Broad Definition of "Substantial Economic Interest" Permits Standing in Shell Pipeline Co. LP

April 11, 2014

On April 10, 2014, a FERC Administrative Law Judge (ALJ) issued a partial initial decision (ID) in Shell Pipeline Co. LP that broadly defines “substantial economic interest,” the regulatory threshold for standing to protest oil pipeline transportation rates.  The finding permits a group of producers to protest initial uncommitted rates on one segment of Shell Pipeline Company LP’s (Shell) Houston to Houma System (Ho-Ho).  As a consequence, Shell will need to provide full cost, revenue, and throughput data supporting the proposed rates unless the ID is reversed.

In December 2013, Shell filed three related tariffs for service on the Ho-Ho System corresponding to transportation along the entire system, the eastern two-thirds of the system, and the eastern third of the system.  A group of producers protested all three tariffs.  FERC’s hearing order that found the producers had standing to protest two of the three tariffs because they were potential future shippers or suppliers on the Ho-Ho System (Order).  But, FERC found it unclear whether the producers had standing to protest the third tariff covering segmented transportation from Erath, Louisiana to Houma, Clovelly, and St. James, Louisiana (Erath segment)—representing the eastern third of the Ho-Ho System.  The Order directed the ALJ to determine the producers’ standing “based on whether they are active in the production area supplying Erath.”  FERC reasoned that if they were not active, the producers were unlikely to have a “substantial economic interest” in the Erath segment rates.  The producers acknowledged that they were not active in the production area supplying Erath, but could become so in the future.

The ID granted the producers standing to protest the Erath segment rates, adopting the producers’ broad view of “substantial economic interest” that was not limited to current activity in the Erath production area.  The ID relied on Enbridge (Southern Lights) LLC, a case that granted standing to non-current shippers with a demonstrated intent to become shippers even though the shipper’s plan to ship was not “imminent.”  It also relied on Order No. 561's finding that standing should be based on the “magnitude of the economic stake” of the protesting party and not shipper status.  The ID also found that there was no precedent “limiting standing to activities in ‘the production area.’”  It was enough that the shippers had standing to protest the tariff covering transportation on the entire Ho-Ho System, starting at Houston,  Texas, which encompassed the Erath Segment at the system’s eastern end.  The ALJ concluded that the producers’ interest was a substantial economic interest because system rates were mutually interdependent.  Costs and revenues would need to be allocated among all origin and destination shipments on the system to establish just and reasonable rates for shipments sourced at Houston.  The administrative efficiency of reviewing the shorter haul rates in the context of the longer haul ones specifically set for hearing also influenced the ID.

A narrower reading of the FERC Order likely would have denied standing based on the producers’ acknowledged lack of activity in the production area supplying Erath.  FERC had directed the ID to be a limited fact-finding exercise.  But, the ID instead focused on legal and policy arguments concerning cost allocation among various pipeline segments.  Given that this proceeding is ongoing, any subsequent decision made by FERC is likely to occur after Shell has produced cost and revenue information on the Erath segment.  It is unclear whether FERC will adopt this broader reading of standing going forward, which will have a wider impact on the oil pipeline industry.

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Van Ness Feldman is continuing to follow the issues in this docket.  For additional information, please contact Brian O’Neill, Shippen Howe, or Emily Pitlick.