[Federal Register Volume 59, Number 151 (Monday, August 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18873]


[[Page Unknown]]

[Federal Register: August 8, 1994]


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DEPARTMENT OF ENERGY
18 CFR Parts 341, 342, and 343

[Docket No. RM93-11-001; Order No. 561-A]

 

Revisions to Oil Pipeline Regulations Pursuant to Energy Policy 
Act of 1992

July 28, 1994.
AGENCY: Federal Energy Regulatory Commission, Energy.

ACTION: Order on rehearing.

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SUMMARY: The Federal Energy Regulatory Commission is amending its 
regulations to revise the requirements for filing suspension 
supplements of oil pipeline tariffs in order to provide additional time 
to file suspension supplements; to modify the circumstances under which 
oil pipelines may use the cost-of-service methodology for changing 
rates in order to more closely track the standard for shipper protests 
to an indexed rate; and to modify the requirements for protests to oil 
pipeline tariff filings in order to require that a protestant file a 
verified statement to support its claim of a substantial interest in 
the proceeding. The effect of these actions will be to provide a more 
accurate, timely, and balanced approach to oil pipeline ratemaking 
under the Energy Policy Act of 1992 and the Interstate Commerce Act.

EFFECTIVE DATE: The amendments to Part 341 are effective September 7, 
1994, and the amendments to Parts 342 and 343 are effective January 1, 
1995.

FOR FURTHER INFORMATION CONTACT:
Harris S. Wood, Office of the General Counsel, Federal Energy 
Regulatory Commission, 825 North Capitol Street, NE., Washington, DC 
20426, (202) 208-0224.

SUPPLEMENTARY INFORMATION: In addition to publishing the full text of 
this document in the Federal Register, the Commission also provides all 
interested persons an opportunity to inspect or copy the contents of 
this document during normal business hours in Room 3104, 941 North 
Capitol Street, NE., Washington, DC 20426.
    The Commission Issuance Posting System (CIPS), an electronic 
bulletin board service, provides access to the texts of formal 
documents issued by the Commission. CIPS is available at no charge to 
the user and may be accessed using a personal computer with a modem by 
dialing (202) 208-1397. To access CIPS, set your communications 
software to use 300, 1200, or 2400 bps, full duplex, no parity, 8 data 
bits and 1 stop bit. CIPS can also be accessed at 9600 bps by dialing 
(202) 208-1781. The full text of this proposed rule will be available 
on CIPS for 30 days from the date of issuance. The complete text on 
diskette in Wordperfect format may also be purchased from the 
Commission's copy contractor, La Dorn Systems Corporation, also located 
in Room 3104, 941 North Capitol Street, NE., Washington, DC 20426.
Before Commissioners: Elizabeth Anne Moler, Chair; Vicky A. Bailey, 
James J. Hoecker, William L. Massey, and Donald F. Santa, Jr.
I. Introduction
A. Order No. 561
    On October 22, 1993, the Federal Energy Regulatory Commission 
(Commission) issued Order No. 561 in this proceeding.\1\ Order No. 561 
promulgated regulations pertaining to the Commission's jurisdiction 
over oil pipelines under the Interstate Commerce Act (ICA),\2\ to 
fulfill the requirements of the Energy Policy Act of 1992 (Act of 
1992).\3\
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    \1\Revisions to Oil Pipeline Regulations Pursuant to Energy 
Policy Act, Order No. 561, III FERC Statute & Regulations 30,985 
(1993), which will be referred to herein as the ``final rule.''
    \2\49 U.S.C. app. 1 (1988).
    \3\42 U.S.C.A. 7172 note (West Supp. 1993).
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    The final rule reflects the Commission's compliance with the 
mandate of Congress in enacting the Act of 1992. In the final rule, the 
Commission recognized that Congress deemed certain rates to be just and 
reasonable, thereby forming a baseline for many future oil pipeline 
rate changes and obviating future debate over the appropriateness of 
existing rates, many of which are based on valuation or trended 
original cost methodologies. The final rule, in accordance with the 
directive of section 1801 of the Act of 1992, provided a ``simplified 
and generally applicable'' approach to changing just and reasonable 
rates through use of an index system to establish ceiling levels for 
such rates. The final rule adopted the annual change in the Producer 
Price Index for Finished Goods, minus one percent (PPI-1), as the 
appropriate index to determine annual ceiling levels of rates to be 
charged by oil pipelines.\4\
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    \4\The Commission stated in the final rule that it would 
undertake an examination of the relationship between the annual 
change in the index and the actual cost changes experienced by the 
oil pipeline industry every five years, beginning in the year 2000.
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    As alternatives to the indexing approach, the final rule permits, 
in certain defined circumstances, other rate-setting or rate-changing 
methodologies. The final rule permits cost-of-service proceedings to 
establish just and reasonable rates, with regard to initial rates for 
new service, and also with regard to changes to existing rates where 
appropriate.\5\ The final rule retained the Commission's policy of 
encouraging settlements of rate issues at any stage in the proceedings. 
Finally, the final rule continued to allow pipelines to seek Commission 
authorization to charge market-based rates.\6\
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    \5\The Commission, concurrently with the issuance of the final 
rule, issued a notice of inquiry to explore ways to improve the 
collection of data on oil pipeline costs, and as a first step in 
establishing filing requirements for cost-of-service rate filings, 
to facilitate these cost-of-service proceedings. See Cost-of-Service 
Filing and Reporting Requirements for Oil Pipelines, Notice of 
Inquiry, IV FERC Stats. & Regs. 35,528 (October 22, 1993); Notice 
of Proposed Rulemaking, Cost of Service Filing and Reporting 
Requirements for Oil Pipelines, Docket No. RM94-2-000, issued 
concurrently with this order.
    \6\The matter of market-based rates is also the subject of a 
notice of inquiry issued concurrently with the final rule. See 
Market-Based Ratemaking for Oil Pipelines, Notice of Inquiry, IV 
FERC Stats. & Regs. 35,527 (October 22, 1993); Notice of Proposed 
Rulemaking, Market-Based Ratemaking for Oil Pipelines, Docket No. 
RM94-1-000, issued concurrently with this order.
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    In addition to establishing the ratemaking methodologies to be 
followed by oil pipelines, the final rule, pursuant to the directives 
of the Act of 1992, adopted certain reforms to the Commission's 
procedures relating to oil pipeline proceedings. The final rule also 
included an updating of Commission regulations pertaining to oil 
pipeline tariffs.
B. Order on Rehearing
    This order on rehearing grants, in certain respects, the 
applications for rehearing that were filed, and clarifies in part the 
final rule.\7\ The changes made in the rule on rehearing are:
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    \7\A list of those parties filing applications for rehearing or 
requests for clarification is attached as Appendix A to this order, 
and the names by which they are referred herein.
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    1. Section 341.4 of the regulations is modified to require the 
filing of suspension supplements within 30 days of the suspension 
order, instead of 15 as required in the final rule.
    2. The ``uncontrollable circumstances'' test of Sec. 342.4 of the 
regulations has been modified to provide that the pipeline may use the 
cost-of-service methodology for changing rates when it can demonstrate 
that its prudently incurred costs have increased to such an extent that 
there is a substantial divergence between such costs and the rate 
produced by application of the index. This change will more closely 
track the standard for shipper protests to an indexed rate as reflected 
in Sec. 343.2.
    3. Section 343.3 of the regulations has been modified to require 
that a protestant must file a verified statement which contains a 
detailed description of the nature and substance of the protestant's 
substantial interest in the pipeline's tariff filing.
    In all other respects, Order No. 561 is affirmed as issued.
    The Commission re-affirms that the index approach to oil pipeline 
ratemaking should be instituted on January 1, 1995. The indexing 
methodology adopted in the final rule is designed to fulfill both the 
simplification directive of the Act of 1992 and the just and reasonable 
standard of the ICA. It will simplify, and thereby expedite, the 
process of changing rates by allowing, as a general rule, such changes 
to be made in accordance with a generally applicable index. It will 
ensure compliance with the just and reasonable standard by subjecting 
the PPI-1 index to periodic monitoring and, if necessary, adjustment, 
and, in addition, by providing both pipelines and their customers with 
an opportunity to show in individual cases that the indexed ceiling 
level does not comport with the just and reasonable requirement of the 
ICA.
    The Act of 1992 directed the Commission to establish a ratemaking 
methodology that is ``simplified and generally applicable,''\8\ and 
comports with the just and reasonable standard of section 1(5) of the 
ICA. At the outset of undertaking compliance with the Act of 1992, the 
Commission was confronted by a significant fact: Congress, in section 
1803 of the Act of 1992, deemed the vast majority of existing rates to 
be just and reasonable, and subject to challenge only under narrowly 
defined circumstances. Thus, with a few exceptions, the oil pipeline 
industry's existing rates have been established as a just and 
reasonable baseline. Moreover, this is a baseline that has resulted not 
from an examination and confirmation of underlying costs, but from a 
statutory edict.
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    \8\Section 1801, Act of 1992.
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    This statutory just and reasonable baseline of existing rates, 
combined with the mandate to simplify and expedite, has focused the 
Commission's task in this proceeding upon formulating a streamlined way 
of regulating rate changes. Thus, the indexed rate-cap methodology set 
forth in the final rule, and re-affirmed in this order, constitutes a 
simplified and generally applicable methodology of changing rates.
    Simplification results from the elimination, with rare exceptions, 
of rate-specific examinations of costs. Under the indexed rate-cap 
approach, rates are allowed to change so long as the resulting rate is 
at or below a ceiling level established by the index. This approach is 
also generally applicable because a rate cap methodology serves to 
constrain rates in the pipeline's markets.
    The indexing methodology adopted in the final rule and affirmed 
here is fundamentally based upon costs. The index selected, PPI-1, is 
that which the evidence in the record indicates most closely 
approximates the actual cost changes experienced by the oil pipeline 
industry. Thus, changes in rate ceilings should reflect changes in 
costs to the pipeline industry. To ensure this nexus is maintained, the 
Commission will periodically examine the relationship between the 
selected index and the actual cost changes experienced by the oil 
pipeline industry. Appropriate adjustments to the index will be made as 
warranted by the results of this periodic review.
    The indexing methodology also provides a mechanism for ensuring in 
individual cases that the actual rates charged are within the zone of 
reasonableness required by the just and reasonable standard of the ICA. 
A protest may be filed against a rate increase that is within the 
applicable ceiling, if the increase is substantially in excess of the 
actual increase in costs experienced by the pipeline. The complaint 
procedure of section 13(1) of the ICA also remains available to 
challenge existing rates that are arguably unjust and unreasonable. 
Conversely, a pipeline may file a rate increase that exceeds the 
applicable ceiling, if it can show that its prudently incurred costs 
are substantially in excess of the cost changes reflected in the index.
    In this fashion, the regulatory scheme adopted by the Commission 
will provide constant monitoring of the relationship of the index to 
the costs of both the pipeline industry as a whole and of individual 
pipelines. To the extent this monitoring indicates a discrepancy 
between the index and changes in pipeline costs such that the indexed 
ceilings do not constrain rates to just and reasonable levels, the 
necessary adjustments to the index, or to its application to a 
particular rate, will be made.
    Although certain petitioners on rehearing have challenged the 
Commissioner's authority to do so, judicial precedents make clear that 
an agency may lawfully enforce a ``just and reasonable'' standard 
through the imposition of rate caps derived from a broad-based 
index.\9\ The indexed rate-cap methodology adopted in this proceeding 
has firm legal grounding in these precedents and is, with one 
exception, no different in substance from the methodologies affirmed in 
these cases.
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    \9\See, e.g., Mobil Exploration & Producing Southeast, Inc., et 
al. v. United Distribution Cos., 498 U.S. 211 (1991); National Rural 
Telecom Association v. FCC, 988 F.2d 174 (D.C. Cir. 1993). See also 
Permian Basin Area Rate Cases, 390 U.S. 747 (1968). In Permian, the 
area rates for producers were established with reference to an 
examination of area costs. Appellants argued on appeal that the 
Commission was required to make a rate-specific cost inquiry. The 
Court held to the contrary.
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    The exception is the index that is to be used. In the Mobil, 
Northern Telecom, and other cases, the index in question was the Gross 
Domestic Product--Implicit Price Deflator (GDP-IPD), which is a measure 
of general inflation in the economy. In this proceeding, the Commission 
has selected the PPI-1 as the index to compute rate caps. This decision 
is based upon the conclusion that the PPI-1, which reflects changes in 
prices of finished goods, will more closely track the cost changes 
experienced by a typical pipeline than will the GDP-IPD. To ensure over 
time that this nexus between the changes in the index and the cost 
changes experienced by the typical pipeline will be maintained, the 
Commission will conduct a review of the PPI-1 index every five years, 
beginning in the year 2000.
    An agency may lawfully rely upon the rate caps established by the 
index to constrain individual rates to just and reasonable levels. 
There is, in other words, generally no need, under the indexed rate-cap 
methodology, to examine the relationship between changes in costs and 
changes in rates on a rate-specific basis. See, e.g., Permian Basin 
Area Rate Cases, supra.
    Nonetheless, since there may be cases presenting exceptional 
circumstances, the methodology includes procedures for both popelines 
and shippers to show the need for overriding the presumptive validity 
of the rate cap. These procedures reinforce the appropriateness of 
using an indexed rate-cap methodology. See Permian Basin Area Rate 
Cases (special relief provision);\10\ National Telecom (waiver 
provisions). It should be emphasized that these procedures will be 
invoked only in truly exceptional cases, in order to achieve the 
simplification objective of the indexed rate-cap methodology.\11\
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    \10\In Permian Basin Area Rate Cases, the Court did not reach 
the question whether providing for exceptions was legally necessary, 
because the Commission's rule contained procedures for exceptions.
    \11\In Permian Basin Area Rate Cases, the Court noted with 
approval the Commission's stated intention to grant exceptions to 
the area rate ceilings only rarely, lest the administrative benefits 
of regulating through area rates be undermined. The Court also found 
no infirmity with the Commission's decision not to set forth in 
advance specific criteria to govern applications for exceptions. 390 
U.S. at 772.
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    It bears emphasizing that the choice of the PPI-1 index for use in 
the methodology adopted in this rule is not a choice for all time. The 
operation of this index will be monitored to ensure that actual rates 
charged customers comply with the just and reasonable standard of the 
ICA.

II. Issues Raised and Commission Response

A. Choice of Index

1. PPI-1 vs. GDP-IPD
    AOPL and its members support the use of a general inflation index, 
but claim that the choice of PPI-1 is not supported by record evidence 
and is based on flawed statistical analysis presented by Dr. Alfred 
Kahn, while voluminous evidence by AOPL (and its members) in favor of 
using the GDP-IPD, adjusted upward by 2.5 percent (GDP+2.5), has been 
ignored.
    Before addressing this criticism directly, it would be useful to 
describe briefly how the Commission came to adopt the PPI-1 index for 
use in this rule.
    The final rule in this proceeding is the result of a notice of 
proposed rulemaking (NOPR) initiated by the Commission on July 23, 
1993,\12\ in response to the mandate of Congress that the Commission 
issued a final order revising oil pipeline ratemaking, contained in the 
Act of 1992. On March 18, 1993, the Commission made available for 
comment a Proposal for Revisions to Oil Pipeline Regulation Pursuant to 
the Energy Policy Act of 1992, prepared by the Commission staff (Staff 
Proposal). Staff proposed, among other things, that the Commission 
adopt as a primary means of regulating oil pipeline rates an indexing 
methodology based on PPI-1. Twenty-four sets of comments were received 
on the Staff Proposal.
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    \12\58 FR 37671 (July 13, 1993).
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    In the NOPR, the Commission proposed to use, as its primary means 
of regulating oil pipeline rates, an indexing system similar to that 
contained in the Staff Proposal. However, rather than the PPI-1, the 
Commission proposed to use the GDP-IPD as the index. Forty-two sets of 
comments were received from parties representing pipelines, shippers, 
State commissions, consumers, and trade associations.
    Included in the comments on the NOPR were the sworn statement of 
Dr. Alfred Kahn, attached to the comments of Crysen Refining Company, 
et al. Dr. Kahn generally supported the use of PPI-1 as best reflecting 
the cost changes experienced by product pipelines and reported to the 
Commission in the pipelines' annual report to the Commission, Form No. 
6. AOPL and the pipelines generally supported the use of the GDP-IPD as 
the index, adjusted upward by 2.5 percent, arguing that this index 
better reflected pipeline cost changes. Based on these comments, the 
Staff paper, and the NOPR, the Commission formulated the final rule, 
adopting as the index for pipeline rates the change in the PPI-1.
    Numerous applications for rehearing were filed, and on December 9, 
1993, Sinclair Oil Corporation and NCFC filed a response to the 
application for rehearing of AOPL. This response included the sworn 
statement of Dr. Robert Means, supporting the Commission's use of PPI-1 
and the Kahn statement generally. Thereafter, on December 22, 1993, the 
Commission requested further comments on the issue of the appropriate 
index to use for changes to oil pipeline rates.\13\ Six statements and 
comments were received. The supplemental comments of AOPL generally 
criticized the Kahn and Means studies.
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    \13\65 FERC 61,377 (1993).
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    Based on consideration of the foregoing items, the Commission 
reaffirms its decision to use the PPI-1 as the appropriate index for 
oil pipeline rate regulation. The choice of PPI-1 was not exclusively 
dependent on the evidence submitted by Dr. Kahn. The proposal for using 
PPI-1 was first introduced into the record in this proceeding in the 
Staff Proposal, before any testimony was submitted. The Staff Proposal 
argued that PPI-1 would track industry costs better than the Consumer 
Price Index (CPI) and the GDP-IPD because, for example, the latter were 
significantly influenced by ``rapidly escalating health care 
costs,''\14\ the full extent of which would not be borne by employers. 
The Commission ultimately chose PPI-1 in the final rule, but this 
choice did not hinge exclusively on Dr. Kahn's testimony nor solely on 
his statistical presentation of pipeline costs.
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    \14\Staff Proposal, at 21.
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    AOPL does not dispute that some general measure of inflation should 
be used as the index for pipeline rate changes. As AOPL points out, 
``The only practical and economically sensible method for addressing 
the oil pipeline industry's capital costs under indexation is to rely 
upon a general measure of inflation, which by its design captures the 
underlying changes in capital costs reflected in the cost of goods 
sold.''\15\
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    \15\Request of AOPL for Rehearing and Clarification of Final 
Rule, at p. 15.
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    Both the GDP-IPD and the PPI-FG are commonly considered and used as 
measures of general inflation. However, the GDP-IPD has flaws, both as 
a measure of general inflation and as a contractual price escalator, 
despite its common use. The flaws are sufficiently serious for the 
Bureau of Economic Analysis of the Department of Commerce (BEA), the 
organization responsible for constructing and publishing this index, to 
have issued a fact sheet recommending against its use as an escalator:

    The Bureau of Economic Analysis does not recommend specific 
measures for escalation in contractual or other agreements. However, 
we do recommend that the implicit price deflators (for GDP, GNP, and 
other components) not be used as measures of price change.\16\
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    \16\BEA's Fact Sheet on the Implicit Price Deflator, attached to 
the comments of USAir, Inc., to the notice of proposed rulemaking in 
this proceeding, filed August 12, 1993, in Docket No. RM93-11-000.

    The two most important flaws of the GDP-IDP are (1) it is not 
simply a measure of price change, but it also reflects changes in the 
composition of GDP, and (2) it is subject to revision for up to five 
years after its publication.
    The first problem can be illustrated by health care costs. Health 
care expenditures and prices have been rising at a much faster rate 
than other components of GDP and non-health care prices, 
respectively.17 Because the GDP-IPD reflects both the increased 
``weight'' given to health care and the increase in its price, it is an 
upwardly biased measure of health care price inflation. For categories 
whose share of GDP fall as prices rise, GPD is a downwardly-biased 
measure of price change.18
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    \1\7See, e.g., Health Care Financing Review, Winter 1992, Vol. 
14, No. 2, at pp. 1, 18.
    \1\8For a thorough discussion of alternative measures of 
deflating GDP see Young, Alan, ``Alternative Measures of Change in 
Real Output and Prices,'' pp. 32-48, and Triplett, Jack, ``Economic 
Theory and BEA's Alternative Quantity and Price Indexes,'' pp. 49-
52, Survey of Current Business, vol. 72 number 4, April, 1992.
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    BEA ordinarily revises the GDP-IPD each July and covers the months 
and quarters of the most recent calendar year and the preceding two 
years. Thus, the July 1994 revision will cover the years 1991, 1992, 
and 1993. Comprehensive revisions are carried out at five year 
intervals, the most recent of which was released in December 
1991.19
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    \1\9For a more detailed account of BEA's release schedule, see 
``A Look at How BEA Presents the NIPA's'', Survey of Current 
Business,'' pp. 30-32, vol. 73, number 2, February 1993. For the 
latest revision, see ``Annual Revision of the U.S. National Income 
and Product Accounts'', Survey of Current Business, pp. 9-51, vol. 
73, number 8, August 1993.
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    In contrast to the GDP-IPD, the PPI-FG is a fixed-weight index of 
the prices of finished goods taken at the producer level. It does not 
directly include the prices of services, such as those provided by 
medical doctors and hospitals, by teachers, lawyers, and others. It 
does reflect indirectly the increased cost of medical care, education, 
and legal service, since product costs will rise if the wage-benefit 
package that producers must pay reflects the higher prices of medical, 
educational, and legal services. Unless offset by productivity gains, 
producer prices will rise to reflect these higher costs. The PPI will 
reflect the higher costs of services to the extent that they represent 
higher costs to producers, but not to the extent that employees rather 
than employers absorb these higher service costs. For example, the 
benefits portion of the employment cost index rose by over 84% between 
1980 and 1990, but the wages and salaries portion grew only by 58%. The 
medical care component of the Consumer Price Index rose by 118% during 
this period. Yet the total compensation index rose by only 65%.20 
Since employers pay the total compensation bill, it is only the latter 
that reflects the actual inflationary increase in their total wage 
bill. The GDP-IPD reflects both the increase in producer prices that 
reflect increases in total worker compensation and the effect of the 
increase in medical care prices as seen by consumers, as well as any 
increase in the price of housing and education.
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    \2\0Economic Report of the President, January 1993, Table B-43, 
397.
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    The cost increases experienced by oil pipelines, which essentially 
do business at the wholesale level, has more closely resembled the cost 
increase experience of goods producers in the past than that of the 
economy as a whole, and it will likely continue to do so in the future. 
Therefore, on a broad conceptual basis, the PPI-FG is a more 
appropriate choice than GDP for an oil pipeline industry-wide index.
2. Kahn's Analysis
    Both Kahn and AOPL provide statistical analyses of pipeline costs 
as reported in Form No. 6, to discern whether PPI-1 or GDP+2.5 more 
closely tracks these reported changes in oil pipeline costs. These Form 
No. 6 data are imperfect and, as AOPL points out, do not necessarily 
reflect true valuation and/or bookkeeping costs. Moreover, Form No. 6 
does not contain the information necessary to compute a trended 
original cost (TOC) rate base or a starting rate base as allowed for in 
Order No. 154-B. Thus, all agree that the measure of the capital cost 
component of the cost of service is highly unsatisfactory.
    Kahn and APOL draw conflicting conclusions from their analyses. 
Kahn concludes that PPI-1 better tracks costs for product pipelines, 
and is inconclusive about crude oil pipelines. AOPL alleges a number of 
statistical flaws in Kahn's analysis, arguing these constitute 
sufficient basis to discredit support for PPI-1 as an index.
    Kahn constructed a sample of pipelines from Form No. 6 data. He 
dropped from his sample those reported pipeline costs in any given year 
which were in the upper and the lower 25% of the cost spectrum, 
primarily to correct for statistical outliers and for incomplete or 
questionable data; and he divided the pipeline universe into strictly 
crude carriers and strictly product carriers, eliminating from his 
sample all pipeline companies which carry both.
    AOPL charges the remaining sample is too small to be statistically 
relevant or informative. It particularly objects to the use of only the 
middle 50% of reported pipeline costs for computing industry-wide 
weighted average costs. It notes the potential downward skewing of 
average industry costs by excluding the top 25% of reported pipeline 
costs, but neglects to address the potential upward skewing that might 
result from eliminating the lower 25%.
    AOPL obtained from some of the reporting pipelines, corrections to 
the data originally found by Kahn to be incomplete or questionable. 
Using these corrected data as supplied by AOPL, Dr. Robert Means21 
subsequently expanded Kahn's analysis to all crude and all product 
pipelines in the middle 50% of the cost range as reported in any given 
year. For reasons explained below, his results would also support the 
choice of PPI-1 as an appropriate index to track the central tendency 
of reported changes in oil pipeline costs.
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    \2\1Dr. Means' statement is attached to the filing of Sinclair 
Oil Corporation and the National Council of Farmer Cooperatives in 
response to the application for rehearing of AOPL, on December 9, 
1993.
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    As Dr. Means points out in his testimony, the use of only the 
median 50% of pipeline costs does not in any way negate the value of 
Kahn's sample as an indicator of the way in which the PPI-1 index 
tracks normal pipeline costs:

    To be applied without exceptions, a price cap index must be 
applied to an industry in which the firm's cost changes fall--or, 
with efficient operation, can be made to fall--within a moderate 
range. Even with corrections, however, the annual rate of increase 
in unit operating expenses and net investment for product pipelines 
still range from 19.89 to -12.89 percent; for crude oil pipelines, 
the range was from 37.75 to -15.32 percent. . . .
    No index can match pipelines' actual cost experience over such a 
range. However, the remedy for this problem cannot be a different 
index. A higher index would alleviate the problem of cost 
underrecovery at the upper end of the range. However, any realistic 
index would fall short of the requirements of the firms with the 
highest rates of cost increase, and it would at the same time 
aggravate the problem of cost overrecovery at the lower end. 
Precisely the reverse would occur if a lower index was selected.
    The composite measure based on the middle 50 percent that was 
used by Dr. Kahn therefore is a reasonable method for assessing an 
index even in the absence of any question of erroneous data.\22\
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    \22\Means at 18-19.

    The median is, in fact, often preferred statistically as a measure 
of central tendency in cases where the distribution is highly 
skewed.\23\ An average may be substantially influenced by one or two 
extreme outliers, whereas the median, or the middle 50% will not.
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    \23\George Snedecor and William Cochran, Statistical Methods, 
Sixth Edition, Iowa State U. Press, 1978, at 123.
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    There is some dispute among commentors on how to weight average 
costs. Some use barrel/miles; others advocate using barrels. The choice 
of weight will significantly affect the average.\24\ Use of the median 
obviates the need to decide on appropriate weights, since the median is 
determined only by its position relative to the other components of the 
series.
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    \24\See, e.g., Answer of Buckeye Pipeline to Brief of US Air, 
Inc., dated January 24, 1994, at p. 5, fn 3.
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    As noted by Means, use of a median range of pipeline costs is also 
more appropriate than the use of an index that includes all changes in 
pipeline costs, no matter how extraordinary. AOPL, in its request for 
rehearing, provides considerable evidence that the index of PPI-1 will 
not cover all changes in pipeline costs. It asserts that PPI-1 would 
not permit pipelines with far-above-average costs to recover those 
costs within the index. It also shows that the GDP implicit price 
deflator index would be insufficient to cover all pipeline costs, and 
that GDP+2.5 percent would better cover the range of extraordinary 
costs incurred by individual pipelines in any given year.
    The role of an index is to accommodate normal cost changes. Its 
purpose is not to guarantee recovery of all costs at any time and in 
full, regardless of other circumstances. Even competitive markets do 
not do this.
    AOPL argues that the more generous index would better track, and 
hence permit more complete recovery of, all reported pipeline costs. If 
the Commission chose such an index, sufficiently high and generous to 
encompass even the most extraordinary costs, it would provide windfalls 
to many oil pipelines by allowing rate changes substantially above cost 
changes. This would effectively abdicate our responsibilities for rate 
regulation under the ICA.
    The choice of PPI-1 is intended to permit pipelines to recover 
normal costs through normal operation of the index.\25\ Extraordinary 
costs can be recovered through either of the alternate rate change 
means--cost of service or settlement rates--as provided in the final 
rule. In both cases, the pipeline will have an opportunity to recover 
its costs.
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    \25\Kahn states in this original testimony, at page 9, footnote 
2, that this is the fundamental purpose of an index:
    The mere fact that changes in a particular price or cost index, 
intended to be applied to all companies across-the-board, diverges 
substantially from changes in the costs of individual companies is 
not necessarily an infirmity: the same is true in competitive 
markets, just as the competitive market price at any given time will 
typically allow some companies to make very high profits and others 
to suffer losses.
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    In the Commission's judgment, PPI-1 adequately tracks normal 
industry average costs. It does not track extraordinary costs. If it 
did, it would permit at least some pipelines to capture monopoly rents, 
and foster the inefficiencies inherent in the exercise of monopoly 
power. PPI-1 may not be the only index that could have been chosen, but 
it is adequate and reasonable for purposes of regulating oil pipeline 
rates.
    There are also strong equity and administrative reasons for 
choosing PPI-1 over GDP as an index. The PPI is issued as a final 
figure once a year and is not subject to further adjustments. Its use 
thus provides a measure of certainty that does not exist with the GDP-
IPD. The GDP-IPD is subject to revisions even five years after so-
called final figures are first issued. Adjustments in the GDP-IPD 
several years after rates have been adjusted would mean that rates 
would be based on unreliable data, thereby undermining the confidence 
of the industry, the financial community, and pipeline customers in the 
rates charged.
    AOPL takes issue with two lesser points regarding Kahn's analysis. 
AOPL alleges that Kahn erred in omitting gathering and delivery costs 
(10% of total industry costs) from his analysis. However, the 
Commission is concerned with tracking changes in pipeline costs, not in 
absolute levels of pipeline costs, of which gathering and delivery 
costs comprise a minor part. Omission of these costs therefore provides 
some consistency to the costs analyzed without jeopardizing the 
validity of the analysis.
    AOPL also takes issue with Kahn's use of changes in net plant 
investment (i.e., rate of change in depreciated original cost) as a 
proxy for oil pipeline capital cost experience. AOPL notes in this 
regard that reported historical book investment has nothing to do with 
current costs of capital; reported net investment does not reflect the 
practice of using parent company equity for investment; and oil 
pipelines use trended original cost for determining rate base, which 
cannot be calculated from reported data. In brief, AOPL argues that no 
generally available or applicable method exists for discerning and 
calculating a given pipeline's capital cost changes from reported data, 
for which reason an index of general inflation is required to permit 
these costs to be tracked. On these grounds AOPL rejects as inaccurate 
Means' calculation of the industry's rate of return.
    Means acknowledges in his testimony that it is not possible to 
determine a trended original cost rate base from publicly available 
data. He explains, however, that the relevant question

* * * does not concern the level of pipelines' aggregate rate base, 
but rather the rate at which that level is changing. Over the life 
of an asset, the average annual rate of change will be the same 
under original cost and trended-original cost methodologies. This 
follows from the fact that the starting point (original cost) and 
the end point (zero) is the same under both.\26\
---------------------------------------------------------------------------

    \26\Means, p. 15.

    The only capital cost data available for public analysis is in Form 
No. 6. Use of such a proxy may be imperfect, but AOPL offers no better 
solution. They prescribe use of a general price deflator to reflect 
capital costs, which the Commission has accommodated by choosing PPI-1. 
AOPL would simply have the Commission choose a different deflator, 
namely GDP or even GDP+2.5. As to Means' rate of return calculations, 
they are irrelevant to the choice of index.
    AOPL's original analysis, in contrast to that of Kahn and Means, 
focussed only on operating expenses, which are more likely to be 
affected by inflation.\27\ Capital costs, which AOPL did not 
specifically address, will reflect depreciation and other adjustments 
that tend to reduce over-all pipeline costs.
---------------------------------------------------------------------------

    \27\As noted in the final rule, some commentors in fact 
suggested that only such operating expenses be indexed, which we 
rejected for reasons explained there.
---------------------------------------------------------------------------

3. Construction of Commission Index
    USAir, Alberta, and Chevron have urged the Commission to devise its 
own index of pipeline costs, using data from Form 6.
    Under the best of circumstances, construction, verification, and 
testing of such an index within the near future would be extremely 
difficult. The data available to the Commission, from Form No. 6, are 
currently insufficient for constructing an oil pipeline industry index. 
This is particularly true for capital costs, as discussed in more 
detail above. Oil pipelines do not file data in their Form No. 6 which 
permit calculation of their capital costs on a trended original cost 
basis; as noted earlier, this has in part dictated the need for using a 
general price inflation index. While the Commission is proposing to 
revise Form No. 6 in the NOPR issued concurrently, it is unlikely that 
the data will be sufficient to construct an oil pipeline industry 
index.\28\
---------------------------------------------------------------------------

    \28\See Notice of Proposed Rulemaking, Cost of Service Filing 
and Reporting Requirements for Oil Pipelines, Docket No. RM94-2-000, 
issued concurrently with this order.
---------------------------------------------------------------------------

    Moreover, a FERC-constructed index would entail serious 
complications. First, to construct such an index would require the 
collection of data over some extended period of time in order to have a 
statistically meaningful set of data points.
    Second, if the cost data submitted by individual pipelines were to 
be used to charge all shippers maximum rates, it may be argued that 
each submission would and should be subject to challenge by any shipper 
on any pipeline. While such oversight is not necessarily undesirable 
per se, it might result in an indexing method that falls short of the 
Act of 1992 goals of simplicity and streamlining.
    Third, the extensive vertical integration of the oil industry 
raises questions concerning meaningfulness of the cost data 
supplied.\29\ Although such companies may operate their pipeline 
divisions as independent profit centers, vertical integration does 
permit integrated companies considerable leeway in allocating common 
costs among their various divisions.
---------------------------------------------------------------------------

    \29\Although the Commission collects no data on, and does not 
have up-to-date information about, the degree to which pipeline 
companies are shipping their own oil from one company division to 
another, historically the industry has been highly vertically 
integrated. According to a Treasury Department staff study, 
``Implications of Divestiture'' (June 1976), the top 20 interstate 
oil pipeline firms (all major producers and refiners), owned 86.6% 
of the interstate trunkline capacity in 1972. A Department of Energy 
study, ``United States Petroleum Pipelines'' (December 1980), 
reports that in 1980 integrated pipelines owned by the major oil 
companies accounted for three out of the top four and 17 of the top 
20 pipelines, 66% of total barrel-miles carried, 57% of total 
barrels delivered per day, and 67% of the undivided interest 
systems.
---------------------------------------------------------------------------

    At one extreme, a pipeline could be allocated none of a company's 
joint or common costs, giving it low rates, and perhaps noticeably 
lowering the average of reported industry costs. At the other extreme, 
a company could allocate to its pipeline a share of the company's 
world-wide common costs, resulting in higher rates and raising the 
industry cost average significantly. In this latter case, if the 
integrated pipeline company transports primarily company crude, it 
would suffer little loss in volumes transported despite its higher 
rates, and could remain indifferent to the actual level of the rate 
being charged. Revenues not recovered by the pipeline could be 
recovered at the producing, refining, or marketing end of the company's 
operations. The Commission is not suggesting that such cost-shifting 
would occur, nor that it would necessarily be improper. But the 
possibility of it occurring undetected in reported data does exist. The 
net result in either case is that the data available to the Commission 
for constructing a proper index would be skewed. In any event, the need 
to improve data collection with regard to oil pipelines is specifically 
the subject of the separate rulemaking proceeding at Docket No. RM94-2-
000.
4. Conclusion
    Based upon the record evidence of this proceeding, publicly 
available data filed with the Commission by pipelines, and the nature 
and characteristics of the PPI and GDP indexes, the Commission 
reaffirms its decision to use the annual change in the PPI-1 index to 
establish rate ceilings under the indexing system. This decision, as 
stated in the final rule, will be reviewed every five years, beginning 
with the year 2000.

B. Filing Requirements for the Indexing System

1. Pipeline Filing Requirements
    The final rule imposes certain new affirmative filing requirements 
on pipelines. These new requirements may be broken down into two 
categories. The first category contains those substantive requirements 
governing a pipeline's use of the ratemaking methodology established in 
the final rule. A pipeline is generally required to use the indexing 
system to change rates. In filing for a rate change under the indexing 
system, a pipeline must file a proposed rate that is no higher than the 
ceiling derived from application of the index. If a pipeline wishes to 
file for a higher rate, it must use a cost-of-service or negotiated-
rate methodology and it must justify that use based upon certain 
factors that are enumerated in the regulations. These requirements are 
contained in Secs. 342.3 and 342.4 of the regulations.
    The second new affirmative pipeline filing requirement, contained 
in Sec. 342.3(e) of the regulations, concerns rate decreases under the 
indexing system. In any year in which the index is negative, and has 
the effect of lowering the applicable rate ceiling, a pipeline with a 
rate above the new ceiling must file a new tariff to bring that rate 
into compliance with the new ceiling, subject to the provisions of the 
Act of 1992. This filing must be effective no later than July 1 of the 
applicable index year.
    AOPL, ARCO, Exxon, MPL, and Phillips challenge the Commission's 
statutory authority to promulgate these requirements on filing rates. 
Their argument is that the ICA grants to a pipeline sole discretion as 
to the substantive content of a rate change proposal. Thus, they argue, 
the Commission is without authority to require a pipeline to abide by 
the requirements established in the final rule for filing for changes 
of rates under an indexing system. According to the petitioners, a 
pipeline has sole control over the substantive contents of a rate 
filing and, when one is made, the Commission's action in response is 
limited by section 15(7) of the ICA to acceptance of the filing, or 
acceptance combined with a suspension of the effective date (of no more 
than seven months), imposition of a refund obligation, and the 
convening of a hearing.
    Petitioners' argument that these regulations are unlawful because 
the Commission has no authority to prescribe substantive requirements 
for rate filings is clearly mistaken. In the first instance, these 
requirements are grounded in specific authorities contained in the ICA. 
The end result of this rulemaking proceeding as it relates to the ICA 
is the same as if the Commission has proceeded in a case specific 
adjudication. That is, the Commission has identified rate levels that 
comply with the just and reasonable standard of section 1(5), and it 
has required that no rates above those levels can be charged to 
customers, unless the pipeline can show there are unusual circumstances 
justifying higher rates. Thus, contrary to the view that underlies 
petitioners' objections, requiring a pipeline to abide by these 
determinations, reflected in the final rule, is no different than 
requiring a pipeline to abide by the requirements of an order issued 
after an adjudication on its existing or proposed rates.
    In regard to the rate decrease filing requirement contained in 
Sec. 342.3(e), AOPL argues that this provision is inconsistent with the 
ICA's scheme on burden of proof. AOPL notes that the ICA places upon 
the Commission, or the complainant, the burden of proving that an 
existing rate is unjust and unreasonable. Contrary to this provision, 
argues AOPL, the final rule's requirement that a pipeline file for a 
rate decrease effectively shifts the burden of proof in respect to the 
lawfulness of an existing rate to the pipeline.
    According to these petitioners, the Commission has acknowledged 
this principle in a prior decision. In Kuparuk Transportation Co., 55 
FERC 61,122 (1991), the Commission declined to order the pipeline to 
make automatic annual filings to change rates based upon a formula-
prescribed ceiling. AOPL argues that the Commission's decision in 
Kuparuk was premised upon the necessity of respecting the ICA's burden-
of-proof scheme, in which a pipeline bears the burden of proof on 
proposed rates, but the challenger bears the burden of proof of showing 
that existing rates are unlawful.
    These arguments of the petitioners are not persuasive.
    In complying with the directive of the Act of 1992 to craft a 
simplified and generally applicable ratemaking methodology for oil 
pipelines, the Commission has exercised its substantive authorities 
under the ICA, which are intended to ensure that the rates charged by 
oil pipelines for transportation services are in accordance with the 
standard contained in section 1(5) of that statute:

    All charges made for any service rendered or to be rendered in 
the transportation of * * * property * * * shall be just and 
reasonable, and every unjust and unreasonable charge for such 
service or any part thereof is prohibited and declared unlawful.

    Sections 13(1) and 15(1) grant to the Commission authority to 
enforce the just and reasonable standard with respect to existing 
rates. If after an investigation instigated by virtue of a complaint 
brought by any person under section 13(1), or upon the Commission's own 
initiative, the Commission finds that an existing rate is not just and 
reasonable, section 15(1) empowers the Commission ``to determine and 
prescribe what will be the just and reasonable * * * rate * * * or the 
maximum or minimum * * * to be charged * * *,'' and to order that the 
pipeline ``shall not thereafter publish, demand, or collect any rate * 
* * in excess of the maximum * * * so prescribed * * *.''
    Section 15(7) provides the Commission with similar authority if the 
pipeline proposes changes to its rates. Thus, under that section the 
Commission is empowered to investigate proposed rate changes and, if it 
determines that the proposed change would not establish a lawful rate, 
issue an order ``as would be proper'' in the context of remedying an 
unlawful existing rate under section 15(1).
    The requirements of the final rule reflect, and are consistent 
with, the Commission's authority under these ICA provisions to 
investigate and establish just and reasonable rate levels. As explained 
in detail in the previous section of this order and in the order 
issuing the final rule, the Commission has conducted an on-the-record 
investigation in this proceeding and has determined that use of a 
generic, cost-based formula (PPI-1 index) for changing existing rates, 
the vast majority of which have been deemed just and reasonable by act 
of Congress, will streamline and expedite the ratemaking process in 
accordance with the mandate of the Act of 1992, while at the same time 
ensuring that the resulting rates are just and reasonable within the 
meaning of section 1(5) of the ICA.
    The specific means by which this indexing system will ensure just 
and reasonable rates is by establishing, in the language of the ICA, 
rate maximums.\30\ Section 342.3(a) of the regulations requires rate 
changes to produce rates that are no higher than the applicable 
ceilings. This regulatory requirement reflects the Commission's 
authority under section 15(7) of the ICA to require that proposed 
changes yield just and reasonable rates. Section 342.3(e) of the 
regulations provides that pipelines must reduce existing rates to 
comply with new ceilings which have been lowered because of the decline 
in the index. This regulation reflects the Commission's rebuttable 
finding that a rate above the ceiling is unjust and unreasonable, and 
under section 15(1) of the ICA, the Commission has the authority to 
require existing rates that are determined to be unjust and 
unreasonable to be adjusted to lawful levels.
---------------------------------------------------------------------------

    \30\Section 1(5) of the ICA.
---------------------------------------------------------------------------

    However, the regulations also provide procedures for both pipelines 
and their customers to show that the applicable ceilings would not 
ensure just and reasonable rates. As explained in detail in the final 
rule, and elsewhere in this order, Sec. 342.4 provides that the 
pipeline may rebut the presumption in the regulation that the above-
ceiling rate is unjust and unreasonable and that rates above the 
ceiling are justified. The pipeline has the burden of proof to show 
that the applicable ceilings are too low to allow recoupment of 
prudently incurred costs, in respect to both proposed and existing 
rates, except for those rates deemed just and reasonable under section 
1803 of the Act of 1992. Section 343.2(c)(1) provides similar 
protection for customers, by providing for challenges to proposed and 
existing rates that are within applicable indexed ceilings, but are 
nonetheless so substantially in excess of actual costs as to be unjust 
and unreasonable.
    Contrary to petitioners' position, nothing in these regulations is 
inconsistent with section 15(1) of the ICA, which places the burden of 
proving the unlawfulness of an existing rate on the complainant or the 
Commission.
    The rate decrease requirement of Sec. 342.3(e) is based upon the 
Commission's finding, in this proceeding, that a rate level in excess 
of the ceiling established by the PPI-1 index is presumptively unjust 
and unreasonable.\31\ The section simply applies this finding to an 
existing rate that is in excess of a new, lower ceiling, subject to an 
opportunity for the pipeline to rebut the presumption to show that its 
prudently incurred costs justify the above-ceiling rate. Thus, the 
statutory burden of proof has been fulfilled in this proceeding and is 
reflected in the regulations.
---------------------------------------------------------------------------

    \31\The pipeline would not be required to lower rates below 
those deemed just and reasonable by the Act of 1992, since the 
Commission is not here making any of the findings required by 
Sec. 1803(b) to allow it to prescribe rates below that level.
---------------------------------------------------------------------------

    Kuparuk does not compel a different conclusion, for it involved a 
distinctly different kind of filing requirement than the rate decrease 
requirement of the indexing regulations. In Kuparuk, it was proposed 
that a pipeline should be required to make a rate change filing every 
year, under section 15(7) of the ICA, which would then be subject to 
review by the Commission. In this review, the burden of proof, as in 
every case under section 15(7), would be upon the pipeline. This 
procedure would have upset the statutory scheme for burden of proof 
because the existing rate to be superseded by the required annual 
filing, unlike the existing rates subject to Sec. 342.3(e), would not 
necessarily have been determined to be unjust and unreasonable. In 
contrast, in this rulemaking, the Commission is exercising its 
authority under section 15(1) of the ICA to require the pipeline to 
file a rate decrease.
    ARCO specifically maintains that the Commission has no authority 
summarily to reject a rate filing without a hearing, except for 
technical formatting reasons. The ICA, ARCO argues, gives a pipeline a 
statutory right to a hearing to justify its rate proposal. This 
contention is also without merit. The hearing requirement contained in 
section 15(1) for existing rates and section 15(7) for proposed rates, 
has been satisfied by the notice and comment procedures of this 
rulemaking. All interested persons, including affected pipelines, have 
had an opportunity to be heard. If a pipeline desires to rebut the 
presumption that a rate above the ceiling is unjust and unreasonable, 
it will receive an individual hearing on that matter. However, a 
pipeline that makes a filing which fails to comply with those 
standards, without a showing as to why those standards should not 
apply, has no right to a hearing. There simply would be no disputed 
facts or issues to warrant a hearing.\32\
---------------------------------------------------------------------------

    \32\See, e.g., United States v. Storer Broadcasting, 351 U.S. 
192 (1956); See also Davis & Pierce, Administrative Law Treatise, 
Sec. 8.3, at 389 (1994):
    Even when an agency is required by statute or by the 
Constitution to provide an oral evidentiary hearing, it need do so 
only if there exists a dispute concerning a material fact.
---------------------------------------------------------------------------

    In short, the rate methodology provisions of the final rule, 
including the filing and other substantive requirements in the indexing 
system, reflect the Commission's exercise of its ICA authority through 
promulgation of rules of general applicability, as opposed to issuance 
of orders through case-by-case adjudication. An agency's discretion to 
exercise its statutory authority in this fashion through a rulemaking, 
rather than case-by-case, is well established.\33\
---------------------------------------------------------------------------

    \33\See, e.g., Heckler v. Campbell, 461 U.S. 458 (1983); United 
States v. Storer Broadcasting, note 32, supra.
---------------------------------------------------------------------------

    The simplification mandate of the Act of 1992 lends further support 
to the reasonableness of the Commission's decision to proceed through a 
rulemaking. Section 1801 of the Act of 1992 directs the Commission to 
implement a ``simplified and generally applicable'' ratemaking 
methodology. It is the Commission's judgment, based upon its experience 
under the ICA and similar statutes, and the evidence compiled in the 
record of this rulemaking, that an indexing methodology will fulfill 
this simplification and general applicability directive, while at the 
same time ensuring that the resultant rates are just and reasonable 
under the ICA. By its very nature, an indexing methodology is a generic 
approach to establishing rates. The requirements of the indexing 
methodology crafted in this final rule therefore are to be applied 
generically, through rules, subject, as explained above, to 
opportunities for pipelines and their customers to show in any 
particular case that the indexed-based ceiling should not apply.
    The claims on rehearing against the validity of the filing 
requirements contained in Part 342 of the new regulations are therefore 
denied.
2. Challenges to Rates
    Under Sec. 343.2(c)(1) of the new regulations, a protest against a 
proposed rate increase under the indexing system must show that the 
``increase is so substantially in excess of the actual cost increases 
incurred'' by the pipeline that the proposed rate would be unjust and 
unreasonable.
    Amoco argues that this standard is too vague. It contends that a 
more appropriate standard would be a change in circumstances since the 
rate was last changed. Sun, Lakehead, and Buckeye make the same 
argument on rehearing, arguing for a standard for bringing protests 
that relates to changed circumstances.
    Several other pipelines on rehearing challenge the notion of 
allowing any protests against a rate increase proposed that is within 
the applicable ceiling. Thus, Explorer, AOPL, MPL, and Shell argue that 
allowing challenges to rate increases within the ceiling would defeat 
the simplification and efficiency goals of the indexing methodology. 
They contend that the simplification goal would be defeated by the fact 
that protests, and thus contested rate proceedings, would proliferate. 
They further contend that the efficiency goal would be defeated because 
a pipeline would have no incentive to cut costs if to do so would 
merely create a divergence between those costs and the allowable rate 
ceiling that could form the basis for a protest.
    The position that the protest mechanism should not be available in 
cases where proposed rate increases comply with the applicable rate 
ceiling must be rejected. As explained in the final rule, under an 
indexing system some divergence between the actual costs of a pipeline 
and its rates is inevitable. An indexing system relies upon industry-
wide average costs, not company-specific costs, to establish rates. 
Moreover, the Commission is requiring that there be a substantial 
divergence between actual costs and rates to allow for efficiency gains 
that may occur.
    The indexing system has been adopted because it complies with 
Congress' mandate in the Act of 1992 for a simplified and generally 
applicable ratemaking methodology, in conformity with the just and 
reasonable standard of the ICA. A measure of the justness and 
reasonableness of rates is the cost of providing the service. Thus, the 
divergence between a pipeline's actual cost increases, and its rate 
increases, while to an extent inevitable under the indexing 
methodology, should not be allowed to grow so wide as to negate the 
cost basis of the rate increases. The provision in question allows a 
protest to be brought against a rate increase that strays too far from 
the actual cost increases of the pipeline in recognition of the just 
and reasonable standard that is still applicable under the ICA.
    This provision should not, contrary to the contention of AOPL, MPL, 
Shell, and Explorer, undermine the simplification and efficiency 
benefits associated with an indexing system of changing rates. 
Prohibiting the hearing of protests that do not state reasonable 
grounds for alleging that the proposed rate increase is substantially 
in excess of cost increases will reduce the number of protests that 
might otherwise be filed in the absence of such a standard. It is true 
that prohibiting all protests against proposed rate increases in 
compliance with the applicable ceiling would further simplify the 
Commission's review of rates. However, as explained above, such a 
prohibition would be inconsistent with the just and reasonable standard 
of the ICA.
    The necessity to comply with the just and reasonable standard is 
also part of the reason for rejecting the argument that a cost-based 
protest against a proposed rate increase must be rejected in order to 
ensure the efficiency benefits of indexing. Another reason for 
rejecting this argument is that the regulation in question does shield 
a pipeline from cost-based protests where rates are not substantially 
in excess of costs, thus allowing a pipeline to capture some efficiency 
gains.
    Amoco, Sun, Lakehead, and Buckeye claim that the standard of ``so 
substantially in excess'' so as to render the proposed rate ``unjust 
and unreasonable'' is vague. This contention, while not entirely 
inaccurate as a matter of linguistics, is not persuasive as an argument 
on rehearing. The extent of the divergence between actual cost 
increases to a pipeline and its proposed rate increase that would 
justify a finding that the proposed rate is unjust and unreasonable is 
not susceptible to mathematically precise definition.
    This determination is reinforced by these parties' proposal for an 
alternative standard--changed circumstances. Such a standard is not 
directly tied to cost changes that may be experienced by a pipeline. 
Thus, were this standard to be used, there would be the potential for 
wide divergences between a pipeline's costs and its rates that would 
nonetheless not be subject to challenge. Such a regulatory regime 
clearly would not serve as an effective check on rate increases, and 
would therefore be contrary to the Commission's continuing 
responsibility to ensure that oil pipeline rates are just and 
reasonable.
    Reflecting a different perspective from that articulated by the 
pipeline petitioners, some shippers have requested rehearing on the 
basis that the threshold standard for filing a protest under the 
indexing system is too stringent.
    Kerr-McGee contends that any rate increase that exceeds the actual 
cost increase experienced by a pipeline is unjust and unreasonable. It 
argues that protests premised on any divergence from actual costs in 
the proposed rate should be allowed.
    As the cases demonstrate, the requirement that rates under the ICA 
be just and reasonable does not mean that such rates must perfectly 
reflect costs, or that non-cost factors may not be taken into account. 
In Farmers Union Central Exchange, Inc. v. FERC, 734 F. 2d 1486 (D. C. 
Cir.), cert. denied, 469 U.S. 1034 (1984), the court stated that rates 
must be within a zone of reasonableness, and that factors other than 
costs may be taken into account. Further, Kerr-McGee's argument would, 
if accepted, negate the legality of any indexing system to implement 
the just and reasonable standard of the ICA. For the reasons explained 
at length in the final rule,\34\ the Commission rejects this argument.
---------------------------------------------------------------------------

    \34\See III FERC Stats. & Regs 30,895 (1993), at pp. 30,948-51.
---------------------------------------------------------------------------

    Holly and Total state that the Commission may not limit protests to 
challenging the increment of the rate increase. According to their 
view, the Commission's statutory duty is to examine the whole rate when 
a rate change is proposed. Holly argues that this is required by the 
principle that the lawfulness of a ratemaking process is dependent upon 
the end result. Chevron also takes the position on rehearing that the 
Commission may not lawfully limit protests to challenging the increase 
in the rate, as opposed to the whole rate.
    This limitation is necessary in order to preserve the vitality of 
the protection for certain existing rates provided in subsection 
1803(a) of the Act of 1992. That section deems rates in existence and 
unchallenged for the one-year period prior to enactment of the Act of 
1992 to be just and reasonable and not subject to a complaint under 
section 13 of the ICA, unless evidence is presented to the Commission 
which establishes that a substantial change has occurred after the date 
of enactment of the Act of 1992 in the economic circumstances of the 
oil pipeline which were the basis of the rate; or in the nature of the 
services provided which were the basis for the rate; or unless the 
person filing the complaint was under a contractual prohibition against 
filing a complaint.\35\
---------------------------------------------------------------------------

    \35\Subsection 1803(b) of the Act of 1992.
---------------------------------------------------------------------------

    This ``grandfathering'' provision of the Act of 1992 protects from 
most complaints the vast majority of rates in existence on the date of 
enactment. To allow a protestant of a proposed increase of a 
statutorily protected underlying rate to challenge the whole rate, and 
not just the proposed increase, would be to remove the protection of 
section 1803(a) solely on account of the filing of a proposal to effect 
a modification of that rate. There is no indication that Congress 
intended the protection of section 1803(a), for those rates that 
qualify, to be overridden by regulatory actions, or to be of limited 
duration. The statute clearly states two conditions under which the 
safe harbor afforded rates under section 1803(a) does not apply. Merely 
filing a protest against a proposed change to a grandfathered rate is 
not one of them.
    In addition, limiting a protestant to challenging the increment of 
the rate increase is consistent with the ICA. Under section 15(7), a 
pipeline proposing a rate change bears the burden of providing the 
change will result in a rate that is just and reasonable. On the other 
hand, in an investigation of an existing rate pursuant to sections 
13(1) and 15(1), the burden of proving the rate is unjust and 
unreasonable lies with the complainant (or the Commission, in 
investigations begun sua sponte). To allow a protestant in a section 
15(7) proceeding, where the burden of proof lies with the pipeline, to 
challenge that part of a rate that was pre-existing would therefore be 
contrary to the statutory scheme.
    It is relevant to note, moreover, that under the indexing system 
adopted in the final rule, existing rates to the extent not 
grandfathered under the Act of 1992 remain subject to investigation 
under the complaint process set forth in section 13(1) of the ICA.
3. Other Issues
    Holly and Total argue for an automatic periodic Commission review 
of pipeline rates. Total suggests that this be done every five years, 
with the pipelines being required to file cost and revenue data to be 
used in this process. Total also favors insulating pipelines from 
protests during the five year intervals between the cost-based rate 
reviews.
    The concern reflected in these requests--that under the indexing 
system pipeline rates will increasingly diverge from actual pipeline 
costs--has been addressed by the Commission in its structuring of the 
index system. First, pipeline rates under the indexing system will be 
subject to investigation through both the protest and the complaint 
procedures of the ICA. Second, under the final rule, every five years 
beginning in the year 2000, the Commission will examine the 
relationship between changes in the index (PPI-1) and actual cost 
changes experienced by the oil pipeline industry. The purpose of this 
review will be to ensure that the ceiling rates established under the 
indexing system fairly and reasonably track the actual cost changes to 
the oil pipeline industry, such that rates in compliance with the 
applicable indexed ceiling are just and reasonable within the meaning 
of the ICA.
    The Commission therefore concludes that the requests of Holly and 
Total for a periodic review of pipeline rates should not be adopted.
    Finally, Chevron makes several specific proposals for changing the 
filing requirements of the final rule. Chevron requests that the 
Commission extend the notice period for filing proposed rates to 60 
days, and the period for filing a protest in response to such a filing 
beyond the 15 days contained in the regulation. Further, Chevron 
suggests that a pipeline be required to send notice of its rate 
increase filing by telefax or overnight mail.
    Chevron's requested changes to the regulations will not be adopted. 
The proposal to extend the notice period to 60 days for filing rate 
changes is contrary to the ICA. Section 6(3) of the ICA provides that 
the notice period shall be 30 days, except that a shorter period may be 
provided for by rule or in a particular case. Given this statutory 30-
day notice period, it is not advisable to adopt Chevron's suggestion 
that the period for filing a protest in response to a changed tariff 
filing be greater than 15 days. A longer period would leave an unduly 
short amount of time for the Commission to review the filing and any 
protests and make a determination whether to suspend and initiate an 
investigation of the filing. Finally, Chevron does not make a 
persuasive case for requiring pipelines to telefax or express mail rate 
filings, although pipelines are encouraged to voluntarily do so at the 
request of their shippers.

C. Establishment of Initial Rates

    Section 342.2 of the final rule provides a pipeline with two ways 
of establishing an initial rate for new service. An initial rate may be 
established through a cost-of-service based filing. As an alternative 
to a cost-of-service filing, a pipeline may establish an initial rate 
through an agreement reached with at least one non-affiliated person 
who intends to use the service in question. Under this alternative, 
however, a protest filed against such a settlement rate would require 
the pipeline to justify the rate based upon costs.
1. Market-Based Initial Rates
    Plantation and WPL seek rehearing of the lack of a provision for 
relying upon market forces to justify an initial rate. Plantation 
argues that a pipeline has a statutory right to file an initial rate of 
its choosing and to defend its lawfulness in accordance with the 
suspension and hearing procedures set forth in the ICA. In addition, 
Plantation states that the establishment of a rate for a service not 
previously offered is a particularly appropriate context for use of 
market competition as a justification for the rate because a pipeline 
cannot exercise market power in a market it is not already serving.
    Based upon the comments and reply comments received in this 
proceeding the Commission concluded that an initial rate should be 
established either on a cost-of-service or a settlement basis. The 
Commission was concerned that a pipeline might be able to exercise 
market power to establish an initial rate that was unjust and 
unreasonable. In this regard, it is important to note that an initial 
rate for new service may, depending upon the circumstances, represent 
no more than an additional receipt or delivery point on an existing 
pipeline. Contrary to the impression given by Plantation's argument, a 
new service may not always, or even most of the time, involve 
additional service to a new market. The pipeline offering the new 
service, and seeking approval for an initial rate, may be the only or 
one of the few transporters in an existing market.
    The regulations promulgated in the final rule do expressly provide 
a pipeline with an opportunity to use a market-based methodology to 
change existing rates, subject to proof that competitive pressures 
exist to a sufficient degree to restrain rate changes to just and 
reasonable levels. See Sec. 342.4(b). Thus, the Commission has 
recognized that under some circumstances a market-based rate may be 
lawful. The regulation, however, provides that market-rates may only be 
charged after the Commission has determined that such ratemaking 
methodology is appropriate and lawful. Until such time, a pipeline must 
show some other basis for its rates, such as costs or compliance with 
the indexed ceiling.
    Rehearing on this issue is denied.
2. Protests of Settlement-based Initial Rates
    Plantation and WPL also argue that the settlement option for 
establishing initial rates does not go far enough. They contend that 
the regulations should not prohibit the shipper agreeing to the rate 
from being an affiliate of the pipeline. Further, they maintain that a 
settlement initial rate should be immune from protests. Thus, under 
their view, the only mechanism for a party to challenge the justness 
and reasonableness of a settlement initial rate would be a complaint, 
with the burden proof, in accordance with section 13(1) of the ICA, 
being upon the complainant. Plantation and WPL asserts that allowing a 
protest of a negotiated rate defeats and renders superfluous the 
negotiation.
    Unlike the case of changes of existing rates, the settlement option 
for initial rates only requires the agreement of one non-affiliated 
shipper. The purpose of requiring the one shipper who must agree to the 
initial rate to be unaffiliated with the pipeline is to ensure that the 
agreement is based upon arms-length negotiations. Allowing a protest to 
a settlement rate permits those shippers who were not party to that 
agreement to protect themselves and other shippers from an unjust and 
unreasonable initial rate. The arguments of Plantation and WPL do not 
show that these requirements are unreasonable or unfair. In particular, 
these requirements should not render initial rate settlements, or the 
negotiations preceding them, meaningless. A pipeline will still have an 
incentive, and derive a benefit, from seeking to gain the concurrence 
of its potential shippers to an initial rate for new service. To the 
extent concurrence is obtained, a protest is unlikely. If unanimous 
concurrence of potential shippers is not obtained, the regulation still 
allows the pipeline to file the initial rate based upon the agreement 
of at least one non-affiliated shipper. This one-shipper provision 
simply expands the options for a pipeline. The availability of the 
protest mechanism in such a case provides balance to the provision from 
the standpoint of the interests of shippers.
    Rehearing on this issue is therefore denied.

D. Other Rate Changing Methodologies

1. Uncontrollable Circumstances Test
    Several parties have asked for clarification or rehearing of the 
requirement contained in Sec. 342.4 that there be cost increases 
incurred because of ``uncontrollable circumstances'' before carriers 
may change rates based on a cost-of-service methodology. AAPC suggests 
that the Commission clarify that what constitutes ``uncontrollable 
circumstances'' will be determined in individual cases. ARCO and 
Lakehead ask that the standard be relaxed to reflect only that a change 
in circumstances need occur before the pipeline is allowed to justify 
its rates on a cost-of-service basis. MPL argues that the rule is too 
restrictive and may prevent pipelines from recovering their costs 
associated with catastrophic losses due to accident, equipment failure, 
or third-party damage, any one of which might lead to extraordinary 
costs and liabilities.
    The Commission's intent in the Final Rule was that there be a 
change in economic circumstances that justifies use of the cost-of-
service methodology brought about by events or conditions outside the 
control of the pipeline. These circumstances would include, but not be 
limited to, events such as those alluded to by MPL. It was never the 
Commission's intent to provide an exhaustive list in the Final Rule of 
what might constitute ``uncontrollable circumstances.''\36\
---------------------------------------------------------------------------

    \36\ Some of the items referred to on rehearing were clearly not 
within the contemplation of the Commission, such as the suggestion 
by ARCO that it might be allowed to raise its rates in the future to 
make up for past earnings lost due to competition. (ARCO, pp. 14-16)
---------------------------------------------------------------------------

    SFPP and Phillips contend that the pipeline seeking to invoke a 
cost-of-service methodology should be governed by the same standard as 
those seeking to challenge an indexed rate--i.e., a substantial 
divergence between costs and the indexed rate. SFPP asserts that the 
Commission should allow cost-of-service treatment in the event of a 
divergence in actual costs and indexed rates so substantial that the 
existing rate level under indexing is not just and reasonable, 
regardless of the nature of the circumstances.
    The Commission is persuaded that a modification such as that 
proposed by SFPP and Phillips should be made to the test. There indeed 
may be instances where prudently incurred costs have increased to such 
an extent that the rate produced by the index would not be just and 
reasonable. Such cost changes may be the result of planned expansions 
or of upgrading or replacement of facilities for safety or 
environmental considerations. Accordingly, where the pipeline can show 
that the costs are prudently incurred and that there is a substantial 
divergence in its costs and the rate that would be produced by 
application of the index, the pipeline will be allowed to charge rates 
based on a cost-of-service methodology. Section 342.4 will be modified 
to reflect this change.
2. Fully Allocated Costs
    Amoco, AOPL, and WPL object to the Commission's characterization of 
its current methodology as contemplating use of fully allocated costs 
to determine proper rates for any movement. In the final rule at 
footnote 83, the Commission stated, in response to comments addressing 
the issue of whether the cost-of-service methodology should be applied 
on a ``stand-alone'' or fully allocated basis, ``The Commission is 
proposing no change in its current practice of using fully allocated 
rates.'' The Commission cited Opinion No. 154-B as illustrative. In 
this regard, the Commission determines the justness and reasonableness 
of rates for other modes of transportation it regulates on a fully-
allocated cost basis. However, as the commenters point out, this issue 
has not been determined in a fully litigated case by this Commission 
under the Interstate Commerce Act. The Commission does not intend by 
this rulemaking to decide the issue with finality, and proponents of 
``stand-alone'' cost methodology or other costing methodologies will 
not be precluded from advocating such methodologies in individual 
cases.\37\
---------------------------------------------------------------------------

    \37\As AOPL correctly notes, the Commission's Notice of Inquiry 
(NOI) at Docket No. RM94-2-000, issued concurrently with the final 
rule in this proceeding, encompasses the data to be filed with a 
cost-of-service showing, including the issue of whether such data 
should be required on a stand-alone or fully-allocated cost basis, 
or some other basis. Kerr-McGee's recommendation that the Commission 
establish a simplified cost-of-service method will also be 
considered in that NOI. See NOI at mimeo p. 8. See also the NOPR in 
Docket No. RM94-2-000 issued concurrently with this order.
---------------------------------------------------------------------------

E. Procedures for Streamlining Action on Rates

1. Requirements for Standing
    Section 343.3(b) provides that only persons with a substantial 
economic interest in a tariff filing have standing to file a protest 
against that filing. A protest must be accompanied by a verified 
statement as to the protestant's substantial economic interest.
    ARCO requests that the Commission amend the regulation on standing 
to require the verified statement to explain in sufficient detail the 
nature of the substantial economic interest and its connection to the 
proposed rate, so that the Commission will be able to make a 
determination on the standing of the protestant expeditiously. ARCO 
proposes that the regulation be changed to read as follows:

    Along with the protest, the protestor shall file a verified 
statement which shall contain a reasonbly detailed description of 
the nature and substance of the protestor's economic interest in the 
tariff filing in question.

    In support of its request, ARCO notes that the Commission will have 
a relatively short period of time after the filing of the rate, the 
protest, and the response to the protest, in which to make a 
determination on what action to take. Requiring a protestant to explain 
in reasonable detail how it meets the standing requirement will, 
according to ARCO, assist the Commission in making a timely decision on 
standing.
    ARCO's suggested amendment to the standing requirement appears to 
be reasonable. ARCO is not advocating a substantive change in the 
standing requirement contained in the regulation. Rather, it is 
requesting that the Commission require that the basis for standing be 
stated in enough detail to allow an informed decision on standing to be 
made in a timely fashion. It is obviously to the benefit of the 
Commission, in performing its review function, and to the interested 
public, that this be done. Moreover, this should not pose a burden for 
protestants who possess the requisite substantial economic interest in 
a tariff filing. Rehearing is granted on this issue, and Sec. 343.3(b) 
will be revised accordingly.
2. Pipeline Response to a Complaint
    Under Sec. 343.4(a) a pipeline may file a response to a complaint 
no later than 30 days after the complaint is filed. AOPL requests this 
section be changed to allow a response to be filed no later than 30 
days after service of the complaint, as opposed to filing.
    This request will be denied. AOPL has stated no facts indicating 
that the procedure set forth in Sec. 343.4(a), which is unchanged from 
current practice, provides insufficient time for a pipeline to file a 
response to a complaint.

F. Revisions to Existing Procedures

    In its application for rehearing, WPL cites five areas of concern 
about the revisions to existing procedures contained in Part 341 which 
were adopted in the final rule. Each is discussed below.
    1. WPL claims that certain regulations increase the burden on 
pipelines with no apparent benefit to shippers. It points to an alleged 
redundancy in Sec. 341.2(c), which requires that transmittal letters 
describe the filing and explain changes to the carrier's rates, rules, 
terms, or conditions of service, and Sec. 341.(b)(10)(i), which 
requires that tariff changes be indicated and described by specific 
symbols. It cites AOPL for the argument that the requirements of the 
new regulation would transform a ministerial document into a 
substantive summary of the filing, whereas the tariff publication 
itself must identify all such changes. It asserts that to have the 
letter of transmittal also identify those changes would be superfluous.
    WPL reads too much in the Commission's requirements for the 
transmittal letter. Simply stated, the Commission desires an 
informative transmittal letter which will briefly state the essential 
facts--that the carrier is seeking to change its rates and the basis 
for its rate change--i.e., it is based on the carrier's application of 
the index, or it is based on the carrier's cost of service, or it is a 
settlement rate. Moreover, a brief statement of any tariff language 
changes proposed will suffice. It is not intended that the carrier 
restate the terms and conditions of its tariff filing in the 
transmittal letter.
    Further, the rule requiring a narrative explanation of tariff 
changes in a letter of transmittal is not duplicative of 
Sec. 341.3(b)(10)(i) which refers to designating changes in the tariff 
by use of uniform symbols. Clearly, these are two separate 
requirements. A general explanation of the filing is warranted. The 
brief nature of the description required is not burdensome. Indeed, 
this requirement is common practice for several carriers which have 
been including an explanation of their filing in their letters of 
transmittal for some time, even prior to implementation of these 
regulations.
    WPL also argues that limiting the number of supplements to one 
rather than five, which currently exists, will likewise burden the 
pipelines, since they must capsulize all their supplements into one 
large supplement even if the matter sought to be supplemented could be 
done in a single page. WPL suggests that if the intent is to 
consolidate all supplements, the result could be achieved by requiring 
that subsequent supplements clearly indicate all prior supplements 
currently in effect.
    The Commission finds the rule allowing only one effective 
supplement is reasonable. The previous rules were written when all 
tariffs were individually printed by printing press. Now many carriers 
have computerized the publication of their tariffs, making it easier to 
merely bring forward all the changes into one complete supplement. In 
addition, the previous limitations relating to the number of 
supplements to be filed to an effective tariff, as well as the 
requirements for the length of the supplements themselves, were 
confusing and not useful. Since oil pipeline bound tariffs are rarely 
in excess of forty pages, the previous maximum supplement limitation of 
five supplements to be filed to a tariff in excess of 200 pages was 
never reached. Further, under the previous regulations, tariffs of four 
pages or less could not be supplemented. The rules as currently revised 
allow one effective supplement to a tariff to be filed. In addition to 
this one supplement, there are five other types of technical or 
ministerial supplements which can be filed and are not included in the 
count. These are correction supplements (three allowed per tariff), 
suspension supplements, postponement supplements, cancellation 
supplements, and adoption supplements. The Commission believes this 
series of supplements is ample to meet the carriers' needs. Given the 
clarity and uniformity of the rule, the elimination of page 
restrictions for supplements, and the exception for certain types of 
supplements, the Commission believes the rule is a balanced one. The 
Commission denies rehearing on this issue.
    2. WPL claims that certain regulations are inconsistent with the 
explanatory text. It cites Sec. 341.0(a)(7), which requires that 
pipelines post tariffs at the carrier's principal office and other 
offices of the carrier where business is conducted with affected 
shippers, and the textual statement in the final rule that this section 
``requires such posting only at `principal' pipeline offices.''\38\
---------------------------------------------------------------------------

    \38\III FERC Stats. & Regs. 30,985, at p. 30,969.
---------------------------------------------------------------------------

    The Commission has determined that a carrier should maintain its 
tariff in places where it does business with its customers. The 
Commission used the term ``principal pipeline offices'' in the 
explanatory text of the final rule in this context. Confusion over the 
requirement in Sec. 341.0(a)(7) was created by the use of the term 
``principal place of business'' in its more legalistic sense; however, 
the sense of what the Commission sought to achieve is contained in the 
phrase ``and other offices where business is conducted with affected 
shippers.''
    WPL argues that Sec. 341.3(b)(6)(i) would require that all rules 
affecting the rates or services provided for in the tariff publication 
must be included in the tariff publication, whereas the text\39\ of the 
final rule allows for incorporation by reference.
---------------------------------------------------------------------------

    \39\Ibid.
---------------------------------------------------------------------------

    As the Commission explained in the explanatory text, incorporation 
by reference of rules affecting the rates or services will be allowed, 
so long as the document to which reference is made is readily 
available.
    3. WPL claims that certain regulations, while clear, do not make 
sense when applied. It cites Sec. 341.3(b)(6)(iii), which prohibits 
tariffs from including rules which provide that traffic of any nature 
will be transported only by special agreement, arguing that agreements 
such as volume incentive and throughput and deficiency agreements are 
common industry practice have long been accepted under the ICA. It 
seeks clarification that the Commission is not banning such agreements.
    The Commission did not intend to change the current practice 
respecting the prohibition of a tariff that provides that traffic of 
any nature ``will be transported only by special agreement.'' Such a 
prohibition has always existed in the regulations.\40\ The ``special 
agreement'' referred to in this context means that the carrier may not 
require a special agreement available only to one shipper, which would 
be discriminatory to another similarly situated shipper who sought to 
ship on the carrier's lines. The Commission did not attempt to bar the 
use of non-discriminatory throughput and deficiency agreements, or 
volume incentive agreements. Administration of such agreements will 
continue as before.
---------------------------------------------------------------------------

    \40\Section 341.4(h)(3) of the regulations which existed prior 
to promulgation of the instant regulations provided, in part, ``* * 
* nor shall any rule be provided to the effect that traffic of any 
nature will be `taken only by special agreement' or other provision 
of like import.''
---------------------------------------------------------------------------

    WPL cites Sec. 341.4(f), which requires pipelines to publish 
suspension supplements within 15 days of suspension, whereas the 
pipeline does not often receive the suspension notice within sufficient 
time to do so. It asks that the Commission telecopy such suspension 
notices to the pipeline.
    The Commission will modify Sec. 341.4(f) so that suspension notices 
must be filed within 30 days of the suspension, thus obviating the need 
that suspension notices be telecopied to the pipeline.
    4. WPL claims that certain regulations appear to serve no purpose, 
citing Sec. 341.2(b) which prohibits pipelines from posting tariffs 
more than 60 days before the effective date. WPL argues that the 
Commission has given no explanation for this requirement, and its 
imposition may hurt shippers who have a shorter period to find 
alternatives. Moreover, it argues, such a requirement would 
unnecessarily inhibit seasonal rate filings.
    The Commission does not agree. The Commission encourages carriers 
to keep their shippers informed of proposed changes in a timely 
fashion. At times, the carrier may determine that it should notify the 
shippers at a date sooner than 60 days of its proposal, and nothing in 
the regulations prohibits this. Also, nothing in the regulations 
prohibits seasonal filings, as long as there is only one effective date 
for the tariff. Moreover, since the deadline for filing a protest is 
proposed to be changed to 15 days after the filing date of the tariff 
publication and not 12 days before the effective date of the tariff, as 
has been the past requirement, shippers could be placed in the 
untenable situation wherein they would be judging the tariff filing 
under circumstances which could significantly change prior to the 
effective date of the tariff. This requirement should have no 
significant effect on the planning functions of the pipeline and its 
shippers; rather it will streamline the tracking of filings made at the 
Commission.
    5. WPL claims that certain provisions are not properly included in 
the final rule, citing Sec. 341.8, which requires that pipelines 
publish in their tariffs rules which in any way increases or decreases 
the value of service to a shipper. ARCO and AOPL object to including 
such items as prorationing of capacity, product specification, and 
connection policies. AOPL argues that the Commission cannot require 
publication of non-rate terms and conditions of service; ARCO argues 
that there is no statutory authority for this requirement; rather, the 
Commission's statutory authority is limited to rates or rate-related 
matters, not a ``public interest'' standard, as indicated by the 
Commission in the text of the final rule.\41\
---------------------------------------------------------------------------

    \41\ARCO, p. 25. See III FERC Stats. & Regs. 30,985, at p. 
30,969 (1993).
---------------------------------------------------------------------------

    Section 1(3) of the ICA\42\ defines transportation to include ``* * 
* all services in connection with the receipt, delivery, elevation, and 
transfer in transit  * * * storage, and handling of property 
transported.''
---------------------------------------------------------------------------

    \42\49 U.S.C. app. Sec. 1(3) (1988).
---------------------------------------------------------------------------

    Section 1(6) of the ICA\43\ requires all carriers to ``establish, 
observe, and enforce * * * just and reasonable regulations and 
practices affecting classifications, rates, or tariffs, * * * the 
facilities for transportation, * * * and all other matters relating to 
or connected with the receiving, handling, transporting, storing, and 
delivery of property. * * *''
---------------------------------------------------------------------------

    \43\49 U.S.C. app. Sec. 1(6) (1988).
---------------------------------------------------------------------------

    Section 6(1)\44\ of the ICA provides that carriers' tariffs shall
---------------------------------------------------------------------------

    \44\49 U.S.C. app. Sec. 6(1) (1988).

state the places between which property * * * will be carried, and 
shall also state separately all terminal charges, storage charges, 
icing charges, and all other charges which the Commission may 
require, all privileges or facilities granted or allowed, and any 
rules or regulations which in any wise change, affect, or determine 
any part of the aggregate of such aforesaid rates, fares, and 
charges, or the value of the service rendered to the * * * shipper. 
---------------------------------------------------------------------------
* * * (Emphasis added.)

    The three items specifically mentioned by the applicants for 
rehearing--prorationing policy, line connection policy, and product 
specification--all constitute conditions of offering transportation 
service by the carrier, or constitute conditions of ``receipt, delivery 
* * *, and transfer in transit * * *, and handling'' by the 
carrier.\45\ They certainly affect the value of services to the 
shipper. Thus, they are encompassed within the term ``transportation'' 
as defined in the ICA.
---------------------------------------------------------------------------

    \45\Section 1(3) of the ICA.
---------------------------------------------------------------------------

    It is clearly within the Commission's authority under section 6(1) 
to require that such regulations and practices be contained in the 
company's tariffs on file with the Commission and open to public 
inspection. This is a primary purpose of a tariff--to set forth the 
terms and conditions under which the service of the carrier is offered 
so as to militate against discrimination and preferential treatment in 
favor of one shipper over another.\46\
---------------------------------------------------------------------------

    \46\See Atchison, Topeka & Santa Fe Ry., 607 F. 2d 1199 (7th 
Cir. 1979); Central R,R, Co. v. Anchor Line, Ltd., 219 F. 716,718 
(2d Cir. 1914); Central & S. Motor Frtg. Tar. Assn. v. United 
States, 273 F. Supp. (D. Del. 1967).
---------------------------------------------------------------------------

    Moreover, these items which are required to be included in tariffs 
not only affect the value to the shipper of the service offered by the 
carrier, but also can have a direct effect on access to transportation. 
Because different carriers implement different policies, a carrier's 
prorationing, carrier liability, quality bank, and connection policies 
may adversely affect shippers. As the Commission has stated in another 
context, ``By requiring publication of such tariff provisions, section 
6 [of the ICA] helps ensure rate certainty and uniformity between 
shippers and reduces the possibility of discriminatory treatment 
between shippers.''\47\
---------------------------------------------------------------------------

    \47\KK Appliance Co., 47 FERC 61,076 at p. 61,217 (1989).
---------------------------------------------------------------------------

    All items contained in Sec. 341.8 (except for prorationing policy, 
carrier liability, quality bank, and line connection policy) have been 
listed in Sec. 341.10 of the Commission's regulations for a substantial 
number of years, as ARCO has observed.\48\ In fact, Sec. 341.10 
required the publication of tariffs which contain all the rules 
governing the various items listed in that section, as well as all 
rules ``which increase or decrease the value of service to the 
shipper.''
---------------------------------------------------------------------------

    \48\ARCO, p. 28.
---------------------------------------------------------------------------

    The new items specifically added are rules ``which increase or 
decrease the value of service of shippers,'' or are required to 
diminish the possibility of discrimination. Since they are of the same 
character as those contained in Sec. 341.10, which was superseded by 
the new Sec. 341.8, the Commission is not convinced that they will 
constitute the burden on carriers expressed by AOPL, ARCO, and 
Williams.

G. TAPS

    ARCO, Unocal, and Alaska each request that the Commission clarify 
its intent regarding establishing rates for TAPS carriers and those 
delivering to TAPS. ARCO requests that the Commission confirm that TAPS 
and other excluded pipelines will continue to be regulated under the 
ratemaking standards that are currently in effect, and that nothing in 
the final rule should be construed to the contrary. Alaska similarly 
asks that the Commission clarify that three pipelines delivering oil to 
TAPS--Kuparuk, Endicott, and Milne Point--shall continue to justify 
their rates under their respective settlement agreements. Unocal 
requests clarification that the TAPS Settlement Methodology (TSM) is 
not the sole methodology applicable to TAPS carriers.
    It was not the Commission's intent to change, in any way, the 
current ratemaking standards for TAPS and excluded carriers. Indeed, as 
stated in the final rule, the Act of 1992 specifically excluded TAPS 
and any pipeline delivering oil directly or indirectly to TAPS from the 
provisions of the Act for ratemaking purposes. As further explained, 
TAPS and those excluded pipelines will continue to be regulated under 
the ratemaking standards that are currently in effect.\49\ That 
continues to be the Commission's intent.
---------------------------------------------------------------------------

    \49\III FERC Stats. & Regs. 30,985 (1993), at 30,961.
---------------------------------------------------------------------------

H. Miscellaneous Issues

    Chevron asserts that the Commission's procedures are not adequately 
defined, and that such lack of definition now generates protracted oil 
pipeline rate proceedings. Chevron states that ``at a minimum the 
Commission should scrutinize its discovery and decision-making 
processes.''\50\ This would entail, according to Chevron, new 
regulations that would prevent a pipeline from delaying the rate review 
process and that would require issuance of orders and decisions in a 
timely manner.
---------------------------------------------------------------------------

    \50\Chevron Rehearing, at 8.
---------------------------------------------------------------------------

    In response to Chevron's arguments, the Commission believes that 
the regulations contained in the final rule will streamline and 
expedite the Commission's ratemaking and decision-making processes. 
Chevron has not identified any specific changes or additional reforms 
that would improve and expedite the implementation of the ICA by the 
Commission.
    In particular, as Chevron notes, the discovery process can 
contribute to delay in the hearing of contested proceedings. The 
improved filing requirements that will result from the Commission's 
NOPR in Docket No. RM94-2-000 should ameliorate this problem as it 
existed in the past. In addition, no specific proposals to expedite and 
reform discovery procedures were submitted in the comment phase of this 
rulemaking, by Chevron or anyone else.

The Commission Orders

    The applications for rehearing and requests for clarification are 
granted to the extent reflected herein. In all other respects, such 
applications and requests are denied.

List of Subjects

18 CFR Part 341

    Maritime carriers, Pipelines, Reporting and recordkeeping 
requirements.

18 CFR Parts 342 and 343

    Pipelines, Reporting and recordkeeping requirements.

    By the Commission. Commissioner Hoecker concurred in part and 
dissented in part with a separate statement attached. Commissioner 
Massey dissented with a separate statement attached.
Lois D. Cashell,
Secretary.

    In consideration of the foregoing, Parts 341, 342, and 343, Chapter 
I, Title 18, Code of Federal Regulations, are amended as set forth 
below.
    The following regulations are effective September 7, 1994.

PART 341--OIL PIPELINE TARIFFS: OIL PIPELINE COMPANIES SUBJECT TO 
SECTION 6 OF THE INTERSTATE COMMERCE ACT

    1. The authority citation for Part 341 continues to read as 
follows:

    Authority: 42 U.S.C. 7101-7352, 49 U.S.C. 1-27.

    2. In Sec. 341.4, paragraph (f) is revised to read as follows:


Sec. 341. 4  Filing requirements for amendments to tariffs.

* * * * *
    (f) Suspension supplements. A suspension supplement must be filed 
for each suspended tariff or suspended part of a tariff within 30 days 
of the issuance of a suspension order. The suspension supplement must 
be served on all subscribers. The supplement must include the date it 
is issued, a reproduction of the ordering paragraphs of the suspension 
order, a statement that the tariff or portion of the tariff was 
suspended until the date stated in the suspension order, a reference to 
the docket number under which the suspension order was issued, and a 
statement that the previous tariff publication remains in effect.
    The following regulations are effective January 1, 1995.

PART 342--OIL PIPELINE RATE METHODOLOGIES AND PROCEDURES (EFFECTIVE 
JANUARY 1, 1995)

    1. The authority citation for part 342 continues to read as 
follows:

    Authority: 5 U.S.C. 571-83; 42 U.S.C. 7101-7532; 49 App. U.S.C. 
1-85; 42 U.S.C. 7172 note.

    2. In Sec. 342.3, paragraph (e) is revised to read as follows:


Sec. 342.3  Indexing.

* * * * *
    (e) Rate Decreases. If the ceiling level computed pursuant to 
Sec. 342.3(d) is below the filed rate of a carrier, that rate must be 
reduced to bring it into compliance with the new ceiling level; 
provided, however, that a carrier is not required to reduce a rate 
below the level deemed just and reasonable under section 1803(a) of the 
Energy Policy Act of 1992, if such section applies to such rate or to 
any prior rate. The rate decrease must be accomplished by filing a 
revised tariff publication with the Commission to be effective July 1 
of the index year to which the reduced ceiling level applies.

    3. In Sec. 342.4, paragraph (a) is revised to read as follows:


Sec. 342.4  Other rate changing methodologies.

    (a) Cost-of-service rates. A carrier may change a rate pursuant to 
this section if it shows that there is a substantial divergence between 
the actual costs experienced by the carrier and the rate resulting from 
application of the index such that rates at the ceiling level would 
preclude the carrier from being able to charge a just and reasonable 
rate within the meaning of the Interstate Commerce Act. A carrier must 
substantiate the prudence of the costs incurred. A carrier that makes 
such a showing may change the rate in question, based upon the cost of 
providing the service covered by the rate, without regard to the 
applicable ceiling level under Sec. 342.3.
* * * * *

PART 343--PROCEDURAL RULES APPLICABLE TO OIL PIPELINE PROCEEDINGS 
(EFFECTIVE JANUARY 1, 1995)

    1. The authority citation for Part 343 continues to read as 
follows:

    Authority: 5 U.S.C. 571-83; 42 U.S.C. 7101-7532; 49 App. U.S.C. 
1-85; 42 U.S.C. 7172 note.

    2. In Sec. 343.3, paragraph (a) is amended by adding the following 
sentence at the end thereof as follows:


Sec. 343.3  Filing of protests and responses.

    (a) Protests.
* * * * *
    Only persons with a substantial economic interest in the tariff 
filing may file a protest to a tariff filing pursuant to the Interstate 
Commerce Act. Along with the protest, the protestant must file a 
verified statement which must contain a reasonably detailed description 
of the nature and substance of the protestant's substantial economic 
interest in the tariff filing.
* * * * *

Appendix--List of Parties Seeking Rehearing and/or Clarification of 
Order No. 561

Alaska, State of (Alaska)
Alberta Petroleum Marketing Commission (Alberta)
All American Pipeline Company (AAPC)
Amoco Pipeline Company (Amoco)
Association of Oil Pipelines (AOPL)
ARCO Pipe Line Company, Four Corners Pipe Line Company and ARCO 
Transportation Alaska, Inc. (ARCO)
Buckeye Pipe Line Company, L.P. (Buckeye)
Chevron U.S.A. Products Company (Chevron)
Colonial Pipeline Company (Colonial)
Conoco Pipe Line Company (Conoco)
Exxon Pipeline Company (Exxon)
Holly Corporation (Holly)
Kerr-McGee Refining Corporation (Kerr-McGee)
Lakehead Pipe Line Company (Lakehead)
Marathon Pipe Line Company (MPL)
Petrochemical Energy Group (PEG)
Phillips Pipe Line Company (Phillips)
Plantation Pipe Line Company (Plantation)
SFPP, L.P. (SFPP)
Shell Pipe Line Corporation (Shell)
Sun Pipe Line Company (Sun)
Total Petroleum, Inc. (Total)
US Air, Inc. (USAir)
Unocal Pipeline Company (Unocal)
Williams Pipe Line Company (WPL)

    HOECKER, Commissioner, concurring in part and dissenting in 
part:
    I largely concurred with the Final Rule adopted in this 
docket.\1\ The regulatory regime that will become effective January 
1, 1995, for oil pipelines is generally quite simple for companies 
whose rates tend to track legitimate cost incurrence. On rehearing, 
two serious flaws in the Final Rule persist. Consequently, I will 
dissent in part once again.
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    \1\A full exposition of my views on Order No. 561 and on 
regulation of the oil pipeline industry are contained in my 
statement of November 2, 1993, which will be, belatedly, published 
at III FERC Stats. and Regs. 30,985 (1993). Pending publication, a 
copy of the November statement may be obtained from the Commission's 
public reference room.
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    First, the rule continues to require that protests to indexed 
rates will be allowed only where ``the increment of the rate change 
produced by application of the index is substantially in excess of 
the individual pipeline's increase in costs.'' As I explained in my 
prior dissent on this issue, I would have preferred a rule that 
allowed protests that can show a substantial divergence between the 
rate taken as a whole and the pipeline's total costs. Even with an 
index, costs and rates may occasionally become so unrelated that 
rates cease to be just and reasonable under the Interstate Commerce 
Act. We should provide for such exigencies.
    Second, I continue to be concerned that the ``settlement rate 
methodology,'' under which existing rates can be changed or initial 
rates can be established, may lead to unjust and unreasonable rates 
wherever negotiations are not constrained by demonstrable market 
forces. This aspect of the rule should only be adopted pursuant to 
the market-based rate procedures proposed in Docket No. RM94-1-
000.\2\ While I fully support settlements, I believe that 
settlements should be in the public interest and subject to 
Commission scrutiny. I believe the procedures established in this 
rule do not adequately safeguard against potential abuses of market 
power and, indeed, may invite the unlawful use of market power to 
obtain rate increases in excess of the indexed rate.
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    \2\Market-based Ratemaking for Oil Pipelines, Notice of Proposed 
Rulemaking, issued July ____, 1994, IV FERC Stats. and Regs. 
32,______ (1994).
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    For these reasons, as well as those previously expressed in my 
November 2, 1993 statement, I respectfully concur in part and 
dissent in part to today's Order.
James J. Hoecker,
Commissioner.
    MASSEY, Commissioner, dissenting:
    I respectfully dissent for the same reasons set out in my 
statement, issued November 5, 1993, dissenting from Order No. 
561.\3\
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    \3\65 FERC  61,109 (1993).
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William L. Massey,
Commissioner.
[FR Doc. 94-18873 Filed 8-5-94; 8:45 am]
BILLING CODE 6717-01-M