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interest from the vagaries of the monopolistic market place.2 Thus both State and Federal Governments have recognized the scale economies associated with pipelines that make them natural monopolies and as a result have turned to common carrier regulation to assure that transportation cost savings have been passed on to consumers.3
It is noteworthy that there is no dispute concerning the economies of scale inherent in pipelines. The phenomenon was recognized as early as 1934, but it took the war experience with the big-inch pipelines to justify their use and demonstrate the practicalities of large diameter pipelines.
There is no doubt that pipelines are the safest, most efficient, least expensive and most environmentally desirable overland method of oil transportation. For example, the cost of constructing a 36-inch line would be about 31/2 times the cost of a 12-inch line, yet it could carry 17 times the volume. In other words, 17 pipelines, each 12 inches in diameter would be required to carry the same volume as one 36-inch pipeline 6
In comparison to transporting other forms of energy overland, oil pipelines are by far the cheapest,
Comparative overland transportation costs for oil substantiate the cost advantages of pipeline transportation.
Cost per hundred
$0.47 to $0.65." Rail
$0.10 to $0.50.3 Barge
$0.03 to $0. 15. Pipeline
$0. 025 to $0. 12.5 Tanker
$0.01 to $0.06.* 1 Source : AOPL at 30-35.
2 Although the most costly form of transportation, trucks provide the greatest flexibility, used primarily to gather crude and distribute products from terminals. Id.
3 Rail transportation is more economical than trucking above 200 miles. Id.
• Barges and tankers are limited to accessible waterways; thereby limiting their competition. Id.
6 Pipelines of 20 inches or greater can compete with barges. Id.
2 Prerritt at 210.
5 PICA hearings at 256 ; Market Performance, Part 1 at 315; Ind. Reorg., Part 8 at 5939: NET at 209 ; AOPL at 30-35. A PICA hearings at 256.
L at 32.
Due to the fact pipelines above 20 inches can compete effectively with barges, pipeline owners try not to build pipelines less than 20 inches any more.8
Pipelines can be volume sensitive, that is, as the volume decreases, the cost of shipping rises significantly. Large pipelines, however, are not particularly volume sensitive, since the pipeline is close to its optimum cost over a large range of volume. Thus significant volume decreases in large pipelines will not affect costs substantially.'
Pipelines are highly capital intensive. The fixed costs of the pipeline can range as high as 80 percent; variable costs, mainly power costs, are not substantial cost factors.10 As the diameter o,fthe line increases, construction costs increase linearly, but capacity increases exponentially, with decreasing unit costs throughout the range of diameter increases." Economies of scale have not been exhausted yet; only technical limitations prevent larger diameter pipelines.12
To summarize, pipelines are characterized by increasing economies of scale and limited competition from other pipelines and other modes of transportation. Pipelines, therefore, are natural monopolies. Like any monopolist, an unregulated pipeline owner will take advantage of its monopoly position and raise its tariffs to the highest point possible, keeping all the cost advantages of pipeline transportation. To pass on these transportation efficiencies to consumers, regulation, and specifically common carrier regulation, has been used to limit the excess profits a monopolist is capable of obtaining from its ownership of the natural monopoly pipeline.
B. Pipeline Regulation and the Hepburn Act The early 1900's were a time of agitation for increased regulation of railroads. The abuses of the railroad monopoly were creating economic and political chaos. President Theodore Roosevelt took advantage of the railroad abusive behavior and strongly urged that their rate abuses be controlled by the Federal Government. On December 5, 1905, he delivered his annual message to Congress and declared that the most pressing need was for legislation eliminating unjust rates, specifically indicating his desire to empower the ICC to fix maximum rates only after shipper complaints; to eliminate the last vestiges of rebating; and to extend the ÎCC's powers to other matters.1In response to this call for action, Rep. William P. Hepburn introduced his bill on January 4, 1906 to extend the ICC's powers according to the President's desires. 14
The Congress also was concerned about Standard Oil's control of the oil industry and in 1905 ordered the recently formed Bureau of Corporations to study the transportation of petroleum. After the introduction of the Hepburn bill, and prior to any submission from the Bureau of Corporations, Rep. Joseph L. Rhinock on February 22, 1906, introduced a bill to subject pipelines to ICC jurisdiction. Upon introduction of his bill, Rep. Rhinock said,
& Market Performance, Part 1 at 315.
13 Hoogenboom, Ari and Hoogenboom, Olive, A History of the ICC, W. W. Norton Inc., New York, 1976, at 50-51 (Hereinafter cited as “Hoogenboom"].
14 Jornston at 23.
The pipelines ought to be brought under the control of the Interstate Commerce Commission. Its enormous traffic—the largest in the world—makes it peculiarly appropriate that it should be brought under this control. It has the right of eminent domain and exercises it; it occupies the place of a public market; it has been declared a common carrier by the legislatures of several States; and the [Standard Oil] company itself, through one of its counsel, has admitted that it is a common carrier in all the territory of the United States east of the Mississippi River; it deals in an article most essential to public use, and by all means it should be
regulated and controlled. 16 Shortly thereafter, during consideration of the Hepburn bill in the Senate 11 Senator Henry Cabot Lodge offered an amendment to the Hepburn bill to accomplish the same thing as the Rhinock bill and as a consequence the Rhinock bill was not considered.18 The original Lodge amendment not only subjected oil pipelines to the common carrier provisions of the Interstate Commerce Act, but natural gas pipelines and water pipelines as well. Other Senators objected to the inclusion of the latter: Senator Lodge indicated that he only wanted to get at the oil pipelines and when the amendment was reintroduced on May 1, 1906, it applied only to oil pipelines.19
On May 4. 1906, President Roosevelt transmitted a summary of the Bureau of Corporations Report to the Senate; however, the focus of the President's message was on railroad and Standard Oil's practices. 20 The modified Lodge amendment was submitted moments after the receipt of the President's message 21 and passed the same day 75–0,22 despite Standard Oil's effort to convince Senator Lodge of the folly of his amendment.23
One month after passage of the Lodge amendment, Senator Stephen B. Elkins introduced a commodities clause amendment to the Hepburn bill making all common carriers subject to the Interstate Commerce Act also subject to the commodities clause provisions of his amendment.24
The commodities clause originally was aimed at separating coal production and transportation. Railroads used their ownership of coal production and transportation to benefit themselves to the detriment of independent coal producers.25 On May 6, 1906, the ICC commenced its invesigation.26 The Senate, sensing the public distrust of big business and the railroads, in particular, forged ahead with consideration of Senator Elkins amendment and passed it with its application to pipelines.
18 40 Cong. Rec. 9:337-9338 (daily ed., June 26, 1906).
24 Id at 28; the Elkins admendment should not be confused with a prior bill known as the Elkins Act, 32 Stat. 847 (Feb. 19. 1903), 49 U.S.C. 41, 43, which made the giving or receipt of any railroad rebate a misdemeanor and subject to fine. The objective of the Elkins Act was to eliminate the overwhelming competitive advantage afforded by the rate concessions on railroads. The rebate was used as a device to drive competitors from the railroad industry and secure control of the railroad industry. [Consent Decree report at 130.]
25 Id. at 28.
28 The investigation was authorized in 1905 at the same time Congress authorized the Bureau of Corporations study on petroleum transportation ; however, the ICC's investigation was put off by the President to prevent any conflict with the Bureau of Corporation's effort. Id.
At about this time, the Bureau of Corporations' full report was sent to Congress (on May 17, 1906) and hit hard at Standard Oil's practices. It concluded:
The Standard Oil Company has all but a monopoly of the pipelines in the United States. Its control of them is one of the chief sources of its power. While in the older oil fields pipelines are by the State laws common carriers, there has been little attempt by the States to regulate their charges. The Federal Government has not as yet exercised any control over pipelines engaged in interstate commerce. The result is that the charges made by the Standard for transporting oil through its pipelines for outside concerns are altogether excessive, and in practice are largely prohibitive. Since the charges far exceed the cost of the service, the Standard has a great advantage over such of its competitors as are forced to use its pipelines to secure their
crude oil.27 With varying Hepburn bills, a House-Senate conference committee met to iron out differences. There was little concern in this first conference regarding pipelines, except that as the Elkins admendment applied to pipelines, Senator Shelby Cullom said, the Elkins amendment "was not discussed except to agree generally that whatever would curb the Standard Oil Company we ought to be for." 28
The results of the first conference committee brought the oil industry into action. The debate in the Senate centered around the issue of whether pipelines should have their rates controlled and be available to all who would use them. Senator Lodge and Rep. Rhinock urging this position, argued that pipelines are like railroads, also monopolies, and should just transport goods and not operate them as well.29 Senators Foraker and Long argued the opposing position that pipelines were plant facilities and unlike railroads; there should be no separation between the operation and ownership of the goods transported.
Senator Knute Nelson spotted the weakness of the arguments. What good is making pipelines common carriers if they will be immune from regulation because they transport only their own goods? Regulation of pipeline charges in that situation would be irrelevant; divorcement of pipeline transportation from oil company ownership was essential. In Sen. Nelson's view, the industry's structure determined its behavior. 31
The oil industry overwhelmingly was opposed to the commodities clause. Independent producers feared that imposing common carrier status on integrated pipelines and consequently the Elkins amendment, would hamper their competitive strength, for if a pipeline was barred from carrying its own oil, independents could no longer sell to pipelines at the wellhead and might have to undertake the costs and risks of shipments and sale directly to refineries.32 Moreover, the independents were fearful that the impact would fall most heavily upon them,
* Bureau of Corporations, "Transportation of Petroleum”, 1906, at 37, in PICA at 98. * Johnson at 28. * Id. at 30. 30 Id. at 30; it should be noted that Sen. Foraker was a former Standard Oil counsel. 31 d. at 30-31. 32 3d AG report at 59.
while the Standard Oil companies would find a way around the commodities clause restriction.33 Senator Elkins was pressured by the many oil interests in his home state of West Virginia. Other Senators, unhappy with legislation, forced a reconsideration in a second conferenco Committee.
In the second conference committee, the bill was changed so that Elkins amendment would apply only to railroads and not to common carriers.34 Senator "Pitchfork Ben” Tillman of South Carolina, the manager of the Hepburn bill, refused to sign the report of the second conference committee,35 Senator Tillman commented, “It simply means in plain English that the Standard Oil Company has got in its work. . . . We released the Standard Oil people entirely from the control of the provision which divorces the producers of commodities from the transportation of commodities.”*36 Other "Senators alleged that the Standard Oil Company used devious political devices in order to get pipelines exempted from the commodities clause.” 37 A third conference ultimately was held in order to reach agreement on all portions of the bill.38 The President signed the bill on June 29, 1906.39 Thus President Roosevelt won a substantial victory and with the Hepburn Act; 40 the rates of both railroads and pipelines became subject to the maximum rate regulation of the ICC, but only after complaint.
The theory behind making pipelines common carriers in the Hepburn Act was that if pipelines could be used by all on payment of reasonable charges (cost plus a fair profit for risk) no monopolistic advantage would accure to the owner. Thus the benefits of pipeline transportation would be available to all shippers. *1
C. Limited Nature of ICC Authority Over Oil Pipelines As a result of the Hepburn Act, section 1(1) of the Interstate Commerce Act (ICA) provides:
The provisions of this chapter shall apply to common carriers engaged in
(b) The transportation of oil or other commodity, except water and except natural or artificial gas, by pipelines, or
partly by pipeline and partly by railroad or by water. It is the duty of every common carrier pipeline subject to ICC regulation to provide and furnish transportation upon reasonable request and to establish reasonable through routes with other carriers as well as just and reasonable rates, fares, charges and classifications for through transportation. Moreover, provision must be made for
38 Johnson at 28-29. 84 Johnson at 29. 35 Id. at 29. 38 Black at 511. 37 Prewitt at 201, n. 9. as id. 39 Johnson at 32. 40 34 Stat. 584 (1906); 49 U.S.C. section 1. 41 Harmon at 115.