FERC’s Oil Pipeline Index and Rising Pipeline Rates

• Many interstate liquids pipelines follow the FERC’s Oil Pipeline Index, which sets the ceiling for rate adjustments that can be made each July 1.
• Pipelines tracking the index were able to increase their rates by up to 1.26% at the start of this month – a significant moderation from the 13+% increase seen for July 2023 as inflation has cooled.
• With the five-year review of the Oil Pipeline Index on the horizon, FERC could be seeking comments on a new proposed adjustment factor in June 2025.

In addition to being the quintessential summer month, July is also an important mile-marker for pipeline operators. Specifically, pipelines that follow the Federal Energy Regulatory Commission’s (FERC) Oil Pipeline Index are able to adjust their rates every July 1 based on inflation from the prior year. Today’s note provides a brief overview of the Oil Pipeline Index, the rate adjustment that just took effect, and why news about the index bears watching in 2025 and 2026.

Many interstate liquids pipelines follow the FERC’s Oil Pipeline Index and adjust their rates every July 1 accordingly. Liquids include crude, natural gas liquids (NGLs), and refined products like gasoline and diesel. The index sets the ceiling for annual rate increases and is based on the change in the Producer Price Index for Finished Goods (PPI-FG) for the prior year plus an adjustment. Currently, the index is calculated based on the change in PPI-FG – 0.21%.

The index helps level the playing field for these FERC-regulated pipelines. Keep in mind, FERC is tasked with ensuring that interstate pipeline rates are just and reasonable. By setting a ceiling for annual rate changes, FERC is essentially dictating through the index what is a just and reasonable change to the tariffs pipelines can charge.

Over time, the index will fluctuate based on inflation as measured by changes in PPI-FG. With significant inflation in 2022, the fee multiplier for July 1, 2023 was 1.13 or an increase of 13.32% (read more). This was the highest annual increase since the index was introduced in 1995 as shown in the chart below. With a significant slowdown in inflation in 2023, the multiplier for this year is much more modest and in line with historical adjustments. Pipelines tracking the index were able to increase their rates by up to 1.26% at the start of this month.

The Oil Pipeline Index is predominantly used by interstate liquids pipelines, which are regulated by FERC. But not all these pipelines follow the index. Interstate liquids pipelines can instead have cost-of-service rates, market-based rates, or settlement rates in certain circumstances (read more). For example, Enterprise Products Partners’ (EPD) and Enbridge’s (ENB) Seaway pipeline, which provides a critical connection between the Cushing, Oklahoma oil hub and the Gulf Coast, uses market-based rates.

Outside of interstate liquids pipelines, other midstream assets can rely on the index for annual rate adjustments based on contractual agreements. Intrastate liquids pipelines may use the index, even though they are regulated by the relevant state instead of the FERC. Midstream contracts will typically include inflation adjustments based on the FERC Oil Pipeline Index or another inflation metric. Combined with midstream’s real asset exposure, inflation-protected cash flows can be attractive in periods of high inflation and supportive for performance.

It is common for liquids pipelines to use the Oil Pipeline Index. Natural gas pipelines typically have cost-of-service or negotiated rates (read more). For context, at the end of June, the MLP-focused Alerian MLP Infrastructure Index (AMZI) had a 28.2% weighting toward petroleum pipeline MLPs, and the Alerian Midstream Energy Select Index (AMEI) had 22.6% weighting toward petroleum pipeline companies.

The next major milestone for the Oil Pipeline Index will be the five-year review of the adjustment factor. PPI-FG – 0.21% is the formula for the index through June 30, 2026. However, FERC reevaluates the adjustment factor every five years to make sure the index is appropriately reflecting industry cost changes. With the upcoming review, FERC will be setting the index formula for July 1, 2026 to June 30, 2031.

If FERC follows the same timeline as the last five-year review, the regulator could be seeking comments on a new proposed adjustment factor in June 2025 – less than a year away. Interested parties, including pipeline operators and their customers, can submit comments on the proposed adjustment factor.

Liquids pipelines that follow the FERC Oil Pipeline Index can adjust their rates every July 1 using a formula based on inflation. With inflation moderating, the ceiling increase for 2024 is modest; however, the index remains an important determinant of pipeline rates and will bear watching as the five-year review approaches.

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For more news, information, and analysis, visit the Energy Infrastructure Channel.

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