Where There’s Smoke There’s Frequently Fire — FERC Judge Smokes Out and Fires Targa’s Tacit Tariff-Avoiding Transportation Agreements

In a precedent-setting and strongly worded decision FERC Presiding Administrative Law Judge Patricia E. Hurt found that Targa is providing transportation service in violation of the Interstate Commerce Act (ICA). This finding stemmed from an investigative proceeding initiated following a 2020 complaint filed by Enerplus alleging that Targa was violating the non-discrimination provisions in the ICA by charging Enerplus higher rates than other producers connected with Targa’s system.

That complaint was dismissed, but it shed light on contractual practices for the Targa Badlands System pipeline in the Bakken that was operating with a waiver from FERC jurisdiction. The waiver exempted Targa from filing and charging tariff-based rates based on assurances that third party shippers would not seek access or utilize the pipeline. In reality, third parties, such as Enerplus, did utilize the pipe under contractual arrangements called Purchase and Sale Agreements (PSAs) which allowed Targa to take ownership of barrels during the time they are transported on its pipeline. Doing so allowed Targa to technically qualify for the waiver by always having ownership of the barrels it transported — thus no third parties. After many years of this questionable practice, it has been found to be in violation of the ICA.

We wrote about this is in pointed detail in 2020 in Enerplus and Targa Start a Fight that Could Impact all LIquids Pipelines and identified the proceeding again as one we would follow for customers this year in The Protest Proceedings of Oil Pipelines and Shippers - Business as Usual in 2024? The judge’s decision (available at https://elibrary.ferc.gov/eLibrary/search by searching for OR23-2-000) said in summary:

"I find that Targa no longer meets the criteria to qualify for temporary waivers of sections 6 and 20 of the ICA’s filing and reporting requirements and parts 341 and 357 of the Commission’s regulations.

Targa’s ownership of the oil being moved on its pipeline is limited, both in time and scope, and ambiguous at best. The record shows that there has been, and continues to be unaffiliated, third-party interest in gaining access to its pipeline. There is no evidence of customer opposition to Targa’s waivers; however, the record demonstrates that there is restrictive language in the subject Purchase and Sale Agreements (PSAs) which warrants further scrutiny from the Commission.

By definition, if Targa does not qualify for temporary waivers and has no tariff on file, any movement of oil on its pipeline occurs in violation of the ICA. I also find that Targa is providing transportation service in violation of the ICA. The record shows that the substantive services and fees that Targa charges its producers pursuant to its PSAs are consistent with tariffs for transportation service filed with the Commission."

This case has origins dating back to 2011, when the previous owner of the pipeline (Saddle Butte Pipeline, LLC) applied for the waivers and assured the Commission that third parties would not have access to the system. Subsequent assurances were provided to FERC after Targa acquired the pipeline and during the entire period that the PSA contracts were in place to effectively enable third party access. This situation ultimately led to the “undue discrimination” complaint by Enerplus, which we noted in 2020 never seemed to have a problem with the arrangement until some other third party got a better deal.

Industry Implications:

Any possible regulatory changes impacting common industry practices related to FERC jurisdiction and application of the ICA receive close industry attention. This decision reasserts the “four prong” test established to evaluate waiver requests. Those four “prongs” / conditions are: (1) the pipeline (or its affiliates) own 100 percent of the throughput on the line; (2) there is no demonstrated third-party interest in gaining access to or shipping upon the line; (3) no such interest is likely to materialize; and (4) there is no opposition to granting the waivers. OR23-2-000 found Targa no longer meets number two. It judged that the 19 PSAs in place on the pipeline spread across 12 third-party producers was indicative of third-party interest in shipping.

Assuming Commission approval of the order and no rehearing, Targa will be required to file a tariff for the Badlands system and recontract with what will become acknowledged third-party shippers. Any existing or future waiver requests received by FERC with similar ownership transfer models will most certainly be denied. Since we last presented the below chart in 2020, nine additional waiver requests have been filed. One — Rough Rider — very transparently presented a “PSA” or “buy/sell” model, and the request was denied.

So What About Affiliates?

This decision will likely end the use of PSA contracts as a means of qualifying for ICA waivers. However, the investigation touched on some of the jurisdictional and commercial issues unique to liquids (ICA regulated) pipelines that ladder up to a larger persistent issue involving the relationship between pipelines and affiliated marketing entities. FERC has attempted to address oil pipeline affiliates several times over the past decade, but industry stakeholders on both sides of the issue are entrenched — seeming to prefer an imperfect but known semi-regulated marketplace to one with more regulation lending to possible unintended consequences. But the issue is recurrent and any actions will also have industry-wide ramifications.

While our view is that FERC is correct to find Targa in violation of the ICA, beyond that matter, it is not clear that affiliates that can serve to balance supply and demand on pipelines exposed to volatile commodity prices are not needed or are nefarious by nature.

A Magellan petition to create a marketing affiliate that was denied in 2017 was the most prominent proceeding examining affiliates. We detailed that in Magellan, Plains, Among Others, Request Marketing Affiliate Clarification. At the time, Magellan requested a rehearing which did not receive FERC attention for five more years. When FERC finally did take up the request at the end of 2022, it was denied with little explanatory narrative leading to a lengthy diatribe dissent from then Commissioner Danley.

At the same open meeting that the Magellan request was denied, FERC issued a proposed policy statement for comment representing its most recent attempt to address “oil pipeline affiliate committed service.” At issue was, and is, whether a buy-sell agreement with a marketing affiliate should be permitted if the differential in price is not sufficient to cover the cost of shipping on the affiliated pipeline because it may violate the non-discrimination and anti-rebate provisions of the ICA.

A review of the comments received could be the subject of another Arbo article, but in summary, they were predictable. The pipeline trade associations strenuously objected to any change, citing lots of reasons but did not address the contractually contrived temporary ownership practices discussed above. The position that more regulation is not needed is largely based on the belief that existing complaint and protest mechanisms are sufficient to provide remedies for the sophisticated parties involved in common carrier transactions. (For representative pipeline comments see LEPA Initial Comments, Docket No. PL23-1 available at https://elibrary.ferc.gov/eLibrary/docketsheet?docket_number=pl23-1-000.)

The shippers assert that much of what occurs in the marketplace that might be evidence of unjust and unreasonable rates or discriminatory practices, particularly between affiliated entities, is non-public information that could not be easily brought forward as evidence to the regulator by any potential complainant. They believe the regulatory regime must evolve and suggest a technical conference to table the issues such that progress could be made beyond a proposed policy / comment stage, which is as far as any recent FERC attempt has made it.

(For representative shipper comments see Reply Comments of Shell Trading (US) Co. in Oil Pipeline Affiliate Committed Service (PL23-1) available at https://elibrary.ferc.gov/eLibrary/docketsheet?docket_number=pl23-1-000.)

Monitoring Liquids Pipeline Regulatory Matters

Cross-commodity industry participants often observe that the regulation of liquids pipelines under the ICA is less stringent than the regulatory regime for gas pipelines. As such, while both industries are subject to contractual conflicts over transportation rates and access that require regulator intervention, questionable liquids industry practices can persist as status quo for much longer periods of time. In part, this is due to a “hands off” approach first legislated by Congress over a century ago.

Monitoring oil pipeline regulatory matters to be best informed on when status quo might actually change impacting transportation access, costs, netbacks, or other business fundamentals is a tedious and time consuming task. Arbo’s Oil Pipeline Tariff Monitor and Alerts available via our Liquids Commerce Platform makes this task much more efficient and effective for customers.