STB is an independent agency administratively housed within the Department of Transportation. It is responsible for the economic regulation of interstate surface transportation to ensure that competitive and efficient transportation services are provided to meet the needs of shippers, receivers, and consumers. While STB is primarily responsible for railroads, it also regulates pipelines that provide interstate transportation of commodities other than oil, gas, or water. This oversight involves ensuring that pipelines fulfill their “common carrier” obligations. These obligations include (1) charging reasonable rates; (2) providing rates and services to all upon reasonable request; (3) not unfairly discriminating among shippers; (4) establishing classifications, rules, and practices that are reasonable; and (5) interchanging traffic with other carriers or modes of transportation. As part of its oversight of pipeline rates, STB may investigate complaints from shippers that pipeline rates are high. An important element of an STB rate investigation is the determination of the methodology to apply in evaluating the reasonableness of rates. STB does not have specific guidelines for investigating the reasonableness of the rates pipeline carriers charge. Instead, when feasible, it refers to the “rate reasonableness guidelines” that it developed for railroad rate cases.Under those rate reasonableness guidelines, shippers have the option of presenting evidence that the rates being charged for particular services exceed the rates that a hypothetical, fully efficient carrier would need to charge to cover all its costs (including a fair return on investment). While the ICC Termination Act specifically sanctioned such an approach, shippers may also present evidence supporting the use of alternative methodologies to demonstrate the unreasonableness of rates. However, the ICC Termination Act does require STB to take several specific factors into consideration, including the availability of other economic transportation alternatives. STB examines these alternatives to determine whether a pipeline carrier can exercise significant market power—the ability to charge rates that are unreasonably high relative to the cost of providing the service. If competition is sufficient to prevent a pipeline carrier from exercising market power, STB believes that, absent unreasonable discrimination among shippers, the marketplace should be allowed to determine the most efficient level of prices. In determining whether a carrier can exercise market power, STB looks for the existence of (1) other carriers, including those from other modes of transportation, that could transport the commodity; (2) other sources of the commodity; and (3) the availability of other products that could be substituted for the commodity. STB also examines other factors, such as the costs and capacity associated with each alternative. For example, while a barge terminal may be located close to a pipeline terminal that delivers the same commodity, the barge terminal’s capacity for shipping additional amounts of the commodity may not be sufficient to compete effectively. The ICC Termination Act authorized STB to exempt pipelines from rate regulation. Exemption proceedings may be initiated by STB or at the request of an interested party. As of February 1998, STB had neither initiated any pipeline exemption proceedings nor received any requests to do so. STB may also revoke an exemption, if necessary. During congressional consideration of the ICC Termination Act, one commodity under ICC’s jurisdiction and now under STB’s jurisdiction—anhydrous ammonia—was of particular interest. Anhydrous ammonia, a nitrogen-rich compound, is the basic building block for the nitrogen chemical industry. About 75 percent of the anhydrous ammonia used in the United States is used as a nitrogen fertilizer for crops, while the remaining 25 percent is used in nonagricultural applications, as a refrigerant or as a component in producing plastics, fibers, and resins, for instance. Anhydrous ammonia is classified as a hazardous substance because it is a corrosive chemical that can severely burn the skin and eyes. Historically, the federal government has regulated the rates charged by interstate pipelines because these pipelines have the characteristics of natural monopolies and associated cost advantages that make it difficult for other pipelines or other transportation modes to compete. The regulation of firms with these characteristics has been imposed to enforce the common carrier obligations, including ensuring that, in the absence of competition, the firms do not charge unreasonably high rates relative to the cost of producing the good or providing the service. The federal government has often regulated industries engaged in interstate competition when the market structure exhibits the characteristics of a natural monopoly. A market’s structure refers to the characteristics of firms and purchasers of a particular product and the way their interaction determines the market price and quantities transacted. Markets that have a competitive structure should, by their nature, have product prices that are low relative to the cost of producing the good. The key characteristics of competitive markets are the presence of many firms producing a good (so that no one firm has influence over the market price) and the lack of any significant barriers to new firms entering or exiting the market. Markets may not be competitively structured when the production of a good entails significant economies of scale, meaning that firms need to be fairly large in relation to the market to be served in order to produce the good efficiently. In particular, a large firm may be considered a natural monopoly if it has very high fixed costs but low marginal costs of production, enabling it to produce the good at a lower per-unit cost than any combination of two or more firms. This single firm has the ability to temporarily charge low prices in the face of real or potential competition, thus frustrating the emergence of competitive alternatives. However, in the absence of competition, the firm could, if unregulated, charge rates that are high relative to the cost of providing the service. Economic regulation, then, is intended to protect consumers against the unreasonably high prices that might be charged by an unregulated natural monopolist. Interstate pipelines have historically been regulated because of concerns that they have the characteristics of natural monopolies and, if left unregulated, pipeline companies could exercise market power to set unreasonably high rates—relative to costs—for transporting goods.Pipelines exhibit significant economies of scale for transporting bulk liquid or gas commodities. These economies of scale result in low operating costs because, after a substantial initial investment for construction, the marginal (or additional) cost of transporting an additional unit of a commodity through a pipeline is extremely low. In addition, larger pipelines have lower operating costs than smaller pipelines because transport capacity rises more than proportionately with increases in the diameter of the pipeline. For example, a pipeline that is 12 inches in diameter can transport more than twice as much as a pipeline that is 8 inches in diameter. These characteristics make it more efficient to build one large pipeline rather than two or more small pipelines and may also make it difficult for other modes, such as water carriers (barges), railroads, and trucks, to compete. Pipelines also offer transportation advantages over other modes: They provide safe and dependable service with little opportunity for accidents and weather-related delays because the product is transported underground and is completely encased. For example, out of more than 7,000 accidents involving railroad, barge, and pipeline transport in 1995, only about 350, or 5 percent, occurred on pipelines. The federal economic regulation of interstate pipelines is provided by two agencies: the Federal Energy Regulatory Commission and STB. Most pipelines—for oil and natural gas—are regulated by the Federal Energy Regulatory Commission. These pipeline carriers are required to file reports disclosing the rates charged to transport commodities through their pipelines and, in most cases, an annual report on their operations. As described in the next section, STB does not require such filings from the pipeline carriers under its jurisdiction. Barges come closest to meeting pipelines’ low operating costs and rates for transportation. However, domestic barge transportation is limited to areas that are accessible by river and by weather conditions that restrict it during winter and periods of severe flood or drought. While railroads offer more flexibility in delivery points, rail transportation is generally more expensive. Truck delivery is also much more costly than pipeline delivery over long distances and, when used at all, generally complements, rather than competes with, delivery by pipeline or barge because trucks generally deliver the product from pipeline or barge delivery points to final retail destinations. The ICC Termination Act provided a limited role for STB in the economic regulation of pipelines. The act retained the requirement that pipeline carriers must fulfill the entire range of common carrier obligations. However, STB—unlike ICC—may not begin investigations of a pipeline’s rates on its own initiative. Instead, STB may begin investigations only in response to complaints by shippers or other affected parties. In addition, the act eliminated the requirement for pipeline carriers to file the rates they charge to transport goods—which was the sole reporting requirement under ICC—and does not provide STB with any authority to regulate a pipeline carrier’s decision to enter or abandon markets. STB does not routinely collect information from pipeline carriers. As a result, STB does not attempt to identify all products or pipelines under its jurisdiction. We identified five products—anhydrous ammonia, carbon dioxide, coal slurry, hydrogen, and phosphate slurry—carried by 21 pipelines subject to STB’s jurisdiction. (See table 1.) Appendix I provides more detailed information about each of these products and pipelines. According to STB officials, over the past 10 years, only five cases concerning pipeline issues have come before STB or its predecessor, ICC.One case concerned a pipeline’s status as a common carrier and the obligation to file its rates in response to the request of an independent shipper. Three of the cases—one of which is ongoing—involved investigations of the reasonableness of pipeline rates, as well as other common carrier issues. The fifth case concerned ICC’s jurisdiction over anhydrous ammonia pipelines. STB is currently receiving evidence in the ongoing case, which was initiated in March 1996, and expects to issue a final decision by the statutory deadline of March 1999. As a result of this limited caseload, STB devotes few resources to pipeline issues.