By Jeanine Prezioso and Sabina Zawadzki
NEW YORK, Oct 24 (Reuters) - A ruling by a federal judge to cut agreed tariffs on a major oil pipeline has drawn fire from the energy industry which says it could jeopardize billions of dollars of future investment.
The provisional ruling last month, if approved by the U.S. Federal Energy Regulatory Commission (FERC), would reduce so-called “committed” rates already agreed in contracts last year to ship oil on the Oklahoma-to-Texas Seaway pipeline. The rates were settled with shippers to ensure the operators had enough guaranteed revenue to justify the investment in the line.
While FERC frequently reviews the “uncommitted” tariffs that pipeline operators use for short-term customers, Administrative Law Judge Karen Johnson’s decision challenging the commercially settled “committed” long-term rates appeared to be unprecedented.
“The very idea that you have the potential to rewrite these contracts down the line is worrisome,” said Steven Kramer, general counsel for the trade group Association of Oil Pipelines (AOPL).
A deluge of objections were filed last week by operators Enterprise Product Partners and Enbridge Energy Partners ; committed shippers including Continental Resources and Tidal Energy Marketing; as well as other companies concerned about future rulings, such as Chesapeake Energy and Plains All American (PAA).
“This ruling would upset 17 years of fundamentally important commission precedent and policy,” PAA said in a filing.
The decision emerged from a case that focused on “uncommitted” rates, a relatively common dispute over how rates are set for those who would use the pipeline occasionally.
The question remains whether FERC will actually use proceedings from a rate case to change its policy. The agency has long been regarded as upholding “contract sanctity” and reaffirmed that position in a March filing.
FERC declined to comment on the case which must be approved by the five-member commission, but indicated there was no precedence for the decision.
“Generally, this is the first time, the first effort to open up the committed rates,” FERC spokeswoman Mary O‘Driscoll said.
The ruling threatens to complicate one of the most basic practices in the pipeline business - the use of ‘open seasons’ by operators, a period of weeks or months during which they can gauge customer interest in shipping oil or gas on a particular pipeline and secure commitments on price and volume.
On the face of it, a decision to lower rates would seem to be good news for shippers. However, lawyers and executives said many firms are worried about establishing a precedent that could allow FERC to intervene in future contracts.
Without the financial security of committed rates, investors, such as infrastructure funds, may be unwilling to commit to the massive investments needed to help modernize the U.S. pipeline network amid the biggest U.S. oil boom in generations, critics say.
“It’s difficult enough to finance pipelines. By putting committed contracts into play it really makes it nearly impossible until after the regulator has acted to financially evaluate a project,” said Daniel Hagan, a partner who specializes in energy law at law firm White & Case in Washington, D.C. and who has been reviewing the case.
With the unexpected oil boom in North Dakota and Texas, pipeline companies are rushing to build, convert or reverse lines to connect the new-found oil with markets. These projects tend to come with billion-dollar price tags.
Seaway is one such project, involving the reversal of an existing pipeline to deliver 400,000 barrels per day from the Cushing oil storage hub to the Gulf Coast. The pipeline began operations in May 2012 and in total $2 billion will be spent on its reversal, expanding capacity and adding a twin pipeline.
Seaway said in a filing last week the decision will “put in jeopardy billions of dollars of existing and planned infrastructure projects that depend on the sanctity and enforceability of contracts with shippers supporting those projects.” It declined to comment beyond its regulatory filings.
The original Seaway dispute involves several potential uncommitted shippers including Apache, Chevron, Noble Energy and Suncor Energy Corp who asked that Seaway provide more justification for the rates they set.
In the April 13, 2012 filing, Seaway proposed uncommitted rates of $3.82 per barrel for light crude and $4.32 for heavy. Committed rates were set between $2.75-3.00 for up to 100,000 barrels of light crude for a 5 year period, $2.50-2.75 for a ten year period and $3.25-3.50 and $3.00-3.25 for heavy crude.
The judge’s ruling in this case stemmed from the objections to the April rates filed by Seaway which came only from the uncommitted shippers.
The decision, however, did not please them. Apache, Chevron, Noble and Suncor also objected last week to strands of the ruling, arguing for even lower uncommitted rates.
Following a 30-day period allowed for filing arguments there will now be a 20-day period for appeals and objections. There is no fixed timeline for the five-member commission to approve, amend or reject the decision after that date.
“Every shipper in the oil industry and anyone owning a pipeline is saying this case is going to set a precedent,” said an industry executive from a company that intervened early on in the case. If the decision is final, committed shippers may fight FERC in court, the executive said.
“You’ve got everybody looking at the case.”