Given its regulatory authority to set the rates charged by oil and natural gas liquids (NGL) pipelines, the Federal Energy Regulatory Commission (FERC) plays a major role in developing pipeline infrastructure in the US.

However, FERC’s current practices and policies in many ways work against the objective of promoting optimal investment in this infrastructure, something Brattle Principal Dr. Daniel Arthur and Senior Associate Mike Tolleth explore in a recent Energy Law Journal article.

The article, “FERC’s Policies are Incentivizing the Exercise of Market Power Through Under-Development of Oil and Natural Gas Liquids Pipeline Capacity,” argues that – based on the fundamental principles of competitive economics – optimal development of oil pipeline transportation capacity is achieved when pipeline transportation rates reflect the long-run marginal cost of developing incremental capacity.

Highlighting various FERC policies, the article examines how certain of FERC’s current policies for review of negotiated “committed” rates and for approving market-based rate authority actually work against the objective of promoting optimal investment in pipeline infrastructure at rates consistent with competitive levels reflective of the underlying cost of providing the transportation service. That is, rather than ensuring oil pipeline rates are set at competitive levels reflective of long-run marginal cost, FERC’s current approach instead incentivizes pipeline companies to exploit the natural monopoly characteristics of the oil pipeline industry to under-develop capacity in an exercise of market power. To remedy this, Dr. Arthur and Mr. Tolleth provide a number of recommendations for changes to FERC’s existing policies for evaluating market power as well as regarding the establishment of committed rates in order to incentivize oil and NGL companies to construct capacity levels consistent with competitive levels while also ensuring rates are reasonable.

Read the full article below.

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