Docket No. RM26-6-000
Today’s order should not raise gas prices at the pump, or the price of airfare for ordinary Americans. The reality is that pipeline transportation costs represent a tiny fraction of the total price of fuel from an end-use consumer’s perspective.[1]
This order is no windfall for the pipelines, but rather a routine mechanism to make them whole by ensuring that the rates they receive for a critical national service reflect industry cost increases. Consistent with our well-established practice in conducting five-year index reviews, our task is to ensure that the index continues to “accurately track cost changes in the pipeline industry”—using PPI-FG as a baseline measure for inflation, appropriately “adjusted to account for actual cost changes experienced by the oil pipeline industry.”[2]
That is a largely technical and data-driven exercise. In this instance, the primary points of contention revolve around (1) whether to adjust the data used to calculate the index level to account for the 2020 change in Commission policy for determining oil pipelines’ allowed rate of return on equity, (2) whether the index calculation should incorporate resubmitted 2019 cost data, and (3) whether “trimming” the data set to the middle 80%, or instead the middle 50%, provides a more representative picture of industry cost experience.
I will not reprise in detail the reasons for our resolution of those issues here, which are fully explained in the order. Suffice to say that our decision on each of those points is consistent with Commission precedent, amply supported by the record, and—most importantly—advances the index’s basic cost-tracking purpose. But because the bottom-line result of our index review is likely to loom larger than the technical details of how we reached that result, I write separately to contextualize today’s order in the bigger picture of our rate regulation under the Interstate Commerce Act (ICA).
Our important but limited charge under the ICA is to ensure that interstate oil pipeline rates are just and reasonable.[3] At the broadest level, carrying out that statutory responsibility entails balancing the need to protect shippers from excessive rates—particularly rates that may reflect abuses of market power—and the need to ensure that pipelines receive fair returns, which is in turn a prerequisite to the long-term health of (and adequate future investment in) the nation’s oil pipeline infrastructure. We have sought to strike that balance, consistent with our other statutory obligations,[4] through the detailed ratemaking system established under our regulations—including the indexing methodology introduced in Order No. 561.
The purpose of our five-year index reviews is not to revisit that balance. We are simply making incremental adjustments to the index level to reflect cost changes in the industry. While that inevitably involves some judgment calls, those judgment calls are guided by a concern for empirical and economic accuracy. In short, our narrow task in this proceeding is to faithfully advance the cost-tracking purpose of our index review, not to pick economic winners or losers.
Finally, it bears keeping in mind that, insofar as end-use consumers have a stake in the outcome of our index reviews, it is by no means a one-sided equation. Although the benefits of lower-priced services are self-explanatory, ordinary Americans’ interests are not served by excessively low pipeline rates. That would risk disincentivizing investment in the infrastructure that provides the least expensive and safest method of transporting the energy products our day-to-day lives and economy depend on.[5]
Today’s order faithfully holds the line we established when we created the indexing system, ensuring—as promised in Order No. 561—that the index keeps apace with industry cost trends. Broader policy questions about whether our approach to oil pipeline rates under the ICA is well-adapted to today’s economic realities, and whether that overall approach best balances and serves the competing interests at stake, are for another day.
For these reasons, I respectfully concur.
[1] Moreover, this proceeding concerns only marginal adjustments to the rate at which pipelines may raise their rates under indexing (itself just one of multiple methods oil pipelines may use when changing rates). Thus, from an end-use consumer’s perspective, the contested issues here would at most implicate small differences to an already minuscule cost component (i.e., pipeline transportation).
[2] Ass’n of Oil Pipe Lines v. FERC, 876 F.3d 336, 340 (D.C. Cir. 2017) (cleaned up).
[3] 49 U.S.C. app. 1(5).
[4] Notably, the Energy Policy Act of 1992’s mandate to develop a “simplified and generally applicable” ratemaking methodology. Pub. L. No. 102-86, 1801(a), 106 Stat. 3010 (Oct. 24, 1992), codified at 42 U.S.C. 7172 note.
[5] See, e.g., Kenneth P. Green & Taylor Jackson, Pipelines Are Safer Than Rail in the Transportation of Oil and Gas, Manhattan Institute (Aug. 12, 2015), https://manhattan.institute/article/pipelines-are-safer-than-rail-in-the-transportation-of-oil-and-gas; Tracy Johnson, Pipelines vs. Trains: Which Is Better for Moving Oil?, CBC News (Mar. 10, 2015), https://www.cbc.ca/news/business/pipelines-vs-trains-which-is-better-for-moving-oil-1.2988407.