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.
At the successful completion of this lesson, students should be able to:
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.
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 |
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.
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."
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.
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.
While watching the Mini-Lecture, keep in mind the following key points and questions:
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.
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.
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.
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.
Log onto Canvas and complete the Lesson 8 Quiz
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.
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