On Thursday, June 18, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) to reset the index that’s used to make annual changes to the rate ceilings for interstate pipelines that transport crude oil, refined products, and other hydrocarbon liquids. Every year, the highest rate an indexed oil pipeline can charge goes up or down — almost always up — using the FERC index. The commission’s new proposal, which would become effective in July 2021, follows an already-approved index adjustment that will take effect a week from Wednesday, on July 1. Taken together, the two changes would reduce the maximum annual increase in the rate ceiling from more than 4% now to less than 1%, which could have a major impact on liquids pipeline owners. Today, we discuss the NOI, the meaning of the pipeline index, where it came from, and where it might be headed.
FERC’s regulation of liquids pipeline rates started in 1977, when the job was handed over from the Interstate Commerce Commission (ICC). Ultimately, FERC didn’t follow the same regulatory approach as the ICC; instead, over time it came up with its own way of doing things. FERC imposed cost-based regulation in 1988, with really complicated transition mechanisms, then it developed various other approaches when it became clear that oil pipelines weren’t an industry sector that did real well being regulated like a utility. Then, in 1992, Congress said, “You’re right. Oil is different.” So, in the Energy Policy Act of 1992, FERC was ordered to develop a simple, streamlined way to regulate oil pipeline rates (which, although they call it “oil,” involves all liquid hydrocarbons). Specifically, Congress said that FERC should add “flexibility and reduced regulation and efficiency in oil pipeline rates.” FERC complied with the law by issuing Opinion No. 561, which established the indexed approach.
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