On December 17, 2020, FERC issued an order setting a new adder for crude oil and liquids pipeline rates subject to indexing. The new index level, which goes into effect on July 1, 2021, is the Producer Price Index for Finished Goods plus 0.78% (PPI-FG+0.78%). This formula will remain in effect for a five-year period, although it is currently subject to rehearing and possible judicial review.
Every five years, FERC examines pipeline industry costs to set a new adder. Starting in 1993, FERC began allowing pipelines to increase rates up to an indexed ceiling over their current rates, as a more simple, efficient alternative to pipelines having to make cost-of-service filings to adjust rates to reflect increased costs. Among other things, this year’s review assessed the impact of the corporate tax cuts adopted pursuant to the Tax Cuts and Jobs Act of 2017. In setting the new adder, FERC had also proposed to take into account the elimination of the income tax allowance for certain master limited partnership and other pipelines organized as a pass-through entity. For example, FERC had directed MLP crude oil pipelines to reflect the elimination of the income tax allowance in their Form No. 6, page 700 reporting. However, FERC ultimately decided not to factor in the effects of the income tax allowance elimination, although this decision and other aspects of the order, including using the middle 80% band of pipeline industry costs instead of the middle 50% band previously used by FERC, are subject to rehearing and potentially judicial review.
In setting the adder at 0.78%, FERC’s order adopted a significantly higher index level than the 0.09% adder it originally proposed in June 2020. For comparison, the current adder that was applied on July 1, 2020 and over the past five years was 1.23%. As noted, the order is subject to rehearing and judicial review.
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