Petroleum Pipeline Rates and Competition--Issues Long Neglected By Federal Regulators and in Need of Attention

EMD-79-31: Published: Jul 13, 1979. Publicly Released: Jul 13, 1979.

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A network of 174,000 miles of oil pipelines crisscrosses the United States, carrying 9.6 billion barrels of crude oil and petroleum products, and providing the most efficient and economical means of moving oil; pipeline costs represent only 2 or 3 percent of the delivered price of petroleum products. The Interstate Commmerce Commission (ICC) regulated these pipelines until October 1977, when jurisdiction was transferred to the Federal Energy Regulatory Commission (FERC). Over 70 years of ostensible regulation by ICC, little was done and information as to past compliance is sketchy.

GAO reviewed pipeline regulation and found that consumer benefits accruing from regulation could not be determined because no acceptable rate of return was established for pipeline rates, federal investigations of allegations of anticompetitive practices have lingered on for years, and FERC has ignored many oil pipeline common carrier issues, except for rates. Oil pipeline owners receive a higher profit return than other profitable companies; and government has not established criteria for assessing the justness and reasonableness of these rates. The few reviews conducted by ICC were usually limited to mere records of charges without evaluation. Naturally, pipeline companies responded by steadily increasing rates beyond ICC-approved levels, partly because of a 1941 federal consent decree, which limited dividends payable by companies to shipper-owners, but did not mention rates or profits. Even the minimal requirement of annual dividend payment reports has largely gone unheeded. Allegations of noncompetitive practices have not been resolved because the ICC gave pipelines low priority and investigated only in response to complaints; necessary information was not collected; no standards were developed for evaluating pipeline company practices; carriers' tariff rules and conditions were not questioned or reviewed; and no systematic compliance program existed until 1976. FERC has been more aggressive than ICC in pipeline regulation, although regulatory jurisdiction should be extended to include certification of public convenience.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: To assure just and reasonable rates, FERC should implement rate reform and develop appropriate criteria without discouraging continued investment in pipelines. Procedures should include justification of rate increases, use of experienced tariff examiners, and an adequate auditing process. Pipeline regulation would be strengthened by the collection of financial and operating information by FERC and the Energy Information Administration, a determination of regulatory jurisdiction over terminals, the development of common carrier requirements for oil pipelines, and an assurance that all potential pipeline users are adequately considered in making decisions regarding routing, sizing, and expansion. The Attorney General should move to vacate the Consent Decree because it no longer serves any useful purpose. Its removal would free both the pipeline companies from the obligation of filing frequent reports and the Justice Department from the administrative burden of assuring compliance.

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