Different Strokes for Different Folks, Part 2 - How the FERC Sets Oil and Gas Pipeline Rates

The uninitiated might be forgiven for thinking that oil and gas pipeline operations are similar. After all, they’re just long steel tubes that move hydrocarbons from one point to another, right? Well, that’s about where the similarity ends. While the oil and gas pipeline sectors are interlinked, they developed in quite distinctly different ways and that’s led to a vast chasm in both the way the two are regulated and how their transportation rates are determined. Bridging that gap between oil and gas can be a perilous and chaotic endeavor because you’ve got to consider how each sector evolved over time and the separate sets of rules that have been established to form today’s competitive marketplace. In today’s blog, we continue our review of oil and gas pipelines and how their separate histories led to the current differences in pipeline rate structures.

In Part 1, we discussed how crude oil and natural gas pipeline regulation in the U.S. developed. Both sectors have been under the purview of the Federal Energy Regulatory Commission (FERC) since the 1970s. Oil pipeline oversight by the federal government started with the enactment of the Hepburn Act of 1906, which modified the Interstate Commerce Act, adding oil pipelines to the list of the Interstate Commerce Commission’s (ICC) concerns. The ICC’s primary focus was on providing producers with common-carrier access to crude-carrying pipelines. Federal regulation of natural gas pipelines didn’t kick in until 1938 with the enactment of the Natural Gas Act (NGA), which put regulation of gas pipelines in the hands of the Federal Power Commission (FPC), an entity that was created in the 1920s to regulate interstate electricity transactions. The Energy Organization Act of 1977 transformed the FPC into the FERC, which also became responsible for the regulation of oil pipelines. That’s pretty much how it’s been ever since, though the Energy Policy Act of 1992 made some revisions to how FERC regulates oil pipelines.

What we didn’t delve into last time was natural gas pipeline regulation. Nor did we explain how the actual agency-level regulation of oil pipelines has worked out. Today, we will start with the gas side and come back to oil regulation in the next part. As we said in our previous blog, by the late 1930s, natural gas pipeline development was taking off, but gas midstreamers faced the challenge of reconciling the different sets of laws and rules for each state that their pipelines traversed (and being long and skinny, that was a lot of states). For example, an upstream state could actually find ways to swipe gas from a downstream state. So as part of his New Deal, President Franklin D. Roosevelt, seeing that this was an important interstate activity, got the Natural Gas Act of 1938 (NGA) passed, providing a detailed regulatory structure, custom-designed for interstate natural gas pipelines. The NGA was to be administered by the FPC (see timeline in Figure 1). 

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