[Federal Register Volume 80, Number 251 (Thursday, December 31, 2015)]
[Rules and Regulations]
[Pages 81744-81752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32701]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 342

[Docket No. RM15-20-000]


Five-Year Review of the Oil Pipeline Index

AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Order establishing index level.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) issues 
this Final Order concluding its five-year review of the index level 
used to determine annual changes to oil pipeline rate ceilings. The 
Commission establishes an index level of Producer Price Index for 
Finished Goods plus 1.23 percent (PPI-FG+1.23) for the five-year period 
commencing July 1, 2016.

DATES: December 31, 2015.

FOR FURTHER INFORMATION CONTACT:
Andrew Knudsen (Legal Information), Office of the General Counsel, 888 
First Street NE., Washington, DC 20426, (202) 502-6527
Monil Patel (Technical Information), Office of Energy Market 
Regulation, 888 First Street NE., Washington, DC 20426, (202) 502-8296

SUPPLEMENTARY INFORMATION:

Order Establishing Index Level

(Issued December 17, 2015)

    1. On June 30, 2015, the Commission issued a Notice of Inquiry 
initiating its five-year review to establish the oil pipeline index 
level for the July 1, 2016 to June 30, 2021 time period.\1\ The June 
2015 NOI requested comment regarding (a) a proposed index level between 
Producer Price Index for Finished Goods (PPI-FG)+2.0 percent and PPI-
FG+2.4 percent \2\ and (b) any alternative methodologies for 
calculating that index level.
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    \1\ Five-Year Review of the Oil Pipeline Index, 80 FR 39010 
(July 8, 2015), FERC Stats. & Regs. ] 35,053 (cross-referenced at 
151 FERC ] 61,278 at P 1 (June 2015 NOI)).
    \2\ The June 2015 NOI included a range as opposed to a specific 
index level because some pipelines had yet to report FERC Form No. 6 
(Form No. 6) data for 2014.
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    2. For the reasons discussed below, the Commission adopts an index 
level of the PPI-FG+1.23 percent. The departure from the June 2015 NOI 
results from (a) the use of FERC Form No. 6 page 700 (page 700) data 
that directly measures changing pipeline costs as opposed to the 
estimates previously used to calculate the index level \3\ and (b) 
updated Form No. 6 filings and other corrections to the data set. The 
Commission's indexing calculations and other data analysis are 
contained in Attachment A to this order. As discussed below, the 
Commission rejects other changes to the index calculation proposed by 
commenters.
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    \3\ The index range presented in the June 2015 NOI was 
calculated based on estimates derived from FERC Form No. 6 
accounting data on pages 110-111, 114, and page 600.
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I. Background

A. Establishment of the Indexing Methodology

    3. The Energy Policy Act of 1992 (EPAct 1992) required the 
Commission to establish a ``simplified and generally applicable'' 
ratemaking methodology \4\ that also was consistent with the just and 
reasonable standard of review of the Interstate Commerce Act (ICA).\5\ 
To implement EPAct 1992's mandate, the Commission issued Order No. 561 
\6\ establishing an indexing methodology that allows oil pipelines to 
change their rates subject to certain ceiling levels as opposed to 
making cost-of-service filings.\7\
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    \4\ Public Law 102-486, 106 Stat. 3010, 1801(a) (Oct. 24, 1992). 
EPAct 1992's mandate to establish a simplified and generally 
applicable method of regulating oil transportation rates 
specifically excluded the Trans-Alaska Pipeline System (TAPS), or 
any pipeline delivering oil, directly or indirectly, into it. Id. 
1804(2)(B).
    \5\ 49 U.S.C. app. 1 (1988).
    \6\ See Revisions to Oil Pipeline Regulations Pursuant to the 
Energy Policy Act of 1992, Order No. 561, FERC Stats. & Regs. ] 
30,985 (1993), order on reh'g, Order No. 561-A, FERC Stats. & Regs. 
] 31,000 (1994), aff'd, Assoc. of Oil Pipelines v. FERC, 83 F.3d 
1424 (D.C. Cir. 1996).
    \7\ Pursuant to the Commission's indexing methodology, oil 
pipelines change their rate ceiling levels effective every July 1 by 
``multiplying the previous index year's ceiling level by the most 
recent index published by the Commission.'' 18 CFR 342.3(d)(1) 
(2015). Oil pipeline rates may be adjusted to the ceiling levels 
pursuant to the Commission's regulations as long as no protest or 
complaint demonstrates that the index rate change substantially 
diverges from the pipeline's cost changes. 18 CFR 343.2(c)(1) 
(2015).

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[[Page 81745]]

    4. In Order No. 561, the Commission committed to review the index 
level every five years to ensure that it adequately reflects changes to 
industry costs.\8\ The Commission conducted such reviews in 2000,\9\ 
2005,\10\ and 2010.\11\ In the 2010 five-year review, the Commission 
established the index level of PPI-FG+2.65, to be effective for the 
five-year period commencing July 1, 2011. The index level established 
herein results from the Commission's fourth five-year review of the 
index level.
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    \8\ Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,941.
    \9\ Five-Year Review of Oil Pipeline Index, 93 FERC ] 61,266 
(2000) (2000 Index Review), aff'd in part and remanded in part sub 
nom. AOPL v. FERC, 281 F.3d 239 (D.C. Cir. 2002) (AOPL II), Five-
Year Review of Oil Pipeline Pricing Index, 102 FERC ] 61,195 (2003) 
(2000 Index Review Remand Order), aff'd sub nom. Flying J Inc. v. 
FERC, 363 F.3d 495 (D.C. Cir. 2004).
    \10\ Five-Year Review of Oil Pipeline Index, 114 FERC ] 61,293 
(2006) (2005 Index Review).
    \11\ Five-Year Review of Oil Pipeline Index, 133 FERC ] 61,228 
(2010) (2010 Index Review), order on reh'g, 135 FERC ] 61,172 (2011) 
(2010 Index Review Rehearing Order).
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B. The Kahn Methodology

    5. In Order No. 561 and each successive index review, the 
Commission has calculated the index level based upon a methodology 
developed by Dr. Alfred E. Kahn.\12\ The Kahn Methodology uses pipeline 
data from the prior five year period to determine an adjustment to be 
applied to a current year PPI-FG. The calculation is as follows. Each 
pipeline's cost change on a per barrel-mile basis over the prior five-
year period (e.g., the years 2009-2014 in this proceeding) is 
calculated. In order to remove statistical outliers and spurious data, 
the resulting data set is trimmed to those pipelines in the middle 50 
percent of cost changes. The Kahn Methodology then calculates three 
measures of the middle 50 percent's central tendency: The median, the 
mean, and a weighted mean.\13\ The Kahn Methodology calculates a 
composite by averaging these three measures of central tendency and 
measures the difference between the composite and the PPI-FG index data 
over the prior five year period. The index level is then set at PPI-FG 
plus (or minus) this differential, which tracks the relationship over 
the last five years between PPI-FG and oil pipeline costs.
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    \12\ The Commission's use of the Kahn Methodology has been 
affirmed by the United States Court of Appeals for the District of 
Columbia Circuit. Assoc. of Oil Pipelines v. FERC, 83 F.3d 1424 
(D.C. Cir. 1996); Flying J Inc., et al. v. FERC, 363 F.3d 495 (D.C. 
Cir. 2004).
    \13\ The weighted mean assigns a different weight to each 
pipeline's cost change based on the pipeline's total barrel-miles.
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C. The 2015 Proceeding

    6. The Commission initiated this proceeding on June 30, 2015, with 
the issuance of a Notice of Inquiry initiating its five-year review to 
establish the oil pipeline index level for the July 1, 2016 to June 30, 
2021 time period.\14\ The June 2015 NOI proposed a range for the index 
level of between Producer Price Index for Finished Goods (PPI-FG)+2.0 
percent and PPI-FG+2.4 percent. The June 2015 NOI included a range as 
opposed to a specific index level because some pipelines had yet to 
report FERC Form No. 6 data for 2014. Importantly, the NOI sought 
comment not only on the proposed level but also any alternative 
methodologies for calculating that index level. To facilitate the 
development of the new index and gain an understanding of the positions 
of the parties in advance of the filed comments, the Commission 
announced plans to hold a technical conference. That conference 
occurred on July 30, 2015.
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    \14\ June 2015 NOI, 151 FERC ] 61,278 at P 1.
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II. Comments

    7. Initial Comments filed in response to the June 2015 NOI and 
technical conference were due on August 24, 2015, and reply comments 
were due on September 21, 2015. Comments were filed by the Association 
for Oil Pipelines (AOPL),\15\ APV Shippers,\16\ Liquids Shippers Group 
(Liquids Shippers),\17\ Suncor Energy Marketing Inc. (Suncor), Canadian 
Association of Petroleum Producers (CAPP),\18\ HollyFrontier/Western 
Refining, the Pipeline Safety Trust, and the Pipeline and Hazardous 
Materials Safety Administration (PHMSA). On October 16, 2015 AOPL filed 
supplemental reply comments. On October 21, 2015, APV Shippers also 
filed supplemental reply comments.
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    \15\ AOPL is a trade association that represents the interests 
of common carrier oil pipelines.
    \16\ APV Shippers include Airlines for America, the National 
Propane Gas Association (NPGA), and Valero Marketing and Supply 
Company. Airlines for America members include: Alaska Airlines, 
Inc.; American Airlines Group; Atlas Air, Inc.; Delta Air Lines, 
Inc.; Federal Express Corporation; Hawaiian Airlines; JetBlue 
Airways Corp.; Southwest Airlines Co.; United Continental Holdings, 
Inc.; and United Parcel Service Co. Air Canada is an associate 
member.
    \17\ Liquids Shippers consists of crude oil or natural gas 
liquids producers, including: Anadarko Energy Services Company; 
Apache Corporation; Cenovus Energy Marketing Services Ltd.; 
ConocoPhillips Company; Devon Gas Services, L.P.; Encana Marketing 
(USA) Inc.; Marathon Oil Company; Murphy Exploration & Production 
Company--USA; Noble Energy, Inc.; Pioneer Natural Resources USA, 
Inc.; Statoil Marketing & Trading (US) Inc.; and WPX Energy 
Marketing, LLC.
    \18\ CAPP represents companies that develop and produce natural 
gas and crude oil throughout Canada.
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    8. The commenters raised a number of issues related to the index 
range proposed by the Commission in the June 2015 NOI and possible 
alternatives for calculating the index level. The commenters advocated 
varying index levels, including AOPL's proposal of PPI-FG+2.47, APV 
Shippers' proposal of PPI-FG+0.5, and Liquids Shippers' proposal of 
PPI-FG+0.23.\19\ These proposed index levels were based upon various 
modifications to the Kahn Methodology, as discussed in greater detail 
below.
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    \19\ Not every party filing comments attempted to calculate a 
proposed index level.
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III. Discussion

    9. The Commission adopts an index level of PPI-FG+1.23 percent for 
the five-year period commencing July 1, 2016. The Commission adopts APV 
Shippers' proposal to use page 700 data that directly measures changing 
pipeline costs as opposed to the previously used Form No. 6 accounting 
data. The Commission rejects other modifications proposed by industry 
comments, including: (a) Various manual data trimming methodologies, 
(b) the consideration of the middle 80 percent in addition to the 
middle 50 percent of the cost changes in the data set, (c) separate 
index levels for product and crude pipelines, and (d) Liquids Shippers' 
proposals to temporarily set the index level at PPI-FG while initiating 
a proceeding to revise the Commission's indexing regulations.

A. Form No. 6 Page 700

1. Comments
    10. APV Shippers propose calculating the index level based upon 
page 700 total cost-of-service data as opposed to the Form No. 6 
accounting data used in the June 2015 NOI and prior five-year review 
proceedings.\20\ APV Shippers state that page 700 data is superior 
because page 700 data provides a direct measure of changing pipeline 
barrel-mile costs.\21\ In reply comments, HollyFrontier/Western 
Refining, CAPP and Liquids Shippers support APV Shippers' proposal.
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    \20\ APV Shippers Initial Comments at 9-16.
    \21\ Id.
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    11. AOPL opposes the use of page 700 data to calculate the index. 
Among other assertions, AOPL argues that page 700 data should not be 
used because the page 700 total cost-of-service incorporates returns on 
equity (ROEs) that may be volatile due to industry-wide fluctuations in 
the equity

[[Page 81746]]

markets.\22\ AOPL also argues that page 700 cost-of-service data may 
include allocations that distort the index calculation.\23\
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    \22\ AOPL Reply Comments at 41.
    \23\ Id. at 44 (citing Shehadeh September 2015 Affidavit at 10).
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2. Discussion
    12. The Commission will update its calculation of the five-year oil 
pipeline index to use page 700 data to measure changing barrel-mile 
costs. Page 700 provides a summarized total cost-of-service and a 
pipeline's interstate barrel-miles. Page 700 did not exist when the 
Kahn Methodology was first developed in Order No. 561, and, as a 
result, the Commission estimated pipeline total cost changes using 
accounting data from elsewhere on Form No. 6. Now that page 700 is 
available, the Commission concludes that page 700 data provides a 
superior data source for use in the Kahn Methodology.\24\
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    \24\ Page 700 was created in 1994 after Order Nos. 561 and 561-
A. Cost-of-Service Reporting and Filing Requirements for Oil 
Pipelines, Order No. 571, FERC Stats. & Regs. ] 31,006, at 31,168 
(1994), order on reh'g, Order No. 571-A, FERC Stats. & Regs. ] 
31,012 at 31,251. The Commission considered using Page 700 data 
during the 2010 Index Review. However, the Commission declined to 
adopt such a proposal due to erroneous reporting instructions on 
page 700 that caused pipelines to report mismatching data, 
specifically, interstate-only costs and combined intrastate and 
interstate throughput. 2010 Index Review, 133 FERC ] 61,228 at PP 
83-85. The Commission was concerned that widespread mismatching data 
could skew the index. Following the 2010 Index Review, the 
Commission corrected the page 700 instructions, and the Commission 
also required pipelines to file corrected data from 2009-2011 so 
that page 700 could be used ``during the 2015 Five-Year Index Review 
if deemed appropriate.'' Revision to Form No. 6, Order No. 767, FERC 
Stats. & Regs. ] 31,335, at P 19 (2012).
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    13. Using page 700 data provides four primary benefits. First, the 
index is meant to reflect changes to recoverable pipeline costs, and, 
thus, the calculation of the index should use data that is consistent 
with the Commission's cost-of-service methodology.\25\ In contrast to 
the accounting data historically used in the Kahn Methodology as a 
proxy for this information, page 700 includes actual total cost-of-
service data.
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    \25\ When lamenting the difficulty of estimating industry cost 
changes, Order No. 561-A specifically noted that industry-wide total 
cost-of-service data was not then available. Order No. 561-A, FERC 
Stats. & Regs. ] 31,000 at 31,096.
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    14. Second, using page 700 data eliminates the need to use proxies 
to measure capital costs and income tax costs. Because direct measures 
of these costs were not available when the index was first 
established,\26\ the Kahn Methodology used net carrier property as a 
proxy for capital costs and income taxes. At that time, the Commission 
acknowledged the net carrier property proxy was ``highly 
unsatisfactory'' and ``imperfect.'' \27\ Although net carrier property 
measures changes to the book value of the pipeline's asset base, it 
does not incorporate changes to the costs of financing the asset base 
(i.e., interest costs of debt and investor demanded equity return). The 
relationship between net carrier property and income tax costs is 
similarly attenuated because income taxes are dependent upon the 
pipeline's return (specifically the ROE), not merely the size of the 
pipeline's asset base. Despite these flaws, the Commission used net 
carrier property proxy in the absence of a ``better solution.'' \28\ 
Now that page 700 data is available, such a better solution exists.
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    \26\ Id. at 31,096, 31,098.
    \27\ Id.
    \28\ Id. at 31,098. When the index was established, AOPL itself 
argued that net carrier property was a poor measure of capital 
costs. Id.
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    15. Third, using page 700 data eliminates the need for an 
``operating ratio'' to estimate each pipeline's annual cost changes. 
When using Form No. 6 accounting data, the operating ratio is necessary 
because a pipeline's annual total cost change cannot be calculated by 
simply adding (a) the annual change in operating costs to (b) the 
annual change in net carrier property (the proxy used for capital 
costs). This is because a one-year change to net carrier property is a 
change in the net investment in the pipeline, not the pipeline's annual 
capital cost consisting of the pipeline's yearly debt payments and 
yearly return to investors. Thus, a pipeline's annual total cost change 
is estimated based on a ratio of operating expenses to operating 
revenue, which assumes that the residual revenues equate to a 
pipeline's annual capital costs.\29\ This provides, at best, a rough 
proxy for total pipeline cost changes. For example, the operating ratio 
unrealistically assumes that pipelines incur no capital costs in years 
in which the operating expenses exceed revenues.\30\ This assumption is 
deficient because, at a minimum, a pipeline must service its debt 
obligations.\31\ In contrast to the rough proxy provided by the 
operating ratio, page 700 total cost-of-service incorporates an annual 
capital cost based upon established ratemaking techniques.
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    \29\ Using the operating ratio, the total cost change is 
estimated by using the two formulas below:
    Total Cost Changes = Operating Costs Changes * Operating Ratio + 
(Net Carrier Property Changes * (1 - Operating Ratio)).
    Operating Ratio = ((Operating Expense at Year 1/Operating 
Revenue at Year 1) + (Operating Expense at Year 5/Operating Revenue 
at Year 5))/2. If the operating ratio is greater than one, then it 
is assigned the value of 1 in the Kahn Methodology calculations. 
Applying the ratio, Total Cost Changes = (1 - operating ratio) * net 
plant + operating ratio * operating expenses.
    \30\ The operating ratio is set between 0 and 1 based upon the 
ratio of (a) operating expenses to (b) pipeline revenues. If 
operating expenses exceed revenues, then the operating ratio is set 
to 1, meaning that no weight is assigned to capital costs (net plant 
under the prior methodology) in the formula.
    \31\ Although operating expenses may exceed revenues in a 
particular year, a pipeline may nonetheless be able to attain new 
financing for capital investments based upon anticipated future 
profitability. Moreover, a company may continue to pay dividends (or 
other payments) to investors even in years in which the company is 
not profitable.
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    16. Fourth, page 700 contains cost and barrel-mile data exclusively 
related to interstate pipeline operations, as opposed to the combined 
intrastate and interstate data used in prior five-year reviews. These 
interstate and intrastate costs do not necessarily apply to the same 
facilities.\32\ The index applies only to interstate pipelines, and 
thus, to the extent possible, it is appropriate to use interstate-only 
data to derive the index.\33\
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    \32\ Although sometimes intrastate and interstate shipments 
share parts of the same pipe, the overlap is often not exact. On 
other occasions, the same parent pipeline may own entirely separate 
interstate and intrastate facilities.
    \33\ Although it is unclear whether there is a substantial 
difference between the cost changes for interstate and intrastate 
service, there is no reason to base the index on combined intrastate 
and interstate data when an interstate-only data alternative is 
available.
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    17. The Commission is also not persuaded by AOPL's arguments 
against using page 700 data. The Commission disagrees with AOPL's 
argument that page 700 data should not be used because it incorporates 
ROEs that may be volatile on an industry-wide basis due to fluctuations 
in the equity markets. The index is designed to capture changing 
capital costs, of which financing costs are an important component. To 
the extent that industry-wide equity costs change with market 
conditions, those changes should be captured by the index. Furthermore, 
the record does not support AOPL's claim that ROEs were erratic on an 
industry-wide basis during the 2009-2014 period. AOPL's own 
calculations show that the average ROEs in the middle 50 percent stayed 
within a roughly 100 basis point range throughout the 2009-2014 
period.\34\ Additionally, the Commission notes that to the extent that 
a particular pipeline's per barrel-mile cost changes (including its 
equity cost changes) departed substantially from industry norms, that 
pipeline would not be among the middle 50 percent used to calculate the 
index level.
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    \34\ Shehadeh September 2015 Affidavit at 10.
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    18. The Commission is also not persuaded by AOPL's argument that 
page 700 contains various allocations

[[Page 81747]]

that may distort the index calculation. The allocation methodologies 
used by pipelines on page 700 should reflect established ratemaking 
practices, and thus these allocation methodologies should be 
sufficiently robust to calculate the index. Furthermore, some 
assumptions and allocations are necessary in any pipeline's measurement 
of its costs, including the Form No. 6 accounting data previously used 
in the Kahn Methodology.\35\ In addition, to the extent a pipeline's 
page 700 ratemaking assumptions change over a period of time, pipelines 
are obligated to note them on their page 700.\36\ Yet, despite the 
availability of this information, AOPL points to no specific 
circumstances in which such changing allocations have distorted the 
page 700 calculations in this proceeding. The mere presence of 
allocation methodologies is not a reason to reject the use of page 700 
data.\37\ Overall, the changes we make in this order to use the page 
700 data eliminates the need for several assumptions and more closely 
aligns the index with changing oil pipeline costs.
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    \35\ For example, several pipelines are subsidiaries of parent 
companies, and, thus their Form No. 6 data include costs allocated 
from those parent entities.
    \36\ As instruction six on page 700 states, ``If the company 
makes major changes to its application of the Opinion No. 154-B et 
al. methodology, it must describe such changes in a footnote, and 
calculate the amounts in columns (b) and (c) of lines No. 1-12 using 
the changed application.''
    \37\ The Commission similarly dismisses AOPL's argument that 
using page 700 data may create illusory cost changes due to shifts 
involving interstate and intrastate volumes. AOPL fails to 
distinguish between page 700 data and the accounting estimates 
historically used by the Commission. Under any circumstance, 
increasing intrastate barrel-miles absorb a larger portion of the 
pipeline's fixed costs and cause interstate barrel-mile costs to 
decline. Similarly, decreasing intrastate volumes absorb less of a 
pipeline's fixed costs, causing the pipeline's interstate per 
barrel-mile costs to rise.
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B. Manual Data Trimming

    19. APV Shippers, Liquids Shippers, CAPP, and Suncor advocate 
various forms of manual data trimming in addition to the statistical 
data trimming to the middle 50 percent. The manual data trimming 
proposals assume two broad forms: (1) Removing from the data set 
pipelines that underwent expansions between 2009 and 2014 and (2) 
removing from the data set pipelines that appeared to report flawed or 
anomalous data.\38\
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    \38\ APV Shippers state that applying both of these data 
trimming methodologies to page 700 data would reduce the index from 
approximately PPI-FG+1.3 to their proposed PPI-FG+0.5.
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1. Alternative Rate Treatment
a. Comments
    20. Several shipper commenters advocate removing pipelines from the 
data set that underwent expansions, arguing that the expansions 
distorted index calculation. APV Shippers and CAPP propose to remove 
from the data set the pipelines that filed petitions for declaratory 
order seeking approval for committed shipper rates.\39\ Other shipper 
parties solely analyzed pipeline costs. Suncor proposes to remove 36 
pipelines that had shown greater than 25 percent year-over-year 
increases in both (a) their net plant and (b) net plant per barrel 
mile.\40\ Liquids Shippers propose a variant that removes only those 
pipelines with rate base changes of 25 percent between 2013 and 2014, 
asserting that because these new expansions may still be ramping-up to 
long term throughput levels, costs per barrel-mile may be 
exaggerated.\41\
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    \39\ Commission policy allows pipelines making significant 
capital expansions to seek committed shipper rates. Although not 
required, pipelines generally file petitions for declaratory order 
in order to ensure Commission approval of the committed rate 
structure.
    \40\ Suncor states that this adjustment would change the index 
to PPI-FG+0.67.
    \41\ The Liquids Shippers presented this proposal in their reply 
comments. By presenting this argument so late in the proceeding, the 
Liquids Shippers did not provide other entities adequate opportunity 
to respond in reply comments.
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    21. AOPL opposed these proposals asserting, among other arguments, 
that (a) this manual data trimming lacks methodological integrity and 
(b) statistically trimming of the data set (such as data trimming via 
the middle 50 percent or middle 80 percent) more appropriately 
addresses anomalous cost changes.
b. Discussion
    22. The Commission declines to adopt the various proposals to 
manually remove from the data set pipelines making capital expansions 
during the 2009 to 2014 period. In the 2010 Index Review, Commission 
rejected a similar proposal.\42\ As explained below, comments in this 
proceeding have not provided a basis for the Commission to depart from 
its prior determination.
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    \42\ 2010 Index Review, 133 FERC ] 61,228 at PP 48-55 (rejecting 
proposal that manually trimmed pipelines that (a) experienced large 
rate base changes and (b) sought alternative rate treatment).
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    23. As the Commission explained in the 2010 Index Review, 
statistically trimming the data set to the middle 50 percent already 
removes anomalous cost/barrel-mile changes.\43\ To the extent that a 
capital expansion caused a pipeline's per barrel-mile costs to deviate 
from industry norms, that pipeline's cost changes will not be among the 
middle 50 percent.\44\
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    \43\ Id. PP 48-55.
    \44\ Id. P 48. APV Shippers, CAPP, and Liquids Shippers 
incorrectly assume that all pipelines seeking petitions for 
declaratory order in order to implement contractual rates have 
experienced ``extraordinary'' per barrel-mile cost changes. 
Pipelines filing for committed rate structures are making 
significant infrastructural investments; however, because an 
expansion generally leads to increased throughput, an expansion does 
not necessarily equate to a large relative increase in barrel-mile 
costs. For example, of the 10 pipelines APV Shippers exclude from 
the data set based upon committed shipper contracts, three of them 
are within the middle 50 percent of the Commission's index 
calculation, three of them are in the bottom 25 percent of pipelines 
excluded from the middle 50 percent and four of them are in the top 
25 percent of pipelines included within the middle 50 percent. 
Attachment A, Exhibit 2.
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    24. As the Commission also explained in 2010, it is both subjective 
and arbitrary to state which circumstances render a pipeline's 2009 
barrel-mile costs non-comparable to its 2014 costs.\45\ Pipelines 
operate amidst continually changing business circumstances affecting 
throughput and costs.\46\ These manual data trimming proposals 
subjectively and arbitrarily focus upon one aspect, expansions, while 
ignoring other factors (such as changing product demand and supplies) 
that can also alter per barrel-mile costs.\47\ As APV Shippers concede, 
the data set includes a wide dispersion in barrel-mile cost changes 
that exists independently from pipelines using alternative rate base 
methodologies \48\ or those experiencing expansions. As the Commission 
concluded in the 2010 Index Review, without attempting to assess each 
pipeline's underlying circumstances, the Kahn Methodology appropriately 
addresses extraordinary or anomalous cost changes by trimming the data 
set to the middle 50 percent.\49\
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    \45\ 2010 Index Review, 133 FERC ] 61,228 at P 49.
    \46\ The Commission also rejects APV Shipper's claim that other 
adjustments to the data set are analogous to removing pipelines that 
filed petitions for declaratory order for committed shipper rates 
during the 2009-2014 period. As discussed, infra, the Commission 
these adjustments serve a different purpose than ``comparability'' 
to justify any aspect of the Kahn Methodology.
    \47\ Suncor and Liquids Shippers' proposed adjustments may be 
particularly skewed because they manually remove pipelines from the 
data set based upon rate base increases of 25 percent but ignore 
pipelines with rate base decreases.
    \48\ APV Shippers state that after manually trimming all 
pipelines which filed a petition for declaratory order requesting 
approval of committed shipper rate structures (in addition to other 
manual data trimming), the data set continues to include significant 
dispersion. O'Loughlin August 2015 Affidavit at 22.
    \49\ Unlike the other parties, the APV Shippers did not solely 
focus upon rate base changes or pipelines seeking committed shipper 
rates. The APV Shippers also manually trimmed two pipelines that 
sought cost-of-service changes during the 2009-2014 period. However, 
this does not change the Commission's disposition of the manual data 
trimming issue, including the potential for bias. As an initial 
matter, both of these pipelines were excluded by the middle 50 
percent. Attachment A, Exhibit 3. Moreover, the APV Shippers 
inconsistently apply their own principle that use of a non-indexing 
rate mechanism demonstrates that these pipelines experienced 
anomalous cost changes. For example, APV Shippers do not exclude 
pipelines (such as Colonial) that were required to file reduced 
rates as a result of the settlement of complaints against their 
rates. E.g., Southwest Airlines Co. v. Colonial Pipeline Co., 148 
FERC ] 61,161 (2014). Because Colonial is a large pipeline, it 
heavily influences the weighted average in the Kahn Methodology, and 
its removal alone would increase the index in the Commission's own 
calculation from PPI-FG+1.23 to PPI-FG+1.54. Attachment A, Exhibit 
4. APV Shippers' inconsistency only further emphasizes the risk of 
arbitrariness and bias inherent to manual data trimming 
methodologies.

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[[Page 81748]]

    25. Furthermore, the Commission emphasizes that the index properly 
reflects capital cost changes. Consistent with the EPAct 1992's mandate 
of general applicability, capital costs changes have always been part 
of the index calculation.\50\ To the extent that a pipeline's total 
cost changes are within the middle 50 percent of all pipelines, those 
pipelines' capital cost changes are appropriately considered in the 
derivation of the index.
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    \50\ Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,951-52, 
aff'd AOPL I, 83 F.3d at 1437; 2010 Index Review, 133 FERC ] 61,228 
at P 101.
---------------------------------------------------------------------------

    26. The Commission rejects other arguments raised in support of 
manually removing pipelines undergoing expansions from the data set. 
The Commission rejects CAPP and APV Shippers' argument that such manual 
data trimming is necessary to avoid double recovery.\51\ In this 
proceeding, the historic costs are being used to estimate the future 
relationship between oil pipeline per-barrel mile costs changes and 
PPI-FG. It is contrary to basic ratemaking principles (not to mention 
APV Shippers' own index calculations in this case) to suggest that the 
use of historic cost data to estimate future cost changes leads to a 
double-recovery of pipeline costs. All pipelines in the data set had 
rates in effect which were intended to recover their costs during the 
2009-2014 period. Furthermore, the fact that some pipelines sought a 
cost-of-service or other form of rate increase during the 2009-2014 
data collection period is irrelevant. Any index filing made during the 
2016-2021 period will be based upon the then-existing PPI-FG and will 
be for the recovery of the pipeline's future costs--not costs incurred 
during the 2009-2014 data collection period.
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    \51\ The Commission acknowledges CAPP's assertion that some 
committed shipper agreements include both (a) index increases and 
(b) additional provisions environmental health and safety cost 
increases. CAPP's concern appears to be that such committed rates 
may allow for double recovery. CAPP Reply Comments at 11. However, 
the vast majority of pipelines do not recover safety or 
environmental costs in this manner, and the index has never been 
calculated to exclude the effects of safety and environmental costs. 
To the extent that a shipper is concerned that double-recovery is 
being permitted in a particular petition for declaratory order or an 
index filing, that shipper may file a protest.
---------------------------------------------------------------------------

    27. The Commission adopts the same rationale that the Commission 
articulated in the 2010 Index Order and rejects APV Shippers' argument 
that because the Commission removes costs associated with Ultra Low 
Sulfur Diesel (ULSD) surcharges from the index calculation, it must 
also remove costs associated with committed shipper rates and cost-of-
service filings.\52\ The ULSD surcharge involves EPA regulations solely 
applicable to the shipment of diesel fuel whereas all pipelines incur 
investment costs related to building and maintaining rate base.\53\ 
Second, whereas the ULSD surcharge is solely assessed as a separate 
charge upon diesel shipments, rate base related costs are recovered 
through the primary transportation rates that apply to all crude and 
product shipments.\54\ Moreover, the ULSD surcharge presents a 
particular set of circumstances regarding a relatively modest cost, and 
it does not support the fundamental modification of the Kahn 
Methodology as proposed by the manual data trimming methodologies.
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    \52\ When the Commission first approved the ULSD surcharge in 
2006, it explained that because these charges were recovered in a 
separate surcharge and not the base transportation rates, the 
Commission would exclude the ULSD cost data from the data used to 
calculate the indexed rates. Magellan Pipeline Co., L.P., 115 FERC ] 
61,276, at P 13 (2006). The ULSD surcharge applies to costs incurred 
due to Environmental Protection Agency (EPA) regulations that 
affected a subset of pipelines transporting certain diesel products. 
The ULSD surcharge was assessed on shippers of ULSD only, and not 
shippers of other distillates and the ULSD surcharge was not subject 
to indexing. Id. P 9. Unlike APV Shippers' proposal, which would 
require the Commission to remove entire pipelines from the 
calculation of the index, the Commission's ULSD surcharge policies 
required pipelines to separately record their ULSD related costs so 
that they could be removed from the calculation of the index.
    \53\ 2010 Index Review Rehearing Order, 135 FERC ] 61,172 at P 
18.
    \54\ Moreover, unlike APV Shippers' proposal, the Commission 
does not remove pipelines from the data set based upon ULSD costs--
rather the ULSD costs are removed from the pipeline's page 700 costs 
of service. Were the APV Shippers to attempt to exclude other costs 
in a manner consistent with the ULSD precedent, they would need to 
identify those costs and remove them from the pipeline's page 700 
data. They have made no such attempt.
---------------------------------------------------------------------------

    28. The Commission also rejects CAPP's contention that the 
contractual rates are ``cross-contaminating'' the calculation of the 
index.\55\ The calculation of the index is based upon a pipeline's 
costs, not the rate methodology used by the pipeline to recover those 
costs. In some cases, pipelines using non-indexed rate methodologies 
can provide useful data that helps inform our understanding of 
industry-wide cost experience, and, as noted above, the middle 50 
percent data trimming removes pipelines with anomalous costs. Further, 
CAPP's argument for the manual data trimming relies upon its position 
that contractual committed shipper agreements reduce pipeline risk.\56\ 
This argument is contrary to CAPP's argument that inclusion of such 
pipelines inflates the index level. To the extent that volume 
commitments in these agreements have reduced the pipeline's risk, the 
page 700 total cost-of-service would reflect this reduction in the 
embedded costs of equity and costs of debt. CAPP's argument provides no 
basis for the exclusion of pipelines with committed shipper contracts.
---------------------------------------------------------------------------

    \55\ CAPP Reply Comments at 15. The Commission further notes 
that the policy permitting committed shipper rates has existed for 
nearly 20 years. Notwithstanding increased filings requesting 
committed shipper rates during the 2009-2014 period, the application 
of the Kahn Methodology to the 2009-2014 period results in a lower 
index than the Commission developed based upon 2004-2009 data in the 
2010 Index Review. This is true whether one uses the accounting data 
historically used by the Commission or page 700 data adopted in this 
order.
    \56\ CAPP Reply Comments at 5-9.
---------------------------------------------------------------------------

    29. The Commission dismisses Liquids Shippers' proposal to remove 
from the data set pipelines with rate base changes of 25 percent 
between 2013-2014. Liquids Shippers' argument that these expansions are 
``non-recurring'' is unsupported--unlike non-recurring costs in a rate 
case, capital investments represent a long term change in the 
pipeline's cost level. The proposal also errs by focusing solely on 
expansions without also considering other cost changes (increases or 
decreases) which may be ``non-recurring.'' Moreover, Liquids Shippers' 
proposal is internally inconsistent. First, Liquids Shippers' proposal 
focuses solely on rate base increases while ignoring commensurate rate 
base decreases. Second, although Liquids Shippers argue that new 2014 
expansions could be skewing the 2014 costs per barrel-mile upward while 
throughput is ramped up, the Liquids Shippers make no similar 
adjustments for 2008-2009 expansions which could be having a similar 
upward effect on 2009 costs per barrel-mile (thereby, minimizing the 
change between 2009 and 2014).\57\ As noted elsewhere in this

[[Page 81749]]

order, to the extent that expansions lead to extraordinary cost per 
barrel-mile changes, the pipelines will not be among the middle 50 
percent.
---------------------------------------------------------------------------

    \57\ Inflated 2009 costs per barrel-mile would lower the 
apparent cost changes over the 2009-2014 period.
---------------------------------------------------------------------------

    30. The Commission also rejects Liquids Shippers' assertion that 
Enbridge Energy, Limited Partnership (Enbridge Lakehead) distorts the 
index calculation. As shown in Attachment A, Enbridge Lakehead is not 
included in the middle 50 percent of page 700 per barrel-mile cost 
change data adopted herein. Further, to the extent that Enbridge 
Lakehead heavily influenced the calculations in the June 2015 NOI, this 
resulted from the Kahn Methodology's longstanding (and unchallenged) 
use of a weighted average based upon pipeline barrel-miles.\58\
---------------------------------------------------------------------------

    \58\ Enbridge Lakehead transported over 15 percent of total 
industry barrel-miles in 2014. Attachment A, Exhibit 7.
---------------------------------------------------------------------------

2. APV Shippers Additional Manual Trimming Adjustments
a. Comments
    31. APV Shippers propose additional manual trimming adjustments to 
the data set in order to remove pipelines which they state reported 
2009 data that was ``non-comparable'' to the pipeline's 2014 data. 
Toward this objective, APV Shippers propose that the Commission remove 
the following from the data set:
     Four pipelines that began or ceased operations during 2009 
or 2014 because these pipelines' page 700 may include a full year's 
rate base, but only a partial year's operating costs.
     Ten pipelines with significant divestitures or 
acquisitions between 2009 and 2014.
     Four pipelines with other operational changes or data 
reporting anomalies on page 700.
     Eleven pipelines that APV Shippers assert report a 
combination intrastate and interstate barrel-mile data on page 700.
    32. AOPL opposes these proposed adjustments, claiming that such 
manual data trimming is prone to bias and error. AOPL states that 
statistical data trimming using the middle 50 percent or middle 80 
percent provides a more appropriate resolution for these issues.
b. Discussion
    33. The Commission declines to adopt APV Shippers' manual data 
trimming proposal. As previously explained, the Commission trims the 
data set to the middle 50 percent to address any potential distortions 
caused either by (a) outlying data or (b) spurious data.\59\ To the 
extent reporting errors or other circumstances cause a pipeline's cost 
changes to differ significantly from industry norms, such outlying 
pipelines will not be among the middle 50 percent. APV Shippers have 
not demonstrated that data anomalies within the middle 50 percent are 
distorting the Kahn Methodology's calculations.\60\
---------------------------------------------------------------------------

    \59\ E.g., 2010 Index Review, 133 FERC ] 61,228 at P 7.
    \60\ Fifteen of the 41 pipelines that APV Shippers seek to 
remove from the data set via manual trimming remain in the 
Commission's middle 50 percent. Attachment A, Exhibit 10. When those 
15 pipelines are manually removed from the middle 50 percent, the 
cost-of-service per barrel-mile increases by a very small amount, 
from 1.23 to 1.33. Attachment A, Exhibit 8.
---------------------------------------------------------------------------

    34. Any potential improvement from manual data trimming is 
outweighed by the increase in the potential for error or manipulation. 
Manual data trimming requires a pipeline-by-pipeline analysis of page 
700 data and subjective decisions involving that data. Fully validating 
APV Shippers' proposal would require the Commission and industry 
participants to evaluate the specific circumstances for nearly 130 
pipelines.\61\ Consistent application of the ``non-comparability'' 
standard would also require addressing whether APV Shippers identified 
every possible characteristic which could render a pipeline's data 
``non-comparable.'' \62\ Without such a comprehensive review, there is 
no way to verify that the selective data trimming methods employed by 
APV Shippers do not skew the index calculation either upward or 
downward.
---------------------------------------------------------------------------

    \61\ Starting with a preliminary data set of 129 pipelines, APV 
Shippers manually data trim 41 pipelines. O'Loughlin August 2015 
Affidavit at 21.
    \62\ Under manual data trimming, the decision regarding which 
pipelines should be retained in the data set is as subjective (and 
as important) as to which pipelines to remove. Yet, as explained 
below, APV Shippers' methodology provides little certainty that the 
pipelines remaining in the data set reported ``comparable data'' 
between 2009 and 2014.
---------------------------------------------------------------------------

    35. Illustrating the difficulty of such a process, APV Shippers 
concede that their manual data trimming methodology does not remove 
from the data set all pipelines reporting ``non-comparable'' data. When 
AOPL presented evidence that the six pipelines with the lowest per 
barrel-mile cost remaining in APV Shippers' data set should have been 
removed under the ``non-comparability'' standard, the APV Shippers 
conceded that these six pipelines ``likely had sufficient reason to be 
excluded.'' \63\ The failure to remove these pipelines affected APV 
Shippers' index calculation.\64\ Moreover, attempting to minimize the 
effect of retaining these pipelines in the data set, APV Shippers 
emphasized that additional pipelines (this time with higher cost 
changes) with ``non-comparable data'' were also not removed.\65\ By APV 
Shippers' own concession, the processes used by APV Shippers were 
inadequate for consistently identifying and removing ``non-comparable'' 
data.\66\
---------------------------------------------------------------------------

    \63\ O'Loughlin October 2015 Affidavit at 70. Of these six 
pipelines, Arrowhead Louisiana Gathering, LLC explained that a 
significant shift in its page 700 data was due to an accounting 
change. Shehadeh October 2015 Affidavit at 14-17. Another, Conoco 
Offshore Pipeline, experienced a leak that caused its costs per 
barrel-mile to temporarily spike in 2009, thereby distorting the 
measure of cost change between 2009 and 2014. Id. A third, Mobile 
Eugene Island divested 50 percent of its assets. Id. Two others 
reported data anomalies, Belle Rose NGL Pipeline (throughput 
dropping from 273 million to 6 million without any commensurate 
change in assets) and Total Petrochemical Pipeline US Inc. 
(reporting both 100 percent debt and equity capital structure). The 
sixth pipeline, Valero MKS Logistics LLC, showed ROE percentages of 
five percent in 2008 and five percent in 2010, with an unexplained 
spike to 16.73 percent 2009. In the last instance, it is unclear 
whether this spike was erroneous or in some sense captured real 
changing pipeline costs during the economic upheaval of the 2008-
2009 recession. In any case, this type of uncertainty and the 
requirement for this type of subjective decision further supports 
the rejection of the ``non-comparability'' manual data trimming 
methodology.
    \64\ Removing these six pipelines alone would have raised the 
index level in APV Shippers' final calculation from PPI-FG+0.5 to 
PPI-FG+0.9. Attachment A, Exhibit 9.
    \65\ O'Loughlin October 2015 Affidavit at 70-71.
    \66\ APV Shippers relied upon certain filters for determining 
which pipelines to scrutinize further. O'Loughlin September 2015 
Affidavit at 31-32; O'Loughlin October 2015 Affidavit at 66-71. As 
discussed above, these filters were not sufficient for identifying 
those pipelines that needed to be evaluated in order to consistently 
apply APV Shippers manual data screening methodology. Most of the 
anomalies identified by AOPL were apparent from the data reported on 
Form No. 6, and, to the extent that AOPL obtained this information 
from other filings with the Commission or other sources, it is not 
clear why a manual trimming methodology should exclude this 
information.
---------------------------------------------------------------------------

    36. APV Shippers have failed to demonstrate that manual data 
trimming should be incorporated into the Kahn Methodology. As the 
Commission explained both in the 2010 Index Review and this proceeding, 
to manually trim the data set solely based upon one factor (such as 
large rate base changes) is biased and has the potential to distort the 
index calculation.\67\ On the other hand, the manual identification of 
every pipeline with potentially anomalous or idiosyncratic 
characteristics would require several highly subjective decisions. This 
subjective process is prone to bias and error. In contrast, statistical 
data trimming using the middle 50 percent is objective, transparent, 
and minimizes the need to analyze individual pipeline data.
---------------------------------------------------------------------------

    \67\ 2010 Index Review, 133 FERC ] 61,228 at P 49.
---------------------------------------------------------------------------

    37. Further, contrary to APV Shippers' arguments, manual data

[[Page 81750]]

trimming is not a mere extension to the existing processes in the Kahn 
Methodology. The Commission disagrees with APV Shippers' claim that the 
Commission already makes other adjustments to the data set to ensure 
``comparability.'' \68\ The adjustments made by the Commission have 
served a different purpose. The Commission's removal of pipelines with 
incomplete data is inapposite to the manual data trimming proposed by 
APV Shippers. It is mathematically impossible to evaluate a pipeline's 
year-on-year changes in barrel-mile costs when no such data exist. 
Thus, those pipelines with incomplete data cannot be incorporated into 
the data set.\69\ In contrast, APV Shippers propose to remove pipelines 
that have reported the data necessary to evaluate annual barrel-mile 
cost changes. The use of an objective measure not to incorporate those 
pipelines that mathematically cannot be used is distinct from the 
subjective process proposed by APV Shippers.
---------------------------------------------------------------------------

    \68\ O'Loughlin August 2015 Affidavit at 17.
    \69\ 2010 Index Review Rehearing Order, 135 FERC ] 61,172 at P 
15.
---------------------------------------------------------------------------

    38. Likewise, the Commission rejects APV Shippers' analogy of 
manual data trimming to the Kahn Methodology's traditional treatment of 
mergers. Historically, when two pipelines have combined, the Commission 
has added separate costs the pipelines reported on Form No. 6 in the 
first year of the data set (e.g. 2009) and compared this sum to the 
newly combined company's costs in the last year of the data set (e.g. 
2014). Without this step, the absorbed pipeline's cost data would be 
needlessly discarded.\70\ Commission efforts to preserve cost change 
data should not be confused with an effort to ensure ``comparability.'' 
On the contrary, a merger may change several aspects of company 
operations and significantly alter the pipeline's business 
circumstances. Preserving data, not ``comparability,'' was the 
justification for the Kahn Methodology's historic treatment of 
mergers.\71\
---------------------------------------------------------------------------

    \70\ If a pipeline is completely absorbed by another pipeline, 
this pipeline no longer reports Form No. 6 data and such data would 
not be available for measuring cost changes.
    \71\ We further note that APV Shippers' treatment of mergers and 
divestitures is not analogous to the Kahn Methodology's treatment of 
mergers and divestitures. As opposed to preserving data, APV 
Shippers propose to remove from the data set (a) pipelines that sold 
a portion (not all) of their pipeline assets and (b) the pipeline 
that acquired those assets. This step is not justified. 
Notwithstanding the asset transfer, many of the pipelines that APV 
Shippers propose to remove have filed page 700 data over the entire 
2009-2014 data collection period. Moreover, there is no evidence 
that these asset transfers are improperly influencing the index 
level. A merger may cause a pipeline's barrel-mile costs to go up or 
down depending upon the barrel-mile costs of the transferred asset. 
Of course, if the acquiring or purchasing pipeline experienced 
particularly large (or small) barrel-mile cost changes, those 
pipelines would be trimmed by the application of the middle 50 
percent.
---------------------------------------------------------------------------

    39. The Commission also rejects APV Shippers' analogy to the Kahn 
Methodology's full utilization of the data on Form No. 6 in order to 
correct missing or erroneous data. As APV Shippers note, when data has 
been missing or erroneous in one portion of a pipeline's Form No. 6, 
the Commission has sometimes substituted data from elsewhere on the 
Form No. 6.\72\ Such substitutions, which utilize data that the 
pipeline has already reported on Form No. 6, are not akin to manual 
data trimming that completely removes pipelines from the data set in an 
effort to achieve an undefinable ``comparability.'' \73\
---------------------------------------------------------------------------

    \72\ 2005 Index Review, 114 FERC ] 61,293 at PP 43-44 
(reconciling operating revenue data from different sections of the 
Form No. 6). In addition, a similar process has been applied to the 
use of Form No. 6 page 700 barrel-mile data for missing or erroneous 
barrel-mile data reported on Form No. 6 page 600. Although APV 
Shippers raise methodological objections to this particular 
adjustment, this issue has been rendered moot by the Commission's 
adoption of page 700 data.
    \73\ The Commission further dismisses APV Shippers' reference to 
the 2010 Index Review Rehearing's statement that ``Although the Kahn 
Methodology removes from the data set those pipelines that reported 
erroneous or incomplete data, erroneous or incomplete data differ 
from the accurately reported actual costs Valero and ATA seek to 
remove using the rate base screening methodology.'' APV Shippers 
Initial Comments at 22 (citing 2010 Index Review Rehearing Order, 
135 FERC ] 61,172 at P 15). Placed in proper context, this statement 
is not an endorsement of manual data trimming for erroneous data. 
This comment regarding erroneous data was made solely in the context 
of rejecting an analogy made by Valero. Elsewhere, the 2010 Index 
Review order explained that the Commission uses the middle 50 
percent to remove pipelines reporting spurious (i.e. erroneous) 
data. 2010 Index Review order, 133 FERC ] 61,228 at P 7. As 
discussed above, the specific analogies made by APV Shippers to 
prior Commission applications of the Kahn Methodology do not support 
the adoption of their proposed manual data trimming.
---------------------------------------------------------------------------

C. Middle 80 Percent Data Trimming

1. Comments
    40. AOPL urges the Commission to determine the index using an 
average of applying the Kahn Methodology to the (a) middle 50 percent 
and (b) middle 80 percent. In the June 2015 NOI, the Commission trimmed 
the data set to the middle 50 percent, which removes the 25 percent of 
pipelines with the greatest cost increases and the 25 percent of 
pipelines with the greatest cost decreases. AOPL states that the 
Commission should also consider the middle 80 percent because: (a) The 
accuracy of the middle 80 percent data is supported by its conformity 
to a lognormal distribution and (b) using the middle 80 percent 
accounts for more barrel-miles.\74\
---------------------------------------------------------------------------

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

    41. CAPP,\75\ HollyFrontier/Western,\76\ Liquid Shippers,\77\ and 
APV Shippers \78\ assert that the middle 50 percent is a superior data 
source because, among other reasons, the middle 50 percent removes more 
anomalous and erroneous data.
---------------------------------------------------------------------------

    \75\ CAPP Reply Comments at 15.
    \76\ HollyFrontier/Western Reply Comments at 7.
    \77\ Liquids Shippers Reply Comments at 13.
    \78\ APV Shippers Reply Comments at 17-19.
---------------------------------------------------------------------------

2. Discussion
    42. The Commission rejects AOPL's proposal to calculate the index 
based upon both the middle 80 percent and the middle 50 percent.\79\ In 
the 2010 Index Review, the Commission determined that the index should 
be calculated based upon the middle 50 percent alone.\80\ As the 
Commission explained in the 2010 Index Review, the middle 50 percent, 
more effectively than the middle 80 percent, excludes pipelines with 
anomalous cost changes while avoiding the complexity and distorting 
effects of subjective, manual data trimming methodologies.\81\
---------------------------------------------------------------------------

    \79\ AOPL's proposal averages the results by applying the Kahn 
Methodology using the middle 50 percent of the data set and the 
middle 80 percent of the data set. This would raise the index level 
from the approximately PPI-FG+1.2 to PP-FG+1.65 when applied to the 
page 700 data.
    \80\ As the Commission explained in the 2010 Index Review, this 
returned the Commission's policy to the application of the Kahn 
Methodology in Order No. 561, which based its calculation of the 
index on the middle 50 percent alone. 2010 Index Review, 133 FERC ] 
61,228 at P 60. Although the middle 80 percent was used in the 2000 
and 2005 reviews, the Commission made this change without providing 
a rationale for the change or explaining the departure from previous 
practice. Id. Once the issue was presented to the Commission in the 
2010 Index Review, the Commission determined that the middle 50 
percent alone provided a more appropriate means for trimming the 
data sample. Id. P 61.
    \81\ 2010 Index Review, 133 FERC ] 61,228 at PP 60-63.
---------------------------------------------------------------------------

    43. The record in this proceeding does not provide a basis for 
altering that position. We are not persuaded by AOPL's argument that 
the middle 80 percent should be considered merely because it conforms 
to a lognormal distribution. Conformity with a particular statistical 
distribution may generally support the accuracy of the middle 80 
percent data. However, by definition, costs at the top (or bottom) of 
the middle 80 percent deviate significantly from the cost experience of 
other pipelines.\82\ To the extent that the

[[Page 81751]]

middle 80 percent data conforms to a lognormal distribution, outlying 
cost increases per barrel-mile will not be offset by similarly outlying 
cost decreases. Thus, using the middle 80 percent would skew the index 
upward based upon these outlying cost increases, which is contrary to 
the objective of the index to reflect normal industry-wide cost 
changes.
---------------------------------------------------------------------------

    \82\ Id. P 61.
---------------------------------------------------------------------------

    44. Similarly, the Commission rejects AOPL's argument that the 
middle 80 percent should be used merely because it contains more 
barrel-miles. The Kahn Methodology aims to capture the central tendency 
of the data set so that the index is not distorted by outlying costs. 
Pipelines in the middle 80 percent, as opposed to the middle 50 
percent, are more likely to have outlying cost changes which could 
result from idiosyncratic factors particular to that pipeline.\83\ By 
considering the entire data set (without manual trimming) \84\ and then 
applying statistical data trimming to the middle 50 percent, the 
Commission addresses these issues via a methodology that is objective 
and transparent.\85\
---------------------------------------------------------------------------

    \83\ The middle 80 percent of the Commission's page 700 data set 
includes 30 of the 41 pipelines identified by APV Shippers as 
warranting exclusion from the data set because they have anomalous 
data during 2009-2014, including 10 of the 12 pipelines APV Shippers 
excluded because they filed cost-of-service rate increases or 
petitions seeking approval of committed shipper rates. Attachment A, 
Exhibit 10. In contrast, the middle 50 percent includes only 15 of 
the pipelines APV Shippers seek to manually trim from the data set, 
and, in particular, only three of the 12 pipelines APV Shippers 
proposes to exclude due to cost-of-service rate filings or committed 
shipper rates. Id.
    \84\ The data set consists of pipelines that have filed complete 
data and are subject to the indexing regulations.
    \85\ It is also not the case that the middle 50 percent 
represents a narrow or selective sector of the industry. On the 
contrary, the Commission began with a page 700 data set that, prior 
to statistical data trimming, includes more pipelines (130) than 
AOPL's data set (123). Once the middle 50 percent has been applied, 
the statistically trimmed data set includes more than 50 percent of 
industry barrel-miles. Attachment A, Exhibit 1. Although this is a 
lower percentage than in some prior reviews, this is not a 
sufficient basis to risk including more outlying data. Moreover, 
much of the difference in barrel-miles from the 2010 Index Review 
can be attributed to the fact that Enbridge Lakehead, a pipeline 
representing over 15 percent of the barrel-miles in the data set, 
was in the middle 50 percent in 2010, but is not in the middle 50 
percent in this proceeding. Compare Appendix A, Exhibit 1 with AOPL, 
Initial Comments, Docket No. RM10-25-000, Declaration of Ramsey 
Shehadeh, Appendix B.
---------------------------------------------------------------------------

D. Crude Versus Product Pipelines

1. Comments
    45. APV Shippers state that if the Commission declines to adjust 
the data set for large capital expenditures and other erroneous data, 
the Commission should establish separate indices for crude and product 
pipelines. APV Shippers state that, using page 700 data without data 
trimming, the middle 50 percent of crude pipelines had an index 
differential of PPI-FG+3.36 percent and the middle 50 percent of 
petroleum product pipelines showed an index differential of PPI-FG+0.4 
percent.\86\ APV Shippers state that these differentials result from 
significant crude pipeline projects over the past few years. AOPL and 
Liquids Shippers oppose the use of separate indices for crude and 
product pipelines.
---------------------------------------------------------------------------

    \86\ APV Shippers Initial Comments at 42 (citing O'Loughlin 
August 2015 Affidavit at 91).
---------------------------------------------------------------------------

2. Discussion
    46. The Commission declines to adopt the proposal to use different 
indices for crude and product pipelines. Contrary to APV Shippers' 
claim that the differences in the index differentials result from wide-
spread crude pipeline expansions, the discrepancy primarily occurs due 
to (a) the effect of two very large crude pipelines which happen to 
have above average cost changes and (b) one very large product pipeline 
which happens to have below average cost changes. Data discrepancies 
caused by only three pipelines do not justify the claim that crude and 
product pipelines as a whole are experiencing dramatically different 
cost changes.\87\ Moreover, to the extent that a somewhat 
disproportionate number of crude pipelines recorded outlying barrel-
mile cost changes, this issue is sufficiently addressed by application 
of the middle 50 percent to the combined data set of all pipelines.\88\
---------------------------------------------------------------------------

    \87\ The relatively large crude pipelines are (a) Enbridge 
Lakehead and (b) Mid-Valley Pipeline Company. The very large product 
pipeline is Colonial Pipeline Company. These pipelines have a 
disproportionate effect because the Kahn Methodology uses a weighted 
average in conjunction with a simple average to measure the central 
tendency. Although the size of these pipelines makes their data 
particularly relevant for assessing industry-wide barrel-mile cost 
changes, data from such a small number of crude pipelines (2 out of 
60) or product pipelines (1 out of 48) appears insufficient to 
demonstrate an extreme difference between crude and product 
pipelines costs. Simply removing the effect caused by those few 
pipelines' data reduces the differential between crude and product 
pipelines from 295 basis points, as calculated by APV Shippers, to a 
much smaller differential of 48 basis points, or PPI-FG+1.14 (crude 
pipelines) and PPI-FG+0.66 (product pipelines). Attachment A, 
Exhibit 11.
    \88\ Of the pipelines in the middle 50 percent of page 700 data 
used by the Commission, the included product pipelines (excluding 
Colonial, as explained supra) would result in an index level of PPI-
FG+1.05 and crude pipelines would have an index level of PPI-
FG+1.14. Attachment A, Exhibit 12.
---------------------------------------------------------------------------

E. Liquids Shippers & CAPP Proposal To Set Index at PPI-FG and To 
Revise Commission Regulations To Abandon Indexing

1. Comments
    47. Liquids Shippers state that the Commission should temporarily 
set the index at PPI-FG while undertaking a review of the Commission's 
oil pipeline regulations. Among other things, the Liquids Shippers 
complain that oil pipeline indexing increases have exceeded interstate 
natural gas pipeline rate increases, that the indexing increases have 
exceeded the consumer price index (CPI), and that certain oil pipelines 
have been over-recovering. The Liquids Shippers state that the 
Commission should consider abolishing the indexing methodology, or, to 
the extent that indexing is retained, change the manner in which the 
Commission evaluates oil pipeline index filings. In its reply comments, 
CAPP endorses these proposals. AOPL opposes Liquids Shippers' proposals 
and disputes their various claims.
2. Discussion
    48. The Commission declines to adopt the Liquids Shippers' proposal 
to temporarily set the index at PPI-FG as unsupported. The evidence in 
this proceeding demonstrates that oil pipeline cost changes between 
2009 and 2014 have exceeded PPI-FG. Liquids Shippers provide no 
compelling reason to depart from the longstanding practice of 
calculating the index based upon historic pipeline costs.\89\ In 
particular, the Commission rejects Liquids Shippers' claim that recent 
audits revealed reporting errors rendering Form No. 6 data unusable; on 
the contrary, the errors discovered by these audits were relatively 
limited.\90\ Furthermore, as discussed previously, the middle 50 
percent data trimming removes the allegedly anomalous data that Liquids 
Shippers claim distorts the index calculation.\91\ Finally, Liquids

[[Page 81752]]

Shippers' claim that oil pipeline index increases exceed the CPI does 
not support changes to the index because Liquids Shippers have not 
demonstrated that historic, industry-wide oil pipeline cost changes 
have corresponded to the CPI.\92\
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    \89\ E.g. AOPL II, 281 F.3d at 247 (quoting EPAct 1992, at 
1801(a) and noting that the Commission satisfied the statutory 
objective by calculating the index based upon historic costs).
    \90\ Liquids Shippers have made no showing that the issues 
raised in these audits are such that they would materially alter the 
industry-wide index calculation.
    \91\ In initial comments, Liquids Shippers identified four 
pipelines (Enbridge Lakehead; TransCanada Keystone Pipeline, LP; 
Seaway Crude Pipeline Company Co.; Enterprise TE Products Pipeline 
Company LLC) as reporting anomalous data. Yet, none of these 
pipelines are included in the middle 50 percent, and, in fact, 
TransCanada Keystone is not even in the data set because they did 
not file 2009 Form No. 6 information. Attachment A, Exhibit 6.
    \92\ Similarly, Liquids Shippers' comparison to natural gas 
pipeline rate changes is misleading because Liquids Shippers' data 
only includes a portion of natural gas pipelines (not all natural 
gas pipelines) and does not include all rate changes proposed by 
those pipelines. Shehadeh October 2015 Affidavit at 31. The 
underlying economic premise of this analysis is also flawed. First, 
as Dr. Shehadeh explains, the analogy to natural gas pipelines 
depends upon a misunderstanding of prices--as price levels, not 
price growth, are determined by the level of competition in an 
industry. Id. at 30. Second, Liquids Shippers do not establish that 
the same market forces determining natural gas pipeline prices apply 
to oil pipelines. Id.
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    49. Liquids Shippers' arguments that the Commission should change 
its regulations governing indexing are beyond the scope of this 
proceeding. The June 2015 NOI sought comment regarding two narrow 
issues, (a) the proposed index level and (b) possible changes to the 
Kahn Methodology used to calculate the index level.\93\ Liquids 
Shippers' comments regarding the Commission's indexing policies, 
committed shipper contracts,\94\ and other issues are beyond the scope 
of this limited inquiry.
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    \93\ June 2015 NOI, 151 FERC ] 61,278 at P 1.
    \94\ This five-year review addresses the calculation of the 
industry-wide index-level. Negotiated committed shipper contracts 
only incorporate indexing when both the pipeline and the committed 
shippers accept such terms. Any objections to these negotiated 
provisions (including the application of indexing) may be raised 
during the applicable petition for declaratory order process.
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    50. Further, Liquids Shippers' comments have not persuaded us to 
reexamine the Commission-approved indexing methodology.\95\ In general 
terms, Liquids Shippers have not substantiated their claims of 
unchecked oil pipeline over-recoveries. For example, of the 20 
pipelines (out of Liquids Shippers' sample of 42) that Liquids Shippers 
allege are over-recovering, evidence provided in this proceeding 
indicates that 15 actually under-recovered their cost-of-service in one 
(and in many cases more) of the years between 2009 and 2014.\96\ 
Furthermore, to the extent issues arise on a particular pipeline, a 
shipper may file complaints or protests against indexed rate increases 
\97\ or complaints against an oil pipeline's underlying base rates. In 
addition to being beyond the scope of the June 2015 NOI, Liquids 
Shippers have not substantiated their claims.\98\
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    \95\ The Commission's indexing methodology was affirmed on 
appeal following Order No. 561. AOPL I, 281 F.3d 239. The dissents 
and other materials from that proceeding cited by Liquids Shippers 
were part of the record at that time. In addition, Liquids Shippers 
cite a Congressional letter which was written before the indexing 
regulations were finalized, and does not accurately portray how 
those regulations have been implemented. For example, the letter 
implies that the index may only increase rates, when, in fact, under 
Commission regulations the index may require rates to go down. See 
18 CFR 342.3(e) (2015).
    \96\ See Shehadeh September 2015 Affidavit at 32. Further, the 
industry as a whole continues to show an under-recovery of the 
aggregate page 700 cost-of-service. Moreover, as has been recognized 
from the inception of indexing, some pipelines costs will exceed the 
rate increases allowed by indexing whereas efficient pipelines may 
benefit from controlling their costs. Order No. 561, FERC Stats. & 
Regs. ] 30,985 at 30,948-49.
    \97\ Liquids Shippers argue that pipelines with page 700 
revenues exceeding page 700 cost of service should not receive index 
increases. To the extent that index rate filings of particular 
pipelines substantially exacerbate pre-existing over-recoveries, 
current Commission policies allow shippers to file complaints 
against those index increases. BP West Coast Products, LLC v. SFPP, 
L.P., 121 FERC ] 61,141 (2007).
    \98\ Remaining issues regarding the Commission's regulatory 
policies may be raised in an adjudicatory context or another, more 
appropriate forum.
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F. Suncor's Proposals

    51. The Commission will not adopt the various proposals advanced by 
Suncor. The Commission's adoption of page 700 data addresses several of 
these proposals, which were advanced as alternatives should the 
Commission not adopt page 700 data. In addition, the Commission also 
will not adopt Suncor's proposed alternative methodology to trim the 
data set based upon anomalous years (as opposed to trimming pipelines 
reporting anomalous data) because the justification for this proposal, 
including the use of broader data set, was based upon the previously 
used Form No. 6 accounting data, not the page 700 data. Moreover, AOPL 
has presented evidence that Suncor's proposal included significant 
computational errors.\99\
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    \99\ Shehadeh September 2015 Affidavit at 38.
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IV. 2016-2021 Oil Pipeline Index

    52. Based on the foregoing, the Commission calculates the five-year 
review of the index level used to determine annual changes to oil 
pipeline rate ceilings for the five-year period commencing July 1, 2016 
as follows. First, as shown in Attachment A (Exhibit 13, Exhibit 14) we 
remove those pipelines that did not provide Form No. 6, page 700 data 
or provided incomplete data. Second, as shown in Attachment A (Exhibit 
15) we look at the data on Form No. 6, page 700 to calculate each 
pipeline's cost change on a per barrel-mile basis over the prior five-
year period (e.g. the years 2009-2014 in this proceeding). Third, in 
order to remove statistical outliers and spurious data, we trim the 
data set to those pipelines in the middle 50 percent of cost changes. 
Fourth, as shown in Attachment A (Exhibit 15) we calculate three 
measures of the middle 50 percent's central tendency: The median, the 
mean, and a weighted mean. Fifth, we calculate a composite by taking a 
simple average of those three measures of central tendency, as shown in 
Attachment A (Exhibit 1). Finally, this composite is compared to the 
value of the PPI-FG index data over the same period. The index level is 
then set at PPI-FG plus (or minus) this differential. Using these 
calculations, the Commission establishes an index level of PPI-FG plus 
1.23 percent (PPI-FG+1.23) for the five-year period commencing July 1, 
2016.

The Commission Orders

    Consistent with the discussion in this order, the Commission 
determines that the appropriate oil pricing index for the next five 
years, July 1, 2016 through June 30, 2021, is PPI-FG+1.23.

    By the Commission.

    Issued: December 17, 2015.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2015-32701 Filed 12-30-15; 8:45 am]
 BILLING CODE 6717-01-P