Daily Blog

Different Strokes for Different Folks, Part 3 - How the FERC Sets Oil and Gas Pipeline Rates

Oil and gas pipeline regulation have two things in common: They’re both regulated by the Federal Energy Regulatory Commission (FERC), and they were both brought under regulatory oversight in the first place by a Roosevelt — oil pipelines by Teddy Roosevelt and gas pipelines by Franklin Roosevelt. However, that’s where the similarities end. They’re regulated under different statutes, with wildly different histories that have led to very different types of oversight and rate structures. These rules tend to offer oil pipelines a higher degree of flexibility, but in doing so, they also make their rate structures less predictable. Today, we wrap up our review of oil and gas pipelines, and how their separate histories led to the current differences in pipeline rate structures, this time with a focus on oil pipeline ratemaking.

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 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 oil 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 (see timeline for oil and gas pipelines regulation in Figure 1).

In Part 2, we delved further into how the evolution of natural gas pipeline regulation has shaped transportation ratemaking and service structures — from the days when pipelines were the buyers and sellers of natural gas and prices for gas sold to interstate pipelines were regulated by the feds, to the early 1990s, when FERC Order No. 636 restructured the industry, taking pipelines out of the gas buying-and-selling business and joining with the Wellhead Decontrol Act of 1989 to deregulate gas commodity prices (see timeline in Figure 1). The mess that led to restructuring and deregulation started in 1954, when major dislocations grew between prices for gas on interstate pipelines, which were federally regulated, and intrastate pipelines, which fell outside federal jurisdiction. For the next 45 years, the gas industry had every kind of dysfunction, from severe shortages to massive rate increases, wild statutory swings in the legal prices for wellhead gas, and an industry drowning in overpriced gas. With wellhead deregulation in 1989, Order No. 636 restructuring in 1993, and the advent of shale gas abundance in the early 2000s, the natural gas industry climbed out of its 45-year pit. Today, the gas industry is healthy and transparent.

Join Backstage Pass to Read Full Article

Learn More