13
Moving jet fuel from the Gulf Coast to the Midwest costs
nearly $2.50 per barrel, a 72 percent increase over
the past 10 years. Even before the products are moved
on those pipelines there are costs associated with the
movement of crude oil to the refineries – a cost passed-
on to end users.
The pipeline industry has consolidated substantially since
1995 when the Commission began allowing automatic
index-based rate increases and market-based rates,
but there has been no systematic review of individual
carrier rates and costs. Meanwhile, the cumulative index
increase from 1995 to 2017 exceeded 80 percent.
During this period pipelines have consistently reported
excessive returns on existing assets. A4A considers a
pipeline company’s annual return to be “excessive”
or reflecting an “over-recovery” when it reports to the
Commission total interstate operating revenues greater
than total cost of service (which cost of service already
includes an allowed return). To address this issue, if any
pipeline has an “excessive” return or an “over-recovery”
exceeding 7.5 percent for two consecutive years, the
Commission should require the company to show cause
as to why its rates are just and reasonable.
15
Perversely, because the current regulatory framework —
now in place for more than two decades — effectively
allows pipeline owners to systematically charge rates that
over-recover costs on existing assets, they have little,
if any, incentive to invest in expansion and/or upgrade
of existing interstate pipeline networks. The pipeline
perspective is that such projects or investments dilute
the return from existing pipeline assets, making new
investments comparatively unattractive. This is another
reason why a systematic review of pipeline rates and
costs and a show cause process are needed. These
disincentives would be eliminated if the Commission
addressed the “over-recoveries” that exist under a
structure that has been in place for more than two
decades.
It is in the interest of all consumers of liquid fuels —
including the flying, driving and shipping public —
for the Commission to increase the transparency of
pipeline filings, tariffs and rate-making processes. Such
transparency is especially critical within a regulatory
framework that relies almost exclusively on the shippers
to police pipeline rates and initiate administrative actions
to ensure that rates and services are provided on a just
and reasonable basis. But consumers of gasoline, diesel,
propane and home heating oil, for example, typically
lack the resources to monitor and contest pipeline rates
and services, so airlines are in the forefront of policing
them.
Further, the pipeline’s routine excess recoveries distort
market forces and create barriers — not incentives — to
needed infrastructure investment. Additional and more
transparent information will enable effective regulation of
the nation’s interstate pipelines and promote investment
in the infrastructure required to support a thriving,
efficient pipeline industry and a thriving, affordable
commercial aviation system. For more detail on pipeline
regulatory issues, see Appendix A.
Congress and or/federal agencies could take the
following steps to improve the reliability of our nation’s
jet-fuel supply: establish incentives to increase refined
product pipeline capacity, increase the transparency of
pipeline data submissions to regulators, and increase
oversight of pipeline over-recoveries and excessive
returns.
12 See ICA sections 1(4) and 1(5) and https://www.ferc.gov/industries/oil/indus-act/handbooks/volume-III/8.pdf
13 Per “Regulation of Natural Monopoly” (Ben W.F. Depoorter, Center for Advanced Studies in Law and Economics, University of Ghent, Faculty of Law): “Under perfect competition prices of goods equal
marginal cost, as firms engage in a competitive bidding process. Under conditions of monopoly, the profit-maximizing behavior of the incumbent firm will lead to a higher price charged to consumers and a
lower output. It enables the seller to capture much of the value that would otherwise be attained by consumers. Monopoly pricing thus results in a wealth transfer from consumers of a product to the seller.”
14 Ibid. “Allowing regulated firms to acquire a total sum that consist of annual expenditure plus a reasonable profit on capital investment, the so-called ‘fair’ rate of return, was constructed by American
courts and the regulating bodies in order to meet constitutional demands of utilities to set prices on a ‘just and reasonable’ level.”
15 See Joint comments of Airlines for America, National Propane Gas Association and Valero Marketing and Supply Company and Affidavit of Daniel S. Arthur, Principal of The Brattle Group, Docket No.
RM17-1-000, “Revisions to Indexing Policies and Page 700 of FERC Form No. 6” (Jan. 19, 2017)