FERC Affirms and Clarifies Magellan Marketing Affiliate Order

After a five-year wait, the Federal Energy Regulatory Commission (FERC) has denied rehearing of its 2017 order in Magellan Midstream Partners, L.P., 161 FERC ¶ 61,219 (2017) (Magellan) that declared Magellan Midstream Partners' marketing affiliate proposal would violate the Interstate Commerce Act's (ICA) prohibitions against rebates. At the same time, however, FERC's rehearing order provides several important clarifications concerning 1) how it will assess whether future marketing affiliate transactions create unlawful rebates and 2) the scope of its Magellan holdings.

FERC's order turns on its analysis of "integrated-company economics" among the pipeline, its marketing affiliate and their common parent company. In FERC's view, these economics can create the potential for an implicit subsidy/unlawful rebate from the parent company to the pipeline's affiliated shipper to enable otherwise uneconomic transactions.

A Closer Look

FERC explains that:

When the affiliated shipper transports product on the affiliated pipeline, the incremental transportation cost to the parent company is not the full tariff rate, but rather the lower variable cost of transportation on the pipeline. Thus, when the price differential between the origin and destination that the affiliated shipper receives from its third-party transaction(s) is not sufficient to cover the tariff rate, it may be presumed that, in order to make the transaction economic for the affiliated shipper, the parent company subsidizes the affiliated shipper for the difference between (i) the full tariff rate and (ii) the variable cost of the pipeline movement.

Notwithstanding the foregoing presumption, FERC also recognizes that "not every affiliated shipper movement leads to a rebate" and that the existence of a rebate depends upon the specific circumstances. For example, where the price differential is greater than or equal to the full tariff rate, integrated company economics do not result in a rebate. In addition, as urged by several parties on rehearing, FERC clarifies that there may be factors other than the full tariff rate and the price differential (e.g., avoiding contract breach, refinery shutdown or preserving pipeline capacity rights) that would affect a rebate determination, even in the face of unfavorable price differentials.

Expressed in "algebraic terms," FERC's Magellan rebate analysis amounts to T ≤ D + K, where T is the full tariff rate, D is the price differential and K is another business factor. According to FERC, this equation "captures those situations where it would be economically rational for a nonaffiliated shipper … to make the same movement and to pay the full tariff rate." If a nonaffiliated shipper would find the movement economical without a rebate, FERC finds it "reasonable to conclude that the affiliated shipper would make the movement without a rebate."

FERC further clarifies that its Magellan order addressed only the specific transactions described in the pipeline's declaratory order petition, not transactions involving different facts. Recognizing that transactions involving oil pipeline capacity are "complex and varied," FERC declines to discuss whether any other transactions would violate the ICA's rebate prohibitions. Instead, FERC intends to review rebate issues posed by particular transactions on a case-by-case basis based upon the facts and circumstances presented.

It is clear, though, that FERC's reasoning on impermissible rebates reaches beyond the pipeline petition's description of a "marketing affiliate" that would ship "crude oil" using its affiliated pipeline's capacity. For example, FERC finds it "self-evident" that the ICA's prohibitions on rebates apply not just to crude oil pipelines but rather to all jurisdictional oil pipelines. Similarly, FERC states that the ICA's rebate prohibitions are not limited to marketing affiliates and may reach transactions by affiliated shippers that are not marketers. Finally, FERC cautions that the ICA's prohibition on rebates may be violated where an affiliated shipper buys product in the origin market from a third party and sells product in the destination market to either the same third party or a different third party.

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