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Parallel revolutions in energy

The massive growth over the past decade in oil and natural gas production from shale formations across the United States has generated significant, increasing development of formations that were previously not well known, such as the Bakken, Denver-Julesburg, Eagle Ford, Marcellus, and Utica, and dramatically revived production in older ones, such as the Permian Basin. For example, the Energy Information Administration projects that US crude oil production may increase to 9.6 million barrels per day by 2019. For reference, US crude oil production was 3.1 million barrels per day in 2012.

Surges in liquid hydrocarbon production throughout the US have demanded the rapid development of transportation infrastructure to handle increasing crude oil and natural gas production (both in terms of production area gathering and long-haul trunk pipelines) and the rippling effects downstream – for example, the need for pipelines to carry (1) gasoline, diesel, jet fuel and other petroleum products produced from crude oil refining; (2) natural gas liquids ("NGLs") generated by natural gas processing, and (3) ethane, propane, and other purity NGLs generated by NGL fractionation. From 2014 to 2020, the US is expected to increase NGL pipeline capacity by at least 2.8 million barrels per day and crude oil pipeline capacity by at least 5.2 million barrels per day, with related capital spending exceeding $3 billion per year in the near term.

Faced with this revolution in transportation demand, a key question has been whether the liquids pipeline industry would be able to respond creatively and efficiently when it is governed by one of the nation's oldest regulatory statutes – the Interstate Commerce Act of 1887 (or "ICA").

Ever since the Hepburn Act of 1906 brought interstate petroleum pipelines under the ICA, such pipelines have been required to function as "common carriers" – i.e., to provide service to all interested customers making reasonable requests for service – without undue discrimination or preference and at just and reasonable rates. The common carriage requirement, however, appeared to place an obstacle in the way of efficient investment in new liquids pipeline infrastructure since the customers willing to make commitments to see that a new pipeline was built – to "anchor" the project – could not be assured that they would be able to use the capacity and, instead would have to vie with all other potential customers for access to the new capacity.

Fortunately, the Federal Energy Regulatory Commission (or "FERC"), charged with implementing the ICA, has recently interpreted the common carriage requirement in ways that have afforded increased flexibility to meet market and financing needs while fulfilling that obligation, such as approving various forms of preferential capacity access and related rate structures for customers making term and volume commitments to new or expanding pipelines.

FERC has ruled that common carriage does not require equal allocation of capacity to all pipeline customers and has further ruled that the pipeline may treat customers differently with respect to available transportation rates, so long as those customers are not "similarly-situated." When the customers are not "similarly-situated," differential treatment is not likely to result in unreasonable discrimination or preference.

Accordingly, when new or expanding interstate liquids pipelines seek long-term contractual commitments from customers to support infrastructure development ("committed shippers"), such pipelines may offer through the "open season" process a variety of rate and capacity access options for such committed shippers. If these process and contractual arrangements are properly structured, committed shippers will not be viewed as similarly-situated in comparison to shippers that do not make such contractual commitments ("uncommitted shippers") and each class of committed shipper will not be viewed as similarly-situated vis-à-vis other classes of committed shippers.

Through the open season, the pipeline developer publicizes its project, providing interested parties with project details (e.g., origins, destinations, and capacity access and rate structures) and the transportation services agreement that will become, subject to comments, the long-term contract between committed shippers and the pipeline. The pipeline may offer up to ninety percent of its capacity for volume commitments in the open season and should typically reserve at least ten percent of its capacity for uncommitted shippers both during the open season process and once the pipeline is operational. FERC has found this approach to be consistent with common carriage because the open season provides all interested shippers with the opportunity to become committed shippers and the pipeline reserves a reasonable amount of capacity for uncommitted shippers.

FERC has approved through its declaratory order process a useful range of capacity access and rate structures, finding those structures to be consistent with the ICA when offered through an open season. For example, a pipeline may offer committed shippers discount transportation rates in exchange for long-term ship-or-pay commitments to the pipeline and combine these rates with preferential (though non-firm) access to capacity in comparison to what is available to uncommitted shippers. A pipeline may also offer firm service to committed shippers so long as they pay a premium rate for this priority service. Moreover, these capacity and rate structures can be tiered to account for differing volume commitment levels, durations, and other terms (e.g., acreage dedications).

In summary, FERC's evolving precedent in administering the ICA has fostered efficient market pricing for the development of infrastructure, permitted pipelines to obtain commitments to support projects, and afforded pipeline customers certainty of capacity access–aligning the statutory regime with the economic realities of the shale boom and national energy policy priorities.