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Rockefeller price gouging returns to petroleum industry

As FERC slumbers, oil and gas customers pay a heavy price

January 14, 2016 2:00AM ET

Next time you fill your gas tank, the price will likely be inflated by a few pennies per gallon because the sightless sheriffs at the Federal Energy Regulatory Commission, or FERC, have ignored a return of the 19th century price-gouging techniques made infamous by John D. Rockefeller.

Unless FERC acts, everyone soon will have their pockets picked as pipeline charges are illegally jacked up, by as much as 500 percent, or about 25 cents per gallon, FERC records show.  

In this case, the price gouging is by pipeline shippers with rights to transport  refined petroleum. They resell those rights at a huge markup and get kickbacks.

The Supreme Court in 1959 reminded us that the Interstate Commerce Act makes it “unlawful for a common carrier to grant rebates to individual shippers by any device whatsoever or to discriminate in favor of any shipper directly or indirectly.” Illegal fees for transporting refined petroleum products in interstate commerce can result in criminal charges and up to two years behind bars upon conviction.

But instead of seeking civil damages and criminal prosecution, FERC is holding a one-day technical conference on Jan. 26 that may institutionalize price gouging rather than stop it.

This is yet another reason Congress needs to investigate FERC, which has a history of finding ways to suppress its duty to protect the public from price gouging in electricity prices as well as oil pipeline charges. FERC has also erected barriers to prevent complaints by consumers, the very public it is supposed to protect.

Congress requires FERC to make sure that only “just and reasonable” prices are charged for shipping oil and refined products like gasoline through the pipelines, whose prices, or rates, the agency is supposed to control. Because pipelines are legal monopolies, meaning there is no competitive market to ensure quality service and reasonable prices, FERC is supposed to protect consumers and regulate the monopolies. It does not.

The immediate issue involves Colonial Pipeline, the largest system for moving gasoline, jet fuel and other refined petroleum products. Charles and David Koch, Shell Oil, a subsidiary of the KKR private equity firm and two other enterprises own the system, which has more than 5,000 miles of pipe and serves 13 Eastern states.

The latest price gouging arises because the demand to move refined petroleum from Texas to the East Coast is outstripping the pipelines’ capacity. Some longtime users who have rights to ship through Colonial pipes have been reselling their rights for huge markups, which they then pocket.

In reselling capacity, these shippers have made themselves common carriers under the law Congress enacted in 1887 to stop the abuse of customers by Rockefeller and others. Rockefeller was so greedy that he demanded and got kickbacks from railroads not just on the oil he shipped but also on the oil his competitors shipped.

It is a federal crime to ship oil through a multistate pipeline without a FERC-approved price chart, known as a tariff, notes Elisabeth Myers, a veteran pipeline lawyer and an adjunct associate professor of law at American University College of Law in Washington, D.C., in a forthcoming white paper.

Even if FERC refuses to hear from consumers, they should complain to the commission about its bias in favor of pipeline owners.

Colonial persuaded FERC to suspend its tariff while a new price chart is considered in the context of its customers reselling pipeline capacity. In its filing, Colonial made no mention of the illegalities — a smart strategy that, if successful, will further enrich Colonial’s owners while causing widespread economic damage through FERC-enabled price gouging.

Colonial is enormously profitable, thanks to FERC’s reliance on four methods of accounting. One is used for reports to investors, another for tax returns, a third for FERC accounting and a fourth for FERC rate making. The bottom line is that if Colonial can divert attention from the need for more pipelines, it can keep its prices high, protecting its lush profits.

Documents filed with FERC in an earlier pipeline case indicate Colonial’s $1 billion in annual revenue includes about $170 million of overcharges. Its annual reports, known as Page 700, suggest Colonial’s rate of return is an eye-popping 39 percent, not the 10.4 percent authorized by FERC.

Colonial issued a statement saying the reselling of capacity “is outside of Colonial’s purview, and Colonial does not benefit from it in anyway. Brokering is undertaken by shippers on the system through secondary market buy/sell transaction, which FERC has not prohibited.”

That is a very artful statement. It is designed to insulate Colonial from a rate case, which could establish that it has overcharged customers for years and would thus owe refunds. It also protects Colonial from liability in the event of a court ruling that companies that resold capacity owe refunds.

While it is true that FERC has not prohibited reselling by Colonial customers, Congress and the Supreme Court have.

The Interstate Commerce Act requires anyone shipping oil across state lines to file a tariff. That it is illegal to ship across state lines without a tariff was upheld by the Supreme Court in 1932. Federal courts have ruled that FERC must protect consumers from egregiously extortionate pipeline rates and that any charge for shipment that is not just and reasonable is unlawful.

Colonial does not share in the extra fees its customers charge for reselling their capacity. But it gets indirect benefits.  

First, it is not being required to expand the capacity of its pipelines, which run underground along perpetual rights of way it was granted by government for the public convenience and necessity. (These exclusive zones are immensely valuable, especially since they are monopoly rights.) Minimizing capacity helps justify higher rates over time, as electricity sellers have learned.

Second, Colonial is not under pressure to increase pipeline capacity, nor is FERC under pressure to authorize a new pipeline, perhaps by another company, to meet this demand.

Myers shared a draft white paper on FERC and pipeline price gouging in which she asserts that FERC is working to restrain capacity, discourage investment in more pipelines and thus help regulated monopolists further inflate profits. That hurts everyone but pipeline owners.

She notes that the 1887 law, as currently written, prohibits rebates and kickbacks, yet FERC has not gone after these criminal acts or sought refunds so that only lawful prices are charged.

As things stand, Myers writes, none of the gas pump customers or even retailers who ultimately bear the higher prices caused by price gouging have sought to intervene in the case. On the basis of decisions dismissing mere consumers as lacking legal authority to intervene, such efforts may be futile. Still, even if FERC refuses to hear from consumers, they should complain to the commission about its bias in favor of pipeline owners.

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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