Published on EBF 301: Global Finance for the Earth, Energy, and Materials Industries (https://www.e-education.psu.edu/ebf301)

Home > Course Outline > Lesson 8 - Transportation Rates & Regulations

Lesson 8 - Transportation Rates & Regulations

Lesson 8 Introduction

Overview

Over the years, many industries have been regulated by the federal government. But one by one, they became "de-regulated" over time. The banking and airline industries were once heavily regulated, as was the telephone business. In exchange for federally-approved rates of service and a set return on investment, companies were given exclusive franchises, or service territories. Today, the de-regulation of formerly regulated businesses has spurred-on competition and stimulated new products and services. The natural gas and crude oil businesses followed behind but eventually became de-regulated as well. Thechain of events leading up to that, and the current regulatory status of these industries, is presented in this lesson.

Learning Outcomes

At the successful completion of this lesson, students should be able to:

  • Understand the regulatory environment for the delivery of natural gas and crude oil, including the respective governing bodies.
    • Utility status & franchises
    • Evolution of the “spot” market
    • “Non-discriminatory access”
    • “Eminent domain”
    • Key regulations
  • Understand the regulatory requirements for posting “public” information
  • Visit a pipeline company website and research the tariff. Recognize the various services provided by pipeline companies and key “tariff” provisions: firm transportation and storage, “park & loan,” etc.
  • Calculate transport costs to deliver natural gas or crude to market
    • Demand/reservation Fees
    • Commodity Fees
    • Fuel retention
  • Be familiar with the pipeline “scheduling” process
    • Deadlines
    • Web-based nomination systems

What is due for this lesson?

This lesson will take us one week to complete. There are a number of required activities in this module. The chart below provides an overview of the activities for this lesson. For assignment details, refer to the location noted.

All assignments will be due Sunday, 11:59 p.m. Eastern Time.

Lesson Requirements
REQUIREMENT LOCATION SUBMITTING YOUR WORK
Reading Assignment: Reading Assignment Page No submission
Mini-lecture: Pipeline Regulations & Rates - Crude Oil Part I No submission
Mini-lecture: Pipeline Regulations & Rates - Natural Gas Part II No submission
Lesson Calculation Activity Lesson Activity Page Submit to Canvas
Lesson Quiz Summary and Final tasks page Submit to Canvas
Lesson Fundamental Factors (on-going) Submit to Canvas

Questions?

If you have any questions, please post them to our General Course Questions discussion forum (not e-mail), located under Modules in Canvas. The TA and I will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you, too, are able to help out a classmate.

Reading Assignment: Lesson 8

Reading Assignment:

Go to NaturalGas.org [1] and read the section on "The History of Regulation." Also, see "A Brief History of Energy Regulations" [2] and read the "Overview" and "Oil Market Policies."

Key Points of Emphasis

  • "franchises"
  • Monopolies
  • Price controls
  • "Open Access"
  • "Bundled" services
  • De-regulation
  • "Spot" market
  • "Just and reasonable rates"
  • Utility status

Part I: Mini-Lecture: Crude Oil Regulation

The history of regulation for crude oil and liquids pipelines goes back to the first regulation of the railroads in the 1800s. A fear of a monopoly by the few railroads in existence prompted the US government to form the Interstate Commerce Commission. The body was later given jurisdiction over interstate crude oil pipelines based upon the same monopoly fears. Today, that responsibility lies with the Federal Energy Regulatory Commission (FERC).

Under federal regulations, pipelines must file “just and reasonable” rates and provide access to any shipper requesting space, if available.

The following mini-lecture provides a brief summary of the history of regulation in the crude oil pipeline industry.

Key Learning Points for the Mini-Lecture: Crude Oil Regulation

  • All crude, natural gas, and liquids pipelines in the US are regulated by the federal government.
  • The Federal Energy Regulatory Commission (FERC) replaced the Interstate Commerce Commission as the regulatory body for crude oil pipelines.
    • “Common carrier” status
    • Non-utility vs. natural gas pipeline utility status
  • Rate schedules – “tariffs”
  • Safety issues – all pipelines are regulated by the Department of Transportation
  • Pipelines must post all tariff information on a website.
  • "Open access"
  • Monopoly vs. competition
EBF 301 Crude Oil Regulation
Click for transcript.

We talked about the value chain along the well head to burnertip path a couple of times now. One of things we have to consider are the actual rates of service that the pipeline companies and storage owners charge for performing that service. And these are a function of the regulation of the respective industries both crude oil and natural gas. So here, we'll discuss the regulation and the transportation services and rates of crude oil. 

The federal regulation of crude oil pipelines began with the Hepburn Act of 1906. They put the oil pipelines under the jurisdiction of the Interstate Commerce Act of 1887 which was established initially to regulate railroads. However, there was a concern that oil pipeline companies could have a monopoly similar to what the railroads had. And so, they were designated as an Interstate common carrier for all transportation of oil by pipeline. 

The Interstate Commerce Act of 1887 required that railroads and now crude oil pipelines file rates and charges that were reasonable and just with the federal government. They would also have to outline their terms of service, that is the rules and regulations regarding the transportation of crude oil. They would have to show the form and content of their tariffs, tariffs being the rules of the game, so to speak, as well as the rates, the method of accounting, the type of reporting that they would do both to customers and the federal government. And then, disclosure of shipper information. They were going to have to let everyone know who the shippers were on their pipelines. 

The Federal Energy Regulatory Commission, basically Congress, in 1995 abolished the Interstate Commerce Commission, the entities subject to the ICC were now under FERC jurisdiction. They were still known as common carriers. Crude oil pipelines are not considered utilities. Natural gas pipeline companies were granted utility status under the Natural Gas Act of 1938. 

Therefore, crude oil pipeline companies have no guaranteed franchises, that is no guaranteed market regions. They don't have the right of eminent domain. That basically means that they don't serve in the public interest. And so, if they're in a dispute with a landowner over building pipeline, they have no fallback. They have to negotiate with the landowners to lease their surface rights to put the pipeline through there. However, they are required to file just and reasonable rates, and they have the same reporting requirements as natural gas pipeline companies. 

Here's a sample of a crude oil pipeline tariff that Shell Pipeline Company in Houston, Texas uses. You can see in the case of this pipeline, since it's entirely within the state of Texas, the Texas Railroad Commission has jurisdiction. You can see the type of pipeline is a petroleum product. Getting down to the rates there, the unit of measure is in cents per barrel. 

And at the very bottom, you can see that the rates for the first tier which is set on volume. The rate is $0.164 per barrel. The more that you ship on Shell's pipeline, the cheaper the rate becomes. So anything above approximately 66,000 barrels, the rate reduces to $0.082 per barrel.

John A. Dutton e-Education Institute

Part II: Mini-Lecture: Natural Gas Regulation & Rates

Key Learning Points for the Mini-Lecture: Natural Gas Regulation & Rates

While watching the Mini-Lecture, keep in mind the following key points and questions:

  • All interstate natural gas pipelines are regulated by the Federal Energy Regulatory Commission.
  • Prior to 1985, pipelines and gas companies were the sole providers of gas supply. They bought the gas, transported it, and sold it.
  • Deregulation later “unbundled” pipeline services, leading to the “spot” market and the emergence of marketing companies to take-on this role.
  • Interstate pipeline companies provide different levels of service including firm and interruptible transportation and storage.
  • Interstate pipeline companies must file a “tariff” of rates and services with FERC and the rates must be “just and reasonable.”
  • Safety issues – all pipelines are regulated by the Department of Transportation
  • Pipelines must post all tariff information on a website.
EBF 301 Lesson 8 Mini-lecture Part 2 - Transportation Rates & Regs
John A. Dutton e-Education Institute

Lesson Activities

Rate Calculation Activity

Grading Criteria

This activity, due at 11:59 pm on Sunday is worth up to 20 points on the EBF 301 grading scale. Question 1 is worth 13 points and Question 2 is worth 7 points.

Fundamental Factors

The Fundamental Factors activity is due as usual this week, at 11:59 pm on Sunday, and is worth 30 points on the EBF 301 grading scale. Please refer to the Fundamental Factors Instructions [3] for additional information and grading rubric.

Submitting Your Work

Rate Calculation Activity: Submit your answers in a spreadsheet file via the Rate Calculation Activity in Canvas.

Fundamental Factors: Submit your work as a single word processed document to the Lesson 8 Fundamental Factors Activity in Canvas.

  1. In this activity we will use an actual transportation rate document ("tariff") from the Natural Gas Pipeline Company of America to perform some pipeline rate calculations. Start by reviewing the Lesson Rate Calculation Example in the Modules under Lesson 8: Pricing Methodologies. Then, go to the Natural Gas Pipeline Company of America informational web site [4]. Click on "Informational Postings," then "Tariff." Under "Currently Effective Rates," click on "Rate Schedule FTS Peak." Then, go to Page 13. Look at the "Reservation" and "Commodity" Rates for moving gas from the Midcontinent Region to the Market Region. Using the "Lesson 8: Transportation Rate Calculation Spreadsheet" spreadsheet in the Modules under Lesson 8: Pricing Methodologies, calculate the daily rate per MMBtu.
  2. Next, find the "Gas Quality" standards set forth by the pipeline under "Gas Quality - Tariff Reference". List the following quality specifications on the same spreadsheet.
    • Oxygen (O2)
    • H2S (Hydrogen Sulfide)
    • Sulfur
    • CO2
    • H2O
    • Inert gases
    • Btu value

Summary and Final Tasks

Key Learning Points: Lesson 8

  1. All pipelines, crude and natural gas, are regulated by the federal government and regulations have evolved over time.
  2. Pipelines provide various levels of service.
  3. The rates they charge must be “just and reasonable,” and must be posted on their websites.
  4. Once a heavily-regulated industry, natural gas pipelines became deregulated in 1985, and the “spot” market emerged.
  5. Marketing companies developed to provide the once “bundled” services provided by the pipelines and gas companies.
  6. The costs incurred in transporting crude and natural gas must be considered in the “value chain” from wellhead to end-use.

The services and rates that pipelines charge represent a component of the value chain for crude and natural gas, but how the actual wellhead and delivered prices are determined will be examined in the next lesson.

Quiz

Log onto Canvas and complete the Lesson 8 Quiz

Reminder - Complete all of the lesson tasks!

You have reached the end of this lesson. Double-check the list of requirements on the first page of this lesson to make sure you have completed all of the activities listed there before beginning the next lesson.


Source URL: https://www.e-education.psu.edu/ebf301/node/481

Links
[1] http://www.naturalgas.org
[2] http://www.downsizinggovernment.org/energy/regulations
[3] https://www.e-education.psu.edu/ebf301/680
[4] http://webapps.elpaso.com/PortalUI/DefaultKM.aspx?TSP=NGPL