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FERC and Transportation Rates
Shippers and Pipeline Operators
Pipelines transport crude oil and petroleum products on behalf of their customers. Products shipped on a pipeline are owned by the customer, referred to as a “shipper,” and not by the pipeline operator.
FERC Regulation of Interstate Pipelines
The U.S. Federal Energy Regulatory Commission (FERC) regulates the rates, terms and conditions that apply for the interstate transportation of petroleum and petroleum products by pipeline. Pursuant to the requirements of the Interstate Commerce Act, FERC ensures that the rates, terms and conditions are “just and reasonable.”
Regulatory Approach Reflects The Industry’s Unique Dynamics
The FERC’s regulatory approach reflects the oil pipeline industry’s unique competitive market dynamics. Pipelines face competition from other forms of transportation as well as rapidly changing market conditions. Competing against pipelines are rail, ships and barges, and trucks. Changes in production locations and refinery operations, fluctuating commodity prices and dynamic economic conditions can mean pipeline deliveries rise or fall over the short-, medium- or long-term.
Methodologies for Establishing Pipeline Rates
Consistent with these market dynamics, the FERC allows rates charged by oil pipelines to be set pursuant to several approaches. The oil pipeline rate index is the predominate approach used to set rates. Rates are also commonly set through negotiations and settlements, and by competition (market-based rates). These ratemaking methodologies incent needed investment and operating efficiencies, and protect shipper interests. In the oil pipeline industry, traditional cost-of-service ratemaking is employed in limited circumstances.
Pipeline Rates Are Stable and Represent a Small Fraction of The Price at the Pump
Interstate pipeline rates are generally stable, and do not fluctuate with changes in crude oil, gasoline or other fuel prices. Only about a few cents of the cost paid by a retail customer for a gallon of gasoline can be attributed to pipeline transportation, resulting in a low and predictable transportation price for customers. Indeed, the price of a gallon of gasoline at the pump may fluctuate during a week or month due to market conditions more than the cost attributed to pipeline transportation.