170 FERC ¶ 61,133
`UNITED STATES OF AMERICA
`FEDERAL ENERGY REGULATORY COMMISSION
`
`Before Commissioners: Neil Chatterjee, Chairman;
` Richard Glick and Bernard L. McNamee.
`
`
`HollyFrontier Refining & Marketing LLC, Southwest
`Airlines Co., Tesoro Refining and Marketing Company,
`US Airways, Inc., Valero Marketing and Supply
`Company, and Western Refining Company, L.P.
` v.
`SFPP, L.P.
`
` Docket Nos. OR14-35-003
`
`Chevron Products Company
` v.
`SFPP, L.P.
`
`American Airlines, Inc., Chevron Products Company,
`HollyFrontier Refining & Marketing LLC, Southwest
`Airlines Co., and Valero Marketing and Supply
`Company
` v.
`SFPP, L.P.
`
`Tesoro Refining & Marketing Company LLC and
`Western Refining Company, L.P.
` v.
`SFPP, L.P.
`
`Phillips 66 Company
` v.
`SFPP, L.P.
`
`OR14-36-003
`
`OR19-21-000
`
`OR19-33-000
`
`OR19-37-000
`
`

`

`Docket No. OR14-35-003, et al.
`
`2
`
`ORDER ON REMAND AND COMPLAINTS, AND DIRECTING BRIEFS
`
`(Issued February 21, 2020)
`
`This order addresses the United States Court of Appeals for the District of
`1.
`Columbia Circuit’s remand in Southwest Airlines1 which vacated and remanded
`Commission orders rejecting complaints in Docket Nos. OR14-35 and OR14-36
`challenging index rate increases that SFPP, L.P. (SFPP) implemented for the 2012 and
`2013 index years (2014 Complaints).2 This order also addresses complaints filed in
`Docket Nos. OR19-21, OR19-33, and OR19-37 challenging SFPP’s index rate increases
`implemented for the 2018 index year (2019 Complaints). The 2014 Complaints and
`2019 Complaints allege that the challenged index rate increases fail the Commission’s
`Substantially Exacerbate Test and are therefore unjust and unreasonable.
`
`As discussed below, upon review of the Commission’s policy for reviewing
`2.
`challenges to index rate increases under section 343.2(c)(1) of our regulations,3 we
`propose to eliminate the Substantially Exacerbate Test and evaluate the complaints
`against index rate increases by applying the Percentage Comparison Test. We direct the
`parties in the above-captioned proceedings to file briefs addressing their views on this
`proposal within 60 days of the date this order issues. Parties may submit reply briefs
`within 30 days thereafter.
`
`I.
`
`Background
`
`The Commission regulates oil pipeline rates pursuant to the Interstate Commerce
`3.
`Act’s (ICA) just and reasonable standard.4 In accordance with the Energy Policy Act
`of 1992 (EPAct 1992),5 the Commission adopted the indexing regime to provide a
`simplified and generally applicable ratemaking methodology for oil pipelines and create
`
`1 Sw. Airlines Co. v. FERC, 926 F.3d 851 (D.C. Cir. 2019) (Southwest Airlines).
`
`2 HollyFrontier Ref. & Mktg. LLC v. SFPP, L.P., 149 FERC ¶ 61,097 (2014)
`(October 2014 Order) (holding 2014 Complaints in abeyance); HollyFrontier Ref. &
`Mktg. LLC v. SFPP, L.P., 157 FERC ¶ 61,186 (2016) (December 2016 Order) (granting
`rehearing and dismissing 2014 Complaints); HollyFrontier Ref. & Mktg. LLC v. SFPP,
`L.P., 162 FERC ¶ 61,232 (2018) (March 2018 Order) (denying rehearing).
`
`3 18 C.F.R. § 343.2(c)(1) (2019).
`
`4 49 U.S.C. app. § 1(5) et seq. (1988).
`
`5 Energy Policy Act of 1992, Pub. L. No. 102-486 § 1801(b), 106 Stat. 3010 (Oct.
`24, 1992).
`
`

`

`Docket No. OR14-35-003, et al.
`
`3
`
`streamlined procedures related to oil pipeline rates.6 Indexing allows oil pipelines to
`change their tariff rates so long as those rates remain at or below applicable ceiling levels,
`which change every July 1 based upon an index that tracks industry-wide cost changes.
`When the Commission created indexing, it also added Page 700 to Form No. 6 to provide
`cost, revenue, and throughput information so that the Commission and the industry can
`monitor these indexed rates.7
`
`In adopting the indexing regime, the Commission established a procedure to allow
`4.
`shippers to challenge rate increases that, while in compliance with the applicable ceiling,
`are substantially in excess of the actual cost changes that the pipeline incurred. Section
`343.2(c)(1) of the Commission’s regulations provides that a protest or complaint against
`an index rate increase must allege “reasonable grounds” that the index rate increase is “so
`substantially in excess of the actual cost increases incurred by the carrier that the rate is
`unjust and unreasonable.”8 The Commission reviews protests and complaints against
`index rate increases by: (1) applying a preliminary screen based on cost and revenue data
`from the pipeline’s Page 700 and (2) if the preliminary screen is satisfied, investigating
`the rate or rate increase at a hearing.
`
`6 See Revisions to Oil Pipeline Regulations Pursuant to Energy Policy Act of
`1992, Order No. 561, FERC Stats. & Regs. ¶ 30,985 (cross reference 65 FERC ¶ 61,109)
`(1993), order on reh’g and clarification, Order No. 561-A, FERC Stats. & Regs.
`¶ 31,000 (cross reference 68 FERC ¶ 61,138) (1994), aff’d sub nom. Ass’n of Oil Pipe
`Lines v. FERC, 83 F.3d 1424 (D.C. Cir. 1996).
`
`7 Cost-of-Service Reporting and Filing Requirements for Oil Pipelines, Order
`No. 571, FERC Stats. & Regs. ¶ 31,006 (cross reference 69 FERC ¶ 61,102) (1994),
`order on reh’g and clarification, Order No. 571-A, FERC Stats. & Regs. ¶ 31,012 (69
`FERC ¶ 61,411) (1994), aff’d sub nom. Ass’n of Oil Pipe Lines v. FERC, 83 F.3d 1424
`(D.C. Cir. 1996); see also Revisions to and Electronic Filing of the FERC Form No. 6
`and Related Uniform Systems of Account, Order No. 620, FERC Stats. & Regs. ¶ 31,115
`(93 FERC ¶ 61,262) (2000), reh’g denied, Order No. 620-A, 94 FERC ¶ 61,130 (2001);
`Revisions to Page 700 of FERC Form No. 6, 144 FERC ¶ 61,049, at PP 29-40 (2013),
`reh’g denied, 148 FERC ¶ 61,235 (2014). All jurisdictional pipelines are required to
`file Page 700, including pipelines exempt from filing the full Form No. 6. 18 C.F.R.
`§ 357.2(a)(2)-(3).
`
`8 18 C.F.R. § 343.2(c)(1) (2019). See also Order No. 561, FERC Stats. & Regs.
`¶ 30,985 at 30,951. Protests and complaints can also allege that the indexed rate exceeds
`the ceiling level. 18 C.F.R. § 343.2(c)(1) (2019). If this is true, then the indexed rate is
`rejected.
`
`

`

`Docket No. OR14-35-003, et al.
`
`4
`
`Under the Commission’s current policy, the preliminary screen differs for protests
`5.
`and complaints. When a proposed index rate increase is protested, the Commission
`applies the Percentage Comparison Test and will investigate the protested increase if
`the pipeline’s Page 700 revenues exceed its costs and there is more than a 10 percentage-
`point differential between (a) the index rate increase and (b) the change in the prior
`two years’ total cost-of-service data reported on Page 700, line 9.9 By contrast, when a
`complaint against an index rate increase is filed, the Commission considers “a wider
`range of factors beyond the Percentage Comparison Test,” including the Substantially
`Exacerbate Test.10 Pursuant to the Substantially Exacerbate Test, the Commission
`will investigate a complaint against an index rate increase if the complaint shows that:
`(1) the pipeline is substantially over-recovering its cost of service (first prong) and
`(2) the index rate increase so exceeds the actual increase in the pipeline’s cost that the
`resulting rate increase would substantially exacerbate the pipeline’s over-recovery
`(second prong).11
`
`II.
`
`Remand in Docket Nos. OR14-35-003 and OR14-36-003
`
`A.
`
`2014 Complaints
`
`In the 2014 Complaints, Joint Shippers12 allege that the Commission should reject
`6.
`SFPP’s index rate increases for 2012 and 2013 under the Substantially Exacerbate Test
`because: (1) SFPP was substantially over-recovering its cost of service at the time of its
`2012 and 2013 index filings and (2) the index rate increases substantially exacerbated
`SFPP’s over-recovery. Regarding the 2012 index rate increase, Joint Shippers argue that
`SFPP’s 2011 Page 700 reported a cost-of-service over-recovery of 13.11 percent and that
`the index rate increase would increase this over-recovery by approximately 38%.13
`
`9 E.g., SFPP, L.P., 168 FERC ¶ 61,043, at P 4 (2019) (citing Calnev Pipe Line,
`L.L.C., 130 FERC ¶ 61,082, at PP 10-11 (2010)).
`
`10 E.g., Calnev, 130 FERC ¶ 61,082, at P 11 (citing BP West Coast Prods. LLC v.
`SFPP, L.P., 121 FERC ¶ 61,243, at PP 8-9 (2007); BP West Coast Prods., LLC v. SFPP,
`L.P., 121 FERC ¶ 61,141, at P 7 (2007) (BP West Coast II)).
`
`11 BP West Coast II, 121 FERC ¶ 61,141 at P 10.
`
`12 The complainants in Docket No. OR14-35 include: HollyFrontier Refining &
`Marketing LLC, Southwest Airlines Co., Tesoro Refining and Marketing Company, US
`Airways, Inc., Valero Marketing and Supply Company, and Western Refining Company,
`L.P. Chevron Products Company filed a separate complaint in Docket No. OR14-36.
`The complainants in Docket Nos. OR14-35 and OR14-36 are collectively referred to
`herein as Joint Shippers.
`
`13 OR14-35 Complaint at 13; OR14-36 Complaint at 12-13.
`
`

`

`Docket No. OR14-35-003, et al.
`
`5
`
`Regarding the 2013 index rate increase, Joint Shippers contend that SFPP’s 2012 Page
`700 reported a cost-of-service over-recovery of 10.13 percent and that the index rate
`increase would increase the over-recovery by approximately 50%.14
`
`In the December 2016 and March 2018 Orders, the Commission dismissed the
`7.
`2014 Complaints and declined to further investigate SFPP’s 2012 and 2013 index rate
`increases.15 The Commission found that the 2014 Complaints failed the second prong of
`the Substantially Exacerbate Test because, notwithstanding the challenged rate increases,
`data from SFPP’s FERC Form No. 6, Page 700 that became available after SFPP
`implemented the challenged rate increases and before the 2014 Complaints were filed
`(post-increase data) showed that the difference between SFPP’s costs and revenues
`declined from 13.11 percent in 2011, to 10.13 percent in 2012, to 9.22 percent in 2013.16
`The Commission reasoned that this continuing decline in SFPP’s cost-revenue differential
`was inconsistent with the claim that the 2012 and 2013 index rate increases substantially
`exacerbated SFPP’s pre-existing over-recoveries.17 The Commission concluded that it
`would be inefficient and inequitable to ignore additional Page 700 data where that data
`was available at the time Joint Shippers filed the 2014 Complaints and undermined the
`basis of Joint Shippers’ claims.18 Moreover, the Commission found Joint Shippers’
`reliance on earlier Commission orders holding that later-developed data is irrelevant in
`indexing proceedings to be misplaced.19
`
`B.
`
`Southwest Airlines
`
`Following an appeal by Joint Shippers, in Southwest Airlines, the court found that
`8.
`the Commission had departed from its prior policy by considering post-increase data in
`evaluating the 2014 Complaints.20 The court cited two reasons for this conclusion. First,
`the Commission had previously found that only pre-increase data is relevant in indexing
`cases and that such data reflects “precisely what indexing is supposed to measure:
`cost changes in the previous year.”21 Second, in three earlier complaint cases, the
`
`14 OR14-35 Complaint at 14-15; OR14-36 Complaint at 14-15.
`
`15 December 2016 Order, 157 FERC ¶ 61,186 at P 8.
`
`16 Id. P 9.
`
`17 Id.
`
`18 March 2018 Order 162 FERC ¶ 61,232 at P 14.
`
`19 Id. P 15.
`
`20 Southwest Airlines, 926 F.3d at 856.
`
`21 Id. at 856-57 (citing Tesoro Ref. & Mktg. Co. v. SFPP, L.P., 129 FERC
`
`

`

`Docket No. OR14-35-003, et al.
`
`6
`
`Commission considered only pre-increase data despite presumably having post-increase
`data available.22 The court concluded that the Commission’s orders on the 2014
`Complaints did not adequately explain its change in policy and that by considering post-
`increase data in applying the Substantially Exacerbate Test, the Commission had
`reinterpreted the section 343.2(c)(1) phrase “actual cost increases incurred by the carrier”
`to include both costs incurred before the rate increase’s filing and costs incurred before
`the complaint’s filing.23 The court stated that this reinterpretation “calls into question the
`purpose of indexing itself. Are index-based rate increases designed to compensate
`pipelines for cost increases actually incurred in the previous calendar year, costs likely
`incurred in the current calendar year, or, depending on the type of proceeding, both?”24
`
`The court stated that it was not convinced that the Commission could allow this
`9.
`question to go unanswered and remanded the orders so that the Commission, if it chose
`to use post-increase data in evaluating the 2014 Complaints, could offer a reasoned
`explanation that persuasively distinguishes or knowingly abandons its prior practice of
`considering only pre-increase data.25 The court concluded as follows:
`
`Though expressing no opinion on how the Commission should apply the
`substantially exacerbate test going forward, we emphasize that however the
`Commission chooses to proceed, it must explain its actions in a way that coheres
`with the rest of its indexing scheme—namely the manner in which it establishes
`yearly indexes and the methods it uses to evaluate challenges to index-based rates.
`In short, the Commission must provide a reasoned explanation that treats like
`cases alike.26
`
`III.
`
`2019 Complaints
`
`On May 24, 2018, SFPP filed in Docket Nos. IS18-380-000 and IS18-380-001
`10.
`to implement index rate increases for the 2018 index year for its East, West, North, and
`Oregon Lines. SFPP proposed increases of 8.25 percent for its East and North Lines and
`
`¶ 61,114, at PP 17-18 (2009); SFPP, L.P., 140 FERC ¶ 61,016, at PP 34, 42 (2012)).
`
`22 Id. at 857-58 (discussing BP West Coast Prods. LLC v. SFPP, L.P., 118 FERC
`¶ 61,261 (2007); BP West Coast Prods. LLC v. SFPP, L.P., 119 FERC ¶ 61,241 (2007)
`(BP West Coast I); Tesoro Ref. & Mktg. Co. v. Calnev Pipe Line, LLC, 121 FERC
`¶ 61,142 (2007)).
`
`23 Id. at 858.
`
`24 Id.
`
`25 Id. at 859.
`
`26 Id. (emphasis added).
`
`

`

`Docket No. OR14-35-003, et al.
`
`7
`
`4.41 percent for its West and Oregon Lines. Several shippers filed protests challenging
`the increases to SFPP’s East Line and West Line rates. The Commission applied the
`Percentage Comparison Test and determined that the differential between the challenged
`rate increases and the 1.75 percent cost decrease reported on SFPP’s 2016 and 2017
`Page 700s were within the Commission’s 10% threshold for accepting an index filing
`without further investigation.27 The Commission exercised its discretion not to
`investigate SFPP’s 2018 index rate increases.28
`
`On April 4, 2019, American Airlines, Inc., Chevron Products Company,
`11.
`HollyFrontier Refining & Marketing LLC, Southwest Airlines Co., and Valero Marketing
`and Supply Company (collectively, Joint Complainants) filed a complaint in Docket
`No. OR19-21-000 challenging SFPP’s 2018 index rate increases for its East, West, North,
`and Oregon Lines under the Substantially Exacerbate Test (OR19-21 Complaint). On
`August 20, 2019, Tesoro Refining & Marketing Company LLC (Tesoro) and Western
`Refining Company, L.P. (Western, and together with Tesoro, TW Shippers) filed a
`complaint in Docket No. OR19-33-000 raising largely identical issues and moved for
`consolidation with Docket No. OR19-21-000 (OR19-33 Complaint). On September 27,
`2019, Phillips 66 Company (Phillips 66) filed a complaint in Docket No. OR19-37-000
`challenging the same index rate increases (OR19-37 Complaint).
`
`The 2019 Complaints allege that SFPP’s 2018 index rate increases are unjust and
`12.
`unreasonable, claiming that SFPP was substantially over-recovering its cost of service
`at the time of the increases and the increases will substantially exacerbate that over-
`recovery.29 According to the 2019 Complaints: (1) SFPP’s 2017 Page 700 shows
`interstate revenues of $174,838,939 and an interstate cost of service of $164,190,607,
`reflecting an over-recovery of 6.49 percent, and (2) the 2018 index rate increases are
`expected to exacerbate SFPP’s over-recovery by least $7.7 million, or 72%.30 The 2019
`Complaints request that the Commission summarily rescind or set the index rate increases
`for hearing and award reparations for amounts paid to SFPP in excess of the rates
`determined to be just and reasonable.31
`
`27 SFPP, L.P., 163 FERC ¶ 61,232, at PP 13, 20 (2018).
`
`28 Id. PP 11-12, 19-25.
`
`29 OR19-21 Complaint at 6, 8-10; OR19-33 Complaint at 5, 7-9; OR19-37
`Complaint at 8-10.
`
`30 OR19-21 Complaint at 8-9; OR19-33 Complaint at 7-8; OR19-37 Complaint at
`9 & n.9.
`
`31 OR19-21 Complaint at 6, 11-12, 16; OR19-33 Complaint at 5-6, 10-12, 17;
`OR19-37 Complaint at 2, 10, 14.
`
`

`

`Docket No. OR14-35-003, et al.
`
`IV.
`
`Public Notice and Answers
`
`8
`
`Notice of the OR19-21 Complaint was issued on April 5, 2019, providing for
`13.
`answers, protests, and interventions to be filed on or before May 3, 2019. On May 3,
`2019, SFPP filed an answer to the OR19-21 Complaint. On May 20, 2019, Joint
`Complainants filed an answer to SFPP’s answer. On June 4, 2019, SFPP filed an answer
`to Joint Complainants’ answer.
`
`Notice of the OR19-33 Complaint was issued on August 21, 2019, providing for
`14.
`answers, protests, and interventions to be filed on or before September 19, 2019. On
`September 18, 2019, SFPP filed an answer to the OR19-33 Complaint. On September
`19, 2019, Phillips 66 filed a motion to intervene in Docket No. OR19-33-000. On
`October 3, 2019, TW Shippers filed an answer to SFPP’s answer. On October 16, 2019,
`SFPP filed an answer to TW Shippers’ answer.
`
`Notice of the OR19-37 Complaint was issued on October 9, 2019, providing for
`15.
`answers, protests, and interventions to be filed on or before October 17, 2019. SFPP filed
`an answer to the OR19-37 Complaint on October 17, 2019. On November 1, 2019,
`Phillips 66 filed an answer to SFPP’s answer. On November 7, 2019, SFPP filed an
`answer to Phillips 66’s answer.
`
`In its answers to the 2019 Complaints, SFPP argues that the 2019 Complaints fail
`16.
`the Substantially Exacerbate Test because a 6.49 percent over-recovery is not substantial
`under the first prong of the test.32 SFPP contends that deeming a 6.49 percent over-
`recovery to be substantial would undermine indexing’s cost efficiency incentives.33 SFPP
`also argues that the Substantially Exacerbate Test can produce irrational results because
`as a pipeline’s over-recovery declines, the degree by which an index rate increase
`exacerbates that over-recovery increases.34 SFPP asserts that because of this mechanical
`flaw, “the Commission should adopt a relatively high threshold for what constitutes a
`‘substantial over-recovery’ under the first prong of the test.”35
`
`32 SFPP Answer to OR19-21 Complaint at 5-12; SFPP Answer to OR19-33
`Complaint at 5-11; SFPP Answer to OR19-37 Complaint at 5-11.
`
`33 SFPP Answer to OR19-21 Complaint at 8-9; SFPP Answer to OR19-33
`Complaint at 8-9; SFPP Answer to OR19-37 Complaint at 8-10.
`
`34 SFPP Answer to OR19-21 Complaint at 12-15; SFPP Answer to OR19-33
`Complaint at 11-14; SFPP Answer to OR19-37 Complaint at 12-14.
`
`35 SFPP Answer to OR19-21 Complaint at 15; SFPP Answer to OR19-33
`Complaint at 14; SFPP Answer to OR19-37 Complaint at 14.
`
`

`

`Docket No. OR14-35-003, et al.
`
`9
`
`SFPP further contends that the Arizona Grocery doctrine may foreclose the 2019
`17.
`Complaints.36 SFPP states that under Arizona Grocery, Commission-mandated just and
`reasonable rates may only be changed prospectively.37 SFPP states that Commission
`decisions in several pending proceedings will establish just and reasonable rates for
`SFPP’s East, West, North, and Oregon Lines.38 SFPP claims that such rates, once
`established, will then be indexed forward to establish just and reasonable rates for
`subsequent years including the indexing periods covered by the 2019 Complaints.39
`SFPP argues that because these rates could only be adjusted prospectively under Arizona
`Grocery, the requests for reparations are moot.40
`
`SFPP also claims that the OR19-21 Complaint fails to make a good faith
`18.
`effort to quantify the financial action or burden as required by Rule 206(b)(4) of the
`Commission’s Rules of Practice and Procedure.41 In addition, SFPP argues that TW
`Shippers lack standing to bring a complaint against certain of SFPP’s pipelines.42 Finally,
`SFPP submits that if the Commission does not reject the 2019 Complaints, it should hold
`them in abeyance pending final resolution of complaints against SFPP’s
`base rates in Docket Nos. OR11-13, OR11-16, OR11-18, and OR16-6.43
`36 Ariz. Grocery Co. v. Atchison, Topeka & Santa Fe. Ry. Co., 284 U.S. 379
`(1932) (Arizona Grocery).
`
`37 SFPP Answer to OR19-21 Complaint at 18 (citing SFPP, L.P., 111 FERC
`¶ 61,334, at PP 56-57 (2005)); SFPP Answer to OR19-33 Complaint at 15; SFPP
`Answer to OR19-37 Complaint at 15.
`
`38 SFPP states that the Commission is in the process of establishing just and
`reasonable rates for SFPP’s West Line in Docket No. IS08-390 and SFPP’s East Line
`in Docket No. IS09-437. In addition, SFPP states that the resolution of complaints in
`Docket Nos. OR11-13, OR11-16, and OR11-18 may lead to determinations regarding
` the just and reasonable rates for SFPP’s West, North, and Oregon Lines. SFPP Answer
`to OR19-21 Complaint at 17-18; SFPP Answer to OR19-33 Complaint at 14-15; SFPP
`Answer to OR19-37 Complaint at 15.
`
`39 SFPP Answer to OR19-21 Complaint at 17-18; SFPP Answer to OR19-33
`Complaint at 14-15; SFPP Answer to OR19-37 Complaint at 15.
`
`40 SFPP Answer to OR19-21 Complaint at 18; SFPP Answer to OR19-33
`Complaint at 15; SFPP Answer to OR19-37 Complaint at 15-16.
`
`41 SFPP Answer to OR19-21 Complaint at 15-17 (citing 18 C.F.R. § 385.206(b)
`(4) (2019)).
`
`42 SFPP Answer to OR19-33 Complaint at 16.
`
`43 SFPP Answer to OR19-21 Complaint at 19-20; SFPP Answer to OR19-33
`
`

`

`Docket No. OR14-35-003, et al.
`
`V.
`
`Discussion
`
`A.
`
`Procedural Matters
`
`10
`
`Pursuant to Rule 214 of the Commission’s Rules of Practice and Procedure,44 all
`19.
`unopposed and timely filed motions to intervene and any unopposed motions to intervene
`out of time in Docket Nos. OR19-21, OR19-33, and OR19-37 filed before the issuance
`date of this order are granted. Rule 213 of the Commission’s Rules of Practice and
`Procedure45 prohibits answers to answers unless otherwise ordered by the decisional
`authority. We are not persuaded to accept the answers to answers in Docket Nos. OR19-
`21, OR19-33, and OR19-37 and will, therefore, reject them.
`
`B.
`
`Substantive Matters
`
`In Southwest Airlines, the court remanded the Commission’s orders dismissing the
`20.
`2014 Complaints for the Commission to evaluate those complaints solely based on pre-
`increase data or, if the Commission uses post-increase data, to persuasively distinguish or
`knowingly abandon its prior practice of considering only pre-increase data in evaluating
`complaints against index rate increases. The court directed the Commission, in making
`this determination, to address whether index rate increases are designed to compensate
`pipelines for actual cost increases incurred during the previous calendar year, costs likely
`incurred in the current calendar year, or both.46 The court emphasized that the
`Commission must explain its decision in a manner that “coheres with the rest of its
`indexing scheme” and “treats like cases alike.”47
`
`Upon review of the policies governing evaluation of challenges to index rate
`21.
`increases, we propose to modify the Commission’s existing policy by eliminating the
`Substantially Exacerbate Test and applying the Percentage Comparison Test to both
`protests and complaints under section 343.2(c)(1) of the Commission’s regulations. In
`our view, several considerations support this proposed change in policy. First, we are
`concerned that the Substantially Exacerbate Test has not been defined, suffers from
`mechanical flaws, and appears to be inconsistent with the purposes of indexing and the
`language of section 343.2(c)(1). Second, applying the Percentage Comparison Test,
`which relies upon pre-increase Page 700 data, to both protests and complaints would
`better adhere to the purposes of indexing and respond to the Southwest Airlines remand
`Complaint at 16-17; SFPP Answer to OR19-37 Complaint at 16-17.
`
`44 18 C.F.R. § 385.214.
`
`45 Id. § 385.213(a)(2).
`
`46 Southwest Airlines, 926 F.3d at 859.
`
`47 Id.
`
`

`

`Docket No. OR14-35-003, et al.
`
`11
`
`by adopting a single standard for governing challenges to index rate changes based upon
`pre-increase data that would treat like cases alike. Third, this approach would provide
`the foregoing benefits without depriving shippers of the ability to challenge a pipeline’s
`rates where the pipeline is substantially over-recovering its cost of service.
`
`1.
`
`Concerns with the Substantially Exacerbate Test
`
`a.
`
`The Substantially Exacerbate Test Has Not Been Defined
`
`Because only a relatively small number of complaints have invoked the
`22.
`Substantially Exacerbate Test since its adoption in 2007, the showings needed to satisfy
`its two prongs are largely undefined and the Commission has not established numerical
`thresholds for either prong. Among the five proceedings in which the complainants
`sought relief pursuant to the Substantially Exacerbate Test,48 the Commission has
`established a hearing to investigate an index-related complaint on only one occasion. In
`Docket Nos. OR07-8 and OR07-11, the Commission established a hearing to investigate
`complaints alleging that SFPP was over-recovering its cost of service by $16 million and
`that the challenged index rate increase would have “represented an increase in SFPP’s
`return of some 25%.”49 Adopting the Substantially Exacerbate Test for the first
`time, the Commission found that these showings “might normally be sufficient” to
`satisfy the new standard50 and set the complaints for hearing.51 The Commission did
`not, however, define generally applicable minimum thresholds that complaints invoking
`the Substantially Exacerbate Test would be required to satisfy going forward.52 The
`
`48 These five proceedings include: (1) Docket Nos. OR07-08 and OR07-11,
`(2) Docket No. OR07-16, (3) Docket No. OR07-20, (4) Docket No. OR09-18, and
`(5) Docket Nos. OR14-35 and OR14-36, which addressed the 2014 Complaints. Notably,
`
`all of these proceedings involved either SFPP or its affiliate Calnev Pipe Line, L.L.C.
`
`49 BP West Coast II, 121 FERC ¶ 61,141 at P 8.
`
`50 BP West Coast I, 119 FERC ¶ 61,241 at P 11.
`
`51 The Commission initially held the complaints in abeyance pending the
`resolution of ongoing proceedings involving generic oil pipeline cost-of-service
`issues and set the complaints for hearing and settlement judge procedures after those
`proceedings concluded. BP West Coast II, 121 FERC ¶ 61,141 at P 8 (holding complaints
`in abeyance); ExxonMobil Oil Corp. v. SFPP, L.P., 122 FERC ¶ 61,129,
`at P 1 (2008) (setting complaints for hearing).
`
`52 The hearing established to address the complaints resulted in settlement. See
`BP West Coast Prods., LLC v. SFPP, L.P., 125 FERC ¶ 61,138, at P 2 (2008) (letter order
`approving uncontested settlement).
`
`

`

`Docket No. OR14-35-003, et al.
`
`12
`
`four subsequent complaint proceedings likewise did not clarify the threshold showings
`required to satisfy the Substantially Exacerbate Test.53
`
`The Commission therefore has not opined upon the minimum levels of over-
`23.
`recovery and exacerbation required to justify setting a complaint for hearing under the
`Substantially Exacerbate Test. As a result, the standards on which parties may rely in
`bringing or defending against index increase complaints or which the Commission may
`apply in deciding whether to investigate such complaints at a hearing are not clear.
`
`b.
`
`The Substantially Exacerbate Test May be Mechanically
`Flawed
`
`24. We are concerned that the Substantially Exacerbate Test may suffer from an
`inherent mechanical flaw that makes developing analytically sound thresholds
`unworkable: as a pipeline’s over-recovery increases, an index rate increase will
`exacerbate the over-recovery by a lower percentage; conversely, applying the same index
`rate increase to a lower level of over-recovery will exacerbate the over-recovery by a
`higher percentage. This relationship between the Substantially Exacerbate Test’s two
`prongs, where higher levels of over-recovery lead to lower degrees of exacerbation,
`causes the Substantially Exacerbate Test to yield irrational results whereby complaints
`against pipelines with higher over-recoveries would be less likely to be investigated.
`
`25. This phenomenon is demonstrated in the table below, which presents results of the
`Substantially Exacerbate Test over a relevant range of over-recovery and index levels.54
`The table shows that the Substantially Exacerbate Test is driven entirely by (1) the extent
`of the pipeline’s over-recovery and (2) the level of the index rate increase.
`
`53 The Commission found in three of these proceedings that the complaints failed
`the Substantially Exacerbate Test because the challenged index rate increases were
`smaller than the actual changes in the pipelines’ costs. See Tesoro Ref. & Mktg. Co. v.
`Calnev Pipe Line, L.L.C., 121 FERC ¶ 61,142, at P 7 (2007) (OR07-16); BP West Coast
`Prods. LLC v. SFPP, L.P., 121 FERC ¶ 61,243, at P 4 (2007) (OR07-20); SFPP, L.P., 129
`FERC ¶ 61,228, at P 41 (2009) (OR09-18). As discussed above, the fourth proceeding
`involved the 2014 Complaints, which the Commission held failed the Substantially
`Exacerbate Test’s exacerbation prong because post-increase Page 700 data showed that
`SFPP’s cost-revenue divergence decreased after SFPP implemented the challenged
`increases. December 2016 Order, 157 FERC ¶ 61,186 at P 9.
`
`54 Since its inception in 1995, the oil pipeline index has ranged from -2.0 percent
`to 8.6 percent. Because the Substantially Exacerbate Test would not apply to an index
`that is less than zero (a negative index), the range of index levels presented in the
`columns of the table encompasses the historical levels of the oil pipeline index.
`
`

`

`Docket No. OR14-35-003, et al.
`
`13
`
`Table – Exacerbation Percentages at Various Over-Recovery-Index Combinations
`
`Index Level
`5%
`105
`55
`38
`30
`25
`22
`19
`18
`16
`15
`
`4%
`84
`44
`31
`24
`20
`17
`15
`14
`13
`12
`
`6%
`126
`66
`46
`36
`30
`26
`23
`21
`19
`18
`
`7%
`147
`77
`54
`42
`35
`30
`27
`25
`23
`21
`
`8%
`168
`88
`61
`48
`40
`35
`31
`28
`26
`24
`
`9%
`189
`99
`69
`54
`45
`39
`35
`32
`29
`27
`
`1%
`21
`11
`8
`6
`5
`4
`4
`3
`3
`3
`
`2%
`42
`22
`15
`12
`10
`9
`8
`7
`6
`6
`
`3%
`63
`33
`23
`18
`15
`13
`12
`11
`10
`9
`
`5%
`10%
`15%
`20%
`25%
`30%
`35%
`40%
`45%
`50%
`
`Revenues Exceeding Costs (%)
`
`The table shows that at low levels of over-recovery, a modest index rate increase
`26.
`exacerbates the over-recovery by a large percentage. For example,55 the second line of
`the table indicates that applying a 4 percent index rate increase to an over-recovery of
`10% will exacerbate the over-recovery by 44%. In comparison, the same increase would
`only exacerbate a 50% over-recovery by 12%. This leads to a perverse result whereby a
`complaint against the pipeline with the 50% over-recovery is less likely to be set for
`hearing under the Substantially Exacerbate Test than a complaint against the pipeline
`with the 10% over-recovery due to the lower degree of exacerbation. There appears to be
`no combination of threshold levels for the first and second prongs of the test that would
`yield reasonable results in all circumstances. This mechanical flaw raises concerns
`regarding whether the Substantially Exacerbate Test provides a workable standard for the
`Commission to evaluate complaints under section 343.2(c)(1).
`
`c.
`
`The Substantially Exacerbate Test is Arguably
`Inconsistent with Indexing’s Purpose
`
`In addition to its apparent mechanical flaw, we are concerned that the Substantially
`27.
`Exacerbate Test is inconsistent with the purposes of indexing. Indexing allows annual
`pipeline rate increases to reflect industry-wide cost changes during the prior year so that
`the pipeline’s rates will be sufficient to recover future years’ costs. Under the indexing
`
`55 The Substantially Exacerbate Test measures over-recovery using the equation
`(Revenues−Costs)
` and measures exacerbation using the equation
`(Costs )
`( (Revenues−Costs)∗Index Adjustment )−(Revenues−Costs)
`(Revenues−Costs)
`
`.
`
`

`

`Docket No. OR14-35-003, et al.
`
`14
`
`regime, protests and complaints against index rate increases are intended to provide a
`“fail safe” ensuring that a particular pipeline’s proposed increase does not “substantially
`exceed” its cost changes.56 The Substantially Exacerbate Test, however, arguably does
`not closely adhere to ind