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Federal Register / Vol. 86, No. 29 / Tuesday, February 16, 2021 / Rules and Regulations
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oil pipeline rates.2 Under that approach, if an oil pipeline increases its rates by less than the annual ceiling established by the index, the pipeline does not need to justify those rates through a cost-ofservice filing.3 The majority of oil pipelines under the Commissions jurisdiction use this index to demonstrate that their rate increases are just and reasonable.
3. Following Order No. 561, the Commission updates the index every five years to ensure that it represents a reasonable measure of the annual change in a typical oil pipelines cost of service. To set the annual index, the Commission calculates each jurisdictional pipelines change in its cost-of-service over the previous fiveyear periodwe call this oil pipelines cost change data. The Commission then uses that data to determine an appropriate adjustment to the Producer Price Index for Finished Goods PPIFG
established by the U.S. Department of Labor.4 To avoid outliers or other anomalous, unrepresentative cost data, the Commission has historically relied on only the cost change data for the middle 50% of pipelines when updating the indexthat is, it excludes data from the 25% of pipelines with the lowest cost changes and the data from the 25%
of pipelines with the highest.5
4. In June of this year, the Commission issued a notice of inquiry that commenced its five-year update to the index. In that notice, the Commission proposed an index level of PPIFG+0.09, based on our historical practice of relying on the middle 50%
of cost change data.6 Todays order tosses that historical practice aside and establishes an index level that is nearly ten times higher at PPIFG+0.78.7 That order of magnitude increase is largely 2 Revisions to Oil Pipeline Reguls. Pursuant to Energy Poly Act of 1992, Order No. 561, FERC
Stats. & Regs. 30,985, at 30,955 1993 crossreferenced at 65 FERC 61,109, order on rehg, Order No. 561A, FERC Stats. & Regs. 31,000
1994 cross-referenced at 68 FERC 61,138, affd sub nom. Assn of Oil Pipe Lines v. FERC, 83 F.3d 1424 D.C. Cir. 1996.
3 At least absent a protest to the update. See Order No. 561, FERC Stats. & Regs. 30,985 at 30,947.
4 Five-Year Rev. of the Oil Pipeline Index, 173
FERC 61,245, at P 5 2020 2020 Index Review.
The resulting index level is expressed as the PPI
FG plus or minus a value that corresponds to the cost change data adjustment.
5 This practice of excluding the top and bottom 25% was part of Dr. Alfred Kahns original proposal that the Commission adopted in 1994. Assn of Oil Pipe Lines v. FERC, 876 F.3d 336, 340 D.C. Cir.
2017 noting that in 1994 Dr. Kahn omitted from his analysis the pipelines within the upper and lower 25 percent of the cost spectrum in order to exclude statistical outliers and incomplete or questionable data.
6 Five-Year Rev. of the Oil Pipeline Index, 171
FERC 61,239, at P 9 2020.
7 2020 Index Review, 173 FERC 61,245 at P 2.

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the result of a pair of unreasoned, illogical and unsupported changes that lack any meaningful support in the record before us. Ill discuss them in turn.
5. The Commissions first major mistake is to abandon its wellestablished practice of updating the index using the cost change data from the middle 50% of oil pipelines. As noted, in order to weed out potential anomalous, unrepresentative cost data and ensure that the cost change data reflects the experience of a typical pipeline, the Commissions established practice is to trim the data down to the middle 50% of cost changes. The Commission has explained that relying only on those central values best approximates the operations of a typical pipeline because it prevents the Commission from relying on unrepresentative cost changes, such as a one-time increase in rate base, plant retirement, significant expansions or acquisitions, or localized changes in supply and demand.8
6. Todays order abandons that approach and instead uses the data from the middle 80% of pipelines.9 That change dramatically increases the likelihood that the updated index will reflect anomalous data that does not shed light on the cost changes experienced by a typical pipeline, which, in practice, skews the index upwards. Relying upon those relative outliers is particularly inappropriate here since the middle 50% of pipelines corresponds to a much larger percentage of the total barrel-miles shipped over the last five years than in previous index updates.10 In other words, the middle 50% already corresponds to a significantly larger percentage of total oil transportation service provided than in previous index updates, which would seem to undermine any need to expand the data set.
7. The Commissions justification for abandoning the 50% approach consists of nothing more than variations on the theme that more data is better.11 But, as with most things in life, quality is more important than quantity. Including more cost change data is not necessarily an improvement when there is good reason to believe that the incremental data is 8 Five-Year Rev. of Oil Pricing Index, 133 FERC
61,228, at P 61 2010 citing Order No. 561A, FERC Stats. & Regs. 31,000 at 31,097 2010 Index Review; Five-Year Rev. of Oil Pipeline Index, 153
FERC 61,312, at P 24 2015 2015 Index Review.
9 2020 Index Review, 173 FERC 61,245 at P 25.
10 The middle 50% of this data set contains 82%
of total barrel-miles subject to the index while, in 2015 and 2010, the middle 50% contained only 56% and 76% of total barrel-miles, respectively. Id.
P 23.
11 Id. PP 2629.

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made up of outliers whose experience is less representative of a typical oil pipeline with a normal cost structure.
As noted, the purpose of the index is to approximate a typical oil pipelines change in costan exercise that does not benefit from including cost change data from pipelines that are, by definition, unrepresentative of the average pipeline.12 And that is exactly why the Commission has consistently rejected replacing the 50% approach with the 80% approach adopted in todays order.13 In addition, the Commission chastises shippers for not arguing that every pipeline whose cost change data would have been excluded using the middle 50% was an outlier.14
As an initial matter, the shippers did provide illustrative data explaining why seven of those pipelines cost change data was not representative, which you might think would suffice to support the Commission continuing its historical practice.15 In any case, the burden to show that the index is reasonable is on the Commission, and it cannot be carried simply by arguing that the shippers should have done more.
8. The Commissions second major mistake is to break its promise to protect ratepayers following the U.S. Court of Appeals for the District of Columbia Circuits decision in United Airlines v.
FERC,16 which struck down the Commissions practice of allowing Master Limited Partnerships MLPs to double recover their income tax cost.17
As a result of that decision, MLPs may no longer recover an income tax 12 See 2015 Index Review, 153 FERC 61,312 at P 43 By definition, costs at the top or bottom of the middle 80 percent deviate significantly from the cost experience of other pipelines. To the extent that the middle 80 percent data conforms to a lognormal distribution, outlying cost increases per barrel-mile will not be offset by similarly outlying cost decreases. Thus, using the middle 80 percent would skew the index upward based upon these outlying cost increases, which is contrary to the objective of the index to reflect normal industrywide cost changes.; 2010 Index Review, 133 FERC
61,228 at P 63 The use of the middle 50
minimizes the risk of including pipelines that experienced either large increases or decreases in cost or errant data that may be included in an 80
percent sample, while still capturing changes from a broad spectrum of the pipeline industry..
13 See 2015 Index Review, 153 FERC 61,312 at PP 4244; 2010 Index Review, 133 FERC 61,228
at PP 6063.
14 2020 Index Review, 173 FERC 61,245 at P 28.
15 Id.
16 United Airlines, Inc. v. FERC, 827 F.3d 122
D.C. Cir. 2016 finding that the Commission permitted a double recovery of income tax costs by allowing an MLP to recover both an income tax allowance and a return on equity determined pursuant to the discounted cash flow methodology, which already reflects income tax costs.
17 Inquiry Regarding the Commissions Pol. for Recovery of Income Tax Costs, 162 FERC 61,227
2018 Income Tax Policy Statement, rehg denied, 164 FERC 61,030 2018.

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