[Federal Register Volume 85, Number 128 (Thursday, July 2, 2020)]
[Proposed Rules]
[Pages 39854-39856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13623]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 342
[Docket No. RM20-14-000]
Five-Year Review of the Oil Pipeline Index
AGENCY: Federal Energy Regulatory Commission, Department of Energy.
ACTION: Notice of inquiry.
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SUMMARY: The Federal Energy Regulatory Commission (Commission) invites
comments on its proposed index level used to determine annual changes
to oil pipeline rate ceilings. The Commission proposes to use the
Producer Price Index for Finished Goods (PPI-FG) plus 0.09% as the
index level for the five-year period commencing July 1, 2021. The
Commission invites interested persons to submit comments regarding this
proposal and any alternative methodologies for calculating the index
level.
DATES: Initial Comments are due on or before August 17, 2020, and Reply
Comments are due on or before September 11, 2020.
ADDRESSES: You may submit comments, identified by docket number, by any
of the following methods:
Agency Website: http://www.ferc.gov. Documents created
electronically using word processing software should be filed in native
applications or print-to-PDF format and not in a scanned format. All
supporting workpapers must be submitted with formulas and in a
spreadsheet format acceptable under the Commission's eFiling rules.
Mail/Hand Delivery: Commenters unable to file comments
electronically must mail or hand deliver an original to: Federal Energy
Regulatory Commission, Office of the Secretary, 888 First Street NE,
Washington, DC 20426.
FOR FURTHER INFORMATION CONTACT:
Monil Patel (Technical Information), Office of Energy Market
Regulation, Federal Energy Regulatory Commission, 888 First Street NE,
Washington, DC 20426, (202) 502-8296, [email protected].
Evan Steiner (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street NE, Washington,
DC 20426, (202) 502-8792, [email protected].
SUPPLEMENTARY INFORMATION:
1. The Commission annually applies an index to existing oil
pipeline transportation rate ceilings to establish new rate ceiling
levels.\1\ The Commission reexamines the index level every five
years.\2\ In this notice of inquiry (NOI), the Commission invites
comments on its proposal to use the Producer Price Index for Finished
Goods (PPI-FG) \3\ plus 0.09% as the index level for the next five
years beginning July 1, 2021.\4\ This proposal is based on the Kahn
Methodology established in Order No. 561 and applied in subsequent
five-year index review proceedings.\5\
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\1\ Indexing allows oil pipelines to change their tariff rates
so long as those rates remain at or below certain ceiling levels. 18
CFR 342.3(a).
\2\ The five-year index review process was established in Order
No. 561. See Revisions to Oil Pipeline Regulations Pursuant to the
Energy Policy Act of 1992, Order No. 561, FERC Stats. & Regs. ]
30,985 (1993), order on reh'g, Order No. 561-A, FERC Stats. & Regs.
] 31,000 (1994), aff'd, Ass'n of Oil Pipe Lines v. FERC, 83 F.3d
1424 (D.C. Cir. 1996).
\3\ The PPI-FG is determined and issued by the Bureau of Labor
Statistics, U.S. Department of Labor.
\4\ As provided by 18 CFR 342.3(d)(2), ``The index will be
calculated by dividing the PPI-FG for the calendar year immediately
preceding the index year, by the previous calendar year's PPI-FG.''
Multiplying the rate ceiling effective on June 30 of the index year
by the resulting number establishes the new rate ceiling for the
year beginning the next day, July 1.
\5\ Five-Year Review of the Oil Pipeline Index, 153 FERC ]
61,312, at PP 5, 12-18 (2015) (2015 Index Review), aff'd, Ass'n of
Oil Pipe Lines v. FERC, 876 F.3d 336 (D.C. Cir. 2017); Five-Year
Review of Oil Pipeline Pricing Index, 133 FERC ] 61,228, at PP 5-9,
60-63 (2010) (2010 Index Review), order on reh'g, 135 FERC ] 61,172
(2011); see also Five-Year Review of Oil Pipeline Pricing Index, 114
FERC ] 61,293 (2006) (2005 Index Review); Five-Year Review of Oil
Pipeline Pricing Index, 102 FERC ] 61,195 (2003), aff'd, Flying J
Inc. v. FERC, 363 F.3d 495 (D.C. Cir. 2004).
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2. As discussed below, commenters are invited to submit comments
[[Page 39855]]
regarding the Commission's proposal and any alternative methodologies
for calculating the index level. Among other issues, these comments may
address different data trimming methodologies and whether and how the
index should reflect changes to the Commission's policies regarding
income tax costs and return on equity (ROE). The Commission will select
a final index level at the conclusion of this proceeding.
I. Background
A. Five-Year Review Process
3. In Order No. 561, the Commission established an indexing
methodology that allows oil pipelines to change rates based upon an
annual index as opposed to making cost-of-service filings.\6\ The
Commission committed to review the index level every five years to
ensure that the index level chosen by the Commission adequately
reflects changes to industry costs.\7\
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\6\ Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,947.
\7\ Id.
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4. In Order No. 561 and each successive five-year index review, the
Commission has calculated the index level based upon a methodology
developed by Dr. Alfred E. Kahn.\8\ The Kahn Methodology uses pipeline
data from Form No. 6, page 700 \9\ from the prior five-year period to
determine an adjustment to be applied to PPI-FG. The calculation is as
follows. Each pipeline's cost change on a per barrel-mile basis over
the prior five-year period (e.g., the years 2014-2019 in this
proceeding) is calculated. In order to remove statistical outliers and
spurious data, the resulting data set is trimmed to those oil pipelines
in the middle 50% of cost changes. The Kahn Methodology then calculates
three measures of the middle 50% central tendency: The median, the
mean, and a weighted mean.\10\ The Kahn Methodology calculates a
composite by averaging these three measures of central tendency and
measures the difference between the composite and the PPI-FG over the
prior five-year period. The index level is then set at PPI-FG plus (or
minus) this differential.
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\8\ The Commission's use of the Kahn Methodology has been
affirmed by the United States Court of Appeals for the District of
Columbia Circuit. Ass'n of Oil Pipelines v. FERC, 83 F.3d 1424 (D.C.
Cir. 1996); Flying J Inc. v. FERC, 363 F.3d 495 (D.C. Cir. 2004).
\9\ 2015 Index Review, 153 FERC ] 61,312 at P 12 (updating the
Commission's calculation of the five-year oil pipeline index to use
page 700 data to measure changing barrel-mile costs). Page 700
provides summarized interstate barrel-mile and cost-of-service data
consistent with the Commission's cost-of-service methodology. Id. PP
12-13, 16.
\10\ The weighted mean assigns a different weight to each
pipeline's cost change based on the pipeline's total barrel-miles.
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B. Developments Since the Most Recent Five-Year Review
5. Since the Commission's most recent review of the index in 2015,
the Commission has adopted two major changes to the cost-of-service
methodology used to populate page 700 data. First, in 2018, the
Commission revised its policy concerning the treatment of income taxes
and Accumulated Deferred Income Taxes (ADIT) in the rates of master
limited partnership (MLP) pipelines (income tax policy change).
Following the remand in United Airlines, Inc. v. FERC,\11\ the
Commission determined that an impermissible double recovery results
from granting MLP pipelines an income tax allowance when using the
discounted cash flow (DCF) methodology.\12\ Thus, the Commission
instructed MLP oil pipelines to eliminate the income tax allowance from
page 700 costs filed on April 18, 2018 \13\ and clarified that
pipelines eliminating an income tax allowance may also eliminate
previously-accumulated ADIT from their costs of service.\14\ The
Commission further stated that it would incorporate the effects of the
income tax policy change on industry-wide oil pipeline costs in the
2020 five-year review of the oil pipeline index level.\15\
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\11\ 827 F.3d 122 (D.C. Cir. 2016).
\12\ Inquiry Regarding the Commission's Policy for Recovery of
Income Tax Costs, 162 FERC ] 61,227, at P 8 (2018) (Income Tax
Policy Statement), reh'g denied, 164 FERC ] 61,030 (2018) (Income
Tax Policy Statement Rehearing Order).
\13\ Id. P 46.
\14\ Income Tax Policy Statement Rehearing Order, 164 FERC ]
61,030 at P 13.
\15\ Income Tax Policy Statement, 162 FERC ] 61,227 at P 46.
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6. Second, on May 21, 2020, the Commission issued a policy
statement revising its methodology for determining ROE for interstate
natural gas and oil pipelines (ROE policy change).\16\ The Commission
departed from its longstanding policy of determining pipeline ROEs by
relying solely on the discounted cash flow model (DCF) and expanded its
methodology to afford equal weighting to the results of DCF and Capital
Asset Pricing Model (CAPM) analyses.\17\ Moreover, the Commission
encouraged oil pipelines to file updated Form No. 6, page 700 data for
2019 reflecting the revised ROE methodology, explaining that such data
may help the Commission better estimate industry-wide cost changes for
purposes of the five-year index review.\18\ The Commission explained
that following Office of Management and Budget (OMB) approval of this
voluntary information collection pursuant to the Paperwork Reduction
Act,\19\ the Commission will issue a notice affording pipelines two
weeks to file updated Form No. 6, page 700 data reflecting the revised
ROE methodology.\20\
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\16\ Inquiry Regarding the Commission's Policy for Determining
Return on Equity, 171 FERC ] 61,155 (2020) (ROE Policy Statement).
\17\ Id. PP 18, 28, 50.
\18\ Id. P 92. The Commission further explained that pipelines
that previously filed Form No. 6 for 2019 and choose to submit
updated page 700 data should, in a footnote on the updated page 700,
either (a) confirm that their previously filed Form No. 6 was based
solely upon the DCF model or (b) provide the real ROE and resulting
cost of service based solely upon the DCF model as it was applied to
oil pipelines prior to the ROE Policy Statement. Id.
\19\ 44 U.S.C. 3501-21.
\20\ ROE Policy Statement, 171 FERC ] 61,155 at P 93. The
Commission clarified that pipelines that have not filed Form No. 6
for 2019 (e.g., pipelines that have received an extension of the
Form No. 6 filing deadline) should file page 700 data consistent
with their previously granted extensions and such filings should be
based upon the DCF model, which was the Commission's oil pipeline
ROE methodology as of April 20, 2020. Id. Moreover, upon OMB
approval of the information collection in the ROE Policy Statement,
those pipelines will have the opportunity to file updated page 700
data reflecting the Commission's revised oil pipeline ROE
methodology. Id. n.192.
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II. Commission Proposal
7. We propose PPI-FG plus 0.09% as the index level for the five-
year period commencing July 1, 2021. This proposal is based on the Kahn
Methodology as applied to Form No. 6, page 700 data from the 2014
through 2019 period. The Commission's calculations are included in
workpapers available in this docket on the Commission's eLibrary
system.\21\. This proposal is subject to change based upon the updated
Form No. 6, page 700 data for 2019 and other potential adjustments as
supported by the record in this proceeding.
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\21\ See infra P 17 (discussing the Commission's eLibrary
system).
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8. We invite interested persons to submit comments regarding the
Commission's proposal and any alternative methodologies for calculating
the index level for the five-year period commencing July 1, 2021.
Commenters may address issues that include, but are not limited to,
different data trimming methodologies and whether, and if so how, the
Commission should reflect the effects of cost-of-service policy changes
in the calculation of the index level.
[[Page 39856]]
A. Trimming of the Data Set
9. The Commission calculated the proposed index level by trimming
the data set to the middle 50 percent of all oil pipelines, consistent
with the Commission's practice in the 2010 and 2015 index reviews.\22\
We encourage commenters to address whether the Commission should
continue to trim the data set to the middle 50 or adopt an alternative
approach to data trimming, such as returning to the Commission's prior
practice of considering the middle 80 \23\ or any other approach.
Commenters should explain why any such alternative approach is superior
to the middle 50 and how it would appropriately address outliers and
spurious data that could bias the results in either direction.
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\22\ 2015 Index Review, 153 FERC ] 61,312 at PP 42-44; 2010
Index Review, 133 FERC ] 61,228 at PP 60-63.
\23\ See, e.g., 2005 Index Review, 114 FERC ] 61,293.
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B. Cost-of-Service Policy Changes
10. As discussed above, the Commission uses the Kahn Methodology to
measure changes in pipeline costs using page 700 data from the prior
five-year period. Accordingly, the Commission's proposal incorporates
the effects of the income tax policy change on industry-wide oil
pipeline costs because this policy change is reflected in pipelines'
page 700 data. The Commission's proposal does not include the effects
of the ROE policy change because page 700 data reflecting that policy
change has yet to be filed. However, as explained in the ROE Policy
Statement, the Commission will afford pipelines an opportunity to file
this data for consideration in this five-year index review.\24\ As
discussed above, interested persons may address whether, and if so how,
the Commission should reflect the effects of cost-of-service policy
changes (including the income tax policy change \25\ and the ROE policy
change \26\) in the calculation of the index level.
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\24\ ROE Policy Statement, 171 FERC ] 61,155 at P 93.
\25\ Income Tax Policy Statement, 162 FERC ] 61,227 at P 8.
\26\ ROE Policy Statement, 171 FERC ] 61,155 at P 2.
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11. However, this proceeding is not the appropriate forum to
litigate the merits of the policy changes themselves. Litigating the
merits of cost-of-service policy changes in the five-year index review
is inappropriate for several reasons. First, the index adjusts for and
the effects of subsequent changes to the Commission's cost-of-service
policies which could be incorporated into the index level in the next
five-year index review. Second, litigating policy changes in the five-
year index review would be impractical because, whereas the
Commission's policies are continually evolving, the five-year index
review is based upon a snapshot of pipeline cost changes during the
applicable review period. Third, litigating policy changes would
improperly complicate and prolong the five-year index review by
introducing complex cost-of-service issues that can require years to
resolve.\27\ The Commission must complete this five-year index review
in order to establish the index level in sufficient time for it to be
used by pipelines in the index filings to be effective July 1, 2021.
Finally, cost-of-service rate proceedings, where participants and the
Commission have a full opportunity to develop an evidentiary record,
are a more appropriate forum for litigating policy changes than the
generic, industry-wide proceeding on the five-year index review.
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\27\ See, e.g., SFPP, L.P., Opinion No. 511-C, 162 FERC ]
61,228, at PP 4-7 (2018) (noting that the litigation culminating in
the 2018 income tax policy change began in 2008).
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III. Comment Procedures
12. Initial Comments are due on or before August 17, 2020 and Reply
Comments are due on or before September 11, 2020. Comments must refer
to Docket No. RM20-14-000, and must include the name of the commenter,
the organization they represent, if applicable, and their address.
13. We encourage comments to be filed electronically via the
eFiling link on the Commission's website at http://www.ferc.gov. The
Commission accepts most standard word processing formats. Documents
created electronically using word processing software should be filed
in native applications or print-to-PDF format and not in a scanned
format. All supporting workpapers must be submitted with formulas and
in a spreadsheet format acceptable under the Commission's eFiling
rules. Commenters filing electronically do not need to make a paper
filing.
14. Commenters that are not able to file comments electronically
must send an original of their comments to: Federal Energy Regulatory
Commission, Secretary of the Commission, 888 First Street NE,
Washington, DC 20426.
15. All comments will be placed in the Commission's public files
and may be viewed, printed, or downloaded remotely as described in the
Document Availability section below. Commenters are not required to
serve copies of their comments on other commenters.
IV. Document Availability
16. In addition to publishing the full text of this document in the
Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
internet through the Commission's Home Page (http://www.ferc.gov). At
this time, the Commission has suspended access to the Commission's
Public Reference Room, due to the proclamation declaring a National
Emergency concerning the Novel Coronavirus Disease (COVID-19), issued
by the President on March 13, 2020.
17. From the Commission's Home Page on the internet, this
information is available on eLibrary. The full text of this document is
available on eLibrary in PDF and Microsoft Word format for viewing,
printing, and/or downloading. To access this document in eLibrary, type
the docket number excluding the last three digits of this document in
the docket number field.
18. User assistance is available for eLibrary and the Commission's
website during normal business hours. For assistance, please contact
the Commission's Online Support at (202) 502-6652 (toll free at 1-866-
208-3676) or email at [email protected], or the Public
Reference Room at (202) 502-8371, TTY (202) 502-8659. Email the Public
Reference Room at [email protected].
By direction of the Commission.
Issued: June 18, 2020.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2020-13623 Filed 7-1-20; 8:45 am]
BILLING CODE 6717-01-P