SUMMARY
- Many liquids pipelines in the U.S. were able to increase their rates by 2% on July 1 in accordance with the Federal Energy Regulatory Commission’s (FERC) Oil Pipeline Index.
- FERC’s Oil Pipeline Index is based on the change in Producer Price Index for Finished Goods with an adjustment. The adjustment factor changes every five years.
- A new adjustment factor for the five-year period from July 2026 through June 2031 could be announced later this year.
With all due respect to Canada Day, July 1 carries other significance for U.S. liquids pipeline operators. Namely, this is the day that pipelines following the Federal Energy Regulatory Commission’s (FERC) Oil Pipeline Index are able to adjust the rates charged to customers. Today, these pipelines can increase their rates by up to 2.0%. This note explains the Oil Pipeline Index, looks at historical rate adjustments, and discusses the upcoming five-year review of the index.
Understanding FERC’s Oil Pipeline Index.
Interstate liquids pipelines by definition transport oil, natural gas liquids, and refined products (gasoline, diesel, etc.) across state lines. These pipelines typically adjust their rates each year based on the FERC’s Oil Pipeline Index. It is estimated that around three-fourths of oil pipelines use the FERC index.
The FERC index sets the ceiling for annual rate increases that go into effect each July 1. The index is based on the change in the Producer Price Index for Finished Goods (PPI-FG) with an adjustment. Because the index is based on an inflation metric, it is often cited when discussing midstream’s inflation-protected cash flows (read more). To be clear, indexed rates are mostly used for liquids pipelines, but other midstream assets can have contracts with inflation escalators.
Currently, the index is set at PPI-FG + 0.78%. Given that PPI-FG increased by 1.22% for 2024, liquids pipelines are able to increase their rates by up to 2.0% on July 1 (or technically 1.9976%).
The chart below shows the annual changes in the index since 1995. For the period shown, the average adjustment is 3.1%, and the median is 2.7%. On occasion, in periods of deflation, the index has dictated a decrease in rates. High inflation in 2022 resulted in a ceiling increase of 14.3% for July 1, 2023.
The adjustment factor for 2021 to 2026 has fluctuated.
While indexed rates should be straightforward, the adjustment factor in the FERC Index has been a point of contention. FERC sets the adjustment factor every five years.
In December 2020, the index was established at PPI-FG + 0.78% for July 1, 2021 to June 30, 2026. However, in an unusual move, FERC changed the index to PPI-FG – 0.21% in January 2022 as part of a rehearing. In September 2024, FERC reinstated the initial order setting the index at PPI-FG + 0.78% after a court ruled that FERC’s rehearing violated the Administrative Procedure Act.
The chart above reflects the higher reinstated values. It remains unclear how pipelines will make up for under-charging between March 2022, when the lower adjustment factor went into effect and September 2024, when the initial order was reinstated. FERC has sought comment on how to best remedy the lower earnings during that period.
Next five-year review on deck.
If historical patterns hold, FERC would be accepting comments for the next five-year review of the pipeline index over the coming months. A new adjustment factor for July 2026 through June 2031 could potentially be announced later this year. As a reminder, FERC is tasked with ensuring that pipeline rates are just and reasonable.
Ideally, the adjustment factor will remain constant through the next five-year period. The benefits of indexed rates are their simplicity, transparency, and straightforward implementation. Unfortunately, some of those benefits were lost in the 2021 to 2026 period as the adjustment factor was set, changed, and reset.
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Related Research:
Why Lower Inflation Won’t Rain on MLP/Midstream’s Parade
FERC’s Oil Pipeline Index and Rising Pipeline Rates
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