Good morning, Mr. Chairman and Commissioners.
Item G-1 is a draft order that concludes the Commission’s five-year review of the oil pipeline index and establishes the new index level of PPI-FG+0.78 for the next five years. By way of background, the Commission developed its indexing methodology in response to the Energy Policy Act of 1992’s directive to implement a “simplified and generally applicable” ratemaking methodology for oil pipelines. Under the indexing methodology, oil pipelines may adjust their rates to applicable ceiling levels as opposed to making cost-of-service filings. Every July 1, the rate ceiling levels are modified by multiplying the existing ceilings by the index for that year. The Commission reviews the index level every five years to ensure that the index continues to correspond to industry-wide oil pipeline cost changes.
On June 18, 2020, the Commission issued a Notice of Inquiry to initiate this latest five-year review of the index level. The June Notice of Inquiry invited comment on issues such as different data trimming methodologies and whether the Commission should reflect the effects of cost-of-service policy changes in the calculation of the index level.
In performing this review, as in prior reviews, the Commission examined the difference between oil pipeline cost changes and the changes to the Producer Price Index for Finished Goods, or PPI-FG, over the prior five-year period. The index level is set at PPI-FG plus (or minus) this differential. Now, my colleague Monil Patel from the Office of Energy Market Regulation will provide a summary of the analysis in the draft order.
The record in this proceeding supports an index level of PPI-FG+0.78 to be effective for the July 2021 – June 2026 period. This represents a reduction from the existing index level of PPG-FG+1.23 and an increase from the preliminary index level of PPI- FG+0.09 proposed in the Notice of Inquiry. This increase from the index level in the Notice of Inquiry results from three primary factors.
First, based upon the record and in response to comments, the draft order adjusts the data set to remove from the index calculation the effects of the Commission’s 2018 income tax policy change that required Master Limited Partnership-owned pipelines to eliminate the income tax allowance and associated Accumulated Deferred Income Tax (or ADIT) balances from their page 700 summary costs of service. This step involves adjusting the 2014 FERC Form No. 6, page 700 data for all pipelines that were owned by a Master Limited Partnership in 2014 to reduce the income tax allowance to zero and revise the return on rate base to reflect the removal of ADIT. This adjustment ensures that the index is calculated using data reflecting the same income tax policies for both 2014 and 2019 and allows for an “apples-to-apples” comparison of pipeline cost changes.
Second, the draft order calculates the index using data from the middle 80% of pipeline cost changes, as opposed to the middle 50%. Using this broader, more inclusive data sample should enhance the Commission’s calculation of the central tendency of normal industry-wide cost changes.
Third, the index level results, in part, from updated FERC Form No. 6 filings made by oil pipelines and other corrections to the data set used in calculating the index. The draft order declines to adopt other changes to the index calculation proposed by commenters.
Accordingly, the draft order concludes that the appropriate index level is PPI- FG+0.78.
We are happy to answer any questions you may have. Thank you.