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Watershed: US Petroleum Pipelines under Trump

The US energy pipeline network is the largest in the world, including over 200,000 miles of pipeline moving crude oil, refined petroleum products, and natural gas liquids. To maintain, modify, and expand that extensive petroleum pipeline system to meet the evolving needs of the American economy and, indeed, respond to worldwide market patterns requires significant and sustained capital investment. The Federal Energy Regulatory Commission (FERC) plays an important role in fostering such investment by providing a supportive regulatory regime–one that maintains a stable set of ground rules for investment recovery, permits those providing the capital to earn a return commensurate with risk, and provides a flexible regulatory "tool kit" for use in responding to market demands. Recent developments have introduced uncertainty into FERC's pro-infrastructure regulatory approach.

Over the past 20 years, FERC has fostered expansion both of petroleum pipeline infrastructure and of the opportunity for pipelines and shippers to explore innovative service arrangements. Key milestones in that progression were the 1996 Express Pipeline orders,1 which granted advance approval for a project using a non-traditional rate structure, and the 2003 Caesar and Proteus orders,2 which approved Outer Continental Shelf pipelines' provision of priority (or "firm") service to contracting shippers. These and other rulings, followed by dozens of declaratory orders, have elaborated and defined a FERC regulatory regime that supports infrastructure investments and provides a range of rate and service options, including innovative contract rates and capacity arrangements, a broad, rational approach to competition-based rates, and a well-defined default mechanism for setting rates based on industry inflation experience ("indexing"). This environment has encouraged investment in green-field and expansion pipeline projects, along with the re-purposing of existing under-utilized pipeline assets to meet new market demands. As a result, billions of dollars have been committed to energy infrastructure development, fostering increased use of domestic resources.

However, key elements of that regime have been called into question.

In the 1980s, Congress enacted tax provisions that favored investment in petroleum pipelines through tax-pass-through structures, such as master limited partnerships, and pipeline companies widely adopted such ownership structures. FERC, in turn, adopted a policy in 2005 on the rate treatment of tax-pass-through-owned pipelines that is consistent with congressional tax policy. In 2007, the US Court of Appeals for the D.C. Circuit upheld FERC's policy, which had served to increase both adoption of such structures and pipeline investment. However, in July 2016, the same court issued an opinion reopening FERC's policy. Following the court's remand, FERC initiated a public comment process.

In addition to that public comment process, FERC also issued an Advanced Notice of Proposed Rulemaking (ANOPR) on October 2016 where it proposed potential changes (1) to its indexing regulations that would render inflation-based rate adjustments less available to petroleum pipelines and (2) to its annual reporting system that would make it more burdensome for petroleum pipelines and easier for shippers to bring rate challenges.

These and other more modest steps by the regulator have appeared to indicate a turn toward tighter regulation of petroleum pipelines and a desire to align such regulation more closely with natural gas pipelines. FERC's recent actions also appear to give decreased credence to the less rigorous statutory scheme applicable to petroleum pipelines and to the long-recognized reality that the forces of competition have a freer play in the petroleum pipeline industry.

As a result, one would have to look back many years to find an era in which the regulatory framework applied to interstate petroleum pipeline was in greater flux, with so many important issues unsettled. Not surprisingly, uncertainty is not welcomed in an industry that looks for stability and certainty in undertaking capital commitments to major infrastructure projects. In the midst of this already uncertain environment, the 2016 US presidential election adds yet another unknown. The major question is how will now-President Trump, who campaigned on development of domestic energy resources and promised to jump-start national infrastructure investment, translate those goals into the filling of the multiple, empty Commissioners' chairs of the quorum-less FERC.

FERC is at a true watershed. Whether the current strong trend toward creative development of much-needed petroleum pipeline infrastructure will continue depends on how the FERC Commissioners to be appointed by President Trump choose to tackle the key open questions before the agency.

  1. Express Pipeline Partnership, 75 FERC ¶ 61,303, order on reh'g, 76 FERC ¶ 61,245 (1996).
  2. Proteus Pipeline Company LLC, 102 FERC ¶ 61,333 (2003); Caesar Pipeline Company LLC, 102 FERC ¶ 61,339 (2003) (issued under FERC’s Outer Continental Shelf Lands Act authority).