FERC on Thursday established an inflationary adjustment, or price index formula, that will increase the ceiling levels on rates for pipelines carrying crude oil and petroleum products, including natural gas liquids (RM10-25).

The order calls for existing rates to be adjusted for the next five years beginning July 1, 2011 by applying the Producer Price Index for Finished Goods plus 2.65% (PPI-FG+2.65). The current price index adjustment formula is PPI-FG+1.3. The formula, which the Federal Energy Regulatory Commission (FERC) is required to review every five years, reflects changes in pipeline operating and capital costs.

Comparing the first 11 months of PPI data for 2009, when the indicator hit an all-time low, with the same period in 2010, shows an increase in the PPI index itself of 4.3% year over year. The annual trend line growth of the PPI-FG since 1988 is 2.1%.

In its initial proposal last June, FERC had proposed maintaining the existing formula. The Association of Oil Pipe Lines (AOPL) filed comments protesting that rate, saying pipeline costs had gone up and would continue to rise, particularly to meet new integrity and safety regulations. The AOPL’s cost estimate was backed up in part by the Transportation Department’s Pipeline and Hazardous Materials Safety Administration, which also filed comments in the FERC proceeding. AOPL proposed a PPI-FG plus 3.64% index.

The National Propane Gas Association (NPGA) advised that the costs for crude pipelines had gone up more than twice as much as those for products pipelines and argued for separate indices for crude and products pipelines. Failing that, NPGA favored a straight PPI-FG rate with no adjustments.

FERC said it had used the middle 50% of the cost data set to determine the appropriate index level, which ensured that pipelines with relatively large cost increases or decreases would not distort the index.

Many oil and products pipelines use FERC’s indexed rate scheme, although they may choose instead to use negotiated or market-based rates.

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