FERC Adopts New Standard For Assessing Complaints Against Liquids Energy Pipeline Indexing Adjustments

• Published date: 03 November 2022
• Subject Matter: Energy and Natural Resources, Energy Law, Oil, Gas & Electricity
• Law Firm: Baker Botts
• Author: Emil Barth, Ryan C. Norfolk, Michelle Boudreaux and Scott Looper

On October 20, 2022, the Federal Energy Regulatory Commission ("FERC") issued a Policy Statement providing guidance on how it will evaluate complaints against liquids energy pipeline index-based rate adjustments.¹ In doing so, FERC resolved long-standing concerns with its prior policy, some dating back to 2007. As described in greater detail, below, the Policy Statement rejects FERC's problematic Substantial Exacerbation Standard for complaints against index-based rates and adopts in its place the Percentage Comparison Test it currently uses to assess other rate protests.

The Indexing Regime and the Policy Statement

Liquids pipelines are regulated by FERC pursuant to the Interstate Commerce Act of 1887. Generally, liquids pipeline rates must be just and reasonable, and their rates and terms and conditions of service must not be unduly discriminatory or preferential. Under the Energy Policy Act of 1992, Congress directed FERC to create a "simplified, generally applicable ratemaking methodology" for liquids pipelines. In following this directive, FERC established its indexing methodology whereby liquids pipelines are permitted to adjust their rates annually (typically in July of each year) by an index based on industry-wide cost changes (currently the Producer Price Index for Finished Goods minus 0.21%).² Generally, application of this index each year to the pipeline's agreed-upon or cost-based rate will generate the pipeline's ceiling rate level, and the pipeline has the flexibility to charge a rate at or below this index ceiling.³

FERC's regulations permit shippers to challenge a pipeline's index-based rate adjustments by protest or complaint. A challenge filed against the indexing component of a rate:

must allege reasonable grounds for asserting that the rate violates the applicable ceiling level, or that the rate increase is so substantially in excess of the actual cost increases incurred by the carrier that the rate is unjust andunreasonable, or that the rate decrease is so substantially less than the actual cost decrease incurred by the carrier that the rate is unjust and unreasonable.⁴

Prior to the Policy Statement, FERC used one standard for evaluating protests and a different standard for complaints against index rate adjustments. With the Policy Statement, FERC reverses its problematic Substantial Exacerbation Standard for assessing these complaints and instead finds that the Percentage Comparison Test it uses to assess protests should also apply...