The History of Oil Pipeline 

Regulation

Association of Oil Pipelines

September 17, 2009

San Diego, California

Steven Reed
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?
Background of U.S.

Oil Pipeline Regulation

 Development of U.S. Oil Industry

 John D. Rockefeller/Standard Oil

 1906: Pivotal Year
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?
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
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
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
What did the Hepburn Act cover?

 Interstate

 Common Carrier

 Transportation

 Of Oil

 By Pipeline
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))
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

 long-term storage and terminalling

 in-line transfer documentation
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
Canadian Pipeline Regulation

 National Energy Board established 1959 by 

NEB Act

 Regulates both oil pipelines and gas pipelines

 Broader powers than FERC (includes pipeline 

safety)

 No separation of functions

 Experimenting with incentive regulation
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)
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
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)

 Farmers Union II (D.C. Circuit 1984)
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
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”
Market-based Rate Alternative

 Buckeye rule broadened to all oil pipelines 

 “Lighthanded” regulation now understood to 

mean market-based rates 

 Burden is on pipeline to show lack of market 

power

 Geographic and product market definitions

 Use of market share and HHI data
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
FERC Rulemaking

 FERC adopted indexing as “simplified and 

generally applicable” methodology

 Original index was Producer Price Index 

minus one percent (PPI-1)

 Base for indexing = rates in effect 12/31/94

 Challenges to indexed rates theoretically 

possible, but difficult to sustain
Indexing Developments

 Year 2000 review – FERC initially decided to 

retain PPI-1 index

 D.C. Circuit reversed, ruling that FERC had 

improperly changed its standard

 On remand, FERC reverted to PPI as the 

index, effective as of July 1, 2001

 Most recent FERC review led to adoption of 

PPI+1.3 index now in effect

 Next review will occur in 2010
Alternatives to Indexing

 FERC rulemaking under EPAct retained three 

alternatives to indexing

 Cost of service rates (Opinion 154-B)

 Market-based rates

 Negotiated rates
Recent Developments

 FERC addressing innovative proposals to 

adapt its existing regulatory regime to need 

for new pipeline infrastructure

 FERC continuing to evolve policy on 

grandfathering of rates under EPAct

 Recent policy statements addressed issues 

regarding FERC calculation of return on 

equity and tax allowance
Conclusion