Allegations that Colonial Pipeline is Over Recovering
A complaint by three shippers on Colonial Pipeline alleged that Colonial had overcharged to ship gasoline, diesel and jet fuel has further added to various market impactful liquids pipeline matters pending before the Federal Energy Regulatory Commission (FERC) -- including
Magellan's marketing affiliate petition and Occidental's complaint against
Bridge Tex Pipeline. Will their complaint be set for hearing, similar to a 2014 shipper complaint against Colonial, which ultimately settled -- or will the Commission dismiss the case before a hearing? With historical precedent from 2014 as a guide, it may take the Commission at least three months from the complaint (end of February 2018) to make its decision, especially given scarce Commission Staff resources, which may be diverted to addressing other liquids pipeline matters.
The Allegations
On November 22, 2017, Chevron Products Co., Valero Marketing & Supply Co. and Epsilon Trading LLC, a subsidiary of Delta Air Lines, jointly filed a 917-page complaint at FERC, alleging, based on expert opinion and voluminous data, that:
Based upon Colonial's Form 6, page 700 filing (i.e., an interstate liquids pipeline's cost-of-service that "serves as a preliminary screening tool for pipeline rates") as well as various adjustments, Colonial's 2016 revenue exceeds the pipeline's interstate cost of service by an estimated level of $339.3 million and, thus, are not "just and reasonable";
Although FERC has previously granted Colonial market-based rate authority for transportation to certain destinations, that grant does not prevent the Complainants from challenging such rates as unjust or unreasonable, and seeking reparations or other relief;
Colonial's increased market power suggests that their current market-based rates are no longer just and reasonable; and
Colonial's practices and miscellaneous charges are not properly disclosed in its tariff, and Colonial has not justified or established a basis for these charges and practices, rendering it impossible to determine whether they are just and reasonable.
The Complainants also supplemented their initial Complaint with an additional filing on January 8, 2018. This filing noted that the recently passed Tax Cut and Jobs Act, which lowers the corporate tax rate from 35% to 21%, provided additional evidence to support their claim that Colonial's Page 700 information should not be presumed to be accurate, and that, specifically, Colonial's reported income tax allowance is not representative of Colonial's actual going forward income tax expense. The Complainants noted that it is undisputed that the new tax rate reduction will have a material impact on Colonial's income tax allowance and overall cost of service going forward.
In light of these allegations, the Complainants requested that: (1) FERC investigate Colonial's rates and practices, and hold an evidentiary hearing to determine the just and reasonable rates for the transportation of petroleum products on Colonial's system, (2) require Colonial to pay reparations starting two years before the date of the Complaint for all rates, and (3) award such other relief as FERC deems necessary and appropriate.
Colonial's Response
For its part, Colonial responded to the Complaint on December 22 with its Answer, denying all of the allegations. As to the Complainants' principal argument that Colonial's rates are unjust and unreasonable, Colonial asserted that its as-filed Page 700 provides only a difference of 2.5% between Colonial's costs and revenues, a figure well below that which would cause FERC to initiate an investigation -- a change in return on equity greater than 25%. Colonial characterized the Complainants' attempts to artificially adjust Colonial's as-filed Page 700 data to make its case as misguided, unsupported and contrary to FERC precedent.
Colonial also disputed the validity of the Complainants' allegations regarding the "grandfathered" nature of Colonial's rates, asserting that the Complainants had not met the high burden of demonstrating "substantially changed circumstances" regarding Colonial's grandfathered rates. On this point, Colonial cited a 2006 FERC case, that stated, unambiguously, in Colonial's view, that "Colonial's existing transportation rates are grandfathered."
Colonial also disputed the validity of the Complainants' request that its market-based rates and its market-based ratemaking authority be investigated, as the Complainants, in Colonials' view, had failed to present any reasonable grounds for investigating, as there had been no substantial change in the competitive landscape.
Colonial urged FERC to "decline to spend its scarce administrative resources on a proceeding" in that the Complaint was "replete with factual, mathematical and substantive errors." If FERC were to act on the Complaint, Colonial requested that FERC first determine the continued validity of Colonial's existing market-based rate authority before any cost-of-service investigation.
Read-Through
While it is relatively common for activist shippers to comment and protest proposed tariff changes, it is far less common for the shippers to lodge a formal complaint. In fact, during the past two years, nearly all complaints focused on narrow issues, such as accepting jet fuel at specific points, rather than complaints challenging the reasonableness of pipeline rates. But setting this case for hearing would not be unprecedented, given that FERC did so for Colonial Pipeline in 2014, based on shipper allegations regarding Page 700 data, as well as in 2012 for the Osage Pipeline and the Buckeye Pipe Line Co.
Nonetheless, the issues before FERC are complex, data intensive and, given what's currently before them, a quick response is unlikely. During the 2014 rate complaint against Colonial, it took FERC about three months to set the case for hearing. FERC's decision whether to proceed to a hearing, along with the supporting precedent, will be watched closely by other shippers considering similar complaints. The case ultimately settled and included a reduction of certain rates, stipulations as to payments, and implementation of annual volume incentive programs.
Relatedly, the Commission's decision, regardless of how it breaks, may breathe new life back into the staled rulemaking initiated by the Liquids Shippers Group, which includes ConocoPhillips and Pioneer Natural Resources, among others, to make the Form 6 reporting requirements more transparent. According to the Liquids Shippers Group, shippers' need for this data is important given the Commission's practice of relying on shippers to mount rate challenges, rather than initiating its own investigations into crude oil and petroleum product pipeline rates.
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