Federal Pipeline Rate Making: Alternative Approaches of the United States Federal Energy Regulatory Commission

This article provides an overview of the alternative rate making methodologies adopted by the United States Federal Energy Regulatory Commission (FERC) in its regulation of transportation rates for oil and natural gas pipelines. In 1997, authority over rate making for interstate oil and natural gas pipelines was transferred to the newly created FERC. This article describes the history of interstate pipeline rate making and the transfer of rate making authority to the FERC.

The author looks at the innovative pipeline rate making methodologies implemented by the FERC in its regulation of transportation rates for both oil and natural gas pipelines. The article describes the adoption by FERC of market based rates and a generally applicable indexed rate cap methodology for oil pipeline rate setting. In respect of natural gas pipelines, the legislative requirements and practical realities associated with cost-of-service rate making by FERC are described and FERC’s policies permitting selective discounting, shipper-specific negotiated rates, and market based rates for natural gas pipelines are
reviewed.

The Commission’s adoption of the alternative rate making methodologies has taken the emphasis off of general rate case litigation as a means of establishing just and reasonable rates for interstate oil and natural gas pipelines and related facilities. The alternative rate making methodologies also represent a significant departure from cost-of-service rate making, with increasing focus on rate flexibility and competition as a means of generating efficiencies for customers of interstate oil and natural gas pipelines.