04 April 2019

Oil and Products Pipeline Declaratory Orders Suggest Changes to FERC Policy

On March 27, 2019, the Federal Energy Regulatory Commission (“FERC”) issued a trio of declaratory orders responding to uncontested Petitions for Declaratory Order (“PDOs”) that sought regulatory certainty for three distinct crude oil pipeline projects with contract commitments. The decisions, which governed filings made by Enterprise Crude Pipeline LLC (“Enterprise”) (Docket No. OR18-27-000), EnLink Crude Pipeline, LLC (“EnLink”) (Docket No. OR18-38-000), and EnLink Delaware Crude Pipeline, LLC (“EnLink Delaware”) (Docket No. OR19-3-000), consisted of one denial (Enterprise) and two approvals with conditions (EnLink and EnLink Delaware). Together, these three decisions suggest a notable departure from FERC’s prior declaratory order precedent, which had tended to approve uncontested PDOs without conditions. When coupled with another three declaratory orders issued on March 11, 2019, FERC’s latest round of declaratory orders indicates a trend towards greater scrutiny of pipeline projects regulated under the Interstate Commerce Act (“ICA”).

Enterprise resulted in the denial of an uncontested PDO on undue discrimination grounds. Enterprise, in a PDO filed on June 27, 2018, had sought regulatory certainty for premium contract rates on a new and expanded crude petroleum gathering system in New Mexico and Texas, that included the construction of a new 143-mile 16- to 20-inch diameter pipeline from Lea County, New Mexico to Midland, Texas. FERC’s undue discrimination finding was grounded in the pipeline’s minimum volume commitment of 100,000 barrels per day (“bpd”), required to obtain priority firm service, given that the project’s total capacity was 171,000 bpd. FERC found that the open season had not been shown to meet the ICA’s anti-discrimination provisions. Specifically, FERC found that the large size of the minimum volume commitment unduly discriminated in favor of large shippers, as evidenced in part by the fact that while nine shippers had signed confidentiality agreements, only one shipper had executed a Transportation Service Agreement (“TSA”). FERC further found that this potential problem was “exacerbated by the Evergreen Provision that potentially extends the term of this contractual arrangement indefinitely.” None of the other nine shippers protested the PDO or alleged undue discrimination.

In Enterprise, FERC relied on a 97-year old Interstate Commerce Commission case, Brundred Brothers v. Prairie Pipe Line Co., 688 I.C.C. ¶ 458 (1922), as rationale for the denial. It explained that the reservation of capacity for a few large shippers “essentially deprives the lines of the common-carrier status,” and that the reservation of ten percent or more of overall pipeline capacity for uncommitted service “does not cure the problem of an excessive minimum-tender requirement in an oil pipeline open season.” For the first time, FERC opined that “relatively large minimum tender requirements” must be justified on an operational basis, “such as scheduling, measuring, and ticketing each tender and minimizing contamination among batches.”

FERC granted the EnLink and EnLink Delaware PDOs, albeit with conditions, even though both petitions sought rulings that were similar to those denied in Enterprise. Notably, EnLink sought regulatory certainty for committed shipper rates on a 38,000 bpd expansion project on its Chickadee System crude oil pipeline system. Like Enterprise, the proposal would have permitted 90 percent of system capacity to be contracted for by committed shippers for a 10-year primary term with evergreen rights, and to obtain firm service not subject to prorationing for a one-cent premium. The contract’s minimum tender was 15,000 bpd, meaning that no more than two shippers could receive the proposed contract benefits. In EnLink Delaware, the committed shipper rates for EnLink’s new pipeline system in the Delaware Basin of Texas and New Mexico were also subject to a 10-year term with evergreen rights, and the opportunity to obtain firm service at a one-cent premium. A potential key distinction, albeit not expressly acknowledged by FERC, is that contract shippers had to commit to ship or pay for at least 10,000 bpd on a 100,000 bpd system, allowing for more than 1-2 committed shippers to obtain capacity.

The conditions on the EnLink and EnLink Delaware PDOs are similar to those placed on PDOs granted on March 11, 2019 for Magellan Pipeline Company’s West Leg Expansion (Docket No. OR18-31) and Targa NGL Pipeline Company LLC (Docket No. OR18-30). In all four orders, FERC stated that its regulations require that initial contract rates meet FERC’s regulatory requirements for initial rates. Initial rates are set one of two ways: (1) by filing a cost-of-service rate; or (2) filing a sworn affidavit that the rate is agreed to by at least one non-affiliated shipper who intends to use the service in question. It conditioned approval of the pipelines’ committed rate structure, and agreed to treat the committed rates as settlement rates, provided the pipelines confirm to one of the two aforementioned methodologies. FERC made similar statements in a declaratory order issued to Enterprise TE Products Pipeline Company (“Enterprise TE”) (Docket No. OR18-34), but accepted its PDO without condition because the petition had clearly stated that the contract rate shipper was unaffiliated.

Collectively, the declaratory orders signify a palpable change in FERC policy, and raise many questions as to the predictability of the declaratory order model that did not exist prior to their issuance. For example, the industry in the past has depended on FERC issuing declaratory orders within three months of a PDO’s filing, with FERC alerted to in-service deadlines reliant on prompt action. Due to significant delays by FERC, several of the implicated pipeline projects entered service prior to obtaining their declaratory orders, including Enterprise, which was denied, and Targa, which filed tariffs that included a committed rate for an affiliate. While FERC has issued prior denials of declaratory orders based on an insufficiency of the open season process, such denials always followed a protest alleging undue discrimination. Moreover, prior orders have not distinguished affiliate from non-affiliate contract rates in the PDO context, nor have they applied the rate setting methodologies for initial rates to contract rates. If the trend set forth in the most recent declaratory orders continues, pipelines will need to take extra precaution to structure their projects in a manner consistent with this new regime.