EBF 301
Global Finance for the Earth, Energy, and Materials Industries

Part I: Mini-Lecture: Crude Oil Regulation

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The history of regulation for crude oil and liquids pipelines goes back to the first regulation of the railroads in the 1800s. A fear of a monopoly by the few railroads in existence prompted the US government to form the Interstate Commerce Commission. The body was later given jurisdiction over interstate crude oil pipelines based upon the same monopoly fears. Today, that responsibility lies with the Federal Energy Regulatory Commission (FERC).

Under federal regulations, pipelines must file “just and reasonable” rates and provide access to any shipper requesting space, if available.

The following mini-lecture provides a brief summary of the history of regulation in the crude oil pipeline industry.

Key Learning Points for the Mini-Lecture: Crude Oil Regulation

  • All crude, natural gas, and liquids pipelines in the US are regulated by the federal government.
  • The Federal Energy Regulatory Commission (FERC) replaced the Interstate Commerce Commission as the regulatory body for crude oil pipelines.
    • “Common carrier” status
    • Non-utility vs. natural gas pipeline utility status
  • Rate schedules – “tariffs”
  • Safety issues – all pipelines are regulated by the Department of Transportation
  • Pipelines must post all tariff information on a website.
  • "Open access"
  • Monopoly vs. competition
EBF 301 Crude Oil Regulation
Click for transcript.

We talked about the value chain along the well head to burnertip path a couple of times now. One of things we have to consider are the actual rates of service that the pipeline companies and storage owners charge for performing that service. And these are a function of the regulation of the respective industries both crude oil and natural gas. So here, we'll discuss the regulation and the transportation services and rates of crude oil. 

The federal regulation of crude oil pipelines began with the Hepburn Act of 1906. They put the oil pipelines under the jurisdiction of the Interstate Commerce Act of 1887 which was established initially to regulate railroads. However, there was a concern that oil pipeline companies could have a monopoly similar to what the railroads had. And so, they were designated as an Interstate common carrier for all transportation of oil by pipeline. 

The Interstate Commerce Act of 1887 required that railroads and now crude oil pipelines file rates and charges that were reasonable and just with the federal government. They would also have to outline their terms of service, that is the rules and regulations regarding the transportation of crude oil. They would have to show the form and content of their tariffs, tariffs being the rules of the game, so to speak, as well as the rates, the method of accounting, the type of reporting that they would do both to customers and the federal government. And then, disclosure of shipper information. They were going to have to let everyone know who the shippers were on their pipelines. 

The Federal Energy Regulatory Commission, basically Congress, in 1995 abolished the Interstate Commerce Commission, the entities subject to the ICC were now under FERC jurisdiction. They were still known as common carriers. Crude oil pipelines are not considered utilities. Natural gas pipeline companies were granted utility status under the Natural Gas Act of 1938. 

Therefore, crude oil pipeline companies have no guaranteed franchises, that is no guaranteed market regions. They don't have the right of eminent domain. That basically means that they don't serve in the public interest. And so, if they're in a dispute with a landowner over building pipeline, they have no fallback. They have to negotiate with the landowners to lease their surface rights to put the pipeline through there. However, they are required to file just and reasonable rates, and they have the same reporting requirements as natural gas pipeline companies. 

Here's a sample of a crude oil pipeline tariff that Shell Pipeline Company in Houston, Texas uses. You can see in the case of this pipeline, since it's entirely within the state of Texas, the Texas Railroad Commission has jurisdiction. You can see the type of pipeline is a petroleum product. Getting down to the rates there, the unit of measure is in cents per barrel. 

And at the very bottom, you can see that the rates for the first tier which is set on volume. The rate is $0.164 per barrel. The more that you ship on Shell's pipeline, the cheaper the rate becomes. So anything above approximately 66,000 barrels, the rate reduces to $0.082 per barrel.

John A. Dutton e-Education Institute