Pipeline Operators Ask FERC To Protect Financing Of New Construction

February 2013, Vol. 240 No. 2

The Association of Oil Pipe Lines (AOPL) wants the Federal Energy Regulatory Commission (FERC) fix a brewing dispute threatening billions of dollars in infrastructure projects.

Andy Black, president and CEO of AOPL, said: “Literally billions of dollars of energy infrastructure project investment vital to new domestic energy supplies and lower energy prices is threatened if FERC does not act to protect the ability of project sponsors to finance their projects based on committed rate contracts.”
“Financing new pipeline construction depends upon a guaranteed stream of revenue based on rates charged for using the pipeline. Shippers and pipeline operators enter into contracts to deliver crude oil, gasoline, diesel and other products at agreed upon rates. These committed rate agreements give confidence to shippers that the infrastructure they need to deliver their production to market will be there when they need it.

These agreements also give confidence to companies and investors ready to fund new pipeline projects that their investments will be repaid. Unfortunately, FERC staff testimony in a pending pipeline rate case could undercut this financing method by threatening to void mutually beneficial rate contracts agreed to by energy shippers and pipeline operators,” he said.

Because of the importance of this issue to new pipeline construction, AOPL filed a motion to intervene and comments at FERC supporting a petition filed by the Seaway Pipeline. On Dec. 12, 2012, the joint owners of the Seaway pipeline stretching from Cushing, OK, to Houston filed a Petition for declaratory order (Docket No. OR13-10-000) asking FERC to confirm that the rate contracts agreed to by Seaway’s operator and shippers are not subject to review in Seaway Pipeline’s pending rate proceeding.

Instead of honoring the rate contracts reached by the pipeline operator and a prospective shipper, FERC staff recommended an entirely different rate and rate structure. FERC staff seeking to overturn a rate contract in these circumstances is unprecedented. The idea that FERC would retroactively throw out rate agreements upon which private financing is dependent could negatively reverberate throughout the financing and infrastructure development communities. Commercial agreements between knowledgeable and sophisticated parties should be honored.

In its filing, AOPL said pipeline operators and shippers may be deterred from entering into contracts for new projects or from moving forward current projects based on existing contracts, until FERC rules on the issue. AOPL called on FERC to act quickly and to provide reassurance to the public that committed rate contracts will be honored.

New pipelines and energy infrastructure development is vital to delivering Americans the new supplies and lower energy prices of our current energy boom. New drilling technologies are unlocking vast new domestic energy resources in North Dakota, Texas, Pennsylvania and other areas not adequately served by pipeline. New pipeline infrastructure is needed to efficiently connect American workers and consumers to these new energy sources.

AOPL estimates that approximately $10 billion in new liquids pipeline infrastructure has already been committed to projects commenced in2012 and later years. More than 2 MMbpd in committed projects and nearly 1.8 MMbpd in projects seeking shipper support awaits financing. A stable contract and rate structure is vital to financing any of these new projects.

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