Federal Energy Regulatory Commission Students' Corner Energy We Regulate

OIL

What are FERC's responsibilities for regulating oil?

Regulating interstate and U.S. international transportation of petroleum by common carrier pipelines; and
Ensuring that oil pipeline carriers file tariffs, which contain the rates, charges, and rules for transporting the oil by pipeline. See 18 Code of Federal Regulations (CFR) Part 341.

How are rates for oil and oil pipelines established?

Rates are established in these four ways:

Indexing. An oil pipeline determines an annual ceiling level which caps (places a maximum number the rate can be) the rate an oil pipeline may charge. This ceiling level is adjusted annually based upon changes in the Producer Price Index minus one.
Cost-of-service. A pipeline must show that there is a substantial difference between the actual costs experienced by the pipeline and the rate resulting from application of the index such that the rate at the ceiling level would precluded the carrier from being able to charge a just and reasonable rate within the meaning of the ICA.
Settlement rate. A pipeline secures the agreement of all its existing customers to its proposed rate change.
Market-based rates. A pipeline must show that it does not have significant market power in the markets it is applying for market-based rates.

Establishment of Initial Rates

There are two methods to establish initial rates:

Cost-of-service A pipeline must submit the applicable cost, revenue, and data supporting such a rate as required by the Commission's regulations. At that time the Commission will review the rate and decide whether it is appropriate to set the price at that rate.
Sworn affidavit A pipeline must submit a sworn affidavit that the initial rate was agreed to by at least one non-affiliated person who intends to use service. If application is protested, the pipeline must submit cost-of-service data to support the initial rate.

What FERC does not regulate

The oversight of oil pipeline construction (that authority rests with states and local jurisdictions);
Abandonment of Service;
Mergers and Acquisitions;
Safety (that authority rests with the Department of Transportation); and
Pipeline transportation on or across the Outer Continental Shelf.

Brief History of Oil Pipeline Regulation

Interstate Commerce Commission (ICC): Responsible for regulating interstate oil pipelines from 1906 until 1977.
Department of Energy (DOE) Organization Act of 1977: Transferred regulation of interstate oil pipelines from the ICC to DOE to FERC.

Energy Policy Act of 1992

Mandated FERC to provide a "simplified and generally applicable" ratemaking methodology for oil pipelines;
Authorized FERC to streamline oil pipeline proceedings; and
Deemed oil pipeline's existing rates were just and reasonable as of the enactment of the 1992 Act.

FERC's Response to the Energy Policy Act of 1992

Adopted indexing as the "simplified, generally applicable ratemaking methodology;
Permitted the use of the cost-of-service, settlement or market-based rate change methodologies; and
Streamlined oil pipeline procedures by:

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