Market-based Ratemaking for Oil Pipelines
Federal RegisterNov 16, 1994
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DEPARTMENT OF ENERGY
18 CFR Part 348
[Docket No. RM94-1-000]
Market-based Ratemaking for Oil Pipelines
Issued October 28, 1994.
AGENCY: Federal Energy Regulatory Commission.
ACTION: Final rule.
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SUMMARY: The Federal Energy Regulatory Commission is amending its
regulations to adopt filing requirements and procedures with respect to
an application by an oil pipeline for a determination that it lacks
significant market power in the markets in which it proposes to charge
market-based rates. This rule adopts procedural rules in order to
implement the Commission's Order 561 market-based ratemaking policy,
which was published in the Federal Register on November 4, 1993. In
that order, the Commission adopted a simplified and generally
applicable ratemaking methodology for oil pipelines, which is an
indexing system to establish ceilings on those rates. The Commission
also continued its policy of allowing an oil pipeline to attempt to
show that it lacks significant market power in the market in which it
proposes to charge market-based rates. However, an oil pipeline may not
charge market-based rates until the Commission concludes that the oil
pipeline lacks significant market power in the relevant markets.
EFFECTIVE DATE: This final rule is effective January 1, 1995.
FOR FURTHER INFORMATION CONTACT: Jeffrey A. Braunstein, Office of the
General Counsel, Federal Energy Regulatory Commission, 825 North
Capitol Street, NE., Washington, DC 20426, (202) 208-2114.
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 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.
Order No. 572
I. Introduction
The Federal Energy Regulatory Commission (Commission) hereby adopts
procedural rules governing an oil pipeline's application for a
Commission finding that the oil pipeline lacks significant market power
in the relevant markets.
The present rule is a companion to Order No. 561.\1\ There, the
Commission adopted a simplified and generally applicable ratemaking
methodology for oil pipelines to fulfill the requirements of Title VIII
of the Energy Policy Act of 1992 (Act of 1992).\2\ That methodology is
an indexing system to establish ceilings on oil pipeline rates. The
Commission also will permit, under defined circumstances, the use of
two alternative methodologies. These are the use of a cost-of-service
methodology and the use of settlement rates. In addition, in Order No.
561, the Commission continued its policy of allowing an oil pipeline
``to attempt to show that it lacks significant market power in the
market in which it proposes to charge market-based rates.''\3\ Under
Order No. 561, however, an oil pipeline may not charge market-based
rates until the Commission concludes that the oil pipeline lacks
significant market power in the relevant markets.\4\ The present rule
adopts procedural rules in order to implement Order No. 561's market-
based ratemaking policy.
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\1\Revisions to Oil Pipeline Regulations pursuant to Energy
Policy Act, Order No. 561, 58 FR 58785 (November 4, 1993), III
Stats. & Regs. 30,985 (1993), order on reh'g and clarification,
Order No. 561-A, 59 FR 40243 (August 8, 1994), III FERC Stats. &
Regs. 31,000 (1994).
\2\42 U.S.C. 7172 note (West Supp. 1993).
\3\18 CFR 342.4(b) to be effective January 1, 1985.
\4\Id.
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II. Public Reporting Requirement
The Commission estimates the public reporting burden for this
collection of information under the rule will increase the existing
reporting burden associated with FERC-550 by an estimated 510 hours
annually--an average of 255 hours per response based on an estimated 2
responses. The information filed by the oil pipelines will be collected
by the Commission under FERC-550 ``Oil Pipeline Rates: Tariff
Filings.'' FERC-550 is a designation covering oil pipeline tariff
filings made to the Commission. The estimates include the time for
reviewing instructions, researching existing data sources, gathering
and maintaining the data needed, and completing and reviewing the
collection of information. The current annual reporting burden is 5,350
hours based on an estimated 535 responses from approximately 140
respondents.
Interested persons may send comments regarding these burden
estimates or any other aspect of this information collection, including
suggestions for reducing this burden, to the Federal Energy Regulatory
Commission, 941 North Capitol Street NE., Washington, DC 20426
[Attention: Michael Miller, Information Services Division, (202) 208-
1415]; and to the Office of Information and Regulatory Affairs of OMB
(Attention: Desk Officer for Federal Energy Regulatory Commission).
III. Background
On October 22, 1993, the Commission issued a Notice of Inquiry
(NOI) about market-based rates for oil pipelines.\5\ In the NOI, the
Commission first inquired whether it should continue to permit oil
pipelines to seek market-based rates on a showing that they do not have
significant market power in the relevant markets. The Commission also
inquired about how it should make a market power determination and, in
that connection, raised a number of substantive and procedural issues.
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\5\Market-Based Ratemaking for Oil Pipelines, Notice of Inquiry,
58 FR 58814 (November 4, 1993), IV FERC Stats. & Regs. Notices
35,527 (October 22, 1993).
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On July 28, 1994, the Commission issued a Notice of Proposed
Rulemaking (NOPR) in response to the NOI and the comments to the
NOI.\6\ In the NOPR, the Commission concluded that oil pipelines may
continue to seek market-based rates upon a showing that they do not
have significant market power in the relevant markets. In addition, the
Commission concluded that no consensus existed on the substantive
standards to be used in determining whether an oil pipeline lacks
significant market power in the relevant markets and that, therefore,
the appropriate course of action is to develop oil pipeline precedents
on a case-by-case basis. Accordingly, the Commission did not propose in
the NOPR any substantive rules about market power determinations.
However, the Commission did propose in the NOPR appropriate procedural
rules to govern applications by oil pipelines for a market-power
determination that could lead to market-based rates. The Commission has
received comments on the NOPR from eleven commenters.\7\ In brief,
after analyzing those comments as discussed below, the Commission is
adopting the procedural rules proposed in the NOPR with minor
modifications and some clarifications.
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\6\Market-Based Ratemaking for Oil Pipelines, Notice of Proposed
Rulemaking, 59 FR 39985 (August 5, 1994), IV FERC Stats. & Regs.
Proposed Regulations 32,508 (July 28, 1994).
\7\Comments were filed by: ARCO Pipe Line Company and Four
Corners Pipe Line Company (ARCO), the Association of Oil Pipe Lines
(AOPL), Marathon Pipeline Company (Marathon), Buckeye Pipe Line
Company, L.P. (Buckeye), Kaneb Pipe Line Operating Partnership, L.P.
(Kaneb), Glenn E. Davis (Davis), Total Petroleum, Inc. (Total),
Alberta Department of Energy (Alberta), Petrochemical Energy Group
(Petrochemical), Natural Council of Farmer Cooperatives (Farmers),
and Sinclair Oil Corporation, Crysen Refining, Inc., Frontier
Refining Company, and Lion Oil Company (Sinclair).
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IV. The Continuation of Market-Based Rates
As in the NOPR, the Commission concludes that oil pipelines may
continue to seek market-based rates on a showing that they do not
possess significant market power in the relevant markets. Most of the
commenters support or do not oppose the continuation of market-based
rates. Only Sinclair and the Farmers oppose the continuation of market-
based rates. Sinclair maintains that there is no need for a market-
based methodology in light of the indexation approach adopted by the
Commission in Order No. 561, coupled with the cost-of-service
alternative. The Farmers argue that market-based ratemaking is not
needed in that the Order No. 561 ratemaking options provide pipelines
with ample flexibility in obtaining just and reasonable rates and that
market-based ratemaking will create an unnecessary potential for abuse
of market power.
The Commission believes that it is appropriate for oil pipelines to
continue to be able to seek market-based rates because this approach
comports with the spirit of the Act of 1992 by retaining a light-handed
regulatory method to complement the indexing approach adopted as the
generally applicable ratemaking methodology for oil pipelines. In
addition, as the Commission has previously stated, a market-based
approach is clearly within the Commission's authority under the ICA.\8\
Further, the Commission believes that the market-based approach will be
of use in circumstances where the oil pipeline needs the flexibility to
compete provided by market-based rates, rather than other approaches.
Under the market-based approach, the oil pipeline will be able to
engage in competitive pricing in order to react to changes in market
conditions, such as increased demand for its service. This can result
in pricing that is both efficient and just and reasonable. As the court
stated in Tejas Power Corp. v. FERC:
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\8\Order No. 561, III FERC Stats. & Regs. 30,985 at p. 30,958;
Cf. Elizabethtown Gas Co. v. FERC, 10 F.3d 866 (D.C. Cir. 1993).
In a competitive market, where neither buyer nor seller has
significant market power, it is rational to assume that the terms of
their voluntary exchange are reasonable, and specifically to infer
that the price is close to marginal cost, such that the seller makes
only a normal return on its investment.\9\
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\9\908 F.2d 998, 1004 (D.C. Cir. 1990).
Traditional regulatory ratemaking is based on historic accounting cost.
But rates based on historic cost do not function well to signal
individuals how to efficiently respond to changes in market
conditions.\10\ Historic cost-based rates, even if indexed for past
inflation, do not perform this function well, which generally requires
one price to change relative to another. Therefore, where appropriate,
it is reasonable to permit a market pricing option.
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\10\The classic statement on the informational role of prices is
F. Hayek, ``The Use of Knowledge in Society,'' American Economic
Review, XXXV(4) 519-30 (September, 1945). On the natural gas
shortage and its relation to historic cost of service ratemaking see
Stephen Breyer and Paul McAvoy, Energy Regulation by the Federal
Power Commission, Brookings 56-88 (1974).
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The Commission is confident that the information provided to it by
the procedural requirements adopted in this rule will permit the
Commission to make informed decisions about market power and prevent
the possibility of abuses of market power. In that vein, both Sinclair
and the Farmers in general support the rules proposed in the NOPR.
Those rules will enable the Commission to comply with Farmers Union by
not permitting market-based rates until there is an affirmative showing
that the oil pipeline lacks significant market power in the relevant
markets.\11\ Such a showing will assure the Commission that the oil
pipeline's prices are just and reasonable.\12\
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\11\Farmers Union Central Exchange, Inc. v. FERC, 734 F.2d 1486,
1510 (D.C. Cir. 1984).
\12\Elizabethtown Gas Co. v. FERC, 10 F.3d 866, 870 (D.C. Cir.
1993), citing Tejas Power Corp. v. FERC, 908 F.2d 998, 1004 (D.C.
Cir. 1990) and Farmers Union Central Exchange, Inc. v. FERC, 734
F.2d 1486, 1510 (D.C. Cir. 1984).
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V. Legal Basis
The oil pipelines raise several legal objections to the proposed
regulations. In brief, they maintain that the Commission has acted
outside of its authority under the Interstate Commerce Act (ICA)\13\
and has contravened the mandate of Section 1802 of the Act of 1992 by
not adopting streamlined procedures for market-based filings.
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\13\49 U.S.C. app. 1 (1988).
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In Order No. 561, the Commission adopted section 342.4(b) of the
regulations, which provides that: ``Until the carrier establishes that
it lacks market power, these rates will be subject to the applicable
ceiling level under Sec. 342.3.'' This rule builds on that requirement
by requiring an oil pipeline to file an application for a market power
determination rather than a rate filing under the ICA. Only after the
Commission concludes that the oil pipeline lacks significant market
power in the markets in which it proposes to charge market-based rates
may it file market-based rates.
The AOPL, Kaneb, and Marathon argue that the Commission has
overstepped its authority under the ICA by precluding an oil pipeline
from charging market-based rates until the Commission has determined
that the oil pipeline lacks significant market power in the relevant
markets. The AOPL and Kaneb maintain that the Commission will be
improperly suspending market-based rates indefinitely when Section
15(7) of the ICA permits suspensions for a period no longer than seven
months. They both contend that the Commission's procedure is
unnecessary in light of the ICA's refund mechanism, which protects the
public interest. The AOPL further maintains that the Commission is
acting inconsistently with its approach to market-based determinations
for gas storage rates while Kaneb contends that the Commission has not
justified disparate treatment between market-based rate filings and
cost-of-service based rate filings, which will be allowed to become
effective, subject to refund. Marathon maintains that the Commission
will violate Section 6(3) of the ICA by opening an investigation before
either a rate can be filed or go into effect.\14\
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\14\Section 6(3) of the ICA provides: No change shall be made in
the rates, fares, and charges or joint rates, fares, and charges
which have been filed and published by any common carrier in
compliance with the requirements of this section, except after
thirty days' notice to the Commission and to the public published as
aforesaid, which shall be plainly indicated upon the schedules in
force at the time and kept open to public inspection: Provided, That
the Commission may, in its discretion and for good cause shown,
allow changes upon less than the notice herein specified, or modify
the requirements of this section in respect to publishing, posting,
and filing of tariffs, either in particular instances or by a
general order applicable to special or peculiar circumstances or
conditions: Provided further, That the Commission is authorized to
make suitable rules and regulations for the simplification of
schedules of rates, fares, charges, and classifications and to
permit in such rules and regulations the filing of an amendment of
change in any rate, fare, charge, or classification without filing
complete schedules covering rates, fares, charges or classification
not changed if, in its judgement, not inconsistent with the public
interest.
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The Commission rejects the above arguments as collateral attacks on
Order No. 561. ARCO recognized that the present rule merely implements
that regulation when it stated that ``the Commission has indicated in
Order No. 561-A that it intends to proceed on the basis that it has
this power'' to prevent an oil pipeline from putting into effect a
market-based rate until the Commission concludes that the oil pipeline
lacks significant market power in the relevant markets.\15\
Nonetheless, the Commission sees no merit in the above arguments.
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\15\Comments at 9.
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The indexing method sets the maximum lawful rate subject to
exceptions which must be proven. For purposes of analyzing the legal
issues presented, the Commission must assume that market-based rates
would be higher than indexed rates because an oil pipeline is free to
file for rates under the index without justification. Hence, an oil
pipeline must show that it is entitled to an exception to charge more
than the index would permit. In this context, the application is in
essence a request for waiver of the maximum rate. Such a moratorium on
filings for market-based rates (except under the application process)
comports with the Commission's power to restrict filings of proposed
rates higher than those determined by the Commission to be just and
reasonable.\16\
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\16\Cf., Permian Basin Area Rate Cases, 390 U.S. 747, 780
(1968). (``The Commission may under Sections 5 and 16 [of the
Natural Gas Act] restrict filings under Section 4(d) of proposed
rates higher than those determined by the Commission to be just and
reasonable.'')
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It is true that this treatment of market-based rates differs from
the Commission's approach to filings by oil pipelines for cost-based
rates. However, the difference is justified. It is appropriate to take
the present action with respect to market-based rates for oil pipelines
in order to ensure that presumed market forces will not be the basis of
effective rates for the transportation of oil when an oil pipeline's
application (i.e., its waiver request) is under consideration.\17\ The
Commission cannot permit market-based rates without an affirmative
showing that the oil pipeline lacks significant market power in the
relevant markets.\18\
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\17\Farmers Union Central Exchange, Inc. v. FERC, 734 F.2d 1486,
1510 (D.C. Cir. 1984).
\18\Id. With respect to the AOPL's contention about gas storage
rates, the Commission notes that those cases were considered mostly
in certificate proceedings. While Koch Gateway Pipeline Company's
proceeding was a rate filing, it involved the continuation of an
experimental program that had been previously approved as part of a
settlement. 66 FERC 61,385 (1994). In addition, oil pipeline market
cases have been lengthy and have gone beyond the statutory
suspension period.
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Because the Commission is taking the approach that an oil pipeline
must file an application for market-based rates, Marathon's reliance on
Section 6(3) of the ICA is misplaced. Simply put, there is no rate
investigation. Rather, the investigation is into whether the oil
pipeline possesses significant market power in the relevant markets.
The AOPL also maintains that the Commission is not authorized by
the ICA to adopt market-power filing requirements. It argues that,
under Section 6(3) of the ICA, an oil pipeline seeking to change its
rates need only file a notice of proposed change with the Commission,
and that the Commission's authority under that action is limited to
rules and regulations for the ``simplification'' of schedules.\19\ The
AOPL adds that the ICA does not require the submission of material in
justification of a proposed rate change unless and until that rate
change is set for hearing. It asserts that the oil pipeline's statutory
burden of proof under Section 15(7) of the ICA does not attach until
the matter is set for hearing.\20\ The AOPL last maintains that the
Commission's characterization of the market power application as a
nonrate filing does not cure the statutory shortcoming because if it is
not a rate filing there is no statutory basis for the application. It
further maintains that, in any event, the characterization is wrong as
shown by the caption of this proceeding and the collection of
information form (FERC 550 ``Oil Pipeline Rates--Tariff Filings'').
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\19\Comments at 18.
\20\Section 15(7) provides in pertinent part:
At any hearing involving a change in a rate, fare, charge, or
classification, or in a rule, regulation, or practice, the burden of
proof shall be upon the carrier to show that the proposed changed
rate, fare, charge, classification, rule, regulation, or practice is
just and reasonable, and the Commission shall give to the hearing
and decision of such questions preference over all other questions
pending before it and decide the same as speedily as possible.
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As discussed in the order in Cost-of-Service Filing and Reporting
Requirements for Oil Pipelines, issued contemporaneously with this
rule, the Commission has the authority to adopt filing requirements
beyond the mere form of notices and schedules. The Commission may
require information upon which to determine how to act on a filing. In
any event, as discussed above, the Commission views the application
required here as in essence a waiver request, which will enable the
Commission to make the required affirmative finding that the oil
pipeline lacks significant market power in the relevant markets before
it permits market-based rates as an exception to the indexing approach.
Nothing in the ICA prevents the Commission from setting forth the
requirements of a waiver request, including placing the burden of proof
on the person seeking the waiver. Even if the application is a rate
change under Section 15(7), the Commission is not compelled to hold a
hearing, but if it does hold a hearing, the hearing may be resolved on
the written record. The required application simply starts the hearing
process and the statutory burden of proof would affix.\21\ With respect
to the AOPL's arguments about the caption to this proceeding, it merely
reflects the end result of the process--market-based rates. Further,
the form for the collection of information merely recognizes the end-
result--oil pipeline rates and, in any event, is purely ministerial.
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\21\The AOPL maintains that the scope of discovery is limited
under the Commission's rules of practice and procedure (18 CFR
385.402(a)) to issues set for hearing. It submits that the
Commission will put the ``procedural cart before the horse by
requiring production of discovery--related information before the
scope of contested issues has been established.'' Comments at 40. As
stated in the text, the Commission has the authority to adopt filing
requirements and to set forth the requirements for a waiver as the
first stage of the investigation.
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The AOPL maintains that the Commission's market power application
process is inconsistent with the Act of 1992 streamlining mandate
because it violates the Act of 1992's requirements that the Commission
``develop streamlined procedures `to avoid unnecessary regulatory costs
and delays','' that ``proceedings address issues raised by parties with
real economic interests, and that Staff initiated proceedings be
limited to `specific circumstances.'''22 It thus ``submits that
the scope of any market power investigation should be limited to (1)
rates subject to a valid protest by an entity with a demonstrated
economic interest in the pipeline's rate, or (2) markets that do not
meet Commission-established screens.''23 It asserts that the
Commission's failure to adopt substantive guidelines does not comply
with the Act of 1992's streamlining mandate.
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\2\2Comments at 25. ARCO, Marathon, and Davis similarly argue
that the Commission has fallen short of the Act of 1992's
streamlining mandate.
\2\3Id.
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The Commission has fully complied with the mandate of the Act of
1992. The Commission has adopted the indexing methodology, which is ``a
simplified and generally applicable ratemaking methodology for oil
pipelines in accordance with section 1(5) of Part I of the
[ICA].''24 And, the Commission has adopted streamlined procedures
with respect to rates established under that methodology. The market-
based ratemaking approach is not generally applicable. Therefore, it
must be optional and oil pipeline specific. Indeed, the Commission
doubts that it could have adopted market-based ratemaking as the
simplified and generally applicable ratemaking methodology in light of
the court's holding in Farmers Union that the Commission cannot presume
the existence of competition or that a competitive price will be within
a just and reasonable range.25 In any event, the Commission
believes that the present regulations, in the spirit of the Act of
1992, indeed streamline procedures as to market-based rates by filling
a regulatory void with respect to procedures and by minimizing burdens
by obtaining data at the outset. This should avoid unnecessary
regulatory costs and delays and result in informed decisions with
respect to all markets in which an oil pipeline seeks to charge market-
based rates rather than the generally applicable indexing methodology
or, if appropriate, cost-based rates. In addition, the Commission's
requirements for standing are applicable.26 Last, there is nothing
in the Act of 1992 even suggesting that the Commission must adopt
substantive guidelines for market-based rates, which, as discussed
below, are not warranted at this time.
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\2\4Section 1801(a) of the Act 1992.
\2\5Farmers Unions Central Exchange, Inc. v. FERC, 734 F.2d
1486, 1510 (D.C. Cir. 1984).
\2\6See section 348.2(g) referring to section 343.2(b).
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C. Disclosure of Confidential Shipper Information
The AOPL maintains that the NOPR's filing procedures will place oil
pipelines in the untenable position of violating their statutory duty
not to disclose confidential shipper information in order to comply
with the rule. The AOPL asserts that the Commission cannot by rule
repeal the statutory protection of confidentiality provided to shipper
information by Section 15(13) of the ICA. The AOPL asks the Commission
``to clarify that nothing in the NOPR is intended to require the
production of shipper information otherwise protected by ICA Section 15
(13).''27
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\2\7Comments at 23.
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Section 15(13) of the ICA makes it unlawful for an oil pipeline to
disclose ``any information concerning the nature, kind, quality,
destination, consignee, or routing of any property tendered to'' the
oil pipeline for transportation, ``which information may be used to the
detriment or prejudice of such shipper or consignee, or which may
improperly disclose his business transactions to a competitor.''
However, Section 15(13) provides certain exceptions to allow ``the
giving of such information in response to any legal process under the
authority of any State or Federal court, or to any officer or any agent
of the Government of the United States * * * in the exercise of its
powers * * *.''
The Commission is concerned about the possibility that an oil
pipeline might violate Section 15(13) and subject itself to a
misdemeanor charge under Section 15(14) of the ICA by disclosing
statutorily protected shipper information. However, the Commission sees
no reason to eliminate the information collection in the proposed rule
on that ground. Under the new procedural rules adopted as
Sec. 348.2,28 the oil pipeline must file its application for a
market power determination with the Commission and provide a copy of
its letter of transmittal, without a copy of the application, to each
shipper and subscriber on or before the day the material is submitted
to the Commission. Thereafter, the shipper or subscriber must make a
written request for a copy of the oil pipeline's complete application,
which must be provided by the oil pipeline.
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\2\8See infra.
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The Commission will adopt the following additional approach with
respect to protected shipper information. First, under the exception
provided by Section 15(13), the Commission in this order authorizes an
oil pipeline to disclose information and materials necessary for it to
file its application, which disclosure in the absence of this order
might be deemed to violate Section 15(13). Next, as with all
submissions to the Commission that include privileged information, the
oil pipeline should file its application for a market power
determination with a request for privileged treatment under Section
388.112 of the Commission's regulations. As required by that section,
the oil pipeline must indicate the information for which it is seeking
privileged treatment, including identification of the material subject
to Section 15(13) of the ICA. However, for administrative convenience,
the Commission is requiring the oil pipeline to file the original
application and three copies in an unredacted form rather than only the
original as required by section 388.112(b)(ii) of the Commission's
regulations. The oil pipeline must file the remaining eleven copies
required by section 348.2(a) of this rule and by Section 388.112(b)
without the information for which privileged treatment is sought as
required by section 388.112(b)(iii).
In addition, the Commission will require the pipeline to submit a
proposed form of protective agreement with its request for privileged
treatment and with its letter of transmittal to its shippers and
subscribers. Any shipper or subscriber seeking a complete copy of the
oil pipeline's application must provide the oil pipeline with an
executed copy of the protective agreement at the time it requests a
copy of the oil pipeline's application. The Commission will act
expeditiously to resolve any controversies about protective agreements.
This approach is similar to that used in litigated cases to prevent the
disclosure of sensitive information29 and akin to that suggested
by the AOPL in its comments to the NOI. This approach will be
sufficient to prevent the use of the information to the detriment or
prejudice of a shipper and will not result in the improper disclosure
of business transactions to a competitor.30 Hence, there will be
no violation of Section 15(13).
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\2\9See, e.g., Phillips Pipe Line Co., Order to Produce Shipper
Information and Enter Protective Order, Docket No. IS94-1-000
(January 19, 1994).
\3\0Id.
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VI. Substantive Guidelines and Screens and Alternative Procedures
The Commission will not adopt substantive standards, including
screens and rebuttable presumptions at this time. Instead, the
Commission will continue to develop oil pipeline precedents on a case-
by-case basis through the application procedure adopted by this rule.
The AOPL, Marathon, and ARCO maintain that the Commission should
adopt market power guidelines in this rule. The AOPL contends that the
absence of those guidelines threatens to impose undue burdens on all
participants in a market-based rate proceeding. They further assert
that the NOPR's reliance on a lack of consensus was misplaced because
the Administrative Procedure Act (APA) does not require consensus as a
prelude to adoption of a final rule and that, in any event, there was
substantial support for streamlining market power determinations. It
believes that without such substantive guidelines a market power
presentation will be too elaborate and unfocussed because the oil
pipeline will fear selecting an analytical model that unknown to it is
disfavored by the Commission. It thinks the industry is facing a
``regulatory vacuum.''
The AOPL, Marathon, and ARCO suggest the Commission adopt certain
guidelines and threshold screens in connection with establishing
rebuttable presumptions as a means of streamlining market power
determinations. They maintain that the oil pipelines should be able to
use BEAs31 as their geographic markets without justification as
proposed by the NOPR. They further submit that the relevant product
market should be delivered pipelineable petroleum products (AOPL) or
delivered pipelineable barrels of both refined and unrefined products
(Marathon). They also maintain that the Commission should establish
market power screens to establish rebuttable presumptions in connection
with market power determinations. Marathon suggests an HHI32 of
2500. ARCO suggests screens of a market share based on actual
deliveries or capacity of less than 45 percent into, for example, a BEA
or a market share of 55 percent combined with an HHI of 2500 or less
based on capacity data. The AOPL refers to those screens as suggested
by Williams33 and Buckeye34 and refers to a third threshold
of a ten percent market share for potential waterbased traffic.
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\3\1The term BEA refers to United States Department of Commerce,
Bureau of Economic Analysis Economic Areas. BEAs are geographic
regions surrounding major cities that are intended to represent
areas of actual economic activity.
\3\2The HHI stands for the Herfindahl-Hirschman Index, which
calculates market concentration by summing the squares of individual
market shares of all the firms in the market. For example, if each
of four firms has a 25 percent share of the market, the HHI for the
market would be .2500 ((.25 x .25)4) or 2500 in nontechnical terms.
\3\3Williams Pipe Line Co., 68 FERC 61,136 (1994).
\3\4Buckeye Pipe Line Co., 53 FERC 61,473 (1990), order on
reh'g, 55 FERC 61,084 (1991).
---------------------------------------------------------------------------
On the other hand, Alberta, Total, the Farmers, and Sinclair
support the Commission's decision not to set substantive standards and
to develop precedents on a case-by-case basis. They agree with the NOPR
that no consensus exists among affected groups about substantive
standards and maintain that the Commission should not consider
establishing substantive standards until it has gained more experience
from a number of applications for market rates. Total and the Farmers
submit that the Commission properly rejected the use of HHIs as screens
to avoid arbitrary results. Sinclair approves of the Commission's
decision not to establish generic standards about geographic markets
and to place the burden on the oil pipeline to show the relevance of
any BEA.
The Commission recognizes that the APA does not require a consensus
to adopt rules. However, here, where the Commission has the very
limited experience of two oil pipeline proceedings with respect to
market power determinations, this lack of consensus among the parties
most affected suggests to the Commission that it should proceed
cautiously on a case-by-case basis to ensure that markets are not
presumed to be competitive.35 Hence, the Commission at this time
is not adopting substantive guidelines and screens.36
---------------------------------------------------------------------------
\3\5Farmers Union Central Exchange, Inc. v. FERC, 734 F.2d 1486,
1510 (D.C. Cir. 1984).
\3\6The comments to the NOI, among other things, indicated a
lack of consensus about the use of BEAs and the appropriate level
for an HHI screen.
---------------------------------------------------------------------------
The Commission sees no regulatory vacuum as asserted by the AOPL.
The Commission's procedural regulations set forth clearly what matters
are pertinent in determining significant market power--e.g., geographic
and product markets, HHIs and market share. The Commission does not
view the lack of screens as unfair or unduly burdensome. As with any
proponent, the oil pipeline must make its most persuasive case for its
position.
With respect to specific screen issues, the Commission is not ready
to adopt BEAs as the defined or presumed geographic market in the
absence of more experience in determining relevant geographic markets.
Similarly, the Commission is not ready to adopt a specific definition
of product market. Nor can the Commission at this time adopt
presumptions about market power determinations. The Commission prefers
to gain more experience with specific cases to develop HHI (market
concentration) and market power criteria for oil pipelines.37
These issues should all be pursued cautiously on a case-by-case basis
to ensure that markets are not assumed to be competitive. Of course, as
more experience is gained, precedent can serve as well as presumptions
to provide guidance.
---------------------------------------------------------------------------
\3\7Geographic and product markets and HHIs and market power are
also discussed infra.
---------------------------------------------------------------------------
The AOPL contends that the proposed application process is unfair
because an oil pipeline must shoulder its burden of proof prior to
knowing whether the competitiveness of a market has been challenged.
Both the AOPL and ARCO suggest alternative procedures based on the use
of screens. Total, the Farmers, Petrochemical, and Sinclair approve of
the Commission's procedural rules requiring the oil pipeline to file a
case-in-chief at the outset. Total maintains that this will lessen the
burden on parties to a market power case. It suggests that the burden
could be further minimized and the analytical quality of the data
enhanced if the Commission would direct staff to aggregate oil pipeline
data by origin and destination markets.38
---------------------------------------------------------------------------
\3\8In example, Total states that: ``delivery-based market
shares of pipelines can be aggregated to calculate delivery-based
HHIs. The availability of such studies to shippers would minimize
their burden of constructing an answer to a pipeline's direct
case.'' Comments at 2, 3.
---------------------------------------------------------------------------
As indicated above, the Commission is not adopting any market power
screens. Hence, it rejects the AOPL's and ARCO's proposed alternative
procedures. In any event, the Commission sees no unfairness in adopting
the proposed case-in-chief approach in lieu of the ``Buckeye''
approach.39 The Commission is requiring no more than an oil
pipeline bear its burden of proof in a fashion that ensures that there
is no reliance on presumed market forces.40 Last, the Commission,
as part of this rule, sees no reason to direct staff to aggregate oil
pipeline data.
---------------------------------------------------------------------------
\3\9In general, an oil pipeline tariff filing was not suspended
or investigated unless it was protested. Under the ``Buckeye''
approach, if its rates were protested, the oil pipeline could elect
at the hearing to prove it lacked significant market power, filing
its case-in-chief after discovery. See Buckeye Pipe Line Co., 44
FERC 61,066 (1988).
\4\0Farmers Union Central Exchange, Inc. v. FERC, 734 F.2d 1486,
1510 (D.C. Cir. 1984).
---------------------------------------------------------------------------
ARCO suggests that if an oil pipeline's indexed-based rates are
challenged as substantially exceeding its increase in costs, the oil
pipeline should be allowed to advance a market-based justification of
those rates in a Buckeye bifurcated procedure. The Commission rejects
ARCO's suggestion because it is appropriate to keep cost challenges to
indexed rates separate from market-based rate cases. For example, under
ARCO's proposal, if the oil pipeline failed in its market-based
defense, it would still be able to defend on cost grounds. The
Commission believes it better for the oil pipeline to defend solely on
cost grounds under Order No. 561. An oil pipeline may file an
application for market-based rates at any time.
Buckeye asks about noncompetitive markets after others are found to
be competitive. It asks the Commission to clarify that it will ``permit
substantially competitive pipelines to propose alternative ratemaking
programs or approaches that do not apply the index to their less
competitive markets.''41 It also is concerned about the difficulty
of an allocation of costs between competitive and noncompetitive
markets under a cost-of-service analysis if raised by the shipper or
oil pipeline.
---------------------------------------------------------------------------
\4\1Comments at 8. Buckeye refers to its own program but states
that it does not suggest that it be addressed here.
---------------------------------------------------------------------------
The Commission sees no need to discuss Buckeye's requests and
concerns here. Any oil pipeline seeking a waiver from the index for
another approach for noncompetitive markets may file such a waiver
request with its application for market-based rates.
VII. Monitoring and Constraints
As in the NOPR, the Commission proposes no generic constraints on
the level of market-based prices or on their duration. In addition, the
Commission proposes no mechanism to monitor market-based rates.
Sinclair maintains that the Commission, to discharge its
responsibilities under the ICA, must impose price caps and term limits
on market-based rates. The Farmers submit that any market-based rates
should be experimental and for a trial period such as the three-year
period allowed in Buckeye. They argue that this will allow the
Commission and shippers to judge whether competition is actually
effective in a particular market. In addition, they maintain that the
final rule should require applicants for market-pricing authority to
propose specific safeguards against the risk that competition will not
effectively constrain rate increases.
Alberta maintains that the Commission should require an oil
pipeline to file comprehensive information about the markets in which
it is charging market rates so that the Commission can examine whether
the pipeline has been able to exercise significant market power. It
also suggests that the Commission monitor an oil pipeline's earnings
because comparison of its earnings prior to using market rates to its
earnings thereafter may indicate that it has exerted monopoly power.
Alberta further suggests the Commission reconsider adopting a rate
trigger mechanism as a safeguard against monopoly rents and to provide
a tolerance level around rates to ensure they do not stray from a zone
of reasonableness.
The Commission concludes that there is no need to adopt generic
rules about constraints on the level or duration of market-based
prices. This is a matter to be considered in individual cases in light
of the circumstances there. The Commission does not consider the
market-based rate approach for oil pipelines generically as
experimental or in need of a trial or in need of generic safeguards,
such as rate triggers. All such issues can be discussed in the context
of an individual case.
The Commission will be able to adequately monitor market-based
rates through price changes because the oil pipeline must file its
rates. In addition, the Commission can monitor the oil pipeline's
aggregate earnings through its Form No. 6 filing.
VIII. The Rule
The Commission is amending subchapter P of its regulations,
Regulations Under the Interstate Commerce Act, by adding a new Part 348
to those regulations. Section 348.1(a) requires an oil pipeline to file
a statement of position and supporting statements with its application.
Section 348.1(b) provides that an oil pipeline's statement of position
must include an executive summary of its statement of position and a
statement of material facts. The latter must include citation to the
supporting statements, exhibits, affidavits, and prepared testimony. In
its statement of position, the oil pipeline would be expected to
present its arguments in favor of its position that it lacks
significant market power in the relevant markets. The Commission
received no comments about the specifics of Sections 348.1(a) and
(b).42
---------------------------------------------------------------------------
\4\2The argument that it is unfair to require the oil pipeline
applicant to file a case-in-chief at the outset was discussed above.
---------------------------------------------------------------------------
Section 348.1(a) requires that an oil pipeline seeking a market
power determination include with its application the information
required by section 348.1(c). Under section 348.1(c) the oil pipeline
must include certain designated information. The information required
is mostly factual and is relevant to measuring the oil pipeline's
ability to exercise market power in the relevant markets. That
measurement will enable the Commission to determine whether the oil
pipeline can exercise significant market power by profitably
maintaining its prices significantly above competitive levels for a
significant period.
The Commission is requiring the oil pipelines to essentially file
the same information as the Commission has analyzed in the past in oil
pipeline proceedings with respect to market power determinations. In
brief, the Commission is first requiring the oil pipeline to define the
relevant markets to be analyzed. It must identify the geographic areas
and the products to be analyzed to establish the relevant markets for
which to determine market power. For example, the inquiry might be,
does the oil pipeline possess significant market power over the
transportation of crude oil into the Houston area? Further, the
Commission is requiring the oil pipeline to identify the competitive
transportation alternatives for its shippers, including potential
competition, and other competition constraining its rates. Finally, the
oil pipeline must compute the market concentration for the relevant
markets (the HHI) and other market power measures based on the
information provided about competition. The Commission will be able to
analyze the oil pipeline's information and its measures of market
concentration and power to determine if the oil pipeline lacks
significant market power in the relevant markets.
If a record about a market has been established in an oil pipeline
proceeding, another oil pipeline may make use of all or part of that
record in satisfying its burden to present information to the extent
the other record contains relevant public information which is not out-
of-date.43 The Commission turns to the specific supporting
statements.
---------------------------------------------------------------------------
\4\3FERC Stats. & Regs. Proposed Regulations 32,508 at p.
32,889.
---------------------------------------------------------------------------
A. Statement A--Geographic Market
In Statement A, the Commission is requiring that the oil pipeline
describe the geographic markets in which it seeks to make a showing
that it lacks significant market power. The oil pipeline must explain
why its method for selecting the geographic markets is appropriate. The
Commission also is requiring the oil pipeline to include both relevant
origin and destination markets in its evidentiary presentation. This
will provide interested parties with complete information about
competition at the supply and delivery ends of the pipeline system. The
Commission is not requiring the oil pipeline to file a market analysis
of each point-to-point corridor. The Commission concludes that, in
light of the significant point-to-point traffic in the oil pipeline
industry, this would be too onerous a requirement at the filing stage,
that a point-to-point corridor analysis may exclude competitive
alternatives to the relevant service and, in some instances, it could
provide an inaccurate picture of market concentration. However, a
protestant may, as part of its response to the oil pipeline's
application, seek to prove that in the particular circumstances a
point-to-point corridor approach should be used to determine the
appropriate geographic market.
The Commission is not requiring an oil pipeline to file pursuant to
any particular geographic market definition. But the Commission expects
that oil pipelines will propose to use BEAs as their geographic
markets. In that event, the burden will be on the oil pipeline to
explain why its use of BEAs or any other definition of the geographic
market is appropriate. If a pipeline uses BEAs, it must show that each
BEA represents an appropriate geographic market. Of course, the oil
pipeline may choose to define its relevant geographic markets at a sub-
BEA level, such as by a given radius around its terminals. As with
BEAs, the oil pipeline must explain why this geographic market
definition is appropriate.
The AOPL, ARCO, and Marathon maintain that the Commission should
establish BEAs ``as the generally applicable means for determining
relevant geographic markets'' or ``[a]lternatively the `explanation'
that use of BEAs to define relevant geographic markets complies with
Commission precedent should satisfy a pipeline's obligation to explain
its chosen approach.''44 The AOPL refers to Buckeye and Williams
as such precedents employing BEAs to define relevant geographic
markets.
---------------------------------------------------------------------------
\4\4AOPL's comments at 41.
---------------------------------------------------------------------------
Alberta, Total, and the Farmers support the Commission's geographic
market proposal. Alberta maintains that the geographic size of markets
will depend on many factors. Total submits that there are many
instances where BEAs are larger than a relevant geographic market area,
such as where a pipeline needs two terminals to serve distinct
population centers. It further states that it does not object to the
Commission's proposal to allow pipelines to submit data on a BEA basis,
provided that shippers have the right to contend that the BEA is too
large. In addition, Total states that it supports the Commission's
conclusion that shippers should be entitled to present information
demonstrating that it may be appropriate to utilize a point-to-point
transportation corridor market as the relevant geographic market. The
Farmers maintain that it is far more realistic to define relevant
geographic markets on a fact basis than on the basis of arbitrary BEAs.
The Commission rejects the oil pipelines' requests with respect to
BEAs. As stated above, the Commission believes that the appropriate
geographic markets should be determined in each proceeding based on its
facts. The burden is on the proponent of any particular definition.
The AOPL also argues against the proposal to include origin
markets. It states that the Commission provided no rationale in the
NOPR and that in Buckeye and Williams the Commission rejected arguments
that it consider origin markets and focused only on destination
markets. It adds that this complexity is not needed when there is
little reason to be concerned about monopsony power in origin markets,
that an analysis of each end of point-to-point service would
significantly increase the burden on oil pipelines, and that the
definition of origin market is a matter of some uncertainty owing to
interconnections. The AOPL asserts that a competitive analysis of
origin markets should be required only when proposed by an oil pipeline
or if a shipper raises an issue of market power in origin markets.
On the other hand, Alberta and the Farmers support the Commission's
proposal to include origin markets. Alberta maintains that an oil
pipeline need only possess market power in either an origin or
destination market to exert market power in a transportation corridor.
The Farmers state that while the NOPR properly allows protestants to
seek corridor market definitions, there is no justification for
requiring protestants to bear the burden of proof and that if a
protestant raises the issue of corridor market power, the burden of
proof should remain with the applicant as part of its overall burden of
establishing the relevant geographic market.
The Commission concludes that it is appropriate to include origin
markets in the geographic market information. At this time, the
Commission is still concerned about the possibility of monopsony power.
The Commission agrees with the Farmers that the ultimate burden of
proof is on the oil pipeline to establish the relevant geographic
market. However, a proponent of corridor geographic markets must come
forward with an adequate presentation to warrant rebuttal by the oil
pipeline.
B. Statement B--Product Markets
In Statement B, the Commission is requiring the oil pipeline to
identify the product market or markets for which it seeks to establish
that it lacks significant market power. The oil pipeline must explain
why the particular product definition is appropriate.
Under the ICA, the Commission regulates the transportation of oil
by pipeline.45 In a market power analysis, the Commission must
determine the oil pipeline's ability to exercise market power over this
transportation service. However, a market power analysis in general
cannot be made solely in the context of transportation rates. Where
competitive alternatives constrain the applicant's ability to raise
transport prices, the effect of such constraints are ultimately
reflected in the price of the commodity transported. Hence, the
delivered commodity price (relevant product price plus transportation
charges) generally will be the relevant price to be analyzed for making
a comparison of the alternatives to a pipeline's services. However, in
some instances such as for origin markets or crude oil pipelines, it
may be appropriate to make a case based only on transportation rates. A
pipeline may elect to file such a case and a protestant may argue that
such a case is appropriate. In either event, the burden of establishing
the relevant product market remains on the oil pipeline.
---------------------------------------------------------------------------
\4\549 U.S.C. 1(1)(b).
---------------------------------------------------------------------------
The Commission is not requiring a specific way to define the
product markets. The relevant product market first would be
distinguished between the transportation of crude oil and the
transportation of refined products. Crude oil transportation could
further be divided to include transportation of natural gas liquids
while products transportation could be delineated by type, such as
motor gasoline, distillates, or jet fuel. The oil pipeline should, in
the first instance, select its product market and the burden is on the
oil pipeline to justify its choice.
The AOPL argues that the Commission is unjustifiably retreating
from the standard of Buckeye and Williams--``delivered pipelineable
petroleum products.'' It maintains that this standard should be the
generally applicable method for identifying relevant product markets,
with participants free to argue for exceptions as appropriate.
Total maintains that the Commission has correctly recognized that
crude and product markets can and should be divided further into
differentiated products. It argues that, in order to minimize the need
for discovery, the Commission should require that the delivery data be
submitted by crude and product type and that capacity relied upon in
HHI calculations should be segregated by crude types and product types.
It further submits that oil pipelines should be further required to
identify all alternatives of the same crude type or products which are
being transported by the pipeline seeking a market-power demonstration.
The Commission reiterates that it is up to the oil pipeline to
identify the product market or markets for which it seeks to establish
that it lacks significant market power. As stated above, the Commission
is not establishing at this time any presumptions as suggested by the
AOPL. Nor will the Commission require the oil pipeline to submit
information by crude and product type as proposed by Total. This would
be too onerous at the outset. However, in identifying competition, as
suggested by Total, the type identification should match that of the
oil pipeline's commodity type used to determine the product market.
The AOPL also contends that the Commission's discussion of
transportation in the product context is ``problematic.'' It argues
that if it ``is intended to address relevant price for the purpose of
comparing competitive alternatives to all pipeline transportation, it
simply is misplaced and should be shifted to a discussion of how to
define market power,'' but if the Commission intends to require
relevant product markets to be defined to include transportation, or
the transportation of particular products, the discussion would
represent a significant break with Buckeye and Williams which
recognized that relevant product market could include non-
transportation alternatives, such as refiners.46 It asks the
Commission at a minimum to clarify that ``no such narrowing of the
definition of `relevant product markets' was intended.''47
---------------------------------------------------------------------------
\4\6Comments at 44.
\4\7Id.
---------------------------------------------------------------------------
The Commission is not narrowing the definition of relevant product
market by defining it in terms of the transportation of the commodity.
That definition of relevant product market simply recognizes that the
Commission regulates the transportation rate. As the AOPL maintains,
non-transportation factors, such as competition from refiners, are an
element in an analysis of an oil pipeline's market power with respect
to the pertinent product.
Sinclair is concerned about the NOPR's statement that ``the
delivered commodity price (relevant product price plus transportation
charges) generally will be the relevant price.''48 It assumes, and
seeks clarification, that the term ``product'' applies to both
petroleum products and crude oil. It further urges that the Commission
``state that the use of any delivered price concept in a market power
analysis is directed to the market power which a pipeline exercises
with respect to shippers--not with respect to the price ultimate
consumers pay for refined petroleum products.'' It maintains that the
Commission should do this because shippers, and not end users, are the
protected class under the ICA.49 Sinclair further urges the
Commission to reflect on the particular situations in which the
delivered price concept is useful in market power analysis, such as in
developing the geographic contours of the market. It further contends
that it must be recognized that it is a pipeline's ability to increase
its transportation rates, and not the delivered price, that must be the
ultimate focus of the analysis. It specifically refers to crude oil
origin markets, where the net-back price is pertinent, and to captive
refiners in the origin market of a product pipeline, which refiner
could be adversely affected by a rate increase by an inability to raise
prices in the retail market. Sinclair suggests that protestants should
always be given the opportunity to conduct discovery and present
evidence with respect to a pipeline's ability to unilaterally raise its
transportation rates and that there should not be any narrow bounds on
the relationship between the commodity price and a pipeline's market
power.
---------------------------------------------------------------------------
\4\8IV FERC Stats. & Regs. Proposed Regulations 32,508 at p.
32,890.
\4\9Citing Williams Pipeline Co., 21 FERC 61,260 at p. 61,584
(1982).
---------------------------------------------------------------------------
Sinclair is right that the product referred to in the NOPR was both
petroleum products and crude oil. Sinclair is also correct that the
Commission's analysis reflects market power vis a vis shippers and not
consumers. This is because, whether or not the ICA is intended to
protect consumers, it is the rate paid by shippers that must be just
and reasonable.50 Sinclair's other arguments should be presented
in a particular case when the Commission must consider the appropriate
determination of the geographic and product market. The Commission will
consider requests for discovery when it determines what future
proceedings are appropriate after protests are filed.
---------------------------------------------------------------------------
\5\0Farmers Union Central Exchange, Inc. v. FERC, 734 F.2d 1486,
1507 (D.C. Cir. 1984).
---------------------------------------------------------------------------
C. Statement C--Pipeline Facilities and Services
In Statement C, the Commission is requiring the oil pipeline to
describe its own facilities and services in the relevant markets
identified in Statements A and B. Statement C must include all
pertinent data about the pipeline's facilities and services in those
markets. For example, without limitation, the oil pipeline would have
to include data on the capacity of its facilities, on its throughput,
on its receipts in its origin markets, on its deliveries in its
destination markets and to its major consuming markets, and the mileage
between its terminals and its major consuming markets. Data should be
supplied for each commodity carried, such as jet fuel, gasoline, etc.
The AOPL maintains that, aside from its origin market objection,
the proposed Statement C would require extremely sensitive shipper
receipt and delivery information, which, in many instances, would
constitute disclosure of confidential shipper information in violation
of Section 15(13) of the ICA. It adds that disclosure of data for each
commodity carried would compound the problem. It makes two requests.
First, Statement C should be streamlined to require only information
likely to influence the ultimate market power determination and,
second, some mechanism must be developed to safeguard the
confidentiality of the information filed.
Alberta and Total support the Commission's proposal to collect
detailed data. Total adds that the Commission should direct its staff
to aggregate delivery data submitted by all pipelines serving each BEA
and calculate delivery-based HHIs because the availability of such
studies would reduce the need and difficulty of obtaining such data in
discovery. It further states that the delivery data also will be useful
to determine the extent of excess capacity and to determine the
likelihood that terminals would be constructed in response to a rate
increase because it is necessary to know the extent of available
uncommitted upstream capacity and supplies to serve a new terminal.
The Commission rejects the AOPL's request that Statement C require
only data likely to influence the ultimate market power determination
because it would enable the oil pipeline to make that determination at
the outset. The AOPL's concern about safeguarding the confidentiality
of sensitive information is being addressed through a change in
procedures as discussed above. In this rule, the Commission will not
direct staff to collect aggregate delivery data and calculate delivery-
based HHIs. However, if the Commission receives sufficient data to make
collection warranted, it may reconsider this in the future.
D. Statement D--Competitive Alternatives
In Statement D, the Commission is requiring the oil pipeline to
describe available transportation alternatives in competition with the
oil pipeline in the relevant markets and other competition constraining
the oil pipeline's rates in those markets. To the extent available,
Statement D must include all pertinent data about transportation
alternatives and other constraining competition. For example, the oil
pipeline would have to include data similar to that provided for its
own facilities and services in Statement C, including cost and mileage
data in specific reference to the oil pipeline's terminals and major
consuming markets. The following transport and other competition might
be included in a market power calculation: Other pipelines, including
private pipelines and those passing through the geographic market but
without terminals, pipelines passing near the geographic market,
barges, trucks, and refineries within the geographic market. The
Commission is not excluding any alternative form of transport or other
competition, including, for example, local consumption in origin
markets. However, the burden is on the oil pipeline to justify its
inclusion of transportation alternatives and other competition in its
market power analysis.
The AOPL maintains that the Statement D-type information lies
largely beyond a pipeline's reach. It declares it highly unlikely that
a competing pipeline will provide information such as throughput,
origin market receipts, destination market deliveries, and deliveries
to major consuming markets, particularly by commodity. It states that
to do so would be illegal. It also argues that Statement D potentially
requires the production of much ultimately useless information. It
requests the Commission to require ``only information or estimates
concerning matters ultimately affecting the Commission's determination
of market power'' and to require only ``publicly available information
or [the oil pipeline's] best estimate of competitive
alternatives.''51
---------------------------------------------------------------------------
\5\1Comments at 46.
---------------------------------------------------------------------------
The Commission denies the AOPL's first request. As stated above,
permitting the oil pipeline to submit information or estimates that
only affects the Commission's determination of market power will enable
it to make that determination at the outset. With respect to the second
request, the Commission has modified the proposal in the NOPR to
require the oil pipeline to include pertinent data only to the extent
available. Hence, as requested by the AOPL, the oil pipeline need only
file information that is publicly available or its best estimates of
competitive alternatives, unless the oil pipeline possesses additional
information. Of course, it is in the oil pipeline's interest to make
its best case to satisfy its burden of proof.
E. Statement E--Potential Competition
In Statement E, the Commission is requiring the oil pipeline to
describe potential competition in the relevant markets. To the extent
available, Statement E must include data about the potential
competitors such as a potential entrant's costs and their distance in
miles from the oil pipeline's terminal and major consuming markets.
The AOPL asserts that the most reliable information is possessed by
shippers and not pipelines. It states that it has no objection so long
as the pipeline's best estimates of potential competition drawn from
publicly available information are acceptable.
The Commission has modified the proposal in the NOPR to require the
oil pipeline to include data only to the extent available. Hence, as
proposed by the AOPL, an oil pipeline need only submit its best
estimates of potential competition drawn from publicly available
information, unless the oil pipeline possesses additional information.
Of course, it is in the oil pipeline's interest to make its best case
to satisfy its burden of proof.
F. Statement F--Maps
In Statement F, the Commission is requiring maps showing the oil
pipeline's principal transportation facilities and the points at which
service is rendered under its tariff, the direction of flow of each
line, the location of each of the oil pipeline's terminals, the
location of each of its major consuming markets (cities, airports, and
the like, as appropriate), and the location of alternatives to the oil
pipeline, including their distance in miles from oil pipeline's
terminals and major consuming markets. The statement must include a
general system map and maps by geographic markets and the information
required by this statement may be on separate pages. No commenter
opposed Statement F.
G. Statement G--Market Power Measures
In Statement G, the Commission is requiring the oil pipeline to set
forth the calculation of the HHI52 and its market share with
respect to the relevant markets and the calculation of other market
power measures relied on by the oil pipeline, along with complete
particulars about those calculations. The Commission believes that it
is useful to obtain a showing of market concentration using the HHI.
The HHI must include the oil pipeline and the competitive alternatives
set forth in Statements D and E. The burden is on the oil pipeline to
justify the individual market shares used in calculating the HHIs. In
addition, the Commission is not proposing any particular HHI level,
such as 1800 or 2500, as a screen or presumption, rebuttable or
otherwise. All factors must be considered in determining whether an oil
pipeline lacks significant market power.
---------------------------------------------------------------------------
\5\2Id.
---------------------------------------------------------------------------
The Commission also is requiring the oil pipeline to submit a
market share calculation based on its receipts in its origin markets
and its deliveries in its destination markets, if the HHIs are not
based on those factors. For example, if the destination HHIs are based
on capacity determined market shares, the oil pipeline would have to
submit a calculation showing its share of the market based on
deliveries in the respective destination markets. The Commission is not
proposing any screen or presumption, rebuttable or otherwise, about
particular market share levels. All factors must be considered in
determining whether an oil pipeline lacks significant market power.
The oil pipeline may also include other indicators of the lack of
significant market power for example, it could present evidence about
water transportation as an indication that the oil pipeline lacks
significant market power.
The AOPL objects to the inclusion of origin market information in
HHI and market share calculations and to the production of underlying
HHI and market share calculations as part of an initial submission,
particularly where a market's HHI or pipeline market share is so low as
to preclude a challenge to the market's competitiveness. The AOPL also
maintains that market share data for HHIs should reflect market
capacity and not market deliveries. It argues that the use of delivery
data distorts the analysis of market behavior because it is at best a
``snapshot'' of the market as it existed prior to any purported try to
exercise market power rather than a gauge of the potential of the
market to respond to such an exercise. It maintains that this
prospective response can be evaluated best by considering the market's
capacity to respond. It also argues that delivery data are not readily
available and of questionable accuracy unlike capacity data which tend
to be a matter of public information and more readily available.
Total supports the collection of delivery data in order to
calculate market shares. It further maintains that the delivery
information should be aggregated in order to calculate delivery-based
HHIs to provide the Commission with a picture of how the market is
actually behaving inasmuch as this understanding is essential to
analyzing the rule of potential competition.
As discussed above, the Commission considers it appropriate to
include origin markets in a determination of market power because it is
not ready to exclude the possibility of oil pipeline monopsony power.
The Commission is permitting oil pipelines to submit HHIs based on
capacity rather than on deliveries. They need submit delivery based
data only for market share as another factor to consider in making the
determination whether or not an oil pipeline possesses significant
market power. At this time, the Commission is not going to aggregate
data, but may do so at a later time.
H. Statement H--Other Factors
In Statement H, the oil pipeline would describe any other factors
that bear on the issue of whether it lacks significant market power in
the relevant markets. The oil pipeline must explain why those other
factors are pertinent. Possible other factors are: Exchanges, Excess
Capacity, Competition with vertically integrated companies, buyer
power, and profitability. The Commission is not excluding any factor
and is not limiting the factors to those listed in the NOI. For
example, an oil pipeline might want to show that it has been losing
markets over a period of years or that the relevant market is
expanding. The burden is on the oil pipeline to show the relevance of
any factor to showing its lack of significant market power. No
commenter opposed Statement H.
I. Statement I--Proposed Testimony
In Statement I, the Commission is requiring the oil pipeline to
present proposed testimony in support of its application. This will
serve as its case-in-chief if the Commission sets the application for
hearing. The proposed witness must subscribe to the testimony and swear
that all statement of facts in the proposed testimony are true and
correct to the best of his or her knowledge, information, and belief.
The AOPL opposes Statement I because it does not believe it should
present a case-in-chief prior to the filing of a protest as discussed
above. In addition, it argues that the filing of a case-in-chief at
this stage raises significant due process concerns because it cannot
conduct discovery, as it can now, of other shippers prior to submitting
its case. It points out that all participants except the oil pipeline
will be able to conduct discovery before first filing prepared
testimony. It asks, at a minimum, that an oil pipeline should receive a
15-day period after its initial filing to submit proposed testimony.
There is no entitlement to discovery before an applicant files a
case-in-chief. In addition, the Commission has not ruled that a
participant is entitled to discovery from the oil pipeline or any one
else before it files a protest and its responsive case.53 Last,
the AOPL has provided no justification for a 15-day delay in filing its
proposed testimony.
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\5\3See infra.
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The Commission expects the oil pipeline to file a complete
application which should contain sufficient information upon which the
Commission could grant the application after expiration of the protest
period. However, in the event the Commission finds it necessary to
establish a hearing, that process would be greatly expedited because
the applicant's testimony is part of the record already. Thus, this
requirement is intended to expedite the hearing process. The
Commission's experience with gas pipelines, for example, has been that
the proposed testimony often provides essential justification for the
applicant's proposal which is not provided elsewhere in the filing. It
has been the Commission's experience that the process of proposing
sworn testimony often causes an applicant to organize its arguments and
facts in a manner that is easier to understand. This also aids the
protestants in their framing of the issues to pursue.
IX. Procedural Requirements
In new section 348.2 the Commission is adopting several procedural
requirements in connection with applications for a market power
determination. First, an oil pipeline must file an original and 14
copies of its complete application with the Commission but would only
have to provide its letter of transmittal to its shippers and
subscribers. As discussed above, some of the supporting information may
be prohibited from disclosure under Section 15(13) of the ICA. Hence,
the oil pipeline must submit with its application any request for
privileged treatment of documents and information under Section 388.112
of the Commission's regulations and a proposed form of protective
agreement. In the event the oil pipeline requests privileged treatment
under Sec. 388.112, it must file the original and three copies of its
application with the information for which privileged treatment is
sought and 11 copies of the application without that information. The
letter of transmittal must describe the application for a market power
determination and identify each rate that would be market-based, if the
oil pipeline shows that it lacks significant market power in the
relevant market. The pipeline must include a copy of its proposed form
of protective agreement with its letter of transmittal.
Under the regulations, a person must make a written request to the
pipeline for a copy of the complete application within 20 days after
the filing of the application with the Commission. The requesting
person must include an executed copy of the protective agreement. Any
person objecting to a proposed form of protective agreement must file a
motion under Section 385.212 of the Commission's regulations.54
The oil pipeline must provide a person with a copy of its complete
application within seven days after receipt of the written request and
an executed copy of the protective agreement. A protestant must file
its protest to the application within 60 days after the filing of the
application. At that time, the protestant must set forth in detail its
grounds for opposing the oil pipeline's application, including
responding to its statement of position and information, and, if the
protestant desires, presenting information of its own pursuant to
Statements A-I.
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\5\4The Commission will act expeditiously to resolve any
controversies about protective agreements.
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The Commission, after examination of the oil pipeline's application
and any protests, will issue an order in which it will rule summarily
on the application or, if appropriate, establish additional procedures
and the scope of the investigation. Additional procedures may or may
not involve a hearing before an administrative law judge.
The Commission is requiring the oil pipelines to file their
applications with the Commission on an electronic medium in addition to
the paper filing. The formats for the electronic filing and the paper
copy will be obtainable at the Federal Energy Regulatory Commission,
Public Reference and Files Maintenance Branch, 941 North Capitol
Street, N.E., Washington, D.C. 20426. The Commission intends to
establish the formats in cooperation with the oil pipeline industry.
The Commission believes that it is sufficient to adopt procedures
only for the submission of applications and responses thereto. Hence,
the Commission is not adopting any regulations with respect to protests
or complaints against existing market-based rates under Sections 15(7)
and 13(1) of the ICA. However, the Commission expects a protestant or
complainant to allege and to present evidence that the pipeline has
developed significant market power. In particular, the Commission would
expect a protestant or complainant to describe any circumstances that
have changed since the Commission made the determination that the oil
pipeline lacks significant market power and could charge market-based
rates.
Petrochemical requests that the Commission publicly notice any oil
pipeline rate filing in the Federal Register as further assurance that
any notice of a proposed rate change is widely disseminated. It further
asks the Commission to clarify that ``pursuant to proposed regulation
Sec. 348.2(b), the copy of the letter of transmittal that is to be
provided to shippers and subscribers on or before the day the
application is filed, must be received by the shipper or subscriber
prior to the date of the application. In other words, the deadline is
an in-hand receipt date, not a posted for mailing date.''55 It
contends that this is necessary to avoid erosion of the 15-day window
for requesting a copy of the entire application.
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\5\5Comments at 5.
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It has not been the Commission's practice to publicly notice oil
pipeline tariff filings in the Federal Register because the oil
pipeline must serve all affected persons. However, the Commission has
modified the proposal in the NOPR to require written requests 20 days
after the application was filed rather than 15 days. This should
satisfy Petrochemical's concern about the deadline running from the
date of application rather than receipt by the shipper.
Alberta, Petrochemical, and Sinclair maintain that protestants need
more time than 60 days after the filing of the application as proposed
in the NOPR. Alberta and Petrochemical suggests that the deadline for
filing protests be extended to 90 days.
The Commission believes that protestants will be able to respond
within 60 days of the filing of the application. However, if this
period is insufficient in a particular case, then additional time can
be requested from the Commission under Section 385.2008 of the
Commission's regulations. The Commission will act liberally in
connection with requests for an extension of time.
Petrochemical requests clarification that a complete copy of the
application provided to protestants will include the materials
submitted in electronic format. It argues that the ``ability to obtain
cost and other data in electronic form would save vast amounts of money
that would otherwise be spent in the redundant task of taking a hard
copy generated from computers and then reentering the data into
computer format so that studies and analyses can be performed on the
data.''\56\ The Commission clarifies, as requested by Petrochemical,
that the complete copy of the application must include the materials
submitted in electronic format.
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\56\Comments at 6.
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Davis submits that if ``electronic medium'' is defined as computer
modem-based electronic equipment, the electronic filing requirement may
be a hardship on small independent pipeline companies. Davis suggests
the requirement be permissive. Davis also maintains that proposed
sections 348.2 (b) and (c) are redundant to current procedure and place
an additional burden on oil pipelines.
The Commission is not modifying its requirement that applications
must be submitted on an electronic medium. However, an oil pipeline may
submit a waiver request. Last, with respect to Davis' redundancy
argument, the Commission sees to harm in repetition as the new
regulations merely reiterate in part current procedure for convenience.
The Farmers maintain that the protestants have a right to a hearing
where a case involves substantial issues of fact, law, or ratemaking
policy. They argue that because the time for preparing a rebuttal is so
short, shippers need the opportunity for normal prehearing and hearing
procedures to present a meaningful response to an oil pipeline's case-
in-chief and to obtain clarification or explanation of the applicant's
evidence. Alberta also suggests that ``all proceedings must receive
full hearing before an Administrative Law Judge (ALJ) to ensure that
all evidence is thoroughly tested and the Commission has a complete
evidentiary record on which to base its decision.''\57\
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\57\Comments at 4.
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The Commission believes that the procedures for proceeding on an
application for a market power determination should be tailored to the
specifics of the case. Hence, the Commission will make no generic
decisions here. The protestants should make their request for a hearing
before an ALJ when they file their protests. The oil pipeline
applicants may make their request after the protests are filed. The
Commission is not establishing provisions for limited discovery. The
oil pipeline and the protestants should file their case-in-chiefs and
responsive pleadings without discovery. The Commission believes that
the oil pipeline and the protestants should have sufficient information
available from public sources or their own experience to submit their
cases. Of course, the Commission encourages the informal exchange of
information to expedite and facilitate the application process. The
protestants may request discovery when their protests are filed. The
oil pipeline applicants may request discovery after the protests are
filed. Both requests must provide a full explanation for the need for
discovery, a hearing, or both.
X. Environmental Analysis
The Commission is required to prepare a Environmental Assessment or
an Environmental Impact Statement for any action that may have a
significant adverse effect on the human environment.\58\ The Commission
has categorically excluded certain actions from these requirements as
not having a significant effect on the human environment.\59\ The
action taken here is procedural in nature and therefore falls within
the categorical exclusions provided in the Commission's
regulations.\60\ Therefore, neither an environmental impact statement
nor an environment assessment is necessary and will not be prepared in
this rulemaking.
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\58\Order No. 486, Regulations Implementing the National
Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Statutes
and Regulations, Regulations Preambles 1986-1990 30,783 (1987).
\59\18 CFR 380.4.
\60\See 18 CFR 380.4(a)(2)(ii).
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XI. Reporting Flexibility Certification
The Regulatory Flexibility Act (RFA)\61\ generally requires the
Commission to describe the impact that a rule would have on small
entities or to certify that the rule will not have a significant
economic impact on a substantial number of small entities. An analysis
is not required if a rule will not have such an impact.\62\ Most oil
pipelines to whom the rule will apply do not fall within the definition
of small entity.\63\ Consequently, pursuant to section 605(b) of the
RFA, the Commission certifies that the regulations will not have a
significant impact on a substantial number of small entities.
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\61\5 U.S.C. 601-612.
\62\5 U.S.C. 605(b).
\63\Section 601(c) of the RFA defines a ``small entity'' as a
small business, a small not-for-profit enterprise, or a small
governmental jurisdiction. A ``small business'' is defined by
referent to section 3 of the Small Business Act as an enterprise
which is ``independently owned and operated and which is not
dominant in its field of operation.'' 15 U.S.C. 632(a).
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XII. Information Collection Requirements
The Office of Management and Budget's (OMB) regulations\64\ require
that OMB approve certain information and recordkeeping requirements
imposed by an agency. The information collection requirements in this
rule are contained in FERC-550 ``Oil Pipeline Rates'' Tariff Filings''
(1902-0089).
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\64\5 CFR 1320.14.
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The Commission's Office of Pipeline Regulation uses the data
collected in these information requirements to investigate the rates
charged by oil pipeline companies subject to its jurisdiction, to
determine the reasonableness of rates, and when appropriate prescribe
just and reasonable rates. In addition, the information to be required
by the rule would allow the Commission to determine if an oil pipeline
lacks significant power in the relevant markets when it proposes to
charge market-based rates.
Because the adoption of the procedural rules will create an
expected increase in the public reporting burden under FERC-550, the
Commission is submitting a copy of the rule to OMB for its review and
approval. Interested persons may obtain information on these reporting
requirements by contacting the Federal Energy Regulatory Commission,
941 North Capitol Street, N.E., Washington, D.C. 20426 [Attention:
Michael Miller, Information Services Division, (202) 208-1415].
Comments on the requirements of this rule can be sent to the Office of
Information and Regulatory Affairs of OMB (Attention: Desk Officer for
Federal Energy Regulatory Commission).
XIII. Effective Date
The final rule will be effective January 1, 1995.
List of Subjects in 18 CFR Part 348
Pipelines, Reporting and recordkeeping requirements.
By the Commission.
Lois D. Cashell,
Secretary.
In consideration of the foregoing, the Commission adds Part 348,
Chapter I, Title 18, Code of Federal Regulations, to read as follows:
PART 348--OIL PIPELINE APPLICATIONS FOR MARKET POWER DETERMINATIONS
Sec.
348.1 Content of application for a market power determination.
348.2 Procedures.
Authority: 42 U.S.C. 7101-7352; 49 U.S.C. 60502; 49 App. U.S.C.
1-85.
Sec. 348.1 Content of application for a market power determination.
(a) If, under Sec. 342.4(b) of this chapter, a carrier seeks to
establish that it lacks significant market power in the market in which
it proposes to charge market-based rates, it must file and provide an
application for such a determination. An application must include a
statement of position and the information required by paragraph (c) of
this section.
(b) The carrier's statement of position required by paragraph (a)
of this section must include an executive summary of its statement of
position and a statement of material facts in addition to its complete
statement of position. The statement of material facts must include
citation to the supporting statements, exhibits, affidavits, and
prepared testimony.
(c) The carrier must include with its application the following
information:
(1) Statement A--geographic market. This statement must describe
the geographic markets in which the carrier seeks to establish that it
lacks significant market power. The carrier must include the origin
market and the destination market related to the service for which it
proposes to charge market-based rates. The statement must explain why
the carrier's method for selecting the geographic markets is
appropriate.
(2) Statement B--product market. This statement must identify the
product market or markets for which the carrier seeks to establish that
it lacks significant market power. The statement must explain why the
particular product definition is appropriate.
(3) Statement C--the carrier's facilities and services. This
statement must describe the carrier's own facilities and services in
the relevant markets identified in statements A and B in paragraphs (c)
(1) and (2) of this section. The statement must include all pertinent
data about the pipeline's facilities and services.
(4) Statement D--competitive alternatives. This statement must
describe available transportation alternatives in competition with the
carrier in the relevant markets and other competition constraining the
carrier's rates in those markets. To the extent available, the
statement must include all pertinent data about transportation
alternatives and other constraining competition.
(5) Statement E--potential competition. This statement must
describe potential competition in the relevant markets. To the extent
available, the statement must include data about the potential
competitors, including their costs, and their distance in miles from
the carrier's terminals and major consuming markets.
(6) Statement F--maps. This statement must consist of maps showing
the carrier's principal transportation facilities, the points at which
service is rendered under its tariff, the direction of flow of each
line, the location of each of its terminals, the location of each of
its major consuming markets, and the location of the alternatives to
the carrier, including their distance in miles from the carrier's
terminals and major consuming markets. The statement must include a
general system map and maps by geographic markets. The information
required by this statement may be on separate pages.
(7) Statement G--market power measures. This statement must set
forth the calculation of the market concentration of the relevant
markets using the Herfindahl-Hirschman Index. The statement must also
set forth the carrier's market share based on receipts in its origin
markets and deliveries in its destination markets, if the Herfindahl-
Hirschman Index is not based on those factors. The statement must also
set forth the calculation of other market power measures relied on by
the carrier. The statement must include complete particulars about the
carrier's calculations.
(8) Statement H--other factors. This statement must describe any
other factors that bear on the issue of whether the carrier lacks
significant market power in the relevant markets. The description must
explain why those other factors are pertinent.
(9) Statement I--prepared testimony. This statement must include
the proposed testimony in support of the application and will serve as
the carrier's case-in-chief, if the Commission sets the application for
hearing. The proposed witness must subscribe to the testimony and swear
that all statements of fact contained in the proposed testimony are
true and correct to the best of his or her knowledge, information, and
belief.
Sec. 348.2 Procedures.
(a) A carrier must file, as provided in Sec. 341.1 of this chapter,
an original plus fourteen copies of its application, including its
statement of position, statements, and related material, and a letter
of transmittal and must submit its application on an electronic medium.
The formats for the electronic filing and the paper copy can be
obtained at the Federal Energy Regulatory Commission, Division of
Public Information, 825 North Capitol Street, N.E., Washington, D.C.
20426. A carrier must submit with its application any request for
privileged treatment of documents and information under Sec. 388.112 of
this chapter and a proposed form of protective agreement. In the event
the carrier requests privileged treatment under Sec. 388.112 of this
chapter, it must file the original and three copies of its application
with the information for which privileged treatment is sought and 11
copies of the application without the information for which privileged
treatment is sought.
(b) A carrier must provide a copy of its letter of transmittal and
its proposed form of protective agreement to each shipper and
subscriber on or before the day the material is transmitted to the
Commission for filing.
(c) A letter of transmittal must describe the market-based rate
filing, including an identification of each rate that would be market-
based, and the pertinent tariffs or supplement numbers, state if a
waiver is being requested and specify the statute, section, subsection,
regulation, policy or order requested to be waived. Letters of
transmittal must be certified pursuant to Sec. 341.2(c)(2) of this
chapter and acknowledgement must be requested pursuant to
Sec. 341.2(c)(3) of this chapter.
(d) An interested person must make a written request to the carrier
for a copy of the carrier's complete application within 20 days after
the filing of the application. The request must include an executed
copy of the protective agreement. Any objection to the proposed form of
protective agreement must be filed under Sec. 385.212 of this chapter.
(e) A carrier must provide a copy of the complete application to
the requesting person within seven days after receipt of the written
request and an executed copy of the protective agreement.
(f) A carrier must provide copies as required by paragraphs (b) and
(e) of this section by first-class mail or by other means of
transmission agreed upon in writing.
(g) Any intervention or protest to the application must be filed
within 60 days after the filing of the application and must be filed
pursuant to Secs. 343.2 (a) and (b) of this chapter. A protest must
also be telefaxed if required by Sec. 343.3(a) of this chapter.
(h) A protest filed against an application for a market power
determination must set forth in detail the grounds for opposing the
carrier's application, including responding to its position and
information and, if desired, presenting information pursuant to
Sec. 348.1(c).
(i) After expiration of the date for filing protests, the
Commission will issue an order in which it will summarily rule on the
application or, if appropriate, establish additional procedures and the
scope of the investigation.
[FR Doc. 94-27620 Filed 11-15-94; 8:45 am]
BILLING CODE 6717-01-P
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.