Puzzling PLA: Inside Colonial Pipeline's Tariff Turmoil

Since 2017, many shippers on Colonial Pipeline have protested the company’s mechanism for deriving and adjusting product loss allowance (PLA) charges and its alleged failure to state those charges in official tariffs. In December 2021, the Administrative Law Judge (ALJ) rendered a partial initial decision in response to FERC’s consolidated proceedings including this matter, suggesting the Commission should find in favor of shippers that Colonial’s existing PLA mechanism is violative of the Interstate Commerce Act (ICA). In November of last year, FERC finally responded with Opinion No. 585, which reversed and affirmed discrete components of the initial decision. Earlier this year, Colonial filed new rules and regulations as well as a revised tariff reflecting the Commission’s directives.

Enduring industry conflict surrounds PLA and pipelines’ ability to recover (or potentially over-recover) losses. The tension here is natural, as shippers desire a transparent and predictable total transportation cost, but the ultimate cost of inevitable product loss is impacted by commodity price swings which range in volatility over time. Decisions on this particular docket set precedent for future industry proceedings and all stakeholders should be aware of its implications.

A review of Arbo’s tariff database demonstrates various types of programs for the recovery of products carriers’ product loss, which we’ll summarize in today’s ArView. Pursuant to FERC’s orders, Colonial has resolved the requirement to clearly state PLA charges in its tariff. However, the new specifics of its recovery mechanism and related calculation methodology — while more detailed in description — are ultimately no less complex and don’t remedy some of the main concerns raised throughout the proceeding. That said, many shippers have settled and withdrawn, and Colonial did not object to FERC trial staff’s prescribed remedy, which suggests a reasonable compromise was achieved on this portion of the docket. Finally, product loss and grade changes due to transmix generation are disparate effects of the pipeline transportation process, and we believe using the same mechanism to address both resulting costs leads to lack of clarity and transparency.

Transmix 101

Product loss as a result of evaporation and meter inaccuracy is inherent to liquids pipeline transportation. Additionally for refined products, product downgrades and volumetric gains and losses occur upon delivery due to the “interface” between sequenced shipments of different products. Colonial’s website FAQ illustrates the following example: “Regular unleaded gasoline may be shipped next to premium unleaded gasoline. When the flow of product is ‘cut’ or diverted for delivery into storage tanks, the ‘cut’ is made to protect the entire premium gasoline batch, allowing some premium to be added to the regular, unleaded gasoline.” Reconciling this situation results in a net loss for the pipeline, because it collects a lower amount for delivering extra regular gasoline than it must compensate the shipper who received less of its higher-value product.

Products in this scenario are considered compatible because premium can be downgraded and still meet regular specifications. When products with incompatible characteristics come into contact, the resulting interface is called transmix — typically a combination of gasoline, diesel, and/or jet fuel that comes to rest in a terminal before on-site processing or removal via truck and rail for processing elsewhere. The distillation process yields gasoline and diesel which are marketed at fluctuating product prices.

Image source: https://www.colpipe.com/about-us/faqs

Accounting for Product Loss

Carriers use a variety of methods to manage their costs associated with volumetric losses, including the following:

• Tender deduction / loss allowance - a percent deduction of volume received by the shipper
• Fixed fee per barrel - a fixed cents per barrel charge that is modified on a periodic basis with the goal of balancing to market
• Fixed percentage of value charge - assessed on the commodity value of tendered shipments
• Monthly true-up - based on shipper’s actual product loss as measured with a one-month delay on the invoice
• Allocation assessment - total (estimated or modeled) cost of product downgrades and volume variations divided by the shipper’s associated total volume throughput for the same period, adjusted on a periodic basis

Industry standard (or lack thereof) was addressed repeatedly in the Colonial docket, so we thought it prudent to review PLA and transmix practices for similarly situated products carriers.

This brief survey supports the proposition that there is no “one size fits all” approach for loss allowance, related fees, and transmix handling. But — spoiler alert — given the outcome of this case, it’s worth noting that Buckeye’s PLA mechanism is similar to Colonial’s previous one — and its charge is also not listed in a tariff, but published only in a shipper manual. (Although Buckeye describes its calculation methodology and files revised FERC tariffs each time it is changed in the shipper manual.)

Ongoing industry conflict surrounds PLA and pipelines’ ability to recover (or potentially over-recover) their resulting costs. In general, shippers desire the ability to predict total transportation costs they perceive as fair, and value transparency in cost of service ratemaking as well as methodologies underlying all fee and charge calculation to the extent they are regulated by FERC. Complexity and significance increase at the intersection of these income streams, as we last discussed in Oil Pipeline Shippers Claim Pipelines are Understating Their Revenue regarding a complaint by the Liquids Shippers Group alleging most oil pipelines in the country were understating their revenue by excluding certain fees from the calculations.

Unsurprisingly, complaints about Colonial’s financial accounting and recordation of its product loss procedures also appear in the recent docket, as well as discussions of its regional market-based rate authority, and reparations — but for simplicity, we’ll steer clear of these issues in today’s ArView. Our goal instead is to summarize as simply as possible Colonial’s prior and revised product loss policies and transmix handling activities, review what transpired in the proceeding, and offer a few potential implications of this precedent on the industry.

Seven Years in Six Paragraphs

Since 2017, many shippers on Colonial Pipeline have protested the lack of clarity in the company’s mechanism for deriving and adjusting product loss allowance (PLA) charges and its alleged failure to state those specific charges in official tariffs.

Colonial’s rules and regulations tariff described a product loss allocation charge assessed on each delivered barrel to “recover, but not over-recover,” any loss amounts not otherwise mitigated (by the sale of transmix). The fee itself, and a description of how gains and losses were valued, was published in the shipper manual.

Shippers complained that “no discernable formula” was provided for calculation of PLA and that it was not tied to a current or expected cost. In proceeding testimony, Colonial said it “routinely evaluated” the charge to “determine if it need[ed] to be adjusted, upward or downward, to ensure the carrier’s ultimate collections reflect[ed] its actual experience” and bring accounts within a +/- $10 million balance within 12 months. Colonial’s stated policy was to communicate to shippers via the T4 electronic bulletin board 30 days prior to any such changes taking effect.

According to Colonial, PLA assessment charges collected were applied to the balance of a product loss account the pipeline maintained on behalf of its shippers. The account received the pipeline’s compensation to shippers for each barrel of spec gasoline and jet fuel “lost” (due to) or in other words downgraded to transmix — at market prices — as well as net proceeds from the carrier’s sale of transmix on behalf of shippers. Colonial explained its costs resulted because of the “pricing differential between the type of product lost (for which the account paid shippers) and the inherently lower price of transmix (which the account receives).”

Over the years, shippers argued the pipeline “posted enormous overrecoveries,” but Colonial maintained and testified that the account was “managed to zero over time,” and has been in a loss position 60% of the time between January 2001 and October 2019. An employee explained, “unlike a number of oil pipelines, Colonial does not manage its PLA account as a profit center; … amounts collected from shippers are neither retained as earnings … nor do they leave Colonial via distribution or other transfers.”

Colonial depicts inflows and outflows of this account in the visual below.

One group of shippers proposed a fixed percentage PLA charge assessed on the commodity value of tendered shipments, and based on ticketed receipts by the oil pipeline. (“For example, if the fixed percentage-of-value charge is 0.19% and a shipper tenders for shipment 1,000 barrels worth $100 per barrel, then the shipper would be invoiced $190 on its monthly settlement statement.”) They suggested Colonial be required to make an annual tariff filing that would set one product loss assessment charge for the next year, and then true up its costs and revenues.

Light-Handed Oversight

The ALJ found Colonial’s “unapproved construct of the product loss account” to be not just and reasonable, citing the following characteristics:

• The charge wasn’t posted as a filed rate in Colonial’s tariff and therefore not Commission-approved.
  
  
• When, how, and why Colonial changes the rate or its collection method, or to whom it applies, were not substantially justified in the record.

• Colonial changes the rate at an inconsistent frequency in order to reconcile the product loss account at its own discretion and without modeling evidence.
  
  
• The product loss account is “demonstrated to over-recover and under-recover, based solely upon Colonial’s internal management of it” and “shippers are unable to plan for or anticipate increased rates.” (This concern doesn’t seem resolved by the replacement mechanism dictated by Opinion No. 585.)
  
  
• Colonial charged different fees for long-haul and short-haul shipments with minimal and insufficient justification for such discrimination. (FERC Trial Staff would ultimately disagree.)
  
  
• The mechanism Colonial used “is not used nor has been approved for use by any other FERC-regulated oil pipeline.” And, consistent business practices replicated by market participants make business easier to do and more predictable, and they make “the oil pipeline light-handed oversight that is required of the Commission under the [ICA] more efficient.”

The ALJ recommended a fixed allowance oil deduction percentage of .19% — siting consistency with (1) loss and transmix accounting data during a test period, (2) language proposed by a proceeding witness on behalf of one group of shippers, and (3) “the basic business practice embraced by Magellan, Explorer and Plantation.”

FERC’s orders in Opinion No. 585, issued in November 2023, would ultimately affirm the ALJ on most of the above notions, but disagree on the prescribed remedy. In lieu, Trial Staff directed “a refinement of Colonial’s existing PLA mechanism” — a cents-per-barrel charge with a tracker, which the Commission found “suitable because Colonial’s PLA costs are volatile and difficult to project,” whereas it agreed with Colonial that “a fixed percentage-of-value charge may not track the primary driver of costs related to the PLA account: the highly variable differences between the price of various refined products.” This reason also drove FERC to reject the idea that data from one test period could be accurately used to underpin a fixed percentage of value.

FERC’s order “direct[ed] Colonial to make a compliance filing with tariff sheets that state the cents-per-barrel PLA charge and describe in detail the tracker and true-up mechanism.” The resulting document was accompanied by a whopping 24-page transmittal letter and filed January 22, 2024. Over a full page of additional text was added to the tariff to meet FERC’s requirements and, ostensibly, create transparency for shippers. But the resulting change to Colonial’s PLA charge was actually an increase — from 33 cents to 33.29 cents per barrel (now for all shippers, where the previous charge was discounted for intrastate movements).

Reflections and Implications

We took note of a few observations in our review of this proceeding.

Accounting for costs due to product losses and downgrades is obviously quite complex already, and we think a case could be made that aspects of Colonial’s transmix handling are not jurisdictional. This led our team to question the approach of grouping transmix processing and related costs together under the product loss category. A footnote in the Partial Initial Decision similarly stated: “it seems preferable from a regulatory accounting perspective that Colonial separate its product loss (evaporation, metering discrepancies and the like) recoveries from the costs and revenues of compatible and incompatible interface and transmix disposition.”

Having covered liquids proceedings in Oil Pipeline Tariff Monitor for over a decade, we also found unexpected the degree to which a replacement mechanism was prescribed to Colonial for the management of its PLA — by both the ALJ and the Commission — especially since both acknowledged multiple variants exist across industry. But the Partial Initial Decision notes, “the burden is on Colonial and each proponent of an alternative collection method to proffer an alternative that is just and reasonable,” but with a citation to the ICA: “or the Commission may order Colonial to recover these charges through a different method that it deems just and reasonable.” We’ll be watching future proceedings to see if this becomes a trend, but the record in this case so far may suggest FERC, Colonial and many of its shippers (who have settled and withdrawn from the proceeding) arrived at a reasonable compromise on this particular portion of the docket.

Importantly, FERC’s opinion states “we note that a variety of PLA mechanisms may be just and reasonable in the context of refined products pipelines ... The Commission evaluates such mechanisms on a case-by-case basis,” and “the PLA mechanism that we approve here is based on the record developed in this case.”

Finally, detailed descriptions of PLA deductions, charges, calculation methodologies, and accounting are scant in ordinary oil regulatory filings (and vocabulary used to refer to these policies and procedures are as varied as the mechanisms employed for cost recovery). This proceeding, which resulted in an entire additional tariff page devoted to PLA, may change that going forward if it’s held as precedent.

For now, that remains to be seen, as counsel for three shippers have filed at the D.C. Circuit for judicial review of FERC Opinion 585.

If you would like to speak with Arbo’s Oil Pipeline Tariff Monitor team, or have the materials referenced in this ArView sent over for light reading, please get in touch.