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FERC Affirms and Clarifies Magellan Marketing Affiliate Order | Holland & Knight LLP

After a five-year wait, the Federal Energy Regulatory Commission (FERC) has denied rehearing of its 2017 order in Magellan Midstream Partners, L.P., 161 FERC ¶ 61,219 (2017) (Magellan) that declared Magellan Midstream Partners’ marketing affiliate proposal would violate the Interstate Commerce Act’s (ICA) prohibitions against rebates. At the same time, however, FERC’s rehearing order provides several important clarifications concerning 1) how it will assess whether future marketing affiliate transactions create unlawful rebates and 2) the scope of its Magellan holdings.

FERC’s order turns on its analysis of “integrated-company economics” among the pipeline, its marketing affiliate and their common parent company. In FERC’s view, these economics can create the potential for an implicit subsidy/unlawful rebate from the parent company to the pipeline’s affiliated shipper to enable otherwise uneconomic transactions.

A Closer Look

FERC explains that:

When the affiliated shipper transports product on the affiliated pipeline, the incremental transportation cost to the parent company is not the full tariff rate, but rather the lower variable cost of transportation on the pipeline. Thus, when the price differential between the origin and destination that the affiliated shipper receives from its third-party transaction(s) is not sufficient to cover the tariff rate, it may be presumed that, in order to make the transaction economic for the affiliated shipper, the parent company subsidizes the affiliated shipper for the difference between (i) the full tariff rate and (ii) the variable cost of the pipeline movement.

Notwithstanding the foregoing presumption, FERC also recognizes that “not every affiliated shipper movement leads to a rebate” and that the existence of a rebate depends upon the specific circumstances. For…

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