FERC Proposes Policy Statement on Oil Pipeline Affiliate Contracts
On October 15, 2020, the Federal Energy Regulatory Commission (FERC) issued a proposed policy statement containing guidance for oil (and petroleum products) pipeline common carriers proposing rates and terms pursuant to affiliate contracts. The proposed guidance likely stems from a 2017 order in Magellan Midstream Partners, L.P., wherein FERC denied a petition for declaratory order requesting that a proposal to establish a marketing affiliate to buy, sell, and ship crude oil be found compliant with the Interstate Commerce Act (ICA). FERC’s guidance seeks to address the key issue identified in the Magellan order—using affiliates to provide a discount or rebate to producers that are not shippers. The policy statement addresses this concern by requesting additional disclosures in an effort to foster greater transparency.
The policy statement provides oil pipelines with clear guidelines when seeking approval in a petition for declaratory order or tariff filing for contract rates or terms pursuant to an affiliate contract. The policy statement outlines information carriers may provide to demonstrate that proposed rates and terms of service pursuant to affiliate contracts comply with the ICA. Under this proposal, affiliates may continue to participate in oil pipeline open seasons and become committed shippers on their affiliated pipelines. Additionally, the guidance would not preclude oil pipeline carriers from implementing contract rates and terms of service pursuant to affiliate contracts. The proposed guidance is not intended to reflect any view of FERC that pipelines are currently engaging in practices that afford their affiliates an undue preference and unduly discriminating against nonaffiliated shippers in open seasons, or that affiliate contracts are inherently discriminatory.
The guidance falls into four categories: (1) identifying affiliate contracts; (2) information that could demonstrate an open season process was not unduly discriminatory; (3) methods for showing that rates and terms pursuant to an affiliate contract are just, reasonable and not unduly discriminatory; and (4) ensuring that sufficient access to pipeline capacity is reserved for uncommitted shippers.
Identifying Affiliate Contracts in FERC Filings
FERC proposes to define “affiliate” as any entity that, directly or indirectly, controls, is controlled by or is under common control with, the carrier. FERC seeks comments on how to define control and any standards or thresholds for establishing a rebuttable presumption of control or lack of control.
Open Season Process
When providing information regarding an open season process that resulted in the execution of only an affiliate contract, the carrier can demonstrate that its affiliate emerged as the only committed shipper via a fair, transparent, and non-discriminatory process. This can be accomplished by providing information regarding (A) open season advertising and participation; (B) open season timing; (C) open season negotiations and changes; and (D) additional facts.
A. Open Season Advertising and Participation
To demonstrate open season advertising and participation, FERC provides a proposed list of examples that may support a finding that a carrier did not afford an affiliate an undue preference. Those examples include: (1) describing the steps the carrier undertook to advertise the open season; (2) identifying how many (if any) nonaffiliated entities participated in the open season process; (3) describing any facts that could be relevant to explaining the lack of participation by nonaffiliated shippers, if no such nonaffiliated shippers expressed interest or participated in the open season; or (4) showing that any confidentiality agreement that shippers were required to sign as a prerequisite for obtaining the proposed contract was narrowly tailored.
FERC explained that the level of supporting information currently provided by carriers is widely varied. This proposal is intended to require carriers to provide detailed information in order to alleviate concerns regarding affiliate favoritism. Evidence may include press releases and web postings, as well as information regarding the level of participation from nonaffiliated entities during an open season. If no nonaffiliated entities participated, carriers can identify specific circumstances that shed light on the lack of nonaffiliated shipper interest to assist FERC in its evaluation.
The proposal also requires additional information on confidentiality agreements used in open seasons. Specifically, carriers proposing rates and terms pursuant to affiliate contracts must provide a showing that any confidentiality agreement that was a prerequisite to obtaining open season materials was narrowly tailored consistent with FERC policy.
B. Open Season Timing
FERC is seeking additional information demonstrating that the timing of an open season did not afford an affiliate an undue preference. This may include: (1) information showing that the open season process permitted any potential nonaffiliated committed shippers adequate time to meaningfully participate; (2) identifying whether a carrier conducted its open season before beginning construction of any pipeline facilities or infrastructure that would enable service offerings, such that the scope could potentially be modified to accommodate requests from potential nonaffiliated committed shippers during the open season; or (3) identifying whether discussions were ongoing with potential nonaffiliated committed shippers prior to the close of the open season, and whether the open season was extended to allow additional time for discussions with potential nonaffiliated committed shippers.
Additionally, filings must include a representation that the initial open season notice permitted potential shippers 30 days or longer to submit commitments consistent with industry standards, or explain why a shorter deadline was used.
C. Open Season Negotiations and Charges
FERC is seeking additional information on discussions and modifications that took place during the open season. This could include information such as: (1) open season materials, including any pro forma contracts, the carrier offered in open season; (2) describing any open season negotiations and any changes proposed or made to the offered terms; (3) explaining the carrier’s basis for not accepting commitments submitted by any nonaffiliated entities during the open season or providing any facts relevant to why such nonaffiliated entities did not ultimately become committed shippers; (4) describing steps taken to ensure that any relevant information or data provided or communicated to an affiliate related to the proposed contract terms was also provided to all open season participants; (5) providing all offers and commitments submitted by the carrier’s affiliates; or (6) showing that a neutral, independent third-party monitored or administered the open season process.
Information regarding any commitments, offers, or bids submitted by affiliated or nonaffiliated entities could also be relevant. Although the above-listed information may be confidential, carriers are encouraged to file the information under seal. FERC is also seeking comment on whether independent, third-party monitors could play a role in ensuring that oil pipeline open seasons afford meaningful participation by nonaffiliates and prevent undue discrimination in favor of pipeline affiliates.
D. Additional Facts
Carriers are encouraged to provide any other information that supports a finding that an open season provided an equal opportunity for nonaffiliated shippers to enter a contract and did not unduly discriminate in favor of the carrier’s affiliates. The lists provided above are not intended to be exclusive or exhaustive, and FERC invites comments on any information pertinent to demonstrating the integrity of an open season that does not result in commitments from nonaffiliated shippers.
Methods for Demonstrating Just and Reasonable Rates and Terms
FERC is also seeking comment on proposed guidance for a carrier to demonstrate that it did not unduly discriminate in favor of an affiliate by offering excessively burdensome or uneconomic contract terms designed to prevent nonaffiliated shippers from becoming committed shippers. A contract rate or term that appears to impose excessive burdens and departs from industry standards could be an indication that the carrier was seeking to exclude any nonaffiliated shippers from entering the contract and unduly discriminating in favor of its affiliate. FERC is proposing that carriers expressly address the following items in their filings and demonstrate that such terms are consistent with FERC’s policies:
A. Minimum Commitment Requirements
In circumstances where a carrier’s affiliate is the only committed shipper, a high minimum volume commitment that is not operationally justified may be an indication that the carrier intended to unduly discriminate in favor of its affiliate. A long minimum term commitment that departs from industry standards without any explanation raises similar concerns. To combat these issues, FERC is proposing that carrier filings for affiliate contracts do the following: (1) describe the minimum commitment (volume and term length) required to enter the contract; (2) state the maximum number of committed shippers the minimum requirements would allow the carrier to accept; and (3) explain whether minimum commitment requirements are consistent with FERC policy and industry standards or, where not consistent with industry standards, any operational or other considerations or circumstances that would justify the requirements.
FERC has proposed that a safe harbor method for justifying affiliate contract rates is to offer a cost-of-service rate. Offering a cost-of-service rate over the term of the agreement to any interested shippers in an open season would support a finding that such rate offerings are just and reasonable. A cost-of-service rate can serve as a substitute for a competitive market rate where the indicia of fair dealing that accompanies arms-length, non-affiliate transactions is absent. A cost-of-service rate to any interested shippers in an open season will be entitled to a presumption that the rate is just, reasonable, and not unduly discriminatory under the ICA. The FERC proposes that a carrier can demonstrate that it offered a cost-of-service rate through the following: (1) cost-of-service support for the contract rate in the materials provided to potential shippers during the open season; (2) stipulate in the contract that adjustments to the rate over the term of the contract by the carrier would be pursuant to the FERC’s cost-of-service and indexing regulations; (3) stipulate in the contract that the committed shipper has the right to directly challenge the committed rate on a cost-of-service basis under 18 CFR 343.2; and (4) provide that whenever the rate is changed during the contract term on a cost-of-service basis, the new cost-of-service rate will be set at a 100% load factor (or some other reasonable limit) so the committed shipper is not at risk for future reductions in the pipeline’s throughput.
FERC also recognizes that there are other ways to justify affiliate contract rates outside of offering a cost-of-service rate. To that end, FERC invites comments on any other methods that would warrant a presumption of compliance with the ICA in the absence of arms-length negotiations. Comments that propose alternative methods should address the following points: (1) the criteria for justifying affiliate contract rate terms using the proposed method; (2) the information a carrier would need to provide in order to support the proposed rate terms under the proposed method; (3) how such a showing would support a finding that the rate terms offered in the open season mitigate the potential for undue discrimination towards potential nonaffiliated shippers; (4) why the proposed method is necessary given the availability of the cost-of-service safe harbor; (5) whether the method is consistent with the FERC’s regulations, or, if not, any changes that would be necessary to permit such method.
Ensuring Sufficient Access to Pipeline Capacity
A. Penalties and Deficiency Provisions
FERC proposes that carrier filings include a showing that any terms such as additional fees or penalties are consistent with FERC policy and industry standards, and are reasonably tailored to meet legitimate objectives, in order to demonstrate that they do not impose an excessive or disproportionate burden on nonaffiliate-committed shippers.
B. Duty to Support
The proposal would also require that filings provide a showing that any duty to support clause included in the contract is narrowly tailored consistent with FERC policy. In the context of affiliate contracts, such a showing could be particularly useful to FERC to support a finding that no nonaffiliated entities were unreasonably deterred from entering the contract on the basis that the contract required an overbroad waiver of a shipper’s statutory rights to seek redress before FERC.
C. Prorationing Rules
With regard to situations where the only committed shipper is the carrier’s affiliate, FERC is concerned with prorationing rules that may unduly hinder an uncommitted shipper’s access to pipeline capacity. FERC precedent and industry standards generally support a carrier reserving at least 10% of capacity for uncommitted shippers. The FERC is proposing that carriers fully explain any prorationing terms applicable to committed shippers and the committed volume levels to which these terms apply. Additionally, carriers must explain how the prorationing terms are consistent with FERC policy and the pipeline’s common carrier obligations, and ensure that any unaffiliated shippers that request transportation will have reasonable access to the pipeline as uncommitted shippers.
FERC has proposed that initial comments be submitted on or before December 14, 2020, with reply comments due on January 28, 2021.
Although FERC is seeking comments on affiliate contract issues, the open season, committed shipper, and prorationing issues are frequent topics for negotiation in new oil pipeline projects. Any standards FERC may establish related to affiliated bidders or shippers will have an impact on nonaffiliated parties as well. Pierce Atwood’s energy attorneys have significant experience in guiding bidders and shippers through common carrier open seasons, qualifying for committed shipper rates, prorationing issues, creditworthiness issues, and the negotiation of contracts that arise out of such open seasons.