The successor to ICC, STB is responsible for the economic regulation of railroads and certain pipelines, as well as some motor carrier and water carrier activities. Rail issues constitute the majority of STB’s workload. In fiscal year 1997, STB dedicated 116 of its 131 full-time equivalent staff (89 percent) to rail issues. Pipelines Have Historically Been Regulated to Ensure That Their Rates Are Reasonable

Historically, the federal government has regulated industries engaged in interstate commerce—including common carrier pipelines—with inherent cost advantages that may limit competition from other pipelines as well as other modes of transportation. The regulation of pipelines has been imposed to enforce the common carrier obligation, including ensuring that, in the absence of competition, pipeline carriers do not charge unreasonably high rates relative to their costs The federal economic regulation of interstate pipelines is provided by two agencies: the Federal Energy Regulatory Commission, which regulates oil and gas pipelines, and STB, which regulates the remaining pipelines. Ability of Pipeline Alternatives to Compete Varies Throughout the Midwest

The ability of alternatives to pipelines—local production within the Midwest, as well as barge and rail transport from other areas of the United States—to compete with pipelines within local market areas in the Midwest depends on two factors. We found that, while some local market areas currently served by pipelines also have access to alternatives, other market areas may not. Second, alternatives to pipelines must have the ability to increase their supply of anhydrous ammonia to serve these markets. We found that alternatives may not offer effective competition to pipelines because they have limited ability to increase their supply of anhydrous ammonia without additional investments in capital. Because of the large number of local markets that exist along the two midwestern anhydrous ammonia pipelines, we were not able to definitively determine the number of markets that do or do not have competitive alternatives to pipelines. 1.) 1.) Issues Before the Congress in Deciding the Future of STB’s Regulation of Pipelines

No clear conclusions can be reached on whether the continued economic regulation of pipelines under STB’s jurisdiction is needed because such a determination requires the examination of competition in numerous local markets along 21 pipelines. There will be several issues before the Congress as it decides whether to extend, modify, or rescind STB’s authority to regulate pipelines. First, do pipelines under STB’s jurisdiction lack effective competition in a significant number of market areas and have the potential to charge unreasonably high rates? Third, does the limited number of pipeline rate cases indicate there is no need for continued regulation? Finally, would shippers have recourse if STB’s economic regulation of pipelines was eliminated?
Why GAO Did This Study

GAO discussed the regulatory role of the Surface Transportation Board (STB), focusing on: (1) STB's responsibilities in regulating surface transportation; (2) the historical reasons for the economic regulation of pipelines; (3) the ability of alternatives to anhydrous ammonia pipelines to compete in the Midwest; and (4) issues before Congress as it decides to extend, modify or rescind STB's authority to regulate pipelines.

What GAO Found

GAO noted that: (1) STB is responsible for the economic regulation of railroads and certain pipelines, as well as some aspects of motor carrier and water carrier transportation; (2) the majority of STB's resources and workload are devoted to examining rail issues; (3) in fiscal year 1997, STB dedicated 89 percent of its staff years to rail issues and less than 1 percent to pipeline issues; (4) historically, the federal government has regulated the rates charged by interstate pipelines because pipelines have inherent cost advantages that may limit competition from other pipelines as well as from other modes of transportation; (5) two federal agencies--STB and the Federal Energy Regulatory Commission--regulate pipelines; (6) this regulation includes ensuring that all shippers have access to pipeline transportation services and that the rates charged by pipeline carriers for these services are reasonable and nondiscriminatory; (7) the ability of alternatives to anhydrous ammonia pipelines to compete with pipelines in the Midwest varies, depending on these alternatives' access to the market areas served by pipelines and their ability to increase their supply of anhydrous ammonia to compete within those market areas; (8) GAO's work showed that some market areas currently served by pipelines also have access to alternatives, while other market areas may not; (9) however, even where alternatives to pipelines are available, they may not offer effective competition because they have limited ability to increase their supply of anhydrous ammonia without additional investments in capital; (10) because of the large number of local markets that exist along the two midwestern anhydrous ammonia pipelines, GAO was not able to definitively determine the number of markets that do or do not have competitive alternatives to pipelines; (11) no clear conclusions can be reached on whether continued economic regulation of pipelines under STB's jurisdiction is needed because such a determination requires the examination of competition in numerous local markets along 21 pipelines; and (12) however, as Congress considers reauthorizing STB, pipeline regulation issues to consider include: (a) whether pipelines do not face effective competition in a significant number of market areas and subsequently have the potential to charge unreasonably high rates; (b) what the costs of regulating pipelines are; (c) whether the limited number of pipeline cases before STB and its predecessor indicates there is no need for regulation; and (d) whether shippers would have any recourse if STB's economic regulation of pipelines was eliminated.