FERC Reaffirms Reliance on “Committed Shipper” Rate Agreements for Oil Pipelines

by Morgan Lewis

The Commission emphasizes that a committed shipper negotiated rate’s deviation from cost-of-service does not overturn the presumption that the rate is just and reasonable.

In addressing interstate pipeline requests to build new infrastructure for facilities subject to the Interstate Commerce Act, the Federal Energy Regulatory Commission (FERC or the Commission) has permitted pipelines to negotiate long-term agreements with anchor or “committed” shippers following publicized open seasons. FERC has approved committed shipper negotiated rates that deviate from strict cost-of-service ratemaking principles and has permitted parties additional flexibility on some terms and conditions of service. On September 13, 2013, a FERC administrative law judge (ALJ) issued an initial decision in Seaway Crude Pipeline Co.[1] The Initial Decision found that committed shipper rates must be cost-based. Committed shippers and the pipeline challenged that finding. On February 28, a unanimous Commission reversed the Initial Decision.[2]

The Commission’s Order

Rejecting the ALJ’s decision in its entirety, FERC emphasized that the requirement to provide cost-of-service data does not also require committed rates to be cost-based. The Commission highlighted its “well-established policy of honoring negotiated contract rates,”[3] which the ALJ failed to respect. Although the Commission acknowledged, as did the ALJ, its authority to modify committed rates that it finds unjust and unreasonable,[4] it expressly declined to exercise that authority. The Commission also pointed out that pipelines must support protested uncommitted rates with cost data, but not committed rates.[5]

The Rationale

The Commission underlined that it accepts a number of ratemaking methods in addition to cost-of-service ratemaking and acknowledged that negotiated rates are not necessarily unjust or unreasonable. More specifically, in the present context, the Commission said that negotiated rates between “sophisticated businesses” might involve a number of rationales in the valuation of the services.[6] Just and reasonable rates need not be cost-of-service, but they must “fall within the oft-cited zone of reasonableness, where rates are neither less than compensatory nor excessive.”[7]

At the same time, FERC set guidelines for when it might find a negotiated rate to be unjust and unreasonable. Specifically, “contract negotiations must be held in good faith and not involve fraud or improper conduct.”[8] To protect against abuses of market power, shippers that refuse to or cannot pay a negotiated rate must receive “an alternative cost-based” uncommitted rate.[9] Further, the Commission will not require pipelines to show that they lack market power in order to justify their negotiated rates unless “a pipeline’s non-cost based rates will be payable by all shippers.”[10] The Commission suggested that it would consider modifying a contract “where the negotiated rate places an excess burden on [third parties],” but it found that this was not the case here.[11] Finally, the Commission emphasized that it would honor negotiated rates when “the process was open, transparent, and free of the traditional contract nullifiers.”[12] In FERC’s view, as long as negotiations are fair, deviations from cost-of-service do not by themselves make negotiated rates unjust and unreasonable.

The Outcome

The Commission reversed and remanded the ALJ’s decision for a “revised Initial Decision.” Citing a public interest in finality, the Commission declined to reopen the evidentiary record. However, the Commission allowed briefs that addressed exceptions in the proceeding.

[1]. Docket No. IS12-226-000, 144 FERC ¶ 63,026 (2013) [hereinafter Initial Decision].

[2]. Seaway Crude Pipeline Co. LLC, Docket No. IS12-226-000, 146 FERC ¶ 61,151 (2014), available here.

[3]. Id. at P 17.

[4]. The ALJ justified the rate modification under a Transportation Service Agreement term, while the Commission cited its authority to modify rates under the Interstate Commerce Act. See id. at PP 18–19.

[5]. See id. at P 20.

[6]. See id. at P 25.

[7]. See id. at P 27 (internal citation and quotations omitted).

[8]. Id. at P 28.

[9]. See id. at PP 29–30.

[10]. Id. at P 32.

[11]. Id. at P 33.

[12]. Id. at P 37.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morgan Lewis | Attorney Advertising

Written by:

Morgan Lewis

Morgan Lewis on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.