Pipelines Have Inherent Cost Advantages That Historically Have Led Them to Be Regulated

Historically, the federal government has regulated the rates charged by interstate pipelines because these pipelines have the characteristics of natural monopolies and associated cost advantages that make it difficult for other pipelines or other transportation modes to compete. In addition, the act eliminated the requirement for pipeline carriers to file the rates they charge to transport goods—which was the sole reporting requirement under ICC—and does not provide STB with any authority to regulate a pipeline carrier’s decision to enter or abandon markets. According to STB officials, over the past 10 years, only five cases concerning pipeline issues have come before STB or its predecessor, ICC.One case concerned a pipeline’s status as a common carrier and the obligation to file its rates in response to the request of an independent shipper. The ICC Termination Act specifies that the rates charged for the transportation of most commodities provided under contract by rail carriers are not subject to STB’s jurisdiction. Ability of Alternatives to Compete With Anhydrous Ammonia Pipelines Varies Across the Midwest

The ability of alternatives to anhydrous ammonia 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. Considering these factors, alternatives to pipelines may not offer effective competition because they may not have access to all the market areas served by the pipelines and because they have limited ability to increase their supply of anhydrous ammonia without additional investments in capital. Pipeline transport rates account for about 10 percent of the cost of anhydrous ammonia to farmers. 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. However, there will be several issues before the Congress as it decides whether to extend, modify, or rescind STB’s authority to regulate pipelines carrying products other than gas, oil, or water. The issues before the Congress include the following:
Do pipelines under STB’s jurisdiction lack effective competition in a significant number of market areas and subsequently have the ability to charge unreasonably high rates? Instead, Justice concluded that the number of markets along a pipeline that do not have competitive alternatives—and therefore require regulation—should be balanced against the societal burden of regulating that pipeline. Does the limited number of pipeline cases under ICC and STB indicate there is no need for continued regulation? It is possible that the limited number of rate cases brought before STB and its predecessor in the last 10 years is evidence of effective competition, and therefore there is no need to continue pipeline regulation. Would shippers have recourse if STB’s economic regulation of pipelines were eliminated? This pipeline is the only interstate phosphate slurry pipeline in the nation.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reported on the impact of the Surface Transportation Board's (STB) regulation on pipeline competitiveness and the transportation of anhydrous ammonia, focusing on: (1) the historical reasons for regulating pipelines; (2) STB's role in regulating pipelines, including the number of pipelines regulated by STB; (3) the ability of alternatives to compete with pipelines that transport anhydrous ammonia to the Midwest; and (4) issues before Congress as it examines whether to extend, modify, or rescind STB's authority to regulate pipelines.

What GAO Found

GAO noted that: (1) historically, the federal government has regulated the rates charged by interstate pipelines because these pipelines have the characteristics of natural monopolies and associated cost advantages that make it difficult for other pipelines or other transportation modes to compete; (2) the regulation of pipelines has been imposed to ensure that all shippers have access to pipeline transportation services and that the rates charged by pipeline carriers for these services are reasonable and nondiscriminatory; (3) the Interstate Commerce Commission Termination Act of 1995 limited STB's role in regulating pipelines by specifying that the Board can investigate pipeline issues only in response to a complaint by a shipper or other interested party; (4) the act also eliminated the requirement for pipeline carriers to file the rates they charge to transport commodities, which was the sole reporting requirement for pipelines under the Interstate Commerce Commission's (ICC) regulations; (5) over the last 10 years, only five cases concerning pipeline issues have come before ICC or STB; (6) one factor that may have limited the number of cases is the use of multiyear contracts, which makes it less likely that shippers will be dissatisfied with the rates charged by a pipeline; (7) the ability of alternatives to pipelines to compete with the two anhydrous ammonia pipelines in the Midwest varies; (8) while some market areas currently served by the pipelines also have access to alternatives, other market areas may not; (9) 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 market areas that do or do not have competitive alternatives to the pipelines; (10) 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; and (11) however, as Congress considers reauthorizing STB, issues to consider include: (a) whether pipelines lack effective competition in a significant number of market areas, and subsequently have the potential to charge unreasonably high rates; (b) what are the costs of regulating pipelines; (c) whether the limited number of pipeline cases in the history of STB and its predecessor indicates that there is no need for continued regulation; and (d) whether shippers would have any recourse if SBT's economic regulation of pipelines were eliminated.