[Federal Register Volume 87, Number 208 (Friday, October 28, 2022)]
[Rules and Regulations]
[Pages 65163-65175]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-23343]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 343

[Docket No. AD20-10-000]


Standard Applied to Complaints Against Oil Pipeline Index Rate 
Changes

AGENCY: Federal Energy Regulatory Commission.

ACTION: Policy statement.

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SUMMARY: In this Policy Statement, the Federal Energy Regulatory 
Commission

[[Page 65164]]

(Commission) provides guidance regarding how it will evaluate 
complaints against oil pipeline index rate increases. Specifically, the 
Commission replaces the Substantially Exacerbate Test with the 
Percentage Comparison Test as the preliminary screen for determining 
whether to investigate complaints against index rate increases.

DATES: October 28, 2022.

FOR FURTHER INFORMATION CONTACT: 
Evan Steiner (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street NE, Washington, 
DC 20426, (202) 502-8792, [email protected]
Monil Patel (Technical Information), Office of Energy Market 
Regulation, Federal Energy Regulatory Commission, 888 First Street NE, 
Washington, DC 20426, (202) 502-8296, [email protected]

SUPPLEMENTARY INFORMATION: 
    1. On March 25, 2020, the Commission issued a Notice of Inquiry \1\ 
seeking comments regarding its proposal to replace the Substantially 
Exacerbate Test as the preliminary screen for determining whether to 
investigate complaints against index rate increases for oil pipelines 
and to instead evaluate such complaints using the Percentage Comparison 
Test, which historically has applied to protests of index rate 
increases. The Commission also sought comment on whether it should 
apply the Percentage Comparison Test's existing 10% threshold to 
complaints.\2\
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    \1\ Standard Applied to Complaints Against Oil Pipeline Index 
Rate Changes, 85 FR 21420 (Apr. 17, 2020), 170 FERC ] 61,252 (2020) 
(NOI).
    \2\ Id. P 14.
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    2. As discussed below, we provide guidance regarding how the 
Commission will evaluate complaints against index rate increases.\3\ 
Specifically, we adopt the proposal to apply the Percentage Comparison 
Test with its existing 10% threshold as the preliminary screen in both 
protest and complaint challenges to index rate increases.
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    \3\ This policy statement does not establish a binding rule or 
precedent but instead provides guidance by notifying entities of the 
course of action the Commission intends to follow in future 
adjudications. See Pac. Gas & Elec. Co. v. FPC, 506 F.2d 33, 38 
(D.C. Cir. 1974).
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I. Background

A. The Indexing Methodology

    3. The Commission regulates oil pipeline rates pursuant to the 
Interstate Commerce Act's (ICA) just and reasonable standard.\4\ In 
accordance with the Energy Policy Act of 1992 (EPAct 1992),\5\ the 
Commission adopted indexing to provide a simplified and generally 
applicable ratemaking methodology for oil pipelines and create 
streamlined procedures related to oil pipeline rates.\6\ Indexing 
allows oil pipelines to change their tariff rates so long as those 
rates remain at or below applicable ceiling levels, which change every 
July 1 based upon an index that tracks industry-wide cost changes. When 
the Commission adopted indexing, it also added page 700 to FERC Form 
No. 6 to provide cost, revenue, and throughput information so that the 
Commission and the industry can monitor pipelines' indexed rates.\7\
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    \4\ 49 U.S.C. app. 1(5).
    \5\ Public Law 102-486 1801(b), 106 Stat. 3010 (Oct. 24, 1992).
    \6\ See Revisions to Oil Pipeline Reguls. Pursuant to Energy 
Pol'y Act of 1992, Order No. 561, 58 FR 58753 (Nov. 4, 1993), FERC 
Stats. & Regs. ] 30,985 (1993) (cross-referenced at 65 FERC ] 
61,109), order on reh'g, Order No. 561-A, 59 FR 40243 (Aug. 8, 
1994), FERC Stats. & Regs. ] 31,000 (1994) (cross-referenced at 68 
FERC ] 61,138), aff'd sub nom. Ass'n of Oil Pipe Lines v. FERC, 83 
F.3d 1424 (D.C. Cir. 1996) (AOPL v. FERC).
    \7\ Cost-of-Service Reporting & Filing Requirements for Oil 
Pipelines, Order No. 571, 59 FR 59137 (Nov. 16, 1994), FERC Stats. & 
Regs. ] 31,006 (cross-referenced at 69 FERC ] 61,102), order on 
reh'g and clarification, Order No. 571-A, 60 FR 356 (Jan. 4, 1995), 
FERC Stats. & Regs. ] 31,012 (1994) (cross-referenced at 69 FERC ] 
61,411), aff'd sub nom. AOPL v. FERC, 83 F.3d 1424 (D.C. Cir. 1996); 
see also Revisions to & Elec. Filing of the FERC Form No. 6 & 
Related Unif. Sys. of Accts., Order No. 620, 65 FR 81335 (Dec. 26, 
2000), FERC Stats. & Regs. ] 31,115 (2000) (cross-referenced at 93 
FERC ] 61,262), reh'g denied, Order No. 620-A, 94 FERC ] 61,130 
(2001); Revisions to Page 700 of FERC Form No. 6, Order No. 783, 78 
FR 44424 (July 24, 2013), 144 FERC ] 61,049, at PP 29-40 (2013), 
reh'g denied, Order No. 783-A, 148 FERC ] 61,235 (2014). All 
jurisdictional oil pipelines are required to file page 700, 
including pipelines exempt from filing the full Form No. 6. 18 CFR 
357.2(a)(2)-(3) (2021).
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    4. In adopting indexing, the Commission established a procedure to 
allow shippers to challenge rate increases that, while in compliance 
with the applicable ceiling, are substantially in excess of the actual 
cost changes that the pipeline incurred. Section 343.2(c)(1) of the 
Commission's regulations provides that a protest or complaint against 
an index rate increase must allege ``reasonable grounds'' that the 
index rate increase is ``so substantially in excess of the actual cost 
increases incurred by the carrier that the rate is unjust and 
unreasonable.'' \8\ The Commission reviews protests and complaints 
against annual index rate increases by (1) applying a preliminary 
screen based on data from the pipeline's page 700 and (2) if the 
preliminary screen is satisfied, investigating the rate increase at a 
hearing.\9\
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    \8\ 18 CFR 343.2(c)(1).
    \9\ Such challenges to annual index rate increases are distinct 
from complaints on a cost-of-service basis against a pipeline's 
total rate. See BP W. Coast Prods. LLC v. SFPP, L.P., 121 FERC ] 
61,243, at PP 8-10 (2007) (distinguishing complaints against annual 
index rate increases from complaints against the pipeline's base 
rate).
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    5. Under the Commission's current policy, the preliminary screen 
differs for protests and complaints. When a proposed index rate 
increase is protested, the Commission applies the Percentage Comparison 
Test and will investigate the protested increase if there is a more 
than 10 percentage-point differential between (1) the index rate 
increase and (2) the change in the prior two years' total cost-of-
service data reported on page 700, line 9.\10\ By contrast, when a 
complaint against an index rate increase is filed, the Commission 
considers ``a wider range of factors beyond the Percentage Comparison 
Test,'' including the Substantially Exacerbate Test.\11\ Under the 
Substantially Exacerbate Test, the Commission will investigate a 
complaint against an index rate increase if the complaint shows that 
(1) the pipeline is substantially over-recovering its cost of service 
(first prong) and (2) the index rate increase so exceeds the actual 
increase in the pipeline's costs that the resulting rate increase would 
substantially exacerbate the pipeline's over-recovery (second 
prong).\12\
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    \10\ E.g., SFPP, L.P., 168 FERC ] 61,043, at P 4 (2019) (citing 
Calnev Pipe Line, L.L.C., 130 FERC ] 61,082, at PP 10-11 (2010)); 
see also Appendix (depicting Percentage Comparison Test formula). 
The Commission has explained that there is an exception to the 
Percentage Comparison Test whereby the Commission will not 
investigate a protest if the pipeline's costs exceed its revenues. 
SFPP, L.P., Opinion No. 527-A, 162 FERC ] 61,230, at P 20 (2018) 
(citing Shell Pipe Line Co., 102 FERC ] 61,350, order on reh'g, 104 
FERC ] 61,021 (2003)) (``[W]hen a pipeline is under-recovering its 
costs, the Commission permits a pipeline to receive the index 
increase. In these circumstances, the index increase (even if it 
exceeds the pipeline's cost changes) is not likely to lead to a rate 
that is `unjust and unreasonable.' '').
    \11\ E.g., Calnev, 130 FERC ] 61,082 at P 11 (citing BP W. Coast 
Prods. LLC v. SFPP, L.P., 121 FERC ] 61,243 at PP 8-9; BP W. Coast 
Prods., LLC v. SFPP, L.P., 121 FERC ] 61,141, at P 7 (2007) (BP West 
Coast II)).
    \12\ BP West Coast II, 121 FERC ] 61,141 at P 10; see also 
Appendix (depicting Substantially Exacerbate Test formulas).
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B. Procedural History

    6. In Southwest Airlines Co. v. FERC, the U.S. Court of Appeals for 
the District of Columbia Circuit vacated and remanded Commission orders 
applying the Substantially Exacerbate Test to complaints against index 
rate increases by SFPP, L.P. (SFPP).\13\ The court held

[[Page 65165]]

that the Commission had departed from its prior policy by considering 
post-rate-increase data in evaluating the complaints.\14\ The court 
vacated and remanded the Commission's orders dismissing the complaints. 
The court emphasized the general principle that the Commission must 
``explain its action in a way that coheres with the rest of its 
indexing scheme'' and ``provide a reasoned explanation that treats like 
cases alike.'' \15\ These complaint proceedings subsequently 
settled.\16\
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    \13\ Sw. Airlines Co. v. FERC, 926 F.3d 851, 856 (D.C. Cir. 
2019) (Southwest Airlines). In the vacated orders, the Commission 
addressed complaints filed in 2014 against SFPP's index rate 
increases for the 2012 and 2013 index years. The Commission 
dismissed the complaints for failing the second prong of the 
Substantially Exacerbate Test. HollyFrontier Ref. & Mktg. LLC v. 
SFPP, L.P., 157 FERC ] 61,186, at P 8 (2016) (December 2016 Order), 
reh'g denied, 162 FERC ] 61,232, at P 14 (2018). The Commission 
explained that notwithstanding the challenged rate increases, page 
700 data that became available after SFPP implemented the rate 
increases and before the complaints were filed (post-rate-increase 
data) showed that the difference between SFPP's costs and revenues 
declined between 2011 and 2013. December 2016 Order, 157 FERC ] 
61,186 at P 9.
    \14\ Southwest Airlines, 926 F.3d at 858.
    \15\ Id. at 859.
    \16\ SFPP, L.P., 178 FERC ] 61,019 (2022); SFPP, L.P., 173 FERC 
] 61,295 (2020).
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    7. Following the remand in Southwest Airlines, the Commission 
issued the NOI and sought comment upon its proposal to eliminate the 
Substantially Exacerbate Test as the preliminary screen applied to 
complaints against index rate increases and to instead evaluate such 
complaints by applying the Percentage Comparison Test.\17\ The NOI 
outlined the Commission's concerns regarding the Substantially 
Exacerbate Test: that the test lacks clear standards, suffers from an 
inherent mechanical flaw that yields irrational results, and is 
inconsistent with the purpose of indexing and the Commission's 
regulations.\18\ The Commission sought comment addressing the merits of 
the proposal, including whether the Commission should apply the 
Percentage Comparison Test's existing 10% threshold to complaints and 
whether and how the Commission should consider additional factors 
beyond the Percentage Comparison Test in evaluating complaints against 
index rate increases.\19\
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    \17\ NOI, 170 FERC ] 61,252 at P 14. The Commission first 
described this proposal in an order on remand following Southwest 
Airlines. HollyFrontier, 170 FERC ] 61,133 at P 21; see also NOI; 
170 FERC ] 61,252 at P 14 (soliciting public comment on the 
Commission's proposal).
    \18\ NOI, 170 FERC ] 61,252 at P 9.
    \19\ Id. P 14.
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C. Comments

    8. Initial and reply comments on the NOI were submitted by Joint 
Complainants,\20\ the Liquids Shippers Group (Liquids Shippers),\21\ 
SFPP, the Canadian Association of Petroleum Producers (CAPP), and the 
Liquid Energy Pipeline Association (LEPA).\22\
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    \20\ Joint Complainants are the complainants from the 
HollyFrontier proceedings: American Airlines, Inc.; Chevron Products 
Company; HollyFrontier Refining & Marketing LLC; Southwest Airlines 
Co.; and Valero Marketing and Supply Company.
    \21\ Liquids Shippers are Apache Corporation, Cenovus Energy 
Marketing Services Ltd., ConocoPhillips Company, Devon Gas Services, 
L.P., Equinor Marketing & Trading US Inc., Fieldwood Energy LLC, 
Marathon Oil Company, Ovinitiv Marketing Inc., and Pioneer Natural 
Resources USA, Inc.
    \22\ At the time its comments were filed, LEPA was known as the 
Association of Oil Pipe Lines.
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    9. SFPP and LEPA generally support the proposal in the NOI, arguing 
that the Percentage Comparison Test is well-founded in precedent and 
aligns with the Commission's goals of streamlined and simplified index-
based ratemaking.\23\ Liquids Shippers, CAPP, and Joint Complainants 
oppose the proposal and also propose alternatives to the Percentage 
Comparison Test.
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    \23\ E.g., LEPA Initial Comments at 4-5; SFPP Initial Comments 
at 13-19.
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II. Discussion

    10. In this policy statement, we adopt the proposal set forth in 
the NOI to use the Percentage Comparison Test as the preliminary screen 
for both protests and complaints against annual index rate increases 
and to eliminate the Substantially Exacerbate Test. As explained below, 
we conclude that: (1) the Substantially Exacerbate Test should be 
eliminated; (2) the Percentage Comparison Test provides a preferable 
alternative for evaluating complaints against index rate changes; (3) 
the Percentage Comparison Test's 10% threshold is supported; (4) 
commenters' alternative proposals are incompatible with the indexing 
scheme; (5) the Commission intends to generally limit its consideration 
to the Percentage Comparison Test in evaluating complaints against 
index rate changes but will address other arguments as they arise in 
specific cases; and (6) proposals to adopt broader changes to the 
Commission's oil pipeline ratemaking methodologies are beyond the scope 
of this proceeding.

A. The Substantially Exacerbate Test Should Be Eliminated

    11. As discussed below, we are ending our use of the Substantially 
Exacerbate Test because it (1) lacks clear standards, (2) suffers from 
an inherent mechanical flaw, and (3) does not effectively implement the 
Commission's regulations.
1. The Substantially Exacerbate Test Lacks Clear Standards
    12. The Substantially Exacerbate Test lacks clear standards for 
evaluating complaints. Consistent with EPAct 1992's mandate for a 
simplified and streamlined ratemaking methodology, we conclude that the 
preliminary screen used to determine whether to investigate a complaint 
against an annual index rate increase would benefit from clear 
percentage thresholds to avoid complex case-specific analysis. Also, 
clear percentage thresholds facilitate ``treat[ing] like cases alike,'' 
as the D.C. Circuit emphasized in Southwest Airlines.\24\
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    \24\ Southwest Airlines, 926 F.3d at 859. Although the court 
made this statement while specifically addressing the Commission's 
use of post-rate-increase data in evaluating the complaints in 
HollyFrontier, we find the general principle instructive that like 
cases must be treated similarly and that the Commission's indexing 
policies must be internally coherent. See id.
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    13. However, in establishing the Substantially Exacerbate Test, the 
Commission did not set clear percentage thresholds of over-recovery and 
exacerbation for using the test to determine whether to set a complaint 
for hearing.\25\ Since 2007, only a small number of shipper complaints 
have invoked the Substantially Exacerbate Test. Among the six sets of 
proceedings in which complainants sought relief pursuant to the 
Substantially Exacerbate Test,\26\ the Commission applied the 
Substantially Exacerbate Test to establish a hearing on only one 
occasion. However, in that case, the Commission did not establish a 
minimum percentage threshold that could be applied going forward in 
other cases.\27\ The five other complaint

[[Page 65166]]

proceedings likewise did not specify the thresholds for establishing a 
substantial over-recovery or substantial exacerbation.\28\ As a result, 
the Substantially Exacerbate Test lacks clear standards on which 
parties may rely in bringing or defending against index increase 
complaints or which the Commission may apply in deciding whether to 
investigate such complaints at a hearing. Comments in response to the 
NOI, addressed below, do not persuade us to reach a different 
conclusion. Rather, as discussed in the following section, clear 
standards are difficult to develop due to the Substantially Exacerbate 
Test's mechanical flaws, and we are unpersuaded by Joint Complainants' 
argument that such thresholds are unnecessary.\29\
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    \25\ HollyFrontier, 170 FERC ] 61,133 at PP 22-23; see also 
supra P 5 (explaining that the Substantially Exacerbate Test 
considers whether (1) the pipeline is substantially over-recovering 
its cost of service and (2) the index rate increase so exceeds the 
actual increase in the pipeline's costs that the resulting rate 
increase would substantially exacerbate the pipeline's over-
recovery).
    \26\ These six proceedings include (1) Docket Nos. OR07-08 and 
OR07-11, (2) Docket No. OR07-16, (3) Docket No. OR07-20, (4) Docket 
No. OR09-18, (5) Docket Nos. OR14-35 and OR14-36, and (6) Docket 
Nos. OR19-21, OR19-33, and OR19-37. Moreover, although the 
Commission has received index filings from over 200 pipelines 
annually in recent years, these complaints were all against either 
SFPP or its affiliate Calnev Pipe Line, L.L.C.
    \27\ In Docket Nos. OR07-08 and OR07-11, the Commission 
established a hearing to investigate complaints alleging that SFPP 
was over-recovering its cost of service by $16 million and that the 
challenged index rate increase would have ``represented an increase 
in SFPP's return of some 25%.'' BP West Coast II, 121 FERC ] 61,141 
at P 8. The complaints resulted in settlement. See ExxonMobil Oil 
Corp. v. SFPP, L.P., 122 FERC ] 61,129, at P 1 (2008) (setting 
complaints for hearing); BP W. Coast Prods., LLC v. SFPP, L.P., 125 
FERC ] 61,138, at P 2 (2008) (approving uncontested settlement 
resolving complaints).
    \28\ The Commission found in three of these proceedings that the 
complaint failed the Substantially Exacerbate Test because the 
challenged index rate increases were smaller than the actual changes 
in the pipelines' costs. See Tesoro Ref. & Mktg. Co. v. Calnev Pipe 
Line, L.L.C., 121 FERC ] 61,142, at P 7 (2007) (OR07-16); BP W. 
Coast Prods. LLC v. SFPP, L.P., 121 FERC ] 61,243 at P 4 (OR07-20); 
SFPP, L.P., 129 FERC ] 61,228, at P 41 (2009) (OR09-18). The fourth 
set of proceedings involved the complaints at issue in Southwest 
Airlines. As discussed above, the Commission held that these 
complaints failed the Substantially Exacerbate Test's second prong 
because post-rate-increase page 700 data showed that SFPP's cost-
revenue divergence decreased after SFPP implemented the challenged 
increases. Supra note 13. Finally, the fifth set of proceedings 
involved complaints addressed in the Commission's order on remand 
following Southwest Airlines, HollyFrontier, 170 FERC ] 61,133 
(OR19-21, OR19-33, OR19-37), and these complaints ultimately 
settled. SFPP, 178 FERC ] 61,019; SFPP, 173 FERC ] 61,295.
    \29\ See infra PP 14-19.
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2. The Substantially Exacerbate Test Is Mechanically Flawed
    14. The Substantially Exacerbate Test suffers from an inherent 
mechanical flaw that makes developing analytically sound percentage 
thresholds unworkable. For example, as a pipeline's over-recovery 
increases, an index rate increase will exacerbate the over-recovery by 
a lower percentage; thus, if a pipeline has a relatively high over-
recovery, even a relatively large index increase will lead to a minimal 
exacerbation.\30\ Conversely, applying the same index rate increase to 
a lower level of over-recovery will result in a higher degree of 
exacerbation.\31\ This relationship between the Substantially 
Exacerbate Test's two prongs causes the Substantially Exacerbate Test 
to yield results whereby complaints against pipelines with higher over-
recoveries are less likely to be investigated because a large index 
increase will lead to minimal exacerbation.\32\
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    \30\ HollyFrontier, 170 FERC ] 61,133 at P 24.
    \31\ Id. This flaw was illustrated in HollyFrontier with a table 
presenting results of the Substantially Exacerbate Test over a range 
of over-recovery and index levels. Id. P 25. For example, if a 
pipeline's revenues exceed its costs by 50%, a 3% index increase 
leads to an exacerbation of 9%. Id. In contrast, if a pipeline's 
revenues exceed its costs by only 5%, that same 3% index increase 
leads to an exacerbation of 63%. Id.
    \32\ Id. P 24; see also supra P 5 (explaining that the 
Substantially Exacerbate Test considers whether (1) the pipeline is 
substantially over-recovering its cost of service and (2) the index 
rate increase so exceeds the actual increase in the pipeline's costs 
that the resulting rate increase would substantially exacerbate the 
pipeline's over-recovery).
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    15. Moreover, there appears to be no combination of threshold 
levels for these two prongs of the test that would consistently yield 
reasonable results, such that the test fails to provide a workable 
standard for evaluating complaints against index rate increases.\33\ 
This phenomenon is demonstrated in the table below, which presents 
results of the Substantially Exacerbate Test over a relevant range of 
over-recovery and index levels.\34\ The table shows that the 
Substantially Exacerbate Test is driven by (1) the extent of the 
pipeline's over-recovery and (2) the level of the index rate increase.
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    \33\ Id. PP 24, 26.
    \34\ Since its inception in 1995, the oil pipeline index has 
ranged from approximately -2.0% to 8.7%. Because the Substantially 
Exacerbate Test would not apply to an index that is less than zero 
(a negative index), the range of index levels presented in the 
columns of the table encompasses only the positive historical levels 
of the oil pipeline index.
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Table--Exacerbation Percentages at Various Over-Recovery-Index 
Combinations
[GRAPHIC] [TIFF OMITTED] TR28OC22.002

    16. The table shows that at low levels of over-recovery, a modest 
index rate increase exacerbates the over-recovery by a large 
percentage. For example, the second line of the table indicates that 
applying a 4% index rate increase to an over-recovery of 10% will 
exacerbate the over-recovery by 44%. In comparison, the same increase 
would only exacerbate a 50% over-recovery by 12%. This leads to a 
result whereby a complaint against the pipeline with the 50% over-
recovery is less likely to be set for hearing under the Substantially 
Exacerbate Test than a complaint against the pipeline with the 10% 
over-recovery due to the lower degree of exacerbation. Due to this 
mechanical flaw, there is no combination of threshold levels that would 
consistently yield reasonable results. Accordingly, the Substantially 
Exacerbate Test fails to provide a workable standard for the Commission 
to evaluate complaints under Sec.  343.2(c)(1).
    17. We disagree with Joint Complainants' argument that the

[[Page 65167]]

Substantially Exacerbate Test does not produce irrational results 
because it is not meant to provide an absolute mathematical threshold, 
but rather provides information to help the Commission determine, in 
its judgment, whether a substantial over-recovery would be 
substantially exacerbated.\35\ As discussed above, we find that, to 
further the goals of streamlining and simplifying the ratemaking 
process, the preliminary screen used to determine whether to 
investigate a complaint against an index rate increase benefits from 
clear thresholds. Furthermore, a clearly established threshold also 
facilitates ``treat[ing] like cases alike'' consistent with Southwest 
Airlines.\36\
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    \35\ E.g., Joint Complainants Reply Comments at 13.
    \36\ 926 F.3d at 859; see also supra note 24.
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    18. Similarly, we disagree with Joint Complainants' argument that 
the Commission could apply the Substantially Exacerbate Test on a case-
by-case basis using a ``pragmatic quantitative and qualitative 
analysis'' similar to the analysis used in full cost-of-service rate 
cases.\37\ The purpose of indexing is to avoid the complexity of cost-
of-service litigation,\38\ and therefore we view clear thresholds as a 
means to effectuate the streamlining and simplification required by 
EPAct 1992.\39\ Finally, Joint Complainants do not explain how their 
``pragmatic quantitative and qualitative analysis'' would function as a 
workable standard for evaluating complaints in the indexing regime.
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    \37\ Joint Complainants Initial Comments at 26 (arguing that 
clear thresholds are unnecessary and that the Commission could use a 
``pragmatic quantitative and qualitative analysis'' similar to the 
analysis used in full cost-of-service rate cases).
    \38\ See, e.g., Order No. 561, FERC Stats. & Regs. ] 30,985 at 
30,948 (explaining that indexing avoids ``the need of strict 
regulatory review of the pipeline's individual cost of service, thus 
saving regulatory manpower, time and expense'').
    \39\ We also find that using, as a screen for complaints against 
index rate increases, the same analytical approach that the 
Commission uses in base-rate proceedings could exacerbate the 
protracted length of complaint proceedings, about which Joint 
Complainants also express concern. Joint Complainants Initial 
Comments at 19-20.
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    19. We are also not persuaded by Joint Complainants' reliance upon 
the Commission's prior statement in Order No. 561-A that precise 
thresholds are not feasible for reviewing challenges to index rate 
changes.\40\ Our experience since Order No. 561-A, including applying 
the Percentage Comparison Test's 10% threshold,\41\ has demonstrated 
that precise thresholds are feasible, and in fact preferable, in this 
setting.
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    \40\ Id. at 22 (citing Order No. 561-A, FERC Stats. & Regs. ] 
31,000 at 31,103).
    \41\ E.g., SFPP, L.P., 168 FERC ] 61,043, at P 21 (2019) 
(declining to investigate protested index rate increase where 
differential under Percentage Comparison Test was less than 10%); 
N.D. Pipeline Co., 163 FERC ] 61,235, at P 11 (2018) (setting 
protested index rate increase for hearing where Percentage 
Comparison Test differential exceeded 10%).
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3. The Substantially Exacerbate Test Does Not Effectively Implement the 
Commission's Regulations
    20. The Substantially Exacerbate Test does not effectively 
implement Sec.  343.2(c)(1)'s ``substantially in excess'' requirement. 
Section 343.2(c)(1) provides that complaints ``must allege reasonable 
grounds for asserting . . . that the rate increase is so substantially 
in excess of the actual cost increases incurred by the carrier that the 
rate is unjust and unreasonable.'' \42\ When the Commission first 
established the Substantially Exacerbate Test, it concluded that 
complaints applying that test did not need to satisfy the regulation's 
``substantially in excess'' requirement.\43\ On rehearing, recognizing 
the Commission could not wholly disregard this part of its regulation, 
the Commission sought to rectify the error by explaining that the 
complainant applying the Substantially Exacerbate Test needed to show 
that the rate change substantially exceeded the cost change (``in 
dollar amounts'' or percentages) as part of its demonstration that the 
rate change substantially exacerbated the prior over-recovery.\44\
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    \42\ 18 CFR 343.2(c)(1) (emphasis added).
    \43\ BP West Coast I, 119 FERC ] 61,241 at PP 10-11.
    \44\ BP West Coast II, 121 FERC ] 61,141 at P 9. However, the 
Commission has provided limited guidance regarding how this would be 
applied. First, in establishing the Substantially Exacerbate Test, 
the Commission concluded that a $4 million additional return 
resulting from the index rate increase satisfied the ``substantially 
in excess'' standard. Second, in other cases, the Commission stated 
that it would reject index rate increases where the dollar increase 
in costs exceeded the projected dollar increase in revenues. SFPP, 
L.P., 129 FERC ] 61,228 at P 41 & n.74. Moreover, along the same 
lines, the Commission also rejected complaints where the pipeline's 
percentage cost change exceeded the percentage index rate increase. 
See BP W. Coast Prods. LLC v. SFPP, L.P., 121 FERC ] 61,243 at P 4; 
Tesoro Ref. & Mktg. Co. v. Calnev Pipe Line, L.L.C., 121 FERC ] 
61,142 at PP 4, 7.
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    21. Upon further consideration, we now conclude that the 
Substantially Exacerbate Test does not effectively implement the 
regulation. As discussed above, this is because the Substantially 
Exacerbate Test primarily considers pre-existing over-recoveries and 
the exacerbation of those over-recoveries. As discussed below, the 
Substantially Exacerbate Test provides inadequate consideration to 
whether the annual rate increase is ``substantially in excess'' to the 
annual cost increase, which is the standard provided in the regulation.
    22. First, in applying the Substantially Exacerbate Test, the 
Commission stated that ``dollar amounts'' could be used to satisfy the 
regulation's ``substantially in excess'' requirement. However, we find 
that defining ``substantially in excess'' in dollar terms hinders the 
development of consistent and transparent standards for implementing a 
simplified and streamlined ratemaking regime. This is because the 
relative significance of a certain dollar value varies greatly between 
large and small pipelines. For example, an over-recovery of $1 million 
would likely be insignificant for a large pipeline with substantial 
costs and revenues, but it could be significant for a smaller pipeline 
with lower costs and revenues. Thus, this approach is in tension with 
the goals of the Commission's indexing regime.\45\
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    \45\ 926 F.3d at 859.
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    23. Second, conversely, using percentages instead of dollar amounts 
would be redundant of the Percentage Comparison Test. To the extent the 
Substantially Exacerbate Test simply compares the pipeline's percentage 
cost change with the percentage index rate change, this duplicates the 
calculation already used in the Percentage Comparison Test.\46\ Thus, 
the Substantially Exacerbate Test's application of the regulation's 
``substantially in excess'' requirement either (a) undercuts the goals 
of simplified and streamlined ratemaking (relying upon dollar terms) or 
(b) is redundant (relying upon percentages, which uses the same 
standard as the Percentage Comparison Test). We disagree with Joint 
Complainants' arguments that the Substantially Exacerbate Test is 
consistent with the Commission's indexing regulations because (1) Sec.  
343.2(c)(1) requires that index rate changes must produce rates that 
are just and reasonable under the ICA and (2) the Commission can only 
determine whether an index rate change will produce an unjust and 
unreasonable rate by considering whether the pipeline's revenues exceed 
its costs.\47\ Joint Complainants'

[[Page 65168]]

arguments do not explain how the Substantially Exacerbate Test 
effectively implements Sec.  343.2(c)(1), which requires comparing the 
proposed rate increase to the amount of cost increases the pipeline has 
incurred.
---------------------------------------------------------------------------

    \46\ As discussed above, under the Percentage Comparison Test, a 
rate change is ``substantially in excess'' of the cost change when 
the cost change exceeds the percentage index rate by 10 percentage 
points. See supra P 5. No commenter has advanced a viable proposal 
for differentiating this aspect of the Substantially Exacerbate Test 
from the Percentage Comparison Test. Thus, the Substantially 
Exacerbate Test is redundant of the Percentage Comparison Test and, 
to the extent it differs, simply imposes a burden on shippers to 
show a preexisting over-recovery, a requirement that is not 
supported by the regulation.
    \47\ Joint Complainants Initial Comments at 28-29, 32-33, 35; 
see also 18 CFR 343.2(c)(1) (requiring that protests or complaints 
against index rate changes ``allege reasonable grounds for asserting 
that the rate is so substantially in excess of the actual cost 
increase incurred by the carrier that the rate is unjust and 
unreasonable'') (emphasis added). Joint Complainants further argue 
that the Commission's proposal ignores the fact that Sec.  
343.2(c)(1) resulted from Order Nos. 561 and 561-A, which expressly 
envisioned an evaluation of over-recovery of costs and the proposed 
rate increase's impact on that over-recovery. Joint Complainants 
Initial Comments at 33 (citing Order No. 561-A, FERC Stats. & Regs. 
] 31,000 at 31,103; BP West Coast, 121 FERC ] 61,141 at P 10).
---------------------------------------------------------------------------

    24. For the same reason, Joint Complainants' reliance on the 
Commission's statement in Opinion No. 527-A that ``a comparison between 
revenues and costs can be relevant'' under Sec.  343.2(c)(1) is 
inapposite.\48\ The fact that consideration of revenues can be relevant 
under the regulation does not demonstrate that the Substantially 
Exacerbate Test effectively implements the regulation requiring a 
comparison between the ``rate increase'' and the ``cost increases.'' 
\49\
---------------------------------------------------------------------------

    \48\ Joint Complainants Initial Comments at 35 (quoting SFPP, 
L.P., Opinion No. 527-A, 162 FERC ] 61,230, at P 20 (2018)).
    \49\ 18 CFR 343.2(c)(1). Further, in Opinion No. 527-A, the 
Commission allowed for the consideration of revenue as ``tied to the 
language of the regulation'' in the context of the Percentage 
Comparison Test at the hearing stage. Opinion No. 527-A, 162 FERC ] 
61,230 at P 20. Thus, the Percentage Comparison Test responds to 
both parts of the regulation by comparing the index rate change with 
the pipeline's cost changes and considering whether the divergence 
renders the pipeline's rate ``unjust and unreasonable.'' 18 CFR 
343.2(c)(1).
---------------------------------------------------------------------------

    25. We find unpersuasive Joint Complainants' contention that the 
Substantially Exacerbate Test should be retained because indexing is 
designed to allow recovery of historical costs and not prospective 
costs. In particular, they argue that indexing is designed to allow 
recovery of historical costs and not prospective costs based on (1) the 
Commission's statement in Order No. 561 that indexing ``merely 
preserves the value of just and reasonable rates in real economic 
terms'' and (2) the Commission's practice of solely considering data 
preceding the index increase in cases challenging index rate 
changes.\50\ The quoted language in Order No. 561 does not support 
Joint Complainants' contention. Rather, annual index rate increases 
preserve the economic value of pipeline rates by allowing them to keep 
pace with industry-wide cost changes so that rates will be sufficient 
to recover future years' costs.\51\ Although the Commission considers 
page 700 data from the preceding two years in evaluating a challenged 
index rate increase, index rate changes simply adjust a pipeline's 
existing rate so that it does not lose ground relative to industry-wide 
cost changes going forward.\52\ Indexing is not a true-up to account 
for prior-period over- or under-recoveries; rather, it is a permanent 
change in the pipeline's rate to recover future costs.
---------------------------------------------------------------------------

    \50\ Joint Complainants Initial Comments at 29-31, 33-34 
(quoting Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,950).
    \51\ HollyFrontier, 170 FERC ] 61,133 at P 27. Each prior year's 
inflation sets a new industry-wide cost level and inflationary 
changes compound in future years. Thus, if inflation is 10% each 
year and the cost level is $100 in Year 1, then in Year 2 the cost 
level will be $110 and in Year 3 will be $121. Indexing allows 
pipeline rates to increase accordingly.
    \52\ Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,950; 
Ass'n of Oil Pipe Lines v. FERC, 83 F.3d at 1430.
---------------------------------------------------------------------------

    26. Therefore, the concerns outlined above support eliminating the 
Substantially Exacerbate Test as the preliminary screen applied to 
index increase complaints.

B. The Percentage Comparison Test Offers a Preferable Alternative for 
Evaluating Complaints Against Index Rate Increases

    27. We find that the Percentage Comparison Test provides a more 
consistent way to evaluate complaints against index rate changes than 
the Substantially Exacerbate Test.\53\ As discussed below, (1) the 
Percentage Comparison Test lacks the same analytical flaws as the 
Substantially Exacerbate Test, (2) the Percentage Comparison Test 
conforms to the Commission's regulations, and (3) it is preferable to 
evaluate challenges to index rate changes, whether via protest or a 
complaint, using a single test. As discussed below, the comments do not 
dissuade us from adopting this alternative approach.
---------------------------------------------------------------------------

    \53\ NOI, 170 FERC ] 61,252 at PP 10-12 (citing HollyFrontier, 
170 FERC ] 61,133 at PP 32-35, 39, 42-45).
---------------------------------------------------------------------------

1. The Percentage Comparison Test Lacks the Analytical Flaws of the 
Substantially Exacerbate Test
    28. We find that the Percentage Comparison Test is preferable to 
the Substantially Exacerbate Test.
    29. We disagree with the Joint Complainants' and Liquids Shippers' 
objections that the Percentage Comparison Test must be rejected because 
it is also mechanically flawed. They argue that the Percentage 
Comparison Test improperly compares percentages with different 
bases.\54\ We recognize that in other situations the Commission may 
seek to avoid comparisons of percentages with two different bases, but 
that concern is not persuasive here. Joint Complainants and Liquids 
Shippers neither cite evidence that the difference in bases leads to a 
distortion nor have they provided a workable alternative for comparing 
the pipeline's cost change to the index rate change that does not 
involve different bases. In fact, the Percentage Comparison Test has 
been workably applied to protests of index rate increases.\55\ Applying 
this simplified and streamlined formula is appropriate within the 
simplified and streamlined indexing regime, and Joint Complainants and 
Liquids Shippers do not propose any adjustment to the Percentage 
Comparison Test or viable alternative method for performing the rate-
change to cost-change comparison that Sec.  343.2(c)(1) requires.
---------------------------------------------------------------------------

    \54\ Joint Complainants Initial Comments at 20, 40-41 (citing 
Am. W. Airlines, Inc. v. Calnev Pipe Line, L.L.C., 121 FERC ] 
61,241, at P 8 (2007) (``[I]t is incorrect to use the sum of the 
changes in two percentages as a measure of absolute change when the 
percentages have different bases.'')); Liquids Shippers Initial 
Comments at 34-35. For example, when considering an index increase 
filed on July 1, 2022, the Percentage Comparison Test compares the 
rate change (new rate/prior rate) to the cost change ((2021 costs--
2020 costs)/(2020 costs)). Because one denominator is the ``prior 
rate'' and the other denominator is the ``2020 costs,'' Joint 
Complainants and Liquids Shippers assert that the Percentage 
Comparison Test compares percentages with ``different bases.''
    \55\ See, e.g., SFPP, 163 FERC ] 61,232 at PP 13, 20; SFPP, 
L.P., 135 FERC ] 61,274, at P 11 (2011); Calnev Pipe Line, 130 FERC 
] 61,082 at P 10; Calnev Pipe Line L.L.C., 115 FERC ] 61,387, at PP 
10-11 (2006).
---------------------------------------------------------------------------

    30. We also reject Joint Complainants' and Liquids Shippers' 
argument that the Percentage Comparison Test does not ensure just and 
reasonable rates because it permits pipelines with over-recoveries and 
declining costs to implement index rate increases.\56\ As an initial 
matter, we emphasize that index rate increases are limited to the 
industry-wide index level and do not recover a pipeline's cost changes 
in excess of that amount. At the same time, the Commission implemented 
the indexing methodology with the understanding that some individual 
pipelines' revenues could potentially exceed their costs under the 
scheme and that some individual pipelines' annual rate changes could 
also exceed their annual cost changes.\57\ By permitting revenues to 
exceed costs to some degree, indexing encourages pipelines to operate 
efficiently by allowing them to benefit from their cost

[[Page 65169]]

savings.\58\ Likewise, denying index rate increases whenever a 
pipeline's costs decline could discourage pipelines from operating 
efficiently.\59\ Thus, while indexing allows some pipelines to increase 
their rates above their individual cost changes, indexed rate changes 
are below other pipelines' cost changes. Accordingly, denying an index 
rate increase whenever a pipeline's revenues exceed its costs, even 
slightly, and/or the pipeline's costs decline would make indexing a 
lopsided methodology in which pipelines are presented with a 
significant risk of under-recovery without commensurate potential for 
benefits for operating efficiently.
---------------------------------------------------------------------------

    \56\ Joint Complainants Initial Comments at 46; Liquids Shippers 
Initial Comments at 34-35; see also CAPP Initial Comments at 14.
    \57\ See Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,949.
    \58\ See HollyFrontier, 170 FERC ] 61,133 at P 42. Moreover, 
tying indexed rates to pipeline-specific costs would reduce the 
efficacy of the indexing scheme as a streamlined, simplified 
ratemaking methodology, counter to the Commission's goals in Order 
No. 561. See Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,949.
    \59\ This also leads to irrational results. For instance, if the 
index increase in any given year is 3%, it would be illogical to 
deny a pipeline whose costs declined by 0.01% (or less) an index 
rate increase whereas a pipeline whose costs increased by 0.01% 
would receive the full 3% index increase.
---------------------------------------------------------------------------

    31. We are unpersuaded by Liquids Shippers' argument that the 
Commission should expand the scope of indexing proceedings to include a 
review of the pipeline's underlying base rate.\60\ Shippers can 
challenge a pipeline's base rate at any time. The choice of whether to 
challenge a pipeline's index rate increase or its base rate belongs to 
the complaining shipper.\61\ Since indexing's inception, the Commission 
has limited its review of index rate increase challenges to the 
proposed incremental rate change and rejected arguments to expand these 
proceedings to encompass challenges to the pipeline's base rate.\62\ 
Although Liquids Shippers contend that the rationale for this policy no 
longer applies,\63\ they do not explain how enlarging indexing 
proceedings to include a full cost-of-service review of the pipeline's 
base rate would cohere with streamlined and simplified ratemaking or 
conform to the limited scope of Sec.  343.2(c)(1).
---------------------------------------------------------------------------

    \60\ Liquids Shippers argue that the Percentage Comparison Test 
improperly focuses on the incremental change (both in costs and 
separately in rates) rather than the entirety of the pipeline's 
underlying base rate. Liquids Shippers Initial Comments at 2-3, 27-
33; Liquids Shippers Reply Comments at 15-16.
    \61\ If a shipper is concerned that an index rate increase 
substantially exceeds the pipeline's cost changes, it can file a 
complaint against the index rate increase. If successful, such a 
complaint would eliminate or reduce the index rate increase. On the 
other hand, if a shipper is concerned that a pipeline's base rates 
may be substantially over-recovering the pipeline's costs, it can 
file a cost-of-service complaint against the base rates. If 
successful, such a complaint against the base rates would eliminate 
the pipeline's over-recovery.
    \62\ E.g., SFPP, L.P., 107 FERC ] 61,334, at P 10 (2004); Calnev 
Pipe Line, L.L.C., 96 FERC ] 61,350, at 62,304 (2001) (explaining 
that the Commission ``is not subject to a statutory duty to examine 
the whole rate when an indexed change is proposed''); Order No. 561-
A, FERC Stats. & Regs. ] 31,000 at 31,104; see also SFPP, L.P., 140 
FERC ] 61,016, at P 34 (2012) (``Indexing cases are intended to be 
streamlined proceedings that do not delve into cost-of-service 
issues.''); Order No. 561, FERC Stats. & Regs. ] 30,985, at 30,952-
53 (finding that requiring protests under Sec.  343.2(c)(1) to 
compare the proposed incremental rate change to the pipeline's cost 
changes, while permitting complaints against the pipeline's base 
rates, achieves an adequate balance between competing interests).
    \63\ Liquids Shippers Initial Comments at 28-29.
---------------------------------------------------------------------------

2. The Percentage Comparison Test Conforms to Commission Regulations
    32. We find that the Percentage Comparison Test effectively 
implements the Commission's regulations. As discussed above, Sec.  
343.2(c)(1) requires protests and complaints against index rate 
increases to show that the rate increase is ``substantially in excess'' 
of the pipeline's actual cost changes.\64\ Unlike the Substantially 
Exacerbate Test, the Percentage Comparison Test more closely conforms 
to this language by comparing the challenged index rate change to the 
pipeline's already incurred cost changes and relying upon this 
comparison to determine whether the rate increase was, in fact, 
``substantially in excess'' of the cost changes.
---------------------------------------------------------------------------

    \64\ 18 CFR 343.2(c)(1); see also supra P 20.
---------------------------------------------------------------------------

    33. Joint Complainants and Liquids Shippers contend that the 
Percentage Comparison Test is inconsistent with the Commission's 
regulations because Sec.  343.2(c)(1) inquires whether a challenged 
index rate increase substantially exceeds the pipeline's ``actual cost 
increases,'' thereby limiting index rate increases to pipelines that 
experienced cost increases and excluding pipelines that experienced 
cost decreases.\65\ We disagree with these arguments. First, the 
regulatory language that Joint Complainants and Liquids Shippers cite 
describes when shippers can challenge an index rate change, not whether 
a pipeline can implement such a change. To the extent that this 
language could be construed as only allowing challenges to rate 
increases where a pipeline's costs have increased, this would not 
prohibit a pipeline from implementing a rate increase when its costs 
have decreased.
---------------------------------------------------------------------------

    \65\ Joint Complainants Initial Comments at 47-48 (quoting 18 
CFR 343.2(c)(1) (emphasis in original)); Liquids Shippers Initial 
Comments at 34 (same); Liquids Shippers Reply Comments at 15.
---------------------------------------------------------------------------

    34. Second, Joint Complainants' and Liquids Shippers' 
interpretation of the regulation is inconsistent with the Commission's 
indexing precedent. Although the regulation discusses comparing rate 
increases to ``actual cost increases'' and rate decreases to ``actual 
cost decreases,'' \66\ the Commission has consistently interpreted this 
regulation as requiring a comparison of the challenged rate change to 
the pipeline's cost change, whether positive or negative.\67\
---------------------------------------------------------------------------

    \66\ 18 CFR 343.2(c)(1).
    \67\ See, e.g., SFPP, L.P., 139 FERC ] 61,267, at PP 9-10 
(2012), reh'g denied, 143 FERC ] 61,140 (2013).
---------------------------------------------------------------------------

    35. Third, as discussed above, interpreting the regulation as Joint 
Complainants and Liquids Shippers propose would undermine indexing's 
cost-efficiency incentives. Indexing aims to provide pipelines ``with 
the incentive to cut costs aggressively,'' \68\ but denying index rate 
increases to pipelines that succeed in reducing costs would undermine 
that goal.\69\ In contrast, adopting the Percentage Comparison Test 
appropriately triggers investigations where an index rate change 
diverges markedly from the pipeline's recent reported cost changes.
---------------------------------------------------------------------------

    \68\ Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,949 n.37.
    \69\ For example, if reducing costs by 1% precludes a pipeline 
from implementing a 5% index rate increase it could obtain if its 
costs instead increased by 1%, the pipeline's incentives to reduce 
costs would diminish.
---------------------------------------------------------------------------

3. It Is Preferable To Evaluate Challenges to Index Rate Changes Using 
a Single Test
    36. Based on the record in this proceeding, we conclude that it is 
preferable to evaluate protests and complaints against index rate 
changes using the same preliminary screen.\70\ The court in Southwest 
Airlines instructed the Commission to evaluate complaints against index 
rate increases in a manner that coheres with the rest of its indexing 
scheme and ``treats like cases alike.'' \71\ Section 343.2(c)(1) 
requires protests and complaints to make the same showing: that the 
challenged rate increase ``is so substantially in excess of the actual 
cost increases incurred by the carrier that the rate is unjust and 
unreasonable.'' \72\ Given that the same standard applies to all 
challenges to index rate changes regardless of form, we conclude that 
evaluating protests and complaints using a single test conforms to the 
structure of the regulation and will better ensure that similar cases 
are not treated differently.
---------------------------------------------------------------------------

    \70\ HollyFrontier, 170 FERC ] 61,133 at P 37.
    \71\ Southwest Airlines, 926 F.3d at 859.
    \72\ 18 CFR 343.2(c)(1).
---------------------------------------------------------------------------

    37. We acknowledge that the Commission has previously found in BP

[[Page 65170]]

West Coast II that it is not arbitrary to interpret Sec.  343.2(c)(1) 
differently depending upon whether the challenge to the index rate 
change takes the form of a protest or a complaint.\73\ In making this 
finding, the Commission reasoned that the different procedural 
frameworks for protest and complaint proceedings warranted applying 
different interpretations of Sec.  343.2(c)(1) to these pleadings and 
that applying the same standard in both types of proceedings ``would 
effectively deprive shippers of any opportunity to question the rate 
levels and the returns resulting from the pipeline's annual index-based 
rate filings based on changes in the dollar yield from the rate 
index.'' \74\
---------------------------------------------------------------------------

    \73\ BP West Coast II, 121 FERC ] 61,141 at P 7.
    \74\ Id.; see also supra P 22 (discussing why the use of the 
dollar yield is not appropriate).
---------------------------------------------------------------------------

    38. Upon review of the record in this proceeding, we now conclude 
that it is preferable to evaluate protests and complaints under Sec.  
343.2(c)(1) using a single test. The considerations identified in BP 
West Coast II do not compel evaluating complaints against index rate 
increases differently than protests. While different procedural 
frameworks may justify different kinds of evidence that the Commission 
would consider in evaluating complaints as compared to accelerated 
protest proceedings, the different procedural frameworks here--where 
our regulations set forth the requirement for filing protests and 
complaints against index rate adjustments in the same sentence under a 
single standard--do not warrant applying different tests. Here, as 
discussed above, we find the Percentage Comparison Test to be superior 
to the Substantially Exacerbate Test and, given the flaws in the 
Substantially Exacerbate Test, we conclude that it is preferable to 
apply the Percentage Comparison Test to both protests and complaints.
    39. In addition, shippers will be able to challenge index rate 
increases by demonstrating that such increases are disallowed under the 
Percentage Comparison Test. Thus, contrary to commenters' 
arguments,\75\ we disagree that shippers are effectively precluded from 
challenging proposed index rate increases. The Percentage Comparison 
Test provides an effective preliminary screen that enables shippers to 
challenge index rate increases that substantially diverge from the 
pipeline's cost changes.\76\
---------------------------------------------------------------------------

    \75\ Joint Complainants Initial Comments at 19, 39; Liquids 
Shippers Initial Comments at 20-23; see also CAPP Initial Comments 
at 14; CAPP Reply Comments at 2-3.
    \76\ Dr. Webb's analysis demonstrates that for each year between 
2001-2018, a significant segment of oil pipelines filing cost-of-
service information would have failed the Percentage Comparison 
Test's 10% threshold had they attempted to take a full index rate 
increase. SFPP Reply Comments, Ex. B at 7-8 (Affidavit of Michael J. 
Webb). In most years, the 10% threshold would have screened all 
pipelines in the upper quartile of all pipelines from implementing a 
full index rate increase. Id.
---------------------------------------------------------------------------

    40. Furthermore, although the Percentage Comparison Test does not 
permit shippers to raise existing over-recoveries to challenge index 
rate increases,\77\ this is consistent with the plain language of the 
Commission's regulations and with the purpose of annual index rate 
increases. As discussed above, Sec.  343.2(c)(1) requires a complainant 
to show that the pipeline's cost change substantially exceeds its rate 
change, not to evaluate pre-existing over-recoveries.\78\ In addition, 
indexing allows annual pipeline rate increases to reflect industry-wide 
cost changes during the prior year to ensure that the pipeline's rate 
is sufficient to recover future years' costs. Consistent with this 
purpose, the Commission has previously held that the only relevant 
information in reviewing index rate increases is the change in the 
pipeline's costs over the two years preceding the increase.\79\ 
Applying the Percentage Comparison Test to both protests and complaints 
would bring the standard applied to complaints in line with this 
precedent by limiting the inquiry in index increase complaint 
proceedings to the relationship between the rate increase and the 
pipeline's prior changes in cost.
---------------------------------------------------------------------------

    \77\ Liquids Shippers Initial Comments at 20-23; see also CAPP 
Initial Comments at 14; CAPP Reply Comments at 2-3.
    \78\ 18 CFR 343.2(c)(1).
    \79\ E.g., SFPP, L.P., 140 FERC ] 61,016 at P 34 (finding that 
``[t]he only relevant evidence in indexing cases'' is the change in 
the pipeline's cost of service in the two years preceding the index 
rate increase).
---------------------------------------------------------------------------

    41. Moreover, even a successful complaint challenging an index rate 
increase based upon the Substantially Exacerbate Test would merely 
prevent the index increase at issue; it would not address any pre-
existing over-recoveries. Regardless of the standard applied to 
complaints against individual index rate increases, shippers concerned 
that a pipeline may be substantially over-recovering may file a cost-
of-service complaint challenging the pipeline's rates that have 
historically been indexed. If successful, such a complaint would 
eliminate the pipeline's over-recovery.

C. The Percentage Comparison Test's 10% Threshold Is Reasonable

    42. We reaffirm our continued use of a 10% threshold in the 
application of the Percentage Comparison Test.\80\ This record does not 
support a different threshold, and we find the 10% threshold continues 
to be reasonable. As an initial matter, the 10% threshold fulfills the 
Commission's regulations by denying index rate increases where the rate 
increase significantly exceeds the pipeline's cost changes.\81\ In 
contrast, imposing a lower threshold (such as a 5% threshold) could 
prevent a majority or near-majority of the industry from taking full 
index rate increases.\82\ This would undercut the purpose of indexing 
by precluding large portions of the industry from adjusting their rates 
to reflect industry-wide cost changes.
---------------------------------------------------------------------------

    \80\ The Percentage Comparison Test's 10% threshold developed 
gradually through the adjudication of protests to index rate 
increases. HollyFrontier, 170 FERC ] 61,133 at P 41. The Commission 
made this threshold explicit a decade ago in 2012. SFPP, L.P., 139 
FERC ] 61,267 at P 10.
    \81\ An analysis of page 700 data indicates that the 10% 
threshold generally excludes pipelines in the top 30% of industry-
wide cost changes from implementing index rate increases. Moreover, 
between 2017-2020, an average of 32 pipelines per year (or 
approximately 12% of pipelines filing page 700) experienced a 
divergence of 10% or more between their annual percentage change in 
cost of service and the full index rate increase. See also SFPP 
Reply Comments, Ex. B at 8, Figure 2 (Affidavit of Dr. Michael J. 
Webb) (illustrating that in most years between 2001-2018, the 10% 
threshold would have excluded pipelines in the top 30% of industry-
wide cost changes reported on page 700 from implementing full index 
rate increases).
    \82\ Id. at 8-9.
---------------------------------------------------------------------------

    43. Moreover, the 10% threshold preserves indexing's cost-
efficiency incentives and encourages pipelines to control costs. 
Indexing allows for some gap between an individual pipeline's rates and 
its costs, and allowing rates to exceed costs by a modest degree 
encourages pipelines to operate efficiently by permitting them to 
retain a portion of their cost savings while also placing downward 
pressure on the industry-wide index level through the five-year review 
process.\83\ Setting the threshold at 10% provides a reasonable gap 
between rate increases and cost changes above a de minimis level so 
that pipelines have the incentive to control costs and reap the 
benefits of efficiency gains.
---------------------------------------------------------------------------

    \83\ HollyFrontier, 170 FERC ] 61,133 at P 42 (citing Order No. 
561, FERC Stats. & Regs. ] 30,985 at 30,949). The Commission 
recalculates the index based upon industry-wide cost changes over 
the prior five-year period; therefore, any cost savings over that 
prior period will tend to reduce the index level.
---------------------------------------------------------------------------

    44. Conversely, setting the threshold below 10% could undermine 
these efficiency incentives. Industry-wide cost data illustrate this 
point. The average of the annual index levels from 2004 to 2019 is 
approximately 4.10%. In 10 of those 16 years, the index level exceeded

[[Page 65171]]

4.10%. Moreover, in five of those years, the index level exceeded 5%, 
reaching as high as 8.6%. If the threshold is only slightly higher than 
the index level for a given year, pipelines would have little incentive 
to reduce costs because a slight cost reduction could render the 
pipeline unable to implement a full index rate increase.\84\ Moreover, 
a threshold equal to \85\ or lower than \86\ the index level for a 
given year would create incentives for pipelines to maintain or 
increase costs in order to implement an index rate increase. As a 
result, a threshold at or slightly above the index level could weaken 
pipelines' incentive to reduce costs which, in turn, could inflate the 
index adder for future years.\87\ Accordingly, we find that the 
existing 10% threshold balances indexing's efficiency incentives 
without shielding unreasonable rate increases from scrutiny.
---------------------------------------------------------------------------

    \84\ For example, if the threshold is set at 5%, pipelines that 
reduce costs by 1% over the prior two years may be unable to 
implement a full index rate increase at the 4.10% average. An index 
level exceeding 4.10% would further diminish a pipeline's incentive 
to reduce costs.
    \85\ If, for instance, the index level for a given year is 6%, 
and the Percentage Comparison Test threshold is set at 6%, pipelines 
would have little incentive to reduce their costs because even a 1% 
cost reduction would result in the pipeline's cost change diverging 
from the 6% index level by more than the 6% threshold.
    \86\ If the index level is 7% and the Percentage Comparison Test 
threshold is 6%, pipelines could be incentivized to increase their 
costs to bring the gap between their cost change and the index level 
within 7%, thereby undermining indexing's cost efficiency 
incentives.
    \87\ HollyFrontier, 170 FERC ] 61,133 at P 43.
---------------------------------------------------------------------------

    45. Further, the potential that a threshold below 10% could yield 
distorted outcomes is amplified by the high annual volatility in oil 
pipeline cost and volume data.\88\ Because a pipeline's cost changes 
may vary significantly from year to year, the pipeline's ability to 
implement an annual index rate increase in a given year may likewise 
vary. Depending upon the magnitude of the pipeline's cost increases or 
decreases, the level of divergence between cost changes and index rate 
increases permitted under the Percentage Comparison Test can impact 
pipelines' ability to recover costs over time. For example, a 5% cost 
decline in one year, which could lead to the denial of an index rate 
increase, may be followed by a 15% cost increase in the next year, 
which would likely significantly exceed the permitted index rate 
increase. In this way, a low threshold that does not account for annual 
shifts in pipeline costs could cause pipelines to under-recover their 
costs over time.\89\ Along similar lines, a low threshold could also 
unfairly differentiate between a pipeline with sizable one-year cost 
declines and a pipeline whose costs decline at a more consistent pace: 
the former may be barred from implementing an index rate increase while 
the latter is not, even where the former's cost changes deviate less 
from the index level than the latter's.\90\
---------------------------------------------------------------------------

    \88\ Because oil pipelines are common carriers, throughput can 
change significantly from year to year. For example, using page 700 
data, the median annual change in throughput was 14% from 2017-2018. 
Significant changes in throughput can produce significant changes in 
pipeline costs and revenues.
    \89\ This potential distortion would be magnified by the sheer 
number of pipelines that would lose index increases under a 
threshold lower than 10% as discussed above.
    \90\ HollyFrontier, 170 FERC ] 61,133 at P 44. For example, if 
the threshold is set at 8%, Pipeline A with 3% cost decreases in 
year one and year two would be permitted to implement index rate 
increases at the 4.10% average for both years. However, Pipeline B 
with no cost changes in year one and a 5% cost decrease in year two 
would be unable to implement a full 4.10% index rate increase for 
year two, despite the fact that Pipeline B's costs deviated less 
from the index level over two years than the costs of Pipeline A (by 
5% instead of 6%).
---------------------------------------------------------------------------

    46. Joint Complainants have not persuaded us to lower the 10% 
threshold.\91\ Joint Complainants observe that the Commission 
previously stated that the index should not be set so ``sufficiently 
high and generous to encompass even the most extraordinary costs.'' 
\92\ As discussed above, however, the 10% threshold would not encompass 
extraordinary costs and imposing a 5% threshold could prevent a 
majority or near-majority of the industry from taking full index rate 
increases.\93\ This result would fail to account for pipeline cost- and 
throughput-volatility and risk, creating a lopsided ratemaking 
methodology that deprives pipelines an appropriate opportunity for 
sufficient cost recovery.\94\
---------------------------------------------------------------------------

    \91\ Joint Complainants Initial Comments at 42-44.
    \92\ Id. at 49-50 (quoting Order No. 561-A, FERC Stats. & Regs. 
] 31,000 at 31,097).
    \93\ Id. at 8-9.
    \94\ HollyFrontier, 170 FERC ] 61,133 at P 44.
---------------------------------------------------------------------------

    47. We find misplaced Joint Complainants' argument that pipelines 
have cost-efficiency incentives even without the possibility of an 
index rate increase. If a pipeline risks losing a future index increase 
because it reduces costs, then the pipeline's incentive to reduce those 
costs will erode.\95\ As noted above, we remain concerned setting the 
threshold for the Percentage Comparison Test too low would undermine 
pipelines' incentives to control costs. The 10% threshold reasonably 
balances that concern with the need to constrain index rate increases 
that are substantially in excess of pipelines' cost changes.\96\
---------------------------------------------------------------------------

    \95\ For example, if a pipeline is considering steps that could 
reduce its costs by 5% but this would cause the pipeline to lose a 
5% index increase in the next year, then the pipeline will not have 
an incentive to implement the cost reduction.
    \96\ HollyFrontier, 170 FERC ] 61,133 at P 43. Furthermore, 
reducing costs often requires pipelines to invest in cost-saving 
measures, such as more efficient pumps. A stringent Percentage 
Comparison Test threshold that places pipelines at risk of losing 
all or part of an index rate increase when the pipeline modestly 
controls its costs could discourage pipelines from making such 
investments.
---------------------------------------------------------------------------

    48. We are similarly unpersuaded by Joint Complainants' argument 
regarding how a threshold slightly above or below the index level in a 
given year could impact pipelines' incentives to reduce costs. 
Specifically, Joint Complainants claim that even if pipelines could 
forecast the next year's index level, it is highly unlikely that they 
could precisely calibrate their cost changes to take the index level 
into account.\97\ Although Joint Complainants are correct that 
pipelines likely cannot precisely calibrate their costs to account for 
an index level to be published the following year, this misses the 
point. Even if pipelines cannot calibrate their costs with such 
exactitude or anticipate future index levels, losing all or part of an 
index rate increase due to an overly stringent Percentage Comparison 
Test threshold could erode pipelines' incentives to control costs going 
forward. This erosion can become pronounced at thresholds less than 
10%. For example, if the threshold is set at 5% and the index level is 
4.1%, a pipeline whose costs declined by more than 1% could lose at 
least a portion of any index rate increase for that year.\98\ Because 
this slight cost reduction caused the pipeline to lose an index rate 
increase in a year with an average index level, a 5% threshold could 
weaken the pipeline's incentive to reduce costs going forward.
---------------------------------------------------------------------------

    \97\ Joint Complainants Initial Comments at 51 (citing 
HollyFrontier, 170 FERC ] 61,133 at P 43, nn.77, 78, & 79; Brattle 
Report at PP 21-24).
    \98\ HollyFrontier, 170 FERC ] 61,133 at P 43 n.77.
---------------------------------------------------------------------------

    49. Joint Complainants' remaining contentions are also without 
merit. Their argument that the 10% threshold can produce large 
disparities between pipeline revenues and costs lacks support because 
the examples that Joint Complainants provide assume without basis that 
pipelines' revenues will increase in future periods while their costs 
and throughput will remain unchanged.\99\ Joint Complainants also 
provide no evidence that the application of the Percentage Comparison 
Test and the 10% threshold to protested index

[[Page 65172]]

rate increases has in fact lead to significant over-recoveries.
---------------------------------------------------------------------------

    \99\ Joint Complainants Initial Comments at 52.
---------------------------------------------------------------------------

    50. Similarly, we disagree with Joint Complainants' claim that 
indexing only weakly reflects industry-wide cost changes because it 
lacks a recurring requirement to reset industry-wide oil pipeline rates 
on a cost-of-service basis (``rebasing'' mechanism).\100\ As an initial 
matter, it is not clear whether a rebasing mechanism would increase 
pipeline incentives to operate efficiently.\101\ Moreover, this 
proposal is beyond the scope of this proceeding. As discussed above, 
the Commission established indexing as a simplified, streamlined 
ratemaking methodology in response to EPAct 1992's mandate to develop 
an alternative to complex, costly, and lengthy cost-of-service rate 
proceedings. Periodically resetting oil pipeline rates to cost-of-
service levels as Joint Complainants propose could be contrary to that 
mandate,\102\ requiring the Commission to resolve a large number of 
cost-of-service rate cases on a recurring basis and imposing 
substantial burdens on shipper, pipeline, and Commission 
resources.\103\ Joint Complainants do not explain how a recurring 
rebasing mechanism would be consistent with simplified and streamlined 
ratemaking.
---------------------------------------------------------------------------

    \100\ Id. at 52-53.
    \101\ Regularly reducing the pipeline's rates to the cost-of-
service level would reduce pipeline incentives to operate 
efficiently. Moreover, even pipelines that are already earning 
revenues above their costs have an incentive to control costs in 
order to further increase the return to investors.
    \102\ See Ass'n of Oil Pipe Lines v. FERC, 281 F.3d 239, 244 
(D.C. Cir. 2002) (AOPL II) (quoting EPAct 1992, Pub. L. 102-486 
1801(a)) (finding that ``a regime based in large part on [cost-of-
service proceedings] would be inconsistent with Congress's mandate 
under the EPAct for FERC to establish `a simplified and generally 
applicable ratemaking methodology' '').
    \103\ In establishing indexing, the Commission explicitly 
declined to undertake a periodic review of individual pipeline costs 
and the D.C. Circuit affirmed this decision. Order No. 561-A, FERC 
Stats. & Regs. ] 31,000 at 31,104-05, aff'd, AOPL v. FERC, 83 F.3d 
at 1437.
---------------------------------------------------------------------------

    51. Liquids Shippers likewise fail to adequately challenge the 
Percentage Comparison Test's 10% threshold. While Liquids Shippers 
claim that the threshold is arbitrary and unsupported,\104\ it has in 
fact been developed over time through several proceedings.\105\ 
Although Liquids Shippers argue that the Commission has not justified 
setting the threshold at 10% as opposed to a slightly lower level,\106\ 
we find, based on our experience with its application and the record 
before us, that the 10% threshold strikes an appropriate balance 
between upholding the indexing methodology's cost-efficiency incentives 
and ensuring just and reasonable rates.\107\ Moreover, the Commission 
has considerable discretion in setting numerical thresholds,\108\ and 
Liquids Shippers have not demonstrated that the 10% threshold is so 
objectionable as to be ``patently unreasonable.'' \109\
---------------------------------------------------------------------------

    \104\ Liquids Shippers Initial Comments at 35.
    \105\ The 10% threshold evolved through orders in which the 
Commission initiated investigations when the divergence between a 
pipeline's cost increases and the proposed rate increase was more 
than 10% and declined to initiate investigations where such 
divergence was less than 10%. Compare SFPP, 139 FERC ] 61,267 at P 
10 (rejecting protests where divergence was 9.88%), with Calnev 
Pipeline L.L.C., 115 FERC ] 61,387 at PP 10-11 (setting protest for 
hearing based upon 10.95% divergence), and SFPP, L.P., 139 FERC ] 
61,266, at P 7 (2012) (setting protest for hearing where divergence 
was 13.1%).
    \106\ Liquids Shippers Reply Comments at 18 (arguing that the 
Commission has not justified setting the threshold at 10% rather 
than 9.88%).
    \107\ See HollyFrontier, 170 FERC ] 61,133 at PP 41-44. In 
addition, Liquids Shippers' argument that the 10% threshold allows 
for improper gamesmanship is unconvincing. Liquids Shippers support 
this claim by citing an example where a pipeline, faced with a 
shipper protest, withdrew a proposed index rate increase that 
exceeded the 10% threshold and refiled a lower rate increase that 
fell below the threshold. Liquids Shippers Initial Comments at 36 
(citing Buckeye Pipe Line Transportation LLC, Tariff Filing, Docket 
No. IS15-352-000 (filed May 28, 2015)). However, rather than 
undermine the Percentage Comparison Test, this example illustrates 
how the 10% threshold can constrain pipelines from implementing rate 
increases that diverge considerably from their cost changes.
    \108\ E.g., ExxonMobil Gas Mktg. Co. v. FERC, 297 F.3d 1017, 
1085 (D.C. Cir. 2002) (quoting AT&T Corp. v. FCC, 220 F.3d 607, 627 
(D.C. Cir. 2000)) (``FERC `has wide discretion to determine where to 
draw administrative lines.' ''); Mo. Pub. Serv. Comm'n v. FERC, 215 
F.3d 1, 4 (D.C. Cir. 2000). Courts will generally uphold an agency's 
threshold if ``the figure selected by the agency reflects its 
informed discretion, and is neither patently unreasonable nor `a 
dictate of unbridled whim.' '' Vonage Holdings Corp. v. FCC, 489 
F.3d 1232, 1242 (D.C. Cir. 2007) (quoting WJG Tel. Co. v. FCC, 675 
F.2d 386, 388-89 (D.C. Cir. 1982)).
    \109\ Vonage Holdings Corp. v. FCC, 489 F.3d at 1242.
---------------------------------------------------------------------------

    52. Accordingly, we will apply the 10% threshold when using the 
Percentage Comparison Test to evaluate complaints. Although Joint 
Complainants and Liquids Shippers criticize the 10% threshold, they do 
not persuade us that an alternative Percentage Comparison Test 
threshold better satisfies our statutory obligations. As discussed 
above, the Commission possesses significant discretion in setting 
numerical thresholds. We find no reason based upon the record here to 
depart from our proposal in the NOI and our prior precedent.\110\
---------------------------------------------------------------------------

    \110\ See, e.g., SFPP, L.P., 140 FERC ] 61,106 (2012), order on 
reh'g, 143 FERC ] 61,141 (2013); SFPP, L.P., 143 FERC ] 61,297, at P 
11 (2013), order on reh'g, 147 FERC ] 61,012 (2014); SFPP, 163 FERC 
] 61,232 at PP 13, 20.
---------------------------------------------------------------------------

D. The Alternative Proposals Presented Are Inconsistent With the 
Indexing Scheme

    53. Several commenters suggest alternatives to the Percentage 
Comparison Test they assert would provide superior means for evaluating 
complaints against index rate increases. As discussed below, these 
proposals are the ``cost-decrease test'' and the ``revenues test.'' We 
disagree that these alternatives are superior to the Percentage 
Comparison Test. Moreover, both proposals are inconsistent with the 
Commission's regulations requiring that a challenge to an index 
increase be assessed based on whether the increase is substantially in 
excess of the pipeline's cost increases.\111\ Accordingly, we decline 
to adopt these proposals here.
---------------------------------------------------------------------------

    \111\ 18 CFR 343.2(c).
---------------------------------------------------------------------------

1. Cost-Decrease Test
a. Proposal
    54. Joint Complainants propose that the Commission deny index rate 
increases where (i) the pipeline's revenues exceed its costs and (ii) 
the pipeline's costs have decreased for the relevant index period 
(cost-decrease test).\112\ Joint Complainants argue that granting an 
index rate increase in such circumstances would negate the cost basis 
of the index rate increase by allowing the pipeline to double-recover 
the industry-wide cost changes that the rate increase seeks to address. 
Joint Complainants further assert that Opinion No. 511-A supports this 
proposal.\113\
---------------------------------------------------------------------------

    \112\ Joint Complainants Initial Comments at 56.
    \113\ Id. at 57 (citing SFPP, L.P., Opinion No. 511-A, 137 FERC 
] 61,220, at P 407 (2011)).
---------------------------------------------------------------------------

b. Commission Determination
    55. We decline to adopt Joint Complainants' proposed cost-decrease 
test. The proposal is fundamentally flawed. First, the cost-decrease 
test is inconsistent with the Commission's regulations because it may 
permit challenges to index rate increases even though the rate change 
is not substantially in excess of the pipeline's costs changes as 
required by Sec.  343.2(c)(1). For instance, if a pipeline's total 
costs decrease by 0.01% and the index increase is only 0.1%, it is not 
the case that the rate increase is substantially in excess of the cost 
change.
    56. Second, the cost-decrease test is also conceptually flawed. As 
discussed above, some gap between revenues and costs must be permitted 
to preserve indexing's efficiency incentives.\114\

[[Page 65173]]

Likewise, Joint Complainants' proposal would make indexing a lopsided 
methodology in which pipelines face significant risk of under-recovery 
without commensurate potential for benefits for operating 
efficiently.\115\ Finally, Joint Complainants' proposal includes no 
flexibility for the annual fluctuations in a pipeline's costs and 
revenues.\116\
---------------------------------------------------------------------------

    \114\ See supra P 43.
    \115\ See supra P 30.
    \116\ Because oil pipelines are common carriers, throughput can 
change significantly from year to year and this significantly 
affects oil pipeline revenues.
---------------------------------------------------------------------------

    57. Third, we are not persuaded by Joint Complaints' arguments in 
support of the cost-decrease test. In seeking to justify this proposal, 
Joint Complainants mischaracterize the purpose of indexing. Joint 
Complainants argue that index rate increases are designed to recover a 
pipeline's past costs, and therefore to avoid a double-recovery index 
rate increases should not be extended to pipelines whose rates already 
recover these costs.\117\ Contrary to Joint Complainants' assertions, 
and as noted above, an index rate change is not a true-up to account 
for prior period over- or under-recoveries. Rather, indexing allows 
pipeline rates to increase (or decrease) to keep pace with annual 
industry-wide cost changes so that the pipeline can recover its costs 
in future years.\118\ Likewise, indexing does not address a pipeline's 
base costs as in a cost-of-service rate case.\119\ Thus, to the extent 
that a pipeline's rates generate revenues sufficient to recover the 
pipeline's base costs as reported on its page 700, this does not 
necessarily indicate that those rates also recovered the annual 
industry-wide cost changes that indexing is designed to recover. As a 
result, adjusting a pipeline's rate to account for industry-wide cost 
changes, even where the pipeline's cost of service has declined, does 
not negate the cost basis for the rate increase.\120\
---------------------------------------------------------------------------

    \117\ Joint Complainants Initial Comments at 57.
    \118\ See discussion supra P 25.
    \119\ SFPP, L.P., Opinion No. 522-B, 162 FERC ] 61,229, at P 16 
n.25 (2018).
    \120\ Applying the Percentage Comparison Test as the preliminary 
screen for both protests and complaints under Sec.  343.2(c)(1) 
provides an additional safeguard by triggering investigations where 
an index rate change diverges markedly from the pipeline's recent 
reported cost changes.
---------------------------------------------------------------------------

    58. Moreover, we disagree with Joint Complainants' assertion that 
Opinion No. 511-A supports the cost-decrease test. Opinion No. 511-A 
involved different circumstances than those under consideration here. 
As explained in Opinion No. 511-A, the Commission has rejected index 
rate increases following a new cost-of-service rate filing where the 
increase addressed prior-period inflationary cost changes that were 
already incorporated into the test period data used to determine the 
pipeline's cost-of-service rate.129F \121\ Opinion No. 511-A involved 
situations where the test period for setting cost-of-service rates and 
the time period for measuring industry-wide cost changes reflected in 
the index rate increase overlapped, in total or in part. In that cost-
of-service rate case, the Commission correctly found that the 
pipeline's new cost-of-service rates already reflected the prior-period 
cost changes (i.e., the costs in the test period) that would have been 
reflected in the proposed index rate increase. Because that proceeding 
involved new base rates set at the pipeline's cost-of-service level, 
there was no need to adjust those rates to account for inflationary 
industry-wide costs that took place during the cost-of-service test 
period. By contrast, under the indexing regime, it is appropriate as a 
general matter for pipelines to adjust their rates to account for 
industry-wide cost changes where the Commission did not set the rate 
using cost data from the period covered by the index rate change.\122\
---------------------------------------------------------------------------

    \121\ Opinion No. 511-A, 137 FERC ] 61,220 at P 407 (citing 
SFPP, L.P., 117 FERC ] 61,271 (2006), reh'g denied, 120 FERC ] 
61,245 (2007). For instance, in Opinion No. 511-A, the Commission 
allowed SFPP to implement one-quarter of an index rate increase for 
2008 where cost data from the first nine months were reflected in a 
Commission order approving new cost-of-service rates for SFPP. 
Opinion No. 511-A, 137 FERC ] 61,220 at PP 405, 409-411.
    \122\ In these circumstances, the industry-wide cost changes 
that the index rate change is designed to recover are not already 
incorporated into the pipeline's underlying rate. Thus, the mere 
fact that the pipeline's revenues exceed its cost of service does 
not establish that its rates have already recovered the cost changes 
that indexing seeks to recover.
---------------------------------------------------------------------------

2. Revenues Test
a. Proposal
    59. Joint Complainants, Liquids Shippers, and CAPP propose versions 
of a revenues test, wherein the Commission would grant challenges to an 
index rate increase where the pipeline's page 700 revenues exceeded its 
page 700 cost of service by a certain percentage for two consecutive 
years. Joint Complainants propose a 7.5% threshold,\123\ Liquids 
Shippers propose a 5% threshold,\124\ and CAPP proposes a 10% 
threshold.\125\ Joint Complainants explain that over-recovering by 7.5% 
would contribute a 25% impact on the pipeline's return on equity (ROE), 
which Joint Complainants argue is a reasonable threshold and is 
consistent with the Commission's existing framework for rate 
evaluation, including the evaluation of grandfathered rates.\126\ 
Liquids Shippers submit that a 5% threshold is appropriate because it 
translates to a real ROE of 12.3%, which they claim approximates the 
top of the zone of reasonableness as determined by the discounted cash 
flow (DCF) analysis in recent pipeline cost-of-service rate cases.\127\ 
CAPP argues that there are numerous reporting pipelines whose revenues 
exceed its proposed 10% threshold, which in turn represents an 
unwarranted over-recovery that cannot be reconciled with the just and 
reasonable rate standard.\128\
---------------------------------------------------------------------------

    \123\ Joint Complainants Initial Comments at 59.
    \124\ Liquids Shippers Initial Comments at 36-37.
    \125\ CAPP Initial Comments at 14-16.
    \126\ Joint Complainants Initial Comments at 61 (citing Order 
No. 783, 144 FERC ] 61,049 at P 5). EPAct 1992 ``grandfathered,'' or 
deemed just and reasonable, rates that were in effect for the 365-
day period ending on the date of enactment of EPAct 1992, or that 
were in effect on the 365th day preceding enactment, and which were 
not subject to a protest, complaint, or an investigation during this 
365-day period. These grandfathered rates can be challenged under 
certain limited conditions, including where the complainant 
establishes that ``a substantial change has occurred after the date 
of the enactment of'' EPAct 1992 in ``the economic circumstances . . 
. which were the basis for the rate.'' EPAct 1992 1803(b)(1). The 
Commission has interpreted that test to require a complainant to 
demonstrate that the ROE earned on the rate at issue has increased 
by at least 25% over the ROE embedded in the grandfathered rate and 
that the increase has occurred since the passage of EPAct in 1992. 
See, e.g., Tesoro Ref. & Mktg. Co. v. Calnev Pipe Line LLC, 134 FERC 
] 61,214, at PP 17-18, 60 (2011).
    \127\ Liquids Shippers Initial Comments at 38 (citing Revisions 
to Indexing Policies & Page 700 of FERC Form No. 6, 157 FERC ] 
61,047, at n.25 (2016) (2016 ANOPR), withdrawn, 170 FERC ] 61,134 
(2020); El Paso Nat. Gas Co., Opinion No. 528-A, 154 FERC ] 61,120, 
at P 215 (2016); Seaway Crude Pipeline Co., Opinion No. 546, 154 
FERC ] 61,070, at P 194 (2016)).
    \128\ CAPP Initial Comments at 14.
---------------------------------------------------------------------------

b. Commission Determination
    60. We are not persuaded to adopt the proposed revenues tests. As 
an initial matter, a revenues test is inconsistent with the regulations 
because it evaluates existing over-recovery, while the regulations 
require a comparison of cost changes to rate changes.\129\ While 
commenters are correct that the Commission proposed a similar revenues 
test in the 2016 ANOPR, the Commission ultimately declined to adopt 
such a test.\130\
---------------------------------------------------------------------------

    \129\ See 18 CFR 343.2(c)(1).
    \130\ See Revisions to Indexing Policies & Page 700 of FERC Form 
No. 6, 170 FERC ] 61,134 at P 11.
---------------------------------------------------------------------------

    61. Moreover, this record does not provide support for a workable 
application of a revenues test. For example, we conclude that the 
proposed revenues test thresholds lack support. Joint Complainants 
criticize the 2016 ANOPR's 15% threshold as arbitrary

[[Page 65174]]

and capricious,\131\ but they fail to provide substantive support for 
their proposed 7.5% threshold.\132\ Liquids Shippers similarly fail to 
justify their proposed 5% threshold.\133\ In addition, we are concerned 
that the proposed 5% and 7.5% thresholds are inconsistent with a 
streamlined, generally applicable ratemaking methodology, because they 
could necessitate the use of cost-of-service rate filings for many 
pipelines where the pipeline's revenues slightly exceed costs over a 
short period but not necessarily in the long term.\134\ Moreover, such 
narrow thresholds risk making indexing a one-sided methodology in which 
pipelines face significant risk of under-recovery without commensurate 
potential for benefits for operating efficiently.\135\
---------------------------------------------------------------------------

    \131\ Joint Complainants Initial Comments at 60.
    \132\ Joint Complainants justify this threshold on the basis 
that a 1992 oil pipeline rate is ``de-grandfathered'' if the 
pipeline's ROE has increased by 25% over the grandfathered level. 
Joint Complainants Initial Comments at 60-61 (citing Tesoro, 134 
FERC ] 61,214 at PP 53, 60-62). Joint Complainants assert that a gap 
between revenues and costs of 7.5% equates to a 25% increase in ROE 
over the industry-wide average reported on page 700. Joint 
Complainants Initial Comments at 61-62 (citing Brattle Report at PP 
41-47 & Figures 7-9). However, the threshold for de-grandfathering 
rates serves the different purpose of measuring a ``substantial 
change in economic circumstances'' since a specific point in time. 
E.g., Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,944. The 
issue when evaluating an index rate increase is not a change in 
economic circumstances, but, rather, whether the annual index 
increase ``is so substantially in excess of the actual cost 
increases'' that the resulting rate is unjust and unreasonable. 18 
CFR 343.2(c)(1).
    \133\ We are not persuaded by Liquids Shippers' claim that the 
Commission should investigate index increases when revenues are 105% 
of costs, arguing that this approximates the top of the zone of 
reasonableness (an ROE of 12.3%) as determined by the discounted 
cash flow (DCF) analysis in recent oil pipeline cost-of-service 
cases. This argument fails because the just and reasonable return 
permitted by a rate case is not equivalent to the return permitted 
by indexing. Indexing permits efficient pipelines to recover more 
(earn a higher return) than they would under a cost-of-service 
model. Likewise, inefficient pipelines recover less than they would 
under a cost-of-service model (earning a lower return). By capping 
the return at a cost-of-service level, Liquids Shippers' proposal 
would deny the benefit that indexing is meant to provide to 
efficient pipelines while continuing to subject less efficient 
pipelines to the downsides of indexing.
    \134\ See AOPL II, 281 F.3d at 244 (quoting EPAct 1992, Pub. L. 
102-486 1801(a)) (``[A] regime based in large part on [cost-of-
service proceedings] would be inconsistent with Congress's mandate 
under the EPAct for FERC to establish `a simplified and generally 
applicable ratemaking methodology.' ''). Such narrow thresholds fail 
to account for variability of costs and revenues from year to year. 
Over- and under-recovery can vary widely from year to year. For 
example, in 2020 and considering the data set of all pipelines, the 
median variation from the prior year's recoveries was by 37.03 
percentage points. Although a pipeline's revenues resulting from 
indexed rates may track its costs, this is not necessarily true over 
the short term. If such a pipeline's recoveries fluctuate around 
zero but with significant annual variations, denying the pipeline 
index rate increases in those years when revenues modestly exceed 
costs would, over time, cause the pipeline to under-recover its 
costs in the long term. To avoid such under-recoveries, the pipeline 
would need to file a cost-of-service rate increase.
    \135\ See supra P 30. For instance, if a pipeline's revenues 
exceed its costs by 5%, the pipeline would be denied an index rate 
increase under Liquids Shippers' 5% revenues-test threshold. On the 
other hand, if a pipeline's costs exceeded its revenues by 5%, then 
the pipeline would only receive that year's index rate increase, 
which may be insufficient for the pipeline to eliminate the under-
recovery.
---------------------------------------------------------------------------

E. Consideration of Additional Factors in Complaint Proceedings

1. Comments
    62. The NOI invited comment on how and whether the Commission 
should consider additional factors in evaluating complaints against 
index rate increases.\136\ SFPP objects to the Commission's proposal, 
arguing that introducing undefined ``additional factors'' would create 
ambiguity and regulatory uncertainty, which would impede the gains 
achieved by eliminating the Substantially Exacerbate Test as well as 
undermine the goal of creating streamlined procedures that reduce 
litigation.\137\ Therefore, SFPP requests that the Commission clarify 
that it will not consider additional factors beyond the Percentage 
Comparison Test.
---------------------------------------------------------------------------

    \136\ NOI, 170 FERC ] 61,252 at P 14.
    \137\ SFPP Initial Comments at 21.
---------------------------------------------------------------------------

2. Commission Determination
    63. We decline to clarify that the Commission will not consider 
additional factors beyond the Percentage Comparison Test when 
evaluating complaints to an index rate increase. While our intention, 
based upon this record in this proceeding, is to generally limit our 
consideration of challenges to index rate increases to the Percentage 
Comparison Test, we recognize that the Commission must address specific 
arguments as they arise in specific cases.

F. Whether To Adopt Broader Changes to the Commission's Oil Pipeline 
Ratemaking Methodologies

1. Comments
    64. Liquids Shippers claim that the indexing methodology allows for 
significant over-recovery and should be reexamined, referring to 
arguments they made in support of the 2016 ANOPR.\138\
---------------------------------------------------------------------------

    \138\ See Liquids Shippers Initial Comments at 21-22.
---------------------------------------------------------------------------

    65. CAPP contends that the Commission should perform a 
comprehensive review of the indexing regime to ensure that shipper and 
pipeline interests are appropriately balanced and to determine whether 
the regime can be improved.\139\ CAPP further argues that because the 
current cost-of-service ratemaking process is cumbersome, costly, and 
time-consuming, the Commission should consider overhauling the cost-of-
service ratemaking process rather than using its flaws as justification 
for increased reliance on the indexing system.\140\
---------------------------------------------------------------------------

    \139\ CAPP Initial Comments at 9-13.
    \140\ Id. at 9, 17-18; CAPP Reply Comments at 1-3.
---------------------------------------------------------------------------

2. Commission Determination
    66. We reject Liquids Shippers' and CAPP's arguments that the 
Commission should reexamine the indexing methodology and cost-of-
service ratemaking process as outside the scope of this proceeding. The 
NOI requested comment on the Commission's proposal for evaluating 
complaints against index rate increases under Sec.  343.2(c)(1).\141\ 
Because Liquids Shippers' and CAPP's arguments exceed the scope of this 
inquiry, we decline to address their proposals.
---------------------------------------------------------------------------

    \141\ NOI, 170 FERC ] 61,252 at P 14.
---------------------------------------------------------------------------

III. Document Availability

    67. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
internet through the Commission's Home Page (http://www.ferc.gov).
    68. From the Commission's Home Page on the internet, this 
information is available on eLibrary. The full text of this document is 
available on eLibrary in PDF and Microsoft Word format for viewing, 
printing, and/or downloading. To access this document in eLibrary, type 
the docket number excluding the last three digits of this document in 
the docket number field.
    69. User assistance is available for eLibrary and the Commission's 
website during normal business hours from the Commission's Online 
Support at (202) 502-6652 (toll free at 1-866-208-3676), via email at 
[email protected], or from the Public Reference Room at (202) 
502-8371, TTY (202) 502-8659. Email the Public Reference Room at 
[email protected].

    By the Commission. Commissioner Danly is not participating.


[[Page 65175]]


    Issued: October 20, 2022.
Kimberly D. Bose,
Secretary.

Appendix: Percentage Comparison Test and Substantially Exacerbate Test 
Formulas

BILLING CODE 6717-01-P
[GRAPHIC] [TIFF OMITTED] TR28OC22.003

[FR Doc. 2022-23343 Filed 10-27-22; 8:45 am]
BILLING CODE 6717-01-C


