The History of Oil Pipeline 

Regulation

Steven Reed

Steptoe & Johnson LLP

Federal Energy Regulatory 

Commission

May 18, 2004
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Three Questions

• How did oil pipelines come to be regulated 

by the federal government?

• How has federal regulation evolved over 

time?

• What does it mean today?
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Background of U.S.

Oil Pipeline Regulation

• Development of U.S. Oil Industry

• John D. Rockefeller/Standard Oil

• 1906: Pivotal Year
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Origins of the Oil Industry

• What does “Moby Dick” have to do with 

the origins of the oil industry?

• Who was “Colonel” Edwin Drake?

• Why does a barrel of oil contain 42 U.S. 

gallons?

• Who was Samuel Van Syckel?
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Standard Oil

• Founded in 1870 by John D. Rockefeller in 

Cleveland, Ohio

• Controlled 90% of oil refining and 80% of 

oil transportation markets in U.S.

• “Posted prices”

• Rebates and drawbacks

• Squeezed out independents
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Hepburn Act of 1906

• Brought oil pipelines under Interstate 

Commerce Act of 1887 (originally applied 

only to railroads)

• President Theodore Roosevelt and Senator 

Henry Cabot Lodge, both Republicans, 

spearheaded the Hepburn Act

• Enacted rapidly in a climate of public 

outrage
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Was this trip necessary?

• Standard Oil monopoly already threatened 

by new competitors (Gulf, Sun, Texaco, 

Phillips, etc.)

• U.S. v. Standard Oil -- antitrust suit to break 

up Rockefeller monopoly (succeeded in 

1911)

• Growth of demand for gasoline and aviation 

fuel as 20th century dawned
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What did the Hepburn Act cover?

• Interstate

• Common Carrier

• Transportation

• Of Oil

• By Pipeline
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Regulated Activities Under ICA

• Rates and charges

• Terms of service (rules and regulations)

• Form and content of tariffs

• Accounting (USOA)

• Reporting (Form 6)

• Disclosure of shipper information (15(13))
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What does the ICA leave 

unregulated?

• Construction and abandonment of oil 

pipelines (entry and exit)

• Sales and leases of oil pipeline assets

• Securities transactions

• Provision of non-transportation services
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Contrast Oil Pipeline and Gas 

Pipeline Regulation

• OIL PIPELINES

• Common carriage

• Unregulated entry and 

exit

• Highly competitive

• Unique regulatory 

model

• GAS PIPELINES

• Public utilities

• Approval required for 

construction and 

abandonment

• Natural monopoly 

model
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Oil Pipeline History

ICC Era: 1906-1977

• Pipeline Cases (1914)

• ICC Inactivity (1906-1940)

• Atlantic Refining Consent Decree (1941)

• ICC Valuation Methodology (1940’s)

• Williams Pipe Line proceeding (1970’s)

• Trans Alaska Pipeline System opens (1977)
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Oil Pipeline History

FERC Era: 1977-Present

• 1977-1985: Failed efforts to regulate

• 1985: Opinion 154-B

• 1988: Buckeye market-based rate 

alternative

• 1992: Energy Policy Act

• 1994: FERC rulemaking and adoption of 

indexing methodology
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1977-1985: Failed Efforts

• Formation of FERC (Department of Energy 

Organization Act -- 1977)

• Farmers Union I (D.C. Circuit 1978)

• Opinion 154, Williams (FERC 1982)

• American Petrofina Order (FERC 1982)

• Farmers Union II (D.C. Circuit 1984)
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1985: Opinion 154-B

• Opinion 154-B, Williams -- adopted 

modified trended original cost (TOC) 

methodology for oil pipelines

• Provided for “transition rate base” between 

valuation and TOC called SRB

• Intended to be cost-based rate methodology

• Many details left to individual cases
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Cost-of-Service Cases

• ARCO Pipe Line – Opinion 351 (FERC 

1990)

• Kuparuk Transportation Company– (FERC 

1991)

• Endicott Pipeline Initial Decision (1991)

• Continued uncertainty about certain 

elements of Opinion 154-B methodology
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1988: Buckeye market-based 

rate alternative

• Buckeye proceeding involved setting costbased rates under Opinion 154-B

• Dispute arose over disclosure of 

confidential cost information by Buckeye

• On appeal, FERC ruled Buckeye could 

obtain “lighthanded regulation” by showing 

“lack of significant market power in the 

relevant markets”
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Market-based Rate Alternative

• Buckeye rule broadened to all oil pipelines

• Pipelines originally had an election to 

defend filed rates on market power or costof-service grounds 

• “Lighthanded” regulation now understood 

to mean market-based rates 

• Burden is on pipeline to show lack of 

market power
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Energy Policy Act of 1992

• “Grandfathered” existing rates as of 

10/24/92

• Ordered FERC to develop “simplified and 

generally applicable” methodology

• Also required FERC to “streamline” 

procedures for oil pipeline regulation
Conclusion