Commissioner Richard Glick Statement
December 17, 2020
Docket No. RM20-14-000
Order: G-1
Today’s order is a complete abdication of the Commission’s responsibility to protect oil pipeline customers. It overthrows well-established Commission policy and goes back on explicit promises we made to customers just a few years ago. As a result, the Commission is handing oil pipelines a multi-billion-dollar windfall for which customers are left to pick up the tab. I dissent strongly from those unreasoned and indefensible determinations.
A little background is necessary to appreciate just how seriously the Commission has fallen down on the job. In the Energy Policy Act of 1992, Congress directed the Commission to promulgate a rule to simplify its ratemaking methodology for oil pipelines.[1] Shortly thereafter, the Commission issued Order No. 561, which adopted an indexing methodology as part of the Commission’s approach for regulating oil pipeline rates.[2] Under that approach, if an oil pipeline increases its rates by less than the annual ceiling established by the index, the pipeline does not need to justify those rates through a cost-of-service filing.[3] The majority of oil pipelines under the Commission’s jurisdiction use this index to demonstrate that their rate increases are just and reasonable.
Following Order No. 561, the Commission updates the index every five years to ensure that it represents a reasonable measure of the annual change in a typical oil pipeline’s cost of service. To set the annual index, the Commission calculates each jurisdictional pipeline’s change in its cost-of-service over the previous five-year period—we call this oil pipelines’ “cost change data.” The Commission then uses that data to determine an appropriate adjustment to the Producer Price Index for Finished Goods (PPI-FG) established by the U.S. Department of Labor.[4] To avoid outliers or other anomalous, unrepresentative cost data, the Commission has historically relied on only the cost change data for the middle 50% of pipelines when updating the index—that is, it excludes data from the 25% of pipelines with the lowest cost changes and the data from the 25% of pipelines with the highest.[5]
In June of this year, the Commission issued a notice of inquiry that commenced its five-year update to the index. In that notice, the Commission proposed an index level of PPI-FG+0.09, based on our historical practice of relying on the middle 50% of cost change data.[6] Today’s order tosses that historical practice aside and establishes an index level that is nearly ten times higher at PPI-FG+0.78.[7] That order of magnitude increase is largely the result of a pair of unreasoned, illogical and unsupported changes that lack any meaningful support in the record before us. I’ll discuss them in turn.
The Commission’s first major mistake is to abandon its well-established practice of updating the index using the cost change data from the middle 50% of oil pipelines. As noted, in order to weed out potential anomalous, unrepresentative cost data and ensure that the cost change data reflects the experience of a typical pipeline, the Commission’s established practice is to “trim” the data down to the middle 50% of cost changes. The Commission has explained that relying only on those central values best approximates the operations of a typical pipeline because it prevents the Commission from relying on unrepresentative cost changes, such as a one-time increase in rate base, plant retirement, significant expansions or acquisitions, or localized changes in supply and demand.[8]
Today’s order abandons that approach and instead uses the data from the middle 80% of pipelines.[9] That change dramatically increases the likelihood that the updated index will reflect anomalous data that does not shed light on the cost changes experienced by a typical pipeline, which, in practice, skews the index upwards. Relying upon those relative outliers is particularly inappropriate here since the middle 50% of pipelines corresponds to a much larger percentage of the total barrel-miles shipped over the last five years than in previous index updates.[10] In other words, the middle 50% already corresponds to a significantly larger percentage of total oil transportation service provided than in previous index updates, which would seem to undermine any need to expand the data set.
The Commission’s justification for abandoning the 50% approach consists of nothing more than variations on the theme that more data is better.[11] But, as with most things in life, quality is more important than quantity. Including more cost change data is not necessarily an improvement when there is good reason to believe that the incremental data is made up of outliers whose experience is less representative of a typical oil pipeline with a normal cost structure. As noted, the purpose of the index is to approximate a typical oil pipeline’s change in cost—an exercise that does not benefit from including cost change data from pipelines that are, by definition, unrepresentative of the average pipeline. [12] And that is exactly why the Commission has consistently rejected replacing the 50% approach with the 80% approach adopted in today’s order.[13] In addition, the Commission chastises shippers for not arguing that every pipeline whose cost change data would have been excluded using the middle 50% was an outlier.[14] As an initial matter, the shippers did provide illustrative data explaining why seven of those pipelines’ cost change data was not representative, which you might think would suffice to support the Commission continuing its historical practice.[15] In any case, the burden to show that the index is reasonable is on the Commission, and it cannot be carried simply by arguing that the shippers should have done more.
The Commission’s second major mistake is to break its promise to protect ratepayers following the U.S. Court of Appeals for the District of Columbia Circuit’s decision in United Airlines v. FERC,[16] which struck down the Commission’s practice of allowing Master Limited Partnerships (MLPs) to double recover their income tax cost.[17] As a result of that decision, MLPs may no longer recover an income tax allowance in their cost of service.[18] Following United Airlines, in 2018, the Commission required natural gas pipelines to immediately eliminate that double recovery,[19] but declined to require something similar for oil pipelines, promising, quite explicitly, that it would address the issue when it next updated the index.[20]
So much for that. In today’s order, the Commission goes back on its word and allows any oil pipeline that was an MLP in 2014 to retroactively remove its income tax allowance from its 2014 cost-of-service data.[21] That change juices the data to make it look like oil pipeline costs increased by more than they actually did between 2014 and 2019, thereby leading to a higher index value. And, as if that weren’t bad enough, today’s order also allows any pipeline that transitioned from an MLP to a C-Corporation, thereby regaining the right to an income tax allowance, to remove the income tax allowance from their 2014 numbers.[22] The result is, you guessed it, another increase in the cost change data, a higher index level, and more expensive rates for customers.
Nothing in today’s order justifies that result. The Commission summarily concludes that the index update is not an appropriate vehicle for incorporating the post-United Airlines’ policy changes.[23] That proposition is hardly self-evident, especially given that all five then-Commissioners felt differently just two years ago.[24] In any case, the fact of the matter is that tax costs are real costs,[25] meaning that oil pipelines’ costs in the past five years have changed as a result of the United Airlines decision. Finally, reneging on our promise in the 2018 Income Tax Policy Statement perpetuates the effects of the double recovery gravy train that the court invalidated in United Airlines. That is simply indefensible.
The Commission’s actions today hand oil pipelines what will amount to a multi-billion-dollar windfall over the next five years. Calling these decisions arbitrary and capricious or unreasoned would let the Commission off easy. They represent a complete abdication of our statutory responsibility to protect consumers—the companies and individuals who will be stuck paying those additional billions of dollars to the oil pipelines. Although our responsibilities under the Interstate Commerce Act don’t always get the same attention from the public as some of our other proceedings, today’s order illustrates the tremendous financial consequences that they can have for everyday customers. I hope that proceedings like today’s lead interested parties everywhere to more closely scrutinize the Commission’s oil orders so that these multi-billion-dollar handouts do not become a matter of course.
For these reasons, I respectfully dissent.
[1] Energy Policy Act of 1992, Pub. L. No. 102-486, § 1801(a) (Oct. 24, 1992) (codified at 42 U.S.C. § 7172 note (2006)).
[2] Revisions to Oil Pipeline Reguls. Pursuant to Energy Pol’y Act of 1992, Order No. 561, FERC Stats. & Regs. ¶ 30,985, at 30,955 (1993) (cross-referenced at 65 FERC ¶ 61,109), order on reh’g, Order No. 561-A, FERC Stats. & Regs. ¶ 31,000 (1994) (cross-referenced at 68 FERC ¶ 61,138), aff’d sub nom. Ass’n of Oil Pipe Lines v. FERC, 83 F.3d 1424 (D.C. Cir. 1996).
[3] At least absent a protest to the update. See Order No. 561, FERC Stats. & Regs. ¶ 30,985 at 30,947.
[4] Five-Year Rev. of the Oil Pipeline Index, 173 FERC ¶ 61,245, at P 5 (2020) (2020 Index Review). The resulting index level is expressed as the PPI-FG plus or minus a value that corresponds to the cost change data adjustment.
[5] This practice of excluding the top and bottom 25% was part of Dr. Alfred Kahn’s original proposal that the Commission adopted in 1994. Ass’n of Oil Pipe Lines v. FERC, 876 F.3d 336, 340 (D.C. Cir. 2017) (noting that in 1994 Dr. Kahn “omitted from his analysis the pipelines within the upper and lower 25 percent of the cost spectrum in order to exclude statistical outliers and incomplete or questionable data”).
[6] Five-Year Rev. of the Oil Pipeline Index, 171 FERC ¶ 61,239, at P 9 (2020).
[7] 2020 Index Review, 173 FERC ¶ 61,245 at P 2.
[8] Five-Year Rev. of Oil Pricing Index, 133 FERC ¶ 61,228, at P 61 (2010) (citing Order No. 561-A, FERC Stats. & Regs. ¶ 31,000 at 31,097) (2010 Index Review); Five-Year Rev. of Oil Pipeline Index, 153 FERC ¶ 61,312, at P 24 (2015) (2015 Index Review).
[9] 2020 Index Review, 173 FERC ¶ 61,245 at P 25.
[10] The middle 50% of this data set contains 82% of total barrel-miles subject to the index while, in 2015 and 2010, the middle 50% contained only 56% and 76% of total barrel-miles, respectively. Id. P 23.
[11] Id. PP 26-29.
[12] See 2015 Index Review, 153 FERC ¶ 61,312 at P 43 (“[B]y definition, costs at the top (or bottom) of the middle 80 percent deviate significantly from the cost experience of other pipelines. To the extent that the 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.”); 2010 Index Review, 133 FERC ¶ 61,228 at P 63 (“[T]he use of the middle 50 minimizes the risk of including pipelines that experienced either large increases or decreases in cost (or errant data) that may be included in an 80 percent sample, while still capturing changes from a broad spectrum of the pipeline industry.”).
[13] See 2015 Index Review, 153 FERC ¶ 61,312 at PP 42-44; 2010 Index Review, 133 FERC ¶ 61,228 at PP 60-63.
[14] 2020 Index Review, 173 FERC ¶ 61,245 at P 28.
[15] Id.
[16] United Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016) (finding that the Commission permitted a double recovery of income tax costs by allowing an MLP to recover both an income tax allowance and a return on equity determined pursuant to the discounted cash flow methodology, which already reflects income tax costs).
[17] Inquiry Regarding the Commission’s Pol. for Recovery of Income Tax Costs, 162 FERC ¶ 61,227 (2018 Income Tax Policy Statement), reh’g denied, 164 FERC ¶ 61,030 (2018).
[18] Id. P 2.
[19] Interstate & Intrastate Nat. Gas Pipelines; Rate Changes Relating to Fed. Income Tax Rate, 162 FERC ¶ 61,226 (2018).
[20] The Commission’s statement is worth reading in whole: “When oil pipelines file Form No. 6, page 700 on April 18, 2018, they must report an income tax allowance consistent with United Airlines and the Commission’s subsequent holdings denying an MLP an income tax allowance. Based upon page 700 data, the Commission will incorporate the effects of the post-United Airlines’ policy changes (as well as the Tax Cuts and Jobs Act of 2017) on industry-wide oil pipeline costs in the 2020 five-year review of the oil pipeline index level. In this way the Commission will ensure that the industry-wide reduced costs are incorporated on an industry-wide basis as part of the index review.” 2018 Income Tax Policy Statement, 162 FERC ¶ 61,227 at P 46.
[21] 2020 Index Review, 173 FERC ¶ 61,245 at P 16.
[22] Id. P 20.
[23] Id. P 18.
[24] 2018 Income Tax Policy Statement, 162 FERC ¶ 61,227 at P 46.
[25] Ask anyone who pays their taxes.