What’s the issue?
Just before the end of last year, a group of oil pipeline shippers, referred to as the Liquids Shippers Group (LSG), filed a petition with FERC in which it alleged that most oil pipelines in the country have been understating their revenue by excluding certain fees from the calculations.
Why does it matter?
The LSG’s petition is based on FERC’s findings in two recent audits of pipelines which found that both pipelines were not properly reflecting their total income on the Page 700 data that is used to monitor a pipeline’s return from year to year and ultimately to fix the index rates pipelines can recover from their shippers.
What’s our view?
The type of charges being discussed vary widely across the industry and are difficult to find by reading the thousands of tariffs that are on file in FERC's e-library. Arbo's Liquids Commerce Platform offers a comprehensive source of liquids tariffs and rates on 400+ pipelines with 30 years of history, in addition to aggregated Form 6 filings and parsed pipeline financial data that provides critical competitive intelligence for pipelines. Ultimately, we expect FERC will direct the industry to comply with the findings from the two audits referenced by the LSG in its petition, but we don’t expect such accounting changes to impact rates charged given the extensive use of index rates for liquids pipelines.
Liquids Shippers Group
As the name indicates, the Liquids Shippers Group is a group of companies whose members rely on the transportation services offered by the oil pipelines (often referred to as liquids pipelines to differentiate them from gas pipelines) that FERC regulates. This informal group may vary in membership from one filing to the next, but generally consists of a common core of fairly large oil exploration and production companies. The group regularly participates in almost every oil pipeline matter of significance before FERC. In the petition for a declaratory order that the group filed in December of last year, the group identified itself as consisting of Anadarko Energy Services Company, Cenovus Energy Marketing Services Ltd., ConocoPhillips Company, Crescent Point Energy Corp., Devon Gas Services, L.P., Marathon Oil Company, Murphy Exploration and Production Company—USA, Ovintiv Marketing Inc., and Pioneer Natural Resources USA, Inc.
December Petition
The LSG petition in December is based upon audit letters that FERC issued on September 23, 2021 to Bridger Pipeline LLC (Bridger) and to Centurion Pipeline L.P. (Centurion). Both audits covered the period from January 1, 2014 to December 31, 2018 and touched on a wide range of topics, but a common finding in both audits caught the attention of the LSG. FERC’s audit staff noted that both pipelines had understated the pipeline’s total revenue that is reflected on Page 700 in their annual Form 6 because both pipelines had failed to either properly calculate or include as revenue certain benefits each received under their tariffs. The LSG petition was particularly focused on the oil that both companies require their shippers to provide over and above the oil delivered on behalf of the customer to compensate the pipelines for its pipeline loss allowance (PLA). According to the FERC audit report, the oil received from shippers is to be booked as revenue at the market price when it is received and then any actual oil losses should be booked as costs. Both Bridger and Centurion netted the losses against the revenue that was reported in the detailed section of their Form 6, and both failed to include even this net revenue in the total revenue line found on Page 700 of the Form 6.
LSG claims to have looked at the filings of other pipelines in the country and asserts that “nearly every pipeline (94%) did not include PLA revenues in the interstate revenues it reported on Page 700.” Therefore, LSG is asking FERC to issue an order on an expedited basis that would require all pipelines to use the methodology identified in the two audit reports in the Form 6 that will be filed in April for calendar year 2021 and to identify any changes to prior years’ reports that is needed to comply with the correct methodology outlined in the audit reports.
Significance of Amounts
While the petition filed by the LSG focuses primarily on PLA revenue, the audit letters indicate that the same principle applies to a myriad of retainages and other charges that pipelines collect under their tariffs from their shippers. Using data from Arbo's Liquids Commerce Platform, we can see how varied these PLA charges are across all origin and destination pairs.
As seen above, the most common PLA retainage is .2%, which is the percentage under Centurion’s tariffs. Bridger’s retention ranges from a low of .15% to a high of .5% percent, but like the industry as a whole is most commonly set at .2%.
The amount of revenue that is being omitted based on the FERC audit findings also varies between the two pipelines and from year to year.
As seen above, in some years the categories of revenue that FERC thinks was omitted by these companies during the audit period ranged from a low of less than 4% for Bridger in 2015 to a high of over 37% for Centurion in 2017.
FERC’s Form Seems to Have Created the Problem
Page 700 of the FERC Form 6 is a compilation of more detailed data found elsewhere in the Form 6. Page 700, however, is significant because the data on this page is used by shippers to challenge a pipeline’s rates on the grounds that they are excessive and is also used by FERC every five years to calculate the index, which pipelines can use to increase rates for the coming five-year period.
In this case, the Page 700 line in question is the “Total Interstate Operating Revenues” line, which according to the audit findings is designed to summarize the data found on Page 301 of Form 6. Page 301 has a separate line for seven categories of revenue, but then requires the pipeline to allocate only three of those categories between its interstate services and its intrastate services. In its audit findings, FERC acknowledges that the Form 6 filing tool will display an error message if the pipelines include any number on Page 700 that differs from the amount shown on Page 301, which is calculated using only three of the seven categories of revenue reflected on that page. However, FERC audit staff asserted that the warning message makes clear that such a warning does not establish that the reported data is incorrect.
Path Forward
Comments on the LSG petition are due tomorrow. We expect there to be opposition to the proposed changes and, in particular, that the changes should be implemented along with a change to the Form 6 to make the data on Page 301 consistent with the summary on Page 700. However, we believe that it would be inconsistent with the position FERC took in both audits to allow all other pipelines to continue reporting their income on Page 700 in a manner that is inconsistent with FERC’s view of the proper method of reporting. In addition, we also expect that FERC will likely decide it needs to revise Page 301 of the Form 6 in a manner consistent with the findings of the two audits.
Impact on Pipelines
It is possible that, as a result of including this additional revenue in its income, a pipeline that previously did not appear to be overearning on its rate base could now appear to be doing so. However, given the light-handed economic regulation that FERC applies to oil pipelines, that risk is likely to be fairly small. If FERC requires a change to Form 6, that could impact the next calculation of the index, which is scheduled for 2025. If FERC does not require pipelines to revise their forms for 2019, which will be the base year for that next calculation, it could distort the calculation of the index, because any change would be in effect in the last year used for that calculation but not in the first year. That may be the most contentious issue in the proceeding, as it would require pipelines to go back and recalculate revenue for a year that has already closed.