Pipeline profiteering

October 17, 2011

By David Cay Johnston
The opinions expressed are his own.

Last year a fourth of the nation’s oil pipelines earned excessive profits, at up to seven times the rates allowed these regulated monopolies, according to an explosive analysis prepared by a former general counsel for the U.S. Federal Energy Regulatory Commission.

R. Gordon Gooch, the former counsel, alleges in his Oct. 3 study, for instance, that Sunoco’s Mid-Valley Pipeline, which carries crude oil from Texas to Michigan, earned a 55 percent return on assets. That is seven times its authorized profit margin, based on a calculation derived from an accounting report the company filed with FERC.

Three other regulated monopoly pipelines earned more than 40 percent on their assets, while another three earned more than 30 percent, an examination of their FERC filings by Reuters shows.

To put that level of profitability into context, overall nonfinancial businesses earned a 6.7 percent after-tax profit on their assets last year, the latest Bureau of Economic Affairs report shows.

In a competitive market, profits are unlimited except for the discipline of competition. Because there is no market to discipline monopolies, Congress created FERC, which sets prices, known as rates, for pipelines and some other energy monopolies.

FERC is supposed to balance the interests of customers and owners, making sure customers are charged only “just and reasonable” rates and that owners earn “just and reasonable” profits on top of recovering actual costs.

The test of whether that standard is met is revealed each year on a document, filed to FERC under oath, known as Page 700. Line 9 shows how much it cost a pipeline to provide service, including a generous allowance for taxes and its profit. Line 10 shows actual revenues.

The two lines ideally should match, except for minor timing differences. When they do, it indicates the “just and reasonable” standard has been met. If Line 10 is larger, it shows extra profits.

Last year, 47 of the nation’s 175 regulated monopoly oil pipelines reported significantly larger figures on Line 10 than Line 9, as Gooch details in his analysis.

Gooch submitted his findings as part of a FERC rulemaking procedure. He was FERC general counsel from 1969 to 1972. Then he enjoyed a long career as a litigator in pipeline rate cases on behalf of oil companies, known as shippers, who pay pipeline companies to transport their liquids, crude and refined.

Having covered these issues for four decades, I think Gooch’s position here is solid as can be.

The rulemaking at issue would affect how costs are calculated on annual Form 6 reports, of which Page 700 is the most significant part.

“If this rulemaking is adopted as is,” Gooch wrote, “there will be no effect on the unlawful revenues, no risk to the public utilities at all. In fact, their ability to collect unlawful excess profits with impunity may be enhanced.”

FERC spokesperson Mary O’Driscoll said that since Gooch’s analysis was filed in a rulemaking proceeding, the commission will respond in the proceeding. She said, “The commission is not going to speak outside of the proceeding.”

None of the five FERC commissioners responded to my telephone calls to their offices. Only Sunoco Logistics, controlling owner of Mid-Valley Pipeline, returned my calls.

The key defense to the excess profits charge is shown in what Sunoco Logistics told me. Spokesman Joe McGinn said its rates “are approved by FERC and follow all FERC rules and guidelines.”

And that is the scandal. Not just that companies are earning excess profits, but that FERC seems to look the other way and enable this.

Gooch argues that the rulemaking proceeding he commented on in his analysis would institutionalize excess rates and make it difficult for a court to stop oil pipeline owners from collecting more profit than is lawful.

Retired now, Gooch has become a full-time reformer trying to stop what he sees as rules designed to destroy the “just and reasonable” tenet of utility regulation.

The issues here are not academic. Unless controlled, monopolies can cause massive economic damage. Excess profits amount to a tax on the public for private gain.

Utilities have been promoting the theory of deregulation because they know it lets them, as monopolists, escape the rigors of both regulation and competition.

Consumers bear the burden of these excess profits every time they pump gasoline or fly in a jetliner.

Accounting reports show that oil pipeline profiteering has gone on for years under administrations of both parties.

FERC is a small federal agency whose decisions exert a broad impact on the economy, yet it gets little news coverage. Commissioners and key staff come from, and go back to, the energy industries they regulate.

FERC’s budget is financed not with taxes, but fees paid by the energy industries.

On the “just and reasonable” standard, a controlling decision by the Court of Appeals for the District of Columbia in 1984 instructed FERC that “not even a little unlawfulness is to be tolerated.”

Yet in 2005 FERC granted the SFPP pipeline a rate hike nine times greater than its increased costs, Gooch wrote.

The SFPP pipeline is a corporate descendant of the railroad monopolies that caused California so much economic damage a little more than a century ago that they were known as The Octopus.

Despite the easy-to-spot evidence of profits that are far in excess of authorized rates, earlier this year the commissioners gave all 175 pipelines the freedom to raise rates by 6.8 percent per year compounded for the next five years.

Sunoco’s Mid-Valley Pipeline was entitled to a profit of $3.9 million in 2010, but comparing the two lines shows an actual profit seven times that large, more than $27 million.

The latest annual pipeline rate hike was approved in a way that makes consumer challenges virtually impossible.

A general rate case would open every pipeline expense, including taxes and profits, to scrutiny. The commissioners avoided that by granting an indexed rate increase to all pipelines with no proof of higher costs required.

This latest index rate increase will generate $3.4 billion more in excess profits over the next five years, Gooch calculated.

Gooch said he filed his analysis because he believes that if the excess profits were brought to the commission’s attention they would have to stop the profiteering.

He said FERC has failed to “redress years of toleration of unlawful conduct by some oil pipelines.”

By filing his report, he said, “it does not seem likely that any commissioner, past or present, would turn a blind eye to unlawful excess profits of some public utilities if the results of the annual report filings had been called to their attention.”

Here are a few of the questions Gooch’s report raises:

What is the point of filing accounting reports, especially under oath, if their contents are ignored?

Why would a government agency help monopolies whose rates it sets earn more than just and reasonable profit margins?

Why have President Obama (and before him Presidents George W. Bush and Bill Clinton) appointed commissioners closely allied with the energy industry instead of consumer advocates?

Why has Congress not investigated FERC?

There are many more questions. This column will be pursuing answers about how FERC not only ignores, but actively helps, monopoly pipelines gouge the public.  (Editing by Kevin Drawbaugh)

This column first appeared on Thomson Reuters News & Insight.


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FERC is a small federal agency whose decisions exert a broad impact on the economy, yet it gets little news coverage. Commissioners and key staff come from, and go back to, the energy industries they regulate.

FERC’s budget is financed not with taxes, but fees paid by the energy industries.

Proof you cannot let an industry regulate itself. They will line their pockets every time, lie and cheat unabated. Why do we even listen to such nonsense as they will police themsleves? I will not tolerate such foolish talk. Come on grow up – this guys are crooks and con artists and they are taking the country down big time. Time for some real teeth and real punishment that is long term for these crooks.

Posted by JLWR | Report as abusive

We need someone in the FERC to blow the whistle on these industries that are screwing the public. Lets step forward and do your duty you owe it to your country.

Posted by desmoines | Report as abusive

You have a marvelously bright spotlight, Mr. Johnston. Please continue to pivot its light around our nation and its government. Absent good investigative reporting and op-eds like yours, this country would currently be left standing in utter darkness.

This innocuous little line is brilliant: “Excess profits amount to a tax on the public for private gain.” Boy, that sums up so much of our economic problems. But the mere mention of it provokes cries of “class warfare” or “socialism.” I disagree. I liken it more to sanity.

Posted by doggydaddy | Report as abusive

Bravo Mr. Johnston!

> “The commissioners avoided that by granting an indexed rate increase to all pipelines with no proof of higher costs required.”

Isn’t this one of the key advantages of inflation, that it’s supposed to keep service suppliers continually justifying their price-point to their customers as ongoing industrial innovation drives their costs down; (and in the context of at least limited competition)? FERC’s commissioners have apparently written this advantage out of their negotiating rulebook, but your article goes some way toward explaining why they might have done that.

UK rail tickets are presently allowed by the UK government to inflate by: generalised inflation PLUS several percent on top of that! I don’t get the logic of it (especially given that this arrangement has been continuing for some years now). The rail transport companies were already profitable, and I can’t see much evidence of major capital investments; people still frequently have to stand on trains outside “rush hour”. These companies continue going to the government with their begging bowls, demanding massive tax-funded support for railway infrastructure for “environmental” reasons. Is this also a scam?

It seems we’ve identified a template for government-insider/ “deregulation” lobbying scams. I doubt FERC is the only one…

Posted by matthewslyman | Report as abusive

Excellent Reporting. Hope this gets well publicized and corrected. About time “our” bureaucrats are made properly aware that they are there to serve “we, the people” and not their buddies. Kudos!

Posted by OneOfTheSheep | Report as abusive

Small wonder that the Koch Bros. are pushing so hard to deregulate via their support of the Tea Party movement. Will Murdoch still be able to deliver if he’s ousted from News Corp?

Posted by SanPa | Report as abusive

This article is a great example of why Reuters has crediblity as a news source. There are many more rocks that need to be turned over and I hope you will persist in this excellent type of reporting. Keep up the good work!

Posted by reutersreviewer | Report as abusive

Mr. Johnston,

I am a resident in a small town in upstate NY fighting Nisource, DTE, and National Grid and their illegal plans to put a gas compression station in the middle of a residential neighborhood. In my experience FERC is there to rubber-stamp the industry NOT to regulate it. Despite the fact that these companies have lied under oath, misrepresented facts, and we have pointed out several discrepancies and contradictions in their FERC filing, some of which is illegal, FERC is not only allowing them to proceed, but is not conducting a full EIS per NEPA regulations. The idea that there is any oversight or regulation is a joke!

Posted by Minisinkmom | Report as abusive

Please please don’t rock the boat on this. I have stock in several pipeline mlp’s and it is the only thing I own that’s going up. I need to retire in a few years and I’m hoping to live on the dividends. Have mercy!

Posted by hacimo | Report as abusive

Assuming the facts reported in the article are correct, many of the pipeline companies apparently are earning higher profits than regulated targets.

The significance of that finding is open to discussion, though.

First, I don’t agree that the pipelines are monopolies. Today there are many pipeline companies serving the Texas-Oklahoma region that most of SPFF serves — the pipeline company highlighted by Mr. Johnson’s article. Moreover, tanker trucks and trains haul oil in various markets. So I don’t see why we’re regulating the pipelines as though they’re monopolists, though historically that approach may have been justified.

Second, Mr. Johnson mentions that SPFF’s allowable profit on its Mid-Valley Pipeline division last year was $3.9 million. I’m from Missouri, so you’ve got to show me that $3.9 million represents a high rate of return for the operator. Just saying that SPFF earned more than $3.9 million doesn’t qualify the company as public villain.

Third, to judge whether a company is exercising monopoly power rather than simply experiencing some short-term prosperity that’s balanced in other years by short-term disappointments, Mr. Johnson (who has, after all, won the Pulitzer Prize for his reporting) should also provide figures for a longer time frame, such as 5-10 years.

Recently, for example, oil production has increased more rapidly in Texas and Oklahoma than pipeline capacity, so pipeline companies in that region (including SPFF) have faced unusually strong demand. However, that will soon come to an end when expansion plans by competitors are completed over the next two or three years. Then SPFF’s profits will fall back to earth, possibly into negative territory.

Mr. Johnson projects a pro-market approach in his stories, bringing down the hammer not on ‘regular’ companies, but on ‘monopolies’ who are getting away with murder. But if he really had a pro-market approach, he would be more careful about designating a company a monopolist and judging it guilty by the standards he applies and the facts upon which he relies. Citing the horrible evils of railroads a century ago does not constitute evidence against SPFF, and the inclusion of the railroads in this story was inappropriate since there is very little real evidence presented that SPFF is bringing ruin to its customers.

I never read any of the articles that earned Mr. Johnson the Pulitzer, but I’m confident they were better than this one.

Posted by Ozzie903 | Report as abusive

@Ozzie, all pipelines my column refers to are rate-regulated monopolies as a matter of law. If they were competitive there would be no reason to have ever regulated their rates.

The absolute dollars are not the issue, but the rate of return — the 55 percent return cited for the Sunoco line is not a market return. I included the average for all large US companies — 6.7 percent — to give perspective.

And I showed how automatic 6.8% annual rate increases are authorized, which is not market pricing, certainly not in this economy.

I don’t think “ruin” is a reasonable standard, as you evidently do, nor is the issue villainy, as you write. The issue is whether FERC is acting properly and applying the legal standard of just and reasonable is the standard set by law. If you can show how a 55% ROA is reasonable please do so.

Also, its the SFPP pipeline, not SPFF; the Sunoco profit was not $3.9 million (which was authorized) but seven times that much. And Johnston has a “t” in it.

Posted by DavidCayJ | Report as abusive