[Federal Register Volume 86, Number 29 (Tuesday, February 16, 2021)]
[Rules and Regulations]
[Pages 9448-9460]
[FR Doc No: 2021-03120]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 342

[Docket No. RM20-14-000]

Five-Year Review of the Oil Pipeline Index

AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Order establishing index level.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) issues
this Final Order concluding its five-year review of the index level
used to determine annual changes to oil pipeline rate ceilings. The
Commission establishes an index level of Producer Price Index for
Finished Goods plus 0.78% (PPI-FG+0.78%) for the five-year period
commencing July 1, 2021.

DATES: This order is effective February 16, 2021.

FOR FURTHER INFORMATION CONTACT:
Evan Steiner (Legal Information), Office of the General Counsel, 888
First Street NE, Washington, DC 20426,<PHONE_NUMBER>
Monil Patel (Technical Information), Office of Energy Market
Regulation, 888 First Street NE, Washington, DC 20426,<PHONE_NUMBER>

SUPPLEMENTARY INFORMATION:
    1. On June 18, 2020, the Commission issued a Notice of Inquiry
initiating its five-year review to establish the oil pipeline index
level for the July 1, 2021 to June 30, 2026 time period.\1\ The NOI
requested comment regarding: (a) The proposed index level of Producer
Price Index for Finished Goods plus 0.09% (PPI-FG+0.09%); and (b) any
alternative methodologies for calculating the index level.
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    \1\ Five-Year Review of the Oil Pipeline Index, 171 FERC ]
61,239, at P 1 (2020) (NOI).
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    2. For the reasons discussed below, we adopt an index level of PPI-
FG+0.78%. The departure from the NOI results from: (a) Trimming the
data set to the middle 80% of cost changes; (b) adopting Designated
Carriers' \2\ proposal to adjust the data set to remove the effects of
the Commission's 2018 income tax policy change for Master Limited
Partnership (MLP)-owned pipelines; and (c) updated Form No. 6 filings
and other corrections to the data set. The Commission's indexing
calculations and other data analysis are contained in Attachment A to
this order. As discussed below, we decline to adopt other changes to
the index calculation proposed by commenters.
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    \2\ Designated Carriers include Buckeye Partners, L.P., Colonial
Pipeline Company, Energy Transfer LP, Enterprise Products Partners
L.P., and Plains All American Pipeline, L.P.
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I. Background

A. Establishment of the Indexing Methodology

    3. The Energy Policy Act of 1992 (EPAct 1992) required the
Commission to establish a ``simplified and generally applicable''
ratemaking methodology \3\ that was consistent with the just and
reasonable standard of the Interstate Commerce Act (ICA).\4\ To
implement this mandate, the Commission issued Order No. 561 \5\
establishing an indexing methodology that allows oil pipelines to
change their rates subject to certain ceiling levels as opposed to
making cost-of-service filings.\6\
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    \3\ Public Law<PHONE_NUMBER>(a), 106 Stat. 3010 (Oct. 24, 1992).
This mandate to establish a simplified and generally applicable
ratemaking methodology specifically excluded the Trans-Alaska
Pipeline System (TAPS), or any pipeline delivering oil, directly or
indirectly, into TAPS. Id. 1804(2)(B).
    \4\ 49 U.S.C. app. 1 et seq.
    \5\ Revisions to Oil Pipeline Regulations Pursuant to Energy
Policy Act of 1992, Order No. 561, 58 FR 58753 (Nov. 4, 1993) FERC
Stats. & Regs. ] 30,985 (1993) (cross-referenced at 65 FERC ]
61,109), order on reh'g, Order No. 561-A, FERC Stats. & Regs. ]
31,000 (1994) (cross-referenced at 68 FERC ] 61,138), aff'd sub nom.
Ass'n of Oil Pipe Lines v. FERC, 83 F.3d 1424 (D.C. Cir. 1996) (AOPL
I).
    \6\ Pursuant to the Commission's indexing methodology, oil
pipelines change their rate ceiling levels effective every July 1 by
``multiplying the previous index year's ceiling level by the most
recent index published by the Commission.'' 18 CFR 342.3(d)(1). Oil
pipelines may adjust their rates to the ceiling levels pursuant to
Commission's regulations so long as no protest or complaint
demonstrates that the index rate change substantially diverges from
the pipeline's cost changes. Id. 343.2(c)(1).
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    4. In Order No. 561, the Commission committed to review the index
level every five years to ensure that it adequately reflects changes to
industry costs.\7\ The Commission conducted five-year index reviews in
2000,\8\ 2005,\9\ 2010,\10\ and 2015.\11\ In the 2015 review, the
Commission established the index level of PPI-FG+1.23%, to be effective
for the five-year period beginning July 1, 2016.\12\ The index level
established herein results from the Commission's fifth five-year review
of the index level.
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    \7\ Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,941.
    \8\ Five-Year Review of Oil Pipeline Pricing Index, 93 FERC ]
61,266 (2000), aff'd in part and remanded in part sub nom. Ass'n of
Oil Pipe Lines v. FERC, 281 F.3d 239 (D.C. Cir. 2002) (AOPL II),
order on remand, 102 FERC ] 61,195 (2003), aff'd sub nom. Flying J
Inc. v. FERC, 363 F.3d 495 (D.C. Cir. 2004).
    \9\ Five-Year Review of Oil Pipeline Pricing Index, 114 FERC ]
61,293 (2006) (2005 Index Review).
    \10\ Five-Year Review of Oil Pipeline Pricing Index, 133 FERC ]
61,228 (2010) (2010 Index Review), reh'g denied, 135 FERC ] 61,172
(2011).
    \11\ Five-Year Review of the Oil Pipeline Index, 153 FERC ]
61,312 (2015) (2015 Index Review), aff'd sub nom. Ass'n of Oil Pipe
Lines v. FERC, 876 F.3d 336 (D.C. Cir. 2017) (AOPL III).
    \12\ 2015 Index Review, 153 FERC ] 61,312 at P 9.
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B. The Kahn Methodology

    5. In Order No. 561 and each successive five-year review, the
Commission has calculated the index level based upon a methodology
developed by Dr. Alfred E. Kahn.\13\ The Kahn Methodology uses pipeline
data from Form No. 6, page 700 from the prior five-year period to
determine an appropriate adjustment to be applied to PPI-FG. The
calculation is as follows. Each pipeline's cost change on a per-barrel
mile basis over the prior five-year period (e.g., the years 2014-2019
in this proceeding) is calculated. In order to remove statistical
outliers and spurious data, under the Kahn Methodology, the resulting
data set is trimmed to those oil pipelines in the middle 50% of cost
changes (middle 50%). The Kahn Methodology then calculates three
measures of the middle 50%'s central tendency: The median, the mean,
and a weighted mean.\14\ The Kahn Methodology calculates a composite by
averaging these measures of central tendency and measures the
difference between the composite and the PPI-FG over the prior five-
year period. The Commission then sets the index level at PPI-FG plus
(or minus) this differential.
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    \13\ The United States Court of Appeals for the District of
Columbia Circuit has affirmed the Commission's use of the Kahn
Methodology. AOPL I, 83 F.3d at 1433-37; Flying J Inc. v. FERC, 363
F.3d at 497-500.
    \14\ The weighted mean assigns a different weight to each
pipeline's cost change based upon the pipeline's total barrel-miles.
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C. The 2020 Five-Year Review

    6. On June 18, 2020, the Commission issued the NOI initiating its
five-year

review to establish the index level for the July 1, 2021 to June 30,
2026 period. The NOI proposed an index level of PPI-FG+0.09% and
requested comment on this proposal and any alternative methodologies
for calculating the index level.\15\ The Commission explained that
commenters could address issues including, but not limited to,
different data trimming methodologies and whether, and if so how, the
Commission should reflect the effects of cost-of-service policy changes
in the index calculation.\16\
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    \15\ NOI, 171 FERC ] 61,239 at PP 7-8.
    \16\ Id. P 8.
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II. Comments

    7. Initial comments filed in response to the NOI were due on August
17, 2020, and reply comments were due on September 11, 2020. Comments
were filed by the Association of Oil Pipe Lines (AOPL) (together with
Designated Carriers, Pipelines), Designated Carriers, Kinder Morgan,
Inc., Colonial Pipeline Company, Joint Commenters,\17\ the Liquids
Shippers Group (Liquids Shippers),\18\ the Canadian Association of
Petroleum Producers (CAPP) (together with Joint Commenters and Liquids
Shippers, Shippers), the Energy Infrastructure Council (EIC), the
Pipeline Safety Trust, and the Pipeline and Hazardous Materials Safety
Administration (PHMSA).
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    \17\ Joint Commenters include: The Airlines for America; Chevron
Products Company; the National Propane Gas Association; and Valero
Marketing and Supply Company.
    \18\ For purposes of this proceeding, Liquids Shippers include:
Apache Corporation; Cenovus Energy Marketing Services Ltd.;
ConocoPhillips Company; Devon Gas Services, L.P.; Equinor Marketing
& Trading US Inc.; Fieldwood Energy LLC; Marathon Oil Company;
Murphy Exploration and Production Company--USA; Ovintiv Marketing
Inc.; and Pioneer Natural Resources USA, Inc.
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    8. The commenters discuss numerous issues related to the proposed
index level, including statistical data trimming and whether the index
should incorporate the effects of the Commission's 2018 policy change
requiring MLP-owned pipelines to eliminate the income tax allowance and
previously accrued Accumulated Deferred Income Taxes (ADIT) balances
from their page 700 summary costs of service (Income Tax Policy
Change).\19\ In addition, Liquids Shippers propose to replace the
weighted mean in the Kahn Methodology's calculation of central tendency
with the weighted median and to replace the returns on equity (ROE)
reported on page 700 for 2014 and 2019 with standardized, industry-wide
ROEs for both years. The commenters propose varying index levels,
including AOPL's proposal to adopt an index level of at least PPI-
FG+0.79%, Designated Carriers' proposals of PPI-FG+1.27% (using the
middle 80% of cost changes) or PPI-FG+0.82% (using the middle 50%),
Joint Commenters' proposal of PPI-FG-0.19%, and Liquids Shippers'
proposal of PPI-FG-1.58%.
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    \19\ Inquiry Regarding the Commission's Policy for Recovery of
Income Tax Costs, 162 FERC ] 61,227, at P 8 (2018 Income Tax Policy
Statement), reh'g denied, 164 FERC ] 61,030, at P 13 (2018).
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III. Discussion

    9. We adopt an index level of PPI-FG+0.78% for the five-year period
beginning July 1, 2021. We adopt Designated Carriers' proposed
adjustment to remove the effects of the Income Tax Policy Change from
the page 700 data used to derive the index and we adopt Pipelines'
proposal to calculate the index level using the middle 80% of cost
changes. We also reject Liquids Shippers' proposals to: (a) Calculate
the composite measure of the data set's central tendency using the
median of the barrel-mile weighted unit cost change; and (b) replace
the reported page 700 ROEs for 2014 and 2019 with standardized ROEs. We
also address arguments regarding negotiated rate contracts as raised by
CAPP, pipeline costs resulting from integrity management regulations,
and the treatment of mergers and acquisitions in the data set.

A. 2018 MLP Income Tax Policy Change

1. Comments
    10. Commenters disagree about whether the Commission should
incorporate the effects of the Income Tax Policy Change in the index
calculation.\20\ Pipelines argue that the Income Tax Policy Change
should not be incorporated and present proposals for adjusting the page
700 data to remove its effects from the calculation. Shippers oppose
Pipelines' adjustments and contend that the policy change's effects are
appropriately reflected in the index.
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    \20\ Commenters either agree or do not dispute that the effects
of the Tax Cuts and Jobs Act of 2017 (TCJA) are appropriately
reflected in the data set; and no adjustment is necessary to reflect
the Commission's May 21, 2020 policy statement revising its ROE
policy for natural gas and oil pipelines because that policy change
occurred after the conclusion of the 2014-2019 period. Inquiry
Regarding the Commission's Policy for Determining Return on Equity,
171 FERC ] 61,155 (2020) (ROE Policy Statement).
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    11. AOPL argues that its proposed adjustment to eliminate the
effects of the Income Tax Policy Change is necessary to calculate an
index that accurately measures cost changes incurred during the 2014-
2019 period and predicts the likely rate of future cost changes.
According to AOPL, eliminating the income tax allowance from page 700
did not affect costs because MLP pipelines' income tax costs were the
same before and after the policy change. Thus, AOPL asserts that the
Commission should remove the policy change's effects to ensure that the
page 700 data reflects consistent policies.
    12. To remove the policy change's effects from the data set, AOPL's
witness Dr. Shehadeh proposes to adjust the reported page 700 data for
pipelines that were MLPs throughout the 2014-2019 period based upon the
following steps. First, Dr. Shehadeh eliminates the 2014 income tax
allowance for all pipelines that reduced their page 700 income tax
allowance for 2016 from a positive number to zero following the Income
Tax Policy Change.\21\ Second, Dr. Shehadeh adjusts these pipelines'
2014 page 700 return on rate base to reflect the elimination of their
previously accumulated ADIT balances.\22\ This adjustment involves, for
each pipeline: (a) Taking the difference between the 2016 rate base
reported in the pipeline's April 18, 2017 page 700 filing (with ADIT
balances included) and the higher 2016 rate base reported in its April
18, 2018 filing (with ADIT balances removed); (b) adding this amount to
the 2014 rate base; and (c) calculating the return on the higher 2014
rate base by multiplying the higher rate base by the 2014 weighted
average cost of capital.\23\
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    \21\ 2016 is the only year for which pipelines filed page 700
data reflecting both the 2018 Income Tax Policy Change and the
Commission's prior income tax allowance policy. Oil pipelines filed
page 700 data for 2016 on two occasions: As current-year data in the
Form No. 6 filings due for submission on April 18, 2017, before the
Income Tax Policy Change; and as prior-year data in Form No. 6
filings due for submission on April 18, 2018, after the Income Tax
Policy Change. See 2018 Income Tax Policy Statement, 162 FERC ]
61,227 at P 46 & n.83 (directing MLP pipelines to eliminate the
income tax allowance in the 2016 and 2017 data reported in their
April 18, 2018 Form No. 6, page 700 filings).
    \22\ AOPL Initial Comments at 28-29 (citing Shehadeh Initial
Decl. at 14-15).
    \23\ Id.; Shehadeh Initial Decl. at 16.
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    13. Designated Carriers support AOPL's position and propose to
extend AOPL's proposed adjustments to all pipelines that were owned by
MLPs in 2014 and later converted to C-Corporations, not just those
pipelines that were MLPs throughout the 2014-2019 data period.
Designated Carriers contend that this approach is necessary to avoid
treating one class of MLPs (those that were MLPs in 2014 and remained
MLPs in 2019) differently from another class (those that were MLPs in
2014 and converted to C-

Corporations during the review period).\24\
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    \24\ Designated Carriers Initial Comments at 21 (citing Webb
Initial Affidavit at P 24).
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    14. Shippers oppose Pipelines' proposed adjustments and argue that
the Commission should incorporate the effects of the Income Tax Policy
Change in the index calculation. Shippers contend that the index is
meant to reflect changes to recoverable pipeline costs as determined
under the Commission's Opinion No. 154-B cost-of-service
methodology.\25\ Because the Income Tax Policy Change prohibits MLP
pipelines from recovering an income tax allowance under that
methodology, Shippers assert that the index should reflect this
reduction in recoverable costs.\26\
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    \25\ Joint Commenters Reply Comments at 13-14 (quoting 2015
Index Review, 153 FERC ] 61,312 at P 13) (citing AOPL III, 876 F.3d
at 345-46); Liquids Shippers Reply Comments at 6 (quoting AOPL III,
876 F.3d at 345; 2015 Index Review, 153 FERC ] 61,312 at P 13).
    \26\ Joint Commenters Initial Comments at 12-15; Joint
Commenters Reply Comments at 13-15; Liquids Shippers Initial
Comments at 33-42; Liquids Shippers Reply Comments at 6-7.
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    15. Furthermore, Shippers claim that adopting Pipelines' proposals
would contravene the Commission's commitment in the 2018 Income Tax
Policy Statement to ``incorporate the effects of [the policy change] on
industry-wide oil pipeline costs'' and ``ensure that the industry-wide
reduced costs are incorporated on an industry-wide basis as part of''
the 2020 five-year review.\27\ Shippers argue that the Commission opted
to incorporate these effects in the index in lieu of directing
pipelines to submit rate filings or initiating rate investigations to
eliminate the income tax double recovery from MLP oil pipeline rates,
as the Commission did for MLP natural gas pipelines. Thus, Shippers
contend that the Commission must reflect the elimination of the income
tax allowance and associated ADIT balances from MLP oil pipelines' page
700 costs of service in order to bring those pipelines' rates in line
with their recoverable costs.\28\
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    \27\ Joint Commenters Reply Comments at 16-17 (quoting 2018
Income Tax Policy Statement, 162 FERC ] 61,227 at P 46); Liquids
Shippers Initial Comments at 34-35 (same).
    \28\ Liquids Shippers Initial Comments at 34-35, 40; see also
Joint Commenters Reply Comments at 16-17 (citing 2018 Income Tax
Policy Statement, 162 FERC ] 61,227 at P 46).
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2. Commission Determination
    16. Whether the index should reflect the effects of cost-of-service
policy changes is an issue of first impression.\29\ For the reasons
discussed below, we adopt Designated Carriers' proposal to adjust the
page 700 data set to remove the effects of the Income Tax Policy Change
from the index calculation. As a result, for all pipelines that were
MLPs in 2014, we reduce the 2014 income tax allowance to zero and
revise the 2014 return on rate base to reflect the removal of ADIT. We
find that this adjustment is necessary to accurately calculate the
index.
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    \29\ This issue did not arise prior to the 2015 Index Review
because the Commission measured industry-wide cost changes in the
Order No. 561 Rulemaking and the 2000, 2005, and 2010 index reviews
using Form No. 6 accounting data, rather than the summary cost-of-
service data reported on page 700. Because the Commission did not
adopt any significant cost-of-service policy changes during the
2009-2014 review period, the Commission likewise did not have
occasion to address this issue in the 2015 Index Review.
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    17. First, the purpose of indexing is to allow the indexed rate to
keep pace with industry-wide cost changes,\30\ not to reflect
alterations to the Commission's Opinion No. 154-B cost-of-service
methodology.\31\ Although the Commission uses the Opinion No. 154-B
methodology cost data on page 700 for purposes of the five-year review,
changes to the Opinion No. 154-B methodology itself are distinct from
the annual changes to the pipeline costs that are input into the
Opinion No. 154-B methodology. Where the Commission modifies an Opinion
No. 154-B cost-of-service policy used to measure recoverable costs
midway through the five-year review period, the Opinion No. 154-B cost
of service reported on page 700 for the first and last years of the
period will reflect different sets of policies. Just as a business must
account for changes to its accounting policies when comparing its costs
over two different periods, we must make a similar adjustment to the
reported page 700 data here to derive an ``apples-to-apples''
comparison of pipeline cost changes. By contrast, comparing data
reported under different sets of policies will produce a less accurate
measure of normal industry-wide cost changes.
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    \30\ Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,948,
30,950. Capital costs such as income taxes are among the industry-
wide costs that the index is designed to measure. E.g., 2015 Index
Review, 153 FERC ] 61,312 at P 17.
    \31\ In 2015, the Commission adopted page 700 because it
included actual total cost-of-service data reflecting the costs
recoverable under the Opinion No. 154-B methodology. 2015 Index
Review, 153 FERC ] 61,312 at P 13. We reaffirm that using page 700
data remains a superior means of measuring those recoverable costs
as compared to the prior methodology from which the Commission
departed in the 2015 Index Review. Id. PP 12-16. For example, the
Opinion No. 154-B methodology reflected on page 700 more
appropriately addresses capital costs. Id. PP 14-15 & nn.29-30.
However, the purpose of the index is to address changes to those
recoverable costs, not changes to what the Commission deems
recoverable, such as the complete elimination of a particular cost
category such as the MLP income tax allowance.
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    18. Second, although we recognize that in the 2018 Income Tax
Policy Statement the Commission stated that it would ``incorporate the
effects of the post-United Airlines' policy changes on industry-wide
oil pipeline costs in the 2020 five-year review of the oil pipeline
index level,'' \32\ we conclude that the index is not an appropriate
mechanism for incorporating the post-United Airlines' policy changes.
The index allows for incremental rate adjustments to enable pipelines
to recover normal cost changes in future years. It is not a true-up
designed to remedy prior over- or under-recoveries in pre-existing
rates resulting from cost-of-service policy changes during the prior
five-year period. Accordingly, we find that it would be improper to
address any double recovery via the index.
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    \32\ 2018 Income Tax Policy Statement, 162 FERC ] 61,227 at P
46.
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    19. Third, it is not clear that the double recovery of MLP
pipelines' income tax costs was ever incorporated into the index.
Before the Commission updated its calculation of the index in the 2015
Index Review to use page 700 data, the Kahn Methodology used net
carrier property as a proxy for capital costs and income taxes.\33\
This proxy did not reflect changes in the Commission's Opinion No. 154-
B methodology, including changes to the Commission's income tax
policy.\34\ As a result, the Commission's prior policies permitting MLP
pipelines to recover a partial \35\ or full \36\ income tax allowance
were never directly incorporated into

the index.\37\ Because no prior index calculation incorporated the
policies allowing MLP pipelines to recover an index tax allowance, it
is not necessary to reflect the policy change denying those pipelines
an income tax allowance in the calculation here.
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    \33\ 2015 Index Review, 153 FERC ] 61,312 at P 14 (citing Order
No. 561-A, FERC Stats & Regs. ] 31,000 at 31,096, 31,098).
    \34\ Net carrier property measures changes to the book value of
the pipeline's asset base but does not incorporate changes to the
costs of financing the asset base, such as ROE. As the Commission
explained in the 2015 Index Review, the relationship between net
carrier property and income tax costs is attenuated because income
taxes are dependent upon the pipeline's ROE, not merely the size of
the pipeline's asset base. 2015 Index Review, 153 FERC ] 61,312 at P
14.
    \35\ Under the Commission's Lakehead policy from 1995 to 2005,
partnership entities like MLP pipelines could recover an income tax
allowance for income attributable to corporate partners, but not for
income attributable to individuals or other non-corporate partners.
See Lakehead Pipe Line Co., L.P., Opinion No. 397, 71 FERC ] 61,338
(1995), reh'g denied, Opinion No. 397-A, 75 FERC ] 61,181, at
61,594-99 (1996).
    \36\ In 2005, the Commission departed from the Lakehead policy
and issued a policy statement announcing that it would permit
partnership entities to recover an income tax allowance for income
attributable to all partners regardless of the partner's corporate
form, to the extent that the partner had an actual or potential
income tax liability on that income. Inquiry Regarding Income Tax
Allowances, 111 FERC ] 61,139, at P 32 (2005).
    \37\ MLP pipelines therefore would not have benefitted from
these policies unless they established an initial cost-based rate
under 18 CFR 342.2(a) of the Commission's regulations or changed an
existing rate pursuant to the cost-of-service methodology under 18
CFR 342.4(a) while these policies were in effect. 18 CFR 342.2(a),
342.4(a).
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    20. Accordingly, we adopt Designated Carriers' proposal to adjust
the historical page 700 data for 2014 to remove the effects of the
Income Tax Policy Change for all pipelines that were MLPs in 2014,
including those that later converted to a business form (such as a C-
Corporation) eligible to recover an income tax allowance. This approach
is broader than AOPL's more limited proposal to adjust the data for
only those pipelines that were MLPs in 2014 and that continued to be
MLPs for the remainder of the 2014-2019 period. Because the
Commission's revised income tax allowance policy applies equally to all
MLP pipelines,\38\ we conclude that it is appropriate to make these
adjustments for all pipelines that were MLPs in 2014, regardless of
subsequent changes in corporate form. By applying these adjustments to
all pipelines subject to the Income Tax Policy Change, we will ensure
that the entirety of the page 700 data reflects the same MLP income tax
allowance policy for both 2014 and 2019. Furthermore, those pipelines
that converted from the MLP form to the corporate form incurred
increased tax costs as a result of the change in business form. This
cost change, just like any other cost change, should be reflected in
the index.\39\
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    \38\ See 2018 Income Tax Policy Statement, 162 FERC ] 61,227 at
PP 45-46.
    \39\ As the Commission has explained, investors in MLP pipelines
and C-Corporation pipelines incur an investor-level income tax cost
that is reflected in the pipeline's rate of return. SFPP, L.P.,
Opinion No. 511-C, 162 FERC ] 61,228, at PP 22-24 (2018), order on
reh'g and compliance, Opinion No. 511-D, 166 FERC ] 61,142, at PP
10-11 (2019), aff'd, SFPP, L.P. v. FERC, 967 F.3d 788, 795-97 (D.C.
Cir. 2020). However, unlike MLPs, corporations incur an additional
corporate income tax liability prior to the distributions to
investors. See Opinion No. 511-C, 162 FERC ] 61,228 at PP 22 n.44,
25 n.53.
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B. Statistical Data Trimming

1. Comments
    21. AOPL argues that the Commission should calculate the index
level by trimming the data set to the middle 80%.\40\ AOPL asserts that
absent errors in the data, it is preferable to use more data points
because this makes the measurement of industry-wide cost changes more
precise.\41\ AOPL contends that using the middle 50% in this proceeding
would go beyond excluding statistical outliers by removing valuable
data from the analysis, resulting in a less accurate measurement of
industry cost changes.\42\
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    \40\ AOPL Initial Comments at 17-24; AOPL Reply Comments at 7-9.
    \41\ AOPL Initial Comments at 18 (quoting Shehadeh Initial Decl.
at 23); AOPL Reply Comments at 9.
    \42\ AOPL Initial Comments at 19. Trimming the data set to the
middle 50% would exclude 80 of the 160 pipelines in the data set,
whereas trimming to the middle 80% would exclude 32 pipelines.
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    22. In addition, AOPL maintains that considerations the Commission
has previously found to support trimming the data set to the middle 50%
should not control here. It states that whereas the Commission found in
Order No. 561 that data reporting errors supported restricting the
analysis to the middle 50%, subsequent improvements in reporting
accuracy obviated these concerns.\43\ Furthermore, AOPL states that
contrary to the Commission's finding in the 2015 Index Review, the fact
that pipelines in the middle 80% are further removed from the median
does not support excluding their cost data unless that data is
anomalous or spurious.\44\ Designated Carriers, Kinder Morgan, and EIC
support AOPL's proposal to rely solely upon the middle 80%.\45\
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    \43\ AOPL Initial Comments at 21-22 (citing AOPL I, 83 F.3d at
1433).
    \44\ Id. at 23 (citing AOPL II, 281 F.3d at 245-46).
    \45\ Designated Carriers Initial Comments at 7; Kinder Morgan
Initial Comments at 3; EIC Comments at 7-8, 17.
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    23. Shippers oppose use of the middle 80% and argue that the record
does not provide a sufficient basis for departing from the Commission's
practice in the 2015 and 2010 Index Reviews of relying solely upon the
middle 50%.\46\ Shippers cite the Commission's findings in the 2015 and
2010 Index Reviews that using the middle 50% provides a simple and
effective method of excluding outlying data from the sample and
minimizes the need to analyze individual pipeline data. Here, Shippers
argue that the middle 80% contains outlying data and that AOPL did not
undertake a company-by-company review of the incremental data included
in the middle 80% to prove otherwise.\47\ Joint Commenters also contend
that the middle 80% is more dispersed than the middle 50% in this
proceeding and the middle 80% in prior index reviews, indicating that
it contains cost changes that are not representative of typical
experience.\48\ Moreover, Shippers assert that it is unnecessary to use
the middle 80% in this proceeding to obtain a representative sample of
industry cost changes because the middle 50% contains a greater
percentage of barrel-miles subject to the index (82%) than in the 2015
Index Review (56%) or the 2010 Index Review (76%).\49\
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    \46\ Joint Commenters Initial Comments at 15-16; Joint
Commenters Reply Comments at 5-7; Liquids Shippers Reply Comments at
17; CAPP Reply Comments at 15-16.
    \47\ Joint Commenters Reply Comments at 10 (citing Brattle Group
Report at 13-20); Brattle Group Report at 22; Liquids Shippers Reply
Comments at 19-21 (citing Crowe Reply Aff. at 4-5).
    \48\ Joint Commenters Reply Comments, Brattle Group Report at
17-20.
    \49\ Joint Commenters Reply Comments at 7-8; Liquids Shippers
Reply Comments at 26.
---------------------------------------------------------------------------

    24. Shippers further argue that AOPL's arguments for using the
middle 80% are unavailing and inconsistent with the Commission's
findings in the 2015 Index Review.\50\ Joint Commenters maintain that
the Commission has previously rejected the argument that using the
middle 50% will bias the index calculation downwards.\51\ Liquids
Shippers state that AOPL incorrectly argues that the sole purpose of
statistical data trimming is to remove inaccurate data and statistical
outliers. According to Liquids Shippers, data trimming also serves to
exclude data that, while accurate, fails to represent normal industry
cost experience.\52\
---------------------------------------------------------------------------

    \50\ Joint Commenters Reply Comments at 9-11 (quoting 2015 Index
Review, 153 FERC ] 61,312 at P 42 n.80) (citing 2015 Index Review,
153 FERC ] 61,312 at P 43); Liquids Shippers Reply Comments at 23-25
(citing 2015 Index Review, 153 FERC ] 61,312 at PP 40, 43).
    \51\ Joint Commenters Reply Comments, Brattle Report at PP 46-48
(citing 2015 Index Review, 153 FERC ] 61,312 at P 43; Order No. 561-
A, FERC Stats. & Regs. ] 31,000 at 31,098).
    \52\ Liquids Shippers Reply Comments at 22-23 (citing Order No.
561-A, FERC Stats. & Regs. ] 31,000 at 31,097).
---------------------------------------------------------------------------

2. Commission Determination
    25. Based upon our review of the instant record, we calculate the
index level by trimming the data set to the middle 80%. We recognize
that this is a departure from the Commission's practice in the 2015 and
2010 Index Reviews of trimming the data set to the middle 50%.\53\ An
agency may change its position in light of experience or further
analysis so long as it articulates a satisfactory explanation for its
new position.\54\ Thus, notwithstanding the

Commission's determinations in the 2015 and 2010 Index Reviews, the
Commission ``retain[s] a substantial measure of freedom to refine,
reformulate, and even reverse [its] precedents in the light of new
insights'' \55\ if it describes good reasons for the new policy.\56\ In
the NOI, the Commission requested comments that address whether the
Commission should continue to trim the data set to the middle 50% or
adopt an alternative approach to data trimming, including using the
middle 80%.\57\ Based upon our review of the resulting record, we
conclude that using the middle 80% is appropriate for this index
review.
---------------------------------------------------------------------------

    \53\ 2015 Index Review, 153 FERC ] 61,312 at PP 42-44; 2010
Index Review, 133 FERC ] 61,228 at PP 60-63.
    \54\ E.g., Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117,
2125-26 (2016) (``Agencies are free to change their existing
policies so long as they provide a reasoned explanation for the
change. . . . But the agency must at least display awareness that it
is changing position and show that there are good reasons for the
new policy.'') (internal quotation mark and citations omitted); New
England Power Generators Ass'n, Inc. v. FERC, 879 F.3d 1192, 1201
(D.C. Cir. 2018) (``So long as any change is reasonably explained,
it is not arbitrary and capricious for an agency to change its mind
in light of experience . . . or further analysis or other factors
indicating that the agency's earlier decision should be altered or
abandoned.'' (citing FCC v. Fox Television Studios, 556 U.S. 502,
514-16 (2009)); Defenders of Wildlife v. Zinke, 856 F.2d 1248, 1262
(9th Cir. 2017).
    \55\ Davila-Bardales v. INS, 27 F.3d 1, 5 (1st Cir. 1994)
(citing Rust v. Sullivan, 500 U.S. 173, 186-87 (1991); Motor
Vehicles Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29,
42 (1983)).
    \56\ FCC v. Fox Television Studios, Inc., 556 U.S. at 515; see
also id. (explaining that an agency ``need not demonstrate to a
court's satisfaction that the reasons for the new policy are better
than the reasons for the old one; it suffices that the new policy is
permissible under the statute, that there are good reasons for it,
and that the agency believes it to be better'') (emphasis in
original).
    \57\ NOI, 171 FERC ] 61,239 at P 9 (citing 2005 Index Review,
114 FERC ] 61,293).
---------------------------------------------------------------------------

    26. Three primary considerations support using the middle 80%
instead of the middle 50% in this proceeding. First, we find it is
appropriate to consider more data in measuring industry-wide cost
changes rather than less. The Kahn Methodology derives the index level
by computing the central tendency of a statistically trimmed data
sample. As a general matter, considering a broader sample of data
should enhance the Commission's calculation of the central tendency of
industry cost experience. In this proceeding, using the middle 50%
would exclude 48 pipelines \58\ from the Commission's review of
industry-wide cost changes over the 2014-2019 period. We are reluctant
to discard this additional data.
---------------------------------------------------------------------------

    \58\ Shehadeh Initial Decl. at 26.
---------------------------------------------------------------------------

    27. Second, we find in this proceeding that ``normal'' cost changes
are best defined by using the inclusive data sample embodied in the
middle 80%. Prematurely discarding data prior to determining the
central tendency could skew the index such that it does not actually
reflect industry-wide trends. By using this inclusive data sample, the
Commission is able to accurately identify the central tendency of
industry-wide cost changes that reflects the ``normal'' cost changes
recoverable by the index.\59\ Moreover, even if the middle 80% (or, for
that matter, the middle 50%) includes relatively high cost changes at
its upper bound, the index average will be significantly below that
upper bound and will not allow pipelines to recover such extraordinary
costs.\60\ Rather, the index will reflect the central tendency of the
industry-wide data, which, by definition, represents normal industry-
wide costs. Absent a compelling showing that including data from the
middle 80% distorts our measurement of the industry-wide central
tendency, we are inclined to consider this more comprehensive data set.
---------------------------------------------------------------------------

    \59\ The definition of idiosyncratic data can vary from review
to review. In any given five-year review period, an historically
high level of cost change (due to, e.g., new regulatory
requirements) may be widely experienced by pipelines across the
industry and, accordingly, will be reflected in the central tendency
of the industry-wide data and thus identified as a ``normal'' cost
change. On the other hand, if during a different five-year review
period, only a small number of pipelines experience that same level
of cost change, then the cost change will be idiosyncratic and will
differ significantly from the central tendency of the industry-wide
data. Generally, the best method of identifying normal and
idiosyncratic costs is to consider an inclusive and broadly
representative data set such as the middle 80% and to compare those
costs to the central tendency of that data set.
    \60\ Likewise, if the lower bound of the middle 80% includes
pipelines with cost changes that are below industry norms, the index
average will significantly exceed this lower bound.
---------------------------------------------------------------------------

    28. Third, along similar lines, we emphasize that mere generalized
concerns about outlying or unrepresentative data do not justify
excluding the experiences of pipelines in the incremental 30% (i.e.,
those pipelines that are included in the middle 80% but not the middle
50%) from our review of industry cost changes. Unlike in prior index
reviews, the record in this proceeding does not contain sufficient
evidence that pipelines in the incremental 30% experienced anomalous
cost changes that would skew the index. In the 2015 and 2010 Index
Reviews, commenters presented detailed analyses demonstrating that the
incremental 30% contained anomalous cost changes resulting from factors
not broadly shared across the industry that would materially distort
the index calculation.\61\ The record here does not contain a
comparably detailed analysis of the incremental 30%. Although Joint
Commenters identify 7 pipelines (out of 48) with anomalous cost changes
in the incremental 30%, removing those pipelines from the sample would
only marginally affect the central tendency of the middle 80%.\62\
Furthermore, the record contains no evidence that the cost experiences
of the remaining 41 pipelines similarly diverged from industry
norms.\63\ Finally, the mere presence of pipelines with anomalous cost
experiences in a data sample is not sufficient reason to use an
alternative sample. The Commission recognized in the 2015 and 2010
Index Reviews that the middle 50% likely includes pipelines with
idiosyncratic cost experiences, such as rate base expansions.\64\
Accordingly, this record does not justify discarding the additional
data in the incremental 30% via statistical data trimming to the middle
50%.\65\
---------------------------------------------------------------------------

    \61\ For instance, commenters proposing various manual data
trimming methodologies demonstrated that the middle 80% included
pipelines whose cost changes resulted from idiosyncratic
circumstances such as major rate base expansions or increases in net
plant. See 2015 Index Review, 153 FERC ] 61,312 at PP 20-29; 2010
Index Review, 133 FERC ] 61,228 at PP 34-55.
    \62\ When these pipelines are removed from the data set, the
mean of the middle 80% declines from 1.46% to 1.29%, while the
median and weighted mean remain nearly unchanged. This reduces the
composite central tendency of the middle 80% only marginally, from
0.78% to 0.72%. Compare Attachment A, Ex. 1, with id., Ex. 6.
Furthermore, even this limited reduction may be exaggerated because
it results in part from reducing the overall number of pipelines in
the sample, which would tend to lower the mean of the sample.
Additionally, because four of the seven removed pipelines are
located below the median, it is unsurprising that excluding them
from the middle 80% would reduce the mean.
    \63\ In using the middle 80% in this proceeding, we observe that
the index level established herein is nonetheless the lowest index
since the 2000 Index Review. This mitigates concerns that using the
middle 80% leads to an anomalous index level.
    \64\ See 2015 Index Review, 153 FERC ] 61,312 at P 33 n.60
(noting that 26 of the 41 pipelines that commenters proposed to
exclude for reporting ``non-comparable'' data were included in the
middle 50%); 2010 Index Review, 133 FERC ] 61,228 at P 48 n.25
(noting that 7 of the 25 pipelines that a commenter proposed to
exclude for experiencing rate base expansions were included in the
middle 50%). Just as the presence of those pipelines did not
preclude use of the middle 50% in earlier reviews, we find that the
pipelines Joint Commenters identified do not preclude use of the
middle 80% in this proceeding.
    \65\ AOPL also argues that the Commission should use the middle
80% because it conforms more closely to a lognormal distribution
than the middle 50%. AOPL Initial Comments at 20-21, 24 (citing
Shehadeh Initial Decl. at 24); AOPL Reply Comments at 8-9. Shippers
contend that this argument is mathematically flawed and unsound.
Joint Commenters Reply Comments, Brattle Report at PP 50-54; Liquids
Shippers Reply Comments at 24-25 (quoting Crowe Reply Aff. at 5).
Given these objections, we do not rely upon this argument in
reaching our decision to use the middle 80% here. See also 2015
Index Review, 153 FERC ] 61,312 at P 43 (rejecting this same
argument).
---------------------------------------------------------------------------

    29. Shippers' arguments for a contrary result are unavailing.
Notwithstanding that the middle 80% is more dispersed than in prior
reviews, the record contains no evidence addressing

whether the more dispersed cost changes in the incremental 30% resulted
from pipeline-specific factors rather than from broadly shared
circumstances representative of ordinary pipeline operations.
Furthermore, Shippers' own evidence demonstrates the dispersion is
primarily just a few pipelines at the top of the middle 80%. Although
it may be possible that analyses of the middle 80% in this proceeding
similar to those provided in prior index reviews would have raised
similar concerns about considering the middle 80%, no commenter
presented such a comprehensive analysis. In the absence of a more
detailed showing, we prefer to use a larger sample, representing a
broader array of cost experience, in determining the data set's central
tendency.
    30. We are likewise unpersuaded by Shippers' reliance upon the
Commission's findings in the 2015 and 2010 Index Reviews that the
middle 80% includes pipelines further removed from the median and that
using the middle 50% provides a more effective method of excluding
outlying data. As discussed above, we have reconsidered our prior
findings and now conclude that based upon the record in this
proceeding, the benefits of considering the additional data in the
middle 80% outweigh concerns about introducing anomalous data that
could bias the index calculation.
    31. We also find unpersuasive Shippers' argument that it is
unnecessary to use the middle 80% to obtain a representative sample of
industry cost data. We acknowledge that the middle 50% represents a
greater percentage of barrel-miles subject to the index than in 2015 or
2010. However, we find that on this record, it is preferable to
consider additional data that more fully reflects the diversity of
industry cost experience than the middle 50%.
    32. Similarly, we disagree with Shippers' assertion that using the
middle 80% here would result in an index that encompasses extraordinary
cost changes.\66\ As discussed above, the Kahn Methodology determines
the index level using the central tendency of the trimmed data sample,
and does not set the index at the sample's upper or lower bounds. Thus,
using the middle 80% will not allow pipelines at the top or bottom of
the sample to recover their particular cost changes, which by
definition would diverge from the experience of pipelines closer to the
central tendency. Instead, this approach only ensures that those
pipelines' cost experiences are reflected in calculating the data set's
central tendency. As discussed above, we find that considering a wide
spectrum of industry experience will aid the Commission in calculating
a central tendency that better represents normal industry-wide cost
changes.
---------------------------------------------------------------------------

    \66\ See Order No. 561-A, FERC Stats. & Regs. ] 31,000 at 31,097
(rejecting request to adopt index ``sufficiently high and generous
to encompass even the most extraordinary costs'' because such an
index ``would provide windfalls to many oil pipelines by allowing
rate changes substantially above cost changes'').
---------------------------------------------------------------------------

C. Liquids Shippers' Proposal To Calculate the Composite Measure of
Central Tendency Using the Weighted Median

1. Comments
    33. As discussed above, the Kahn Methodology calculates the median,
mean, and weighted mean of the data set and averages the results to
calculate a composite measure of central tendency. Liquids Shippers
argue that the weighted mean of the data set in this proceeding accords
undue weight to two pipelines, Colonial and Enbridge Energy, L.P.
Liquids Shippers allege that these pipelines are substantial outliers
in terms of barrel-miles and cost changes \67\ and that both reported
inaccurate page 700 data for 2014 and 2019.\68\ Because the weighted
mean accords significant weight to these pipelines, Liquids Shippers
state that using it to calculate the composite measure of central
tendency will skew the index level upwards and fail to track normal
industry-wide cost changes.\69\
---------------------------------------------------------------------------

    \67\ Liquids Shippers Initial Comments at 13-15. For instance,
Liquids Shippers state that Colonial and Enbridge comprise 40% of
the total barrel-miles for all of the 160 pipelines in the data set.
Id. In addition, Liquids Shippers claim that Colonial reported a
higher unit cost change over the 2014-2019 period than 69 of the 80
pipelines included in the middle 50% and Enbridge reported a higher
cost change than 47 of those pipelines. Id. at 15.
    \68\ Specifically, Liquids Shippers claim that Colonial reported
an inaccurate capital structure in both 2014 and 2019 and that
Enbridge's reported ROEs are inconsistent with Commission policy.
Id. at 17-19.
    \69\ Id. at 16-19.
---------------------------------------------------------------------------

    34. To remedy this issue, Liquids Shippers propose to replace the
weighted mean in the index calculation with the median of the barrel-
mile weighted cost changes in the middle 50% (weighted median),\70\ as
calculated by their witness Elizabeth H. Crowe. Liquids Shippers
contend that the Commission has recognized that the median is the
preferred statistical measure of central tendency where the data
distribution is highly skewed.\71\ Thus, Liquids Shippers argue that
using the weighted median is a statistically appropriate method of
ameliorating the undue influence that Colonial and Enbridge exert upon
the index calculation.\72\ Alternatively, if the Commission decides not
to replace the weighted mean with the weighted median, Liquids Shippers
propose reducing the weighting afforded to the weighted mean in the
Kahn Methodology from 33.3% to 20% or 10%.\73\
---------------------------------------------------------------------------

    \70\ The standard median identifies the cost change for which
the same number of pipelines have a smaller cost change and a larger
cost change. By contrast, the weighted median identifies the cost
change for which the same share of barrel-miles (rather than the
number of pipelines) is accounted for by the pipelines below and
above the selected median.
    \71\ Liquids Shippers Initial Comments at 19-20 (quoting Order
No. 561-A, FERC Stats. & Regs. ] 31,000 at 31,097).
    \72\ Id. at 20.
    \73\ Id. at 20 n.45; Crowe Initial Affidavit at 8-9.
---------------------------------------------------------------------------

    35. Pipelines oppose this proposal and argue that Liquids Shippers
have not justified modifying the Kahn Methodology to exclude the
weighted mean. Pipelines disagree with Liquids Shippers' claim that the
weighted mean affords excessive weight to Colonial or Enbridge. Rather,
Pipelines assert that averaging the weighted mean with the median and
unweighted mean ensures that larger pipelines receive appropriate
weighting in the index calculation, consistent with indexing's aim to
measure cost changes on an industry-wide basis. Pipelines also assert
that neither Colonial nor Enbridge is an outlier because both pipelines
are included in the middle 50% of the data set. In addition, Pipelines
maintain that Liquids Shippers' allegations regarding Colonial's and
Enbridge's page 700 inputs are both irrelevant and outside the scope of
the five-year review. Finally, Pipelines contend that Liquids Shippers'
calculation of the weighted median is methodologically flawed and would
distort the index by affording undue weight to smaller pipelines in the
data set.\74\ Colonial filed separate reply comments echoing these
arguments and urging the Commission to disregard Liquids Shippers'
claims regarding its page 700.\75\
---------------------------------------------------------------------------

    \74\ AOPL Reply Comments at 22-27; Designated Carriers Reply
Comments at 6-13.
    \75\ Colonial Reply Comments at 3-11.
---------------------------------------------------------------------------

2. Commission Determination
    36. We decline to adopt Liquids Shippers' proposal to replace the
weighted mean with the weighted median. First, removing the weighted
mean from the index calculation would contravene longstanding
Commission practice and Dr. Kahn's testimony in the rulemaking
proceeding that established

the indexing regime. In proposing to average the weighted mean with the
median and unweighted mean to derive the composite central tendency,
Dr. Kahn explained that each of these measures ``captured a significant
aspect of the composite results from an industry perspective.'' \76\
The Commission credited Dr. Kahn's testimony and adopted this approach
to calculating the composite central tendency in that proceeding and in
all subsequent five-year reviews. As discussed below, we find that
Liquids Shippers' arguments do not provide an adequate basis for
departing from this consistent practice.
---------------------------------------------------------------------------

    \76\ Testimony of Dr. Alfred E. Kahn, Docket No. RM93-11-000, at
9 (filed Aug. 12, 1993).
---------------------------------------------------------------------------

    37. Second, we reject as unpersuasive Liquids Shippers' claim that
the Commission should replace the weighted mean merely because it
provides greater weight to larger pipelines like Colonial and
Enbridge.\77\ The index strives to track cost changes on an industry-
wide basis among pipelines of all sizes. To this end, the Kahn
Methodology strikes a balance between large and small pipelines by
determining the central tendency of the cost data using two measures
that do not take pipeline size into account (the median and the mean)
together with the weighted mean, which weights each pipeline's cost
change by its transported volumes. Including the weighted mean in this
analysis ensures that the cost-change calculation takes sufficient
account of pipeline size so that ``minor pipelines do not skew'' the
result.\78\ Thus, the fact that the weighted mean may accord additional
weight to larger pipelines in this data set is fully consistent with
its role in the index calculation. Removing it from the analysis as
Liquids Shippers propose would upset the balance between large and
small pipelines that the Kahn Methodology achieves. For this reason, we
likewise reject Liquids Shippers' alternative proposal to reduce the
weighting of the weighted mean in the calculation from 33.3% to 20% or
10%.
---------------------------------------------------------------------------

    \77\ The Commission has previously recognized that large
pipelines like Colonial can exert significant influence upon the
weighted mean. 2015 Index Review, 153 FERC ] 61,312 at P 24 n.49
(explaining that ``[b]ecause Colonial is a large pipeline, it
heavily influences the weighted average in the Kahn Methodology'').
    \78\ AOPL II, 281 F.3d at 241. Although Order No. 561-A
recognized that the median is often the preferred statistical
measure of central tendency where the distribution is highly skewed,
the Commission made this observation in affirming the use of
statistical data trimming to derive a median sample of the overall
data set rather than in the context of using the median to determine
the data set's central tendency. See Order No. 561-A, FERC Stats. &
Regs. ] 31,000 at 31,096-97. In that proceeding and in each
subsequent index review, the Commission has consistently calculated
the composite measure of central tendency by averaging the median,
mean, and weighted mean.
---------------------------------------------------------------------------

    38. Third, Ms. Crowe's calculation of the weighted median is
methodologically flawed. AOPL's witness Dr. Shehadeh testifies that the
established statistically appropriate method for calculating the
weighted median, as applied to pipeline cost changes, is to identify
the cost change in the data set for which the same share of barrel-
miles (rather than the same number of pipelines) is accounted for by
the pipelines below and above the selected median.\79\ Shehadeh Reply
Decl. at 11 n.17 (citing Thomas H. Cormen, Introduction to Algorithms
194 (2009); 6 F.Y. Edgeworth, On Observations Relating to Several
Quantities 279-85 (1887) (The weighted median may be defined as
follows:
---------------------------------------------------------------------------

    \79\ Shehadeh Reply Decl. at 11.
    [GRAPHIC] [TIFF OMITTED] TR16FE21.153

This value is appropriately derived by ordering the pipelines by cost-
change percentage, computing each pipeline's share of total barrel-
miles, and measuring the cumulative share of total barrel-miles
represented as each pipeline is included in the sample.\80\ The
pipeline whose share of total barrel-miles causes the cumulative share
to reach 50% represents the data set's weighted median.\81\
---------------------------------------------------------------------------

    \80\ For example, consider a set of numbers 3, 4, 6, 10, where
each number is weighted 1, 2, 3, and 5, respectively. In this
scenario, the weighted median of the data set would equal 6, because
including 6 in the set increases the cumulative weighting to 50%.
(1+2+3)/(1+2+3+5) = 6/11 = 54.55%. By contrast, the standard median
would be 5, which equals the average of the second and third numbers
of the set.
    \81\ Dr. Shehadeh correctly performs this calculation using
Liquids Shippers' data set and derives a weighted median cost change
of 0.68%, as reported by Enbridge. Shehadeh Reply Decl., App. B, Ex.
1.
---------------------------------------------------------------------------

    39. Ms. Crowe, however, performed a different calculation by
identifying the median weighted barrel-mile cost-change percentage and
dividing that figure by the average of those pipelines' 2014 barrel-
miles.\82\ This calculation departs from the proper method of
calculating the weighted median discussed above. Rather than identify
the pipeline that causes the cumulative share of total-barrel miles
represented in the sample to reach 50%, Ms. Crowe derives the median
value of the weighted cost-change percentages for 2019 without regard
to the barrel-miles represented below and above that cost change.\83\
Unlike the Commission's calculation of the standard median and Dr.
Shehadeh's calculation of the weighted median, Ms. Crowe does not order
pipelines by cost changes, and instead orders them by cost changes
times barrel-miles.\84\ Thus, the median of Ms. Crowe's data sample
does not capture the central tendency of industry-wide cost changes, as
evidenced by the significant and multidirectional fluctuations above
and

below the purported median that follow no discernible pattern.\85\
Accordingly, we conclude that Ms. Crowe's calculation does not provide
a useful measure of central tendency for purposes of calculating the
index.\86\
---------------------------------------------------------------------------

    \82\ Shehadeh Reply Decl. at 13; see also Crowe Initial Aff.,
App. 6 at Cost Changes Tab. Although Ms. Crowe's testimony on this
issue was unclear, our understanding of her calculation is as
follows. First, she identified the pipelines with percentage cost
changes in the middle 50%. Second, she multiplied each pipeline's
percentage cost change by its barrel-miles. Third, she arranged the
pipelines based upon these results from smallest to largest. Fourth,
she determined the median of this data sample. Because Ms. Crowe's
sample consists of an even number of pipelines, the median lies at
the midpoint between two pipelines, Hilcorp Pipeline Company, LLC,
and BOE Pipeline, LLC. Finally, she divided the median percentage
cost change by those pipelines' 2014 barrel-miles, which produces a
final result of -0.57%. See Crowe Initial Aff., App. 3, at Cost
Changes Tab; Shehadeh Reply Decl. at 10, Figure 1 and App. B, at
Figure 1--Chart Backup Tab.
    \83\ In essence, Ms. Crowe attempts to calculate the weighted
median by using a modified version of the formula the Commission
uses to compute the weighted mean.
    \84\ See Crowe Initial Aff., App. 3 at Cost Changes Tab. Under
this approach, it is unclear whether the median pipeline of a given
sample reported (a) relatively high cost changes and low barrel-
miles or (b) relatively low cost changes and high barrel-miles.
    \85\ A small shift in the data sample's median would produce
significant and multidirectional changes in the calculation's
result. For instance, a median reflecting the pipeline with the next
lowest weighted percentage change (Wildcat Liquids Caddo LLC) would
reduce Ms. Crowe's result from 0.57 to -1.74% (a decrease of over
200%), whereas a median reflecting the next highest change (reported
by Wesco Pipeline, LLC) would reduce the result by an even greater
amount, from -0.57% to -2.28% (a decrease of 400%). These haphazard
results do not reflect a convergence towards a central tendency of
industry-wide cost changes.
    \86\ In addition to failing to reflect the central tendency of
industry-wide cost changes, Ms. Crowe's calculation also improperly
reduces the weighting attributed to larger pipelines in the data
set. Because Ms. Crowe orders the pipelines by barrel-mile cost
change times barrel-miles, a pipeline with high barrel-miles would
likely only lie near the median of the data sample if it reported
extremely low cost changes. Thus, Ms. Crowe's methodology would
nullify the influence of larger pipelines upon the index calculation
and thereby defeat the purpose of relying upon a weighted measure of
central tendency. See AOPL II, 281 F.3d at 241 (explaining that the
weighted mean serves to ensure that ``minor firms do not skew the
result'').
---------------------------------------------------------------------------

    40. Fourth, Liquids Shippers' challenges to Colonial's and
Enbridge's page 700 data are both misplaced and unavailing on the
merits. Indexing proceedings are not an appropriate forum for
challenging specific pipelines' page 700 inputs \87\ and the Commission
has declined to scrutinize individual pipeline data in prior index
reviews.\88\ In any event, the record does not support Liquids
Shippers' claim that Colonial and Enbridge reported outlying cost
changes. Both pipelines are included in the middle 50% of all pipelines
in the data set, which indicates that their cost experiences did not
diverge significantly from industry norms. In fact, as Dr. Shehadeh
demonstrates, Enbridge's reported cost change represents the correctly
calculated weighted median of the data sample,\89\ refuting Liquids
Shippers' contention that it is an outlier in terms of cost changes.
---------------------------------------------------------------------------

    \87\ See AOPL I, 83 F.3d at 1437 (holding that the Commission
did not err in Order No. 561 by declining to periodically review
individual pipeline costs and instead requiring shippers to
challenge individual pipeline rates via protests or complaints); see
also Calnev Pipe Line L.L.C., 127 FERC ] 61,304, at P 5 (2009)
(``[T]he Commission has made quite clear that it will not review
allegations regarding the appropriateness of a pipeline's cost of
service or the accuracy of its accounting in an index proceeding.
Such allegations must be included in a complaint once the index-
based filing becomes effective.'' (citing SFPP, L.P., 123 FERC ]
61,317 (2008); BP W. Coast Prods. LLC v. SFPP, L.P., 121 FERC ]
61,243 (2007)).
    \88\ 2015 Index Review, 153 FERC ] 61,312 at PP 22-30, 33-39
(declining to adopt manual data trimming proposals that would have
required analyzing individual pipeline data); 2010 Index Review, 133
FERC ] 61,228 at PP 48-55 (same).
    \89\ Shehadeh Reply Decl. at 14; see also supra n.81.
---------------------------------------------------------------------------

D. Liquids Shippers' Proposal To Adopt Standardized ROEs for 2014 and
2019

1. Comments
    41. Liquids Shippers state that the Commission should replace the
ROEs that pipelines reported on page 700 for 2014 and 2019 with single,
standardized figures for both years.\90\ Liquids Shippers contend that
the data used to calculate the index level should conform to the
Commission's cost-of-service methodology \91\ and that the reported
ROEs for 2014 and 2019 are inconsistent with this methodology in two
respects. First, Liquids Shippers claim that pipelines' reported ROEs
are self-selected and do not reflect what investors would demand in the
market.\92\ Second, Liquids Shippers state that if all oil pipeline
rates were litigated at the same time, absent unusual circumstances,
the Commission would adopt the same ROE for every pipeline because
regulated pipelines typically fall within a broad range of average
risk.\93\ Liquids Shippers assert that the reported ROEs conflict with
this principle because they vary substantially.\94\
---------------------------------------------------------------------------

    \90\ Liquids Shippers Initial Comments at 21-22.
    \91\ Id. at 21, 25 (citing 2015 Index Review, 153 FERC ] 61,312
at PP 13, 15).
    \92\ Id. at 21 (citing FPC v. Hope Nat. Gas Co., 320 U.S. 591,
603 (1944); Bluefield Water Works & Improvement Co. v. Pub. Serv.
Comm'n of W. Va., 262 U.S. 679, 692-93 (1923); Farmers Union Cent.
Exch., Inc. v. FERC, 734 F.2d 1486, 1502 (D.C. Cir. 1984)).
    \93\ Id. at 22-23. Liquids Shippers assert that regulated
pipelines typically face comparable risks and that the Commission
typically sets oil pipeline ROEs at the median of the proxy group
results. Id.
    \94\ Id. at 23. For instance, Liquids Shippers state that among
the 160 pipelines included in the untrimmed data set, reported page
700 ROEs for 2019 ranged from 0.9% to 22.3%. Id. at 24 (citing Crowe
Initial Aff. at 9).
---------------------------------------------------------------------------

    42. Liquids Shippers also claim that uncertainty surrounding the
Commission's oil pipeline ROE policy undermines the reliability of the
reported ROEs for 2019. They state that the Commission initiated a
review of its ROE policy in Docket No. PL19-4-000 on March 21, 2019 but
did not clarify its ROE methodology for oil pipelines until it issued
the ROE Policy Statement on May 21, 2020.\95\ Because oil pipelines
were required to submit page 700 cost-of-service data for 2019 in April
2020, Liquids Shippers allege that pipelines were not certain of the
Commission's prevailing policy when they reported their 2019 ROEs. In
support of this claim, Liquids Shippers observe that two pipelines
submitted updated Form No. 6 filings in July 2020 indicating that the
page 700 ROEs they filed in April 2020 did not comply with the
Commission's then-applicable policy relying solely upon the DCF
model.\96\
---------------------------------------------------------------------------

    \95\ Id. at 25-26 (citing Inquiry Regarding the Commission's
Policy for Determining Return on Equity, 166 FERC ] 61,207 (2019)).
As discussed above, the Commission issued a policy statement
revising its ROE methodology for natural gas and oil pipelines on
May 21, 2020. ROE Policy Statement, 171 FERC ] 61,155.
    \96\ Id. at 27-28 (citing Crowe Initial Aff., App. 4 at 1-2)
(referring to updated Form No. 6 filings of Plains Pipeline, LP and
Rocky Mountain Pipeline System LLC).
---------------------------------------------------------------------------

    43. In light of these concerns, Liquids Shippers urge the
Commission to replace each pipeline's reported page 700 ROE for 2014
and 2019 with standardized ROEs for purposes of calculating the index
level. For 2014, Liquids Shippers propose a standardized ROE of 10.29%,
which 54 pipelines reported in their 2014 page 700 filings.\97\ For
2019, Liquids Shippers propose to use the 10.02% ROE that Trial Staff
has proposed in testimony in an ongoing oil pipeline rate proceeding
based upon data for the six-month period ending in November 2019.\98\
---------------------------------------------------------------------------

    \97\ Ms. Crowe states that 45 pipelines reported a 10.29% ROE on
their page 700s for 2014. Crowe Initial Aff. at 11-12. However, as
shown in Attachment A, Exhibit 7 to this order, the Commission's
review of Form No. 6 filings submitted in 2016 indicates that 54
pipelines reported this ROE for 2014 in the column on page 700 for
prior-year data.
    \98\ Liquids Shippers Initial Comments at 30-31; Crowe Initial
Aff. at 12 (citing Trial Staff, Direct and Answering Cost-Based Rate
Testimony of Commission Trial Staff Witness Robert J. Keyton, Docket
Nos. OR18-7-002 et al. (filed Jan. 14, 2020)).
---------------------------------------------------------------------------

    44. Pipelines oppose Liquids Shippers' proposal and disagree with
their assertions. AOPL disputes Liquids Shippers' claim that variation
in the reported page 700 ROEs indicates that this data is unreliable or
inconsistent with Commission policy.\99\ Pipelines contend, moreover,
that the Commission found in the 2015 Index Review that statistical
data trimming is sufficient to remove pipelines with outlying equity
cost changes from the data set and that Liquids Shippers' arguments do
not undermine this conclusion.\100\ In addition, AOPL argues that
Liquids Shippers failed to support their proposed standardized ROEs and
that adopting their proposal would complicate the five-year review by
introducing complex cost-of-service ratemaking issues.\101\
---------------------------------------------------------------------------

    \99\ AOPL Reply Comments at 30.
    \100\ Id. at 28 (quoting 2015 Index Review, 153 FERC ] 61,312 at
P 17); Designated Carriers Reply Comments at 13-14 (same).
    \101\ AOPL Reply Comments at 32.

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

2. Commission Determination
    45. We decline to adopt Liquids Shippers' proposal to replace the
reported page 700 ROE data for 2014 and 2019 with standardized ROEs. We
conclude that Liquids Shippers have not adequately demonstrated that
the reported page 700 ROEs are unreliable or inconsistent with
Commission policy.
    46. Contrary to Liquids Shippers' contention, the fact that page
700 ROEs are self-reported does not demonstrate that this data is
unreliable or fails to capture the returns that investors would demand
in the market. Rather, one of the primary reasons the Commission
updated the index calculation to use page 700 data is that this data is
based upon ``established ratemaking techniques.'' \102\ During the
2014-2019 period, these techniques included determining ROE using the
DCF model, which is designed to reflect investors' required returns.
The instructions on page 700 required pipelines to determine their ROE
(as well as other page 700 inputs) consistent with this methodology and
pipelines submitted page 700 under oath and subject to sanction if
there were purposeful errors in their reported data.\103\ In addition,
if a pipeline makes any major changes to its application of the Opinion
No. 154-B methodology in preparing page 700, it must describe such
changes in a footnote on page 700. Given these facts, we find that
Liquids Shippers have not adequately demonstrated that the reported
page 700 ROE data is unreliable merely because pipelines self-
reported.\104\
---------------------------------------------------------------------------

    \102\ 2015 Index Review, 153 FERC ] 61,312 at P 15.
    \103\ See BP W. Coast Prods. LLC v. SFPP, L.P., 121 FERC ]
61,243, at P 9 (observing that ``pipelines submit their FERC Form
No. 6 under oath and exposes the pipeline and its employees to civil
and criminal sanctions if there are purposeful errors in'' applying
the Commission's existing cost-of-service methodology to develop the
underlying cost inputs). Furthermore, the Commission calculates the
index level based upon changes in cost over the applicable review
period, rather than total costs in a given year. Because the last
year of any particular review period (e.g., 2014-2019) is the first
year of the next review period (e.g., 2019-2024), any attempt by
pipelines to distort the index calculation by reporting inflated
cost data in the last year of one period would harm their interests
by establishing a higher cost baseline in the first year of the next
period.
    \104\ If a shipper determines that a pipeline has reported
inaccurate data on its page 700, the shipper may file a complaint
alleging that the pipeline did not properly apply the Opinion No.
154-B methodology in developing its page 700 cost inputs. See BP W.
Coast Prods. LLC v. SFPP, L.P., 121 FERC ] 61,243 at P 9 (explaining
that shippers may file ``a complaint that provides reasonable
grounds to conclude that the pipeline did not properly apply its
existing cost-of-service methodology to develop the underlying cost
inputs used to develop the Page 700 in its annual FERC Form No. 6,
or the inputs were improperly entered into its accounts or the
calculation.'').
---------------------------------------------------------------------------

    47. Similarly, variation among page 700 ROEs does not indicate that
the reported ROE data is unreliable. To the contrary, multiple factors
can cause the DCF model to yield different results for different
pipelines. For example, even when analyzing data from the same time
period, the appropriate proxy group may vary from pipeline to pipeline
depending upon differences in risk. Liquids Shippers themselves
acknowledge \105\ that although the Commission typically sets the real
ROE for oil pipelines at the median of the proxy group results, it may
set the ROE above or below the median where the record demonstrates
that the pipeline faces anomalously high or low risks.\106\
Accordingly, the fact that pipelines reported different ROEs for the
same years does not demonstrate that this data is inaccurate or
inconsistent with Commission policy. Moreover, the Commission explained
in the 2015 Index Review that to the extent a particular pipeline's per
barrel-mile equity cost changes departed substantially from industry
norms, that pipeline would not be among the middle 50% used to
calculate the index level.\107\ Similarly, such pipelines would not be
among the middle 80% used to calculate the index level in this
proceeding. Liquids Shippers provide no basis for altering this
conclusion.
---------------------------------------------------------------------------

    \105\ See Liquids Shippers Initial Comments at 22-23 (quoting El
Paso Nat. Gas Co., Opinion No. 528, 145 FERC ] 61,040, at P 592
(2013)).
    \106\ E.g., BP Pipelines (Alaska) Inc., Opinion No. 502, 123
FERC ] 61,287, at P 195 (2008) (citing Transcon. Gas Pipe Line
Corp., Opinion No. 414-A, 84 FERC ] 61,084, at 61,423-24 (1998)),
order on reh'g and compliance, 125 FERC ] 61,215 (2008), reh'g
denied, 127 FERC ] 61,317 (2009), aff'd sub nom. Flint Hills Res.
Alaska, LLC v. FERC, 726 F.3d 881 (D.C. Cir. 2010).
    \107\ 2015 Index Review, 153 FERC ] 61,312 at P 17.
---------------------------------------------------------------------------

    49. We conclude, moreover, that Liquids Shippers have not supported
their proposed standardized ROEs. For 2014, Liquids Shippers seek to
replace all pipelines' reported ROEs with an ROE figure that only 29%
of pipelines reported for that year.\108\ However, Liquids Shippers do
not demonstrate that this figure accurately measures the investor-
required cost of equity for all pipelines in the data set. Similarly,
Liquids Shippers do not justify why the Commission should adopt, as the
2019 ROE for all pipelines in the data set, a figure that a participant
has proposed in an ongoing hearing on which neither the Presiding Judge
nor the Commission have opined.\109\ Given that oil pipelines have
diverse business models and different risk levels, we cannot simply
assume that any single ROE could reflect the investor-required return
for all pipelines in the data set.
---------------------------------------------------------------------------

    \108\ Whereas Liquids Shippers state that 45 of 158 pipelines
filing page 700 for 2014 reported an ROE of 10.29%, the Commission's
review of Form No. 6 data indicates that 54 of 184 filing pipelines
reported that particular ROE for 2014. Compare Liquids Shippers
Initial Comments at 31 with Attachment A, Ex. 7.
    \109\ According to the most recent procedural schedule adopted
in Docket Nos. OR18-7-002 et al., the initial decision in that
proceeding is currently scheduled for issuance on May 28, 2021.
Epsilon Trading, LLC v. Colonial Pipeline Co., Docket No. OR18-7-
002, at Attachment A (June 23, 2020).
---------------------------------------------------------------------------

    50. Finally, we find that adopting Liquids Shippers' proposal would
undermine indexing's purpose as a simplified and streamlined ratemaking
regime. Whereas the Kahn Methodology promotes simplification by relying
upon reported page 700 data, Liquids Shippers' proposal would require
the Commission, in this proceeding and in future five-year reviews, to
undertake separate analyses to determine just and reasonable industry-
wide ROEs for the first and last years of the five-year review period.
Determining a just and reasonable ROE, particularly on an industry-wide
basis, would be a complex and fact-intensive inquiry that could require
considerable time and resources to resolve. The Commission explained in
the NOI that addressing such complex cost-of-service issues would
improperly complicate and prolong the five-year review process in
violation of EPAct 1992's mandate for simplified and streamlined
ratemaking,\110\ and Liquids Shippers have not refuted these concerns.
---------------------------------------------------------------------------

    \110\ NOI, 171 FERC ] 61,239 at P 11.
---------------------------------------------------------------------------

E. CAPP's Argument Regarding Negotiated Rate Contracts

1. Comments
    51. CAPP argues that the Commission should quantify the effects of
negotiated rate contracts upon oil pipelines' reported costs of equity.
CAPP states that these contracts typically contain provisions such as
shipper volume commitments that serve to transfer risk from the
pipeline to its shippers and that failing to reflect pipelines' reduced
risks in the page 700 data could improperly inflate the index
calculation.\111\ CAPP notes that the Commission found in the 2015
Index Review that the page 700 total cost-of-service would reflect any
reduction in the pipeline's risk, but argues that the page 700 data in
this proceeding does not indicate whether this occurred over the 2014-
2019 period.\112\ To provide

increased transparency, CAPP urges the Commission to consider requiring
pipelines to provide shippers with the workpapers underlying their page
700 calculations.\113\ AOPL contends CAPP's claims are unsupported and
that the Commission has previously rejected this precise argument.\114\
---------------------------------------------------------------------------

    \111\ CAPP Initial Comments at 2-5.
    \112\ Id. at 4 (quoting 2015 Index Review, 153 FERC ] 61,312 at
P 28).
    \113\ Id. at 5.
    \114\ AOPL Reply Comments at 33-37.
---------------------------------------------------------------------------

2. Commission Determination
    52. We find CAPP's arguments unpersuasive. First, as the Commission
explained in the 2015 Index Review, ``[t]o the extent that volume
commitments in [negotiated rate] agreements have reduced the pipeline's
risk, the page 700 total cost of service would reflect this reduction
in the embedded costs of equity and costs of debt.'' \115\ These
effects would tend to reduce pipeline costs and thereby produce a lower
index level, rendering CAPP's concerns unfounded. Although CAPP
questions whether the effects of reduced pipeline risk are reflected in
the page 700 data, it provides no basis for the Commission to conclude
that the reported data fails to adequately account for pipelines' risks
in measuring changes in cost of equity and costs of debt.
---------------------------------------------------------------------------

    \115\ 2015 Index Review, 153 FERC ] 61,312 at P 28.
---------------------------------------------------------------------------

    53. Second, to the extent that CAPP requests that the Commission
review individual pipeline data to evaluate the effects of contract
rates upon the pipeline's risks, this request is both unsupported and
misplaced. CAPP has not presented any method for quantifying any
disparity in the risks pipelines face when using contract rates versus
non-contract rates. Although CAPP states that the Commission should
consider requiring pipelines to provide shippers with the workpapers
underlying their page 700 cost of service calculations, it has not
explained how these workpapers would aid in identifying differences in
risk between contract and non-contract rates. Moreover, as CAPP itself
acknowledges, the Commission recently declined to require pipelines to
provide workpapers \116\ and CAPP has not provided a sufficient basis
for the Commission to revisit this decision here. More broadly, the
Kahn Methodology measures changes in barrel-mile costs on a generic,
industry-wide basis. Thus, in calculating the index level, the
Commission does not scrutinize the inputs underlying individual
pipelines' page 700 data. Accordingly, the review that CAPP appears to
seek would exceed the scope of the five-year index review and conflict
with streamlined and simplified ratemaking.\117\
---------------------------------------------------------------------------

    \116\ Revisions to Indexing Policies and Page 700 of FERC Form
No. 6, 170 FERC ] 61,134, at P 6 (2020).
    \117\ As discussed above, if a shipper determines that a
particular pipeline's page 700 inputs do not accord with the
Commission's existing Opinion No. 154-B methodology, it may file a
complaint to that effect with the Commission. BP W. Coast Prods. LLC
v. SFPP, L.P., 121 FERC ] 61,243 at P 9.
---------------------------------------------------------------------------

F. Pipeline Costs Resulting From Integrity Management Regulations and
Other Developments

1. Comments
    54. AOPL states that oil pipelines have experienced significant
cost increases due to pipeline safety and integrity measures and that
these costs are likely to increase in the future.\118\ AOPL submits a
declaration from William R. Byrd identifying new and continuing
regulatory obligations related to pipeline integrity as well as other
factors affecting pipeline costs, such as expenditures related to
security and cybersecurity, opposition to pipeline infrastructure, and
the COVID-19 pandemic.\119\ Mr. Byrd also describes anticipated
regulatory requirements that he states will increase pipelines'
obligations and compliance costs in the future.\120\ AOPL maintains
that pipelines' ability to undertake future expansions and adopt
environmental, safety, and security measures in compliance with
applicable regulatory requirements depends upon the Commission adopting
an index level that allows pipelines to recover expected future cost
increases.\121\
---------------------------------------------------------------------------

    \118\ AOPL Initial Comments at 36-39; Declaration of William R.
Byrd, P.E. at 21.
    \119\ Byrd Declaration at 7-17.
    \120\ Id. at 17-20.
    \121\ AOPL Initial Comments at 40 (quoting 2005 Index Review,
114 FERC ] 61,293 at P 63).
---------------------------------------------------------------------------

    55. Other commenters make similar assertions. PST states that
pipeline safety requirements have increased over the last five years
and that setting the index level too low could reduce pipelines'
incentives to invest in safety measures.\122\ EIC echoes AOPL's
statements regarding increasing costs and explains that pipelines'
ability to invest in building and operating facilities depends upon
ready access to capital markets and a predictable regulatory
environment that reduces investment risks. Thus, EIC asserts that the
Commission should be mindful that an insufficiently high index level
could impair pipelines' ability to attract investment.\123\
---------------------------------------------------------------------------

    \122\ PST Comments at 1-2.
    \123\ EIC Comments at 7, 11-16.
---------------------------------------------------------------------------

    56. PHMSA filed comments describing safety rules it has enacted
since the 2015 Index Review as well as several pending rulemakings
that, if adopted, would impose additional costs upon pipeline
operators. Although it takes no position on the specific index level
the Commission should adopt, PHMSA states that the index should reflect
the costs that its existing and future regulations impose upon pipeline
operators.\124\
---------------------------------------------------------------------------

    \124\ PHMSA Reply Comments at 1-4.
---------------------------------------------------------------------------

    57. Shippers reject these arguments and contend that the Commission
has previously found that future costs are speculative and
inappropriate for inclusion in the index calculation.\125\ Liquids
Shippers argue that costs related to safety or integrity measures
incurred during the 2014-2019 period should be reflected in the page
700 data.\126\ In addition, Joint Commenters and Liquids Shippers
contend that if safety or integrity-related costs are not captured in
this index calculation, they will be reflected in future index reviews
and pipelines may seek to recover those costs in the interim through
cost-of-service rate filings, where appropriate.\127\
---------------------------------------------------------------------------

    \125\ Joint Commenters Reply Comments at 19-20 (quoting 2010
Index Review, 133 FERC ] 61,312 at P 125); Liquids Shippers Reply
Comments at 31-32 (same); CAPP Initial Comments at 2.
    \126\ Liquids Shippers Reply Comments at 33.
    \127\ Joint Commenters Reply Comments at 20; Liquids Shippers
Reply Comments at 33.
---------------------------------------------------------------------------

2. Commission Determination
    58. We decline to alter our calculation of the index level based
upon the arguments concerning safety or integrity-related costs. To the
extent that new or continuing regulatory requirements caused pipelines'
barrel-mile costs to increase during the 2014-2019 period, those cost
changes would be reflected in the page 700 data.\128\ We also decline
to adjust the index calculation based upon projections of future costs
or other developments occurring after the conclusion of the 2014-2019
period. As the Commission has previously explained, future cost
projections related to regulatory changes are speculative and
inappropriate for inclusion in the index.\129\ Additionally, because
the Kahn Methodology only considers cost changes incurred during

the prior five years, regulatory changes and other developments
occurring after the 2014-2019 period concluded on December 31, 2019,
are beyond the scope of this index review.\130\ To the extent that such
developments affect barrel-mile costs going forward, the Commission
will incorporate those cost changes as reflected in page 700 cost-of-
service data in future index calculations.
---------------------------------------------------------------------------

    \128\ If such obligations result in a substantial divergence
between a pipeline's actual costs and the rate resulting from
application of the index, the pipeline may file to change its rate
using the Commission's cost-of-service methodology pursuant to 18
CFR 342.4(a) of the Commission's regulations. 18 CFR 342.4(a); see
also Order No. 561, FERC Stats. & Regs. ] 30,985 at 30,957
(explaining that ``such circumstances as increased safety or
environmental regulations may justify the use of a cost-of-service
methodology'').
    \129\ 2010 Index Review, 133 FERC ] 61,228 at P 125.
    \130\ Cost changes incurred during the 2019-2024 period as a
result of integrity management and other regulatory obligations will
be addressed in the 2025 index review.
---------------------------------------------------------------------------

G. Treatment of Mergers in the Data Set

1. Comments
    59. To account for mergers that occurred during the study period,
the Kahn Methodology adds the separate costs the pipelines reported on
Form No. 6 in the first year of the data set (e.g., 2014) and compares
this sum to the newly combined company's costs in the last year of the
data set (e.g., 2019).\131\ The Commission employs a similar process
for addressing divestitures, adding the separate costs that the
pipelines reported on Form No. 6 in the last year of the data set and
comparing this sum to the previously combined company's costs in the
first year of the data set. Joint Commenters and AOPL each propose to
adjust the data set to account for merger activity that they claim
occurred during the 2014-2019 period but was not reflected in the data
underlying the Commission's proposal in the NOI.
---------------------------------------------------------------------------

    \131\ 2015 Index Review, 153 FERC ] 61,312 at P 38. The
Commission has explained that without this step, the absorbed
pipeline's cost data would be needlessly discarded. Id.
---------------------------------------------------------------------------

    60. Joint Commenters propose to account for six additional mergers:
(1) Plains Southcap Inc. and Plains Pipeline, LP; (2) Red River Crude
Pipeline LLC and Enterprise Crude Pipeline LLC; (3) Regency Liquids
Pipeline LLC and Lone Start NGL Pipeline LP; (4) Independent Trading &
Transportation Company I, L.L.C. and Hiland Crude, LLC; (5) Phillips 66
Pipeline LLC and Phillips 66 Carrier LLC; and (6) Excel Pipeline LLC
and Sunoco Pipeline L.P.\132\ AOPL proposes to reflect the Excel-Sunoco
merger and two additional mergers: (i) Mid-Valley Pipeline Company and
Energy Transfer Crude Oil Company LLC (Energy Transfer Crude); and (ii)
The Premcor Pipeline Co. and Valero Partners Lucas, LLC (Valero
Lucas).\133\ Joint Commenters disagree with AOPL's proposals to reflect
mergers between Mid-Valley-Energy Transfer Crude and Premcor-Valero
Lucas.\134\
---------------------------------------------------------------------------

    \132\ Joint Commenters Reply Comments, Brattle Group Report,
Attachment D at 2, 4-7 (Data Merger Analysis).
    \133\ Shehadeh Initial Decl., Ex. A1 (Companies Consolidated to
Adjust for Mergers, Acquisitions, and Changes in Corporate Form
2014-2019).
    \134\ Joint Commenters Reply Comments, Brattle Group Report at
48-50.
---------------------------------------------------------------------------

2. Commission Determination
    61. We will adjust the data set to reflect mergers between: (1)
Plains Southcap Inc. and Plains Pipeline, LP; (2) Red River Crude
Pipeline LLC and Enterprise Crude Pipeline LLC; (3) Regency Liquids
Pipeline LLC and Lone Star NGL Pipeline LP; (4) Independent Trading &
Transportation Company I, L.L.C. and Hiland Crude, LLC; (5) Phillips 66
Pipeline LLC and Phillips 66 Carrier LLC; and (6) Excel Pipeline LLC
and Sunoco Pipeline L.P.\135\ We have verified through a review of Form
No. 6 data that these mergers took place during the 2014-2019 period
and will therefore revise the data set to combine these pipelines'
costs in 2019 as appropriate.
---------------------------------------------------------------------------

    \135\ The Commission identified the Excel Pipeline LLC-Sunoco
Pipeline L.P. merger in the NOI proposal but did not combine their
data for 2019.
---------------------------------------------------------------------------

    62. We decline, however, to adopt AOPL's proposal to reflect
mergers between Mid-Valley-Energy Transfer Crude and Premcor-Valero
Lucas. We find that the record does not support adjusting the Form No.
6 data to reflect these mergers. For instance, a review of the total
miles owned at year end does not indicate that any transfer of assets
took place between these companies during the review period.\136\ The
Commission's review of other Form No. 6 data likewise did not confirm
whether these mergers in fact took place.\137\
---------------------------------------------------------------------------

    \136\ Joint Commenters Reply Comments, Brattle Report at 49-50.
    \137\ For example, despite its alleged merger with Energy
Transfer Partners, Mid-Valley continued filing Form No. 6 in its own
name for each year of the review period through 2019.
---------------------------------------------------------------------------

IV. 2021-2026 Oil Pipeline Index

    63. Based upon the foregoing, we calculate the index level used to
determine annual changes to oil pipeline rate ceilings for the five-
year period beginning July 1, 2021 as follows. First, as shown in
Attachment A (Exhibit 2) we remove those pipelines that did not provide
Form No. 6, page 700 data or provided incomplete data. Second, as shown
in Attachment A (Exhibit 5), we consider the data on Form No. 6, page
700 to calculate each pipeline's cost change on a per barrel-mile basis
over the prior five-year period (e.g., the years 2014-2019 in this
proceeding). Third, to remove statistical outliers and spurious or
unrepresentative data, we trim the data set to those pipelines in the
middle 80% of cost changes. Fourth, as shown in Attachment A (Exhibit
5), we calculate three measures of the middle 80%'s central tendency:
The median, the mean, and a weighted mean. Fifth, we calculate a
composite by taking a simple average of those three measures of central
tendency, as shown in Attachment A (Exhibit 1). Finally, we compare
this composite to the value of the PPI-FG index data over the same
period (0.52% in this proceeding) and set the index level at PPI-FG
plus (or minus) this differential. Using these calculations, we
establish an index level of PPI-FG+0.78% for the five-year period
beginning July 1, 2021.

The Commission Orders

    Consistent with the discussion in this order, the Commission
determines that the appropriate oil pipeline index level for the next
five years, July 1, 2021 through June 30, 2026, is PPI-FG+0.78%.

    By the Commission. Commissioner Glick is dissenting with a
separate statement attached. Commissioner Clements is not
participating.

    Issued: December 17, 2020.
Kimberly D. Bose,
Secretary.

Federal Energy Regulatory Commission

Five-Year Review of Oil Pipeline Index

Glick, Commissioner, Dissenting
    1. Today's order is a complete abdication of the Commission's
responsibility to protect oil pipeline customers. It overthrows well-
established Commission policy and goes back on explicit promises we
made to customers just a few years ago. As a result, the Commission is
handing oil pipelines a multi-billion-dollar windfall for which
customers are left to pick up the tab. I dissent strongly from those
unreasoned and indefensible determinations.
* * * * *
    2. A little background is necessary to appreciate just how
seriously the Commission has fallen down on the job. In the Energy
Policy Act of 1992, Congress directed the Commission to promulgate a
rule to simplify its ratemaking methodology for oil pipelines.\1\
Shortly thereafter, the Commission issued Order No. 561, which adopted
an indexing methodology as part of the Commission's approach for
regulating

oil pipeline rates.\2\ Under that approach, if an oil pipeline
increases its rates by less than the annual ceiling established by the
index, the pipeline does not need to justify those rates through a
cost-of-service filing.\3\ The majority of oil pipelines under the
Commission's jurisdiction use this index to demonstrate that their rate
increases are just and reasonable.
---------------------------------------------------------------------------

    \1\ Energy Policy Act of 1992, Public Law 102-486, 1801(a) (Oct.
24, 1992) (codified at 42 U.S.C. 7172 note (2006)).
    \2\ Revisions to Oil Pipeline Reguls. Pursuant to Energy Pol'y
Act of 1992, Order No. 561, FERC Stats. & Regs. ] 30,985, at 30,955
(1993) (cross-referenced at 65 FERC ] 61,109), order on reh'g, Order
No. 561-A, FERC Stats. & Regs. ] 31,000 (1994) (cross-referenced at
68 FERC ] 61,138), aff'd sub nom. Ass'n of Oil Pipe Lines v. FERC,
83 F.3d 1424 (D.C. Cir. 1996).
    \3\ At least absent a protest to the update. See Order No. 561,
FERC Stats. & Regs. ] 30,985 at 30,947.
---------------------------------------------------------------------------

    3. Following Order No. 561, the Commission updates the index every
five years to ensure that it represents a reasonable measure of the
annual change in a typical oil pipeline's cost of service. To set the
annual index, the Commission calculates each jurisdictional pipeline's
change in its cost-of-service over the previous five-year period--we
call this oil pipelines' ``cost change data.'' The Commission then uses
that data to determine an appropriate adjustment to the Producer Price
Index for Finished Goods (PPI-FG) established by the U.S. Department of
Labor.\4\ To avoid outliers or other anomalous, unrepresentative cost
data, the Commission has historically relied on only the cost change
data for the middle 50% of pipelines when updating the index--that is,
it excludes data from the 25% of pipelines with the lowest cost changes
and the data from the 25% of pipelines with the highest.\5\
---------------------------------------------------------------------------

    \4\ Five-Year Rev. of the Oil Pipeline Index, 173 FERC ] 61,245,
at P 5 (2020) (2020 Index Review). The resulting index level is
expressed as the PPI-FG plus or minus a value that corresponds to
the cost change data adjustment.
    \5\ This practice of excluding the top and bottom 25% was part
of Dr. Alfred Kahn's original proposal that the Commission adopted
in 1994. Ass'n of Oil Pipe Lines v. FERC, 876 F.3d 336, 340 (D.C.
Cir. 2017) (noting that in 1994 Dr. Kahn ``omitted from his analysis
the pipelines within the upper and lower 25 percent of the cost
spectrum in order to exclude statistical outliers and incomplete or
questionable data'').
---------------------------------------------------------------------------

    4. In June of this year, the Commission issued a notice of inquiry
that commenced its five-year update to the index. In that notice, the
Commission proposed an index level of PPI-FG+0.09, based on our
historical practice of relying on the middle 50% of cost change
data.\6\ Today's order tosses that historical practice aside and
establishes an index level that is nearly ten times higher at PPI-
FG+0.78.\7\ That order of magnitude increase is largely the result of a
pair of unreasoned, illogical and unsupported changes that lack any
meaningful support in the record before us. I'll discuss them in turn.
---------------------------------------------------------------------------

    \6\ Five-Year Rev. of the Oil Pipeline Index, 171 FERC ] 61,239,
at P 9 (2020).
    \7\ 2020 Index Review, 173 FERC ] 61,245 at P 2.
---------------------------------------------------------------------------

    5. The Commission's first major mistake is to abandon its well-
established practice of updating the index using the cost change data
from the middle 50% of oil pipelines. As noted, in order to weed out
potential anomalous, unrepresentative cost data and ensure that the
cost change data reflects the experience of a typical pipeline, the
Commission's established practice is to ``trim'' the data down to the
middle 50% of cost changes. The Commission has explained that relying
only on those central values best approximates the operations of a
typical pipeline because it prevents the Commission from relying on
unrepresentative cost changes, such as a one-time increase in rate
base, plant retirement, significant expansions or acquisitions, or
localized changes in supply and demand.\8\
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    \8\ Five-Year Rev. of Oil Pricing Index, 133 FERC ] 61,228, at P
61 (2010) (citing Order No. 561-A, FERC Stats. & Regs. ] 31,000 at
31,097) (2010 Index Review); Five-Year Rev. of Oil Pipeline Index,
153 FERC ] 61,312, at P 24 (2015) (2015 Index Review).
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    6. Today's order abandons that approach and instead uses the data
from the middle 80% of pipelines.\9\ That change dramatically increases
the likelihood that the updated index will reflect anomalous data that
does not shed light on the cost changes experienced by a typical
pipeline, which, in practice, skews the index upwards. Relying upon
those relative outliers is particularly inappropriate here since the
middle 50% of pipelines corresponds to a much larger percentage of the
total barrel-miles shipped over the last five years than in previous
index updates.\10\ In other words, the middle 50% already corresponds
to a significantly larger percentage of total oil transportation
service provided than in previous index updates, which would seem to
undermine any need to expand the data set.
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    \9\ 2020 Index Review, 173 FERC ] 61,245 at P 25.
    \10\ The middle 50% of this data set contains 82% of total
barrel-miles subject to the index while, in 2015 and 2010, the
middle 50% contained only 56% and 76% of total barrel-miles,
respectively. Id. P 23.
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    7. The Commission's justification for abandoning the 50% approach
consists of nothing more than variations on the theme that more data is
better.\11\ But, as with most things in life, quality is more important
than quantity. Including more cost change data is not necessarily an
improvement when there is good reason to believe that the incremental
data is made up of outliers whose experience is less representative of
a typical oil pipeline with a normal cost structure. As noted, the
purpose of the index is to approximate a typical oil pipeline's change
in cost--an exercise that does not benefit from including cost change
data from pipelines that are, by definition, unrepresentative of the
average pipeline.\12\ And that is exactly why the Commission has
consistently rejected replacing the 50% approach with the 80% approach
adopted in today's order.\13\ In addition, the Commission chastises
shippers for not arguing that every pipeline whose cost change data
would have been excluded using the middle 50% was an outlier.\14\ As an
initial matter, the shippers did provide illustrative data explaining
why seven of those pipelines' cost change data was not representative,
which you might think would suffice to support the Commission
continuing its historical practice.\15\ In any case, the burden to show
that the index is reasonable is on the Commission, and it cannot be
carried simply by arguing that the shippers should have done more.
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    \11\ Id. PP 26-29.
    \12\ See 2015 Index Review, 153 FERC ] 61,312 at P 43 (``[B]y
definition, costs at the top (or bottom) of the middle 80 percent
deviate significantly from the cost experience of other pipelines.
To the extent that the middle 80 percent data conforms to a
lognormal distribution, outlying cost increases per barrel-mile will
not be offset by similarly outlying cost decreases. Thus, using the
middle 80 percent would skew the index upward based upon these
outlying cost increases, which is contrary to the objective of the
index to reflect normal industry-wide cost changes.''); 2010 Index
Review, 133 FERC ] 61,228 at P 63 (``[T]he use of the middle 50
minimizes the risk of including pipelines that experienced either
large increases or decreases in cost (or errant data) that may be
included in an 80 percent sample, while still capturing changes from
a broad spectrum of the pipeline industry.'').
    \13\ See 2015 Index Review, 153 FERC ] 61,312 at PP 42-44; 2010
Index Review, 133 FERC ] 61,228 at PP 60-63.
    \14\ 2020 Index Review, 173 FERC ] 61,245 at P 28.
    \15\ Id.
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    8. The Commission's second major mistake is to break its promise to
protect ratepayers following the U.S. Court of Appeals for the District
of Columbia Circuit's decision in United Airlines v. FERC,\16\ which
struck down the Commission's practice of allowing Master Limited
Partnerships (MLPs) to double recover their income tax cost.\17\ As a
result of that decision, MLPs may no longer recover an income tax

allowance in their cost of service.\18\ Following United Airlines, in
2018, the Commission required natural gas pipelines to immediately
eliminate that double recovery,\19\ but declined to require something
similar for oil pipelines, promising, quite explicitly, that it would
address the issue when it next updated the index.\20\
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    \16\ United Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir.
2016) (finding that the Commission permitted a double recovery of
income tax costs by allowing an MLP to recover both an income tax
allowance and a return on equity determined pursuant to the
discounted cash flow methodology, which already reflects income tax
costs).
    \17\ Inquiry Regarding the Commission's Pol. for Recovery of
Income Tax Costs, 162 FERC ] 61,227 (2018 Income Tax Policy
Statement), reh'g denied, 164 FERC ] 61,030 (2018).
    \18\ Id. P 2.
    \19\ Interstate & Intrastate Nat. Gas Pipelines; Rate Changes
Relating to Fed. Income Tax Rate, 162 FERC ] 61,226 (2018).
    \20\ The Commission's statement is worth reading in whole:
``When oil pipelines file Form No. 6, page 700 on April 18, 2018,
they must report an income tax allowance consistent with United
Airlines and the Commission's subsequent holdings denying an MLP an
income tax allowance. Based upon page 700 data, the Commission will
incorporate the effects of the post-United Airlines' policy changes
(as well as the Tax Cuts and Jobs Act of 2017) on industry-wide oil
pipeline costs in the 2020 five-year review of the oil pipeline
index level. In this way the Commission will ensure that the
industry-wide reduced costs are incorporated on an industry-wide
basis as part of the index review.'' 2018 Income Tax Policy
Statement, 162 FERC ] 61,227 at P 46.
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    9. So much for that. In today's order, the Commission goes back on
its word and allows any oil pipeline that was an MLP in 2014 to
retroactively remove its income tax allowance from its 2014 cost-of-
service data.\21\ That change juices the data to make it look like oil
pipeline costs increased by more than they actually did between 2014
and 2019, thereby leading to a higher index value. And, as if that
weren't bad enough, today's order also allows any pipeline that
transitioned from an MLP to a C-Corporation, thereby regaining the
right to an income tax allowance, to remove the income tax allowance
from their 2014 numbers.\22\ The result is, you guessed it, another
increase in the cost change data, a higher index level, and more
expensive rates for customers.
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    \21\ 2020 Index Review, 173 FERC ] 61,245 at P 16.
    \22\ Id. P 20.
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    10. Nothing in today's order justifies that result. The Commission
summarily concludes that the index update is not an appropriate vehicle
for incorporating the post-United Airlines' policy changes.\23\ That
proposition is hardly self-evident, especially given that all five
then-Commissioners felt differently just two years ago.\24\ In any
case, the fact of the matter is that tax costs are real costs,\25\
meaning that oil pipelines' costs in the past five years have changed
as a result of the United Airlines decision. Finally, reneging on our
promise in the 2018 Income Tax Policy Statement perpetuates the effects
of the double recovery gravy train that the court invalidated in United
Airlines. That is simply indefensible.
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    \23\ Id. P 18.
    \24\ 2018 Income Tax Policy Statement, 162 FERC ] 61,227 at P
46.
    \25\ Ask anyone who pays their taxes.
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* * * * *
    11. The Commission's actions today hand oil pipelines what will
amount to a multi-billion-dollar windfall over the next five years.
Calling these decisions arbitrary and capricious or unreasoned would
let the Commission off easy. They represent a complete abdication of
our statutory responsibility to protect consumers--the companies and
individuals who will be stuck paying those additional billions of
dollars to the oil pipelines. Although our responsibilities under the
Interstate Commerce Act don't always get the same attention from the
public as some of our other proceedings, today's order illustrates the
tremendous financial consequences that they can have for everyday
customers. I hope that proceedings like today's lead interested parties
everywhere to more closely scrutinize the Commission's oil orders so
that these multi-billion-dollar handouts do not become a matter of
course.
    For these reasons, I respectfully dissent.

Richard Glick,

Commissioner.

[FR Doc. 2021-03120 Filed 2-12-21; 8:45 am]
BILLING CODE 6717-01-P