FERC has issued a notice of inquiry (NOI) on its proposed index level used to calculate annual changes to interstate oil pipeline rate ceilings for the next five years, beginning July 1, 2021.
In its NOI, the Federal Energy Regulatory Commission proposes to use the Producer Price Index for Finished Goods (PPI-FG) plus 0.09% as the index level for the five-year period, based on the methodology developed by Alfred E. Kahn and established in Order No. 561.
Kahn was a U.S. economics professor and played a key role in the deregulation of the U.S. airline and energy industries through his understanding and application of marginal-cost theory.
The Kahn Methodology uses oil pipeline data on Page 700 in FERC Form No. 6 from the prior five-year period to determine an adjustment to be applied to the PPI-FG. Details on how the index works and the index proposal can be found here.
FERC is taking comments through Aug. 17 regarding the proposal and any alternative methodologies for calculating the index level. Comments would be accepted on issues such as different data trimming methodologies and whether the index should reflect the effects of cost-of-service policy changes in the calculation of the index level.
Analysts at ClearView Energy Partners LLC said asset owners and shippers might disagree on parts of the proposal, including which pipelines are appropriate for inclusion in the dataset.
“In our conversations with industry participants, several have argued that since the vast majority of pipelines are not on ”cost-of-service’ rates, the underlying reporting on the Page 700 of the Form 6 are approximations, not precise calculations of costs incurred (such as the formula rates more routinely used for an increasing number of electric transmission rates and in certain natural gas proceedings),” analysts said.
“In the case of many electric and natural gas rates, there are formal ”true ups’ of rates to align with actual costs incurred; no such reconciliation takes place for liquid lines rates.”
At FERC’s monthly meeting Thursday morning, Commissioner Bernie McNamee said he was looking forward to hearing from the interested parties and that Congress has directed the Commission to provide “flexibility and reduced regulation and efficiency in oil pipeline rates.”
Comments should cite No. RM20-14-000.
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