This is an example of an overcharge - a common type of market failure.
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Colonial Pipeline will need to adjust how it charges customers for moving fuel from refineries along the Gulf of Mexico to the East Coast after customers complained of tens of millions of dollars in overcharges, the Federal Energy Regulatory Commission ruled in a decision published late Thursday.
FERC found that Colonial's methodology for charging customers for fuel lost in transportation — either because of evaporation or metering errors — was "not just and reasonable" and was assessed without logical explanation to customers and regulators.
"It is a black box. Colonial does not disclose the model’s inputs, show how it makes projections using the model, or provide support for any past projections used to adjust the (lost fuel) charges," the opinion read.
In their arguments to FERC ahead of the ruling, Colonial's attorneys said the mechanism for calculating fuel loss was based on conventional methods and earned the company no additional profit.
"We are reviewing the commission’s orders and determining next steps," a spokesman for Colonial said Friday.
Phillips 66 declined to comment on the ruling. Valero, Chevron and United did not respond to a request for comment Friday.
In their complaint in 2017, the pipeline's customers said they had collectively been overcharged $60 million. An administrative law judge in 2021 found that FERC should order Colonial to pay its customers reparations.
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- Overcharge: Overcharge is an economic term that refers to the difference between an observed market price and a price that would have been observed in the absence of collusion. The latter is often called a "but-for price" or a competitive "benchmark price". When collusion is not in use, such as by privately owned businesses, overcharge is considered as a markup of the observed market price for the sole profit of the business and in some states is considered illegal, similar to profiteering and price gouging.
An overcharge may be expressed as a mark-up on the benchmark price, or it may be divided by the observed market price. When the benchmark price is equal to the marginal cost of production, as it is in perfect competition, then ratio of the overcharge to market price is the Lerner Index of market power.
When the overcharge is multiplied by the quantity purchased, it becomes the monetary injury or damages incurred by a buyer of goods sold by a cartel.
- Federal Energy Regulatory Commission.
The Federal Energy Regulatory Commission (FERC) is the independent agency of the United States government that regulates the transmission and wholesale sale of electricity and natural gas in interstate commerce and regulates the transportation of oil by pipeline in interstate commerce. FERC also reviews proposals to build interstate natural gas pipelines, natural gas storage projects, and liquefied natural gas (LNG) terminals, in addition to licensing non-federal hydropower projects.
FERC is an independent federal agency, even though it is part of the U.S. Department of Energy. FERC is composed of five commissioners who are nominated by the U.S. president and confirmed by the U.S. Senate. There may be no more than three commissioners of one political party serving on the commission at any given time.
