Surface Transportation: Issues Associated With Pipeline Regulation by the
Surface Transportation Board (Statement/Record, 03/31/98,
GAO/T-RCED-98-127).

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.

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.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-98-127
     TITLE:  Surface Transportation: Issues Associated With Pipeline 
             Regulation by the Surface Transportation Board
      DATE:  03/31/98
   SUBJECT:  Transportation rates
             Economic stabilization
             Independent regulatory commissions
             Pipeline operations
             Common carrier operations
             Railroad transportation operations
             Economic analysis
             Fertilizers
             Agricultural industry

             
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Cover
================================================================ COVER


Before the Subcommittee on Surface Transportation and Merchant
Marine, Committee on Commerce, Science, and Transportation, U.S. 
Senate

Not to Be
Released Before
2:30 p.m.  EST
Tuesday
March 31, 1998

SURFACE TRANSPORTATION - ISSUES
ASSOCIATED WITH PIPELINE
REGULATION BY THE SURFACE
TRANSPORTATION BOARD

Statement for the Record by
Phyllis F.  Scheinberg, Associate Director,
Transportation Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-98-127

GAO/RCED-98-127t


(348081)


Abbreviations
=============================================================== ABBREV

  STB -
  ICC -

============================================================ Chapter 0

Madam Chairwoman and Members of the Subcommittee: 

We appreciate the opportunity to provide this statement for the
record on the regulatory role of the Surface Transportation Board
(STB) as the Subcommittee considers the reauthorization of this
agency.  Our statement presents preliminary information based on our
ongoing work on STB's pipeline regulation.  As you know, this work
was required by the Interstate Commerce Commission (ICC) Termination
Act of 1995.  In asking us to study pipeline competition issues, the
Congress was particularly concerned about the impact of STB's
regulation on the pipeline transportation of anhydrous ammonia--an
important crop fertilizer in the midwestern states.\1 A good portion
of this statement will focus on this topic. 

Specifically, this statement describes (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 the Congress as it decides whether to extend, modify, or
rescind STB's authority to regulate pipelines.  In summary, our
preliminary work shows the following: 

  -- The Surface Transportation Board is responsible for the economic
     regulation of railroads and certain pipelines, as well as some
     aspects of motor carrier and water carrier transportation.  The
     majority of the Surface Transportation Board's resources and
     workload are devoted to examining rail issues.  In fiscal year
     1997, the Surface Transportation Board dedicated 89 percent of
     its staff years to rail issues and less than 1 percent to
     pipeline issues.  Only 21 pipelines are under the Surface
     Transportation Board's jurisdiction. 

  -- 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.  For example,
     pipelines have low operating costs which may allow them to
     reduce their rates temporarily if faced with competition from
     other modes of transportation.  Two federal agencies--the
     Surface Transportation Board and the Federal Energy Regulatory
     Commission--regulate pipelines.  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. 

  -- The ability of alternatives to anhydrous ammonia
     pipelines--local production plants and barge and rail
     transport--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.  Our
     work showed that some market areas currently served by pipelines
     also have access to alternatives, while other market areas may
     not.  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.  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. 

  -- 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. 
     However, as the Congress considers reauthorizing the Surface
     Transportation Board, pipeline regulation issues to consider
     include (1) whether pipelines do not face effective competition
     in a significant number of market areas and subsequently have
     the potential to charge unreasonably high rates; (2) what the
     costs of regulating pipelines are; (3) whether the limited
     number of pipeline cases before the Surface Transportation Board
     and and its predecessor indicates there is no need for continued
     regulation; and, (4) whether shippers would have any recourse if
     STB's economic regulation of pipelines was eliminated. 


--------------------
\1 Anhydrous ammonia is a hazardous substance that is the primary
source of nitrogen for growing crops.  It can be applied directly as
a fertilizer, or used as a component in producing other nitrogen
fertilizers. 


   STB'S ROLE IN SURFACE
   TRANSPORTATION REGULATION
---------------------------------------------------------- Chapter 0:1

STB is an independent agency administratively housed within the
Department of Transportation.  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.  STB has fewer responsibilities and functions than ICC. 
STB's fiscal year 1998 budget is nearly $15.9 million, and it employs
about 135 full-time equivalent staff, compared with ICC's fiscal year
1994 budget of $52.2 million and employment of 615 full-time
equivalent staff.  STB's current authorization ends on September 30,
1998. 

Most of STB's regulatory oversight centers on the rail industry. 
This oversight encompasses enforcement of the "common carrier"
obligation (that the rates, services, and practices of carriers be
reasonable), mergers and acquisitions, and the construction and
abandonment of railroad lines.  The ICC Termination Act eliminated,
among other things, the regulatory requirement to file tariffs
listing rates charged for transporting goods and requirements
pertaining to contracts for the shipment of nonagricultural
commodities.  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.  Of the 1,429 decisions
STB issued in fiscal year 1997, 988 (about 70 percent) concerned rail
issues. 

STB has jurisdiction over pipelines that provide interstate
transportation of commodities other than oil, gas, or water.  We
identified 21 pipelines carrying five commodities--anhydrous ammonia,
carbon dioxide, coal slurry, phosphate slurry, and hydrogen--that are
subject to STB's regulation.  STB's regulation of these pipelines
includes ensuring that pipelines fulfill their common carrier
obligations, including determining if the rates charged for these
services are reasonable and nondiscriminatory.  The ICC Termination
Act limited STB's role in regulating pipeline rates by specifying
that STB can begin a pipeline rate investigation only in response to
a complaint by a shipper or other interested party.  The act also
eliminated the sole reporting requirement for pipeline
carriers--tariff filing.  According to STB, over the past 10 years
only five cases involving pipelines have come before STB or ICC; one
is ongoing.  Because of the limited caseload, STB issued only six
decisions on pipeline cases in fiscal year 1997 and devoted the
equivalent of about one full-time staff member to pipeline issues.\2

STB also has regulatory authority over some motor carrier functions. 
This oversight includes regulating the rates of household goods
carriers and disposition of motor carrier undercharge cases.  The ICC
Termination Act eliminated some requirements for motor carriers,
including tariff filing for most carriers, and transferred
responsibility for others, such as registration and insurance, to the
Federal Highway Administration.  Finally, STB has jurisdiction over
domestic water carrier transportation to or from Alaska, Hawaii, or
territories and possessions of the United States.  This regulation is
limited to tariff filing and rate regulation.  In fiscal year 1997,
STB dedicated about 12 full-time equivalent staff to motor carrier
and water carrier issues, primarily motor carrier issues.  STB issued
420 decisions (about 29 percent of its workload) on these issues,
most related to motor carrier issues. 


--------------------
\2 Each of the six decisions addressed aspects of two cases. 


   PIPELINES HAVE HISTORICALLY
   BEEN REGULATED TO ENSURE THAT
   THEIR RATES ARE REASONABLE
---------------------------------------------------------- Chapter 0:2

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.  Specifically,
because pipelines are expensive to build--but relatively inexpensive
to operate--it is more efficient to build one large pipeline to
transport a given amount of a commodity rather than two or more
smaller pipelines.  In addition, low operating costs may enable a
pipeline to reduce its rates temporarily if faced with competition
from 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.  Regulation by the former covers more pipeline
miles and involves more reporting requirements than the latter.  For
example, about 400,000 miles of oil and gas pipelines are under the
jurisdiction of the Federal Energy Regulatory Commission, while fewer
than 6,000 miles of pipelines are subject to STB's jurisdiction.  In
addition, oil and gas pipeline carriers are generally required to
file tariffs and annual reports, while pipeline carriers under STB
are not. 


   ABILITY OF PIPELINE
   ALTERNATIVES TO COMPETE VARIES
   THROUGHOUT THE MIDWEST
---------------------------------------------------------- Chapter 0:3

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.  First, because storage terminals
are key to the distribution of anhydrous ammonia in local midwestern
market areas, alternatives must have access to storage terminals
within market areas that are also served by pipelines.  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. 

Two pipelines, one owned by Koch Pipeline Company, L.P., and one
owned by MAPCO Ammonia Pipeline, Inc., carry anhydrous ammonia from
Louisiana, Oklahoma, and Texas to the midwestern states.  (See fig. 
1.) These pipelines supplied 2.1 million tons (33 percent) of the
estimated 6.4 million tons of anhydrous ammonia used in the Midwest
in 1996.  Three alternatives to pipelines--local production within
the Midwest; barge shipments from Louisiana up the Mississippi,
Illinois, and Ohio Rivers; and rail shipments primarily from other
areas--also provide anhydrous ammonia to the Midwest.  Local
production accounted for about 3 million tons, or about 47 percent,
of the total midwestern demand.  Barge shipments accounted for 0.9
million tons (14 percent) and rail shipments accounted for 0.4
million tons (6 percent). 

   Figure 1:  Map of Koch and
   MAPCO Pipelines

   (See figure in printed
   edition.)

   Sources:  Koch Pipeline
   Company, L.P.  and MAPCO
   Ammonia Pipeline, Inc.

   (See figure in printed
   edition.)

The highly seasonal demand--lasting as little as 10 days each in
spring and fall--for anhydrous ammonia applied directly to fields as
a fertilizer makes it important to have large amounts of this product
stored close to farms if farmers' needs are to be met.  Regardless of
the means of transport, the most efficient way to meet this demand is
to have large storage tanks (generally from 20,000 to 40,000 tons of
anhydrous ammonia per tank) in terminals located close to fertilizer
dealers and farmers throughout the Midwest.  As a result, anhydrous
ammonia markets in the Midwest appear to be fairly localized. 
Currently, 60 terminals throughout the Midwest--28 of which are
located on pipelines--store anhydrous ammonia for peak-season use. 

Currently, more than half of the 28 terminals located on pipelines
have no alternatives to the pipelines.  (See tbl.  1.) The remaining
terminals have access to alternatives that may limit the pipelines'
ability to charge high rates to deliver the product to that terminal. 



                                Table 1
                
                    Alternative Types of Access for
                     Terminals Served by Pipelines

                                                   Number of terminals
Type of access                                               (percent)
----------------------------------------  ----------------------------
Single pipeline                                                16 (57)
Pipeline and rail                                               7 (25)
Pipeline, local production, and rail                             2 (7)
Pipeline and barge                                               2 (7)
Pipelines and rail                                               1 (4)
======================================================================
Total 2                                                        8 (100)
----------------------------------------------------------------------
Note:  No other combination of access exists, such as a location
served by pipeline, barge, and rail. 

Some of the 32 terminals not on the pipelines may also be able to
supply anhydrous ammonia to fertilizer dealers in a pipeline
terminal's market area and effectively limit pipelines' ability to
charge high rates.  For example, if the price of anhydrous ammonia
were to increase at a pipeline terminal in response to higher
shipping rates on the pipeline, fertilizer dealers in the area could
turn to cheaper sources of anhydrous ammonia--such as terminals
served by barge, rail, or local production--if available.  If these
other sources could increase their supply without incurring
significant increases in their transport and storage costs--thus
enabling them to keep their prices steady--the pipeline might be
forced to keep its rates reasonable in order to retain customers. 

However, the ability of these alternative sources to expand their
supply of anhydrous ammonia beyond current levels without additional
investment may be limited.  It is unlikely that plants devoted to
producing anhydrous ammonia as a first step in manufacturing other
forms of fertilizer will switch to producing anhydrous ammonia for
direct application.  According to representatives from barge
companies and barge terminals, the current fleet of barges is
operating at or near capacity and terminals also have limited excess
capacity.  Fertilizer dealers and shippers were also skeptical about
the ability of rail to expand capacity to compete with the volume of
product currently provided by the pipelines.  Expanding capacity in
any of these modes could be expensive.  For example, new barges are
estimated to cost between $4 million and $5 million each, while new
barge terminals cost approximately $15 million. 

As an alternative to the direct application of anhydrous ammonia,
farmers could substitute other forms of nitrogen fertilizer.  This
action would lessen the need to have large amounts of anhydrous
ammonia shipped to the Midwest.  However, it is not clear that other
nitrogen fertilizers are substitutable for anhydrous ammonia.  For
example, of the nitrogen fertilizers, anhydrous ammonia is best
suited for fall application because it loses little of the nutrient
during the winter compared with other forms of nitrogen fertilizers. 
In addition, anhydrous ammonia is relatively low cost and is the most
concentrated form of nitrogen available.  For example, in April 1997,
the cost to farmers of nitrogen in anhydrous ammonia form--82-percent
nitrogen content--was $369 per ton, while the cost of nitrogen in a
liquid upgrade form--28- to 32-percent nitrogen content--was $533 per
ton.  Because an increase in pipeline transportation rates would
represent only a small portion of the cost of anhydrous ammonia to
farmers, a substantial increase in pipeline rates would be required
before farmers would be likely to switch. 


   ISSUES BEFORE THE CONGRESS IN
   DECIDING THE FUTURE OF STB'S
   REGULATION OF PIPELINES
---------------------------------------------------------- Chapter 0:4

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.  Such an examination was
not feasible for our study, nor was it feasible to address whether
anhydrous ammonia pipelines are representative of all pipelines under
STB jurisdiction.  There will be several issues before the Congress
as it decides whether to extend, modify, or rescind STB's authority
to regulate pipelines.  These issues deal with whether to
substantively change or leave in place how STB regulates pipelines. 
We have not addressed whether the current approach to the economic
regulation of pipelines might remain substantially unchanged but
carried out by another agency. 

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?  Whether pipelines under
STB's jurisdiction have such power is uncertain.  As discussed above,
limited competition may exist in a number of anhydrous ammonia
markets on two pipelines in the Midwest while other markets may have
sufficient alternatives to constrain pipeline rates.  However,
according to a 1986 report from the Department of Justice, all
markets along a pipeline do not necessarily have to be competitive in
order to justify deregulation of the pipeline.\3 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 costs of regulating that
pipeline. 

Second, are the costs of regulation burdensome to pipeline carriers? 
The regulatory requirements imposed on pipeline carriers do not
appear to be high.  STB does not have the authority to initiate rate
cases.  In addition, STB does not require that pipelines file rate
schedules, nor does it impose reporting requirements on pipelines
wanting to start up or go out of business.  In fiscal year 1997, STB
devoted the equivalent of about one full-time staff member to
pipeline issues.  If a rate case is brought before STB, the cost to
the pipeline carrier of defending the case could be substantial.  The
limited number of pipeline rate cases in STB's and ICC's history
provides little basis for estimating the cost of these cases. 
However, STB officials told us that the cost of rail rate cases
ranges from less than $50,000 up to about $1 million. 

Third, does the limited number of pipeline rate cases indicate there
is no need for continued regulation?  It is possible that the very
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.  However,
some shippers we talked to contend that the mere existence of a
federal regulatory agency with the authority to roll back rate
increases acts as a deterrent to unfair rate increases. 

Finally, would shippers have recourse if STB's economic regulation of
pipelines was eliminated?  Absent STB or any other regulatory body,
shippers that believe they are being charged unfair rates would
presumably complain to the Department of Justice or the Federal Trade
Commission.  However, neither of these agencies currently has the
statutory authority to investigate complaints from shippers that
believe they are being charged rates that are unreasonable or
discriminatory, unless the complaint alleges a violation of antitrust
laws. 

This concludes our statement. 


--------------------
\3 Oil Pipeline Deregulation, Report of the U.S.  Department of
Justice, May 1986. 


*** End of document. ***