Sunoco 2013 Annual Report Download - page 22

20
Rate regulation or market conditions may not allow us to recover the full amount of increases in our costs. Additionally, a
successful challenge to our rates could materially and adversely affect our results of operations, financial position, or cash
flows.
The primary rate-making methodology of the Federal Energy Regulatory Commission ("FERC") is price indexing. We
use this methodology in many of our interstate markets. In an order issued in December 2010, the FERC announced that,
effective July 1, 2011, the index would equal the change in the producer price index for finished goods plus 2.65 percent
(previously, the index was equal to the change in the producer price index for finished goods plus 1.3 percent). This index is to
be in effect through July 2016. If the changes in the index are not large enough to fully reflect actual increases to our costs, our
financial condition could be adversely affected. If the index results in a rate increase that is substantially in excess of the
pipeline’s actual cost increases, or it results in a rate decrease that is substantially less than the pipeline’s actual cost decrease,
the rates may be protested, and, if successful, result in the lowering of the pipeline’s rates. The FERC's rate-making
methodologies may limit our ability to set rates based on our true costs or may delay the use of rates that reflect increased costs.
Under the Energy Policy Act of 1992, certain interstate pipeline rates were deemed just and reasonable or
"grandfathered." On our FERC-regulated pipelines, most of our revenues are derived from such grandfathered rates. A person
challenging a grandfathered rate must, as a threshold matter, establish a substantial change since the date of enactment of the
Act, in either the economic circumstances or the nature of the service that formed the basis for the rate. If the FERC were to
find a substantial change in circumstances, then the existing rates could be subject to detailed review. There is a risk that some
rates could be found to be in excess of levels justified by our cost of service. In such event, the FERC would order us to reduce
rates prospectively and could order us to pay reparations to shippers. Reparations could be required for a period of up to two
years prior to the date of filing the complaint in the case of rates that are not grandfathered and for the period starting with the
filing of the complaint in the case of grandfathered rates.
In addition, a state commission could also investigate our intrastate rates or terms and conditions of service on its own
initiative or at the urging of a shipper or other interested party. If a state commission found that our rates exceeded levels
justified by our cost of service, the state commission could order us to reduce our rates.
Potential changes to current rate-making methods and procedures may impact the federal and state regulations under
which we will operate in the future. In addition, if the FERC's petroleum pipeline rate-making methodology changes, the new
methodology could materially and adversely affect our results of operations, financial position, or cash flows.
Our operations are subject to federal, state, and local laws and regulations relating to environmental protection and
operational safety that could require substantial expenditures.
Our pipelines, gathering systems, and terminal operations are subject to increasingly strict environmental and safety laws
and regulations. The transportation and storage of refined products and crude oil result in a risk that refined products, crude oil,
and other hydrocarbons may be suddenly or gradually released into the environment, potentially causing substantial
expenditures for a response action, significant government penalties, liability to government agencies for natural resource
damages, personal injury, or property damage to private parties and significant business interruption. We own or lease a number
of properties that have been used to store or distribute refined products and crude oil for many years. Many of these properties
also have been previously owned or operated by third parties whose handling, disposal, or release of hydrocarbons and other
wastes were not under our control, and for which, in some cases, we have indemnified the previous owners and operators.
Our pipeline operations are subject to regulation by the Department of Transportation ("DOT"), under the Pipeline and
Hazardous Materials Safety Administration ("PHMSA"), pursuant to which PHMSA has established requirements relating to
the design, installation, testing, construction, operation, replacement and management of pipeline facilities. Moreover, PHMSA,
through the Office of Pipeline Safety, has promulgated rules requiring pipeline operators to develop integrity management
programs to comprehensively evaluate their pipelines, and take measures to protect pipeline segments located in what the rule
refers to as "high consequence areas." Activities under these integrity management programs involve the performance of
internal pipeline inspections, pressure testing or other effective means to assess the integrity of these regulated pipeline
segments, and the regulations require prompt action to address integrity issues raised by the assessment and analysis. Integrity
testing and assessment of all of these assets will continue, and the potential exists that results of such testing and assessment
could cause us to incur even greater capital and operating expenditures for repairs or upgrades deemed necessary to ensure the
continued safe and reliable operation of our pipelines.
In addition, we are subject to a number of federal and state laws and regulations, including Occupational Safety and
Health Administration, ("OSHA") and comparable state statutes, the purposes of which are to protect the health and safety of
workers, both generally and within the pipeline industry. In addition, the OSHA hazard communication standard, the EPA,
community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and
comparable state statutes require that information be maintained concerning hazardous materials used or produced in our
operations and that such information be provided to employees, state and local government authorities and citizens. We are also
subject to OSHA Process Safety Management regulations, which are designed to prevent or minimize the consequences of