Colonial tariffs reasonable: FERC judge: Update

Adds Colonial statement.

Colonial Pipeline did not violate federal law by charging Gulf coast customers market-based tariff rates for deliveries along its 5,500-mile refined products pipeline system, although the company may have overstepped in its handling of product loss surcharges, according to a key administrative ruling.

A partial initial decision handed down 1 December by an administrative law judge at the US Federal Energy Regulatory Commission (FERC) found that Colonial fell short of exercising monopoly powers in much of the Gulf coast, although its market position in Alabama supports long-running claims from shippers that the company should be required to link tariffs to an index-based rate.

Between 2017 and 2020 several shippers filed complaints with FERC claiming that Colonial's imposition of market-based tariffs were no longer reasonable given the company's dominant market position in the Gulf coast. Pipeline operators with sufficient power over a particular market must use index-based prices administered by FERC rather than market-based tariffs, according to federal regulations.

But the initial decision found that Colonial lacks market power in a 90-county Gulf coast region serving as point of origin for products delivered to its Line 1 gasoline pipeline and Line 2 distillate line beginning in Pasadena, Texas.

However, the pipeline was determined to have the potential for market power in a 16-county geographic origin market in Alabama identified by FERC staff.

These regional designations are different from those used by Colonial, which broadly breaks its operational footprint into a Gulf Coast district, a southeastern district and a northeastern district, charging market-based rates in the western Gulf coast, Baton Rouge-New Orleans, and Birmingham-Montgomery origin markets.

The company was determined to hold respective market shares of 36pc and 50pc in the Gulf coast and Alabama regions delineated by FERC. And while there are eight competing pipelines in the 90-county Gulf coast region, the only hypothetical alternative to Colonial for shippers in the Alabama region is the Magellan Pipeline, which lies some 600 miles away from Hunt Refining's 66,000 b/d refinery in Tuscaloosa, Alabama.

No fines, but some damage payments

Although Colonial exercises near control of the Tuscaloosa-Moundville geographic origin market in Alabama, the initial decision stopped short of proposing that FERC award damages under the Interstate Commerce Act (ICA). Plaintiffs failed to provide evidence that the market-based rates charged in that region were "unjustly discriminatory or unduly preferential," the administrative judge found.

The FERC-appointed judge did recommend that plaintiff shippers receive damages for so-called extra-tariff rates Colonial charges for product loss. Plaintiffs including Chevron, Trafigura and several other major trading groups had argued that Colonial charged "enormous overrecoveries" when including product loss surcharges in shipping invoices, following "no discernible formula" in determining its rates.

The decision suggested that Colonial convert that discretionary product loss surcharge into a 0.19pc allowance oil deduction for shortages in deliveries as part of its overarching shipping tariff regulated by FERC, and to pay reparations to plaintiffs based on overcharges delivered in the two years preceding a complaint.

The non-binding decision concerned complaints from a "limited number" of Colonial customers looking to lower the prospective FERC-regulated tariff rates charged by the company and to receive refunds for past services, Colonial told Argus. 
Colonial said it relies on the revenues from the tariffs to operate and maintain the pipeline that supplies approximately 50pc of the East coast's fuel.

"Colonial has been one of the least expensive modes of transportation for refined products for decades," the company said.

The decision is still subject to a vote by FERC commissioners. Parties have 30 days to submit exceptions to the findings of the initial ruling.

By Dylan Chase