United States: FERC Declaratory Order Creates Uncertainty For Marketing Affiliates

Consequences for Compliance, Business Strategy and Due Diligence. Requests for clarification and/or rehearing filed on December 22, 2017, signal that the Federal Energy Regulatory Commission (the "Commission") will have an opportunity to revisit its order issued on November 22, 2017 ("Declaratory Order"), which appears on its face to prohibit certain marketing affiliate transactions. Specifically, the Declaratory Order found certain of the proposed transactions described by Magellan Midstream Partners, L.P. ("Magellan") would violate the prohibitions on rebates under the Interstate Commerce Act ("ICA"). As a result:

  • Compliance. While the requests for rehearing are pending, marketers engaged in affiliate transactions, counterparties to such transactions, pipeline affiliates and any potential seller or purchaser of such companies should be reviewing the terms of existing arrangements to confirm compliance with the Declaratory Order.
  • Review. In connection with M&A due diligence and proposed transactions, industry participants should consider the strategic and economic impact of the Declaratory Order and the issues that may be addressed by the Commission on rehearing.

Requests for Clarification and/or Rehearing. On December 22, 2017, Magellan and three other parties filed requests for clarification and/or requests for rehearing of the Declaratory Order.

  • Magellan. Magellan's request raised additional issues, including a request that the Commission expressly state that the Declaratory Order would apply equally to liquids pipelines and crude oil pipelines and, therefore, have broader application within the industry than the petition initially proposed.
  • Other Parties. Clarification and/or rehearing requests filed by other parties seek to limit applicability of the Declaratory Order to marketing affiliate transactions when the price differential is less than the affiliate pipeline's filed tariff rate and the pipeline subsidizes those losses through an actual payment by the pipeline to the marketing affiliate.

Background

Magellan's Petition for Declaratory Order. On November 14, 2016, Magellan filed a petition for declaratory order at the Commission requesting that the Commission rule that Magellan's proposal to establish a marketing affiliate to buy, sell and ship crude oil on Magellan's pipeline system ("Marketing Affiliate") would not violate any provisions of the ICA or the Elkins Act, in particular the prohibitions against rebates. 1 As described by Magellan, a Marketing Affiliate would buy and sell crude oil at origins and destinations on Magellan's subsidiaries' and affiliates' pipeline systems and then ship those volumes on the affiliated pipelines at the applicable tariff rates on file with the Commission. 2 In addition, Magellan requested that the Commission determine that the Marketing Affiliate would be permitted to enter into three types of affiliate agreements not involving the purchase or sale of crude oil:

  • Partial Assignment of Capacity Obtained by Marketing Affiliate Through an Open Season. If the Marketing Affiliate has entered into a transportation service agreement ("TSA") with an affiliated pipeline company through a pipeline's open season, during which the pipeline offers available capacity to all interested parties through a non-discriminatory, widely publicized process, it may partially assign its rights under the TSA to third-party producers and marketers and these third parties may pay a rate to the Marketing Affiliate that differs from the committed shipper rate in the TSA, provided the Marketing Affiliate pays the committed shipper rate to the affiliated pipeline company.
  • Marketing Affiliate Ships While Third Parties Retain Title. The Marketing Affiliate may enter into agreements with third-party producers and marketers to ship their crude oil in the Marketing Affiliate's name, while the third parties retain title to the crude oil and pay the Marketing Affiliate an amount different from the filed tariff rate, provided the Marketing Affiliate pays the filed tariff rate to the affiliated pipeline company.
  • Similar Arrangements. The Marketing Affiliate may enter into any similar arrangements with third-party producers and marketers that provide for the actual transportation of the third party's crude oil or provides the third party the financial benefit of the transportation of crude oil at amounts different from the filed tariff rate, provided the Marketing Affiliate pays the filed tariff rate to the affiliated pipeline company. 3

Parties' Comments Split in Response to Magellan Petition

  • Parties in Support: Parties State Purchase and Sale of Crude Oil Is Not within Commission's Jurisdiction. Several parties, including common carrier oil pipelines and marketers and shippers of crude oil, filed comments in support of Magellan's petition. These parties asserted that Magellan's proposed Marketing Affiliate transactions are consistent with the ICA and Commission precedent, particularly given that the ICA does not govern the purchase and sale of crude oil.
  • Parties in Opposition: Parties Claim Numerous Violations, Including Prohibition on Rebates. Other parties, including producers, marketers and shippers of crude oil and trade associations representing end-use consumers, marketers, wholesalers and shippers of petroleum products and natural gas liquids, filed comments expressing concerns or protesting Magellan's petition. These concerns included the potential for undue discrimination or preference by a common carrier in favor of a Marketing Affiliate, the risk of disclosure of confidential shipper information, the potential for violation of prohibitions on offering transportation rebates, and the potential that the proposed Marketing Affiliate transactions would circumvent both ICA and Commission regulations regarding oil pipeline rates and terms of service.
  • Parties Express Preference for Rulemaking. Several parties, both supporting and opposing Magellan's petition, requested that the Commission take action via a rulemaking proceeding, with notice and comment procedures, rather than in response to a petition for declaratory order. These parties stated that the matters addressed in Magellan's petition are of industry-wide concern and Commission action on such matters could have wide-ranging consequences for all oil pipeline industry participants.

Current Status: Commission's Declaratory Order Finds Transactions Violate ICA. On November 22, 2017, the Commission issued the Declaratory Order denying Magellan's petition for declaratory order. 4 Specifically, the Commission held that while the creation of a Marketing Affiliate by an oil pipeline in itself is permissible under the ICA, taken together, the transactions Magellan proposed would violate various provisions of the ICA, primarily the prohibition on rebates contained in ICA Sections 2 and 6(7). 5 The Commission noted that while the Marketing Affiliate would pay its affiliated pipeline's filed tariff rate, the fact the Marketing Affiliate would sell that capacity for less than that tariff rate would yield a net profit to the integrated company, and the Supreme Court has consistently ruled that such transactions violate the ICA's prohibition on rebates. 6 Specifically, the Commission:

  • Considered the "Entire Transaction." The Commission found that the fact that the Marketing Affiliate paid the filed tariff rate to the pipeline was not relevant if the "entire transaction" includes payments back to the shipper because the ICA prohibits all means that result in a rebate from the filed tariff rate. 7
  • Considered Auxiliary and Non-Jurisdictional Services. The Commission stated that the prohibition on rebates extends to auxiliary and non-jurisdictional services, such as furnishing warehouse space, and therefore determined it "likewise" applied to access to interstate transportation capacity. 8
  • Found That a Price Differential Less than Tariff Rate Violates the ICA. The Commission concluded that the prohibitions on rebates prevent Marketing Affiliates from shipping if the price differential is less than the tariff rate and the pipeline effectively subsidizes those losses. However, the ICA would not prevent Marketing Affiliates from shipping if the price differential equals or exceeds the filed tariff rate. 9

Moreover, the Commission held that the transactions as proposed in Magellan's proposal appeared to violate other provisions of the ICA because the transactions as described:

  • Establish Different Rates, Terms, Conditions and Service for Affiliates. As described, the proposed transactions would provide different rates, terms and conditions to Magellan's affiliates, and would provide service different from that offered in its tariff. Accordingly, these transactions would violate the requirement of ICA Section 1(5) that all rates must be subject to review by the Commission for a determination of whether the rates are just and reasonable, and the ICA Section 3(1) anti-discrimination provisions. 10
  • Exclude an Affiliate's Rate from Public Filing Requirements. As understood by the Commission, Magellan would not be required to publish the arrangements between the pipeline and affiliate. If so, the proposal would violate ICA Section 6(1), which requires that all transportation service rates be on file with the Commission and available for public inspection, and Section 6(3), which requires that any changes in rates be publicly posted for inspection. 11

Current Status: Pending Requests for Clarification and/or Rehearing of the Declaratory Order. Several parties filed requests for clarification and/or rehearing on December 22, 2017. 12 Magellan's clarification request did not focus on the denial of its petition. Rather, Magellan generally asked the Commission to more broadly and more specifically address issues in the Declaratory Order. For example, Magellan sought clarification as follows:

  • Exemption. That a marketing affiliate that executes a TSA with its pipeline affiliate in an open season is not exempt from the Commission's finding that the ICA prohibits a marketing affiliate from buying and selling crude oil to and from third parties and shipping on its pipeline affiliate if the differential is below the tariff rate. 13
  • Applicable Tariff Rate. With respect to the tariff rate, whether the applicable tariff rate is the lowest rate available to the marketing affiliate under the TSA or the then applicable uncommitted transportation rate. 14
  • Discounts. That the ICA does not permit a discount to any shipper on non-jurisdictional service that is provided in connection with pipeline transportation and is not offered to all shippers in a filed rate. 15
  • Application to Liquids Pipelines. That the Declaratory Order applies to all liquids pipelines regulated under the ICA and not only crude oil pipelines. 16

Additional Claims and Requests for Clarification and/or Rehearing. Two common carrier oil pipelines filed requests for clarification and/or rehearing. Each pipeline claimed the Commission lacks jurisdiction over marketing affiliates and that such shippers are protected from discrimination relative to unaffiliated marketers and must be treated in a non-discriminatory fashion under the ICA. 17 Specifically, these pipelines assert:

  • Prohibition Applies When Pipeline Pays Marketing Affiliate. The prohibition on rebates under the ICA prevents a marketing affiliate from shipping where the price differential is less than the filed tariff rate and the pipeline subsidizes those losses through an actual payment by the pipeline to the marketing affiliate. 18
  • Inadequate Record. There is an absence of sufficient factual record and a lack of clarity in the Declaratory Order. 19
  • Magellan's Proposed Transactions Are Atypical. The substance of Magellan's petition was overly simplistic and did not reflect the breadth and complexity of typical marketing affiliate transactions, which may be undertaken for a host of legitimate business reasons. 20 In addition to the claims by the pipelines, a marketer similarly asserted that the Declaratory Order should be limited to the facts raised by Magellan. 21 The marketer offered sworn testimony identifying several different types of transactions a marketer might be willing to undertake for less than the filed tariff rate, e.g., transactions that have legitimate business reasons. 22

Finally, one pipeline expressly requested that the Commission find the Declaratory Order have only prospective effect. 23

Continuing Uncertainty. The Commission's rules permit a petition for declaratory order to be filed to remove uncertainty. Many industry participants expected (and indeed some requested) that the Commission dismiss Magellan's petition for declaratory order for lack of any controversy or uncertainty. However, the Declaratory Order has certainly increased the uncertainty surrounding marketing affiliate transactions. It is unclear whether the limitation advocated by some, an actual payment by the pipeline to the marketing affiliate, will be upheld on rehearing. It is possible that the Commission may broaden the scope of the Declaratory Order on rehearing to cover liquids pipelines as well as crude oil pipelines.

Declaratory Order in Effect. There is no requirement that the Commission substantively address the rehearing and clarification requests by a date certain. Therefore, the uncertainty may continue for some time. What is certain is that the Declaratory Order has not been stayed. Therefore, all industry participants are well advised to consider the Commission's analysis of rebates and transactions with marketing affiliates.

Footnotes

1. Magellan Midstream Partners, L.P., Petition for Declaratory Order of Magellan Midstream Partners, L.P., Docket No. OR17-2 (filed Nov. 14, 2016) ("Magellan Petition").

2. Magellan also proposed that the Marketing Affiliate could sell capacity at less than the tariff rate when price differentials between the origin and destination markets were lower than the applicable tariff rate, incurring a loss, if there was an overall benefit to the integrated company. Id. at 5-6, 8.

3.  Id. at 8-9.

4.  Magellan Midstream Partners, L.P., 161 FERC ¶ 61,219 (2017).

5.  Id. at PP 11-12.

6.  Id. at P 14 (citations omitted).

7.  Id.

8.  Id. at P 18.

9.  Id. at PP 18-19.

10.  Id. at PP 20-21.

11.  Id. at P 22.

12.  Magellan Midstream Partners, L.P., Request for Rehearing of Medallion Pipeline Company, LLC, Docket No. OR17-2 (filed Dec. 22, 2017) ("Medallion Rehearing Request"); Magellan Midstream Partners, L.P., Request of Enterprise Products Partners L.P. for Clarification or, in the Alternative, Rehearing, Docket No. OR17-2 (filed Dec. 22, 2017) ("Enterprise Clarification/Rehearing Request"); Magellan Midstream Partners, L.P., Request for Clarification or, in the Alternative, Request for Rehearing of Plains Marketing, L.P., Docket No. OR17-2 (filed Dec. 22, 2017) ("Plains Marketing Clarification/Rehearing Request"); Magellan Midstream Partners, L.P., Request for Clarification or, in the Alternative, Request for Rehearing of Magellan Midstream Partners, L.P., Docket No. OR17-2 (filed Dec. 22, 2017) ("Magellan Clarification/Rehearing Request").

13. Magellan Clarification/Rehearing Request at 4-5.

14. Id. at 5.

15. Id. at 6-7.

16. Id. at 8-9.

17. Enterprise Clarification/Rehearing Request at 3; Medallion Rehearing Request at 15.

18. Enterprise Clarification/Rehearing Request at 7-8, 17-19; Medallion Rehearing Request at 2-4.

19. Enterprise Clarification/Rehearing Request at 8-18; Medallion Rehearing Request at 8-9, 11-14.

20. Enterprise Clarification/Rehearing Request at 8-18; Medallion Rehearing Request at 20-24.

21. Plains Marketing Clarification/Rehearing Request at 6-10.

22. Id. at 10-21, Exh. A.

23. Medallion Rehearing Request at 28-29.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions