Decades of regulatory abuse and neglect have permitted oil pipelines owned by major oil companies to collect hundreds of millions of dollars in excess profits and to earn a rate of return greater than that of nearly all other American corporations, according to the General Accounting Office.
The Current regulator, the Federal Energy Regulatory Commission, "has not addressed many questionable pipeline practices and presently has no plans to do so," the GAO said in a draft report.
"If recent decisions affecting other regulated industries had been applied to oil pipelines," consumer costs could have been reduced by as much as $300 million in 1976, the most recent year for which comprehensive data are available, the report concludes. Other major findings by the congressional watchdog agency:
Federal agencies "have done little to alleviate or resolve the alleged anticompetitive practices of oil pipelines."
The levels of profits allowed under pipeline regulations "were not enforced" and 41 of the country's 110 regulated oil pipelines in 1976 "had rates of return higher than what was allowed."
The Interstate Commerce Commission, which regualted oil pipelines for over 70 years until the Energy Department (FERC's parent agency) was established in 1977, did not, until June 1976, have a system to ensure that pipeline owners commplied with regulations.
The Energy Department's regulators "have not established criteria for determining the justness and reasonableness of oil pipeline rates."
To correct these and other abuses,GAO urges immediate action by the FERC, Justice Department and Congress.
A draft of the 81-page GAO report, "Petroleum Pipelines: More Effective Regulation Needed," was obtained by The Washington Post.
Patrick H. Corcoran, executive director of the Association of Oil Pipelines, called the GAO findings unjustified in light of risks that major oil companies take. "Another interesting anomaly," Corcoran says, "is that just as the Government seeks to deregulate other modes of Transportation such as the airlines, some are pushing for more regulation on liquid pipelines."
Oil pipelines are classed as "common carriers" with monopoly characteristics just as, say, railroads are, and federal regulation practices "have not controlled pipeline profits and rates," GAO says.
GAO points out that the rate of return on equity - the actual direct investment an owner puts into a project - for 31 out of the 110 oil pipelines exceeded the average of the five most profitable publicly held unregulated companies. Beyond that, GAO says, many pipelines earn profits for investors far in excess of those returned by the most profitable electric or natural gas utilities.
Comparing rates of return on total capital, GAO found that during 1976, the most profitable publicly owned company had a rate of return of 32 percent, versus 137 percent for the most profitable regulated oil pipeline.
Oil pipeline regulation has drawn little public or private attention from President Carter, Energy Secretary James R. Schlesinger or Attorney General-Griffin B. Bell.
Nevertheless, the Justice Department's Antitrust Division and the Federal Trade Commission have repeatedly questioned both the competitiveness and the adequancy of current regulation.
In a recall filing before the FERC, Assistant Attorney General John Shenefield says current regulations give pipeline owners "revenues in excess of what is necessary to meet operating expenses," and calls the regulations "economically inefficient and detrimental to competition in the energy supply industry."
In the nation's 174,000-mile network of oil pipelines, Shenefield says, "virtually all . . . are owned or controlled by larger firms, usually integrated petroleum companies." As an illustration, he says 99 percent of the country's crude oil and 78 percent of the refined products such as gasoline or heating oil shipped by pipeline are carried in major oil companies' lines.
Shenefield's office has called for limiting the majors' ownership of oil pipelines. "Oil companies entered the pipeline industry to take advantage of the monopoly pricing opportunities and to enhance their position in the oil industry overall, not to reduce transportation costs," he says.
Asked about the Justice Department's contrast with the White House and the Energy Department, Justice attorney Donald Kaplan offers this explanation: "The Department of Justice has a well defined position, but the administration has not adopted a position either way."
So far, according to the GAO, the administration has not moved at senior levels to address these issues. Sen. Edward M. Kennedy (D-Mass.), Chairman of the Judiciary Committee, has asked the Federal Trade Commission to limit acquisitions of new pipeline routes by the majors. The FTC has not taken final action on Kennedy's petition.
From the standpoint of the majors, oil pipelines offer a lucrative profit center-in terms of rates of return on investment-as well as a means of managing oil markets.
From the viewpoint of consumers, pipelines are the cheapest mode of overland oil transportation-one fifth the cost shipping by rail and one-twenty-fifth the cost of shipping by truck. The reason is economies of scale. The cost of building a 36-inch line is about 3 1/2 times the cost of building a 12-inch line, yet it will carry 17 times the volume.