Originally published for customers June 21, 2023
What’s the issue?
Many pipeline companies have wide variability in tariff structure within their own assets, and even wider variability compared to their peers.
Why does it matter?
These structures have extremely nuanced language and one sentence can make a difference of millions in revenue.
What’s our view?
By leveraging ArboIQ to benchmark and analyze competitor tariffs, companies can modify existing tariff structures on their assets to optimize their tariffs and realize millions in additional untapped revenue.
The midstream industry faces continually challenging market dynamics, increasing regulatory requirements, and occasional operational issues — which all correlate to costs. To increase revenue on existing assets, pipeline companies leverage complex tariff structures. Arbo works with many customers to conduct a comprehensive evaluation of existing tariffs and peer tariff structures, and identify potential modifications based on market conditions. Today’s ArView will outline the process of this analysis.
Background: A Review of Existing Tariff Structure Composition
Most tariffs are structured in one of, or a combination of, the following ways:
Distance-Based Tariffs: The pipeline company introduces distance-based tariffs to account for variations in transportation costs. Pipelines located farther from major demand centers may impose higher tariffs to cover the additional costs associated with longer transport distances.
Volume Discounts: The pipeline company implements volume-based discounts to encourage higher usage. Customers transporting larger volumes of natural gas are eligible for reduced tariffs, incentivizing them to increase their utilization and consolidate their transportation needs with the company.
Peak and Off-Peak Pricing: The pipeline company introduces time-of-use tariffs, charging higher rates during peak demand periods and lower rates during off-peak hours. This approach encourages customers to shift their transportation schedules to off-peak periods, effectively optimizing asset utilization throughout the day.
Commodity Indexing: The pipeline company considers indexing their tariffs to commodity prices, such as natural gas market indices. This strategy ensures that tariff adjustments align with the prevailing market rates, providing a fair and transparent pricing structure.
A slight variation in the language or nuanced structure of these tariffs can mean leaving millions of dollars in revenue on the table. Oftentimes it can come down to a single sentence in a hundreds-of-pages-long document filed with FERC.
Identifying Tariff Structure Opportunities Through Benchmarking
To start the benchmarking process, one needs to identify relevant industry peers and competitors. Typically, this involves selecting companies with similar pipeline infrastructure, geographical reach, and customer segments. This ensures that the benchmarking provides meaningful and comparable data. As an example, by leveraging Arbo’s data acquisition system, a company could rapidly pull tariff-related data — which could be in the form of “standard” Firm Transportation contracts, Limited Firm contracts, or other kinds of more creative or non-standard transportation service contracts from the selected industry peers. Then, it is imperative to analyze the tariff structures, pricing models, contract terms and language, and incentive programs.
Additionally, by layering in contract analysis to evaluate the competitors' performance metrics — such as revenue per mile, customer retention rates, and market share, one can identify best practices and successful strategies employed by the selected peer set. This ultimately translates to actionable modifications that can be made, including innovative tariff structures, pricing methodologies, customer segmentation approaches, and value-added services. Also, after implementation, it is important to continue to monitor, analyze, and re-assess if peers react in the marketplace based on the new tariffs. By understanding the competitive landscape, a company can pay close attention to any unique offerings that differentiate competitors and attract customers. Based on the findings from this benchmarking research and gap analysis, a company will have a comprehensive tariff optimization strategy to effectively evaluate and monitor revenue opportunities through tariff adjustments.
Depending on scope, a company can start relatively broadly, or start specific and block and tackle. For example, a pipeline company could be looking to identify how peers or competitors are using hourly operational flow orders (OFOs) or accelerated flow service, which can focus more specifically on off-peak pricing. Perhaps the company already offers this service as part of its limited firm transportation contract or is exploring it as a new type of service. Once the universe of peers with hourly OFOs or accelerated flow service contracts is identified, and the language used to describe those provisions within the tariff is identified, a company can extrapolate standard terminology used across these tariffs, as well as any key phrases or anomalies which may be an opportunity for additional revenue capture. By understanding all of the similarities and differences across a large set of peer data, a pipeline company can identify and implement the best practices to alleviate pushback from customers on filing approval as well as ensure revenue maximization.
Companies that prioritize tariff analysis and successfully implement changes in collaboration with relevant stakeholders, including their customers, regulatory bodies, and industry associations, can realize millions in additional revenue opportunities. By incentivizing customers through tweaks to volume discounts and off-peak pricing tariffs for example, pipelines can gain a significant increase in asset utilization rates and a rise in throughput which translates to additional revenue captured by existing assets. Additionally, changes to distance-based tariffs and commodity indexing tariffs can ensure pricing remains aligned with market dynamics, thereby attracting new customers and strengthening existing customer relationships.