XIII. Oil Pipeline Regulation

Transcription

1 XIII. Oil Pipeline Regulation Elisabeth R. Myers, Steven H. Brose, Eugene R. Elrod, and Dena E. Wiggins A. Introduction B. Rulemaking FERC Indexing Notice of Inquiry Pipeline Safety Legislation C. Ratemaking Proceedings Market-Based Rate Applications Mobil Pipe Line Co. Application for Market-Based Rate Authorization Rate Issues C. Tariff Rules Issues Western Refining Southwest Inc. and Western Refining Pipeline Co. v. TEPPCO Crude Pipeline, LLC Enterprise TE Products Pipeline Co. LLC (Enterprise TEPPCO) D. Jurisdictional Issues E. TAPS Issues and 2006 Trans Alaska Pipeline System (TAPS) Interstate Rate Proceedings TAPS Interstate Rate Proceedings TAPS Quality Bank A. INTRODUCTION The key developments in oil pipeline regulation since the 2010 PUCAT Report include the Federal Energy Regulatory Commission s (FERC) issuance of a notice of inquiry (NOI) inviting comments on its five-year review of its oil pipeline pricing index and recent developments related to pipeline safety. These and other matters of interest are summarized below. Elisabeth R. Myers is a partner in the Washington, D.C., office of Husch Blackwell LLP and chair of the Oil Pipelines Committee. Steven H. Brose is a partner in the Washington, D.C., office of Steptoe & Johnson LLP. Eugene R. Elrod is a partner in the Washington, D.C., office of Sidley Austin LLP. Dena E. Wiggins is a partner in the Washington, D.C., office of Ballard Spahr Andrews & Ingersoll, LLP. Ms. Wiggins and Messrs. Brose and Elrod are vice chairs of the Oil Pipelines Committee. The committee acknowledges with great appreciation the contribution to the preparation of this report by Daniel J. Poynor and William Flynn of Steptoe & Johnson LLP; Christopher M. Lyons, Kurt H. Jacobs, and Kelly J. McFadden of Sidley Austin LLP; Shannon P. Coleman and Shannon M. Bañaga of Husch Blackwell LLP; and Charles F. Caldwell and Catherine O Harra of Vinson & Elkins LLP. 317

2 318 RECENT DEVELOPMENTS 2011 B. RULEMAKING 1. FERC Indexing Notice of Inquiry (Docket No. RM10-25) On June 15, 2010, FERC invited comments on its five-year review of its oil pipeline pricing index established in Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of by issuing an NOI. 2 The index for the current five-year period is the producer price index for finished goods (PPI-FG) plus 1.3 percent (PPI-FG+1.3). In the NOI, FERC sought comments on the appropriate pricing index for the five-year period beginning July 1, FERC proposed to continue using PPI-FG+1.3, but invited parties to submit comments on the continued use of PPI+1.3 and to propose, justify, and fully support any alternatives to the indexing procedures. 3 Comments were filed by the Association of Oil Pipe Lines (AOPL), Valero Marketing and Supply Co., Navajo Refining Co., Air Transport Association of America, National Propane Gas Association, Sinclair Oil Corp., Tesoro Refining and Marketing Co., American Trucking Association, Society for the Preservation of Oil Pipeline Shippers, and Canadian Association of Petroleum Producers (CAPP). On December 16, 2010, FERC adopted an index of PPI-FG plus 2.65 percent for the next five-year period. 4 FERC agreed with a proposal made by Valero to rely on the middle 50 percent of the data set instead of both the middle 50 percent and the middle 80 percent. FERC rejected Valero s proposal to exclude from the data set certain pipelines with changes in rate base of greater than 50 percent and Valero s suggestion that FERC use Page 700 data instead of underlying Form data. With respect to excluding pipelines with rate base changes greater than 50 percent and use of Page 700 data, FERC agreed with AOPL that it should continue to apply the established methodology. FERC rejected the proposals of the other commentators. Various parties filed requests for rehearing, which remain pending. CAPP filed a petition for review with the District of Columbia Circuit that it later withdrew. 2. Pipeline Safety Legislation Pipeline safety is currently governed by the Pipeline Inspection Protection, Enforcement and Safety Act of 2006 (PIPES Act). This Act strengthened and reauthorized the pipeline safety program administered by the Pipeline and Hazardous Materials Safety Administration (PHMSA) within the U.S. Department of Transportation (DOT). This program, which has its roots in several earlier acts, was reauthorized through the end of September PHMSA oversees more than 2.2 million miles of natural gas, oil, and liquids pipelines and is charged with 1. Order No. 561, FERC Stats. & Regs. [Regs. Preambles, ] 30,985 (1993). 2. Five-Year Review of Oil Pipeline Pricing Index, Docket No. RM10-25, 131 FERC 61,228 (June 15, 2010). 3. Id. at P Five-Year Review of Oil Pipeline Pricing Index, Docket No. RM10-25, 133 FERC 61,228 (Dec. 16, 2010).

3 OIL PIPELINES 319 ensuring safety in design, construction, testing, operation, and maintenance of pipeline facilities. Last year, however, several pipeline incidents once again drew increased political attention to the pipeline safety program. In September 2010, a natural gas explosion in San Bruno, California shortly after leaks in a pipeline that brings crude oil from Canada into the Midwest once again focused congressional attention on the scope of the pipeline safety program. In 2010, the DOT released proposed legislation designed to give PHMSA increased oversight over pipeline safety matters, including provisions to increase the maximum fines for violations from $1 million to $2.5 million; add forty additional inspectors and other enforcement personnel to PHMSA; and study whether certain pipeline safety rules that currently only apply to high consequence areas should be applied more broadly to all pipelines. Although the congressional committees with jurisdiction over pipeline safety matters held several hearings on reauthorizing the PIPES Act during the 111th Congress, no action on pipeline safety was taken, thus leaving the current level of funding and the current scope of the program intact. As the 112th Congress began, new proposed legislation to reauthorize the PIPES Act has been introduced and likely will be discussed at hearings held by the responsible committees.the hearings held to date reveal the usual tensions between concerns for safety versus those over the cost and ultimate consumer expense of implementing increasingly strict safety requirements. In the meantime, the National Association of Regulatory Utility Commissioners has announced the establishment of a formal working task force led by Arkansas Public Service Commission chair Colette Honorable. The task force will interact with member public service commissioners, the federal government, and consumer and industry stakeholders and is expected to play a leading role in analyzing pipeline safety issues, best practices, and advocacy efforts in Congress and with the federal agencies. C. RATEMAKING PROCEEDINGS 1. Market-Based Rate Applications Mobil Pipe Line Co. Application for Market-Based Rate Authorization (Docket No. OR07-21) On August 24, 2007, Mobil Pipe Line Co. (MPLCO) filed an application for authorization to charge market-based rates on the Pegasus pipeline. The Pegasus pipeline primarily transports Western Canadian crude oil that is shipped to its origination point via two pipeline routes from Alberta from Patoka, Illinois, to Nederland, Texas. By order dated December 20, 2007, FERC found that MPLCO lacked significant market power in its Houston to Lake Charles destination market and set for hearing the issue of whether MPLCO lacks market power in the pipeline s origin market. 5 MPLCO and FERC trial staff presented testimony 5. Mobil Pipe Line Co., Docket No. OR07-21, 121 FERC 61,268 (Dec. 20, 2007).

4 320 RECENT DEVELOPMENTS 2011 and evidence indicating that MPLCO did not have market power with respect to Pegasus, while CAPP, Suncor Energy Marketing, Inc., and Canadian Natural Resources Limited opposed MPLCO s application. Following a hearing in early 2009, presiding judge Karen V. Johnson issued an initial decision (ID) on August 5, 2009, 6 which found that MPLCO s defined upper Midwest origin market was not sufficiently competitive, and that there were no good alternatives to Pegasus in that market. 7 Thus, the decision concluded that MPLCO possessed market power and denied its application to charge marketbased rates. 8 By order dated December 1, 2010, FERC affirmed the decision. 9 In so ruling, FERC adopted a test under which the pipeline s ability to sustain an increase to its tariff rate of 15 percent or more constituted market power. FERC found that there was a netback differential between sales of crude oil in the upper Midwest and sales on the U.S. Gulf Coast (making sales on the U.S. Gulf Coast more profitable), such that the pipeline could raise its rates by more than 15 percent to capture that differential. Accordingly, FERC found that there were no good alternatives to Pegasus in its origin market and that the pipeline should not be permitted to charge market-based rates. 2. Rate Issues a. SFPP, L.P. (Docket Nos. OR92-8/OR96-2 et al.): Chevron Historical Case Settlement On March 15, 2011, FERC approved a comprehensive offer of settlement between SFPP, L.P. and Chevron Products Co.. 10 The settlement is a so-called black box agreement that resolves the remaining portions of a series of ratemaking and complaint cases between the parties that date back to The only currently pending dockets excluded from the offer of settlement are the SFPP East Line and West Line rate cases in Docket Nos. IS and IS08-390, respectively. SFPP s settlement with Chevron follows its recently concluded historic settlement with eleven other litigant-shippers. 11 Chevron had been the only litigant-shipper that was not a party to the earlier settlement. b. SFPP, L.P. (Docket No. IS08-390): West Line Rate Case On February 17, 2011, FERC issued Opinion No. 511, 12 which ruled upon the December 2, 2009, initial decision (2009 ID) on SFPP s June 30, 2008, filing to increase West Line rates. Opinion No. 511 generally affirmed the 2009 ID s conclusions regarding goodwill; allocation of costs among SFPP s affiliates and 6. Mobil Pipe Line Co., Docket No. OR07-21, 128 FERC 63,008 (Aug. 5, 2009). 7. Id. 8. Id. 9. Mobil Pipe Line Co., Docket No. OR07-21, 133 FERC 61,142 (Dec. 1, 2010). 10. SFPP, L.P., Docket Nos. OR92-8/OR96-2 et al., 134 FERC 61,201 (Mar. 15, 2011). 11. SFPP, L.P., Docket No. OR et al., 131 FERC 61,180 (May 28, 2010). 12. SFPP, L.P., Docket No. IS , 134 FERC 61,121 (Feb. 17, 2011).

5 OIL PIPELINES 321 between SFPP s jurisdictional and nonjurisdictional services; and most capital structure, cost of capital, and income tax allowance (ITA) issues. Opinion No. 511 dealt extensively with various challenges raised in this and other proceedings to the ITA policy statement and its application to SFPP, a pipeline owned through an MLP. Opinion No. 511 rejected the claim that there is a double recovery of the ITA in SFPP s allowed return, and ruled instead that legal precedent had established the legality of allowing an ITA for pipelines organized as general partnerships, limited partnerships, MLPs, or other tax pass-through entities. FERC likewise rejected requests that its ITA policy statement be revised to eliminate the ITA for public utilities organized as partnerships. Citing the legislative history of Internal Revenue Code Section 7704, which provides favorable tax treatment to MLPs, FERC concluded that Congress intended to encourage pipeline investment by authorizing favorable tax treatment and found that providing an ITA to MLP-owned pipelines achieves congressional intent. 13 In addressing a number of cost of capital issues, Opinion No. 511 found that purchase accounting adjustments should not be removed from the capital structure of SFPP s parent, Kinder Morgan Energy Partners (KMEP), and that the current portion of long-term debt should be included. Additionally, Opinion No. 511 found the 2009 ID s provision for the pipeline s recovery of its actual regulatory litigation expenses to be inadequate and directed the pipeline to implement a surcharge to recover all of its costs in litigating the rate case. As to the assignment and allocation of KMEP corporate overhead expenses, Opinion No. 511 largely affirmed the 2009 ID, upholding SFPP s methodology. Recognizing the inherent complexity of a large corporate entity such as Kinder Morgan, Inc. (KMI), owner of the general partner of KMEP, FERC endorsed the use of multitiered shared cost assignments and allocations to KMEP s various business segments and the exclusion of various joint ventures and KMI-owned or -operated subsidiaries. This would yield a more accurate allocation of overhead costs to the pipeline and a better matching of cost allocation with cost causation. In so doing, Opinion No. 511 elaborated a materiality standard for determining whether a pipeline s affiliates should be included in the Massachusetts formula allocation. FERC directed SFPP to submit a compliance filing reflecting additional information regarding certain overhead cost recovery matters, revised tariffs, and estimated refunds. c. SFPP, L.P. (Docket No. IS09-437): East Line Rate Case On July 31, 2009, SFPP filed to increase rates on its East Line, claiming that East Line volumes had dropped significantly as a result of declining demand for petroleum products in East Line s Arizona market. SFPP claimed that its East Line costs and revenues diverged by approximately 26.8 percent, thereby meeting FERC s substantial divergence standard for obtaining new cost-based rates. 13. Id. at PP

6 322 RECENT DEVELOPMENTS 2011 Following a hearing before an administrative law judge, FERC issued a September 15, 2010, order accepting and suspending reduced interim rates filed by SFPP on August 16, 2010, and consolidating Docket Nos. IS and IS (SFPP s 2010 Index Filing). 14 The parties filed a joint stipulation that resolved the nominal rate of return on equity, real rate of return, and inflation factor for purposes of calculating SFPP s East Line cost of service. On February 10, 2011, Judge Cintron issued 2011 ID, 15 which ruled upon those issues not addressed by the joint stipulation. Judge Cintron found that SFPP had failed to meet its burden of proof with respect to the majority of the components underlying SFPP s cost-of-service rates and adopted those positions that generally resulted in the lowest cost of service for SFPP. Judge Cintron concluded that an ITA for SFPP would result in a double recovery for investors, but that the stipulated return on equity should not be reduced to account for this double recovery. Such a ruling was precluded by FERC precedent. Judge Cintron issued her decision shortly before the release of Opinion No. 511, discussed above, which addressed a 2009 ID adjudicating the justness and reasonableness of SFPP s West Line. Thus, the 2011 ID diverges from Opinion No. 511 on several issues. Briefs were due April 4 and May 17, SFPP s compliance filing was due April 25, d. SFPP, L.P. and Calnev Pipeline L.L.C.: CPUC General Rate Application, 2009 Rate Increase (A ) On May 12, 2009, SFPP filed an application with the California Public Utilities Commission (CPUC) seeking a 5 percent rate increase for all of its rates except for Watson and ULSD, effective June 15, SFPP s 2009 rate filing was consolidated with the previously consolidated 2008 rate filings of SFPP and Calnev Pipe Line L.L.C. (Calnev), an SFPP affiliate. On June 22, 2010, a CPUC administrative law judge issued a proposed decision declining to allow either SFPP or Calnev to charge market-based rates for transportation of refined petroleum products, but reserving for later decision whether and to what extent rates based on the SFPP and Calnev test year costs of service, including proposed rate increases, are just and reasonable. 16 The proposed decision is advisory in nature and may be rejected, accepted, or modified by the CPUC. The parties filed comments on the proposed decision in July 2010, and the CPUC s ruling is still pending. e. SFPP, L.P.: CPUC Multiyear Rate Cases (A , et al.) SFPP has a number of other pending ratemaking and complaint proceedings before the CPUC in a consolidated proceeding. On April 6, 2010, a CPUC administrative law judge issued a proposed decision on such issues as SFPP s 14. SFPP, L.P., Docket Nos. IS , IS , 132 FERC 61,235 (2010). 15. SFPP, L.P., Docket Nos. IS , IS , 134 FERC 63,013 (2011). 16. See

7 OIL PIPELINES 323 entitlement to an ITA, allocation of environmental expenses, and refunds. 17 The decision, which is the subject of ongoing litigation, was advisory in nature and may be rejected, accepted, or modified by the CPUC. On November 12, 2010, CPUC Commissioner Timothy Simon sponsored an alternate proposed decision similar in all material respects to the April proposal except that it would permit SFPP to continue to include an ITA in its rates. Commissioner Simon s proposal is in line with FERC policy permitting an ITA for all entities or individuals owning public utility assets, provided that an entity or individual has an actual or potential income tax liability to be paid on income from those assets. 18 Both the proposed decision and alternate proposed decision are currently pending CPUC consideration and resolution. f. Mid-America Pipeline Co., LLC (MAPL) (Docket Nos. IS , et al.) The 2009 report discussed the procedural history of this case as well as the initial decision issued by presiding judge Edward M. Silverstein on Septermber 3, After the parties filed briefs on exceptions, FERC in October 2009 approved a settlement agreement that resolved all issues in that proceeding, except the challenges brought by Williams Energy Services, LLC and Williams Power Co., Inc. to the interstate rates of Seminole Pipeline Co. and certain Mid-America/ Seminole joint rates in Docket Nos. OR and IS On February 18, 2010, FERC ruled on Judge Silverstein s initial decision with respect to the remaining issues. 20 On March 22, 2010, MAPL and Seminole filed a compliance filing calculating rates consistent with the order. On April 20, 2010, Williams protested that compliance filing. FERC has yet to rule on that protest. g. Flint Hills Resources v. Mid-America Pipeline Co., LLC (Docket Nos. OR10-2, OR10-11, and IS10-168) On November 5, 2009, Flint Hills Resources, LP filed a complaint against MAPL in Docket No. OR , challenging the reasonableness of MAPL s rates for transporting butane, isobutane, natural gasoline, naphtha, and refinery grade butane (collectively, heavies) on the Northern System portion of MAPL s pipeline system. On February 2, 2010, FERC set the complaint for hearing and held the hearing in abeyance pending the outcome of settlement judge procedures. 21 On March 26, 2010, Flint Hills filed a complaint against MAPL in Docket No. OR , challenging MAPL s rates for transportation of heavies on its Northern System as unduly discriminatory under Sections 2 and 3 of the ICA. On 17. See Id. 19. Mid-America Pipeline Co., LLC, Docket Nos. IS , IS , 124 FERC 63,016 (2008). 20. Mid-America Pipeline Co., LLC, Docket Nos. _IS , IS , 130 FERC 61,123 (2010). 21. Flint Hills Resources, LP v. Mid-America Pipeline Co., LLC, Docket No. OR , 130 FERC 61,086 (Feb. 2, 2010).

8 324 RECENT DEVELOPMENTS 2011 June 1, 2010, FERC set the complaint for hearing pending the outcome of settlement judge procedures and consolidated Docket Nos. OR and OR On March 11, 2010, MAPL filed Supplement No. 2 to FERC Tariff No. 67 in Docket No. IS , which cancelled its transportation service for naphtha and refinery grade butane on the Northern System. On March 26, 2010, Flint Hills filed a motion to intervene and protest. On April 9, 2010, FERC accepted Mid-America s tariff filing and allowed it to take effect three days later without suspension or investigation. 23 On May 10, 2010, Flint Hills filed a request for clarification or, in the alternative, rehearing of that order. Mid-America and Flint Hills subsequently reached a settlement. On July 9, 2010, Flint Hills withdrew its complaints in Docket Nos. OR and OR , as well as its protest and request for clarification in Docket No. IS h. Enbridge Pipelines (Southern Lights) LLC (Docket No. IS10-399) On May 28, 2010, Enbridge Pipelines (Southern Lights) LLC filed FERC Tariff Nos. 1 and 2 24 to begin transportation service on a newly constructed 675-mile pipeline to move diluent 25 from the United States to Canada (the Southern Lights Pipeline). Enbridge Southern Lights proposed a rate for committed volumes of $ per barrel, and a rate of $ per barrel for uncommitted volumes, which is double the committed rate (May 28 Filing). 26 Enbridge sought approval for the rates and the tariffs on the basis that FERC had approved Enbridge s petition for declaratory order in Docket No. OR07-15, and that pursuant to Section 342.2(b) of FERC s regulations, one nonaffiliated shipper that intended to use both the committed and uncommitted service had agreed to the rates. In the declaratory order proceeding, FERC had held that if at the time Enbridge filed its actual rates for the new service there were a protest, Enbridge would be required to file cost, revenue, and throughput data to support the new rates. On June 11, 2010, Imperial Oil and ExxonMobil Oil Corp. (EMOC) (together, indicated shippers) moved jointly and severally to intervene and protested the tariff filing submitted by Enbridge Southern Lights on grounds that the proposed uncommitted rate for Enbridge Southern Lights new diluent service is unjust and unreasonable (June 11 protest). The indicated shippers asked FERC to direct Enbridge Southern Lights to file cost, revenue, and throughput data. 22. Flint Hills Resources, LP v. Mid-America Pipeline Co., LLC, Docket No. OR , 131 FERC 61,207 (June 1, 2010). 23. Mid-America Pipeline Co., LLC, Docket No. IS10-168, 131 FERC 61,012 (Apr. 9, 2010). 24. As a result of Enbridge s Order No. 714, Baseline Tariff Compliance Filing, Enbridge s FERC Tariff Nos. 1 and 2, which were filed in IS10-399, have since been superseded by FERC Tariff Nos and 4.1.0, which are substantively the same and also subject to FERC s June 29, 2010 Order in IS See Letter Order in Docket No. IS issued on Sept. 30, The terms diluent and condensate are used interchangeably in the industry to refer to light hydrocarbon products that are obtained from either refineries or natural gas operations that are used to blend with highly viscous bitumen to facilitate its transportation via pipeline. 26. The committed rate is available to shippers who signed a transportation services agreement with Enbridge. The uncommitted rate is the spot rate for transportation.

9 OIL PIPELINES 325 On June 29, 2010, FERC accepted and suspended the tariff, affirming its prior ruling that under the regulations in the event of a protest, the filing must be cost justified. Accordingly, it permitted the rates to go into effect on July 1, 2010, subject to refund and investigation and to Southern Lights filing cost, revenue, and throughput data pursuant to Part 346 of FERC s regulations to support its initial rates. FERC also set the initial rates for hearing, but held the hearing in abeyance pending the outcome of settlement judge procedures. 27 On July 16, 2010, indicated shippers requested rehearing of FERC s denial of standing to Imperial. While settlement negotiations were ongoing, on December 28, 2010, pursuant to the transportation service agreement (TSA) with committed shippers, which requires Enbridge to recalculate and file new rates each year for the Southern Lights Pipeline, Enbridge filed a new tariff (December 28 tariff filing). 28 Enbridge proposed a rate of $5.4872/bbl for committed volumes and $ /bbl for uncommitted volumes, approximately a 9 percent increase. Enbridge requested an effective date of February 1, On January 7, 2011, the indicated shippers filed a motion to intervene, conditional protest, and request for consolidation with Docket No. IS They submitted a conditional protest on the same grounds as the June 11 protest to ensure that the proposed rates that Enbridge filed in Docket No. IS11-146, superseding the prior rates that were subject to refund and investigation in Docket No. IS10-399, retain that status. On January 31, 2011, FERC accepted and suspended Tariff 4.3.0, consolidated Docket No. IS with Docket No. IS10-399, and granted the indicated shippers rehearing request. 29 FERC found that because the proposed rates are a 9 percent increase over the underlying rates, the same issues concerning whether the rates are just and reasonable apply in Docket No. IS FERC also granted rehearing, finding that although Imperial would not be a shipper, it nonetheless had a substantial economic interest in the rate and therefore had standing to protest. On January 19, 2011, the chief judge issued an order terminating the settlement procedures and appointing Judge Charlotte Hardnett as the presiding judge. 31 i. TransCanada Keystone Pipeline, LP (Docket No. IS11-158) TransCanada Keystone Pipeline, LP (Keystone) recently constructed the Keystone Pipeline to deliver Canadian crude oil from Hardisty, Alberta, to Wood River and Patoka, Illinois (with service commencing on June 30, 2010), and to 27. Enbridge Pipeline (Southern Lights) LLC, Docket No. IS , 131 FERC 61,288 (June 29, 2010). 28. FERC Tariff No superseded FERC Tariff (which had been previously filed by Enbridge to supersede FERC Tariff but then was withdrawn), cancelling FERC Tariff Enbridge Pipeline (Southern Lights) LLC, Docket No. IS , 134 FERC 61,067 (Jan. 31, 2011). 30. Id. at P Enbridge Pipeline (Southern Lights) LLC, Docket Nos. IS and IS ( Jan. 19, 2011).

10 326 RECENT DEVELOPMENTS 2011 Cushing, Oklahoma (with service expected to commence in 2011). The U.S. portion of the pipeline, including the portion that will make deliveries to Cushing, involves the construction of approximately 1,382 miles of pipeline facilities. On April 15, 2010, Keystone filed its initial tariff setting forth rates applicable to transportation on Keystone from the international boundary with Canada near Haskett, Manitoba, to delivery points in Wood River and Patoka. On May 14, 2010, FERC accepted Keystone s initial tariff filings, subject to a compliance filing. 32 Keystone revised its rates to Wood River and Patoka and submitted initial rates to Cushing on January 10, 2011, to be effective February 1, No protests were filed in response to this rate filing. j. TE Products Pipeline Co., LLC (Docket No. IS10-160) On March 1, 2010, TE Products Pipeline Co. (TEPPCO) filed FERC Tariff Nos. 117, 118, and 119, which removed charges for truck loading and odorization services provided at its destination terminals. Two groups of shippers filed motions to intervene and protest, arguing that the terminal facilities were under FERC s jurisdiction and that the services provided at the terminals should be included in TEPPCO s tariffs. FERC rejected the protests and allowed the tariffs to take effect without suspension or investigation. 33 FERC explained that [a] service is subject to the ICA and FERC s jurisdiction only if it is integral or necessary to the pipeline transportation function. 34 Applying that standard, FERC found the terminal services were not jurisdictional for three reasons: (1) the services occurred at the destination point after transportation of propane and butane products has been completed ; (2) neither service was necessary for pipeline transportation, in contrast to the breakout storage tanks in Lakehead that were found to be the functional equivalent of missing pipe ; and (3) many of the terminals connected to the TEPPCO system were operated by nonaffiliated companies that did not file FERC tariffs. 35 FERC concluded that, although TEPPCO may have provided the services as a convenience to shippers, it had no authority to prevent TEPPCO from removing these non-jurisdictional services from its tariff. 36 On April 29, 2010, CHS Inc., Cress Gas Co., Ferrellgas L.P., and the National Propane Gas Association filed a request for rehearing. FERC denied the request on June 28, TransCanada Keystone Pipeline, LP, Docket No. IS11-158, 131 FERC 61,139 (May 14, 2010). 33. TE Product Pipeline Co., LLC, Docket No. IS10-160, 130 FERC 61,257, at P 13 (Mar. 30, 2010). 34. Id. at P 13 (citing Lakehead Pipe Line Co., L.P., 71 FERC 61,338, at 62,325 (1995), order on reh g, 75 FERC 61,181, at 61,601 (1996)). 35. Id. at P Id. at P TE Products Pipeline Co., LLC, Docket No. IS , 131 FERC 61,277 (June 28, 2010).

11 OIL PIPELINES 327 C. TARIFF RULES ISSUES 1. Western Refining Southwest Inc. and Western Refining Pipeline Co. v. TEPPCO Crude Pipeline, LLC (Docket No. OR ) Western Refining Southwest Inc. and Western Refining Pipeline Co. (collectively, Western) filed a complaint against TEPPCO Crude Pipeline, LLC 38 on February 9, Western alleged that TEPPCO Crude had violated its statutory, regulatory, and contractual obligations to them by reversing the flow of its pipeline, retaining crude oil that belonged to them, and continuing to demand lease payments. Western sought damages for these alleged violations. In its answer to the complaint, TEPPCO Crude asserted that because Western s allegations concerned business arrangements under private contracts not subject to FERC s jurisdiction, FERC should dismiss the complaint. More specifically, TEPPCO Crude indicated that it (1) leased pipeline capacity to one of the Western parties and thus was not a common carrier under the ICA with respect to that party; (2) it reversed the flow of one of its pipelines after it became clear that Western could not use that line; (3) its tariff permitted such a reversal; and (4) it could have reversed the line again promptly. By order dated June 22, 2009, FERC dismissed the complaint. 39 FERC found that the dispute under the capacity lease agreement was not subject to its jurisdiction and that Western must pursue the claims in state court. 40 FERC also found that TEPPCO Crude was not a common carrier with respect to Western and agreed with TEPPCO Crude that its tariff allowed for bidirectional movements. 41 Finally, FERC denied a motion from Resolute Natural Resources Co. and Resolute Aneth, LLC to intervene and request to consolidate the proceedings with ongoing proceedings in another docket. 42 On July 20 and July 21, 2009, respectively, Western and Resolute filed requests for rehearing of FERC s order. FERC issued an order denying the requests for rehearing on October 22, Contrary to Western s allegations, FERC found that it had fully investigated the complaint by examining all of the submitted pleadings, affidavits, and exhibits and that it was not required to take evidence or hold a hearing under the ICA. 44 Additionally, FERC reiterated its prior finding that FERC lacked jurisdictional authority over the private contractual dispute between Western and TEPPCO Crude, and found that it had adequately explained 38. Effective March 8, 2010, TEPPCO Pipeline changed its name to Enterprise Crude Pipeline, LLC. 39. Western Refining Southwest, Inc., et al. v. TEPPCO Crude Pipeline, LLC, Docket No. OR , 127 FERC 61,288 (June 22, 2009). 40. Id. at PP Id. 42. Id. at P Western Ref. Southwest, Inc. v. TEPPCO Crude Pipeline, LLC, Docket No. OR , 129 FERC 61,053, at P 13 (Oct. 22, 2009). 44. Id. at PP 7, 17.

12 328 RECENT DEVELOPMENTS 2011 its reasoning in the June 22 order. 45 Finally, FERC denied Resolute s request for rehearing because Resolute was not a party to the lease agreement, did not claim to have a third-party beneficiary interest, and had not shipped crude oil on the pipeline segments implicated in the complaint. 46 On December 17, 2009, Western filed in the Fifth Circuit a petition for review of FERC s orders dismissing the complaint and denying the requests for rehearing Enterprise TE Products Pipeline Co. LLC (Enterprise TEPPCO) (Docket No. IS10-203) On April 13, 2010, Enterprise TEPPCO filed tariffs referencing a change to the maximum inventory requirements in the company s propane inventory policy. By letter order dated May 13, 2010, FERC found the minimum inventory requirement had been unchanged and that the proposed maximum inventory requirement appears to be necessary for the efficient and reliable operation of the pipeline. FERC accepted the tariffs subject to Enterprise TEPPCO filing its prorationing and inventory policies within 15 days of the date of [the] order, and subject to further FERC review and order. 48 On May 19, 2010, Enterprise TEPPCO filed its inventory policy with FERC. On June 3, 2010, the Propane Group filed a request for rehearing of FERC s order. On July 2, 2010, the Office of Energy Market Regulation issued a letter to Enterprise TEPPCO with a series of data requests related to the new inventory policy. Enterprise TEPPCO filed its response on July 16, On October 12, 2010, FERC granted the Propane Group s request for rehearing in part and established a hearing to investigate the justness and reasonableness of Enterprise TEPPCO s propane inventory policy. 49 FERC held the hearing in abeyance pending ongoing settlement judge procedures. D. JURISDICTIONAL ISSUE On November 30, 2010, ConocoPhillips Co. filed a complaint against Enterprise TEPPCO alleging that Enterprise TEPPCO had failed to provide transportation upon reasonable request. 50 For a number of years, Enterprise TEPPCO and ConocoPhillips had been parties to an exchange agreement under which ConocoPhillips provided propane from its refinery in Trainer, Pennsylvania, in exchange for propane from Mont Belvieu, Texas. On March 25, 2010, Enterprise TEPPCO 45. Id. at PP Id. at P Western Refining Southwest, et al v. FERC, et al., Case No Enterprise TE Prods. Pipeline Co. LLC, Docket No. OR , 131 FERC 61,134, at P 11 (May 13, 2010). 49. Enterprise TE Products Pipeline Co. LLC, Docket No. OR , 133 FERC 61,032 (2010). 50. ConocoPhillips Co. v. Enterprise TE Products Pipeline Co. LLC (Docket No. OR ).

13 OIL PIPELINES 329 provided notice terminating the exchange agreement effective March 31, ConocoPhillips asked FERC to require Enterprise TEPPCO to (1) continue to participate in the exchange agreement, (2) include the terms of the exchange agreement in Enterprise TEPPCO s tariff along with any other exchange agreements to which Enterprise TEPPCO is a party, and (3) list ConocoPhillips Trainer refinery as an origin in Enterprise TEPPCO s tariff and publish initial rates from that origin to all Enterprise TEPPCO destinations. On March 4, 2011, FERC dismissed the complaint. 51 FERC held that the exchange agreement was a private contract to trade propane that did not constitute transportation under the ICA and was therefore not subject to FERC s jurisdiction. FERC further found that Enterprise TEPPCO was not required to make the Trainer refinery an origin point, because Trainer is located on the eastern terminus of a line on which Enterprise TEPPCO is not offering east to west service. 52 FERC further held that even if Enterprise TEPPCO were offering east to west or bi-directional service on the [line in question], it could cancel or abandon such service at any time. 53 E. TAPS ISSUES and 2006 Trans Alaska Pipeline System (TAPS) Interstate Rate Proceedings (Docket Nos. IS05-82, et al.) The Reports summarized the proceedings concerning the TAPS Carriers and 2006 interstate rates, which led to FERC s Opinion No. 502 and related orders on rehearing. 55 Petitions for review of Opinion No. 502 and the related rehearing orders were filed in the D.C. Circuit in 2008, and the court consolidated these petitions in Flint Hills Resources Alaska, Inc. v. FERC, Docket No Petitioners and intervenors included the TAPS Carriers, Flint Hills Resources Alaska, LLC, Petro Star Inc., the State of Alaska and Anadarko Petroleum Corp., Tesoro Corp., and Tesoro Alaska Co. (the last three collectively, Anadarko/ Tesoro). In their appeal, the TAPS Carriers, Flint Hills, and Petro Star challenged FERC s treatment of the TAPS settlement agreement, including FERC s use of selected elements of that agreement in establishing cost of service rates for the TAPS Carriers and its failure to apply its new ratemaking methodology for TAPS 51. ConocoPhillips Co. v. Enterprise TE Products Pipeline Co. LLC, Docket No. OR , 134 FERC 61,174 (Mar. 4, 2011). 52. Id. at P Id. 54. The TAPS Carriers are the owners of the TAPS: BP Pipelines (Alaska) Inc. (BPPA), ConocoPhillips Transportation Alaska Inc., ExxonMobil Pipeline Co., Koch Alaska Pipeline Co. LLC, and Unocal Pipeline Co. (Unocal). 55. BP Pipelines (Alaska) Inc., Docket No. IS et al., 123 FERC 61,287 (June 20, 2008) (Opinion No. 502); BP Pipelines (Alaska) Inc., 61,215 (2008); BP Pipelines (Alaska) Inc., Docket No. IS et al., 127 FERC 61,317 (June 30, 2009).

14 330 RECENT DEVELOPMENTS 2011 prospectively. These parties also appealed certain of FERC s rulings concerning dismantling, removal, and restoration funds. Finally, these parties challenged FERC s rulings requiring the TAPS Carriers to enter into a pooling agreement and to charge a uniform rate, although BPPA did not join the other petitioners in these pooling and uniform rate arguments. The state challenged FERC s ruling that the TAPS Carriers interstate rates were not unduly discriminatory vis-à-vis their intrastate rates because FERCestablished rates for 2005 and 2006 rendered moot any potential discrimination. According to the state, its discrimination claim was not rendered moot and should trump FERC-mandated refund floor and permit FERC to order more extensive refunds from the TAPS Carriers. Anadarko/Tesoro argued that the court should uphold Opinion No. 502 and the related rehearing orders. BPPA joined in portions of Anadarko/Tesoro s brief on the pooling and uniform rate issues. On December 3, 2010, the court issued its decision in which it (1) denied the TAPS Carriers challenges to FERC s ratemaking determinations; (2) denied the state s discrimination claims and challenges to the refund floor; and (3) found that FERC s orders regarding pooling and the uniform rate were unripe TAPS Interstate Rate Proceedings (Docket Nos. IS09-348, et al.) At various points during 2009, the TAPS Carriers submitted new rate filings. These rate filings were protested by the state and Anadarko. The protestants contended that the 2009 rate filings were unjust and unreasonable on a number of grounds, including the proposed rate of return, the 2034 life of the line, and the treatment of costs relating to the TAPS Carriers strategic reconfiguration program a program pursuant to which the TAPS Carriers and their agent in the operation and maintenance of TAPS, Alyeska Pipeline Service Co. are electrifying and automating certain TAPS pump stations. FERC consolidated and set for hearing these proceedings by order dated June 30, In that order, FERC also required that the proceeding develop a just and reasonable uniform rate for TAPS transportation, in accordance with its uniform rate rulings from Opinion No. 502 and the related rehearing orders, and further directed that a pooling mechanism be included in the issues for the consolidated proceeding. 58 On January 13, 2010, the chief administrative law judge severed the strategic reconfiguration issues from the nonstrategic reconfiguration issues (i.e., rate of return and uniform rate/pooling) and established hearings with respect to each portion of the case on separate tracks. The parties moved for a concurrent hearing with the Regulatory Commission of Alaska (RCA) with respect to the issues relating to strategic reconfiguration since four of the five TAPS Carriers have rate 56. Flint Hills Resources Alaska, LLC v. FERC, 687 F.3d 881 (D.C. Cir. 2010). 57. BP Pipelines (Alaska) Inc., Docket No. IS09-348, et al., 127 FERC 61,316 (June 30, 2009), order on reh g, 129 FERC 61,211 (Dec. 10, 2009); see also 129 FERC 61,275 (Jan. 20, 2010) FERC 61,316, at PP

15 OIL PIPELINES 331 filings pending before the RCA. FERC issued an order establishing concurrent hearings on January 20, a. Nonstrategic Reconfi guration Issues Phase (Docket Nos. IS , et al.) On January 21, 2010, the presiding administrative law judge adopted a procedural schedule for the nonstrategic reconfiguration hearing, which called for it to begin in October 2010 with an initial decision to be issued in March Throughout 2010, the parties filed testimony and conducted discovery. Following the submission of all prefiled testimony, the parties agreed to a stipulation that resolved all the cost of capital issues in the case. On October 13, 2010, the TAPS Carriers filed a motion for partial summary disposition of the uniform rate issue. Anadarko answered the TAPS Carriers motion, and requested that the presiding judge adopt the modified relief statement set forth in the TAPS Carriers motion as the litigated resolution of the Carriers motion. 60 The hearing in late 2010 focused exclusively on the pooling issue in light of the stipulation that resolved the cost of capital issue and the unanimous motion or partial summary disposition of the uniform rate issue filed by the TAPS Carriers. On March 11, 2011, the presiding judge issued his initial decision. 61 The presiding judge accepted verbatim the parties joint stipulation resolving all cost of capital issues. As for the pooling issue, the presiding judge found that the interstate portion of fixed operating expenses incurred by Alyeska on behalf of the TAPS Carriers, state ad valorem property taxes, and depreciation (return on investment) should be included in the pooling mechanism. The presiding judge also found that the pooling mechanism should include: (1) a percentage of return on investment, (2) other carrier-direct operating expenses, (3) intrastate costs, and (4) 100 percent of costs related to the cost of debt and AFUDC. The presiding judge found that the pooling mechanism should take effect no earlier than January 1, 2009, until which the previous TAPS settlement agreement was in effect and binding. Finally, the presiding judge accepted the position of the parties as set forth in TAPS Carriers unanimous motion for partial summary disposition of the uniform rate issue, but found that implementation of a uniform rate required additional procedures, including mandatory Rule 601 conferences after a carrier files for a new rate. b. Strategic Reconfi guration Issues Phase (Docket Nos. IS , et al.) On January 25, 2010, the chief administrative law judge approved a proposed procedural schedule that extended the proceedings beyond the usual Track III 59. BP Pipelines (Alaska) Inc., Docket No. IS et al., 130 FERC 61,042 (Jan. 20, 2010). 60. The modified relief statement stated: [T]he TAPS Carriers (1) calculation of uniform rates based on total system-wide cost of service and throughput, and (2) filing of such rates based on each TAPS Carrier s own initiative, and without consultation or collaboration with any other TAPS Carrier, complies with FERC s uniform rate requirement in Opinion No. 502; provided, however, that rates calculated and filed in this manner will be subject to complaint and/or protest and further FERC procedures to determine a just and reasonable maximum uniform rate for TAPS. 61. BP Pipelines (Alaska) Inc., 134 FERC 63,020 (2011).

16 332 RECENT DEVELOPMENTS 2011 time standards, which was necessary due to the complexity of the proceedings and the fact that the state raised a prudence challenge to the strategic reconfiguration program. Discovery has been ongoing for the past year. On January 21, 2011, the state filed prepared direct testimony regarding strategic reconfiguration, and the TAPS Carriers filed testimony on cost of service issues. On February 18, 2011, Anadarko filed testimony regarding strategic reconfiguration as supporting a party with the burden of proof. On October 25, 2010, FERC issued an order modifying the procedural schedule so that the hearing would be divided equally between Washington, D.C., and Anchorage. The hearing is set to begin in Anchorage on October 31, TAPS Quality Bank As discussed in prior annual reports, the quality bank is the method for making monetary adjustments among shippers on TAPS because of the co-mingling in the pipeline of different qualities of crude oil. The quality bank is designed to compensate (or charge) a TAPS shipper for the difference between the quality of crude oil it tenders to and receives from TAPS. The existing distillation methodology separates the crude oil stream into its component parts (cuts) and assigns market values to each cut. Each shipper s stream is valued according to the volume-weighted value of its cuts. Our prior reports also described FERC s major ruling on the initial decision in the quality bank hearings, as well as subsequent rehearing orders and court proceedings. 62 a. Docket No. OR Proceedings (Valuation of West Coast Heavy Distillate) In Opinion No. 500, issued on March 20, 2008, FERC affirmed the initial decision in this proceeding concerning valuation of the West Coast heavy distillate cut in all respects. 63 A petition seeking review of that order was filed with the D.C. Circuit, 64 but petitioners subsequently abandoned their challenge. Over the protest of Flint Hills, on December 20, 2008, FERC accepted the TAPS Carriers Opinion No. 500 compliance filing, which established a processing cost adjustment for the heavy distillate cut of cents per gallon to be effective as of June 1, In December 2008, Flint Hills and Petro Star requested a rehearing, which was denied in FERC s August 18, 2009, order. 66 Flint Hills and Petro Star filed petitions for review challenging the June 1, 2006, effective date. 67 Petitioners contended that under the terms of Section 4412(b)(2) 62. Trans Alaska Pipeline Sys., Docket No. OR , 113 FERC 61,062 (Oct. 20, 2005) (Opinion No. 481), order on reh g, 114 FERC 61,323 (2006) (Opinion No. 481-A), order on reh g and clarifi cation, 115 FERC 61,287 (Mar. 29, 2006) (Opinion No. 481-B), aff d, Petro Star Inc. v. FERC, 2008 U.S. App. LEXIS 5328 (D.C. Cir. 2008), cert. denied, Exxon Mobil Corp. v. FERC, 129 S. Ct. 898 (2009). 63. BP Pipelines (Alaska) Inc., Docket No. OR , 122 FERC 61,236 (Mar. 20, 2008). 64. See Petro Star Inc. v. FERC (D.C. Cir.), Docket No BP Pipelines (Alaska), Inc., Docket No. OR , 125 FERC 61,254 (Dec. 20, 2008). 66. BP Pipelines (Alaska), Inc., Docket No. OR , 128 FERC 61,169 (Aug. 18, 2009). 67. Flint Hills Resources Alaska, LLC et al. v. FERC (D.C. Cir.). Case Nos ,

17 OIL PIPELINES 333 of the Motor Carrier Safety Reauthorization Act of 2005, FERC was limited to setting an effective date for valuation of new West Coast heavy distillate no earlier than fifteen months prior to its December 2, 2008, order. By accepting an effective date of June 1, 2006, FERC was alleged to have violated Section 4412(b) (2). Petitioners further challenged FERC s position that its September 26, 2006, order, which approved the TAPS quality bank administrator s (QBA) replacement product reference price and accepted the QBA s proposed processing cost adjustment on an interim basis, qualified as the first FERC order imposing quality bank adjustments. Petitioners contended that FERC s order on December 8 was its first order, as that is used in Section 4412(b)(2) and that FERC therefore was permitted to set an effective date no earlier than fifteen months prior to December 8, On January 18, 2011, the D.C. Circuit vacated FERC s orders and remanded them for additional proceedings. 68 The court held that FERC s order accepting the QBA s proposed processing cost adjustment on an interim basis subject to hearing and refund could not be the first order... imposing Quality Bank adjustments. A FERC decree under which nature simply takes its course nature in this case being the new adjustment cannot, in the conventions of ordinary discourse, be described as imposing the adjustment. 69 The court remanded FERC s order for a determination of what alternative order constituted the first order... imposing Quality Bank adjustments. b. Docket Nos. IS06-466, et al. (Use of the Nelson Farrar Index to Adjust Processing Cost Deductions From Year to Year) On August 8, 2008, FERC issued an order on remand granting rehearing, 70 which held that use of the Nelson-Farrar index methodology to escalate the processing cost deductions for the resid and heavy distillate cuts contained in the TAPS Carriers compliance filing (and upheld in FERC s prior two orders) violated the consistency requirement set forth in the D.C. Circuit s OXY decision.71 According to FERC, the inconsistency resulted from the fact that a different methodology (i.e., the tariff methodology) was being used to escalate the processing cost adjustment of the light distillate cut, and so FERC directed that the tariff methodology be used for the resid and heavy distillate cuts. On September 8, 2008, ConocoPhillips Alaska Inc. and ExxonMobil Corp. filed requests for rehearing, arguing inter alia that the August 8 order erred because it permitted an impermissible collateral attack in a compliance proceeding on the underlying FERC decision in Opinion No. 481; violated the OXY opinion by adopting a methodology that purposefully overvalues the resid and heavy distillate cuts while all other cuts are accurately valued; and erroneously permitted the parties protesting the compliance filing to violate a joint stipulation and to take 68. Flint Hills Resources Alaska, LLC et al. v. FERC, 631 F.3d 543 (D.C. Cir. 2011). 69. Id. at BP Pipelines (Alaska) Inc., Docket No. IS et al., 124 FERC 61,153 (Aug. 8, 2008). 71. OXY USA Inc. v. FERC, 64 F.3d 679, 693 (D.C. Cir. 1995).