Last month, FERC issued Order No. 783, which requires oil pipelines to report additional information on their annual FERC Form 6 filings. Specifically, Order No. 783 requires most oil pipelines  to include additional information on rate base, rate of return, return on rate base, and income tax allowance on Page 700 of Form 6.  Page 700 provides an overview of an oil pipeline’s jurisdictional cost-of-service and is used as a preliminary screening tool to evaluate rates. The order was issued on July 18th.

Rate Base:  Instead of reporting total rate base on line 5, the Commission will now require that rate base be broken down into 3 subparts on three new lines of Page 700: Rate Base – Depreciated Original Cost (line 5a); Rate Base – Unamortized Starting Rate Base Write-up (line 5b); and Accumulated Net Deferred Earnings (line 5c).  The sum of lines 5a, 5b, and 5c constitutes the pipelines Trended Original Cost (TOC) rate base.  The TOC rate base previously was reported on line 5 and will now be reported on line 5d (Total Rate Base – Trended Original Cost).

Rate of Return:  Order No. 783 subdivides rate of return information formerly listed on line 6 of Page 700.  It adds new lines as follows:  Rate of Return – Adjusted Capital Structure Ratio for Long Term Debt (line 6a); Rate of Return – Adjusted Capital Structure Ratio for Stockholder’s Equity (line 6b); Rate of Return – Cost of Long Term Debt Capital (line 6c); Rate of Return – Real Cost of Stockholder’s Equity (line 6d).  In addition, the Commission is adding line 6e, Rate of Return – Weighted Average Cost of Capital, which is (line 6a x line 6c) + (line 6b x line 6d).

Return on Rate Base:  Return on rate base is currently reported on Page 700, line 7, as the total of return on debt plus real return on equity.  Order No. 783 requires oil pipelines to subdivide the information.  New line 7a is Return on Rate Base – Debt Component, which equals the product of the Trended Original Cost Rate Base (new line 5d) and the weighted average cost of debt (new line 6a x new line 6c).  New line 7b is Return on Rate Base – Equity Component, which equals the product of Trended Original Cost Rate Base (new line 5d) and the weighted average cost of equity (new line 6b x new line 6d).  New line 7c is the Total Return on Rate Base, which is the sum of new line 7a + new line 7b.

Composite Income Tax Rate:  Currently, Page 700, line 8, requires oil pipelines to report the total dollar amount attributable to income tax allowance.  Order No. 783 requires an additional line item, line 8a, for Composite Tax Rate Percentage.  This is “the combined federal and state tax rate as adjusted consistent with Commission policy.  The Commission simply seeks the tax rate that represents the amount of additional taxes the oil pipeline would be required to pay if it earned its exact weighted average cost of capital as reported on line 6e and it collected an additional dollar of revenue.” (Order No. 783, P 26).

Calculation of Actual Rate of Return on Equity:  The Commission observed that the Page 700 modifications it was adopting would enable calculation of the actual rate of return on equity for an oil pipeline, which would make Page 700 a more useful tool in evaluating oil pipeline rates.  The NOPR explained that the new data required on Page 700 could be used to calculate an actual rate of return on equity by dividing the actual return on equity by the equity portion of the Trended Original Cost Rate Base reported on new line 5d.  In addition, actual return on equity could be derived by taking the sum of (a) Return on Rate Base – Equity Component (new line 7b), plus the difference, adjusted for taxes, between Total Interstate Operating Revenues (line 10) and Total Cost of Service (line 9), plus the current year’s inflation related earnings deferred for subsequent collection (the product of Trended Original Cost Rate Base (new line 5d) and the current year’s CPI-U)).  In addition, actual return on equity could be divided by the equity portion of the Trended Original Cost rate base (Trended Original Cost Rate Base (new line 5d) times the Adjusted Capital Structure Ratio for Stockholder’s Equity (new line 6b)).

The Commission emphasizes that the formula it set forth in the NOPR for deriving actual rate of return on equity is a “preliminary screen to evaluate whether additional proceedings may be necessary to challenge rates” (Order No. 783, PP 36-37).  It also cautioned that the NOPR method “does not establish a formula for setting oil pipeline rates in a particular rate case” (Id. at P 37); “does not change the Commission’s ratemaking policies,” including the method for calculating total return on equity for oil pipelines set forth in Opinion No. 351 (Id. at P 38); does not indicate any change in Commission policies regarding test period adjustments, net deferred earnings, return calculation, or burdens of proof (Id.); and does not affect existing rates on file (Id.).

Please contact us via email or call (202) 393-1200 if you have any questions or would like further information regarding this bulletin, or other oil or natural gas pipeline regulatory matters.