Document ID: FERC-2020-0845-0001
Agency: ferc
Document Type: Proposed Rule
Title: Five-Year Review of the Oil Pipeline Index
Posted Date: 2020-07-02T04:00Z

[Federal Register Volume 85, Number 128 (Thursday, July 2, 2020)]
[Proposed Rules]
[Pages 39854-39856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13623]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 342

[Docket No. RM20-14-000]

Five-Year Review of the Oil Pipeline Index

AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Notice of inquiry.

-----------------------------------------------------------------------

SUMMARY: The Federal Energy Regulatory Commission (Commission) invites 
comments on its proposed index level used to determine annual changes 
to oil pipeline rate ceilings. The Commission proposes to use the 
Producer Price Index for Finished Goods (PPI-FG) plus 0.09% as the 
index level for the five-year period commencing July 1, 2021. The 
Commission invites interested persons to submit comments regarding this 
proposal and any alternative methodologies for calculating the index 
level.

DATES: Initial Comments are due on or before August 17, 2020, and Reply 
Comments are due on or before September 11, 2020.

ADDRESSES: You may submit comments, identified by docket number, by any 
of the following methods:
     Agency Website: http://www.ferc.gov. Documents created 
electronically using word processing software should be filed in native 
applications or print-to-PDF format and not in a scanned format. All 
supporting workpapers must be submitted with formulas and in a 
spreadsheet format acceptable under the Commission's eFiling rules.
     Mail/Hand Delivery: Commenters unable to file comments 
electronically must mail or hand deliver an original to: Federal Energy 
Regulatory Commission, Office of the Secretary, 888 First Street NE, 
Washington, DC 20426.

FOR FURTHER INFORMATION CONTACT: 
Monil Patel (Technical Information), Office of Energy Market 
Regulation, Federal Energy Regulatory Commission, 888 First Street NE, 
Washington, DC 20426, (202) 502-8296, Monil.Patel@ferc.gov.
Evan Steiner (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street NE, Washington, 
DC 20426, (202) 502-8792, Evan.Steiner@ferc.gov.

SUPPLEMENTARY INFORMATION: 
    1. The Commission annually applies an index to existing oil 
pipeline transportation rate ceilings to establish new rate ceiling 
levels.\1\ The Commission reexamines the index level every five 
years.\2\ In this notice of inquiry (NOI), the Commission invites 
comments on its proposal to use the Producer Price Index for Finished 
Goods (PPI-FG) \3\ plus 0.09% as the index level for the next five 
years beginning July 1, 2021.\4\ This proposal is based on the Kahn 
Methodology established in Order No. 561 and applied in subsequent 
five-year index review proceedings.\5\
---------------------------------------------------------------------------

    \1\ Indexing allows oil pipelines to change their tariff rates 
so long as those rates remain at or below certain ceiling levels. 18 
CFR 342.3(a).
    \2\ The five-year index review process was established in Order 
No. 561. 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, Ass'n of Oil Pipe Lines v. FERC, 83 F.3d 
1424 (D.C. Cir. 1996).
    \3\ The PPI-FG is determined and issued by the Bureau of Labor 
Statistics, U.S. Department of Labor.
    \4\ As provided by 18 CFR 342.3(d)(2), ``The index will be 
calculated by dividing the PPI-FG for the calendar year immediately 
preceding the index year, by the previous calendar year's PPI-FG.'' 
Multiplying the rate ceiling effective on June 30 of the index year 
by the resulting number establishes the new rate ceiling for the 
year beginning the next day, July 1.
    \5\ Five-Year Review of the Oil Pipeline Index, 153 FERC ] 
61,312, at PP 5, 12-18 (2015) (2015 Index Review), aff'd, Ass'n of 
Oil Pipe Lines v. FERC, 876 F.3d 336 (D.C. Cir. 2017); Five-Year 
Review of Oil Pipeline Pricing Index, 133 FERC ] 61,228, at PP 5-9, 
60-63 (2010) (2010 Index Review), order on reh'g, 135 FERC ] 61,172 
(2011); see also Five-Year Review of Oil Pipeline Pricing Index, 114 
FERC ] 61,293 (2006) (2005 Index Review); Five-Year Review of Oil 
Pipeline Pricing Index, 102 FERC ] 61,195 (2003), aff'd, Flying J 
Inc. v. FERC, 363 F.3d 495 (D.C. Cir. 2004).
---------------------------------------------------------------------------

    2. As discussed below, commenters are invited to submit comments

[[Page 39855]]

regarding the Commission's proposal and any alternative methodologies 
for calculating the index level. Among other issues, these comments may 
address different data trimming methodologies and whether and how the 
index should reflect changes to the Commission's policies regarding 
income tax costs and return on equity (ROE). The Commission will select 
a final index level at the conclusion of this proceeding.

I. Background

A. Five-Year Review Process

    3. In Order No. 561, the Commission established an indexing 
methodology that allows oil pipelines to change rates based upon an 
annual index as opposed to making cost-of-service filings.\6\ The 
Commission committed to review the index level every five years to 
ensure that the index level chosen by the Commission adequately 
reflects changes to industry costs.\7\
---------------------------------------------------------------------------

    \6\ Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,947.
    \7\ Id.
---------------------------------------------------------------------------

    4. In Order No. 561 and each successive five-year index review, the 
Commission has calculated the index level based upon a methodology 
developed by Dr. Alfred E. Kahn.\8\ The Kahn Methodology uses pipeline 
data from Form No. 6, page 700 \9\ from the prior five-year period to 
determine an adjustment to be applied to 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 2014-2019 in this 
proceeding) is calculated. In order to remove statistical outliers and 
spurious data, the resulting data set is trimmed to those oil pipelines 
in the middle 50% of cost changes. The Kahn Methodology then calculates 
three measures of the middle 50% central tendency: The median, the 
mean, and a weighted mean.\10\ 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 over the 
prior five-year period. The index level is then set at PPI-FG plus (or 
minus) this differential.
---------------------------------------------------------------------------

    \8\ The Commission's use of the Kahn Methodology has been 
affirmed by the United States Court of Appeals for the District of 
Columbia Circuit. Ass'n of Oil Pipelines v. FERC, 83 F.3d 1424 (D.C. 
Cir. 1996); Flying J Inc. v. FERC, 363 F.3d 495 (D.C. Cir. 2004).
    \9\ 2015 Index Review, 153 FERC ] 61,312 at P 12 (updating the 
Commission's calculation of the five-year oil pipeline index to use 
page 700 data to measure changing barrel-mile costs). Page 700 
provides summarized interstate barrel-mile and cost-of-service data 
consistent with the Commission's cost-of-service methodology. Id. PP 
12-13, 16.
    \10\ The weighted mean assigns a different weight to each 
pipeline's cost change based on the pipeline's total barrel-miles.
---------------------------------------------------------------------------

B. Developments Since the Most Recent Five-Year Review

    5. Since the Commission's most recent review of the index in 2015, 
the Commission has adopted two major changes to the cost-of-service 
methodology used to populate page 700 data. First, in 2018, the 
Commission revised its policy concerning the treatment of income taxes 
and Accumulated Deferred Income Taxes (ADIT) in the rates of master 
limited partnership (MLP) pipelines (income tax policy change). 
Following the remand in United Airlines, Inc. v. FERC,\11\ the 
Commission determined that an impermissible double recovery results 
from granting MLP pipelines an income tax allowance when using the 
discounted cash flow (DCF) methodology.\12\ Thus, the Commission 
instructed MLP oil pipelines to eliminate the income tax allowance from 
page 700 costs filed on April 18, 2018 \13\ and clarified that 
pipelines eliminating an income tax allowance may also eliminate 
previously-accumulated ADIT from their costs of service.\14\ The 
Commission further stated that it would incorporate the effects of the 
income tax policy change on industry-wide oil pipeline costs in the 
2020 five-year review of the oil pipeline index level.\15\
---------------------------------------------------------------------------

    \11\ 827 F.3d 122 (D.C. Cir. 2016).
    \12\ Inquiry Regarding the Commission's Policy for Recovery of 
Income Tax Costs, 162 FERC ] 61,227, at P 8 (2018) (Income Tax 
Policy Statement), reh'g denied, 164 FERC ] 61,030 (2018) (Income 
Tax Policy Statement Rehearing Order).
    \13\ Id. P 46.
    \14\ Income Tax Policy Statement Rehearing Order, 164 FERC ] 
61,030 at P 13.
    \15\ Income Tax Policy Statement, 162 FERC ] 61,227 at P 46.
---------------------------------------------------------------------------

    6. Second, on May 21, 2020, the Commission issued a policy 
statement revising its methodology for determining ROE for interstate 
natural gas and oil pipelines (ROE policy change).\16\ The Commission 
departed from its longstanding policy of determining pipeline ROEs by 
relying solely on the discounted cash flow model (DCF) and expanded its 
methodology to afford equal weighting to the results of DCF and Capital 
Asset Pricing Model (CAPM) analyses.\17\ Moreover, the Commission 
encouraged oil pipelines to file updated Form No. 6, page 700 data for 
2019 reflecting the revised ROE methodology, explaining that such data 
may help the Commission better estimate industry-wide cost changes for 
purposes of the five-year index review.\18\ The Commission explained 
that following Office of Management and Budget (OMB) approval of this 
voluntary information collection pursuant to the Paperwork Reduction 
Act,\19\ the Commission will issue a notice affording pipelines two 
weeks to file updated Form No. 6, page 700 data reflecting the revised 
ROE methodology.\20\
---------------------------------------------------------------------------

    \16\ Inquiry Regarding the Commission's Policy for Determining 
Return on Equity, 171 FERC ] 61,155 (2020) (ROE Policy Statement).
    \17\ Id. PP 18, 28, 50.
    \18\ Id. P 92. The Commission further explained that pipelines 
that previously filed Form No. 6 for 2019 and choose to submit 
updated page 700 data should, in a footnote on the updated page 700, 
either (a) confirm that their previously filed Form No. 6 was based 
solely upon the DCF model or (b) provide the real ROE and resulting 
cost of service based solely upon the DCF model as it was applied to 
oil pipelines prior to the ROE Policy Statement. Id.
    \19\ 44 U.S.C. 3501-21.
    \20\ ROE Policy Statement, 171 FERC ] 61,155 at P 93. The 
Commission clarified that pipelines that have not filed Form No. 6 
for 2019 (e.g., pipelines that have received an extension of the 
Form No. 6 filing deadline) should file page 700 data consistent 
with their previously granted extensions and such filings should be 
based upon the DCF model, which was the Commission's oil pipeline 
ROE methodology as of April 20, 2020. Id. Moreover, upon OMB 
approval of the information collection in the ROE Policy Statement, 
those pipelines will have the opportunity to file updated page 700 
data reflecting the Commission's revised oil pipeline ROE 
methodology. Id. n.192.
---------------------------------------------------------------------------

II. Commission Proposal

    7. We propose PPI-FG plus 0.09% as the index level for the five-
year period commencing July 1, 2021. This proposal is based on the Kahn 
Methodology as applied to Form No. 6, page 700 data from the 2014 
through 2019 period. The Commission's calculations are included in 
workpapers available in this docket on the Commission's eLibrary 
system.\21\. This proposal is subject to change based upon the updated 
Form No. 6, page 700 data for 2019 and other potential adjustments as 
supported by the record in this proceeding.
---------------------------------------------------------------------------

    \21\ See infra P 17 (discussing the Commission's eLibrary 
system).
---------------------------------------------------------------------------

    8. We invite interested persons to submit comments regarding the 
Commission's proposal and any alternative methodologies for calculating 
the index level for the five-year period commencing July 1, 2021. 
Commenters may address issues that include, but are not limited to, 
different data trimming methodologies and whether, and if so how, the 
Commission should reflect the effects of cost-of-service policy changes 
in the calculation of the index level.

[[Page 39856]]

A. Trimming of the Data Set

    9. The Commission calculated the proposed index level by trimming 
the data set to the middle 50 percent of all oil pipelines, consistent 
with the Commission's practice in the 2010 and 2015 index reviews.\22\ 
We encourage commenters to address whether the Commission should 
continue to trim the data set to the middle 50 or adopt an alternative 
approach to data trimming, such as returning to the Commission's prior 
practice of considering the middle 80 \23\ or any other approach. 
Commenters should explain why any such alternative approach is superior 
to the middle 50 and how it would appropriately address outliers and 
spurious data that could bias the results in either direction.
---------------------------------------------------------------------------

    \22\ 2015 Index Review, 153 FERC ] 61,312 at PP 42-44; 2010 
Index Review, 133 FERC ] 61,228 at PP 60-63.
    \23\ See, e.g., 2005 Index Review, 114 FERC ] 61,293.
---------------------------------------------------------------------------

B. Cost-of-Service Policy Changes

    10. As discussed above, the Commission uses the Kahn Methodology to 
measure changes in pipeline costs using page 700 data from the prior 
five-year period. Accordingly, the Commission's proposal incorporates 
the effects of the income tax policy change on industry-wide oil 
pipeline costs because this policy change is reflected in pipelines' 
page 700 data. The Commission's proposal does not include the effects 
of the ROE policy change because page 700 data reflecting that policy 
change has yet to be filed. However, as explained in the ROE Policy 
Statement, the Commission will afford pipelines an opportunity to file 
this data for consideration in this five-year index review.\24\ As 
discussed above, interested persons may address whether, and if so how, 
the Commission should reflect the effects of cost-of-service policy 
changes (including the income tax policy change \25\ and the ROE policy 
change \26\) in the calculation of the index level.
---------------------------------------------------------------------------

    \24\ ROE Policy Statement, 171 FERC ] 61,155 at P 93.
    \25\ Income Tax Policy Statement, 162 FERC ] 61,227 at P 8.
    \26\ ROE Policy Statement, 171 FERC ] 61,155 at P 2.
---------------------------------------------------------------------------

    11. However, this proceeding is not the appropriate forum to 
litigate the merits of the policy changes themselves. Litigating the 
merits of cost-of-service policy changes in the five-year index review 
is inappropriate for several reasons. First, the index adjusts for and 
the effects of subsequent changes to the Commission's cost-of-service 
policies which could be incorporated into the index level in the next 
five-year index review. Second, litigating policy changes in the five-
year index review would be impractical because, whereas the 
Commission's policies are continually evolving, the five-year index 
review is based upon a snapshot of pipeline cost changes during the 
applicable review period. Third, litigating policy changes would 
improperly complicate and prolong the five-year index review by 
introducing complex cost-of-service issues that can require years to 
resolve.\27\ The Commission must complete this five-year index review 
in order to establish the index level in sufficient time for it to be 
used by pipelines in the index filings to be effective July 1, 2021. 
Finally, cost-of-service rate proceedings, where participants and the 
Commission have a full opportunity to develop an evidentiary record, 
are a more appropriate forum for litigating policy changes than the 
generic, industry-wide proceeding on the five-year index review.
---------------------------------------------------------------------------

    \27\ See, e.g., SFPP, L.P., Opinion No. 511-C, 162 FERC ] 
61,228, at PP 4-7 (2018) (noting that the litigation culminating in 
the 2018 income tax policy change began in 2008).
---------------------------------------------------------------------------

III. Comment Procedures

    12. Initial Comments are due on or before August 17, 2020 and Reply 
Comments are due on or before September 11, 2020. Comments must refer 
to Docket No. RM20-14-000, and must include the name of the commenter, 
the organization they represent, if applicable, and their address.
    13. We encourage comments to be filed electronically via the 
eFiling link on the Commission's website at http://www.ferc.gov. The 
Commission accepts most standard word processing formats. Documents 
created electronically using word processing software should be filed 
in native applications or print-to-PDF format and not in a scanned 
format. All supporting workpapers must be submitted with formulas and 
in a spreadsheet format acceptable under the Commission's eFiling 
rules. Commenters filing electronically do not need to make a paper 
filing.
    14. Commenters that are not able to file comments electronically 
must send an original of their comments to: Federal Energy Regulatory 
Commission, Secretary of the Commission, 888 First Street NE, 
Washington, DC 20426.
    15. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters are not required to 
serve copies of their comments on other commenters.

IV. Document Availability

    16. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
internet through the Commission's Home Page (http://www.ferc.gov). At 
this time, the Commission has suspended access to the Commission's 
Public Reference Room, due to the proclamation declaring a National 
Emergency concerning the Novel Coronavirus Disease (COVID-19), issued 
by the President on March 13, 2020.
    17. From the Commission's Home Page on the internet, this 
information is available on eLibrary. The full text of this document is 
available on eLibrary in PDF and Microsoft Word format for viewing, 
printing, and/or downloading. To access this document in eLibrary, type 
the docket number excluding the last three digits of this document in 
the docket number field.
    18. User assistance is available for eLibrary and the Commission's 
website during normal business hours. For assistance, please contact 
the Commission's Online Support at (202) 502-6652 (toll free at 1-866-
208-3676) or email at ferconlinesupport@ferc.gov, or the Public 
Reference Room at (202) 502-8371, TTY (202) 502-8659. Email the Public 
Reference Room at public.referenceroom@ferc.gov.

    By direction of the Commission.

    Issued: June 18, 2020.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2020-13623 Filed 7-1-20; 8:45 am]
BILLING CODE 6717-01-P