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FERC Upholds Policy on Market-Based Rate Criteria for Oil Pipelines

FERC on Thursday gave unanimous approval to an order upholding its denial of Enterprise Products Partners and Enbridge's application for authority to charge market-based rates on its reversed Seaway crude oil pipeline.

The two companies filed an application in December 2011 seeking the authority to charge market-based rates for initial rates on their reversed Seaway pipeline, a crude oil pipeline transporting oil from Cushing, OK to the Gulf Coast (see Shale Daily, Nov. 18, 2011). They planned to send 150,000 b/d from Cushing to the Houston area, but the Federal Energy Regulatory Commission (FERC) denied the application, citing a lack of cost data "which Enterprise and Enbridge acknowledged could not be provided because the application concerned initial rates for a pipeline not yet providing service," according to Derek Anderson of FERC's Office of General Counsel.

Enterprise and Enbridge sought judicial review of the denial but, prior to FERC's decision, the Court of Appeals for the District of Columbia Circuit issued an order in Mobil Pipeline Co. v. FERC, which FERC said directly addressed its approach to reviewing market-based rate applications for oil pipelines and the generally held principles developed and utilized in prior cases.

FERC granted a rehearing of its denial of the Seaway application "for the purpose of seeking comments from all interested entities on the proper interpretation of the Mobil decision...The ultimate question concerning the Mobil decision was whether the methodology as set forth in Order No. 572 [issued by FERC in 1994] was still valid, or if the issue was the proper application of these methods," Anderson said.

FERC concluded that the Mobil decision did not fundamentally alter the methodologies set forth in the order. "In fact," Anderson said, "the court supported the principles established in Order No. 572." The Commission also concluded that the court in the Mobil case found the approaches taken in market-based rate proceedings subsequent to the issuance of Order No. 572 cannot be rigidly applied in all cases.

"As we see so much growth in the domestic oil industry, we're seeing more pipeline business at the Commission, and I think that this draft order we have before us really sets out with greater clarity what the standards are that pipelines have to meet in order to qualify for market-based rates, following on the DC Circuit opinion, and I hope it'll be helpful to those that practice in this area and are in this business," said Acting Chairman Cheryl LaFleur.

In the order approved Thursday, FERC reiterated the steps -- first laid out in Order No. 572 -- necessary for oil pipelines to demonstrate a lack of market power, including identification of relevant markets and competitive transportation alternatives for its shippers, and computation of market concentration for relevant markets and other market power measures.

"The most important clarification that the order puts forth is that taking market dynamics, a broader sense of where market influences are at that particular point in time in a completely competitive marketplace -- we're able to take into account those issues in the analysis," said Adrianne Cook of FERC's Office of Energy Market Regulation.

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