are baseless. AOPL posits 

that the Commission’s methodology for 

calculating its index is well-known to 

industry participants and that there 

exists an ‘‘opportunity for interested 

parties to participate in a meaningful 

way in the discussion and final 

formulation of rules.’’ 15 AOPL further 

emphasizes that Dr. Shehadeh has 

provided data supporting his result 

pursuant to the established 

methodology and states the Commission 

can rely upon these calculations and 

data. 

b. Commission Determination 

24. The Commission rejects the 

assertion that the NOI is procedurally 

defective. The Commission inaugurated 

its five-year review of the indexation 

methodology proposing to continue the 

existing indexing level of PPI–FG+1.3 

while inviting interested parties ‘‘to 

propose, justify, and fully support, any 

alternative indexing proposals.’’ 16 By 

soliciting comments on the current 

index level, the Commission follows the 

same procedure that it used in the 

previous five-year review proceeding for 

allowing parties to present evidence that 

the index level should be modified.17

25. Moreover, the Commission 

subsequently received extensive on-therecord comments and workpapers from 

AOPL, Valero, and other parties. The 

analysis contained within these findings 

is based upon Form No. 6 data, which 

is publically available on the 

Commission Web site and was utilized 

extensively by both AOPL and Valero. 

Furthermore, although the 

Commission’s mechanisms for assessing 

revisions to the index may evolve over 

time, the parties are familiar with the 

types of data that have been considered 

by the Commission in the past, 

including the variants of the Kahn 


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18 129 S.Ct. 1800 (2009). 

19NOI, FERC Stats. & Regs. ¶ 35,566 at P 4. 20AOPL has been given an opportunity to 

respond to these proposals, and AOPL has filed 

reply comments and an October 20 Response that 

vigorously critique the proposed alterations to the 

Kahn Methodology. 

21AOPL II, 281 F.3d at 248. 

22AOPL argues that in the last indexing review, 

the Commission stated that the purpose of the fiveyear review was to determine ‘‘what extent the PPI– 

FG should be adjusted to better reflect those cost 

changes, not whether the method for determining 

pipeline costs should be changed.’’ Second FiveYear Review, 114 FERC ¶ 61,293 at P 46 (emphasis 

added). However, in that passage, the Commission 

was referring to a proposal by the shipper parties 

for an entirely new rulemaking to re-assess the 

means for tracking pipeline costs justified, in part, 

by criticism of the data in Form No. 6. Id. See also 

ATA, Lion Oil Company, National Cooperative 

Refinery Association, Sinclair/Tesoro, Response, 

Docket No. RM05–22, at 13–14 (filed January 23, 

2006). However, elsewhere in Second Five-Year 

Review, when parties did not propose a new 

rulemaking and instead proposed changes using the 

existing information reported to the Commission, as 

Mr. O’Loughlin has done here, the Commission 

evaluated those changes and did not find them to 

be beyond the scope of the five-year review process. 

Second Five-Year Review, 114 FERC ¶ 61,293 at P 

30–36 (rejecting proposal to use ‘‘the arithmetic 

average of the geometric mean of each pipeline’s 

cumulative unit cost change, as opposed to Dr. 

Kahn’s method of calculating the geometric mean 

of the arithmetic average of cumulative unit cost 

change.’’). 

Methodology. The Commission has 

considered comments, reply comments, 

supplemental reply comments, and an 

even later response, giving each party 

more than adequate opportunity to 

respond. Both the data used in this 

proceeding and any potential changes 

from the methodology used in the past 

index review have been subject to ample 

opportunity for examination and 

comment. It is clear that the technical 

support for the index level adopted in 

this proceeding has been provided to 

the parties with adequate opportunity 

for analysis and comment. 

2. Scope of This Proceeding 

a. Comments 

26. In reply comments, AOPL argues 

that the Commission must adhere to the 

methodology applied in prior 

proceedings, and AOPL contends that 

the changes proposed by Valero and its 

expert Mr. O’Loughlin (using page 700 

data, excluding pipelines with large rate 

base changes, and using only the middle 

50 percent) are beyond the scope of the 

five-year review initiated by the NOI. 

27. AOPL contends that in the prior 

five year review, the Commission 

limited the purpose of the review to 

adjustments to the index, not whether 

the index should be changed. AOPL 

adds that because the existing 

methodology was promulgated as part of 

a Commission rulemaking, replacing 

that methodology requires a new 

rulemaking. AOPL asserts that in the 

NOI, the Commission requested 

comments on the appropriate index 

level, but gave no indication it was 

changing its methodology. Moreover, 

AOPL adds that to the extent the 

Commission departs from its prior 

methodology, the Commission must 

establish that the methodology is 

justified. In contrast to Mr. O’Loughlin’s 

proposal, AOPL states that Dr. 

Shehadeh derived the index of PPI–FG 

+3.64 with the same methodology used 

by Dr. Kahn and adopted by the 

Commission in prior proceedings and 

accepted by the D.C. Circuit. 

28. In supplemental reply, citing FCC 

v. Fox Television Stations, Inc.,18 Valero 

states that the Commission only needs 

to establish that the new policy is 

permissible under the statute, that there 

are good reasons for the new policy, and 

that the agency believes it to be a better 

policy. Valero emphasizes that the most 

reasonable course of action available to 

an agency is not always to maintain its 

current policy unchanged. 

29. Valero also dismisses AOPL’s 

argument that a new rulemaking process 

is required to adopt Mr. O’Loughlin’s 

proposals. Valero reiterates that it is not 

proposing a change to this legislative 

rule embodied in the regulations, but 

only a change in data inputs to that 

methodology. Valero also contends that 

all parties, including AOPL, are on 

notice of the alternative proposals 

before the Commission. 

30. Additionally, Valero disagrees 

with AOPL’s contention that the NOI 

does not contemplate an analysis such 

as the O’Loughlin approach. Valero 

states that the Commission invited 

parties to submit comments proposing, 

among other things, alternative indexing 

proposals. Valero argues that AOPL 

mistakes Mr. O’Loughlin’s 

improvements to data sources as a 

change in the methodology itself. 

Rather, Valero contends Mr. 

O’Loughlin’s approach constitutes a 

better approach to utilizing the same 

methodology. 

31. Similarly, on reply, Navajo avers 

that FERC adopted the Kahn 

Methodology only upon the express 

caveat that its initial conclusions were 

not necessarily ‘‘a choice for all time’’ 

and that the ICA required monitoring of 

the index. Navajo adds that an agency 

may depart from past policy or 

precedent so long as the Commission 

acknowledges the change and supports 

its new decision with reasoned 

decision-making and substantial 

evidence. SPOPS also emphasizes that 

the Commission has the flexibility to 

modify its indexing methodology. 

32. In its response, AOPL reiterates 

that Mr. O’Loughlin’s methodology is a 

fundamental departure from the 

established methodology and would 

require a new rulemaking initiated by a 

Notice of Proposed Rulemaking. AOPL 

states that Fox Television also made 

clear that an agency must still provide 

a reasoned explanation for its decisions 

and that a more detailed justification is 

required when the prior policy 

engendered serious reliance interest. 

Valero, according to AOPL, downplays 

this reliance inappropriately. AOPL 

states that the reliance interest was not 

a reliance on any precise pricing index, 

but rather that the pipelines have a 

continued expectation that the 

Commission will apply the established 

methodology in calculating the index. 

b. Commission Determination 

33. The Commission rejects AOPL’s 

assertion that modifications to the 

methodology for evaluating changing 

pipeline costs are beyond the scope of 

this proceeding. The NOI invited 

‘‘interested persons to submit comments 

on the continued use of PPI+1.3 and to 

propose, justify, and fully support, any 

alternative indexing proposals.’’ 19 Thus, 

by inviting parties to submit ‘‘to 

propose, justify, and fully support any 

alternative indexing proposals,’’ the 

Commission provided notice to AOPL 

and others that the Commission would 

consider different methodologies for 

calculating the Index, such as the 

proposals advanced by Valero, among 

others.20 Although the DC Circuit 

rejected in 2003 proposed changes to 

the Kahn Methodology for assessing 

changing pipeline costs, the Court 

rejected this proposal because the 

Commission had neither addressed 

concerns regarding the new 

methodology nor justified its 

methodological shift.21 The Court did 

not hold that the Commission cannot 

make justified modifications to the 

Kahn Methodology. As the Commission 

did in prior five-year reviews of the 

indexing level, the Commission will 

give consideration to alternative 

methodologies for calculating the 

index.22

B. Proposed Changes to the Kahn 

Methodology 

1. Rate Base Screening Methodology 

a. Valero Initial and Reply Comments 

34. To develop the data set for the 

Index, Valero urges the Commission to 

apply a ‘‘rate base screening’’ 

methodology that excludes pipelines 

experiencing both: (a) A rate base 

increase (through expansion) or 

decrease (through divestiture) greater 


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23Using the rate base screening methodology, Mr. 

O’Loughlin excluded 25 pipelines that he states 

experienced major rate base changes during the 

2004–2009 period. O’Loughlin August 20 Aff. ¶ 10. 

Twelve pipelines with rate base changes of more 

than 50 percent remained in the data set because, 

according to Mr. O’Loughlin, they did not appear 

to have requested alternative ratemaking treatment 

and no major acquisition or divestiture was 

identified. O’Loughlin October 8 Aff. ¶ 15. 24Shehadeh September 20 Decl. at 11. 

than 50 percent during the 2004–2009 

period and (b) recovery of cost changes 

during the 2004–2009 period through 

some means other than incremental rate 

increases via the index, such as a costof-service filing or a settlement 

agreement.23 For pipelines with rate 

base changes greater than 50 percent, 

Valero also excluded (a) any pipeline 

with a major divestiture or (b) any 

pipeline that acquired another pipeline 

where the pipeline divesting the assets 

continued to exist after the divestiture. 

In conducting the assessment of 

pipelines with major rate base changes, 

Mr. O’Loughlin also excluded pipelines 

with what he concluded were unreliable 

data. 

35. Valero justifies the rate base 

screening methodology because, citing 

Order Nos. 561 and 561–A, Valero avers 

that the index is intended for normal, 

not extraordinary, changes. Valero 

contends that large rate base changes are 

‘‘extraordinary’’ and that cost changes of 

this nature are typically recovered by a 

cost-of-service filing or settlement, not 

incremental rate changes pursuant to 

the index. 

36. Thus, if the index level reflects 

cost data from the pipelines 

experiencing rate base changes, Valero 

argues that pipelines receiving annual 

index increases that did not construct 

major expansions would obtain a 

windfall due to an index inflated for 

cost changes not experienced by normal 

pipelines. Furthermore, Valero argues 

that pipelines that constructed major 

expansions would receive double 

compensation, first, through a cost-ofservice or other rate changing 

methodology related to the expansion 

and, second, through an inflated index. 

Furthermore, regarding divestitures and 

acquisitions, Valero and its witness 

O’Loughlin also aver that comparisons 

between the period before the 

divestitures or acquisitions and after 

those transactions are meaningless 

because the systems being compared are 

different. 

37. Valero argues that measures taken 

by the Commission in prior proceedings 

do not fully correct the biases caused by 

the inclusion of these pipelines. For 

example, Valero asserts the usage of the 

middle 80 percent or middle 50 percent 

of the sample data set in the prior rate 

proceedings does not adequately 

mitigate the effect of the inclusion of the 

pipelines with major rate base changes. 

38. Valero states that otherwise 

applying Dr. Shehadeh’s methodology, 

while using Valero’s rate base screening 

methodology reduces his recommended 

index from PPI–FG+3.64 to PPI–FG+2.6. 

Valero also states that excluding the 

pipelines with large rate base 

expansions would not frustrate 

expectations because these pipelines do 

not typically use indexing to recover 

increased costs, and the index has never 

previously been set at PPI–FG+3.64 and 

there could have been no expectation 

that this index level would be approved. 

b. AOPL Reply Comments 

39. AOPL states that if a pipeline 

experiencing a rate base change is truly 

a statistical outlier, it will be excluded 

by using the middle 50 and middle 80 

data sets as applied in the Kahn 

Methodology. AOPL states that Mr. 

O’Loughlin’s ‘‘rate screening 

methodology’’ is a highly subjective, 

results-driven attempt to eliminate 

pipelines with higher cost changes. 

This, AOPL argues, biases the data set 

downward before any application of 

statistical measures. AOPL emphasizes 

that an appropriate statistical method 

for excluding outliers must be 

systematic and objective. 

40. AOPL contends Mr. O’Loughlin’s 

‘‘double-recovery’’ argument lacks 

consistency with the structure of the 

index methodology. According to 

AOPL, under the Commission’s 

regulations, if a pipeline files a cost-ofservice rate increase, those rates form 

the ceiling for that year, but in the next 

index year, the pipeline must apply the 

applicable index, whether it is higher or 

lower. AOPL asserts that, rather than 

reflecting ‘‘double recovery,’’ this merely 

follows the appropriate operation of the 

index under the Commission’s 

regulations, which permit annual 

changes in rate ceilings due to actual 

industry-wide cost changes as compared 

to PPI–FG. AOPL further argues that Mr. 

O’Loughlin’s double-recovery argument 

would also discourage pipeline 

expansions and improvements by 

excluding pipelines that would 

undertake significant expansion projects 

or that incur significant expenses in 

compliance with safety regulations. 

41. AOPL also contends that the 

inclusion of pipelines with large rate 

base changes in the data set does not 

create a windfall because, under the 

indexing methodology, pipeline costs 

are merely increasing to reflect 

increased costs across the industry. 

AOPL’s witness Dr. Shehadeh states that 

whether a pipeline ‘‘used a rate 

mechanism other than indexation is 

irrelevant to the value of the 

information that these pipelines can 

provide as evidence for indexing 

pipeline costs.’’ 24

42. AOPL further claims that in Order 

No. 561, the Commission established 

the Index level at PPI–FG–1 to account 

for a wave of asset retirements that 

resulted in significant rate base changes. 

AOPL states that it would now be 

inconsistent to exclude rate base 

changes when those changes relate to 

pipeline expansions. AOPL states that 

the disqualification from the data set 

pipelines that undertake significant 

expansion will discourage pipeline 

expansions and improvements. 

c. Other Shipper Reply Comments 

43. In reply comments, NPGA, ATA 

and Navajo expressed support for 

Valero’s rate base screening 

methodology. 

d. Valero Supplemental Reply Brief 

44. Responding to AOPL, Valero 

disputes the assertion that the rate base 

screening methodology understates cost 

changes experienced by a typical 

pipeline operator. Valero states that Mr. 

O’Loughlin’s analysis applied an 

objective filter which removed pipelines 

experiencing cost increases and cost 

decreases of more than 50 percent. 

Valero notes that pipelines that 

underwent expansions and major 

capital investments often sought to 

recover those costs by means other than 

the price index; to Valero, this suggests 

that the cost increases were 

extraordinary. 

45. In response to AOPL’s and Dr. 

Shehadeh’s argument that volume 

increases offset the cost increases, 

Valero states that it would not have 

been necessary or cost-justified to adopt 

increased cost-based rates if increased 

volumes fully offset any new costs. 

Valero adds that if volumes had 

increased commensurately with costs on 

these pipelines, then the pipelines with 

large rate base changes would not be at 

the high end of the measurement group 

in terms of cost-of-service per barrelmile changes. 

46. Valero also avers that Dr. 

Shehadeh’s claim that the rate base 

screening methodology would have 

increased the index adjustment factor 

established in Order No. 561 contradicts 

his claim that Mr. O’Loughlin’s 

methodology biases results downward 

and leads to an inappropriately low 

index. 


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Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Rules and Regulations 80305 

25To the extent that large rate base changes are 

associated with disproportionately large cost shifts, 

AOPL’s expert Dr. Shehadeh explains that 18 of the 

25 pipelines removed by Mr. O’Loughlin due to rate 

base changes were excluded when the data set was 

reduced to the middle 50 percent using Dr. 

Shehadeh’s methodology. Shehadeh September 20 

Decl. at 12. 

26O’Loughlin August 20 Aff. ¶¶ 44–45, Figure 14. 

27For example, Mr. O’Loughlin explains that, 

using his own methodology, of the 97 pipelines in 

his data set, which has been culled pursuant to the 

rate base screening methodology, there ‘‘are 20 

pipelines that experienced average cost increases 

greater than 10% per year and 10 pipelines that 

experienced average cost decreases of more than 

10% per year over the five-year period.’’ O’Loughlin 

August 20 Aff. ¶ 45. 

28Energy Policy Act of 1992 Public Law 102–486 

Sec. 1801(a), 106 Stat. 3010 (Oct. 24, 1992). 

29The D.C. Circuit has previously recognized the 

importance of an index that is relatively simple to 

derive. AOPL II, 281 F.3d at 247 (quoting EPAct 

1992, at § 1801(a)). The complexity of Mr. 

O’Loughlin’s rate base screening methodology is 

demonstrated by Appendix F of his September 20 

Affidavit, in which Mr. O’Loughlin examines the 

circumstances of 37 pipelines that experienced rate 

base changes greater than 50 percent. To apply the 

rate base screening methodology, for each pipeline 

with a change in rate base exceeding 50 percent, 

Mr. O’Loughlin examined tariff filings, assessed 

acquisition and divestiture activity, probed into the 

reliability of the pipeline’s reported data, 

researched whether the pipeline had sought rate 

increases pursuant to the index, and generally 

sought to determine why the rate base changes 

occurred. 

30O’Loughlin September 20 Aff. ¶ 54 n.75, 

Appendix F at 8–10. 31 Valero Supplemental Reply Comment at 14–15 

(citing Order No. 561–A, FERC Stats. & Regs. 

¶ 31,000 at 31,097). 32 18 CFR 342.3(d)(5). 

e. AOPL October 20, 2010 Response 

47. AOPL states that once an initial 

rate is set for a pipeline expansion, 

indexing becomes the primary method 

for changing oil pipeline rates. 

According to AOPL, there is no reason 

to exclude pipelines filing a cost-ofservice or settlement rate when 

examining industry-wide cost changes 

and that the presence of ratemaking 

alternatives do not justify setting the 

index below overall industry levels. 

AOPL avers that if pipelines 

undertaking significant infrastructure 

investment are excluded from the 

measurement of cost changes, the index 

will be inappropriately low, causing 

more pipelines to use other ratemaking 

methods and undermining the purpose 

of the index. 

f. Commission Determination 

48. The Commission will not adopt 

Valero’s proposal to exclude pipelines 

experiencing major rate base changes 

from the data set. To determine which 

pipelines should be trimmed from the 

data sample, the Commission has relied 

upon the level of the cost changes, not 

the reasons why a particular pipeline’s 

changing costs might be anomalous. 

Thus, in assessing Form No. 6 data in 

prior index proceedings, the 

Commission has trimmed the data sets 

to remove outliers, such as the 25 

percent of pipelines with the greatest 

cost increases per barrel-mile and the 25 

percent with the greatest decreases. As 

discussed below, the Commission in 

this proceeding will trim the data set to 

pipelines in the middle 50 percent of 

cost changes. To the extent that a 

particular pipeline’s cost change is an 

anomalous outlier compared to the 

changes on other pipelines, using the 

middle 50 percent of cost changes, 

should remove any distorting impact 

resulting from the pipeline’s presence in 

the index.25

49. In contrast to this simplified 

methodology, the rate base screening 

methodology proposed by Valero 

selectively emphasizes one factor that 

may cause a substantial change in 

pipeline costs per barrel-mile while 

ignoring other factors. There is no doubt 

that substantial changes in rate base can 

alter the per barrel-mile costs of a 

particular pipeline. However, costs per 

barrel-mile can also be altered by 

shifting customer demand, increased 

competition, economic changes, or 

changing product supplies. As Valero’s 

expert Mr. O’Loughlin notes, there is a 

wide range in the changes in pipeline 

per barrel-mile costs,26 and much of this 

variability 27 is unrelated to the 

significant rate base changes cited for 

exclusion by Mr. O’Loughlin. By 

selectively modifying the data set based 

upon one potential cause for cost 

changes, Mr. O’Loughlin risks distorting 

the index calculation. 

50. Moreover, the index is pursuant to 

a Congressional mandate to develop a 

‘‘simplified and generally applicable 

ratemaking methodology* * *.’’ 28

Consistent with this mandate of general 

applicability, the Commission is 

reluctant to inquire into the particular 

circumstances of every pipeline and 

selectively remove pipelines that 

experienced cost changes due to one 

particular factor from the data set used 

to calculate the index.29

51. Furthermore, large rate base 

changes can reflect changing pipeline 

costs. The cost of new investment 

associated with rate base increases 

reflects industry cost experience related 

to pipeline infrastructure on a barrelmile basis. These rate base changes also 

provide important information 

regarding industry capital requirements. 

A rate base change, like any other 

change in the business circumstances of 

a pipeline, is only an outlier if a 

pipeline’s per barrel costs change in a 

manner disproportionate to those 

changes experienced by other pipelines. 

52. Moreover, the index serves as a 

means of recovery for some pipelines 

with significant rate base changes. 

According to data provided by Mr. 

O’Loughlin, several of the pipelines that 

Mr. O’Loughlin identified as 

experiencing significant rate base 

changes relied upon indexed rates (or at 

least did not seek some other form of 

recovery, such as a cost-of-service 

filing).30 The fact that a non-trivial 

number of pipelines experiencing rate 

base changes continued to use the 

indexing methodology reinforces the 

inclusion of pipelines with rate base 

changes in the data set. 

53. Additionally, merely because a 

pipeline seeks recovery of rates outside 

the indexing methodology, for example 

through a cost-of-service, does not 

establish that the pipeline should be 

excluded from the data set used to 

develop the index. The changing costs 

that compelled the pipeline to seek 

recovery outside the indexing 

methodology nonetheless reflect 

industry cost experience. Moreover, for 

those pipelines with significant rate 

base increases, Mr. O’Loughlin’s 

decision to include only those pipelines 

where the pipeline opted to continue to 

use the index could skew the index 

downward; this is because the pipelines 

continuing to use the index are more 

likely to be the pipelines where the rate 

base change decreased per-barrel mile 

costs. 

54. Valero repeatedly cites language 

in Order Nos. 561 and 561–A that the 

index accounts only for ‘‘normal,’’ not 

‘‘extraordinary’’ changes.31 However, 

this language does not support Valero’s 

proposal to exclude pipelines 

experiencing major rate changes from 

the data set used to determine the index 

level. In these passages, ‘‘extraordinary’’ 

referred to pipelines experiencing 

changed per barrel-mile costs that were 

greater than the changing costs 

experienced by other pipelines 

regardless of the causes underlying any 

particular pipeline’s cost changes. Thus, 

even though a rate base change of 50 

percent is a significant occurrence, it is 

only ‘‘extraordinary’’ as Order Nos. 561 

and 561–A used that term to the extent 

that it causes an anomalous change in 

costs per barrel-mile. 

55. Valero’s contention that including 

pipelines with rate base changes in the 

data set used to determine index will 

lead to double-recovery is without 

merit. After making a cost-of-service 

filing, the cost-of-service rate becomes 

the ceiling rate for that year 32 and 

pipelines are authorized to increase 

their rates pursuant to the index in 


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80306 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Rules and Regulations 

33However, further undermining Valero’s doublerecovery argument, the Commission has denied an 

increase pursuant to the index when the cost-ofservice filing supporting the existing rate already 

incorporated the cost changes covered by the index. 

See SFPP, L.P., 117 FERC ¶ 61,271 (2006) (denying 

an index increase because the cost-of-service rate, 

which used a 2005 base period, already reflected 

the 2005 cost changes covered by the index). 

34 Kahn Decl. at 13 (August 31, 2000) (Docket No. 

RM00–11–000). 35The composite of the middle 50 and middle 80 

were very similar in that proceeding at 1.32 percent 

and 1.2 percent, respectively. Id. 

36Order No. 561–A, FERC Stats. & Regs. ¶ 31,000 

at 31,097 (noting that the purpose of the Index is 

to ensure recovery of ‘‘normal’’ cost changes, not 

‘‘extraordinary’’ cost changes). 

37Shehadeh September 20 Decl. at 12. Only 13 of 

the 25 are excluded in the middle 80 percent. Id. 

The number of excluded pipelines include four 

companies that Dr. Shehadeh removed due to 

missing data. Shehadeh September 20 Decl. at 12 

n.15. 

subsequent years.33 Valero’s argument 

ultimately rests upon the contention 

that the index is inflated by the 

inclusion of pipelines experiencing rate 

base changes. However, as noted 

previously, such inflation of the index 

only occurs if the rate base changes lead 

to changes in per barrel-mile costs that 

are anomalous. To the extent that the 

rate base change leads to an anomalous 

cost increase or decrease, it will be 

excluded by the data set trimming as 

discussed below. 

2. Data Trimming and the Middle 50 

a. Valero Initial and Reply Comments 

56. Valero urges the Commission to 

calculate the index using a data sample 

trimmed to the middle 50 percent, i.e. 

removing the 25 percent of pipelines 

with the greatest cost increases and the 

25 percent of pipelines with the greatest 

cost decreases. Although Valero 

acknowledges that recent index 

proceedings have considered both the 

middle 50 and middle 80 percent, 

Valero contends that trimming the data 

set to the middle 80 percent 

inadequately accounts for outliers due 

to the widely varying average annual 

cost changes. Valero adds that the 

middle 80 includes pipelines with 

anomalous characteristics, such as very 

high costs per barrel-mile or the absence 

of rate base. 

b. AOPL Reply Comments 

57. AOPL opposes trimming the 

sample data set to the middle 50 percent 

of pipelines. Dr. Shehadeh responds to 

Mr. O’Loughlin’s proposal by stating 

that the wide distribution of pipeline 

cost changes (as opposed to a 

normalized bell curve) does not support 

ignoring the middle 80 percent in favor 

of the middle 50 percent. Rather, Dr. 

Shehadeh claims that the wide 

distribution supports the use of the 

middle 80 percent, rather than the 

middle 50 percent because it would be 

more inclusive and represent a larger 

number of pipelines. 

c. Valero Supplemental Reply 

Comments 

58. Valero contends, contrary to 

AOPL’s assertions, that Mr. 

O’Loughlin’s use of the middle 50 

percent data set is justified and 

consistent with Commission policy. 

Valero asserts that the Commission’s 

methodology has varied over the years, 

and in Order Nos. 561 and 561–A, the 

Commission used an analysis of only 

the middle 50 percent of the data set, 

not a composite of the middle 50 

percent and middle 80 percent of the 

data set. Valero’s Mr. O’Loughlin 

emphasizes that the middle 50 percent 

better serves the goal of excluding 

extraordinary data points. Mr. 

O’Loughlin also identifies an additional 

three pipelines in the middle 80 percent 

that he states have unusual 

characteristics, such as a cost of capital 

under two percent or, in another case, 

no rate base yet a positive depreciation 

expense. 

d. AOPL’s October 20, 2010 Response 

59. In its response, AOPL reiterates its 

position that both the middle 50 percent 

and middle 80 percent should be used. 

AOPL reiterates its contention that the 

wide distribution of pipeline cost 

changes does not support assigning no 

weight to the middle 80 percent. AOPL 

also challenges the three pipelines Mr. 

O’Loughlin identified as anomalous, 

noting that one was excluded from Dr. 

Shehadeh’s data set and that the others 

showed overall cost changes that were 

not all that different from other 

pipelines. AOPL states that as the Form 

No. 6 data has improved, there is no 

merit to limiting the data set. 

e. Commission Determination 

60. The Commission will use the 

middle 50 percent of the data set to 

determine the appropriate index level. 

This use of the middle 50 percent is 

consistent with the Commission’s 

approach when it adopted the indexing 

methodology. In Order Nos. 561 and 

561–A, the initial rulemaking 

establishing the indexing methodology, 

the Commission used only the middle 

50 percent of the data set to determine 

the appropriate indexation level. In that 

proceeding, neither the Commission nor 

Dr. Kahn considered the middle 80 

percent. In the second review, Dr. Kahn 

introduced the middle 80 percent to his 

analysis.34 Given that the two data sets 

supported the same resulting indexlevel of an unadjusted PPI–FG, using 

both (as opposed to just the middle 50) 

was not discussed or contested, as there 

was little substantive impact from this 

departure from the Order No. 561 

methodology.35 In the second and most 

recent 5-year review, the composite 

usage of the middle 50 and the middle 

80 reoccurred, but again the relative 

merits of the middle 50 and middle 80, 

and the departure from the prior Order 

No. 561 methodology were not weighed 

or discussed. 

61. Given the more fully developed 

record presented here, the Commission 

returns to its approach in Order Nos. 

561 and 561–A to use the middle 50 

percent as the most appropriate method 

for trimming the data sample. The 

purpose of the index is to permit a 

simplified recovery for normal cost 

changes, not to enable recovery for 

extraordinary cost increases or 

decreases.36 The middle 50 percent 

more appropriately adjusts the index 

levels for ‘‘normal’’ cost changes as 

opposed to the middle 80 percent, 

which, by definition, includes pipelines 

relatively far removed from the median. 

Furthermore, some of these more 

dramatic cost changes may be due to 

circumstances on a particular pipeline 

that are not broadly shared across the 

industry. Even when accurate data is 

reported, pipelines in the middle 80, as 

opposed to the middle 50, are more 

likely to have cost changes resulting 

from factors particular to that pipeline, 

such as a rate base expansion, plant 

retirement, or localized changes in 

supply and demand. Using the middle 

50 ensures that pipelines with relatively 

large cost increases or decreases do not 

distort the index. 

62. The Commission further observes 

that our adoption of the middle 50 

provides a better remedy for some of the 

concerns Mr. O’Loughlin used to justify 

his rate base screening methodology. Of 

the 25 pipelines Mr. O’Loughlin seeks to 

exclude via the rate base screening 

methodology, 18 are excluded by using 

the middle 50 percent in the Kahn 

Methodology as applied by Dr. 

Shehadeh.37 More generally, the 

adoption of the middle 50 is a less 

subjective and more simplified method 

(consistent with the EPAct 1992) of 

removing potentially anomalous data 

than selective removal of certain 

pipelines with particular characteristics 

from the data sample. The middle 50 

also is preferable to such selective 

screening methods because it avoids the 

risk that the index is skewed because 

certain cost changes (such as rate base 

changes) are selectively excluded while 


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Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Rules and Regulations 80307 

38AOPL Comments at 14–15; Dr. Shehadeh 

August 20 Decl. at 10 n.23. 

other significant changes (changes in 

local supply and demand) are 

incorporated. 

63. The Commission accordingly 

concludes that the middle 50 provides 

a robust data sample for determining 

changing barrel-mile costs. The middle 

50 percent of pipelines represents 76 

percent of total barrel-miles in 2004 

subject to the index,38 and thus for this 

index calculation, the Commission finds 

it unnecessary to include the middle 80 

percent to obtain a representative 

sample of the data. Finally, the use of 

the middle 50 minimizes the risk of 

including pipelines that experienced 

either large increases or decreases in 

cost (or errant data) that may be 

included in an 80 percent sample, while 

still capturing changes from a broad 

spectrum of the pipeline industry. 

3. Page 700 Data 

a. Valero’s Initial and Reply Comments 

64. Valero and Mr. O’Loughlin aver 

that the Commission should adopt page 

700, which uses the Opinion No. 154– 

B methodology to derive a total cost-ofservice for interstate pipeline 

companies. Valero states there are 

several advantages to using the page 700 

data as opposed to the other Form No. 

6 data relied upon by the Commission 

in the past. 

65. Valero asserts that by relying upon 

page 700 data, the Commission can 

avoid using net carrier property as a 

proxy for actual changes in allowed 

return and income tax. Valero notes that 

the Commission has previously 

questioned the effectives of net carrier 

property as a proxy for changes in 

capital costs. Valero further states that 

Mr. O’Loughlin’s analysis shows that 

the change in net plant is typically 

greater than the change in allowed 

return and income tax. Additionally, 

Valero argues that net plant data 

reported on Form No. 6 can also include 

purchase accounting adjustments 

(PAAs), which the Commission does not 

allow for ratemaking purposes absent a 

showing of substantial benefits to 

ratepayers. 

66. Valero also contends that the 

‘‘operating ratio’’ weighting methodology 

as applied by Dr. Shehadeh leads to a 

distorted analysis. The operating ratio is 

set between zero and one based upon 

the ratio of operating expenses to 

revenues. If operating expenses exceed 

revenues, then the operating ratio is set 

to one, meaning that no weight is 

assigned to capital costs (net plant 

under the prior methodology) in the 

formula. Thus, Valero contends that for 

fifteen pipelines in Dr. Shehadeh’s data 

set, the weight for the index of changes 

in net plant is zero percent, making the 

index of changes in net plant irrelevant. 

Valero contends that its proposed 

methodology using data from page 700 

obviates the need for the operating ratio 

because the total cost of service on page 

700 incorporates both operating and 

capital costs. 

67. Valero explains that operating 

expense, net carrier property, and 

barrel-mile data, which are reported on 

pages 110–111, 300–303, and 600–601 

of the Form No. 6, include intrastate, as 

well as interstate, pipeline information. 

The solution, Valero contends, is to use 

the data on page 700 of the Form No. 6, 

which includes only interstate 

information. 

b. Other Shipper Comments 

68. In their comments, other parties 

addressed Valero’s proposal to use page 

700. ATA emphasized that any analysis 

of costs should be based on the 

interstate costs reported on page 700. 

ATA emphasizes that page 700 contains 

the information available to shippers to 

provide a screening tool to determine 

whether a ‘‘pipeline’s cost of service or 

per-barrel/mile costs’’ are so divergent 

from revenues as to warrant a challenge 

to the rates. ATA stresses that it is 

appropriate to use the same data to 

develop the index as is used to 

determine whether a pipeline is 

recovering its costs. 

69. NPGA likewise submits that any 

proper analysis of operating costs 

should be based on interstate operations 

and costs and not on costs that reflect 

intrastate operations. Thus, NPGA urges 

the use of page 700 data. 

70. In reply comments, SPOPS urges 

that to the extent the Commission 

continues to apply its methodology, the 

Commission should use the primary 

source for the jurisdictional costs of 

service for the pipelines, the page 700 

and the underlying workpapers, not the 

secondary source methodology 

demanded by AOPL. 

c. AOPL’s Reply Comments 

71. AOPL opposes the use of page 700 

data. AOPL argues that the page 700 

data is more volatile due to the return 

element underlying the page 700 total 

cost-of-service data. Specifically, AOPL 

contends that stock market fluctuations 

make the rate of return highly sensitive 

to the end-year selected by the 

Commission (i.e., 2008 versus 2009) for 

calculating the index. According to 

AOPL, the Form No. 6 net carrier 

property data is preferable because it 

reflects actual changes in capital costs 

while assuming that the competitive 

cost of capital remains constant. 

72. AOPL also argues that if rate of 

return from page 700 is used to measure 

cost increases, increases in pipeline 

efficiency will not result in lower 

indexation levels. AOPL explains that 

pipeline returns are based on a proxy 

group and as the profitability increases 

for companies in the proxy group, 

returns will likely increase. As a result, 

using return from page 700 will tend to 

increase, as oppose to decrease, future 

index levels. 

73. AOPL also disagrees with Mr. 

O’Loughlin’s claim that page 700 data is 

superior to Form No. 6 data because 

page 700 data does not include 

intrastate costs. AOPL counters that oil 

pipelines often make intrastate and 

interstate movements through the same 

pipeline segments. Thus, AOPL believes 

that it is reasonable to assume that both 

interstate and intrastate cost changes are 

likely to be representative of interstate 

cost changes. 

74. AOPL argues that Mr. O’Loughlin 

mistakenly describes the page 700 data 

as new and instead suggests that the 

information Mr. O’Loughlin proposes to 

use has been available to the 

Commission for many years. 

d. Valero Supplemental Reply 

75. Responding to AOPL, Valero 

asserts that pipeline efficiency gains 

will not distort the return information 

from page 700 because basic finance 

theory provides that an increase in a 

company’s current and future cash flow 

increases the equity value of the 

company. Regarding AOPL’s contention 

that volatility in the page 700 return 

data will skew results, Valero argues 

that Dr. Shehadeh, by analyzing the rate 

of return in isolation from the allowed 

return and income tax allowance, 

obtained a result that is not fully 

indicative of a pipeline’s capital costs. 

Valero further argues that recessionary 

declines in petroleum demand 

increased the average cost of service per 

barrel mile for 2009. Valero concludes 

that if the recessionary volatility in 

barrel-miles is reflected in developing 

unit costs, the prevailing rates of return 

as reported in the cost-of-service 

calculations on page 700 of the Form 

No. 6, must also be used. 

76. Valero disputes AOPL’s 

contention that an interstate cost-ofservice value was reflected on page 700 

as early as 1994. Valero states that a 

reliable total interstate-only cost-ofservice data and the specific line items 

composing the interstate cost of service, 

including jurisdictional rate base, were 

not available until 2000. Valero states 

that the Commission has not previously 


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addressed the possibility of using this 

interstate, page 700 data in the index. 

77. Valero also challenges Dr. 

Shehadeh’s claim that the interstateonly operating and maintenance 

expense and depreciation expense data 

reported on page 700 are unsuitable for 

the rate index methodology because the 

data contain various accounting, 

allocation, and normalizing 

assumptions. Rather, Valero contends 

that because the calculations of 

operating and maintenance expense 

must be consistent with the 

Commission’s Opinion No. 154–B 

methodology and because changes in 

those components impact the costs a 

pipeline can recover in rates, those 

considerations are appropriate for 

determining the price index. 

78. Valero states that Dr. Shehadeh’s 

preferred data source, the operating and 

maintenance expense data on page 114 

of the Form No. 6, can contain 

accounting reserves that are not 

permitted for ratemaking. Valero states 

that carriers should not be permitted to 

use these discretionary changes in 

accounting reserves to influence the 

change in unit costs used to determine 

the level of index to be used for annual 

adjustments. 

e. AOPL October 20, 2010 Response 

79. AOPL renews its arguments that 

(a) intrastate costs are representative of 

interstate costs; (b) inclusion of the rate 

of return from page 700 would make the 

index more volatile; (c) net plant is a 

preferable measure of return for the 

purposes of establishing the index than 

the page 700 data; and (d) the page 700 

data has been available during prior 

indexing proceedings. 

80. AOPL also argues that Valero’s 

proposed usage of page 700 ignores 

serious accounting issues. AOPL states 

that, in order to derive a unit cost for 

each carrier, Mr. O’Loughlin divides the 

total cost-of-service reported on page 

700 by the total throughput reported on 

page 700. AOPL states that the page 700 

cost-of-service figure provides each 

carrier’s interstate cost-of-service using 

an Opinion No. 154–B methodology. 

However, AOPL states that the barrelmile data on page 700 includes 

interstate and intrastate volumes. AOPL 

explains that the instructions on page 

700 indicate that the barrel-mile figure 

should be the same as that reported on 

page 600, and the barrel-mile figure on 

page 600 includes ‘‘all oils’’ received by 

the pipeline, not just interstate oils. 

AOPL contends that there could be a 

mismatch between the interstate only 

costs and the interstate and intrastate 

volumes. 

81. AOPL defends the data in Form 

No. 6. AOPL states that while PAAs 

reflected in Form No. 6 are generally not 

allowed to be reflected in regulated 

rates, these adjustments are appropriate 

when calculating cost changes because 

the PAAs reflect the opportunity cost of 

capital. Moreover, AOPL states that 

PAAs do not create the perverse 

incentives in the calculation of an 

industry-wide index that they do when 

calculating an individual pipeline’s 

rates. Also, AOPL also contends that 

although the accounting reserves in 

Form No. 6 present timing issues for the 

purposes of a ratemaking proceeding, 

they also represent real costs of doing 

business that are properly reflected in 

the calculation of the rate index. 

82. AOPL also defends the usage of 

the operating ratio. AOPL states that 

applying a weight of one to operating 

expenses and zero to net plant is 

appropriate for a company where 

operating costs are greater than revenue. 

f. Commission Determination 

83. The Commission does not adopt 

Mr. O’Loughlin’s proposal to use page 

700 data because there is a mismatch 

between the page 700 total cost-ofservice, which includes only interstate 

data, and the page 700 throughput data, 

which includes interstate and intrastate 

data. 

84. As the shipper parties emphasize, 

the total cost of service data on page 700 

relates solely to interstate costs. 

However, the throughput data used by 

Mr. O’Loughlin from page 700 reports a 

combination of interstate and intrastate 

volumes. As AOPL explains in its 

October 20 Response, the barrel-mile 

information listed on page 700 provides 

that the barrel-mile figure should be the 

same as that reported on line 33a of 

page 600 of the Form No. 6. The 

instructions for page 600 refer to the 

inclusion of ‘‘all oils received’’ by the 

pipeline and makes no distinction 

between interstate and intrastate 

volumes. Consequently, pipelines may 

be reporting both interstate and 

intrastate volumes on page 700. 

85. Thus, Mr. O’Loughlin’s 

calculations compare one set of costs 

(interstate costs) with a different set of 

throughput (combined interstate and 

intrastate). Changes in transported 

throughput on a particular movement 

cause changes in the costs related to the 

very same movement. Thus, it is an 

axiomatic rule of ratemaking that the 

same set of costs and volumes must be 

used to determine rates. To obtain an 

accurate measurement of changing per 

barrel-mile costs for purposes of 

establishing an index level, the 

methodology must match the 

throughput used in the methodology to 

the costs incurred to transport the 

throughput used in the methodology. 

Given that page 700 does not match 

interstate costs with interstate volumes, 

the Commission rejects its usage in the 

methodology. 

4. Adjustments for Declining 

Throughput 

a. Comments 

86. In reply comments, CAPP asserts 

that the index should not be inflated by 

the decline in throughput between 2004 

and 2009. CAPP contends that the 

widespread recession caused the 

reduction in 2009 barrel miles and that 

such throughput declines cannot be 

expected to continue for another five 

years. CAPP states that its expert Mark 

Pinney replicated AOPL’s analysis using 

constant 2004 barrel miles and the 

resulting increase equated to PPI–FG 

plus 1.62 percent. CAPP argues that it 

is inconsistent with the purpose of an 

inflation adjusted index to allow 

changes in volumes to affect index 

levels and that increasing the index due 

to declining volumes will be selfperpetuating. CAPP also argues that 

allowing a generic index increase based 

on 2009 barrel-mile data contradicts 

Commission ratemaking policy for new 

pipeline facilities by using barrel-mile 

data instead of capacity as billing 

determinants. 

87. Also in reply, ATA states that U.S. 

Energy Information Administration 

(EIA) estimates project an increase in 

total crude oil and petroleum 

consumption from 2010 to 2011. ATA 

thus advocates establishing an index 

using constant 2009 volumes for 2011 

through 2016 as a ‘‘conservative’’ 

approach more favorable to pipelines. 

88. In its October 20 Response, AOPL 

contends that adjusting actual historical 

throughput to assume constant volume 

levels is speculative and directly 

contrary to the Commission’s 

established methodology. AOPL also 

challenges CAPP’s suggestion that the 

Commission uses capacity to measure 

costs instead of actual throughput, 

stating that because the oil pipeline 

industry is a highly capital intensive 

industry, when throughput declines, 

costs do not decline proportionally. 

AOPL adds that CAPP treats volumes as 

remaining constant but makes no 

attempt to adjust for fuel and power 

costs that are dependent upon volume 

levels. Moreover, AOPL adds that 

contrary to CAPP’s assertion that the 

decline resulted from the 2009 

recession, more than 60 percent of the 

throughput decline occurred between 

2004 and 2005. Thus, AOPL states that 


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39AOPL II, 281 F.3d at 247 (2003) (quoting EPAct 

1992, at § 1801(a)). 

40See 18 CFR 346.2(b)(2). Moreover, it is not clear 

how this capacity information could be obtained in 

the application of the index, since pipelines report 

throughput in Form No. 6, not capacity. 

41Shehadeh October 20 Decl. at 29. 42To derive this rate, Navajo relies upon Mr. 

O’Loughlin’s showing a change in the O&M costs 

for the middle 50 percent of oil pipelines of 5.0 

percent and a change for the composite of the 50 

and 80 percent of 5.4 percent. O’Loughlin August 

20 Aff. ¶ 49, Figure 15. 

43Order No. 561, FERC Stats. & Regs. ¶ 30,985 at 

30,951–52, aff’d AOPL I, 83 F.3d at 1437. The 

Continued 

capacity should not be used to measure 

costs. 

b. Commission Determination 

89. The Commission rejects CAPP’s 

and ATA’s proposal to use constant 

barrel-miles in the Kahn Methodology 

rather than the actual barrel-mile levels. 

90. The Commission finds it 

appropriate to continue to rely upon 

historical data in applying the Kahn 

Methodology. The DC Circuit has 

upheld the Commission’s reliance upon 

historical data finding that the usage of 

historical data is consistent with the 

mandate to apply ‘‘a simplified and 

generally applicable ratemaking 

methodology.’’ 39

91. Moreover, CAPP’s and ATA’s 

analysis of cost changes assuming 

constant volumes are problematic 

because they utilize asynchronous data. 

Regarding CAPP’s proposal to use 

constant 2004 barrel-miles, the 2009 

costs reflect the expenses associated 

with the lower 2009 volume levels. 

Since certain costs (such as fuel and 

power) increase and decrease with 

volume levels, using 2004 data volume 

data with 2009 operating costs will not 

present an accurate depiction of the 

change in per barrel-mile costs. By 

applying an upward adjustment to 2009 

volumes without adjusting for the costs 

that would have been incurred as a 

result of those higher volumes, CAPP 

imposes a downward distortion on the 

change in pipeline costs calculated 

under the Kahn Methodology. Similarly, 

ATA’s proposal to assume constant 

2009 volumes is defective because it 

does not adjust 2004 costs so that the 

2004 costs reflect the lower 2009 

volumes. 

92. The Commission further rejects 

CAPP’s argument that it is inappropriate 

to allow the indexing methodology to be 

calculated based upon declining 

volumes. Declining volumes require 

pipelines to increase rates in order to 

meet revenue needs and, for existing oil 

pipelines, the Commission uses existing 

volumes, not capacity, to determine 

rates.40 Thus, much as in a cost-ofservice, such declining volumes should 

lead to increased pipeline recovery 

levels in the indexing methodology. 

93. Finally, CAPP fails to demonstrate 

that the declining throughput for the 

2004–2009 period resulted primarily 

from the unusual economic conditions 

in 2008 and 2009 as opposed to changes 

reflected throughout the prior five-year 

period. As Dr. Shehadeh demonstrates, 

more than 60 percent of the decline in 

barrel-miles during the 2004–2009 

period recorded on Form 6 occurred 

between 2004 and 2005,41 and was 

unrelated to the recession in 2008 and 

2009. Thus, it is not the case that the 

index level has been distorted by the 

recession in 2008 and 2009. 

5. Applying the Index Only to 

Operations and Maintenance Costs 

a. Comments 

94. In its comments and reply 

comments, Navajo urges the 

Commission to apply the index only to 

operating and maintenance costs and 

not to costs attributable to depreciation, 

return, and income tax allowances. 

Navajo asserts that depreciation is not 

affected by inflation because 

depreciation is based upon equity 

investment, a historical cost. Navajo 

further contends that the two 

components of return—return on equity 

(in the form of increased deferred 

return) and cost of debt—already 

incorporate an inflation component. 

Thus, Navajo asserts that automatically 

granting pipelines an additional 

inflation-based index increase would 

enable pipelines to ‘‘double-dip’’ the 

inflation element. Third, Navajo asserts 

that the income tax allowance should 

not be increased automatically by an 

index, because one of its two 

components (the tax rate) generally is 

fixed by law and does not vary based on 

inflation, and the second component 

(rate of return on equity) already 

accounts for inflation. 

95. Instead, Navajo avers that the 

index should only be applied to 

operating and maintenance (operating 

and maintenance expense) costs. Navajo 

acknowledges that the Commission 

previously rejected this approach as too 

complicated in Order Nos. 561 and 561– 

A, but Navajo notes that the 

Commission now collects categorical 

cost data from pipelines on page 700 of 

Form No. 6 and the Commission could 

apply the index only to operating and 

maintenance costs as recorded on page 

700. Thus, Navajo states that the 

Commission could use the change in 

operating and maintenance expense 

costs identified by O’Loughlin to 

develop the indexed rate.42 Navajo 

explains that under its proposal, for 

each pipeline seeking an annual index 

increase, the index rate could be applied 

to the part of the rate attributable to 

operating and maintenance expense. 

Navajo elaborates that if the operating 

and maintenance expense costs were 40 

percent of a pipeline’s cost of service on 

page 700 of its Form No. 6, the indexbased rate increase should equal the 

pre-existing ceiling rate times the index 

multiplied by ‘‘0.4.’’ 

96. In reply comments, ATA states 

that it agrees that applying an index 

adjustment to items not subject to 

inflation misaligns cost recovery with 

cost increases. ATA also alleges this 

provides a disincentive to invest in 

infrastructure. 

97. In reply comments and its October 

20 Response, AOPL asserts that the 

Commission has twice rejected the 

selective indexing proposal advocated 

by Navajo. AOPL states that Navajo’s 

proposal is beyond the scope of this 

proceeding. Moreover, AOPL asserts 

that because the Commission measures 

capital cost changes by comparing 

changes in net carrier property, the 

Kahn Methodology does not incorporate 

inflation for either return or income tax 

allowance as alleged by Navajo. Rather, 

AOPL asserts, the methodology is based 

upon the assumption that the 

competitive rate of return on capital 

does not change. 

98. AOPL adds that the Commission 

has twice previously rejected Navajo’s 

proposal, first in Order No. 561 and in 

the first five year review on the basis 

that it would be difficult to administer 

and create perverse incentives. AOPL 

states that Navajo has provided the 

Commission with no valid reason to 

reverse its prior rulings. Furthermore, 

AOPL asserts that under Navajo’s 

proposal, each pipeline would be 

required to perform calculations to 

determine its own pipeline specific 

index, a fundamental change from the 

‘‘generally applicable’’ ratemaking 

methodology required by the EPAct 

1992. 

b. Commission Determination 

99. The Commission rejects Navajo’s 

proposal. The Commission has twice 

rejected proposals similar to the one 

advocated by Navajo. In Order No. 561 

as affirmed by the D.C. Circuit, the 

Commission concluded that limiting 

index increases to operating and 

maintenance costs would create 

perverse incentives for pipelines to 

direct a disproportionate amount of 

their spending to operating and 

maintenance costs and to neglect capital 

expenditures.43 Moreover, because new 


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Commission returned to the issue in the first five 

year review, again rejecting the proposal on the 

basis that it could cause perverse consequences. 

First Five-Year Review, 93 FERC at 61,854–55. 

44Order No. 561, FERC Stats. & Regs. ¶ 30,985 at 

30,952. 

45Order No. 561, FERC Stats. & Regs. ¶ 30,985 at 

30,951–52; First Five-Year Review, 93 FERC at 

61,854–55. 

46Because it is not presented by the facts here, 

the Commission does not address whether using 

rate of return data that incorporated an inflation 

component would, in fact, be inappropriate for 

deriving the index. Similarly, the Commission does 

not address issues related to using actual page 700 

tax allowance data because the index currently uses 

a proxy for income tax costs. 47O’Loughlin August 20 Aff. ¶ 61. 

investment may be substantial and 

would not be covered by the index, 

many companies would be required to 

file cost-of-service cases to recover 

significant increases in cost.44

100. In addition to creating perverse 

incentives, the Commission’s prior 

orders noted that Navajo’s proposal 

would also undermine the statutory 

mandate to establish a generally 

applicable and simplified 

methodology.45 The availability of page 

700 data does not change this 

conclusion. Under Navajo’s proposal, 

the index would not be generally 

applicable. Each pipeline would receive 

its own annual index adjustment to the 

ceiling rate dependent upon the 

pipeline’s specific level of operating 

costs as reported on page 700. Navajo’s 

proposal is also contrary to the purpose 

of a simplified methodology. Requiring 

pipelines to multiply the index level by 

the ratio of ‘‘operating and maintenance’’ 

expenses to ‘‘total cost-of-service’’ on 

page 700 before applying the index to a 

pipeline’s existing ceiling rate will 

increase the likelihood of disputes in 

each annual application of the index as 

parties challenge those particular 

components of page 700 data. 

101. Furthermore, Navajo’s arguments 

are theoretically unsound. Capital costs 

are a component of a pipeline’s total 

costs, and any index that tracks actual 

cost changes must account for changing 

capital costs. The Commission also 

rejects Navajo’s argument that for 

income tax and rate of return, the index 

double-counts inflation. The Kahn 

Methodology uses net carrier property 

as a proxy for income tax and rate of 

return, and net carrier property does not 

contain any internal inflation-related 

adjustments.46

6. Separate Indices for Crude and 

Product Pipelines 

a. Comments 

102. In its comments, Valero and its 

witness O’Loughlin recommend one 

index for crude and product pipelines. 

However, Valero avers that differences 

in cost changes experienced between 

crude and product pipelines could 

argue in favor of separate indices for 

these two groups. Valero states that 

using his methodology, Mr. O’Loughlin 

determined that the median annual 

change in unit costs is 2.1 percent for 

products pipelines and 3.3 percent for 

crude pipelines. The composite index 

for the middle 50 percent of the datasets 

is 2.3 percent for products pipelines and 

4.3 percent for crude pipelines. 

103. In reply comments, ATA 

advocates the adoption of separate 

indices for crude and product pipelines, 

asserting that separate indices would 

allocate costs more equitably among 

shippers. ATA emphasizes that doing 

otherwise would force product shippers 

to subsidize crude shippers. The ATA 

urges that the data to produce separate 

indices is readily available, noting that 

of the 97 pipelines included within Mr. 

O’Loughlin’s analysis, 31 were 

classified as crude pipelines and 45 

were classified as product pipelines. 

NPGA also states that, as established by 

Mr. O’Loughlin, the disparity in cost 

changes between crude pipelines and 

product pipelines supports the 

development of separate indices. 

104. In its reply comments and 

October 20 Response, AOPL represents 

that the Commission has previously 

rejected separate indices and 

emphasizes that Valero witness 

O’Loughlin ultimately concluded that 

the Commission should apply one index 

to all oil pipelines. 

b. Commission Determination 

105. Mr. O’Loughlin has provided 

some evidence to indicate that product 

and crude pipelines have experienced 

different levels of cost change. However, 

neither Mr. O’Loughlin, ATA, nor 

NPGA offered an explanation for why 

this cost disparity between crude and 

product pipelines exists. ATA and 

NPGA rely upon Mr. O’Loughlin’s 

testimony, but Mr. O’Loughlin 

recommends using one index for all 

pipelines,47 and ATA and NPGA 

otherwise have failed to demonstrate 

that the Commission should depart from 

its prior policy applying one uniform 

index to all pipelines. Thus, on the 

record presented here, the Commission 

will continue to apply one index to both 

crude and product pipelines. 

C. Allegations of Pipeline Over-Recovery 

1. Comments 

106. In their comments, several 

shippers—Sinclair/Tesoro, the Trucking 

Association, ATA, NGPA, SPOPS, and 

Navajo—reject the notion that the index 

reflects actual pipeline cost changes. 

Sinclair/Tesoro argues that it is unlikely 

the pipeline industry is experiencing 

cost increases equal to the broader 

economy since the last review. In 

support, Sinclair/Tesoro cites depressed 

cost levels in areas specific to pipeline 

operation, such as labor, energy, and 

materials used in pipeline construction. 

In contrast, Sinclair/Tesoro represents 

that PPI–FG has recovered more rapidly, 

almost completely rebounding to its 

mid-2008 peak. Thus, Sinclair/Tesoro 

states that it is not appropriate to 

maintain the prior period rate ceiling of 

PPI–FG+1.3. 

107. In its comments, ATA states that, 

based upon a sample of 73 Commissionregulated pipelines, over 30 pipelines 

have reported over-recoveries for some 

or all of the years from 2002–2009, and 

that these pipelines reported overrecoveries of approximately $1.9 billion. 

ATA asserts that this could cause 

parties to defer capital expenditures 

because returns on depreciated assets 

exceed those provided by new 

investments. Moreover, ATA suggests it 

is suspicious that pipelines that are 

under-recovering by substantial 

amounts have not filed a cost-of-service 

rate increase. In Reply Comments, ATA 

further emphasizes that pipelines 

experience non-uniform cost changes. 

ATA states that the Commission should 

be ‘‘careful’’ in designing any index to be 

applied to pipelines generally. 

108. In addition to reiterating ATA’s 

concerns regarding over-recovery, 

NPGA states that the major propane 

pipelines are now controlled by one 

company and that as a result shippers 

have experienced a pattern of increased 

costs through new fees, reduced service, 

sale of necessary assets to a pipeline 

affiliate, and operating penalties. 

Although NPGA acknowledges that 

pipelines as a whole are reporting an 

under-recovery, NPGA states that this 

does not relieve the Commission of its 

duty to ensure that each individual 

carrier’s rates are just and reasonable 

and the existence of such a disparity 

merely indicates that the index does not 

reflect actual changes in pipeline cost. 

NPGA and ATA urge the Commission to 

require pipelines showing overrecoveries to show cause why their rates 

should not be considered unjust and 

unreasonable. 

109. Similarly, SPOPS avers that oil 

pipelines are consistently overrecovering their costs. Accordingly, 

SPOPS proposes an index rate of zero 

until pipeline profits return to a just and 

reasonable level. SPOPS states that 

since the inception of the index the 

Commission has allowed pipelines to 


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48Second Five-Year Review, 114 FERC ¶ 61,293 

at P 57. This is consistent with the grandfathering 

of the then-existing rates under the EPAct 1992. 

EPAct 1992, at § 1803. 

49Order No. 561, FERC Stats. & Regs. ¶ 30,985 at 

30,948–49; Second Five-Year Review, 114 FERC ¶ 

61,293 at P 57. 

50Contrary to Sinclair/Tesoro’s claims and 

Navajo’s allegations, as discussed above, the 

empirical evidence presented using the Kahn 

Methodology demonstrates that pipeline costs per 

barrel-mile have increased at a rate exceeding 

changes in PPI–FG over the past five-years. There 

is no indication that an adjusted PPI–FG is 

inadequate for tracking cost changes. 

51Shehadeh September 20 Decl. at 32–33. 52AOPL Comment at 19 (quoting Byrd Decl. at 7). 

increase their rates by 39 percent, even 

though by 2009, 41 oil pipelines 

reported excess profits totaling over 

$200 million per year. In its comments, 

SPOPS includes in these profits the 

income tax allowance for Master 

Limited Partnerships (MLP), which do 

not incur income taxes. SPOPS states 

that it is difficult to challenge rate 

increases pursuant to the index. SPOPS 

states, as a result, the Commission has 

abdicated its responsibility under the 

ICA, emphasizing that not even ‘‘a little 

unlawfulness’’ is permitted, and that the 

Commission index as applied by the 

Commission tolerates unlawfulness. 

110. In reply, Navajo states that it has 

reservations about basing the index on 

PPI–FG. Navajo states that nothing in 

the record demonstrates that pipeline 

costs inherently correlate with general 

rates of producer price inflation. In 

addition to claiming that pipelines have 

been over-recovering, on reply, Navajo 

also state that pipelines should not 

receive the benefit of automaticallyapproved rate increases when the 

pipeline reports that it is overrecovering. Navajo states that 

withholding the index from pipelines 

that are over-recovering can be 

accomplished through page 700, and 

thus is not any less administratively 

efficient than the Commission’s current 

approach nor, in Navajo’s view, does it 

increase litigation. 

111. AOPL in its Reply Comments 

and October 20 Response states that the 

Commission properly rejected similar 

arguments during the prior 5-year 

review. AOPL notes that the 

Commission’s rationale in past 

proceedings accepts that some pipelines 

may over-earn while others under-earn 

as an inherent attribute of the index. 

AOPL asserts that the pertinent issue is 

not the overall level of pipeline cost, but 

rather how the index compensates for 

changes in pipeline costs. AOPL also 

states although page 700 data may show 

excess revenues, it does not mean a 

pipeline rates are not just and 

reasonable. According to AOPL, there 

are several other mechanisms other than 

an Opinion No. 154–B methodology to 

establish a pipeline’s rates, including 

market-based rates and negotiated rates. 

In addition, AOPL contends the 

shippers’ allegations do not reflect 

actual pipeline cost recovery. Based on 

Dr. Shehadeh’s calculations, AOPL 

claims approximately two-thirds of 

pipelines’ page 700 calculations report 

under-earning on an Opinion No. 154– 

B basis. AOPL responds to Sinclair’s 

claim that the pipeline industry 

experienced cost changes in alignment 

with the global economic recession by 

stating it is speculative and is contrary 

to actual changes in costs as Dr. 

Shehadeh shows in his calculations 

using the Kahn Methodology. 

2. Commission Determination 

112. The fact that some pipelines may 

be over-recovering is not contrary to the 

establishment of a general index level 

for all pipelines. The purpose of the 

index is to track cost changes using a 

generally applicable and simple 

method, and does not involve an 

assessment of whether each of the 

various pipelines are over- or underrecovering their costs. This can be seen 

in the application of the index. When a 

pipeline proposes an indexed rate 

change, the Commission is not subject 

to a statutory duty to examine the whole 

rate.48 Rather, the Commission’s inquiry 

is limited to a comparison of the 

changes in the rates and costs from year 

to year. 

113. As the Commission explained 

previously, inherent to the application 

of any industry-wide pipeline index, 

some pipelines will over-earn while 

others will under-earn.49 However, the 

Kahn Methodology ensures that that 

indexed changes are consistent with 

recent industry-wide historical norms.50

To the extent that the customers of a 

particular pipeline determine that the 

underlying rates on a particular pipeline 

are unjust and unreasonable, those 

parties may file a complaint against that 

particular pipeline’s rates pursuant to 

the ICA and the Commission 

regulations. Moreover, even when 

considering pipeline over-recoveries 

and under-recoveries (as opposed to 

cost changes), Dr. Shehadeh presented 

evidence that in 2009, the oil pipeline 

industry as a whole was under-earning 

by approximately 17 percent.51

D. Other Factors Affecting Pipeline 

Costs Raised by the Parties 

114. Although not linked to any 

particular modification of the index 

methodology, the comments urged the 

Commission to consider general issues 

related to pipeline integrity and the 

MLP business structure. 

1. Pipeline Integrity and Regulatory 

Safety Costs 

AOPL Initial Comments 

115. AOPL states that costs have 

increased due to assessment and reassessment of pipeline structural 

integrity and remediation required by 

the Pipelines and Hazardous Materials 

Safety Administration (PHMSA), an 

agency of the United States Department 

of Transportation. AOPL, supported by 

the Declaration of William R. Byrd, 

stresses that assessment requires 

expensive technology (including rental 

of inline inspection tools), labor 

intensive processes (involving 

excavation and manual inspection), and 

remediation. Mr. Byrd represents that 

‘‘compliance with the integrity 

management regulations is likely to be 

the largest single variable cost item for 

most pipelines and these costs show no 

signs of decreasing.’’ 52

116. Mr. Byrd projects pipeline 

integrity costs to continue increasing 

because inline inspection tools are 

becoming more expensive and more 

likely to detect pipeline anomalies 

requiring correction. AOPL states that 

PHMSA has imposed increasingly 

stringent obligations and that new or 

expanded regulatory requirements may 

be imposed by Congress during the 

reauthorization of the Pipeline Safety 

Act, which AOPL expects to occur later 

in 2010 or 2011. 

117. AOPL and Mr. Byrd identify 

other regulatory obligations over the 

past five years that have increased costs, 

including public awareness program 

regulations and operator qualification 

regulations. AOPL and Mr. Byrd explain 

that costs in the next five years are 

likely to increase due to new PHMSA 

control room management regulations, 

new PHSMA guidelines regarding landuse on or near pipeline rights-of-way, 

new chemical facility anti-terrorism 

standards promulgated by the 

Department of Homeland Security, and 

issues regarding greenhouse gas 

emissions issued by the Environmental 

Protection Agency. 

118. In separate comments, PHMSA 

also represents that pipeline safety and 

integrity regulations have imposed 

significant compliance costs over the 

past eight years. Further, PHMSA notes 

the possibility of future regulatory 

changes and that it anticipates the cost 

of these activities will continue to 

impose significant financial burdens. 

b. Reply Comments 

119. Several reply comments noted 

increased costs related to pipeline 


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80312 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Rules and Regulations 

53 Valero Reply Comment at 8 (citing 

Jurisdictional Public Utilities and Licensees, 

Natural Gas Companies, and Oil Pipeline 

Companies, 111 FERC ¶ 61,501 (2005)). 

54 Valero Reply Comment at 10 (citing AOPL II, 

281 F.3d at 247). 55AOPL II, 281 F.3d at 247. 

integrity. Platte, an interstate liquids 

pipeline, expects to incur more than $2 

million above historic levels of integrity 

related costs for the foreseeable future. 

Platte notes that significant additional 

costs may appear in damage prevention 

initiatives, valve spacing, leak detection, 

and increased focus on preventing small 

releases. The Pipeline Safety Trust notes 

that it is currently recommending that 

Congress increase PHMSA’s jurisdiction 

over hazardous liquid pipelines and that 

Congress direct PHMSA to expand 

integrity management and other safetyrelated requirements. 

120. Other parties challenged AOPL’s 

contention that the pipeline integrity 

costs supported an elevated index level. 

Valero notes that accounting treatment 

of pipeline costs was not consistent 

prior to 2006, when the Commission 

clarified the accounting practices for 

integrity programs.53 Thus, Valero states 

that AOPL, by comparing changes in 

account 320 between 2004 and 2009, 

overstates the changes in pipeline 

integrity costs. Valero also emphasizes 

that account 320 costs, which include 

both interstate and intrastate data, are 

only 14.4 percent of the total cost-ofservice. Moreover, Valero notes that the 

Commission has previously rejected 

adjustments to the index based upon 

estimates of anticipated increases in 

pipeline integrity costs.54 Lastly, Valero 

asserts that claims of future increases in 

regulatory expenses are speculative. 

121. ATA, in its reply, states that 

pipeline integrity cost increases are 

already appropriately accounted for in 

the years 2004 through 2009. ATA states 

that the Pipeline Integrity Management 

program was established in 2002, and 

that the program required hazardous 

liquid pipeline operators to develop a 

written plan to initially assess the 

integrity of their pipelines over a 

roughly five year period with baseline 

assessments to be 50 percent completed 

by September 30, 2004, and 100 percent 

completed by March 31, 2008. After the 

baseline assessment, the assessments are 

to be repeated every five year period. 

122. SPOPS also avers that future 

costs are speculative and inconsistent 

with a backward looking methodology. 

SPOPS asserts that a large increase 

rewards pipelines with unjust and 

unreasonable rates and that the 

pipelines not recovering their costs are 

free to file for rate increase. Sinclair/ 

Tesoro also assert that more stringent 

safety regulations are not unique to 

pipelines as environmental regulations 

have also imposed costs on shippers, 

and that it is unfair to impose these 

costs alone on shippers. 

c. AOPL October 20, 2010 Response 

123. AOPL states that it relies on Mr. 

Byrd’s declaration to explain that Dr. 

Shehadeh’s calculations are consistent 

with real-world industry experience, 

and to show that establishing an index 

below PPI–FG+3.64 would frustrate 

expectations on which past pipeline 

investments have been made, among 

other things. 

124. AOPL also states that Mr. Byrd’s 

testimony is consistent with the 

comments of PHMSA, which state, 

among other things, that regulations 

have imposed significant compliance 

costs and events, including the 

Deepwater Horizon oil spill, have also 

caused PHMSA to expand its integrity 

management regulations. AOPL 

disagrees with SPOPS’ suggestion that 

pipelines should seek to recover these 

safety and integrity management costs 

through cost-of-service filings, arguing 

that such an approach is inconsistent 

with the implementation of a generally 

applicable ratemaking methodology. 

AOPL argues that if pipelines were 

required to use cost-of-service filings to 

recover these kinds of costs, the 

efficiency gains which were intended by 

EPAct in implementing the generally 

applicable index methodology would be 

lost. 

d. Commission Determination 

125. AOPL and other parties have 

submitted this information regarding 

future costs for Commission 

consideration, but they have not 

proposed to depart from the Kahn 

Methodology’s reliance upon historic 

data. Moreover, future costs projections 

related to regulatory changes are 

speculative and inappropriate for 

inclusion in the index.55 Accordingly, 

the evidence presented regarding 

prospective regulatory changes does not 

alter the Commission’s determination 

regarding the appropriate index level as 

calculated based upon historic costs. 

2. Master Limited Partnerships 

126. CAPP contends that the 

Commission should not grant an 

increased allowance merely to enhance 

cash flow requirements that may be 

attributable to the MLP form of 

business. CAPP states that due to federal 

tax laws, MLPS generally distribute all 

available cash flow to unit holders in 

the form of quarterly distributions. 

CAPP argues that the form of business 

organization and operation may create a 

tension between how a pipeline makes 

prudent safety and integrity-related 

decisions without contravening cash 

distribution constraints. CAPP argues 

that the Commission should not view 

the cash requirements of MLPs as a 

legitimate basis for increasing the 

revenue flow generated by regulated 

rates. SPOPS also claims that the MLP 

structure attracts capital to the pipeline 

industry but, rather than making 

investments in infrastructure, diverts 

the equity capital away in payouts to the 

general and limited partner investors. 

127. AOPL responds in its 

Supplemental Reply Comments that 

shippers made substantially similar 

arguments during the prior five-year 

review period, and the Commission 

rejected them. Furthermore, AOPL 

states it is not seeking ‘‘an increased 

allowance’’ to enhance MLP cash flow 

requirements. AOPL asserts neither the 

cash flow requirements of MLPs nor the 

dividend policies of corporate-owned 

pipelines are part of the calculation of 

changes in oil pipelines costs. Nor is 

there any ‘‘tension’’ between pipeline 

safety and capital investment and MLP 

cash distribution requirements, as CAPP 

contends. AOPL contends the issue is 

not about the pipeline organizational 

structure, but whether pipelines will be 

able to recover sufficient revenue to 

fund their operations. Accordingly, 

AOPL argues shippers provide no valid 

basis to abandon the established 

methodology. 

a. Commission Determination 

128. All pipelines, regardless of 

business form, experience changes in 

cost. The index is designed to enable 

pipelines be able to recover sufficient 

revenue to fund their operations, 

whether or not the pipeline’s business 

form is as an MLP. The middle 50 Kahn 

Methodology allows the Commission to 

appropriately exclude outliers and to 

track general changes in pipeline costs 

whatever the form of the business. 

Accordingly, the discussion regarding 

MLPs does not alter the Commission’s 

determination regarding the appropriate 

index level. 

E. Revisions to Form No. 6 

1. Comments 

129. ATA and NPGA aver that Form 

No. 6 should be revised to segregate cost 

and revenue for each regulated common 

carrier and or system and to supply 

separate page 700 data for each oil 

pipeline or system included in the 

report. To enhance transparency, ATA 

and NPGA also asserts that Form No. 6 

should be revised to require the pipeline 


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Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Rules and Regulations 80313 

to file all workpapers that fully support 

the data reported on Form No. 6 page 

700, including a total cost-of-service. 

ATA and NPGA also assert that 

pipelines must file Form No. 6 before 

initiating an index rate increase. ATA 

and NPGA also argue that the 

Commission should change the interest 

rates applicable to refunds as provided 

in 18 CFR § 340.1(c)(2)(i) to reflect the 

pipeline’s rate of return as reported on 

Form No. 6, page 700. 

130. SPOPS urges, in its reply 

comments, that shippers and customers 

should be allowed access to the 

workpapers underlying page 700. 

SPOPS also contends that the page 700 

data should reveal both the nominal and 

the real rate of return on equity, 

including the amount of dollars of 

equity both collected in rates and 

dollars placed in rate base. SPOPS states 

that the current rate of return on equity 

must be known to determine the need 

for the index increase to attract capital. 

131. In reply comments, AOPL argues 

that the Commission has addressed and 

rejected the proposal regarding 

segmented data and workpapers. AOPL 

states the Commission in its ruling 

explained that page 700 is designed to 

be a preliminary screening tool for 

pipeline rate filings and not form the 

basis of a decision or demonstrates the 

just and reasonableness of proposed or 

existing rates. AOPL asserts the 

Commission has revisited this issue as 

recently as December 2008 and upheld 

its initial views. 

2. Commission Determination 

132. The Commission finds that the 

proposals to modify Form No. 6 are 

outside the scope of this proceeding, 

which is to set the going-forward index 

level. 

The Commission orders: Consistent 

with our review and verification of the 

sample pipeline Form No. 6 data, and 

the application of the previously 

approved Order No. 561 methodology to 

that data, the Commission determines 

that the appropriate oil pricing index for 

the next five years, July 1, 2011 through 

June 30, 2016, should be PPI–FG+2.65. 

By the Commission. 

Nathaniel J. Davis, Sr., 

Deputy Secretary. 

[FR Doc. 2010–32062 Filed 12–21–10; 8:45 am] 

BILLING CODE 6717–01–P 

DEPARTMENT OF JUSTICE 

28 CFR Part 16 

[CPCLO Order No. 006–2010] 

Privacy Act of 1974; Implementation 

AGENCY: Federal Bureau of 

Investigation, Department of Justice. 

ACTION: Final rule. 

SUMMARY: The Federal Bureau of 

Investigation (FBI), a component of the 

Department of Justice, issued a 

proposed rule for a new Privacy Act 

system of records entitled, the ‘‘Data 

Integration and Visualization System 

(DIVS),’’ JUSTICE/FBI–021, 75 FR 53262 

(August 31, 2010). DIVS is exempt from 

the subsections of the Privacy Act listed 

below for the reasons set forth in the 

following text. Information in this 

system of records related to matters of 

law enforcement and the exemptions are 

necessary to avoid interference with the 

national security and criminal law 

enforcement functions and 

responsibilities of the FBI. This 

document addresses a public comment 

on the proposed rule. 

DATES: Effective Date: December 22, 

2010. 

FOR FURTHER INFORMATION CONTACT: Erin 

Page, Assistant General Counsel, 

Privacy and Civil Liberties Unit, Office 

of the General Counsel, FBI, 

Washington, DC 20535–0001, telephone 

202–324–3000. 

SUPPLEMENTARY INFORMATION: 

Background 

On August 31, 2010, the FBI 

published notice of a new Privacy Act 

system of records entitled, ‘‘Data 

Integration and Visualization System 

(DIVS),’’ JUSTICE/FBI–021, which 

became effective on October 1, 2010. In 

conjunction with publication of the 

DIVS system of records notice, the FBI 

initiated a rulemaking to exempt DIVS 

from a number of provisions of the 

Privacy Act, in accordance with 

subsections 553a(j) and/or (k). On 

August 31, 2010, the FBI published at 

75 FR 53262 a proposed rule exempting 

records in the DIVS from Privacy Act 

subsections (c)(3), and (4); (d)(1), (2), (3) 

and (4); (e)(1), (2) and (3); (e)(4)(G), (H) 

and (I); (e)(5) and (8); (f) and (g). 

Public Comment 

The FBI received one comment on the 

proposed rule. The commenter 

concurred with the exemptions cited 

but requested that the FBI provide more 

information explaining the FBI’s 

‘‘internal controls’’ in protecting the data 

itself from improper violations. The FBI 

determined that the public comment 

merited no change in the rule, as the 

commenter concurred with the 

exemptions claimed, and because an 

exemption rule does not provide an 

appropriate venue for the discussion 

requested. 

Regulatory Flexibility Act 

This proposed rule relates to 

individuals as opposed to small 

business entities. Pursuant to the 

requirements of the Regulatory 

Flexibility Act, 5 U.S.C. 601–612, 

therefore, the proposed rule will not 

have a significant economic impact on 

a substantial number of small entities. 

Small Business Regulatory Enforcement 

Fairness Act 

The Small Business Regulatory 

Enforcement Fairness Act (SBREFA) of 

1996, codified as a note to 5 U.S.C. 601, 

requires the FBI to comply with small 

entity requests for information and 

advice about compliance with statutes 

and regulations within FBI jurisdiction. 

Any small entity that has a question 

regarding this document may contact 

the person listed in FOR FURTHER

INFORMATION CONTACT. Persons can 

obtain further information regarding 

SBREFA on the Small Business 

Administration’s Web page at http:// 

www.sba.gov/advo/archive/ 

sum_sbrefa.html. 

Paperwork Reduction Act 

The Paperwork Reduction Act of 

1995, 44 U.S.C. 3507(d), requires that 

the FBI consider the impact of 

paperwork and other information 

collection burdens imposed on the 

public. There is no current or new 

information collection requirements 

associated with this proposed rule. The 

records that are contributed to DIVS are 

created by the FBI or other law 

enforcement and intelligence entities 

and sharing of this information 

electronically will not increase the 

paperwork burden on the public. 

Unfunded Mandates 

Title II of the Unfunded Mandates 

Reform Act of 1995 (UMRA), Public 

Law 104–4, 109 Stat. 48, requires 

Federal agencies to assess the effects of 

certain regulatory actions on State, 

local, and tribal governments, and the 

private sector. UMRA requires a written 

statement of economic and regulatory 

alternatives for proposed and final rules 

that contain Federal mandates. A 

‘‘Federal mandate’’ is a new or 

additional enforceable duty, imposed on 

any State, local, or tribal government, or 

the private sector. If any Federal 

mandate causes those entities to spend, 


emcdonald on DSK2BSOYB1PROD with RULES