Revisions to Oil Pipeline Regulations Pursuant to Energy Policy Act of 1992

DEPARTMENT OF ENERGY

18 CFR Parts 341, 342, and 343

[Docket No. RM93-11-001; Order No. 561-A]

Revisions to Oil Pipeline Regulations Pursuant to Energy Policy

Act of 1992

July 28, 1994.

AGENCY: Federal Energy Regulatory Commission, Energy.

ACTION: Order on rehearing.

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SUMMARY: The Federal Energy Regulatory Commission is amending its

regulations to revise the requirements for filing suspension

supplements of oil pipeline tariffs in order to provide additional time

to file suspension supplements; to modify the circumstances under which

oil pipelines may use the cost-of-service methodology for changing

rates in order to more closely track the standard for shipper protests

to an indexed rate; and to modify the requirements for protests to oil

pipeline tariff filings in order to require that a protestant file a

verified statement to support its claim of a substantial interest in

the proceeding. The effect of these actions will be to provide a more

accurate, timely, and balanced approach to oil pipeline ratemaking

under the Energy Policy Act of 1992 and the Interstate Commerce Act.

EFFECTIVE DATE: The amendments to Part 341 are effective September 7,

1994, and the amendments to Parts 342 and 343 are effective January 1,

1995.

FOR FURTHER INFORMATION CONTACT:

Harris S. Wood, Office of the General Counsel, Federal Energy

Regulatory Commission, 825 North Capitol Street, NE., Washington, DC

20426, (202) 208-0224.

SUPPLEMENTARY INFORMATION: In addition to publishing the full text of

this document in the Federal Register, the Commission also provides all

interested persons an opportunity to inspect or copy the contents of

this document during normal business hours in Room 3104, 941 North

Capitol Street, NE., Washington, DC 20426.

The Commission Issuance Posting System (CIPS), an electronic

bulletin board service, provides access to the texts of formal

documents issued by the Commission. CIPS is available at no charge to

the user and may be accessed using a personal computer with a modem by

dialing (202) 208-1397. To access CIPS, set your communications

software to use 300, 1200, or 2400 bps, full duplex, no parity, 8 data

bits and 1 stop bit. CIPS can also be accessed at 9600 bps by dialing

(202) 208-1781. The full text of this proposed rule will be available

on CIPS for 30 days from the date of issuance. The complete text on

diskette in Wordperfect format may also be purchased from the

Commission's copy contractor, La Dorn Systems Corporation, also located

in Room 3104, 941 North Capitol Street, NE., Washington, DC 20426.

Before Commissioners: Elizabeth Anne Moler, Chair; Vicky A. Bailey,

James J. Hoecker, William L. Massey, and Donald F. Santa, Jr.

I. Introduction

A. Order No. 561

On October 22, 1993, the Federal Energy Regulatory Commission

(Commission) issued Order No. 561 in this proceeding.\1\ Order No. 561

promulgated regulations pertaining to the Commission's jurisdiction

over oil pipelines under the Interstate Commerce Act (ICA),\2\ to

fulfill the requirements of the Energy Policy Act of 1992 (Act of

1992).\3\

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\1\Revisions to Oil Pipeline Regulations Pursuant to Energy

Policy Act, Order No. 561, III FERC Statute & Regulations 30,985

(1993), which will be referred to herein as the ``final rule.''

\2\49 U.S.C. app. 1 (1988).

\3\42 U.S.C.A. 7172 note (West Supp. 1993).

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The final rule reflects the Commission's compliance with the

mandate of Congress in enacting the Act of 1992. In the final rule, the

Commission recognized that Congress deemed certain rates to be just and

reasonable, thereby forming a baseline for many future oil pipeline

rate changes and obviating future debate over the appropriateness of

existing rates, many of which are based on valuation or trended

original cost methodologies. The final rule, in accordance with the

directive of section 1801 of the Act of 1992, provided a ``simplified

and generally applicable'' approach to changing just and reasonable

rates through use of an index system to establish ceiling levels for

such rates. The final rule adopted the annual change in the Producer

Price Index for Finished Goods, minus one percent (PPI-1), as the

appropriate index to determine annual ceiling levels of rates to be

charged by oil pipelines.\4\

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\4\The Commission stated in the final rule that it would

undertake an examination of the relationship between the annual

change in the index and the actual cost changes experienced by the

oil pipeline industry every five years, beginning in the year 2000.

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As alternatives to the indexing approach, the final rule permits,

in certain defined circumstances, other rate-setting or rate-changing

methodologies. The final rule permits cost-of-service proceedings to

establish just and reasonable rates, with regard to initial rates for

new service, and also with regard to changes to existing rates where

appropriate.\5\ The final rule retained the Commission's policy of

encouraging settlements of rate issues at any stage in the proceedings.

Finally, the final rule continued to allow pipelines to seek Commission

authorization to charge market-based rates.\6\

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\5\The Commission, concurrently with the issuance of the final

rule, issued a notice of inquiry to explore ways to improve the

collection of data on oil pipeline costs, and as a first step in

establishing filing requirements for cost-of-service rate filings,

to facilitate these cost-of-service proceedings. See Cost-of-Service

Filing and Reporting Requirements for Oil Pipelines, Notice of

Inquiry, IV FERC Stats. & Regs. 35,528 (October 22, 1993); Notice

of Proposed Rulemaking, Cost of Service Filing and Reporting

Requirements for Oil Pipelines, Docket No. RM94-2-000, issued

concurrently with this order.

\6\The matter of market-based rates is also the subject of a

notice of inquiry issued concurrently with the final rule. See

Market-Based Ratemaking for Oil Pipelines, Notice of Inquiry, IV

FERC Stats. & Regs. 35,527 (October 22, 1993); Notice of Proposed

Rulemaking, Market-Based Ratemaking for Oil Pipelines, Docket No.

RM94-1-000, issued concurrently with this order.

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In addition to establishing the ratemaking methodologies to be

followed by oil pipelines, the final rule, pursuant to the directives

of the Act of 1992, adopted certain reforms to the Commission's

procedures relating to oil pipeline proceedings. The final rule also

included an updating of Commission regulations pertaining to oil

pipeline tariffs.

B. Order on Rehearing

This order on rehearing grants, in certain respects, the

applications for rehearing that were filed, and clarifies in part the

final rule.\7\ The changes made in the rule on rehearing are:

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\7\A list of those parties filing applications for rehearing or

requests for clarification is attached as Appendix A to this order,

and the names by which they are referred herein.

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1. Section 341.4 of the regulations is modified to require the

filing of suspension supplements within 30 days of the suspension

order, instead of 15 as required in the final rule.

2. The ``uncontrollable circumstances'' test of Sec. 342.4 of the

regulations has been modified to provide that the pipeline may use the

cost-of-service methodology for changing rates when it can demonstrate

that its prudently incurred costs have increased to such an extent that

there is a substantial divergence between such costs and the rate

produced by application of the index. This change will more closely

track the standard for shipper protests to an indexed rate as reflected

in Sec. 343.2.

3. Section 343.3 of the regulations has been modified to require

that a protestant must file a verified statement which contains a

detailed description of the nature and substance of the protestant's

substantial interest in the pipeline's tariff filing.

In all other respects, Order No. 561 is affirmed as issued.

The Commission re-affirms that the index approach to oil pipeline

ratemaking should be instituted on January 1, 1995. The indexing

methodology adopted in the final rule is designed to fulfill both the

simplification directive of the Act of 1992 and the just and reasonable

standard of the ICA. It will simplify, and thereby expedite, the

process of changing rates by allowing, as a general rule, such changes

to be made in accordance with a generally applicable index. It will

ensure compliance with the just and reasonable standard by subjecting

the PPI-1 index to periodic monitoring and, if necessary, adjustment,

and, in addition, by providing both pipelines and their customers with

an opportunity to show in individual cases that the indexed ceiling

level does not comport with the just and reasonable requirement of the

ICA.

The Act of 1992 directed the Commission to establish a ratemaking

methodology that is ``simplified and generally applicable,''\8\ and

comports with the just and reasonable standard of section 1(5) of the

ICA. At the outset of undertaking compliance with the Act of 1992, the

Commission was confronted by a significant fact: Congress, in section

1803 of the Act of 1992, deemed the vast majority of existing rates to

be just and reasonable, and subject to challenge only under narrowly

defined circumstances. Thus, with a few exceptions, the oil pipeline

industry's existing rates have been established as a just and

reasonable baseline. Moreover, this is a baseline that has resulted not

from an examination and confirmation of underlying costs, but from a

statutory edict.

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\8\Section 1801, Act of 1992.

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This statutory just and reasonable baseline of existing rates,

combined with the mandate to simplify and expedite, has focused the

Commission's task in this proceeding upon formulating a streamlined way

of regulating rate changes. Thus, the indexed rate-cap methodology set

forth in the final rule, and re-affirmed in this order, constitutes a

simplified and generally applicable methodology of changing rates.

Simplification results from the elimination, with rare exceptions,

of rate-specific examinations of costs. Under the indexed rate-cap

approach, rates are allowed to change so long as the resulting rate is

at or below a ceiling level established by the index. This approach is

also generally applicable because a rate cap methodology serves to

constrain rates in the pipeline's markets.

The indexing methodology adopted in the final rule and affirmed

here is fundamentally based upon costs. The index selected, PPI-1, is

that which the evidence in the record indicates most closely

approximates the actual cost changes experienced by the oil pipeline

industry. Thus, changes in rate ceilings should reflect changes in

costs to the pipeline industry. To ensure this nexus is maintained, the

Commission will periodically examine the relationship between the

selected index and the actual cost changes experienced by the oil

pipeline industry. Appropriate adjustments to the index will be made as

warranted by the results of this periodic review.

The indexing methodology also provides a mechanism for ensuring in

individual cases that the actual rates charged are within the zone of

reasonableness required by the just and reasonable standard of the ICA.

A protest may be filed against a rate increase that is within the

applicable ceiling, if the increase is substantially in excess of the

actual increase in costs experienced by the pipeline. The complaint

procedure of section 13(1) of the ICA also remains available to

challenge existing rates that are arguably unjust and unreasonable.

Conversely, a pipeline may file a rate increase that exceeds the

applicable ceiling, if it can show that its prudently incurred costs

are substantially in excess of the cost changes reflected in the index.

In this fashion, the regulatory scheme adopted by the Commission

will provide constant monitoring of the relationship of the index to

the costs of both the pipeline industry as a whole and of individual

pipelines. To the extent this monitoring indicates a discrepancy

between the index and changes in pipeline costs such that the indexed

ceilings do not constrain rates to just and reasonable levels, the

necessary adjustments to the index, or to its application to a

particular rate, will be made.

Although certain petitioners on rehearing have challenged the

Commissioner's authority to do so, judicial precedents make clear that

an agency may lawfully enforce a ``just and reasonable'' standard

through the imposition of rate caps derived from a broad-based

index.\9\ The indexed rate-cap methodology adopted in this proceeding

has firm legal grounding in these precedents and is, with one

exception, no different in substance from the methodologies affirmed in

these cases.

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\9\See, e.g., Mobil Exploration & Producing Southeast, Inc., et

al. v. United Distribution Cos., 498 U.S. 211 (1991); National Rural

Telecom Association v. FCC, 988 F.2d 174 (D.C. Cir. 1993). See also

Permian Basin Area Rate Cases, 390 U.S. 747 (1968). In Permian, the

area rates for producers were established with reference to an

examination of area costs. Appellants argued on appeal that the

Commission was required to make a rate-specific cost inquiry. The

Court held to the contrary.

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The exception is the index that is to be used. In the Mobil,

Northern Telecom, and other cases, the index in question was the Gross

Domestic Product--Implicit Price Deflator (GDP-IPD), which is a measure

of general inflation in the economy. In this proceeding, the Commission

has selected the PPI-1 as the index to compute rate caps. This decision

is based upon the conclusion that the PPI-1, which reflects changes in

prices of finished goods, will more closely track the cost changes

experienced by a typical pipeline than will the GDP-IPD. To ensure over

time that this nexus between the changes in the index and the cost

changes experienced by the typical pipeline will be maintained, the

Commission will conduct a review of the PPI-1 index every five years,

beginning in the year 2000.

An agency may lawfully rely upon the rate caps established by the

index to constrain individual rates to just and reasonable levels.

There is, in other words, generally no need, under the indexed rate-cap

methodology, to examine the relationship between changes in costs and

changes in rates on a rate-specific basis. See, e.g., Permian Basin

Area Rate Cases, supra.

Nonetheless, since there may be cases presenting exceptional

circumstances, the methodology includes procedures for both popelines

and shippers to show the need for overriding the presumptive validity

of the rate cap. These procedures reinforce the appropriateness of

using an indexed rate-cap methodology. See Permian Basin Area Rate

Cases (special relief provision);\10\ National Telecom (waiver

provisions). It should be emphasized that these procedures will be

invoked only in truly exceptional cases, in order to achieve the

simplification objective of the indexed rate-cap methodology.\11\

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\10\In Permian Basin Area Rate Cases, the Court did not reach

the question whether providing for exceptions was legally necessary,

because the Commission's rule contained procedures for exceptions.

\11\In Permian Basin Area Rate Cases, the Court noted with

approval the Commission's stated intention to grant exceptions to

the area rate ceilings only rarely, lest the administrative benefits

of regulating through area rates be undermined. The Court also found

no infirmity with the Commission's decision not to set forth in

advance specific criteria to govern applications for exceptions. 390

U.S. at 772.

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It bears emphasizing that the choice of the PPI-1 index for use in

the methodology adopted in this rule is not a choice for all time. The

operation of this index will be monitored to ensure that actual rates

charged customers comply with the just and reasonable standard of the

ICA.

II. Issues Raised and Commission Response

A. Choice of Index

1. PPI-1 vs. GDP-IPD

AOPL and its members support the use of a general inflation index,

but claim that the choice of PPI-1 is not supported by record evidence

and is based on flawed statistical analysis presented by Dr. Alfred

Kahn, while voluminous evidence by AOPL (and its members) in favor of

using the GDP-IPD, adjusted upward by 2.5 percent (GDP+2.5), has been

ignored.

Before addressing this criticism directly, it would be useful to

describe briefly how the Commission came to adopt the PPI-1 index for

use in this rule.

The final rule in this proceeding is the result of a notice of

proposed rulemaking (NOPR) initiated by the Commission on July 23,

1993,\12\ in response to the mandate of Congress that the Commission

issued a final order revising oil pipeline ratemaking, contained in the

Act of 1992. On March 18, 1993, the Commission made available for

comment a Proposal for Revisions to Oil Pipeline Regulation Pursuant to

the Energy Policy Act of 1992, prepared by the Commission staff (Staff

Proposal). Staff proposed, among other things, that the Commission

adopt as a primary means of regulating oil pipeline rates an indexing

methodology based on PPI-1. Twenty-four sets of comments were received

on the Staff Proposal.

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\12\58 FR 37671 (July 13, 1993).

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In the NOPR, the Commission proposed to use, as its primary means

of regulating oil pipeline rates, an indexing system similar to that

contained in the Staff Proposal. However, rather than the PPI-1, the

Commission proposed to use the GDP-IPD as the index. Forty-two sets of

comments were received from parties representing pipelines, shippers,

State commissions, consumers, and trade associations.

Included in the comments on the NOPR were the sworn statement of

Dr. Alfred Kahn, attached to the comments of Crysen Refining Company,

et al. Dr. Kahn generally supported the use of PPI-1 as best reflecting

the cost changes experienced by product pipelines and reported to the

Commission in the pipelines' annual report to the Commission, Form No.

6. AOPL and the pipelines generally supported the use of the GDP-IPD as

the index, adjusted upward by 2.5 percent, arguing that this index

better reflected pipeline cost changes. Based on these comments, the

Staff paper, and the NOPR, the Commission formulated the final rule,

adopting as the index for pipeline rates the change in the PPI-1.

Numerous applications for rehearing were filed, and on December 9,

1993, Sinclair Oil Corporation and NCFC filed a response to the

application for rehearing of AOPL. This response included the sworn

statement of Dr. Robert Means, supporting the Commission's use of PPI-1

and the Kahn statement generally. Thereafter, on December 22, 1993, the

Commission requested further comments on the issue of the appropriate

index to use for changes to oil pipeline rates.\13\ Six statements and

comments were received. The supplemental comments of AOPL generally

criticized the Kahn and Means studies.

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\13\65 FERC 61,377 (1993).

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Based on consideration of the foregoing items, the Commission

reaffirms its decision to use the PPI-1 as the appropriate index for

oil pipeline rate regulation. The choice of PPI-1 was not exclusively

dependent on the evidence submitted by Dr. Kahn. The proposal for using

PPI-1 was first introduced into the record in this proceeding in the

Staff Proposal, before any testimony was submitted. The Staff Proposal

argued that PPI-1 would track industry costs better than the Consumer

Price Index (CPI) and the GDP-IPD because, for example, the latter were

significantly influenced by ``rapidly escalating health care

costs,''\14\ the full extent of which would not be borne by employers.

The Commission ultimately chose PPI-1 in the final rule, but this

choice did not hinge exclusively on Dr. Kahn's testimony nor solely on

his statistical presentation of pipeline costs.

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\14\Staff Proposal, at 21.

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AOPL does not dispute that some general measure of inflation should

be used as the index for pipeline rate changes. As AOPL points out,

``The only practical and economically sensible method for addressing

the oil pipeline industry's capital costs under indexation is to rely

upon a general measure of inflation, which by its design captures the

underlying changes in capital costs reflected in the cost of goods

sold.''\15\

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\15\Request of AOPL for Rehearing and Clarification of Final

Rule, at p. 15.

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Both the GDP-IPD and the PPI-FG are commonly considered and used as

measures of general inflation. However, the GDP-IPD has flaws, both as

a measure of general inflation and as a contractual price escalator,

despite its common use. The flaws are sufficiently serious for the

Bureau of Economic Analysis of the Department of Commerce (BEA), the

organization responsible for constructing and publishing this index, to

have issued a fact sheet recommending against its use as an escalator:

The Bureau of Economic Analysis does not recommend specific

measures for escalation in contractual or other agreements. However,

we do recommend that the implicit price deflators (for GDP, GNP, and

other components) not be used as measures of price change.\16\

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\16\BEA's Fact Sheet on the Implicit Price Deflator, attached to

the comments of USAir, Inc., to the notice of proposed rulemaking in

this proceeding, filed August 12, 1993, in Docket No. RM93-11-000.

The two most important flaws of the GDP-IDP are (1) it is not

simply a measure of price change, but it also reflects changes in the

composition of GDP, and (2) it is subject to revision for up to five

years after its publication.

The first problem can be illustrated by health care costs. Health

care expenditures and prices have been rising at a much faster rate

than other components of GDP and non-health care prices,

respectively.17 Because the GDP-IPD reflects both the increased

``weight'' given to health care and the increase in its price, it is an

upwardly biased measure of health care price inflation. For categories

whose share of GDP fall as prices rise, GPD is a downwardly-biased

measure of price change.18

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\1\7See, e.g., Health Care Financing Review, Winter 1992, Vol.

14, No. 2, at pp. 1, 18.

\1\8For a thorough discussion of alternative measures of

deflating GDP see Young, Alan, ``Alternative Measures of Change in

Real Output and Prices,'' pp. 32-48, and Triplett, Jack, ``Economic

Theory and BEA's Alternative Quantity and Price Indexes,'' pp. 49-

52, Survey of Current Business, vol. 72 number 4, April, 1992.

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BEA ordinarily revises the GDP-IPD each July and covers the months

and quarters of the most recent calendar year and the preceding two

years. Thus, the July 1994 revision will cover the years 1991, 1992,

and 1993. Comprehensive revisions are carried out at five year

intervals, the most recent of which was released in December

1991.19

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\1\9For a more detailed account of BEA's release schedule, see

``A Look at How BEA Presents the NIPA's'', Survey of Current

Business,'' pp. 30-32, vol. 73, number 2, February 1993. For the

latest revision, see ``Annual Revision of the U.S. National Income

and Product Accounts'', Survey of Current Business, pp. 9-51, vol.

73, number 8, August 1993.

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In contrast to the GDP-IPD, the PPI-FG is a fixed-weight index of

the prices of finished goods taken at the producer level. It does not

directly include the prices of services, such as those provided by

medical doctors and hospitals, by teachers, lawyers, and others. It

does reflect indirectly the increased cost of medical care, education,

and legal service, since product costs will rise if the wage-benefit

package that producers must pay reflects the higher prices of medical,

educational, and legal services. Unless offset by productivity gains,

producer prices will rise to reflect these higher costs. The PPI will

reflect the higher costs of services to the extent that they represent

higher costs to producers, but not to the extent that employees rather

than employers absorb these higher service costs. For example, the

benefits portion of the employment cost index rose by over 84% between

1980 and 1990, but the wages and salaries portion grew only by 58%. The

medical care component of the Consumer Price Index rose by 118% during

this period. Yet the total compensation index rose by only 65%.20

Since employers pay the total compensation bill, it is only the latter

that reflects the actual inflationary increase in their total wage

bill. The GDP-IPD reflects both the increase in producer prices that

reflect increases in total worker compensation and the effect of the

increase in medical care prices as seen by consumers, as well as any

increase in the price of housing and education.

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\2\0Economic Report of the President, January 1993, Table B-43,

397.

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The cost increases experienced by oil pipelines, which essentially

do business at the wholesale level, has more closely resembled the cost

increase experience of goods producers in the past than that of the

economy as a whole, and it will likely continue to do so in the future.

Therefore, on a broad conceptual basis, the PPI-FG is a more

appropriate choice than GDP for an oil pipeline industry-wide index.

2. Kahn's Analysis

Both Kahn and AOPL provide statistical analyses of pipeline costs

as reported in Form No. 6, to discern whether PPI-1 or GDP+2.5 more

closely tracks these reported changes in oil pipeline costs. These Form

No. 6 data are imperfect and, as AOPL points out, do not necessarily

reflect true valuation and/or bookkeeping costs. Moreover, Form No. 6

does not contain the information necessary to compute a trended

original cost (TOC) rate base or a starting rate base as allowed for in

Order No. 154-B. Thus, all agree that the measure of the capital cost

component of the cost of service is highly unsatisfactory.

Kahn and APOL draw conflicting conclusions from their analyses.

Kahn concludes that PPI-1 better tracks costs for product pipelines,

and is inconclusive about crude oil pipelines. AOPL alleges a number of

statistical flaws in Kahn's analysis, arguing these constitute

sufficient basis to discredit support for PPI-1 as an index.

Kahn constructed a sample of pipelines from Form No. 6 data. He

dropped from his sample those reported pipeline costs in any given year

which were in the upper and the lower 25% of the cost spectrum,

primarily to correct for statistical outliers and for incomplete or

questionable data; and he divided the pipeline universe into strictly

crude carriers and strictly product carriers, eliminating from his

sample all pipeline companies which carry both.

AOPL charges the remaining sample is too small to be statistically

relevant or informative. It particularly objects to the use of only the

middle 50% of reported pipeline costs for computing industry-wide

weighted average costs. It notes the potential downward skewing of

average industry costs by excluding the top 25% of reported pipeline

costs, but neglects to address the potential upward skewing that might

result from eliminating the lower 25%.

AOPL obtained from some of the reporting pipelines, corrections to

the data originally found by Kahn to be incomplete or questionable.

Using these corrected data as supplied by AOPL, Dr. Robert Means21

subsequently expanded Kahn's analysis to all crude and all product

pipelines in the middle 50% of the cost range as reported in any given

year. For reasons explained below, his results would also support the

choice of PPI-1 as an appropriate index to track the central tendency

of reported changes in oil pipeline costs.

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\2\1Dr. Means' statement is attached to the filing of Sinclair

Oil Corporation and the National Council of Farmer Cooperatives in

response to the application for rehearing of AOPL, on December 9,

1993.

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As Dr. Means points out in his testimony, the use of only the

median 50% of pipeline costs does not in any way negate the value of

Kahn's sample as an indicator of the way in which the PPI-1 index

tracks normal pipeline costs:

To be applied without exceptions, a price cap index must be

applied to an industry in which the firm's cost changes fall--or,

with efficient operation, can be made to fall--within a moderate

range. Even with corrections, however, the annual rate of increase

in unit operating expenses and net investment for product pipelines

still range from 19.89 to -12.89 percent; for crude oil pipelines,

the range was from 37.75 to -15.32 percent. . . .

No index can match pipelines' actual cost experience over such a

range. However, the remedy for this problem cannot be a different

index. A higher index would alleviate the problem of cost

underrecovery at the upper end of the range. However, any realistic

index would fall short of the requirements of the firms with the

highest rates of cost increase, and it would at the same time

aggravate the problem of cost overrecovery at the lower end.

Precisely the reverse would occur if a lower index was selected.

The composite measure based on the middle 50 percent that was

used by Dr. Kahn therefore is a reasonable method for assessing an

index even in the absence of any question of erroneous data.\22\

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\22\Means at 18-19.

The median is, in fact, often preferred statistically as a measure

of central tendency in cases where the distribution is highly

skewed.\23\ An average may be substantially influenced by one or two

extreme outliers, whereas the median, or the middle 50% will not.

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\23\George Snedecor and William Cochran, Statistical Methods,

Sixth Edition, Iowa State U. Press, 1978, at 123.

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There is some dispute among commentors on how to weight average

costs. Some use barrel/miles; others advocate using barrels. The choice

of weight will significantly affect the average.\24\ Use of the median

obviates the need to decide on appropriate weights, since the median is

determined only by its position relative to the other components of the

series.

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\24\See, e.g., Answer of Buckeye Pipeline to Brief of US Air,

Inc., dated January 24, 1994, at p. 5, fn 3.

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As noted by Means, use of a median range of pipeline costs is also

more appropriate than the use of an index that includes all changes in

pipeline costs, no matter how extraordinary. AOPL, in its request for

rehearing, provides considerable evidence that the index of PPI-1 will

not cover all changes in pipeline costs. It asserts that PPI-1 would

not permit pipelines with far-above-average costs to recover those

costs within the index. It also shows that the GDP implicit price

deflator index would be insufficient to cover all pipeline costs, and

that GDP+2.5 percent would better cover the range of extraordinary

costs incurred by individual pipelines in any given year.

The role of an index is to accommodate normal cost changes. Its

purpose is not to guarantee recovery of all costs at any time and in

full, regardless of other circumstances. Even competitive markets do

not do this.

AOPL argues that the more generous index would better track, and

hence permit more complete recovery of, all reported pipeline costs. If

the Commission chose such an index, sufficiently high and generous to

encompass even the most extraordinary costs, it would provide windfalls

to many oil pipelines by allowing rate changes substantially above cost

changes. This would effectively abdicate our responsibilities for rate

regulation under the ICA.

The choice of PPI-1 is intended to permit pipelines to recover

normal costs through normal operation of the index.\25\ Extraordinary

costs can be recovered through either of the alternate rate change

means--cost of service or settlement rates--as provided in the final

rule. In both cases, the pipeline will have an opportunity to recover

its costs.

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\25\Kahn states in this original testimony, at page 9, footnote

2, that this is the fundamental purpose of an index:

The mere fact that changes in a particular price or cost index,

intended to be applied to all companies across-the-board, diverges

substantially from changes in the costs of individual companies is

not necessarily an infirmity: the same is true in competitive

markets, just as the competitive market price at any given time will

typically allow some companies to make very high profits and others

to suffer losses.

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In the Commission's judgment, PPI-1 adequately tracks normal

industry average costs. It does not track extraordinary costs. If it

did, it would permit at least some pipelines to capture monopoly rents,

and foster the inefficiencies inherent in the exercise of monopoly

power. PPI-1 may not be the only index that could have been chosen, but

it is adequate and reasonable for purposes of regulating oil pipeline

rates.

There are also strong equity and administrative reasons for

choosing PPI-1 over GDP as an index. The PPI is issued as a final

figure once a year and is not subject to further adjustments. Its use

thus provides a measure of certainty that does not exist with the GDP-

IPD. The GDP-IPD is subject to revisions even five years after so-

called final figures are first issued. Adjustments in the GDP-IPD

several years after rates have been adjusted would mean that rates

would be based on unreliable data, thereby undermining the confidence

of the industry, the financial community, and pipeline customers in the

rates charged.

AOPL takes issue with two lesser points regarding Kahn's analysis.

AOPL alleges that Kahn erred in omitting gathering and delivery costs

(10% of total industry costs) from his analysis. However, the

Commission is concerned with tracking changes in pipeline costs, not in

absolute levels of pipeline costs, of which gathering and delivery

costs comprise a minor part. Omission of these costs therefore provides

some consistency to the costs analyzed without jeopardizing the

validity of the analysis.

AOPL also takes issue with Kahn's use of changes in net plant

investment (i.e., rate of change in depreciated original cost) as a

proxy for oil pipeline capital cost experience. AOPL notes in this

regard that reported historical book investment has nothing to do with

current costs of capital; reported net investment does not reflect the

practice of using parent company equity for investment; and oil

pipelines use trended original cost for determining rate base, which

cannot be calculated from reported data. In brief, AOPL argues that no

generally available or applicable method exists for discerning and

calculating a given pipeline's capital cost changes from reported data,

for which reason an index of general inflation is required to permit

these costs to be tracked. On these grounds AOPL rejects as inaccurate

Means' calculation of the industry's rate of return.

Means acknowledges in his testimony that it is not possible to

determine a trended original cost rate base from publicly available

data. He explains, however, that the relevant question

* * * does not concern the level of pipelines' aggregate rate base,

but rather the rate at which that level is changing. Over the life

of an asset, the average annual rate of change will be the same

under original cost and trended-original cost methodologies. This

follows from the fact that the starting point (original cost) and

the end point (zero) is the same under both.\26\

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\26\Means, p. 15.

The only capital cost data available for public analysis is in Form

No. 6. Use of such a proxy may be imperfect, but AOPL offers no better

solution. They prescribe use of a general price deflator to reflect

capital costs, which the Commission has accommodated by choosing PPI-1.

AOPL would simply have the Commission choose a different deflator,

namely GDP or even GDP+2.5. As to Means' rate of return calculations,

they are irrelevant to the choice of index.

AOPL's original analysis, in contrast to that of Kahn and Means,

focussed only on operating expenses, which are more likely to be

affected by inflation.\27\ Capital costs, which AOPL did not

specifically address, will reflect depreciation and other adjustments

that tend to reduce over-all pipeline costs.

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\27\As noted in the final rule, some commentors in fact

suggested that only such operating expenses be indexed, which we

rejected for reasons explained there.

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3. Construction of Commission Index

USAir, Alberta, and Chevron have urged the Commission to devise its

own index of pipeline costs, using data from Form 6.

Under the best of circumstances, construction, verification, and

testing of such an index within the near future would be extremely

difficult. The data available to the Commission, from Form No. 6, are

currently insufficient for constructing an oil pipeline industry index.

This is particularly true for capital costs, as discussed in more

detail above. Oil pipelines do not file data in their Form No. 6 which

permit calculation of their capital costs on a trended original cost

basis; as noted earlier, this has in part dictated the need for using a

general price inflation index. While the Commission is proposing to

revise Form No. 6 in the NOPR issued concurrently, it is unlikely that

the data will be sufficient to construct an oil pipeline industry

index.\28\

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\28\See Notice of Proposed Rulemaking, Cost of Service Filing

and Reporting Requirements for Oil Pipelines, Docket No. RM94-2-000,

issued concurrently with this order.

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Moreover, a FERC-constructed index would entail serious

complications. First, to construct such an index would require the

collection of data over some extended period of time in order to have a

statistically meaningful set of data points.

Second, if the cost data submitted by individual pipelines were to

be used to charge all shippers maximum rates, it may be argued that

each submission would and should be subject to challenge by any shipper

on any pipeline. While such oversight is not necessarily undesirable

per se, it might result in an indexing method that falls short of the

Act of 1992 goals of simplicity and streamlining.

Third, the extensive vertical integration of the oil industry

raises questions concerning meaningfulness of the cost data

supplied.\29\ Although such companies may operate their pipeline

divisions as independent profit centers, vertical integration does

permit integrated companies considerable leeway in allocating common

costs among their various divisions.

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\29\Although the Commission collects no data on, and does not

have up-to-date information about, the degree to which pipeline

companies are shipping their own oil from one company division to

another, historically the industry has been highly vertically

integrated. According to a Treasury Department staff study,

``Implications of Divestiture'' (June 1976), the top 20 interstate

oil pipeline firms (all major producers and refiners), owned 86.6%

of the interstate trunkline capacity in 1972. A Department of Energy

study, ``United States Petroleum Pipelines'' (December 1980),

reports that in 1980 integrated pipelines owned by the major oil

companies accounted for three out of the top four and 17 of the top

20 pipelines, 66% of total barrel-miles carried, 57% of total

barrels delivered per day, and 67% of the undivided interest

systems.

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At one extreme, a pipeline could be allocated none of a company's

joint or common costs, giving it low rates, and perhaps noticeably

lowering the average of reported industry costs. At the other extreme,

a company could allocate to its pipeline a share of the company's

world-wide common costs, resulting in higher rates and raising the

industry cost average significantly. In this latter case, if the

integrated pipeline company transports primarily company crude, it

would suffer little loss in volumes transported despite its higher

rates, and could remain indifferent to the actual level of the rate

being charged. Revenues not recovered by the pipeline could be

recovered at the producing, refining, or marketing end of the company's

operations. The Commission is not suggesting that such cost-shifting

would occur, nor that it would necessarily be improper. But the

possibility of it occurring undetected in reported data does exist. The

net result in either case is that the data available to the Commission

for constructing a proper index would be skewed. In any event, the need

to improve data collection with regard to oil pipelines is specifically

the subject of the separate rulemaking proceeding at Docket No. RM94-2-

000.

4. Conclusion

Based upon the record evidence of this proceeding, publicly

available data filed with the Commission by pipelines, and the nature

and characteristics of the PPI and GDP indexes, the Commission

reaffirms its decision to use the annual change in the PPI-1 index to

establish rate ceilings under the indexing system. This decision, as

stated in the final rule, will be reviewed every five years, beginning

with the year 2000.

B. Filing Requirements for the Indexing System

1. Pipeline Filing Requirements

The final rule imposes certain new affirmative filing requirements

on pipelines. These new requirements may be broken down into two

categories. The first category contains those substantive requirements

governing a pipeline's use of the ratemaking methodology established in

the final rule. A pipeline is generally required to use the indexing

system to change rates. In filing for a rate change under the indexing

system, a pipeline must file a proposed rate that is no higher than the

ceiling derived from application of the index. If a pipeline wishes to

file for a higher rate, it must use a cost-of-service or negotiated-

rate methodology and it must justify that use based upon certain

factors that are enumerated in the regulations. These requirements are

contained in Secs. 342.3 and 342.4 of the regulations.

The second new affirmative pipeline filing requirement, contained

in Sec. 342.3(e) of the regulations, concerns rate decreases under the

indexing system. In any year in which the index is negative, and has

the effect of lowering the applicable rate ceiling, a pipeline with a

rate above the new ceiling must file a new tariff to bring that rate

into compliance with the new ceiling, subject to the provisions of the

Act of 1992. This filing must be effective no later than July 1 of the

applicable index year.

AOPL, ARCO, Exxon, MPL, and Phillips challenge the Commission's

statutory authority to promulgate these requirements on filing rates.

Their argument is that the ICA grants to a pipeline sole discretion as

to the substantive content of a rate change proposal. Thus, they argue,

the Commission is without authority to require a pipeline to abide by

the requirements established in the final rule for filing for changes

of rates under an indexing system. According to the petitioners, a

pipeline has sole control over the substantive contents of a rate

filing and, when one is made, the Commission's action in response is

limited by section 15(7) of the ICA to acceptance of the filing, or

acceptance combined with a suspension of the effective date (of no more

than seven months), imposition of a refund obligation, and the

convening of a hearing.

Petitioners' argument that these regulations are unlawful because

the Commission has no authority to prescribe substantive requirements

for rate filings is clearly mistaken. In the first instance, these

requirements are grounded in specific authorities contained in the ICA.

The end result of this rulemaking proceeding as it relates to the ICA

is the same as if the Commission has proceeded in a case specific

adjudication. That is, the Commission has identified rate levels that

comply with the just and reasonable standard of section 1(5), and it

has required that no rates above those levels can be charged to

customers, unless the pipeline can show there are unusual circumstances

justifying higher rates. Thus, contrary to the view that underlies

petitioners' objections, requiring a pipeline to abide by these

determinations, reflected in the final rule, is no different than

requiring a pipeline to abide by the requirements of an order issued

after an adjudication on its existing or proposed rates.

In regard to the rate decrease filing requirement contained in

Sec. 342.3(e), AOPL argues that this provision is inconsistent with the

ICA's scheme on burden of proof. AOPL notes that the ICA places upon

the Commission, or the complainant, the burden of proving that an

existing rate is unjust and unreasonable. Contrary to this provision,

argues AOPL, the final rule's requirement that a pipeline file for a

rate decrease effectively shifts the burden of proof in respect to the

lawfulness of an existing rate to the pipeline.

According to these petitioners, the Commission has acknowledged

this principle in a prior decision. In Kuparuk Transportation Co., 55

FERC 61,122 (1991), the Commission declined to order the pipeline to

make automatic annual filings to change rates based upon a formula-

prescribed ceiling. AOPL argues that the Commission's decision in

Kuparuk was premised upon the necessity of respecting the ICA's burden-

of-proof scheme, in which a pipeline bears the burden of proof on

proposed rates, but the challenger bears the burden of proof of showing

that existing rates are unlawful.

These arguments of the petitioners are not persuasive.

In complying with the directive of the Act of 1992 to craft a

simplified and generally applicable ratemaking methodology for oil

pipelines, the Commission has exercised its substantive authorities

under the ICA, which are intended to ensure that the rates charged by

oil pipelines for transportation services are in accordance with the

standard contained in section 1(5) of that statute:

All charges made for any service rendered or to be rendered in

the transportation of * * * property * * * shall be just and

reasonable, and every unjust and unreasonable charge for such

service or any part thereof is prohibited and declared unlawful.

Sections 13(1) and 15(1) grant to the Commission authority to

enforce the just and reasonable standard with respect to existing

rates. If after an investigation instigated by virtue of a complaint

brought by any person under section 13(1), or upon the Commission's own

initiative, the Commission finds that an existing rate is not just and

reasonable, section 15(1) empowers the Commission ``to determine and

prescribe what will be the just and reasonable * * * rate * * * or the

maximum or minimum * * * to be charged * * *,'' and to order that the

pipeline ``shall not thereafter publish, demand, or collect any rate *

* * in excess of the maximum * * * so prescribed * * *.''

Section 15(7) provides the Commission with similar authority if the

pipeline proposes changes to its rates. Thus, under that section the

Commission is empowered to investigate proposed rate changes and, if it

determines that the proposed change would not establish a lawful rate,

issue an order ``as would be proper'' in the context of remedying an

unlawful existing rate under section 15(1).

The requirements of the final rule reflect, and are consistent

with, the Commission's authority under these ICA provisions to

investigate and establish just and reasonable rate levels. As explained

in detail in the previous section of this order and in the order

issuing the final rule, the Commission has conducted an on-the-record

investigation in this proceeding and has determined that use of a

generic, cost-based formula (PPI-1 index) for changing existing rates,

the vast majority of which have been deemed just and reasonable by act

of Congress, will streamline and expedite the ratemaking process in

accordance with the mandate of the Act of 1992, while at the same time

ensuring that the resulting rates are just and reasonable within the

meaning of section 1(5) of the ICA.

The specific means by which this indexing system will ensure just

and reasonable rates is by establishing, in the language of the ICA,

rate maximums.\30\ Section 342.3(a) of the regulations requires rate

changes to produce rates that are no higher than the applicable

ceilings. This regulatory requirement reflects the Commission's

authority under section 15(7) of the ICA to require that proposed

changes yield just and reasonable rates. Section 342.3(e) of the

regulations provides that pipelines must reduce existing rates to

comply with new ceilings which have been lowered because of the decline

in the index. This regulation reflects the Commission's rebuttable

finding that a rate above the ceiling is unjust and unreasonable, and

under section 15(1) of the ICA, the Commission has the authority to

require existing rates that are determined to be unjust and

unreasonable to be adjusted to lawful levels.

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\30\Section 1(5) of the ICA.

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However, the regulations also provide procedures for both pipelines

and their customers to show that the applicable ceilings would not

ensure just and reasonable rates. As explained in detail in the final

rule, and elsewhere in this order, Sec. 342.4 provides that the

pipeline may rebut the presumption in the regulation that the above-

ceiling rate is unjust and unreasonable and that rates above the

ceiling are justified. The pipeline has the burden of proof to show

that the applicable ceilings are too low to allow recoupment of

prudently incurred costs, in respect to both proposed and existing

rates, except for those rates deemed just and reasonable under section

1803 of the Act of 1992. Section 343.2(c)(1) provides similar

protection for customers, by providing for challenges to proposed and

existing rates that are within applicable indexed ceilings, but are

nonetheless so substantially in excess of actual costs as to be unjust

and unreasonable.

Contrary to petitioners' position, nothing in these regulations is

inconsistent with section 15(1) of the ICA, which places the burden of

proving the unlawfulness of an existing rate on the complainant or the

Commission.

The rate decrease requirement of Sec. 342.3(e) is based upon the

Commission's finding, in this proceeding, that a rate level in excess

of the ceiling established by the PPI-1 index is presumptively unjust

and unreasonable.\31\ The section simply applies this finding to an

existing rate that is in excess of a new, lower ceiling, subject to an

opportunity for the pipeline to rebut the presumption to show that its

prudently incurred costs justify the above-ceiling rate. Thus, the

statutory burden of proof has been fulfilled in this proceeding and is

reflected in the regulations.

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\31\The pipeline would not be required to lower rates below

those deemed just and reasonable by the Act of 1992, since the

Commission is not here making any of the findings required by

Sec. 1803(b) to allow it to prescribe rates below that level.

---------------------------------------------------------------------------

Kuparuk does not compel a different conclusion, for it involved a

distinctly different kind of filing requirement than the rate decrease

requirement of the indexing regulations. In Kuparuk, it was proposed

that a pipeline should be required to make a rate change filing every

year, under section 15(7) of the ICA, which would then be subject to

review by the Commission. In this review, the burden of proof, as in

every case under section 15(7), would be upon the pipeline. This

procedure would have upset the statutory scheme for burden of proof

because the existing rate to be superseded by the required annual

filing, unlike the existing rates subject to Sec. 342.3(e), would not

necessarily have been determined to be unjust and unreasonable. In

contrast, in this rulemaking, the Commission is exercising its

authority under section 15(1) of the ICA to require the pipeline to

file a rate decrease.

ARCO specifically maintains that the Commission has no authority

summarily to reject a rate filing without a hearing, except for

technical formatting reasons. The ICA, ARCO argues, gives a pipeline a

statutory right to a hearing to justify its rate proposal. This

contention is also without merit. The hearing requirement contained in

section 15(1) for existing rates and section 15(7) for proposed rates,

has been satisfied by the notice and comment procedures of this

rulemaking. All interested persons, including affected pipelines, have

had an opportunity to be heard. If a pipeline desires to rebut the

presumption that a rate above the ceiling is unjust and unreasonable,

it will receive an individual hearing on that matter. However, a

pipeline that makes a filing which fails to comply with those

standards, without a showing as to why those standards should not

apply, has no right to a hearing. There simply would be no disputed

facts or issues to warrant a hearing.\32\

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\32\See, e.g., United States v. Storer Broadcasting, 351 U.S.

192 (1956); See also Davis & Pierce, Administrative Law Treatise,

Sec. 8.3, at 389 (1994):

Even when an agency is required by statute or by the

Constitution to provide an oral evidentiary hearing, it need do so

only if there exists a dispute concerning a material fact.

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In short, the rate methodology provisions of the final rule,

including the filing and other substantive requirements in the indexing

system, reflect the Commission's exercise of its ICA authority through

promulgation of rules of general applicability, as opposed to issuance

of orders through case-by-case adjudication. An agency's discretion to

exercise its statutory authority in this fashion through a rulemaking,

rather than case-by-case, is well established.\33\

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\33\See, e.g., Heckler v. Campbell, 461 U.S. 458 (1983); United

States v. Storer Broadcasting, note 32, supra.

---------------------------------------------------------------------------

The simplification mandate of the Act of 1992 lends further support

to the reasonableness of the Commission's decision to proceed through a

rulemaking. Section 1801 of the Act of 1992 directs the Commission to

implement a ``simplified and generally applicable'' ratemaking

methodology. It is the Commission's judgment, based upon its experience

under the ICA and similar statutes, and the evidence compiled in the

record of this rulemaking, that an indexing methodology will fulfill

this simplification and general applicability directive, while at the

same time ensuring that the resultant rates are just and reasonable

under the ICA. By its very nature, an indexing methodology is a generic

approach to establishing rates. The requirements of the indexing

methodology crafted in this final rule therefore are to be applied

generically, through rules, subject, as explained above, to

opportunities for pipelines and their customers to show in any

particular case that the indexed-based ceiling should not apply.

The claims on rehearing against the validity of the filing

requirements contained in Part 342 of the new regulations are therefore

denied.

2. Challenges to Rates

Under Sec. 343.2(c)(1) of the new regulations, a protest against a

proposed rate increase under the indexing system must show that the

``increase is so substantially in excess of the actual cost increases

incurred'' by the pipeline that the proposed rate would be unjust and

unreasonable.

Amoco argues that this standard is too vague. It contends that a

more appropriate standard would be a change in circumstances since the

rate was last changed. Sun, Lakehead, and Buckeye make the same

argument on rehearing, arguing for a standard for bringing protests

that relates to changed circumstances.

Several other pipelines on rehearing challenge the notion of

allowing any protests against a rate increase proposed that is within

the applicable ceiling. Thus, Explorer, AOPL, MPL, and Shell argue that

allowing challenges to rate increases within the ceiling would defeat

the simplification and efficiency goals of the indexing methodology.

They contend that the simplification goal would be defeated by the fact

that protests, and thus contested rate proceedings, would proliferate.

They further contend that the efficiency goal would be defeated because

a pipeline would have no incentive to cut costs if to do so would

merely create a divergence between those costs and the allowable rate

ceiling that could form the basis for a protest.

The position that the protest mechanism should not be available in

cases where proposed rate increases comply with the applicable rate

ceiling must be rejected. As explained in the final rule, under an

indexing system some divergence between the actual costs of a pipeline

and its rates is inevitable. An indexing system relies upon industry-

wide average costs, not company-specific costs, to establish rates.

Moreover, the Commission is requiring that there be a substantial

divergence between actual costs and rates to allow for efficiency gains

that may occur.

The indexing system has been adopted because it complies with

Congress' mandate in the Act of 1992 for a simplified and generally

applicable ratemaking methodology, in conformity with the just and

reasonable standard of the ICA. A measure of the justness and

reasonableness of rates is the cost of providing the service. Thus, the

divergence between a pipeline's actual cost increases, and its rate

increases, while to an extent inevitable under the indexing

methodology, should not be allowed to grow so wide as to negate the

cost basis of the rate increases. The provision in question allows a

protest to be brought against a rate increase that strays too far from

the actual cost increases of the pipeline in recognition of the just

and reasonable standard that is still applicable under the ICA.

This provision should not, contrary to the contention of AOPL, MPL,

Shell, and Explorer, undermine the simplification and efficiency

benefits associated with an indexing system of changing rates.

Prohibiting the hearing of protests that do not state reasonable

grounds for alleging that the proposed rate increase is substantially

in excess of cost increases will reduce the number of protests that

might otherwise be filed in the absence of such a standard. It is true

that prohibiting all protests against proposed rate increases in

compliance with the applicable ceiling would further simplify the

Commission's review of rates. However, as explained above, such a

prohibition would be inconsistent with the just and reasonable standard

of the ICA.

The necessity to comply with the just and reasonable standard is

also part of the reason for rejecting the argument that a cost-based

protest against a proposed rate increase must be rejected in order to

ensure the efficiency benefits of indexing. Another reason for

rejecting this argument is that the regulation in question does shield

a pipeline from cost-based protests where rates are not substantially

in excess of costs, thus allowing a pipeline to capture some efficiency

gains.

Amoco, Sun, Lakehead, and Buckeye claim that the standard of ``so

substantially in excess'' so as to render the proposed rate ``unjust

and unreasonable'' is vague. This contention, while not entirely

inaccurate as a matter of linguistics, is not persuasive as an argument

on rehearing. The extent of the divergence between actual cost

increases to a pipeline and its proposed rate increase that would

justify a finding that the proposed rate is unjust and unreasonable is

not susceptible to mathematically precise definition.

This determination is reinforced by these parties' proposal for an

alternative standard--changed circumstances. Such a standard is not

directly tied to cost changes that may be experienced by a pipeline.

Thus, were this standard to be used, there would be the potential for

wide divergences between a pipeline's costs and its rates that would

nonetheless not be subject to challenge. Such a regulatory regime

clearly would not serve as an effective check on rate increases, and

would therefore be contrary to the Commission's continuing

responsibility to ensure that oil pipeline rates are just and

reasonable.

Reflecting a different perspective from that articulated by the

pipeline petitioners, some shippers have requested rehearing on the

basis that the threshold standard for filing a protest under the

indexing system is too stringent.

Kerr-McGee contends that any rate increase that exceeds the actual

cost increase experienced by a pipeline is unjust and unreasonable. It

argues that protests premised on any divergence from actual costs in

the proposed rate should be allowed.

As the cases demonstrate, the requirement that rates under the ICA

be just and reasonable does not mean that such rates must perfectly

reflect costs, or that non-cost factors may not be taken into account.

In Farmers Union Central Exchange, Inc. v. FERC, 734 F. 2d 1486 (D. C.

Cir.), cert. denied, 469 U.S. 1034 (1984), the court stated that rates

must be within a zone of reasonableness, and that factors other than

costs may be taken into account. Further, Kerr-McGee's argument would,

if accepted, negate the legality of any indexing system to implement

the just and reasonable standard of the ICA. For the reasons explained

at length in the final rule,\34\ the Commission rejects this argument.

---------------------------------------------------------------------------

\34\See III FERC Stats. & Regs 30,895 (1993), at pp. 30,948-51.

---------------------------------------------------------------------------

Holly and Total state that the Commission may not limit protests to

challenging the increment of the rate increase. According to their

view, the Commission's statutory duty is to examine the whole rate when

a rate change is proposed. Holly argues that this is required by the

principle that the lawfulness of a ratemaking process is dependent upon

the end result. Chevron also takes the position on rehearing that the

Commission may not lawfully limit protests to challenging the increase

in the rate, as opposed to the whole rate.

This limitation is necessary in order to preserve the vitality of

the protection for certain existing rates provided in subsection

1803(a) of the Act of 1992. That section deems rates in existence and

unchallenged for the one-year period prior to enactment of the Act of

1992 to be just and reasonable and not subject to a complaint under

section 13 of the ICA, unless evidence is presented to the Commission

which establishes that a substantial change has occurred after the date

of enactment of the Act of 1992 in the economic circumstances of the

oil pipeline which were the basis of the rate; or in the nature of the

services provided which were the basis for the rate; or unless the

person filing the complaint was under a contractual prohibition against

filing a complaint.\35\

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\35\Subsection 1803(b) of the Act of 1992.

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This ``grandfathering'' provision of the Act of 1992 protects from

most complaints the vast majority of rates in existence on the date of

enactment. To allow a protestant of a proposed increase of a

statutorily protected underlying rate to challenge the whole rate, and

not just the proposed increase, would be to remove the protection of

section 1803(a) solely on account of the filing of a proposal to effect

a modification of that rate. There is no indication that Congress

intended the protection of section 1803(a), for those rates that

qualify, to be overridden by regulatory actions, or to be of limited

duration. The statute clearly states two conditions under which the

safe harbor afforded rates under section 1803(a) does not apply. Merely

filing a protest against a proposed change to a grandfathered rate is

not one of them.

In addition, limiting a protestant to challenging the increment of

the rate increase is consistent with the ICA. Under section 15(7), a

pipeline proposing a rate change bears the burden of providing the

change will result in a rate that is just and reasonable. On the other

hand, in an investigation of an existing rate pursuant to sections

13(1) and 15(1), the burden of proving the rate is unjust and

unreasonable lies with the complainant (or the Commission, in

investigations begun sua sponte). To allow a protestant in a section

15(7) proceeding, where the burden of proof lies with the pipeline, to

challenge that part of a rate that was pre-existing would therefore be

contrary to the statutory scheme.

It is relevant to note, moreover, that under the indexing system

adopted in the final rule, existing rates to the extent not

grandfathered under the Act of 1992 remain subject to investigation

under the complaint process set forth in section 13(1) of the ICA.

3. Other Issues

Holly and Total argue for an automatic periodic Commission review

of pipeline rates. Total suggests that this be done every five years,

with the pipelines being required to file cost and revenue data to be

used in this process. Total also favors insulating pipelines from

protests during the five year intervals between the cost-based rate

reviews.

The concern reflected in these requests--that under the indexing

system pipeline rates will increasingly diverge from actual pipeline

costs--has been addressed by the Commission in its structuring of the

index system. First, pipeline rates under the indexing system will be

subject to investigation through both the protest and the complaint

procedures of the ICA. Second, under the final rule, every five years

beginning in the year 2000, the Commission will examine the

relationship between changes in the index (PPI-1) and actual cost

changes experienced by the oil pipeline industry. The purpose of this

review will be to ensure that the ceiling rates established under the

indexing system fairly and reasonably track the actual cost changes to

the oil pipeline industry, such that rates in compliance with the

applicable indexed ceiling are just and reasonable within the meaning

of the ICA.

The Commission therefore concludes that the requests of Holly and

Total for a periodic review of pipeline rates should not be adopted.

Finally, Chevron makes several specific proposals for changing the

filing requirements of the final rule. Chevron requests that the

Commission extend the notice period for filing proposed rates to 60

days, and the period for filing a protest in response to such a filing

beyond the 15 days contained in the regulation. Further, Chevron

suggests that a pipeline be required to send notice of its rate

increase filing by telefax or overnight mail.

Chevron's requested changes to the regulations will not be adopted.

The proposal to extend the notice period to 60 days for filing rate

changes is contrary to the ICA. Section 6(3) of the ICA provides that

the notice period shall be 30 days, except that a shorter period may be

provided for by rule or in a particular case. Given this statutory 30-

day notice period, it is not advisable to adopt Chevron's suggestion

that the period for filing a protest in response to a changed tariff

filing be greater than 15 days. A longer period would leave an unduly

short amount of time for the Commission to review the filing and any

protests and make a determination whether to suspend and initiate an

investigation of the filing. Finally, Chevron does not make a

persuasive case for requiring pipelines to telefax or express mail rate

filings, although pipelines are encouraged to voluntarily do so at the

request of their shippers.

C. Establishment of Initial Rates

Section 342.2 of the final rule provides a pipeline with two ways

of establishing an initial rate for new service. An initial rate may be

established through a cost-of-service based filing. As an alternative

to a cost-of-service filing, a pipeline may establish an initial rate

through an agreement reached with at least one non-affiliated person

who intends to use the service in question. Under this alternative,

however, a protest filed against such a settlement rate would require

the pipeline to justify the rate based upon costs.

1. Market-Based Initial Rates

Plantation and WPL seek rehearing of the lack of a provision for

relying upon market forces to justify an initial rate. Plantation

argues that a pipeline has a statutory right to file an initial rate of

its choosing and to defend its lawfulness in accordance with the

suspension and hearing procedures set forth in the ICA. In addition,

Plantation states that the establishment of a rate for a service not

previously offered is a particularly appropriate context for use of

market competition as a justification for the rate because a pipeline

cannot exercise market power in a market it is not already serving.

Based upon the comments and reply comments received in this

proceeding the Commission concluded that an initial rate should be

established either on a cost-of-service or a settlement basis. The

Commission was concerned that a pipeline might be able to exercise

market power to establish an initial rate that was unjust and

unreasonable. In this regard, it is important to note that an initial

rate for new service may, depending upon the circumstances, represent

no more than an additional receipt or delivery point on an existing

pipeline. Contrary to the impression given by Plantation's argument, a

new service may not always, or even most of the time, involve

additional service to a new market. The pipeline offering the new

service, and seeking approval for an initial rate, may be the only or

one of the few transporters in an existing market.

The regulations promulgated in the final rule do expressly provide

a pipeline with an opportunity to use a market-based methodology to

change existing rates, subject to proof that competitive pressures

exist to a sufficient degree to restrain rate changes to just and

reasonable levels. See Sec. 342.4(b). Thus, the Commission has

recognized that under some circumstances a market-based rate may be

lawful. The regulation, however, provides that market-rates may only be

charged after the Commission has determined that such ratemaking

methodology is appropriate and lawful. Until such time, a pipeline must

show some other basis for its rates, such as costs or compliance with

the indexed ceiling.

Rehearing on this issue is denied.

2. Protests of Settlement-based Initial Rates

Plantation and WPL also argue that the settlement option for

establishing initial rates does not go far enough. They contend that

the regulations should not prohibit the shipper agreeing to the rate

from being an affiliate of the pipeline. Further, they maintain that a

settlement initial rate should be immune from protests. Thus, under

their view, the only mechanism for a party to challenge the justness

and reasonableness of a settlement initial rate would be a complaint,

with the burden proof, in accordance with section 13(1) of the ICA,

being upon the complainant. Plantation and WPL asserts that allowing a

protest of a negotiated rate defeats and renders superfluous the

negotiation.

Unlike the case of changes of existing rates, the settlement option

for initial rates only requires the agreement of one non-affiliated

shipper. The purpose of requiring the one shipper who must agree to the

initial rate to be unaffiliated with the pipeline is to ensure that the

agreement is based upon arms-length negotiations. Allowing a protest to

a settlement rate permits those shippers who were not party to that

agreement to protect themselves and other shippers from an unjust and

unreasonable initial rate. The arguments of Plantation and WPL do not

show that these requirements are unreasonable or unfair. In particular,

these requirements should not render initial rate settlements, or the

negotiations preceding them, meaningless. A pipeline will still have an

incentive, and derive a benefit, from seeking to gain the concurrence

of its potential shippers to an initial rate for new service. To the

extent concurrence is obtained, a protest is unlikely. If unanimous

concurrence of potential shippers is not obtained, the regulation still

allows the pipeline to file the initial rate based upon the agreement

of at least one non-affiliated shipper. This one-shipper provision

simply expands the options for a pipeline. The availability of the

protest mechanism in such a case provides balance to the provision from

the standpoint of the interests of shippers.

Rehearing on this issue is therefore denied.

D. Other Rate Changing Methodologies

1. Uncontrollable Circumstances Test

Several parties have asked for clarification or rehearing of the

requirement contained in Sec. 342.4 that there be cost increases

incurred because of ``uncontrollable circumstances'' before carriers

may change rates based on a cost-of-service methodology. AAPC suggests

that the Commission clarify that what constitutes ``uncontrollable

circumstances'' will be determined in individual cases. ARCO and

Lakehead ask that the standard be relaxed to reflect only that a change

in circumstances need occur before the pipeline is allowed to justify

its rates on a cost-of-service basis. MPL argues that the rule is too

restrictive and may prevent pipelines from recovering their costs

associated with catastrophic losses due to accident, equipment failure,

or third-party damage, any one of which might lead to extraordinary

costs and liabilities.

The Commission's intent in the Final Rule was that there be a

change in economic circumstances that justifies use of the cost-of-

service methodology brought about by events or conditions outside the

control of the pipeline. These circumstances would include, but not be

limited to, events such as those alluded to by MPL. It was never the

Commission's intent to provide an exhaustive list in the Final Rule of

what might constitute ``uncontrollable circumstances.''\36\

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\36\ Some of the items referred to on rehearing were clearly not

within the contemplation of the Commission, such as the suggestion

by ARCO that it might be allowed to raise its rates in the future to

make up for past earnings lost due to competition. (ARCO, pp. 14-16)

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SFPP and Phillips contend that the pipeline seeking to invoke a

cost-of-service methodology should be governed by the same standard as

those seeking to challenge an indexed rate--i.e., a substantial

divergence between costs and the indexed rate. SFPP asserts that the

Commission should allow cost-of-service treatment in the event of a

divergence in actual costs and indexed rates so substantial that the

existing rate level under indexing is not just and reasonable,

regardless of the nature of the circumstances.

The Commission is persuaded that a modification such as that

proposed by SFPP and Phillips should be made to the test. There indeed

may be instances where prudently incurred costs have increased to such

an extent that the rate produced by the index would not be just and

reasonable. Such cost changes may be the result of planned expansions

or of upgrading or replacement of facilities for safety or

environmental considerations. Accordingly, where the pipeline can show

that the costs are prudently incurred and that there is a substantial

divergence in its costs and the rate that would be produced by

application of the index, the pipeline will be allowed to charge rates

based on a cost-of-service methodology. Section 342.4 will be modified

to reflect this change.

2. Fully Allocated Costs

Amoco, AOPL, and WPL object to the Commission's characterization of

its current methodology as contemplating use of fully allocated costs

to determine proper rates for any movement. In the final rule at

footnote 83, the Commission stated, in response to comments addressing

the issue of whether the cost-of-service methodology should be applied

on a ``stand-alone'' or fully allocated basis, ``The Commission is

proposing no change in its current practice of using fully allocated

rates.'' The Commission cited Opinion No. 154-B as illustrative. In

this regard, the Commission determines the justness and reasonableness

of rates for other modes of transportation it regulates on a fully-

allocated cost basis. However, as the commenters point out, this issue

has not been determined in a fully litigated case by this Commission

under the Interstate Commerce Act. The Commission does not intend by

this rulemaking to decide the issue with finality, and proponents of

``stand-alone'' cost methodology or other costing methodologies will

not be precluded from advocating such methodologies in individual

cases.\37\

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\37\As AOPL correctly notes, the Commission's Notice of Inquiry

(NOI) at Docket No. RM94-2-000, issued concurrently with the final

rule in this proceeding, encompasses the data to be filed with a

cost-of-service showing, including the issue of whether such data

should be required on a stand-alone or fully-allocated cost basis,

or some other basis. Kerr-McGee's recommendation that the Commission

establish a simplified cost-of-service method will also be

considered in that NOI. See NOI at mimeo p. 8. See also the NOPR in

Docket No. RM94-2-000 issued concurrently with this order.

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E. Procedures for Streamlining Action on Rates

1. Requirements for Standing

Section 343.3(b) provides that only persons with a substantial

economic interest in a tariff filing have standing to file a protest

against that filing. A protest must be accompanied by a verified

statement as to the protestant's substantial economic interest.

ARCO requests that the Commission amend the regulation on standing

to require the verified statement to explain in sufficient detail the

nature of the substantial economic interest and its connection to the

proposed rate, so that the Commission will be able to make a

determination on the standing of the protestant expeditiously. ARCO

proposes that the regulation be changed to read as follows:

Along with the protest, the protestor shall file a verified

statement which shall contain a reasonbly detailed description of

the nature and substance of the protestor's economic interest in the

tariff filing in question.

In support of its request, ARCO notes that the Commission will have

a relatively short period of time after the filing of the rate, the

protest, and the response to the protest, in which to make a

determination on what action to take. Requiring a protestant to explain

in reasonable detail how it meets the standing requirement will,

according to ARCO, assist the Commission in making a timely decision on

standing.

ARCO's suggested amendment to the standing requirement appears to

be reasonable. ARCO is not advocating a substantive change in the

standing requirement contained in the regulation. Rather, it is

requesting that the Commission require that the basis for standing be

stated in enough detail to allow an informed decision on standing to be

made in a timely fashion. It is obviously to the benefit of the

Commission, in performing its review function, and to the interested

public, that this be done. Moreover, this should not pose a burden for

protestants who possess the requisite substantial economic interest in

a tariff filing. Rehearing is granted on this issue, and Sec. 343.3(b)

will be revised accordingly.

2. Pipeline Response to a Complaint

Under Sec. 343.4(a) a pipeline may file a response to a complaint

no later than 30 days after the complaint is filed. AOPL requests this

section be changed to allow a response to be filed no later than 30

days after service of the complaint, as opposed to filing.

This request will be denied. AOPL has stated no facts indicating

that the procedure set forth in Sec. 343.4(a), which is unchanged from

current practice, provides insufficient time for a pipeline to file a

response to a complaint.

F. Revisions to Existing Procedures

In its application for rehearing, WPL cites five areas of concern

about the revisions to existing procedures contained in Part 341 which

were adopted in the final rule. Each is discussed below.

1. WPL claims that certain regulations increase the burden on

pipelines with no apparent benefit to shippers. It points to an alleged

redundancy in Sec. 341.2(c), which requires that transmittal letters

describe the filing and explain changes to the carrier's rates, rules,

terms, or conditions of service, and Sec. 341.(b)(10)(i), which

requires that tariff changes be indicated and described by specific

symbols. It cites AOPL for the argument that the requirements of the

new regulation would transform a ministerial document into a

substantive summary of the filing, whereas the tariff publication

itself must identify all such changes. It asserts that to have the

letter of transmittal also identify those changes would be superfluous.

WPL reads too much in the Commission's requirements for the

transmittal letter. Simply stated, the Commission desires an

informative transmittal letter which will briefly state the essential

facts--that the carrier is seeking to change its rates and the basis

for its rate change--i.e., it is based on the carrier's application of

the index, or it is based on the carrier's cost of service, or it is a

settlement rate. Moreover, a brief statement of any tariff language

changes proposed will suffice. It is not intended that the carrier

restate the terms and conditions of its tariff filing in the

transmittal letter.

Further, the rule requiring a narrative explanation of tariff

changes in a letter of transmittal is not duplicative of

Sec. 341.3(b)(10)(i) which refers to designating changes in the tariff

by use of uniform symbols. Clearly, these are two separate

requirements. A general explanation of the filing is warranted. The

brief nature of the description required is not burdensome. Indeed,

this requirement is common practice for several carriers which have

been including an explanation of their filing in their letters of

transmittal for some time, even prior to implementation of these

regulations.

WPL also argues that limiting the number of supplements to one

rather than five, which currently exists, will likewise burden the

pipelines, since they must capsulize all their supplements into one

large supplement even if the matter sought to be supplemented could be

done in a single page. WPL suggests that if the intent is to

consolidate all supplements, the result could be achieved by requiring

that subsequent supplements clearly indicate all prior supplements

currently in effect.

The Commission finds the rule allowing only one effective

supplement is reasonable. The previous rules were written when all

tariffs were individually printed by printing press. Now many carriers

have computerized the publication of their tariffs, making it easier to

merely bring forward all the changes into one complete supplement. In

addition, the previous limitations relating to the number of

supplements to be filed to an effective tariff, as well as the

requirements for the length of the supplements themselves, were

confusing and not useful. Since oil pipeline bound tariffs are rarely

in excess of forty pages, the previous maximum supplement limitation of

five supplements to be filed to a tariff in excess of 200 pages was

never reached. Further, under the previous regulations, tariffs of four

pages or less could not be supplemented. The rules as currently revised

allow one effective supplement to a tariff to be filed. In addition to

this one supplement, there are five other types of technical or

ministerial supplements which can be filed and are not included in the

count. These are correction supplements (three allowed per tariff),

suspension supplements, postponement supplements, cancellation

supplements, and adoption supplements. The Commission believes this

series of supplements is ample to meet the carriers' needs. Given the

clarity and uniformity of the rule, the elimination of page

restrictions for supplements, and the exception for certain types of

supplements, the Commission believes the rule is a balanced one. The

Commission denies rehearing on this issue.

2. WPL claims that certain regulations are inconsistent with the

explanatory text. It cites Sec. 341.0(a)(7), which requires that

pipelines post tariffs at the carrier's principal office and other

offices of the carrier where business is conducted with affected

shippers, and the textual statement in the final rule that this section

``requires such posting only at `principal' pipeline offices.''\38\

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\38\III FERC Stats. & Regs. 30,985, at p. 30,969.

---------------------------------------------------------------------------

The Commission has determined that a carrier should maintain its

tariff in places where it does business with its customers. The

Commission used the term ``principal pipeline offices'' in the

explanatory text of the final rule in this context. Confusion over the

requirement in Sec. 341.0(a)(7) was created by the use of the term

``principal place of business'' in its more legalistic sense; however,

the sense of what the Commission sought to achieve is contained in the

phrase ``and other offices where business is conducted with affected

shippers.''

WPL argues that Sec. 341.3(b)(6)(i) would require that all rules

affecting the rates or services provided for in the tariff publication

must be included in the tariff publication, whereas the text\39\ of the

final rule allows for incorporation by reference.

---------------------------------------------------------------------------

\39\Ibid.

---------------------------------------------------------------------------

As the Commission explained in the explanatory text, incorporation

by reference of rules affecting the rates or services will be allowed,

so long as the document to which reference is made is readily

available.

3. WPL claims that certain regulations, while clear, do not make

sense when applied. It cites Sec. 341.3(b)(6)(iii), which prohibits

tariffs from including rules which provide that traffic of any nature

will be transported only by special agreement, arguing that agreements

such as volume incentive and throughput and deficiency agreements are

common industry practice have long been accepted under the ICA. It

seeks clarification that the Commission is not banning such agreements.

The Commission did not intend to change the current practice

respecting the prohibition of a tariff that provides that traffic of

any nature ``will be transported only by special agreement.'' Such a

prohibition has always existed in the regulations.\40\ The ``special

agreement'' referred to in this context means that the carrier may not

require a special agreement available only to one shipper, which would

be discriminatory to another similarly situated shipper who sought to

ship on the carrier's lines. The Commission did not attempt to bar the

use of non-discriminatory throughput and deficiency agreements, or

volume incentive agreements. Administration of such agreements will

continue as before.

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\40\Section 341.4(h)(3) of the regulations which existed prior

to promulgation of the instant regulations provided, in part, ``* *

* nor shall any rule be provided to the effect that traffic of any

nature will be `taken only by special agreement' or other provision

of like import.''

---------------------------------------------------------------------------

WPL cites Sec. 341.4(f), which requires pipelines to publish

suspension supplements within 15 days of suspension, whereas the

pipeline does not often receive the suspension notice within sufficient

time to do so. It asks that the Commission telecopy such suspension

notices to the pipeline.

The Commission will modify Sec. 341.4(f) so that suspension notices

must be filed within 30 days of the suspension, thus obviating the need

that suspension notices be telecopied to the pipeline.

4. WPL claims that certain regulations appear to serve no purpose,

citing Sec. 341.2(b) which prohibits pipelines from posting tariffs

more than 60 days before the effective date. WPL argues that the

Commission has given no explanation for this requirement, and its

imposition may hurt shippers who have a shorter period to find

alternatives. Moreover, it argues, such a requirement would

unnecessarily inhibit seasonal rate filings.

The Commission does not agree. The Commission encourages carriers

to keep their shippers informed of proposed changes in a timely

fashion. At times, the carrier may determine that it should notify the

shippers at a date sooner than 60 days of its proposal, and nothing in

the regulations prohibits this. Also, nothing in the regulations

prohibits seasonal filings, as long as there is only one effective date

for the tariff. Moreover, since the deadline for filing a protest is

proposed to be changed to 15 days after the filing date of the tariff

publication and not 12 days before the effective date of the tariff, as

has been the past requirement, shippers could be placed in the

untenable situation wherein they would be judging the tariff filing

under circumstances which could significantly change prior to the

effective date of the tariff. This requirement should have no

significant effect on the planning functions of the pipeline and its

shippers; rather it will streamline the tracking of filings made at the

Commission.

5. WPL claims that certain provisions are not properly included in

the final rule, citing Sec. 341.8, which requires that pipelines

publish in their tariffs rules which in any way increases or decreases

the value of service to a shipper. ARCO and AOPL object to including

such items as prorationing of capacity, product specification, and

connection policies. AOPL argues that the Commission cannot require

publication of non-rate terms and conditions of service; ARCO argues

that there is no statutory authority for this requirement; rather, the

Commission's statutory authority is limited to rates or rate-related

matters, not a ``public interest'' standard, as indicated by the

Commission in the text of the final rule.\41\

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\41\ARCO, p. 25. See III FERC Stats. & Regs. 30,985, at p.

30,969 (1993).

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Section 1(3) of the ICA\42\ defines transportation to include ``* *

* all services in connection with the receipt, delivery, elevation, and

transfer in transit * * * storage, and handling of property

transported.''

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\42\49 U.S.C. app. Sec. 1(3) (1988).

---------------------------------------------------------------------------

Section 1(6) of the ICA\43\ requires all carriers to ``establish,

observe, and enforce * * * just and reasonable regulations and

practices affecting classifications, rates, or tariffs, * * * the

facilities for transportation, * * * and all other matters relating to

or connected with the receiving, handling, transporting, storing, and

delivery of property. * * *''

---------------------------------------------------------------------------

\43\49 U.S.C. app. Sec. 1(6) (1988).

---------------------------------------------------------------------------

Section 6(1)\44\ of the ICA provides that carriers' tariffs shall

---------------------------------------------------------------------------

\44\49 U.S.C. app. Sec. 6(1) (1988).

state the places between which property * * * will be carried, and

shall also state separately all terminal charges, storage charges,

icing charges, and all other charges which the Commission may

require, all privileges or facilities granted or allowed, and any

rules or regulations which in any wise change, affect, or determine

any part of the aggregate of such aforesaid rates, fares, and

charges, or the value of the service rendered to the * * * shipper.

---------------------------------------------------------------------------

* * * (Emphasis added.)

The three items specifically mentioned by the applicants for

rehearing--prorationing policy, line connection policy, and product

specification--all constitute conditions of offering transportation

service by the carrier, or constitute conditions of ``receipt, delivery

* * *, and transfer in transit * * *, and handling'' by the

carrier.\45\ They certainly affect the value of services to the

shipper. Thus, they are encompassed within the term ``transportation''

as defined in the ICA.

---------------------------------------------------------------------------

\45\Section 1(3) of the ICA.

---------------------------------------------------------------------------

It is clearly within the Commission's authority under section 6(1)

to require that such regulations and practices be contained in the

company's tariffs on file with the Commission and open to public

inspection. This is a primary purpose of a tariff--to set forth the

terms and conditions under which the service of the carrier is offered

so as to militate against discrimination and preferential treatment in

favor of one shipper over another.\46\

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\46\See Atchison, Topeka & Santa Fe Ry., 607 F. 2d 1199 (7th

Cir. 1979); Central R,R, Co. v. Anchor Line, Ltd., 219 F. 716,718

(2d Cir. 1914); Central & S. Motor Frtg. Tar. Assn. v. United

States, 273 F. Supp. (D. Del. 1967).

---------------------------------------------------------------------------

Moreover, these items which are required to be included in tariffs

not only affect the value to the shipper of the service offered by the

carrier, but also can have a direct effect on access to transportation.

Because different carriers implement different policies, a carrier's

prorationing, carrier liability, quality bank, and connection policies

may adversely affect shippers. As the Commission has stated in another

context, ``By requiring publication of such tariff provisions, section

6 [of the ICA] helps ensure rate certainty and uniformity between

shippers and reduces the possibility of discriminatory treatment

between shippers.''\47\

---------------------------------------------------------------------------

\47\KK Appliance Co., 47 FERC 61,076 at p. 61,217 (1989).

---------------------------------------------------------------------------

All items contained in Sec. 341.8 (except for prorationing policy,

carrier liability, quality bank, and line connection policy) have been

listed in Sec. 341.10 of the Commission's regulations for a substantial

number of years, as ARCO has observed.\48\ In fact, Sec. 341.10

required the publication of tariffs which contain all the rules

governing the various items listed in that section, as well as all

rules ``which increase or decrease the value of service to the

shipper.''

---------------------------------------------------------------------------

\48\ARCO, p. 28.

---------------------------------------------------------------------------

The new items specifically added are rules ``which increase or

decrease the value of service of shippers,'' or are required to

diminish the possibility of discrimination. Since they are of the same

character as those contained in Sec. 341.10, which was superseded by

the new Sec. 341.8, the Commission is not convinced that they will

constitute the burden on carriers expressed by AOPL, ARCO, and

Williams.

G. TAPS

ARCO, Unocal, and Alaska each request that the Commission clarify

its intent regarding establishing rates for TAPS carriers and those

delivering to TAPS. ARCO requests that the Commission confirm that TAPS

and other excluded pipelines will continue to be regulated under the

ratemaking standards that are currently in effect, and that nothing in

the final rule should be construed to the contrary. Alaska similarly

asks that the Commission clarify that three pipelines delivering oil to

TAPS--Kuparuk, Endicott, and Milne Point--shall continue to justify

their rates under their respective settlement agreements. Unocal

requests clarification that the TAPS Settlement Methodology (TSM) is

not the sole methodology applicable to TAPS carriers.

It was not the Commission's intent to change, in any way, the

current ratemaking standards for TAPS and excluded carriers. Indeed, as

stated in the final rule, the Act of 1992 specifically excluded TAPS

and any pipeline delivering oil directly or indirectly to TAPS from the

provisions of the Act for ratemaking purposes. As further explained,

TAPS and those excluded pipelines will continue to be regulated under

the ratemaking standards that are currently in effect.\49\ That

continues to be the Commission's intent.

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\49\III FERC Stats. & Regs. 30,985 (1993), at 30,961.

---------------------------------------------------------------------------

H. Miscellaneous Issues

Chevron asserts that the Commission's procedures are not adequately

defined, and that such lack of definition now generates protracted oil

pipeline rate proceedings. Chevron states that ``at a minimum the

Commission should scrutinize its discovery and decision-making

processes.''\50\ This would entail, according to Chevron, new

regulations that would prevent a pipeline from delaying the rate review

process and that would require issuance of orders and decisions in a

timely manner.

---------------------------------------------------------------------------

\50\Chevron Rehearing, at 8.

---------------------------------------------------------------------------

In response to Chevron's arguments, the Commission believes that

the regulations contained in the final rule will streamline and

expedite the Commission's ratemaking and decision-making processes.

Chevron has not identified any specific changes or additional reforms

that would improve and expedite the implementation of the ICA by the

Commission.

In particular, as Chevron notes, the discovery process can

contribute to delay in the hearing of contested proceedings. The

improved filing requirements that will result from the Commission's

NOPR in Docket No. RM94-2-000 should ameliorate this problem as it

existed in the past. In addition, no specific proposals to expedite and

reform discovery procedures were submitted in the comment phase of this

rulemaking, by Chevron or anyone else.

The Commission Orders

The applications for rehearing and requests for clarification are

granted to the extent reflected herein. In all other respects, such

applications and requests are denied.

List of Subjects

18 CFR Part 341

Maritime carriers, Pipelines, Reporting and recordkeeping

requirements.

18 CFR Parts 342 and 343

Pipelines, Reporting and recordkeeping requirements.

By the Commission. Commissioner Hoecker concurred in part and

dissented in part with a separate statement attached. Commissioner

Massey dissented with a separate statement attached.

Lois D. Cashell,

Secretary.

In consideration of the foregoing, Parts 341, 342, and 343, Chapter

I, Title 18, Code of Federal Regulations, are amended as set forth

below.

The following regulations are effective September 7, 1994.

PART 341--OIL PIPELINE TARIFFS: OIL PIPELINE COMPANIES SUBJECT TO

SECTION 6 OF THE INTERSTATE COMMERCE ACT

1. The authority citation for Part 341 continues to read as

follows:

Authority: 42 U.S.C. 7101-7352, 49 U.S.C. 1-27.

2. In Sec. 341.4, paragraph (f) is revised to read as follows:

Sec. 341. 4 Filing requirements for amendments to tariffs.

* * * * *

(f) Suspension supplements. A suspension supplement must be filed

for each suspended tariff or suspended part of a tariff within 30 days

of the issuance of a suspension order. The suspension supplement must

be served on all subscribers. The supplement must include the date it

is issued, a reproduction of the ordering paragraphs of the suspension

order, a statement that the tariff or portion of the tariff was

suspended until the date stated in the suspension order, a reference to

the docket number under which the suspension order was issued, and a

statement that the previous tariff publication remains in effect.

The following regulations are effective January 1, 1995.

PART 342--OIL PIPELINE RATE METHODOLOGIES AND PROCEDURES (EFFECTIVE

JANUARY 1, 1995)

1. The authority citation for part 342 continues to read as

follows:

Authority: 5 U.S.C. 571-83; 42 U.S.C. 7101-7532; 49 App. U.S.C.

1-85; 42 U.S.C. 7172 note.

2. In Sec. 342.3, paragraph (e) is revised to read as follows:

Sec. 342.3 Indexing.

* * * * *

(e) Rate Decreases. If the ceiling level computed pursuant to

Sec. 342.3(d) is below the filed rate of a carrier, that rate must be

reduced to bring it into compliance with the new ceiling level;

provided, however, that a carrier is not required to reduce a rate

below the level deemed just and reasonable under section 1803(a) of the

Energy Policy Act of 1992, if such section applies to such rate or to

any prior rate. The rate decrease must be accomplished by filing a

revised tariff publication with the Commission to be effective July 1

of the index year to which the reduced ceiling level applies.

3. In Sec. 342.4, paragraph (a) is revised to read as follows:

Sec. 342.4 Other rate changing methodologies.

(a) Cost-of-service rates. A carrier may change a rate pursuant to

this section if it shows that there is a substantial divergence between

the actual costs experienced by the carrier and the rate resulting from

application of the index such that rates at the ceiling level would

preclude the carrier from being able to charge a just and reasonable

rate within the meaning of the Interstate Commerce Act. A carrier must

substantiate the prudence of the costs incurred. A carrier that makes

such a showing may change the rate in question, based upon the cost of

providing the service covered by the rate, without regard to the

applicable ceiling level under Sec. 342.3.

* * * * *

PART 343--PROCEDURAL RULES APPLICABLE TO OIL PIPELINE PROCEEDINGS

(EFFECTIVE JANUARY 1, 1995)

1. The authority citation for Part 343 continues to read as

follows:

Authority: 5 U.S.C. 571-83; 42 U.S.C. 7101-7532; 49 App. U.S.C.

1-85; 42 U.S.C. 7172 note.

2. In Sec. 343.3, paragraph (a) is amended by adding the following

sentence at the end thereof as follows:

Sec. 343.3 Filing of protests and responses.

(a) Protests.

* * * * *

Only persons with a substantial economic interest in the tariff

filing may file a protest to a tariff filing pursuant to the Interstate

Commerce Act. Along with the protest, the protestant must file a

verified statement which must contain a reasonably detailed description

of the nature and substance of the protestant's substantial economic

interest in the tariff filing.

* * * * *

Appendix--List of Parties Seeking Rehearing and/or Clarification of

Order No. 561

Alaska, State of (Alaska)

Alberta Petroleum Marketing Commission (Alberta)

All American Pipeline Company (AAPC)

Amoco Pipeline Company (Amoco)

Association of Oil Pipelines (AOPL)

ARCO Pipe Line Company, Four Corners Pipe Line Company and ARCO

Transportation Alaska, Inc. (ARCO)

Buckeye Pipe Line Company, L.P. (Buckeye)

Chevron U.S.A. Products Company (Chevron)

Colonial Pipeline Company (Colonial)

Conoco Pipe Line Company (Conoco)

Exxon Pipeline Company (Exxon)

Holly Corporation (Holly)

Kerr-McGee Refining Corporation (Kerr-McGee)

Lakehead Pipe Line Company (Lakehead)

Marathon Pipe Line Company (MPL)

Petrochemical Energy Group (PEG)

Phillips Pipe Line Company (Phillips)

Plantation Pipe Line Company (Plantation)

SFPP, L.P. (SFPP)

Shell Pipe Line Corporation (Shell)

Sun Pipe Line Company (Sun)

Total Petroleum, Inc. (Total)

US Air, Inc. (USAir)

Unocal Pipeline Company (Unocal)

Williams Pipe Line Company (WPL)

HOECKER, Commissioner, concurring in part and dissenting in

part:

I largely concurred with the Final Rule adopted in this

docket.\1\ The regulatory regime that will become effective January

1, 1995, for oil pipelines is generally quite simple for companies

whose rates tend to track legitimate cost incurrence. On rehearing,

two serious flaws in the Final Rule persist. Consequently, I will

dissent in part once again.

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\1\A full exposition of my views on Order No. 561 and on

regulation of the oil pipeline industry are contained in my

statement of November 2, 1993, which will be, belatedly, published

at III FERC Stats. and Regs. 30,985 (1993). Pending publication, a

copy of the November statement may be obtained from the Commission's

public reference room.

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First, the rule continues to require that protests to indexed

rates will be allowed only where ``the increment of the rate change

produced by application of the index is substantially in excess of

the individual pipeline's increase in costs.'' As I explained in my

prior dissent on this issue, I would have preferred a rule that

allowed protests that can show a substantial divergence between the

rate taken as a whole and the pipeline's total costs. Even with an

index, costs and rates may occasionally become so unrelated that

rates cease to be just and reasonable under the Interstate Commerce

Act. We should provide for such exigencies.

Second, I continue to be concerned that the ``settlement rate

methodology,'' under which existing rates can be changed or initial

rates can be established, may lead to unjust and unreasonable rates

wherever negotiations are not constrained by demonstrable market

forces. This aspect of the rule should only be adopted pursuant to

the market-based rate procedures proposed in Docket No. RM94-1-

000.\2\ While I fully support settlements, I believe that

settlements should be in the public interest and subject to

Commission scrutiny. I believe the procedures established in this

rule do not adequately safeguard against potential abuses of market

power and, indeed, may invite the unlawful use of market power to

obtain rate increases in excess of the indexed rate.

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\2\Market-based Ratemaking for Oil Pipelines, Notice of Proposed

Rulemaking, issued July ____, 1994, IV FERC Stats. and Regs.

32,______ (1994).

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For these reasons, as well as those previously expressed in my

November 2, 1993 statement, I respectfully concur in part and

dissent in part to today's Order.

James J. Hoecker,

Commissioner.

MASSEY, Commissioner, dissenting:

I respectfully dissent for the same reasons set out in my

statement, issued November 5, 1993, dissenting from Order No.

561.\3\

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\3\65 FERC  61,109 (1993).

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William L. Massey,

Commissioner.

[FR Doc. 94-18873 Filed 8-5-94; 8:45 am]

BILLING CODE 6717-01-M