Unfinished Business: Ferc's Evolving Standard for Capacity Rights on Oil Pipelines

Article excerpt

Synopsis: Over the past six years, the FERC has gradually fashioned a policy addressing a key issue in regulating oil pipelines: how to apply the 124- year old Interstate Commerce Act and its "common carrier" obligations, in a modern commercial context in which both pipelines and shippers need certainty of access for future pipeline capacity. In a series of orders, the Commission has tried to balance the clear need for assured use of capacity for parties making long-term payment commitments against the statutory admonition that pipelines are common carriers that must provide transportation upon reasonable request. The current policy still presents several significant problems for pipelines and shippers, including apparent limits on prices, scope of contract capacity and its application to new capacity. This article briefly reviews the statutory and case law scope of common carriage under the Interstate Commerce Act and concerning relevant industries, as well as the development of the FERC's current approach, and suggests that the FERC has ample legal and policy basis for further refinement to the policy.

I. INTRODUCTION

The Federal Energy Regulatory Commission (FERC or Commission) regulates three complex and distinct systems1 of liquids pipelines (transporting crude petroleum,2 refined petroleum products,3 and natural gas liquids (NGLs)4 spanning more than 200,000 miles under the Interstate Commerce Act (ICA).5 The physical scope of the interstate oil pipeline network is broadly comparable to the interstate natural gas network. Despite ongoing initiatives to diversify the nation's energy use away from fossil fuels, the need for investment in the oil and liquids pipeline infrastructure in North America is expected to increase significantly in the next decade.6

Yet, the FERC has a surprisingly limited role in regulating oil and liquids pipelines, reflected in the tiny percentage of its budget allocated to oil pipeline regulation.7 The FERC does not have any regulatory authority regarding the liquids transported by pipeline.8 The FERC has never had any role in regulating the production or refining of petroleum.9 The FERC has no authority over an interstate oil or liquids pipeline's decision to build a new pipeline, to expand a pipeline, or to abandon service,10 nor even to interconnect with another pipeline.11 The FERC has no jurisdiction over the decision by a pipeline to reverse the direction of its service,12 to discontinue offering transportation to particular commodities,13 or to lease all or a part of its pipeline system to another pipeline.14 The limited scope of the FERC's regulation of oil pipelines stands in stark contrast to its pervasive role in pipeline infrastructure under the Natural Gas Act (NGA),15 which even prohibits a would-be pipeline sponsor from putting a shovel in the ground until a certificate of public convenience and necessity is issued.16 The developer of a massive new multi-state oil pipeline could (in theory) choose not to inform the FERC of its plan to construct and operate a pipeline until it files an initial tariff thirty to sixty days prior to commencing service. Under the NGA, the FERC recently denied a request by the owners of a natural gas pipeline to abandon service because of the poor economics of continuing service, telling the pipeline to file a rate case or sell the line to shippers but not to cease service.17 In contrast, an oil or liquids pipeline could simply file a tariff supplement, notifying the FERC that it would be canceling service.18

The FERC nonetheless plays a vital role in regulating oil and liquids pipelines. The FERC has exclusive jurisdiction to determine whether pipelines' rates and terms of service are just, reasonable, and not unduly discriminatory.19 A pipeline may be free to build or expand a pipeline without regard to the FERC's views, but ultimately the FERC has the authority to judge and, if required, to prescribe the rates and terms of service of the pipeline. …