153 FERC ¶ 61,312

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

18 CFR Part 342

[Docket No. RM15-20-000]

Five-Year Review of the Oil Pipeline Index

(Issued December 17, 2015)

AGENCY: Federal Energy Regulatory Commission.

ACTION: Order Establishing Index Level.

SUMMARY: The Federal Energy Regulatory Commission (Commission) issues this 

Final Order concluding its five-year review of the index level used to determine annual 

changes to oil pipeline rate ceilings. The Commission establishes an index level of 

Producer Price Index for Finished Goods plus 1.23 percent (PPI-FG+1.23) for the 

five-year period commencing July 1, 2016. 

FOR FURTHER INFORMATION CONTACT:

Andrew Knudsen (Legal Information)

Office of the General Counsel

888 First Street, NE

Washington, DC 20426

(202) 502-6527

Monil Patel (Technical Information)

Office of Energy Market Regulation

888 First Street, NE

Washington, DC 20426

(202) 502-8296

SUPPLEMENTARY INFORMATION:
153 FERC ¶ 61,312

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Norman C. Bay, Chairman;

 Cheryl A. LaFleur, Tony Clark,

and Colette D. Honorable. 

Five-Year Review of the Oil Pipeline Index Docket No. RM15-20-000

ORDER ESTABLISHING INDEX LEVEL

(Issued December 17, 2015)

 

1. On June 30, 2015, the Commission issued a Notice of Inquiry initiating its fiveyear review to establish the oil pipeline index level for the July 1, 2016 to June 30, 2021 

time period.

1

 The June 2015 NOI requested comment regarding (a) a proposed index 

level between Producer Price Index for Finished Goods (PPI-FG)+2.0 percent and 

PPI-FG+2.4 percent2and (b) any alternative methodologies for calculating that index 

level. 

2. For the reasons discussed below, the Commission adopts an index level of the

PPI-FG+1.23 percent. The departure from the June 2015 NOI results from (a) the use of 

 

1

Five-Year Review of the Oil Pipeline Index, 80 Fed. Reg. 39010 (July 8, 2015), 

FERC Stats. & Regs. ¶ 35,053 (cross-referenced at 151 FERC ¶ 61,278 at P 1 

(June 2015 NOI)).

2

The June 2015 NOI included a range as opposed to a specific index level because 

some pipelines had yet to report FERC Form No. 6 (Form No. 6) data for 2014.
Docket No. RM15-20-000 - 2 -

FERC Form No. 6 page 700 (page 700) data that directly measures changing pipeline 

costs as opposed to the estimates previously used to calculate the index level3and (b) 

updated Form No. 6 filings and other corrections to the data set. The Commission’s 

indexing calculations and other data analysis are contained in Attachment A to this order. 

As discussed below, the Commission rejects other changes to the index calculation

proposed by commenters. 

I. Background

A. Establishment of the Indexing Methodology

3. The Energy Policy Act of 1992 (EPAct 1992) required the Commission to 

establish a "simplified and generally applicable" ratemaking methodology4that also was 

consistent with the just and reasonable standard of review of the Interstate Commerce Act 

(ICA).5 To implement EPAct 1992’s mandate, the Commission issued Order No. 5616

 

3

The index range presented in the June 2015 NOI was calculated based on 

estimates derived from FERC Form No. 6 accounting data on pages 110-111, 114, and 

page 600.

4

Pub. L. No. 102-486, 106 Stat. 3010, § 1801(a) (Oct. 24, 1992). EPAct 1992's 

mandate to establish 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).

5

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

6

See Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 

1992, Order No. 561, FERC Stats. & Regs. ¶ 30,985 (1993), order on reh'g, Order 

No. 561-A, FERC Stats. & Regs. ¶ 31,000 (1994), aff’d, Assoc. of Oil Pipelines v. FERC, 

83 F.3d 1424 (D.C. Cir. 1996).
Docket No. RM15-20-000 - 3 -

establishing an indexing methodology that allows oil pipelines to change their rates 

subject to certain ceiling levels as opposed to making cost-of-service filings.

7

 

4. In Order No. 561, the Commission committed to review the index level every 

five years to ensure that it adequately reflects changes to industry costs.8 The 

Commission conducted such reviews in 2000,92005,10 and 2010.11 In the 2010 five-year 

review, the Commission established the index level of PPI-FG+2.65, to be effective for 

the five-year period commencing July 1, 2011. The index level established herein results 

from the Commission’s fourth five-year review of the index level. 

 

7

Pursuant to the Commission’s indexing methodology, oil pipelines change 

their rate ceiling levels effective every July 1 by “multiplying the previous index 

year’s ceiling level by the most recent index published by the Commission.” 18 C.F.R.

§ 342.3(d)(1) (2015). Oil pipeline rates may be adjusted to the ceiling levels pursuant to 

the Commission’s regulations as long as no protest or complaint demonstrates that the 

index rate change substantially diverges from the pipeline’s cost changes. 18 C.F.R. 

§ 343.2(c)(1) (2015).

8 Order No. 561, FERC Stats. & Regs. ¶ 30,985 at 30,941.

9

Five-Year Review of Oil Pipeline Index, 93 FERC ¶ 61,266 (2000) (2000 Index

Review), aff’d in part and remanded in part sub nom. AOPL v. FERC, 281 F.3d 239 

(D.C. Cir. 2002) (AOPL II), Five-Year Review of Oil Pipeline Pricing Index, 102 FERC 

¶ 61,195 (2003) (2000 Index Review Remand Order), aff’d sub nom. Flying J Inc. v. 

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

10 Five-Year Review of Oil Pipeline Index, 114 FERC ¶ 61,293 (2006) (2005 Index

Review). 

11 Five-Year Review of Oil Pipeline Index, 133 FERC ¶ 61,228 (2010) (2010 Index 

Review), order on reh’g, 135 FERC ¶ 61,172 (2011) (2010 Index Review Rehearing 

Order).
Docket No. RM15-20-000 - 4 -

B. The Kahn Methodology

5. In Order No. 561 and each successive index review, the Commission has

calculated the index level based upon a methodology developed by Dr. Alfred E. Kahn.12

The Kahn Methodology uses pipeline data from the prior five year period to determine an 

adjustment to be applied to a current year PPI-FG. The calculation is as follows. Each 

pipeline’s cost change on a per barrel-mile basis over the prior five-year period (e.g., the 

years 2009-2014 in this proceeding) is calculated. In order to remove statistical outliers 

and spurious data, the resulting data set is trimmed to those pipelines in the middle 

50 percent of cost changes. The Kahn Methodology then calculates three measures of the 

middle 50 percent’s central tendency: the median, the mean, and a weighted mean.

13

 

The Kahn Methodology calculates a composite by averaging these three measures of 

central tendency and measures the difference between the composite and the PPI-FG 

index data over the prior five year period. The index level is then set at PPI-FG plus (or 

minus) this differential, which tracks the relationship over the last five years between 

PPI-FG and oil pipeline costs.

 

12 The Commission’s use of the Kahn Methodology has been affirmed by the 

United States Court of Appeals for the District of Columbia Circuit. Assoc. of Oil 

Pipelines v. FERC, 83 F.3d 1424 (D.C. Cir. 1996); Flying J Inc., et al. v. FERC, 

363 F.3d 495 (D.C. Cir. 2004).

13 The weighted mean assigns a different weight to each pipeline’s cost change 

based on the pipeline’s total barrel-miles.
Docket No. RM15-20-000 - 5 -

C. The 2015 Proceeding

6. The Commission initiated this proceeding on June 30, 2015, with the issuance of a 

Notice of Inquiry initiating its five-year review to establish the oil pipeline index level for 

the July 1, 2016 to June 30, 2021 time period.14 The June 2015 NOI proposed a range for 

the index level of between Producer Price Index for Finished Goods (PPI-FG)+2.0 

percent and PPI-FG+2.4 percent. The June 2015 NOI included a range as opposed to a 

specific index level because some pipelines had yet to report FERC Form No. 6 data for 

2014. Importantly, the NOI sought comment not only on the proposed level but also any 

alternative methodologies for calculating that index level. To facilitate the development 

of the new index and gain an understanding of the positions of the parties in advance of 

the filed comments, the Commission announced plans to hold a technical conference. 

That conference occurred on July 30, 2015. 

II. Comments

7. Initial Comments filed in response to the June 2015 NOI and technical conference 

were due on August 24, 2015, and reply comments were due on September 21, 2015. 

Comments were filed by the Association for Oil Pipelines (AOPL),15 APV Shippers,16

 

14 June 2015 NOI, 151 FERC ¶ 61,278 at P 1.

15 AOPL is a trade association that represents the interests of common carrier oil 

pipelines.

16 APV Shippers include Airlines for America, the National Propane Gas 

Association (NPGA), and Valero Marketing and Supply Company. Airlines for America 

(continued...)
Docket No. RM15-20-000 - 6 -

Liquids Shippers Group (Liquids Shippers),

17 Suncor Energy Marketing Inc. (Suncor),

Canadian Association of Petroleum Producers (CAPP),

18 HollyFrontier/Western 

Refining, the Pipeline Safety Trust, and the Pipeline and Hazardous Materials Safety 

Administration (PHMSA). On October 16, 2015 AOPL filed supplemental reply 

comments. On October 21, 2015, APV Shippers also filed supplemental reply comments. 

8. The commenters raised a number of issues related to the index range proposed by

the Commission in the June 2015 NOI and possible alternatives for calculating the index 

level. The commenters advocated varying index levels, including AOPL’s proposal of 

PPI-FG+2.47, APV Shippers’ proposal of PPI-FG+0.5, and Liquids Shippers’ proposal of 

PPI-FG+0.23.19 These proposed index levels were based upon various modifications to 

the Kahn Methodology, as discussed in greater detail below. 

 

members include: Alaska Airlines, Inc.; American Airlines Group; Atlas Air, Inc.; Delta 

Air Lines, Inc.; Federal Express Corporation; Hawaiian Airlines; JetBlue Airways Corp.; 

Southwest Airlines Co.; United Continental Holdings, Inc.; and United Parcel Service 

Co. Air Canada is an associate member. 

17 Liquids Shippers consists of crude oil or natural gas liquids producers, 

including: Anadarko Energy Services Company; Apache Corporation; Cenovus Energy 

Marketing Services Ltd.; ConocoPhillips Company; Devon Gas Services, L.P.; Encana 

Marketing (USA) Inc.; Marathon Oil Company; Murphy Exploration & Production 

Company – USA; Noble Energy, Inc.; Pioneer Natural Resources USA, Inc.; Statoil 

Marketing & Trading (US) Inc.; and WPX Energy Marketing, LLC.

18 CAPP represents companies that develop and produce natural gas and crude oil 

throughout Canada. 

19 Not every party filing comments attempted to calculate a proposed index level. 
Docket No. RM15-20-000 - 7 -

III. Discussion

9. The Commission adopts an index level of PPI-FG+1.23 percent for the five-year 

period commencing July 1, 2016. The Commission adopts APV Shippers’ proposal to 

use page 700 data that directly measures changing pipeline costs as opposed to the 

previously used Form No. 6 accounting data. The Commission rejects other 

modifications proposed by industry comments, including: (a) various manual data 

trimming methodologies, (b) the consideration of the middle 80 percent in addition to the 

middle 50 percent of the cost changes in the data set, (c) separate index levels for product 

and crude pipelines, and (d) Liquids Shippers’ proposals to temporarily set the index 

level at PPI-FG while initiating a proceeding to revise the Commission’s indexing 

regulations. 

A. Form No. 6 Page 700

1. Comments

10. APV Shippers propose calculating the index level based upon page 700 total costof-service data as opposed to the Form No. 6 accounting data used in the June 2015 NOI 

and prior five-year review proceedings.

20

 APV Shippers state that page 700 data is 

superior because page 700 data provides a direct measure of changing pipeline barrel-

 

20 APV Shippers Initial Comments at 9-16. 
Docket No. RM15-20-000 - 8 -

mile costs.21 In reply comments, HollyFrontier/Western Refining, CAPP and Liquids 

Shippers support APV Shippers’ proposal.

11. AOPL opposes the use of page 700 data to calculate the index. Among other 

assertions, AOPL argues that page 700 data should not be used because the page 700 total 

cost-of-service incorporates returns on equity (ROEs) that may be volatile due to

industry-wide fluctuations in the equity markets.22 AOPL also argues that page 700 costof-service data may include allocations that distort the index calculation.

23

 

2. Discussion

12. The Commission will update its calculation of the five-year oil pipeline index to 

use page 700 data to measure changing barrel-mile costs. Page 700 provides a 

summarized total cost-of-service and a pipeline’s interstate barrel-miles. 

Page 700 did not exist when the Kahn Methodology was first developed in Order

No. 561, and, as a result, the Commission estimated pipeline total cost changes using 

accounting data from elsewhere on Form No. 6. Now that page 700 is available, the 

 

21 Id. 

22 AOPL Reply Comments at 41. 

23 Id. at 44 (citing Shehadeh September 2015 Affidavit at 10). 
Docket No. RM15-20-000 - 9 -

Commission concludes that page 700 data provides a superior data source for use in the 

Kahn Methodology.24

13. Using page 700 data provides four primary benefits. First, the index is meant to 

reflect changes to recoverable pipeline costs, and, thus, the calculation of the index 

should use data that is consistent with the Commission’s cost-of-service methodology.

25

 

In contrast to the accounting data historically used in the Kahn Methodology as a proxy

for this information, page 700 includes actual total cost-of-service data. 

14. Second, using page 700 data eliminates the need to use proxies to measure capital 

costs and income tax costs. Because direct measures of these costs were not available 

 

24 Page 700 was created in 1994 after Order Nos. 561 and 561-A. Cost-of-Service 

Reporting and Filing Requirements for Oil Pipelines, Order No. 571, FERC Stats. & 

Regs. ¶ 31,006, at 31,168 (1994), order on reh’g, Order No. 571-A, FERC Stats. & Regs. 

¶ 31,012 at 31,251. The Commission considered using Page 700 data during the 2010 

Index Review. However, the Commission declined to adopt such a proposal due to 

erroneous reporting instructions on page 700 that caused pipelines to report mismatching 

data, specifically, interstate-only costs and combined intrastate and interstate throughput. 

2010 Index Review, 133 FERC ¶ 61,228 at PP 83-85. The Commission was concerned 

that widespread mismatching data could skew the index. Following the 2010 Index 

Review, the Commission corrected the page 700 instructions, and the Commission also 

required pipelines to file corrected data from 2009 - 2011 so that page 700 could be used 

“during the 2015 Five-Year Index Review if deemed appropriate.” Revision to Form 

No. 6, Order No. 767, FERC Stats. & Regs. ¶ 31,335, at P 19 (2012).

25 When lamenting the difficulty of estimating industry cost changes, Order 

No. 561-A specifically noted that industry-wide total cost-of-service data was not then 

available. Order No. 561-A, FERC Stats. & Regs. ¶ 31,000 at 31,096.
Docket No. RM15-20-000 - 10 -

when the index was first established,

26 the Kahn Methodology used net carrier property 

as a proxy for capital costs and income taxes. At that time, the Commission 

acknowledged the net carrier property proxy was “highly unsatisfactory” and 

“imperfect.”27 Although net carrier property measures changes to the book value of the 

pipeline’s asset base, it does not incorporate changes to the costs of financing the asset 

base (i.e., interest costs of debt and investor demanded equity return). The relationship 

between net carrier property and income tax costs is similarly attenuated because income 

taxes are dependent upon the pipeline’s return (specifically the ROE), not merely the size 

of the pipeline’s asset base. Despite these flaws, the Commission used net carrier 

property proxy in the absence of a “better solution.”

28 Now that page 700 data is 

available, such a better solution exists.

15. Third, using page 700 data eliminates the need for an “operating ratio” to estimate 

each pipeline’s annual cost changes. When using Form No. 6 accounting data, the 

operating ratio is necessary because a pipeline’s annual total cost change cannot be 

calculated by simply adding (a) the annual change in operating costs to (b) the annual 

change in net carrier property (the proxy used for capital costs). This is because a 

 

26 Id. at 31,096, 31,098.

27 Id.

28 Id. at 31,098. When the index was established, AOPL itself argued that net 

carrier property was a poor measure of capital costs. Id. 
Docket No. RM15-20-000 - 11 -

one-year change to net carrier property is a change in the net investment in the pipeline, 

not the pipeline’s annual capital cost consisting of the pipeline’s yearly debt payments 

and yearly return to investors. Thus, a pipeline’s annual total cost change is estimated 

based on a ratio of operating expenses to operating revenue, which assumes that the 

residual revenues equate to a pipeline’s annual capital costs.

29

 This provides, at best, a 

rough proxy for total pipeline cost changes. For example, the operating ratio 

unrealistically assumes that pipelines incur no capital costs in years in which the 

operating expenses exceed revenues.30 This assumption is deficient because, at a 

minimum, a pipeline must service its debt obligations.31 In contrast to the rough proxy 

 

29 Using the operating ratio, the total cost change is estimated by using the 

two formulas below: 

Total Cost Changes = Operating Costs Changes * Operating Ratio + (Net Carrier 

Property Changes * (1- Operating Ratio)). 

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 in the Kahn Methodology 

calculations. Applying the ratio, Total Cost Changes = (1- operating ratio) * net plant + 

operating ratio * operating expenses.

30 The operating ratio is set between 0 and 1 based upon the ratio of (a) operating 

expenses to (b) pipeline revenues. If operating expenses exceed revenues, then the 

operating ratio is set to 1, meaning that no weight is assigned to capital costs (net plant 

under the prior methodology) in the formula. 

31 Although operating expenses may exceed revenues in a particular year, a 

pipeline may nonetheless be able to attain new financing for capital investments based 

upon anticipated future profitability. Moreover, a company may continue to pay 

(continued...)
Docket No. RM15-20-000 - 12 -

provided by the operating ratio, page 700 total cost-of-service incorporates an annual 

capital cost based upon established ratemaking techniques.

16. Fourth, page 700 contains cost and barrel-mile data exclusively related to

interstate pipeline operations, as opposed to the combined intrastate and interstate data 

used in prior five-year reviews. These interstate and intrastate costs do not necessarily 

apply to the same facilities.32 The index applies only to interstate pipelines, and thus, to 

the extent possible, it is appropriate to use interstate-only data to derive the index.33

17. The Commission is also not persuaded by AOPL’s arguments against using page 

700 data. The Commission disagrees with AOPL’s argument that page 700 data should 

not be used because it incorporates ROEs that may be volatile on an industry-wide basis 

due to fluctuations in the equity markets. The index is designed to capture changing 

capital costs, of which financing costs are an important component. To the extent that 

industry-wide equity costs change with market conditions, those changes should be 

captured by the index. Furthermore, the record does not support AOPL’s claim that 

 

dividends (or other payments) to investors even in years in which the company is not 

profitable.

32 Although sometimes intrastate and interstate shipments share parts of the same 

pipe, the overlap is often not exact. On other occasions, the same parent pipeline may 

own entirely separate interstate and intrastate facilities. 

33 Although it is unclear whether there is a substantial difference between the cost 

changes for interstate and intrastate service, there is no reason to base the index on 

combined intrastate and interstate data when an interstate-only data alternative is 

available. 
Docket No. RM15-20-000 - 13 -

ROEs were erratic on an industry-wide basis during the 2009-2014 period. AOPL’s own 

calculations show that the average ROEs in the middle 50 percent stayed within a roughly 

100 basis point range throughout the 2009-2014 period.34 Additionally, the Commission 

notes that to the extent that a particular pipeline’s per barrel-mile cost changes (including 

its equity cost changes) departed substantially from industry norms, that pipeline would 

not be among the middle 50 percent used to calculate the index level. 

18. The Commission is also not persuaded by AOPL’s argument that page 700 

contains various allocations that may distort the index calculation. The allocation 

methodologies used by pipelines on page 700 should reflect established ratemaking 

practices, and thus these allocation methodologies should be sufficiently robust to 

calculate the index. Furthermore, some assumptions and allocations are necessary in any 

pipeline’s measurement of its costs, including the Form No. 6 accounting data previously 

used in the Kahn Methodology.35 In addition, to the extent a pipeline’s page 700 

ratemaking assumptions change over a period of time, pipelines are obligated to note 

them on their page 700.36 Yet, despite the availability of this information, AOPL points 

 

34 Shehadeh September 2015 Affidavit at 10.

35 For example, several pipelines are subsidiaries of parent companies, and, thus 

their Form No. 6 data include costs allocated from those parent entities.

36 As instruction six on page 700 states, “If the company makes major changes to 

its application of the Opinion No. 154-B et al. methodology, it must describe such 

(continued...)
Docket No. RM15-20-000 - 14 -

to no specific circumstances in which such changing allocations have distorted the page 

700 calculations in this proceeding. The mere presence of allocation methodologies is 

not a reason to reject the use of page 700 data.37 Overall, the changes we make in this 

order to use the page 700 data eliminates the need for several assumptions and more 

closely aligns the index with changing oil pipeline costs. 

B. Manual Data Trimming

19. APV Shippers, Liquids Shippers, CAPP, and Suncor advocate various forms 

of manual data trimming in addition to the statistical data trimming to the middle 

50 percent. The manual data trimming proposals assume two broad forms: (1) removing

from the data set pipelines that underwent expansions between 2009 and 2014 and

(2) removing from the data set pipelines that appeared to report flawed or anomalous 

data.38 

 

changes in a footnote, and calculate the amounts in columns (b) and (c) of lines No. 1-12 

using the changed application.”

37 The Commission similarly dismisses AOPL’s argument that using page 700 

data may create illusory cost changes due to shifts involving interstate and intrastate 

volumes. AOPL fails to distinguish between page 700 data and the accounting estimates 

historically used by the Commission. Under any circumstance, increasing intrastate 

barrel-miles absorb a larger portion of the pipeline’s fixed costs and cause interstate 

barrel-mile costs to decline. Similarly, decreasing intrastate volumes absorb less of a 

pipeline’s fixed costs, causing the pipeline’s interstate per barrel-mile costs to rise. 

38 APV Shippers state that applying both of these data trimming methodologies to 

page 700 data would reduce the index from approximately PPI-FG+1.3 to their proposed 

PPI-FG+0.5.
Docket No. RM15-20-000 - 15 -

1. Alternative Rate Treatment

a. Comments

20. Several shipper commenters advocate removing pipelines from the data set that 

underwent expansions, arguing that the expansions distorted index calculation. APV 

Shippers and CAPP propose to remove from the data set the pipelines that filed petitions 

for declaratory order seeking approval for committed shipper rates.

39

 Other shipper 

parties solely analyzed pipeline costs. Suncor proposes to remove 36 pipelines that had 

shown greater than 25 percent year-over-year increases in both (a) their net plant and 

(b) net plant per barrel mile.40 Liquids Shippers propose a variant that removes only 

those pipelines with rate base changes of 25 percent between 2013 and 2014, asserting 

that because these new expansions may still be ramping-up to long term throughput

levels, costs per barrel-mile may be exaggerated.

41

 

21. AOPL opposed these proposals asserting, among other arguments, that (a) this 

manual data trimming lacks methodological integrity and (b) statistically trimming of the 

 

39 Commission policy allows pipelines making significant capital expansions to 

seek committed shipper rates. Although not required, pipelines generally file petitions 

for declaratory order in order to ensure Commission approval of the committed rate 

structure.

40 Suncor states that this adjustment would change the index to PPI-FG+0.67.

41 The Liquids Shippers presented this proposal in their reply comments. By 

presenting this argument so late in the proceeding, the Liquids Shippers did not provide 

other entities adequate opportunity to respond in reply comments. 
Docket No. RM15-20-000 - 16 -

data set (such as data trimming via the middle 50 percent or middle 80 percent) more 

appropriately addresses anomalous cost changes. 

b. Discussion

22. The Commission declines to adopt the various proposals to manually remove from 

the data set pipelines making capital expansions during the 2009 to 2014 period. In the 

2010 Index Review, Commission rejected a similar proposal.42 As explained below, 

comments in this proceeding have not provided a basis for the Commission to depart 

from its prior determination. 

23. As the Commission explained in the 2010 Index Review, statistically trimming the 

data set to the middle 50 percent already removes anomalous cost/barrel-mile changes.43 

To the extent that a capital expansion caused a pipeline’s per barrel-mile costs to deviate 

from industry norms, that pipeline’s cost changes will not be among the middle 50 

percent.44 

 

42 2010 Index Review, 133 FERC ¶ 61,228 at PP 48-55 (rejecting proposal that 

manually trimmed pipelines that (a) experienced large rate base changes and (b) sought 

alternative rate treatment).

43 Id. PP 48-55.

44 Id. P 48. APV Shippers, CAPP, and Liquids Shippers incorrectly assume that 

all pipelines seeking petitions for declaratory order in order to implement contractual 

rates have experienced “extraordinary” per barrel-mile cost changes. Pipelines filing 

for committed rate structures are making significant infrastructural investments; 

however, because an expansion generally leads to increased throughput, an expansion 

does not necessarily equate to a large relative increase in barrel-mile costs. For 

(continued...)
Docket No. RM15-20-000 - 17 -

24. As the Commission also explained in 2010, it is both subjective and arbitrary to 

state which circumstances render a pipeline’s 2009 barrel-mile costs non-comparable to 

its 2014 costs.45 Pipelines operate amidst continually changing business circumstances 

affecting throughput and costs.46 These manual data trimming proposals subjectively and 

arbitrarily focus upon one aspect, expansions, while ignoring other factors (such as 

changing product demand and supplies) that can also alter per barrel-mile costs.47 As 

APV Shippers concede, the data set includes a wide dispersion in barrel-mile cost 

changes that exists independently from pipelines using alternative rate base 

 

example, of the 10 pipelines APV Shippers exclude from the data set based upon 

committed shipper contracts, three of them are within the middle 50 percent of the 

Commission’s index calculation, three of them are in the bottom 25 percent of 

pipelines excluded from the middle 50 percent and four of them are in the top 

25 percent of pipelines included within the middle 50 percent. Attachment A, 

Exhibit 2.

45 2010 Index Review, 133 FERC ¶ 61,228 at P 49.

46 The Commission also rejects APV Shipper’s claim that other adjustments to 

the data set are analogous to removing pipelines that filed petitions for declaratory 

order for committed shipper rates during the 2009-2014 period. As discussed, infra, the 

Commission these adjustments serve a different purpose than “comparability” to justify 

any aspect of the Kahn Methodology. 

47 Suncor and Liquids Shippers’ proposed adjustments may be particularly skewed 

because they manually remove pipelines from the data set based upon rate base increases 

of 25 percent but ignore pipelines with rate base decreases. 
Docket No. RM15-20-000 - 18 -

methodologies48 or those experiencing expansions. As the Commission concluded in 

the 2010 Index Review, without attempting to assess each pipeline’s underlying 

circumstances, the Kahn Methodology appropriately addresses extraordinary or 

anomalous cost changes by trimming the data set to the middle 50 percent.49 

25. Furthermore, the Commission emphasizes that the index properly reflects capital 

cost changes. Consistent with the EPAct 1992’s mandate of general applicability, capital 

costs changes have always been part of the index calculation.50 To the extent that a 

 

48 APV Shippers state that after manually trimming all pipelines which filed a 

petition for declaratory order requesting approval of committed shipper rate structures 

(in addition to other manual data trimming), the data set continues to include significant 

dispersion. O’Loughlin August 2015 Affidavit at 22

49 Unlike the other parties, the APV Shippers did not solely focus upon rate base 

changes or pipelines seeking committed shipper rates. The APV Shippers also manually 

trimmed two pipelines that sought cost-of-service changes during the 2009-2014 period. 

However, this does not change the Commission’s disposition of the manual data 

trimming issue, including the potential for bias. As an initial matter, both of these 

pipelines were excluded by the middle 50 percent. Attachment A, Exhibit 3. Moreover, 

the APV Shippers inconsistently apply their own principle that use of a non-indexing rate 

mechanism demonstrates that these pipelines experienced anomalous cost changes. For 

example, APV Shippers do not exclude pipelines (such as Colonial) that were required to 

file reduced rates as a result of the settlement of complaints against their rates. E.g.,

Southwest Airlines Co. v. Colonial Pipeline Co., 148 FERC ¶ 61,161 (2014). Because 

Colonial is a large pipeline, it heavily influences the weighted average in the Kahn 

Methodology, and its removal alone would increase the index in the Commission’s own 

calculation from PPI-FG+1.23 to PPI-FG+1.54. Attachment A, Exhibit 4. APV

Shippers’ inconsistency only further emphasizes the risk of arbitrariness and bias inherent 

to manual data trimming methodologies. 

50 Order No. 561, FERC Stats. & Regs. ¶ 30,985 at 30,951-52, aff’d AOPL I, 

83 F.3d at 1437; 2010 Index Review, 133 FERC ¶ 61,228 at P 101.
Docket No. RM15-20-000 - 19 -

pipeline’s total cost changes are within the middle 50 percent of all pipelines, those 

pipelines’ capital cost changes are appropriately considered in the derivation of the index.

26. The Commission rejects other arguments raised in support of manually removing 

pipelines undergoing expansions from the data set. The Commission rejects CAPP and 

APV Shippers’ argument that such manual data trimming is necessary to avoid double 

recovery.

51

 In this proceeding, the historic costs are being used to estimate the future 

relationship between oil pipeline per-barrel mile costs changes and PPI-FG. It is contrary 

to basic ratemaking principles (not to mention APV Shippers’ own index calculations in 

this case) to suggest that the use of historic cost data to estimate future cost changes leads 

to a double-recovery of pipeline costs. All pipelines in the data set had rates in effect 

which were intended to recover their costs during the 2009-2014 period. Furthermore, 

the fact that some pipelines sought a cost-of-service or other form of rate increase during 

the 2009-2014 data collection period is irrelevant. Any index filing made during the 

2016-2021 period will be based upon the then-existing PPI-FG and will be for the

 

51 The Commission acknowledges CAPP’s assertion that some committed shipper 

agreements include both (a) index increases and (b) additional provisions environmental 

health and safety cost increases. CAPP’s concern appears to be that such committed rates 

may allow for double recovery. CAPP Reply Comments at 11. However, the vast 

majority of pipelines do not recover safety or environmental costs in this manner, and the 

index has never been calculated to exclude the effects of safety and environmental costs. 

To the extent that a shipper is concerned that double-recovery is being permitted in a 

particular petition for declaratory order or an index filing, that shipper may file a protest. 
Docket No. RM15-20-000 - 20 -

recovery of the pipeline’s future costs – not costs incurred during the 2009-2014 data 

collection period. 

27. The Commission adopts the same rationale that the Commission articulated in the 

2010 Index Order and rejects APV Shippers’ argument that because the Commission 

removes costs associated with Ultra Low Sulfur Diesel (ULSD) surcharges from the 

index calculation, it must also remove costs associated with committed shipper rates and 

cost-of-service filings.52 The ULSD surcharge involves EPA regulations solely 

applicable to the shipment of diesel fuel whereas all pipelines incur investment costs 

related to building and maintaining rate base.53 Second, whereas the ULSD surcharge is

solely assessed as a separate charge upon diesel shipments, rate base related costs are

recovered through the primary transportation rates that apply to all crude and product 

 

52 When the Commission first approved the ULSD surcharge in 2006, it explained 

that because these charges were recovered in a separate surcharge and not the base 

transportation rates, the Commission would exclude the ULSD cost data from the data 

used to calculate the indexed rates. Magellan Pipeline Co., L.P., 115 FERC ¶ 61,276, at 

P 13 (2006). The ULSD surcharge applies to costs incurred due to Environmental 

Protection Agency (EPA) regulations that affected a subset of pipelines transporting 

certain diesel products. The ULSD surcharge was assessed on shippers of ULSD only, 

and not shippers of other distillates and the ULSD surcharge was not subject to indexing. 

Id. P 9. Unlike APV Shippers’ proposal, which would require the Commission to remove 

entire pipelines from the calculation of the index, the Commission’s ULSD surcharge 

policies required pipelines to separately record their ULSD related costs so that they 

could be removed from the calculation of the index. 

53 2010 Index Review Rehearing Order, 135 FERC ¶ 61,172 at P 18.
Docket No. RM15-20-000 - 21 -

shipments.

54 Moreover, the ULSD surcharge presents a particular set of circumstances

regarding a relatively modest cost, and it does not support the fundamental modification 

of the Kahn Methodology as proposed by the manual data trimming methodologies.

28. The Commission also rejects CAPP’s contention that the contractual rates are 

“cross-contaminating” the calculation of the index.55 The calculation of the index is 

based upon a pipeline’s costs, not the rate methodology used by the pipeline to recover 

those costs. In some cases, pipelines using non-indexed rate methodologies can provide 

useful data that helps inform our understanding of industry-wide cost experience, and, as 

noted above, the middle 50 percent data trimming removes pipelines with anomalous 

costs. Further, CAPP’s argument for the manual data trimming relies upon its position 

that contractual committed shipper agreements reduce pipeline risk.56 This argument is 

 

54 Moreover, unlike APV Shippers’ proposal, the Commission does not remove 

pipelines from the data set based upon ULSD costs – rather the ULSD costs are removed 

from the pipeline’s page 700 costs of service. Were the APV Shippers to attempt to 

exclude other costs in a manner consistent with the ULSD precedent, they would need to 

identify those costs and remove them from the pipeline’s page 700 data. They have made 

no such attempt. 

55 CAPP Reply Comments at 15. The Commission further notes that the policy 

permitting committed shipper rates has existed for nearly 20 years. Notwithstanding 

increased filings requesting committed shipper rates during the 2009-2014 period, the 

application of the Kahn Methodology to the 2009-2014 period results in a lower index 

than the Commission developed based upon 2004-2009 data in the 2010 Index Review. 

This is true whether one uses the accounting data historically used by the Commission or 

page 700 data adopted in this order. 

56 CAPP Reply Comments at 5-9.
Docket No. RM15-20-000 - 22 -

contrary to CAPP’s argument that inclusion of such pipelines inflates the index level. To 

the extent that volume commitments in these agreements have reduced the pipeline’s risk, 

the page 700 total cost-of-service would reflect this reduction in the embedded costs of 

equity and costs of debt. CAPP’s argument provides no basis for the exclusion of 

pipelines with committed shipper contracts. 

29. The Commission dismisses Liquids Shippers’ proposal to remove from the data 

set pipelines with rate base changes of 25 percent between 2013-2014. Liquids Shippers’ 

argument that these expansions are “non-recurring” is unsupported – unlike non-recurring 

costs in a rate case, capital investments represent a long term change in the pipeline’s cost 

level. The proposal also errs by focusing solely on expansions without also considering 

other cost changes (increases or decreases) which may be “non-recurring.” Moreover, 

Liquids Shippers’ proposal is internally inconsistent. First, Liquids Shippers’ proposal 

focuses solely on rate base increases while ignoring commensurate rate base decreases.

Second, although Liquids Shippers argue that new 2014 expansions could be skewing the 

2014 costs per barrel-mile upward while throughput is ramped up, the Liquids Shippers

make no similar adjustments for 2008-2009 expansions which could be having a similar 

upward effect on 2009 costs per barrel-mile (thereby, minimizing the change between 

2009 and 2014).

57 As noted elsewhere in this order, to the extent that expansions lead to 

 

57 Inflated 2009 costs per barrel-mile would lower the apparent cost changes over 

the 2009-2014 period.
Docket No. RM15-20-000 - 23 -

extraordinary cost per barrel-mile changes, the pipelines will not be among the middle 

50 percent. 

30. The Commission also rejects Liquids Shippers’ assertion that Enbridge Energy, 

Limited Partnership (Enbridge Lakehead) distorts the index calculation. As shown in 

Attachment A, Enbridge Lakehead is not included in the middle 50 percent of page 700 

per barrel-mile cost change data adopted herein. Further, to the extent that Enbridge 

Lakehead heavily influenced the calculations in the June 2015 NOI, this resulted from the 

Kahn Methodology’s longstanding (and unchallenged) use of a weighted average based 

upon pipeline barrel-miles.58 

2. APV Shippers Additional Manual Trimming Adjustments

a. Comments

31. APV Shippers propose additional manual trimming adjustments to the data set in 

order to remove pipelines which they state reported 2009 data that was “non-comparable” 

to the pipeline’s 2014 data. Toward this objective, APV Shippers propose that the 

Commission remove the following from the data set:

 Four pipelines that began or ceased operations during 2009 or 2014 because 

these pipelines’ page 700 may include a full year’s rate base, but only a partial 

year’s operating costs.

 

58 Enbridge Lakehead transported over 15 percent of total industry barrel-miles in 

2014. Attachment A, Exhibit 7. 
Docket No. RM15-20-000 - 24 -

 Ten pipelines with significant divestitures or acquisitions between 2009 and 

2014.

 Four pipelines with other operational changes or data reporting anomalies on 

page 700.

 Eleven pipelines that APV Shippers assert report a combination intrastate and 

interstate barrel-mile data on page 700.

32. AOPL opposes these proposed adjustments, claiming that such manual data 

trimming is prone to bias and error. AOPL states that statistical data trimming using the 

middle 50 percent or middle 80 percent provides a more appropriate resolution for these 

issues. 

b. Discussion

33. The Commission declines to adopt APV Shippers’ manual data trimming 

proposal. As previously explained, the Commission trims the data set to the middle 

50 percent to address any potential distortions caused either by (a) outlying data or 

(b) spurious data.59 To the extent reporting errors or other circumstances cause a 

pipeline’s cost changes to differ significantly from industry norms, such outlying 

pipelines will not be among the middle 50 percent. APV Shippers have not demonstrated 

 

59 E.g., 2010 Index Review, 133 FERC ¶ 61,228 at P 7.
Docket No. RM15-20-000 - 25 -

that data anomalies within the middle 50 percent are distorting the Kahn Methodology’s 

calculations.

60

 

34. Any potential improvement from manual data trimming is outweighed by the

increase in the potential for error or manipulation. Manual data trimming requires a 

pipeline-by-pipeline analysis of page 700 data and subjective decisions involving that 

data. Fully validating APV Shippers’ proposal would require the Commission and 

industry participants to evaluate the specific circumstances for nearly 130 pipelines.61

Consistent application of the “non-comparability” standard would also require addressing 

whether APV Shippers identified every possible characteristic which could render a 

pipeline’s data “non-comparable.”62 Without such a comprehensive review, there is no 

way to verify that the selective data trimming methods employed by APV Shippers do 

not skew the index calculation either upward or downward. 

 

60 Fifteen of the 41 pipelines that APV Shippers seek to remove from the data set 

via manual trimming remain in the Commission’s middle 50 percent. Attachment A, 

Exhibit 10. When those 15 pipelines are manually removed from the middle 50 percent, 

the cost-of-service per barrel-mile increases by a very small amount, from 1.23 to 1.33. 

Attachment A, Exhibit 8.

 

61 Starting with a preliminary data set of 129 pipelines, APV Shippers manually 

data trim 41 pipelines. O’Loughlin August 2015 Affidavit at 21.

62 Under manual data trimming, the decision regarding which pipelines should be 

retained in the data set is as subjective (and as important) as to which pipelines to 

remove. Yet, as explained below, APV Shippers’ methodology provides little certainty 

that the pipelines remaining in the data set reported “comparable data” between 2009 and 

2014. 
Docket No. RM15-20-000 - 26 -

35. Illustrating the difficulty of such a process, APV Shippers concede that their 

manual data trimming methodology does not remove from the data set all pipelines 

reporting “non-comparable” data. When AOPL presented evidence that the six pipelines 

with the lowest per barrel-mile cost remaining in APV Shippers’ data set should have 

been removed under the “non-comparability” standard, the APV Shippers conceded that 

these six pipelines “likely had sufficient reason to be excluded.”63 The failure to remove 

these pipelines affected APV Shippers’ index calculation.64 Moreover, attempting to 

minimize the effect of retaining these pipelines in the data set, APV Shippers emphasized 

that additional pipelines (this time with higher cost changes) with “non-comparable data”

 

63 O’Loughlin October 2015 Affidavit at 70. Of these six pipelines, Arrowhead 

Louisiana Gathering, LLC explained that a significant shift in its page 700 data was due 

to an accounting change. Shehadeh October 2015 Affidavit at 14-17. Another, Conoco 

Offshore Pipeline, experienced a leak that caused its costs per barrel-mile to temporarily 

spike in 2009, thereby distorting the measure of cost change between 2009 and 2014. Id. 

A third, Mobile Eugene Island divested 50 percent of its assets. Id. Two others reported 

data anomalies, Belle Rose NGL Pipeline (throughput dropping from 273 million to 6 

million without any commensurate change in assets) and Total Petrochemical Pipeline 

US Inc. (reporting both 100 percent debt and equity capital structure). The sixth pipeline, 

Valero MKS Logistics LLC, showed ROE percentages of five percent in 2008 and five 

percent in 2010, with an unexplained spike to 16.73 percent 2009. In the last instance, it 

is unclear whether this spike was erroneous or in some sense captured real changing 

pipeline costs during the economic upheaval of the 2008-2009 recession. In any case, 

this type of uncertainty and the requirement for this type of subjective decision further 

supports the rejection of the “non-comparability” manual data trimming methodology. 

64 Removing these six pipelines alone would have raised the index level in APV 

Shippers’ final calculation from PPI-FG+0.5 to PPI-FG+0.9. Attachment A, Exhibit 9. 
Docket No. RM15-20-000 - 27 -

were also not removed.

65

 By APV Shippers’ own concession, the processes used by APV 

Shippers were inadequate for consistently identifying and removing “non-comparable”

data.66 

36. APV Shippers have failed to demonstrate that manual data trimming should be 

incorporated into the Kahn Methodology. As the Commission explained both in the 2010 

Index Review and this proceeding, to manually trim the data set solely based upon one 

factor (such as large rate base changes) is biased and has the potential to distort the index 

calculation.67 On the other hand, the manual identification of every pipeline with 

potentially anomalous or idiosyncratic characteristics would require several highly 

subjective decisions. This subjective process is prone to bias and error. In contrast, 

statistical data trimming using the middle 50 percent is objective, transparent, and 

minimizes the need to analyze individual pipeline data.

 

65 O’Loughlin October 2015 Affidavit at 70-71. 

66APV Shippers relied upon certain filters for determining which pipelines to 

scrutinize further. O’Loughlin September 2015 Affidavit at 31-32; O’Loughlin October

2015 Affidavit at 66-71. As discussed above, these filters were not sufficient for 

identifying those pipelines that needed to be evaluated in order to consistently apply APV 

Shippers manual data screening methodology. Most of the anomalies identified by 

AOPL were apparent from the data reported on Form No. 6, and, to the extent that AOPL 

obtained this information from other filings with the Commission or other sources, it is 

not clear why a manual trimming methodology should exclude this information. 

67 2010 Index Review, 133 FERC ¶ 61,228 at P 49.
Docket No. RM15-20-000 - 28 -

37. Further, contrary to APV Shippers’ arguments, manual data trimming is not a 

mere extension to the existing processes in the Kahn Methodology. The Commission 

disagrees with APV Shippers’ claim that the Commission already makes other 

adjustments to the data set to ensure “comparability.”

68

 The adjustments made by the 

Commission have served a different purpose. The Commission’s removal of pipelines 

with incomplete data is inapposite to the manual data trimming proposed by APV 

Shippers. It is mathematically impossible to evaluate a pipeline’s year-on-year changes 

in barrel-mile costs when no such data exist. Thus, those pipelines with incomplete data 

cannot be incorporated into the data set.69 In contrast, APV Shippers propose to remove 

pipelines that have reported the data necessary to evaluate annual barrel-mile cost 

changes. The use of an objective measure not to incorporate those pipelines that 

mathematically cannot be used is distinct from the subjective process proposed by APV 

Shippers. 

38. Likewise, the Commission rejects APV Shippers’ analogy of manual data 

trimming to the Kahn Methodology’s traditional treatment of mergers. Historically, 

when two pipelines have combined, the Commission has added separate costs the 

pipelines reported on Form No. 6 in the first year of the data set (e.g. 2009) and compared 

 

68 O’Loughlin August 2015 Affidavit at 17.

69 2010 Index Review Rehearing Order, 135 FERC ¶ 61,172 at P 15. 
Docket No. RM15-20-000 - 29 -

this sum to the newly combined company’s costs in the last year of the data set (e.g.

2014). Without this step, the absorbed pipeline’s cost data would be needlessly 

discarded.70 Commission efforts to preserve cost change data should not be confused 

with an effort to ensure “comparability.” On the contrary, a merger may change several 

aspects of company operations and significantly alter the pipeline’s business 

circumstances. Preserving data, not “comparability,” was the justification for the Kahn 

Methodology’s historic treatment of mergers.

71

39. The Commission also rejects APV Shippers’ analogy to the Kahn Methodology’s 

full utilization of the data on Form No. 6 in order to correct missing or erroneous data. 

As APV Shippers note, when data has been missing or erroneous in one portion of a 

pipeline’s Form No. 6, the Commission has sometimes substituted data from elsewhere 

 

70 If a pipeline is completely absorbed by another pipeline, this pipeline no longer 

reports Form No. 6 data and such data would not be available for measuring cost 

changes. 

71 We further note that APV Shippers’ treatment of mergers and divestitures is not 

analogous to the Kahn Methodology’s treatment of mergers and divestitures. As opposed 

to preserving data, APV Shippers propose to remove from the data set (a) pipelines that 

sold a portion (not all) of their pipeline assets and (b) the pipeline that acquired those 

assets. This step is not justified. Notwithstanding the asset transfer, many of the 

pipelines that APV Shippers propose to remove have filed page 700 data over the entire 

2009-2014 data collection period. Moreover, there is no evidence that these asset 

transfers are improperly influencing the index level. A merger may cause a pipeline’s 

barrel-mile costs to go up or down depending upon the barrel-mile costs of the transferred 

asset. Of course, if the acquiring or purchasing pipeline experienced particularly large 

(or small) barrel-mile cost changes, those pipelines would be trimmed by the application 

of the middle 50 percent. 
Docket No. RM15-20-000 - 30 -

on the Form No. 6.72 Such substitutions, which utilize data that the pipeline has already 

reported on Form No. 6, are not akin to manual data trimming that completely removes 

pipelines from the data set in an effort to achieve an undefinable “comparability.”73

C. Middle 80 Percent Data Trimming

1. Comments

40. AOPL urges the Commission to determine the index using an average of applying 

the Kahn Methodology to the (a) middle 50 percent and (b) middle 80 percent. In the 

June 2015 NOI, the Commission trimmed the data set to the middle 50 percent, which 

 

72 2005 Index Review, 114 FERC ¶ 61,293 at PP 43-44 (reconciling operating 

revenue data from different sections of the Form No. 6). In addition, a similar process 

has been applied to the use of Form No. 6 page 700 barrel-mile data for missing or 

erroneous barrel-mile data reported on Form No. 6 page 600. Although APV Shippers 

raise methodological objections to this particular adjustment, this issue has been rendered 

moot by the Commission’s adoption of page 700 data. 

73 The Commission further dismisses APV Shippers’ reference to the 2010 Index 

Review Rehearing’s statement that “Although the Kahn Methodology removes from the 

data set those pipelines that reported erroneous or incomplete data, erroneous or 

incomplete data differ from the accurately reported actual costs Valero and ATA seek to 

remove using the rate base screening methodology.” APV Shippers Initial Comments at 

22 (citing 2010 Index Review Rehearing Order, 135 FERC ¶ 61,172 at P 15). Placed in 

proper context, this statement is not an endorsement of manual data trimming for 

erroneous data. This comment regarding erroneous data was made solely in the context 

of rejecting an analogy made by Valero. Elsewhere, the 2010 Index Review order 

explained that the Commission uses the middle 50 percent to remove pipelines reporting 

spurious (i.e. erroneous) data. 2010 Index Review order, 133 FERC ¶ 61,228 at P 7. As 

discussed above, the specific analogies made by APV Shippers to prior Commission 

applications of the Kahn Methodology do not support the adoption of their proposed 

manual data trimming. 
Docket No. RM15-20-000 - 31 -

removes the 25 percent of pipelines with the greatest cost increases and the 25 percent of 

pipelines with the greatest cost decreases. AOPL states that the Commission should also 

consider the middle 80 percent because: (a) the accuracy of the middle 80 percent 

data is supported by its conformity to a lognormal distribution and (b) using the middle 

80 percent accounts for more barrel-miles.74 

41. CAPP,75 HollyFrontier/Western,76 Liquid Shippers,77 and APV Shippers78 assert 

that the middle 50 percent is a superior data source because, among other reasons, the 

middle 50 percent removes more anomalous and erroneous data. 

2. Discussion

42. The Commission rejects AOPL’s proposal to calculate the index based upon both 

the middle 80 percent and the middle 50 percent.

79

 In the 2010 Index Review, the 

Commission determined that the index should be calculated based upon the middle 

 

74 AOPL Initial Comments at 4; Shehadeh August 2015 Affidavit at 8.

75 CAPP Reply Comments at 15.

76 HollyFrontier/Western Reply Comments at 7.

77 Liquids Shippers Reply Comments at 13.

78 APV Shippers Reply Comments at 17-19.

79 AOPL’s proposal averages the results by applying the Kahn Methodology using 

the middle 50 percent of the data set and the middle 80 percent of the data set. This 

would raise the index level from the approximately PPI-FG+1.2 to PP-FG+1.65 when 

applied to the page 700 data. 
Docket No. RM15-20-000 - 32 -

50 percent alone.80 As the Commission explained in the 2010 Index Review, the middle 

50 percent, more effectively than the middle 80 percent, excludes pipelines with 

anomalous cost changes while avoiding the complexity and distorting effects of 

subjective, manual data trimming methodologies.81 

43. The record in this proceeding does not provide a basis for altering that position. 

We are not persuaded by AOPL’s argument that the middle 80 percent should be 

considered merely because it conforms to a lognormal distribution. Conformity with 

a particular statistical distribution may generally support the accuracy of the middle 

80 percent data. However, by definition, costs at the top (or bottom) of the middle 

80 percent deviate significantly from the cost experience of other pipelines.82 To the 

extent that the middle 80 percent data conforms to a lognormal distribution, outlying cost 

increases per barrel-mile will not be offset by similarly outlying cost decreases. Thus, 

using the middle 80 percent would skew the index upward based upon these outlying cost 

 

80 As the Commission explained in the 2010 Index Review, this returned the 

Commission’s policy to the application of the Kahn Methodology in Order No. 561, 

which based its calculation of the index on the middle 50 percent alone. 2010 Index 

Review, 133 FERC ¶ 61,228 at P 60. Although the middle 80 percent was used in the 

2000 and 2005 reviews, the Commission made this change without providing a rationale 

for the change or explaining the departure from previous practice. Id. Once the issue 

was presented to the Commission in the 2010 Index Review, the Commission determined 

that the middle 50 percent alone provided a more appropriate means for trimming the 

data sample. Id. P 61.

81 2010 Index Review, 133 FERC ¶ 61,228 at PP 60-63.

82 Id. P 61.
Docket No. RM15-20-000 - 33 -

increases, which is contrary to the objective of the index to reflect normal industry-wide 

cost changes. 

44. Similarly, the Commission rejects AOPL’s argument that the middle 80 percent 

should be used merely because it contains more barrel-miles. The Kahn Methodology 

aims to capture the central tendency of the data set so that the index is not distorted by 

outlying costs. Pipelines in the middle 80 percent, as opposed to the middle 50 percent, 

are more likely to have outlying cost changes which could result from idiosyncratic 

factors particular to that pipeline.83 By considering the entire data set (without manual 

trimming)84 and then applying statistical data trimming to the middle 50 percent, the 

Commission addresses these issues via a methodology that is objective and transparent.85 

 

83 The middle 80 percent of the Commission’s page 700 data set includes 30 of the 

41 pipelines identified by APV Shippers as warranting exclusion from the data set 

because they have anomalous data during 2009-2014, including 10 of the 12 pipelines 

APV Shippers excluded because they filed cost-of-service rate increases or petitions

seeking approval of committed shipper rates. Attachment A, Exhibit 10. In contrast, the 

middle 50 percent includes only 15 of the pipelines APV Shippers seek to manually trim 

from the data set, and, in particular, only three of the 12 pipelines APV Shippers proposes 

to exclude due to cost-of-service rate filings or committed shipper rates. Id. 

84 The data set consists of pipelines that have filed complete data and are subject to 

the indexing regulations. 

85 It is also not the case that the middle 50 percent represents a narrow or selective 

sector of the industry. On the contrary, the Commission began with a page 700 data set 

that, prior to statistical data trimming, includes more pipelines (130) than AOPL’s data 

set (123). Once the middle 50 percent has been applied, the statistically trimmed data set 

includes more than 50 percent of industry barrel-miles. Attachment A, Exhibit 1. 

Although this is a lower percentage than in some prior reviews, this is not a sufficient 

(continued...)
Docket No. RM15-20-000 - 34 -

D. Crude versus Product Pipelines

1. Comments

45. APV Shippers state that if the Commission declines to adjust the data set for large 

capital expenditures and other erroneous data, the Commission should establish separate 

indices for crude and product pipelines. APV Shippers state that, using page 700 data

without data trimming, the middle 50 percent of crude pipelines had an index differential 

of PPI-FG+3.36 percent and the middle 50 percent of petroleum product pipelines 

showed an index differential of PPI-FG+0.4 percent.86 APV Shippers state that these 

differentials result from significant crude pipeline projects over the past few years. 

AOPL and Liquids Shippers oppose the use of separate indices for crude and product 

pipelines. 

2. Discussion

46. The Commission declines to adopt the proposal to use different indices for crude 

and product pipelines. Contrary to APV Shippers’ claim that the differences in the index 

differentials result from wide-spread crude pipeline expansions, the discrepancy primarily 

 

basis to risk including more outlying data. Moreover, much of the difference in barrelmiles from the 2010 Index Review can be attributed to the fact that Enbridge Lakehead, a 

pipeline representing over 15 percent of the barrel-miles in the data set, was in the middle 

50 percent in 2010, but is not in the middle 50 percent in this proceeding. Compare

Appendix A, Exhibit 1 with AOPL, Initial Comments, Docket No. RM10-25-000, 

Declaration of Ramsey Shehadeh, Appendix B.

86 APV Shippers Initial Comments at 42 (citing O’Loughlin August 2015

Affidavit at 91).
Docket No. RM15-20-000 - 35 -

occurs due to (a) the effect of two very large crude pipelines which happen to have above 

average cost changes and (b) one very large product pipeline which happens to have 

below average cost changes. Data discrepancies caused by only three pipelines do not 

justify the claim that crude and product pipelines as a whole are experiencing 

dramatically different cost changes.87 Moreover, to the extent that a somewhat 

disproportionate number of crude pipelines recorded outlying barrel-mile cost changes, 

this issue is sufficiently addressed by application of the middle 50 percent to the 

combined data set of all pipelines.88

 

87 The relatively large crude pipelines are (a) Enbridge Lakehead and (b) MidValley Pipeline Company. The very large product pipeline is Colonial Pipeline 

Company. These pipelines have a disproportionate effect because the Kahn Methodology 

uses a weighted average in conjunction with a simple average to measure the central 

tendency. Although the size of these pipelines makes their data particularly relevant for 

assessing industry-wide barrel-mile cost changes, data from such a small number of crude 

pipelines (2 out of 60) or product pipelines (1 out of 48) appears insufficient to 

demonstrate an extreme difference between crude and product pipelines costs. Simply 

removing the effect caused by those few pipelines’ data reduces the differential between 

crude and product pipelines from 295 basis points, as calculated by APV Shippers, to a 

much smaller differential of 48 basis points, or PPI-FG+1.14 (crude pipelines) and PPIFG+0.66 (product pipelines). Attachment A, Exhibit 11.

88 Of the pipelines in the middle 50 percent of page 700 data used by the 

Commission, the included product pipelines (excluding Colonial, as explained supra)

would result in an index level of PPI-FG+1.05 and crude pipelines would have an index 

level of PPI-FG+1.14. Attachment A, Exhibit 12. 
Docket No. RM15-20-000 - 36 -

E. Liquids Shippers & CAPP Proposal to Set Index at PPI-FG and to 

Revise Commission Regulations to Abandon Indexing

1. Comments

47. Liquids Shippers state that the Commission should temporarily set the index at 

PPI-FG while undertaking a review of the Commission’s oil pipeline regulations. 

Among other things, the Liquids Shippers complain that oil pipeline indexing increases

have exceeded interstate natural gas pipeline rate increases, that the indexing increases 

have exceeded the consumer price index (CPI), and that certain oil pipelines have been 

over-recovering. The Liquids Shippers state that the Commission should consider 

abolishing the indexing methodology, or, to the extent that indexing is retained, change 

the manner in which the Commission evaluates oil pipeline index filings. In its reply 

comments, CAPP endorses these proposals. AOPL opposes Liquids Shippers’ proposals 

and disputes their various claims.

2. Discussion

48. The Commission declines to adopt the Liquids Shippers’ proposal to temporarily 

set the index at PPI-FG as unsupported. The evidence in this proceeding demonstrates 

that oil pipeline cost changes between 2009 and 2014 have exceeded PPI-FG. Liquids 

Shippers provide no compelling reason to depart from the longstanding practice of 
Docket No. RM15-20-000 - 37 -

calculating the index based upon historic pipeline costs.

89 In particular, the Commission

rejects Liquids Shippers’ claim that recent audits revealed reporting errors rendering 

Form No. 6 data unusable; on the contrary, the errors discovered by these audits were

relatively limited.

90 Furthermore, as discussed previously, the middle 50 percent data 

trimming removes the allegedly anomalous data that Liquids Shippers claim distorts the

index calculation.91 Finally, Liquids Shippers’ claim that oil pipeline index increases 

exceed the CPI does not support changes to the index because Liquids Shippers have not 

demonstrated that historic, industry-wide oil pipeline cost changes have corresponded to 

the CPI.92

 

89 E.g. AOPL II, 281 F.3d at 247 (quoting EPAct 1992, at § 1801(a) and noting 

that the Commission satisfied the statutory objective by calculating the index based upon 

historic costs).

90 Liquids Shippers have made no showing that the issues raised in these audits are 

such that they would materially alter the industry-wide index calculation.

91 In initial comments, Liquids Shippers identified four pipelines (Enbridge 

Lakehead; TransCanada Keystone Pipeline, LP; Seaway Crude Pipeline Company Co.; 

Enterprise TE Products Pipeline Company LLC) as reporting anomalous data. Yet, none 

of these pipelines are included in the middle 50 percent, and, in fact, TransCanada 

Keystone is not even in the data set because they did not file 2009 Form No. 6 

information. Attachment A, Exhibit 6. 

92 Similarly, Liquids Shippers’ comparison to natural gas pipeline rate changes is 

misleading because Liquids Shippers’ data only includes a portion of natural gas 

pipelines (not all natural gas pipelines) and does not include all rate changes proposed by 

those pipelines. Shehadeh October 2015 Affidavit at 31. The underlying economic 

premise of this analysis is also flawed. First, as Dr. Shehadeh explains, the analogy to 

natural gas pipelines depends upon a misunderstanding of prices – as price levels, not 

(continued...)
Docket No. RM15-20-000 - 38 -

49. Liquids Shippers’ arguments that the Commission should change its regulations 

governing indexing are beyond the scope of this proceeding. The June 2015 NOI sought

comment regarding two narrow issues, (a) the proposed index level and (b) possible 

changes to the Kahn Methodology used to calculate the index level.93 Liquids Shippers’ 

comments regarding the Commission’s indexing policies, committed shipper contracts,94

and other issues are beyond the scope of this limited inquiry. 

50. Further, Liquids Shippers’ comments have not persuaded us to reexamine the 

Commission-approved indexing methodology.95 In general terms, Liquids Shippers have 

not substantiated their claims of unchecked oil pipeline over-recoveries. For example, of 

 

price growth, are determined by the level of competition in an industry. Id. at 30. 

Second, Liquids Shippers do not establish that the same market forces determining 

natural gas pipeline prices apply to oil pipelines. Id. 

93 June 2015 NOI, 151 FERC ¶ 61,278 at P 1.

94 This five-year review addresses the calculation of the industry-wide index-level. 

Negotiated committed shipper contracts only incorporate indexing when both the pipeline 

and the committed shippers accept such terms. Any objections to these negotiated 

provisions (including the application of indexing) may be raised during the applicable 

petition for declaratory order process. 

95 The Commission’s indexing methodology was affirmed on appeal following

Order No. 561. AOPL I, 281 F.3d 239. The dissents and other materials from that 

proceeding cited by Liquids Shippers were part of the record at that time. In addition, 

Liquids Shippers cite a Congressional letter which was written before the indexing 

regulations were finalized, and does not accurately portray how those regulations have 

been implemented. For example, the letter implies that the index may only increase rates, 

when, in fact, under Commission regulations the index may require rates to go down. See 

18 C.F.R. § 342.3(e) (2015).
Docket No. RM15-20-000 - 39 -

the 20 pipelines (out of Liquids Shippers’ sample of 42) that Liquids Shippers allege are 

over-recovering, evidence provided in this proceeding indicates that 15 actually underrecovered their cost-of-service in one (and in many cases more) of the years between 

2009 and 2014.96 Furthermore, to the extent issues arise on a particular pipeline, a 

shipper may file complaints or protests against indexed rate increases97 or complaints 

against an oil pipeline’s underlying base rates. In addition to being beyond the scope of 

the June 2015 NOI, Liquids Shippers have not substantiated their claims.

98

 

F. Suncor’s Proposals

51. The Commission will not adopt the various proposals advanced by Suncor. The 

Commission’s adoption of page 700 data addresses several of these proposals, which 

were advanced as alternatives should the Commission not adopt page 700 data. In 

addition, the Commission also will not adopt Suncor’s proposed alternative methodology 

 

96 See Shehadeh September 2015 Affidavit at 32. Further, the industry as a whole 

continues to show an under-recovery of the aggregate page 700 cost-of-service. 

Moreover, as has been recognized from the inception of indexing, some pipelines costs 

will exceed the rate increases allowed by indexing whereas efficient pipelines may 

benefit from controlling their costs. Order No. 561, FERC Stats. & Regs. ¶ 30,985 at 

30,948-49.

97 Liquids Shippers argue that pipelines with page 700 revenues exceeding page 

700 cost of service should not receive index increases. To the extent that index rate 

filings of particular pipelines substantially exacerbate pre-existing over-recoveries, 

current Commission policies allow shippers to file complaints against those index 

increases. BP West Coast Products, LLC v. SFPP, L.P., 121 FERC ¶ 61,141 (2007). 

98 Remaining issues regarding the Commission’s regulatory policies may be raised 

in an adjudicatory context or another, more appropriate forum.
Docket No. RM15-20-000 - 40 -

to trim the data set based upon anomalous years (as opposed to trimming pipelines 

reporting anomalous data) because the justification for this proposal, including the use of 

broader data set, was based upon the previously used Form No. 6 accounting data, not the 

page 700 data. Moreover, AOPL has presented evidence that Suncor’s proposal included 

significant computational errors.99 

IV. 2016-2021 Oil Pipeline Index

52. Based on the foregoing, the Commission calculates the five-year review of the 

index level used to determine annual changes to oil pipeline rate ceilings for the 

five-year period commencing July 1, 2016 as follows. First, as shown in Attachment A 

(Exhibit 13, Exhibit 14) we remove those pipelines that did not provide Form No. 6, page 

700 data or provided incomplete data. Second, as shown in Attachment A (Exhibit 15) 

we look at the data on Form No. 6, page 700 to calculate each pipeline’s cost change on a 

per barrel-mile basis over the prior five-year period (e.g. the years 2009-2014 in this 

proceeding). Third, in order to remove statistical outliers and spurious data, we trim the 

data set to those pipelines in the middle 50 percent of cost changes. Fourth, as shown in 

Attachment A (Exhibit 15) we calculate three measures of the middle 50 percent’s central 

tendency: the median, the mean, and a weighted mean. Fifth, we calculate a composite 

by taking a simple average of those three measures of central tendency, as shown in 

 

99 Shehadeh September 2015 Affidavit at 38.
Docket No. RM15-20-000 - 41 -

Attachment A (Exhibit 1). Finally, this composite is compared to the value of the 

PPI-FG index data over the same period. The index level is then set at PPI-FG plus 

(or minus) this differential. Using these calculations, the Commission establishes an 

index level of PPI-FG plus 1.23 percent (PPI-FG+1.23) for the five-year period 

commencing July 1, 2016.

The Commission orders:

Consistent with the discussion in this order, the Commission determines that the 

appropriate oil pricing index for the next five years, July 1, 2016 through June 30, 2021, 

is PPI-FG+1.23. 

By the Commission.

( S E A L )

Nathaniel J. Davis, Sr.,

Deputy Secretary.