Crowley, McLeod, and Goodrich File Expert Report before FERC Regarding the Oil Pipeline Price Index

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December 24, 2025 - Nicholas Crowley, Dan McLeod, and Corey Goodrich

CA Energy Consulting authored a report on behalf of the Canadian Association of Petroleum Producers offering recommendations for calibrating the Federal Energy Regulatory Commission’s (FERC) price index that regulates oil pipeline rates (Docket RM26-6). The CA Energy Consulting report also provided analysis of financial trends in the oil pipeline industry and suggestions for modifications to the regulatory framework.

Since the mid-1990s, interstate oil pipelines in the United States have operated under a streamlined approach to rate regulation. Unlike interstate gas pipelines and electricity transmission lines, over which FERC regulates rates of return based on cost-to-serve, oil pipelines may adjust rates according to an exogenous price index set by FERC (as outlined in FERC Order 561). The price index is based on the growth rate in the Producer Price Index for Finished Goods (PPI-FG) plus an additional factor based on oil pipeline industry cost changes. The methodology used to calculate industry cost changes has come to be known as “the Kahn Methodology,” after the regulatory economist Alfred Kahn, who developed the methodology.

FERC’s price index approach appears to have kept total costs and realized revenues aligned in the initial years of the framework. However, over the past decade, oil pipeline revenues have diverged from costs in aggregate, and accordingly, realized return on equity (ROE) has increased, on average, growing from approximately 14 percent in the year 2001 to 25 percent in 2024. This is above the industry average cost of equity, as stated on the FERC Form 6. The upward trend in realized ROE appears to be unique among regulated industries. For example, natural gas distribution utilities, electric utilities, and natural gas transmission pipelines have exhibited falling realized returns since the year 2000. We suggest that, after thirty years of the price index approach, oil pipelines should undertake rebasing proceedings to realign costs and revenues. Alternatively, earnings sharing mechanisms could be introduced as a guardrail to both pipeline companies and shippers.

The report can be downloaded here. Further information regarding Docket RM26-6 can be found here or within FERC’s eLibrary.