While the Federal Energy Regulatory Commission's proposal to set the next oil pipeline indexing rate at 0.09% for 2021-26 is lower than increases seen in recent years, it may end up being a slight positive for pipeline owners.
Katie Bays, managing director of FiscalNote Markets, said that while the proposed index adder is low, it is not negative, as some had feared.
"Similarly, some pipelines structure their contracts to raise rates when the rate index is high, and to retain rates when the index is lower — meaning that pipelines are somewhat insulated against reductions in the index on a short-term basis," Bays said in a June 18 note.
Christi Tezak, managing director of ClearView Energy Partners, said the 0.09% proposed index adder is likely just a starting point before pipeline owners and oil shippers battle over several key issues during the comment period.
Tezak pointed to Chairman Neil Chatterjee's remarks at the commission's June 18 open meeting emphasizing that the proposal was "subject to change" and his willingness to consider "other potential adjustments as supported by the record in this proceeding."
ClearView expects owners and shippers to clash over four key issues:
FERC's March 2018 revised policy statement on income tax allowances for master limited partnerships;
lower tax rates and the interplay of accumulated deferred income taxes for pipelines taxed as corporations under Congress' 2017 tax cuts;
FERC's May 2019 policy statement on determining return on equity for oil and natural gas pipelines; and
which pipelines should be included in the data that determines the index.
Every five years, FERC sets an index used to calculate annual changes to interstate oil pipeline rate ceilings. It is added to or subtracted from annual producer price index for finished goods. The next cycle starts July 1, 2021, and the policy applies to crude, NGL and refined product pipelines.
The 0.09% proposal is based on a calculation of data reported on pipelines' page 700 of FERC Form No. 6 from the prior five-year period.
Final index by year's end
FERC is seeking initial comments on the proposed rulemaking (RM20-14) by Aug.17, with final comments due Sept. 11.
FiscalNote's Bays expects a final decision in November or December.
She said FERC has taken "relatively friendly steps to support oil pipeline rates" this year, including ending consideration of a wholesale reform of "ceiling" rates.
"We expect substantial back and forth over the index, the adder and the index methodology in light of FERC's recent policy changes," Bays said.
Andy Black, president of the Association of Oil Pipe Lines trade group, signaled that this spring's turmoil in US energy markets related to the coronavirus pandemic would play a major role in comments about the rulemaking while FERC considers the final index.
"Higher costs from operational and safety efforts along with COVID-related demand destruction for transportation fuels pipelines deliver make vital FERC's willingness to explore alternative approaches needed to get this right," Black said in a statement.
