The US Federal Energy Regulatory Commission on Jan. 20 slashed the index that oil pipelines must use to set shipping rates for the next five years to a level that Chairman Richard Glick estimated would save customers $3.7 billion through 2026.
The commission set the new index at the Producer Price Index for Finished Goods minus 0.21% and ordered pipelines to recalculate their rate ceiling levels effective March 1 (RM20-14). It was previously at PPI-FG plus 0.78%. The decision overturns the ceiling set in December 2020 at PPI-FG plus 0.78%, which was challenged through a rehearing proceeding.
Oil pipeline owners said the decision ignores that costs for maintenance and safety operations are rising faster than inflation.
Arbo, a software company providing commercial decision support, predicts pipelines might still be able to increase their rates despite the lower ceiling, given that inflation has climbed so high. The PPI-FG is at it highest level by far since FERC adopted the indexing method in 1993, said Gary Kruse, Arbo's managing director of research.
Inflation has soared to levels not seen since 1982, with overall energy costs rising 29% from 2020, gasoline costs up 50% and fuel oil costs up 41%, according to Jan. 12 data from the US Bureau of Labor Statistics. Overall US inflation rose 7% in 2021.
Still, Andy Black, CEO of the Association of Oil Pipe Lines trade group, said the lower index puts some pipelines at risk of curtailing services.
"Operators could face the impossible situation of newly uneconomic operations at certain locations," Black said. "Now is not the time to hurt energy reliability or availability to customers."
Glick dismissed that concern, telling reporters after the FERC meeting that the indexing proceeding has estimated cost increases over the last five years on an industry basis and allowed pipelines to recover them.
"We're basing it on their costs, so I don't see why there was an argument ... that somehow all of a sudden they're going to reduce service," he said.
Glick added that oil pipelines can also opt out of the index and ask for cost-based rates on an individual basis or negotiate market-based rates.
"So there's a variety of options there for them," he said. "And I would argue that what we did today was consistent with what we've done in the past, and we didn't see any reduction in service when we issued similar index mechanisms back in 2015 or 2010."