U.S. Ends Bid to Deregulate Oil Pipelines : Commission Rules That Firms Must Base Their Rates on Costs

WASHINGTON —  The Federal Energy Regulatory Commission, tacitly conceding defeat of a Reagan Administration attempt to deregulate the nation’s 123 oil pipelines, has ruled that their rates must be based on costs.

The commission decision came in a decade-old case involving the 8,400-mile Williams Pipeline that runs through 12 Midwestern states. It unanimously reversed its 1982 ruling which concluded there was no “consumer protection” benefit to regulating the pipelines.

Critics had complained that the earlier ruling allowing pipelines in most cases to set their own rates regardless of their costs would have resulted in consumers being charged millions of dollars in higher gasoline prices.

Courts Cited

In its new ruling Friday, the four-member commission said federal courts were forcing it to go back to using the “depreciated trended original cost” of a pipeline as the basis for calculating revenue requirements and the rate of return it may earn.

The U.S. Court of Appeals for the District of Columbia in May, 1984, struck down the commission’s 1982 ruling, saying that it found “unconvincing FERC’s attempts at justifying its novel interpretation of ‘just and reasonable’ rates.”

“FERC’s statutory mandate . . . requires oil pipeline rates to be set within the zone of reasonableness,” the court said. “Presumed market forces may not comprise the principal regulatory constraint” as the commission had contended.

In its 1982 decision, the commission said consumers had only a “negligible” interest in what pipelines charged because shipping rates represent a small share of gasoline and other refined petroleum products.

It said then there was little justification for “aggressive federal intervention” and, therefore, the commission would be “liberal to the carriers” and challenge their rates only in cases where “aggrieved parties” complain.

Return to Old Method

In its reversal Friday, the commission said it was going back to a policy of allowing pipelines a rate of return based primarily on their equity capital.

“Original cost is the best yardstick to compare an oil pipeline to other oil pipelines, to other industrial companies and to the entire American economy in order to approximate the oil pipeline’s cost of capital,” the commission said Friday.

Settlement Approved

Earlier this year and as a part of the same case, the commission approved a settlement in which Williams agreed to refund $29.5 million to Kerr-McGee Corp. and other refiners who had complained since 1971 that Williams’ rates for shipping gasoline were excessive.

The Reagan Administration concluded in a draft study by the Justice Department a year ago that all but a few of the 123 pipelines should be deregulated because there is ample competition from barge companies and other over-water transporters.