FERC RULE REFORMS RATEMAKING FOR OIL PIPELINES

As required by the 1992 Energy Policy Act, the Federal Energy Regulatory Commission has issued a rule reforming ratemaking for U.S. oil pipelines.

FERC's rule applies an industry-wide cap on annual rate changes, using as an index the producer price index for finished goods minus 1%.

The rule allows rates to be charged up to the ceiling level and places no limit on the number of times a rate may be changed so long as the ceiling is not violated.

FERC said pipelines must use the indexing system to change rates unless it approves an alternative method. When a pipeline can secure the agreement of all customers, it may file a rate change based on such a settlement.

FERC will permit pipelines to show they lack significant market power in a region, and therefore some market based form of rate regulation is warranted.

"Until such time as the commission has determined that the pipeline lacks market power, the pipeline will be constrained in the rate it may charge," FERC said. "Until the commission makes that finding, the rates cannot exceed the ceiling level which would be applicable under the indexing methodology.

"However, if the pipeline files a cost of service justification for the rate, it may charge such cost based rate until the commission makes the market power determination. Any such rates are subject to suspension and refund."

FERC stressed that cost of service, settlement, and market based rate methods are alternatives to the generally applicable and required indexing approach and will be used only in certain circumstances.

Rather than allowing total discretion by pipelines to choose among alternative methodologies, the commission's final rule prescribes limitations under which the alternative methodologies may be used.

The commission also said it will review the appropriateness of the index in relation to industry costs every 5 years, starting July 1, 2000.

"Finally, the indexing system is a methodology for changing rates," FERC said.

"Generally, the initial rate will be established by a cost of service showing. However, a pipeline may file an initial rate based upon the agreement of at least one nonaffiliated shipper. The commission will not require a cost of service justification for such an agreed upon rate.

"An initial rate established by agreement may be protested, in which case the pipeline will be required to justify the rate based on a cost of service showing."

FERC said from its experience, the cost of service methodology may need to be reformed, and changes may be required for the market based approach to setting rates.

It issued a notice of inquiry on those issues, seeking industry and public comments on how it can improve annual reporting, determine whether a consensus can be formed on cost of service filing requirements, and exploring market based rates for oil pipelines.

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