Item G-1: Commissioner James Danly Dissent Regarding Oil Pipeline Affiliate Committed Service

Commissioner James Danly Statement
December 16, 2022
PL23-1-000

I dissent from today’s order.[1]  I would normally not oppose a proposed policy statement.  There is often nothing wrong with seeking a record to consider reforms.  I am also generally skeptical of affiliate transactions and think that the Commission should apply a heightened review as compared to non-affiliate transactions.

However, this proposal is, for the most part, not new.  This is not a genuine request for comment.  The policies proposed today (particularly the safe harbor) are nearly identical to those proposed two years ago in the policy statement on Oil Pipeline Affiliate Contracts,[2] which was withdrawn two days after the expiration of the initial comment deadline.[3]  Were one unfamiliar with the Commission’s oil docket one would not know this if all one had to rely upon was today’s order.  While that proceeding is mentioned in a footnote nearly a third of the way through the order,[4] there is “nothing [in the order] so much as an acknowledgement of the views expressed.”[5]  The majority chooses to omit (and presumably ignore) comments that exposed profound weaknesses that counseled a more deliberate approach in that (and now this) proposed policy.

For example, commenters in the original proceeding alleged that there was (there still is) no record evidence supporting the Commission’s premise that its policies—or the complaint mechanisms afforded by the statute—are inadequate to the task of preventing or remediating affiliate abuse in settlement rate negotiations, or for that matter, that such affiliate abuse even exists commonly enough to justify this proceeding at all.[6]  One comment stated that of the 140 petitions for declaratory order that had been approved by the Commission from 2010 through 2020, “only one . . . arguably included allegations of undue affiliate preference”[7] and even in that case, “the crux of the shipper’s challenge did not hinge on affiliate concerns.”[8]  Another comment questioned the entire proceeding, explaining that the proceeding was based on a fundamental misapprehension as to how the business operates, stating that presumably other midstream companies “invest significant capital in order to attract shippers, not keep shippers away.”[9]

The majority does not acknowledge the comments from the earlier proceeding that state that there may not be a problem at all nor does it ask about whether there is a problem.  Instead, the majority insists that “parties have raised concerns,”[10] citing the very complaint proceeding that commenters in the earlier docket explained does not support the majority’s position,[11] a complaint proceeding where the Commission found no affiliate abuse.[12]  The order also cites comments in other proceedings that simply ask hypotheticals[13] and express shippers’ “belie[f] this problem . . . exists.”[14]  In order to justify embarking on a new generic proceeding that proposes burdensome intrusions into the business of regulated entities, there must be some evidence that there is an actual problem to solve.  And should this or any other policy be finalized, there must be at least substantial evidence.  The Commission must eventually do more than “[p]rofess[] that an order ameliorates a real industry problem”[15] or cite parties’ “belie[f] that [a] problem . . . exists”[16] in order to meet the statutory requirement of basing its decisions on substantial evidence or the APA’s requirement to base orders on reasoned decision-making.

Commenters in the original docket identified other fatal weaknesses.  The plain terms of the safe harbor, materially the same as that proposed today, contravenes the Commission’s regulations by limiting the methodologies by which pipelines can adjust rates[17] and by requiring the use of a 100% load factor for cost-of-service-based rate adjustments.[18]  This is an evident infirmity—agencies cannot amend their regulations without undergoing the notice-and comment procedures required by the Administrative Procedure Act (APA).[19]

Although not a threat to the proposal’s legal durability, commenters also stated that, if implemented, the safe harbor proposal would result in the Commission “interjecting itself into commercial negotiations,”[20] “imposing contractual terms that would otherwise not find themselves in contracts negotiated at arms’ length between third parties.”[21]  Specifically, they explained that “carriers and contract shippers typically do not agree to a contract rate while also providing a unilateral right to try to change the rate,”[22] and that “[m]ost carriers will be unwilling to invest hundreds of millions of dollars in new infrastructure if their rates—which are the sole means by which the carrier may recoup its investment—may be reduced at any time during the contract term pursuant to a cost-of service challenge.”[23]

Despite this evidence that was brought before the Commission in the earlier docket, the majority does even mention it, let alone change course, continuing to propose a safe harbor policy that requires carriers to allow shippers to unilaterally challenge a rate.[24]  Given the evidence already adduced in an earlier proceeding, one would be justified in having skepticisms of the majority’s claim that this proposed policy “will provide guidance to industry participants that will aid in the efficient deployment of capital.”[25]

Perhaps worst of all, commenters offered alternative approaches for the Commission’s consideration which the majority declined to consider or, in fact, even mention.  For example, one party suggested the imposition of a requirement that pipelines demonstrate that affiliate rates are aligned with those of competing pipelines or other modes of transportation.[26]  Why not include seemingly reasonable alternatives for comment if you persist in your belief—despite the lack of evidence—that affiliate abuses are widespread in the industry?  If the Commission is concerned that a carrier is offering non-market rates to its affiliate, a showing that the rate is consistent with market would seem to address the concern and do so far less invasively and without violating our own regulations.

It is a mistake for the majority to repropose a policy shown to have irremediable vulnerabilities under the APA and a near certain chilling effect on investment.  The Commission has the benefit of an existing record.  Rather than ignoring it, the Commission should have made use of that record to determine whether there is a problem at all and, if there is, use it to determine what additional evidence needs to be gathered, what policy goals it seeks to achieve, and what is the best, least invasive, and most defensible course of action.  The Commission should not rush a policy only to have go back and fix known errors.

For these reasons, I respectfully dissent.