Magellan, Plains, Among Others, Request Marketing Affiliate Clarification

Originally published for customers December 27, 2017

Much uncertainty has followed the Federal Energy Regulatory Commission's (FERC) November 22 order denying Magellan Midstream Partners L.P. 's petition, which sought permission to create a marketing affiliate. However, as we discussed in a prior customer note, Magellan appears to have crafted its petition to obtain a negative decision in order to sow uncertainty about common industry practices undertaken by its competitors.

Magellan's December 22 filing with FERC seeking clarification or rehearing of the FERC order appears to further support our view. Unlike a typical petitioner who receives a negative finding from FERC and then seeks clarification to reverse or limit the impact of the negative ruling, Magellan actually asked FERC to broaden its findings. Not surprisingly, in an attempt to get ahead of the ruling, on the same day that Magellan requested FERC to broaden its findings, Enterprise Products Partners L.P., Medallion Pipeline Company, LLC and Plains Marketing, L.P. all sought to narrow FERC's ruling by asking FERC to either vacate the order, clarify it or grant rehearing.

We expect FERC to grant rehearing or substantially modify its order in a manner that will address the clarifications and changes requested by the opponents of the order - and not those requested by Magellan. Such modifications by the FERC should reduce some of the uncertainty created by the original order, but there is no timeframe in which it is required to do so. Regardless, unless FERC simply vacates the prior order, the final order will likely be contested in federal court. In fact, if FERC delays addressing these concerns, the opponents have threatened to appeal the original order.

Issues for Clarification

Despite many areas of disagreement, all four parties who filed requests last week agreed that FERC correctly addressed a number of issues in its order. In particular, the four parties agreed that FERC properly found that:

• the creation of a marketing affiliate is permissible under the Interstate Commerce Act (ICA);
• the marketing affiliate may ship on an affiliated/parent pipeline;
• marketing affiliates are also allowed to participate in the affiliated pipeline's open seasons, just as non-affiliated shippers are; and
• marketing affiliates may enter into transportation service agreements (TSA) with the pipeline affiliate.

Magellan and the other three parties disagreed on almost everything else about the order. In particular, the disagreements focus on a key holding in FERC's order that the "prohibitions on rebates found in the ICA therefore prevent marketing affiliates from shipping in situations where the price differential is insufficient to cover the filed tariff rate and the pipeline subsidizes those loses (sic)."

Magellan's Approach to Competition

In its December 22 filing, Magellan explained that it was seeking clarification or rehearing because it is actively engaged in the development of new pipeline infrastructure projects, and noted that further guidance on what oil pipeline marketing affiliate activities are permitted under the ICA could be a factor in its pursuit of such projects. Far from trying to narrow or restrict FERC's order, Magellan's request seeks to broaden the reach of the order in the following four ways: 1.  Extend the prohibition against below market shipments by a marketing affiliate to all below market shipments under a long term TSA.
2.  Extend the prohibition against below market shipments by a marketing affiliate to buy/sell transactions where the marketing affiliate buys crude oil at an origin from one third party but sells it at the destination to a different third party.
3.  Clarify that the order applies to all liquids pipelines and not just crude oil pipelines.
4.  Extend the holding in the case to any non-jurisdictional service provided by the marketing affiliate if the price offered to pipeline customers is lower than the price offered to non-pipeline customers, even if the marketing affiliate still made a profit from the transaction.

Enterprise, Plains and Medallion Weigh-In

Not surprisingly, those parties asking FERC to reverse or limit the impact of its original decision are pipelines with marketing affiliates or the marketing affiliates themselves, namely, Enterprise, Medallion, and Plains.

Enterprise

Enterprise focused almost exclusively on FERC's finding that "prohibitions on rebates found in the ICA . . . prevent marketing affiliates from shipping in situations where the price differential is insufficient to cover the filed tariff rate and the pipeline subsidizes those losses." Enterprise argued that the italicized language limits the finding to situations where the pipeline does, in fact, subsidize the losses of the marketing affiliate. In particular, Enterprise points out that there are a number of situations in which the marketing affiliate may ship on the pipeline and take a loss on the commodity for valid economic reasons which do not include any subsidization by the pipeline, including the following two circumstances:
1. A marketer with a "ship or pay" commitment in its TSA, regardless of its affiliate status, will move product under the TSA as long as it is able to sell its product at the destination for a price that is higher than the price it paid at the origin, because any sales price above the cost at the origin mitigates the fixed transportation costs for which the shipper is responsible under its TSA.
2. Marketers, regardless of their affiliate status, with TSAs on pipelines that have adopted pro-rationing policies based on a shipper's past history, may choose to move volumes on a pipeline - even if the price differential between the origin and destination is less than the filed tariff rate - because the shipper projects that the differential will ultimately change and that space on the pipeline may become valuable and constrained in the future.

Plains

The rehearing petition by Plains, like Enterprise's, focused on the economic reasons why both affiliated and non-affiliated marketers would enter into transactions when the price differential was lower than the tariff rate. Plains asked FERC to clarify that its order applied only to the hypothetical patterns offered by Magellan which were generally predicated on the assumption that the marketing affiliate had no independent business rationale for the proposed transaction other than granting an improper discount.

Medallion

Medallion's primary request was that FERC voluntarily vacate the entire order because FERC went beyond the facts presented to reach its conclusions, despite acknowledging that Magellan's hypotheticals did not describe "the exact nature of how payments will be reflected amongst the integrated company." In fact, Medallion noted that the order does not provide any factual support for the conclusion that the transactions described in the petition involved "payments" by the pipeline to the marketing affiliate. Therefore, Medallion fears that the order could be read as broadly precluding a marketing affiliate from shipping on an affiliated pipeline if it engaged in a non-jurisdictional transaction that resulted in a loss, regardless of whether the loss is subsidized by the pipeline. According to Medallion, such a holding would clearly be beyond the FERC's jurisdiction.

Read-Through

We believe FERC will substantially rewrite its original order to address the issues raised. At the very least, we would expect FERC to clarify that the order should not be read as broadly precluding a marketing affiliate from shipping on an affiliated pipeline in all situations where the non-jurisdictional transaction resulted in a loss. As we explained in our earlier note, there is no time limit on how long FERC can take to reconsider a prior decision. In this case, if FERC takes too long, it is possible that one of the parties seeking rehearing will appeal the original order because, as Medallion noted in its petition, the ICA does not require parties to seek rehearing prior to obtaining judicial review of FERC orders.