Page images

ficult to comprehend. First, the lines had been originally constructed to serve the former Standard companies and thus fitted in well economically with their individual overall operations. Second, as we shall see, effective implementation of the regulation required by the Hepburn amendment to the Interstate Commerce Act to force the lines to operate in fact as common carriers was not forthcoming. Hence the strategic reasons which occasioned Standard's original desire to control the network were also still present. The only difference in the years immediately following 1911 was that there were several large firms instead of a single giant.91

E. Pipeline Regulation Since 1934 ICC efforts at regulation of oil pipelines really do not begin until 1934. Earlier efforts and failures have been described in an earlier section. But in 1934, the ICC on its own motion, after receiving a series of complaints, instituted a proceeding that was to result in some changes in the regulation of oil pipelines.

In 1933–34, the ICC received numerous complaints from refiners located near producing fields that the rate reductions of various oil pipelines emanating from the Mid-Continent to both the Midwest and the Gulf Coast were unreasonable and should be suspended. The field refiners argued that their ability to compete with the refiners located in population centers would be seriously affected and therefore the rates should be suspended and investigated.92 In June 1934, the ICC on its own motion, began its investigation of Reduced Pipe Line Rates and Gathering Charges in dkt. 26570.

After a rather desultory hearing that engendered little interest from the industry,93 Examiner J. Paul Kelley issued a proposed report in April 1936. He proposed that minimum tenders in excess of 10,000 barrels should be held to be unreasonable; that more information was needed to update the responses for the 1934–35 period; and he questioned why pipeline rates should not be found to be unreasonable to the extent that they may exceed 65 percent of the rates in effect on December 31, 1933.94

Another hearing was held in November 1938 regarding the additional information obtained as a result of Examiner Kelley's request. Examiner Kelley issued another proposed report in February 1940 and in this report he changed his approach entirely. He accepted the notion that pipelines were plant facilities and he found no basis for the ICC to conclude that the rates were unreasonable or that the rules and regulations were unlawful or discriminatory.95

The ICC issued its preliminary order on December 23, 1940.96 The Commission disagreed with the Examiner's second set of conclusions. It found that for crude pipelines, a 10,000 minimum tender requirement was reasonable and anything more than that was unreasonable and unlawful.97 It also found that an 8 percent annual return on

1 Harmon at 117–118, footnotes omitted.
02 Johnson at 242.
88 Id. at 243-44.

Id. at 244. 25 Id. at 247-48. pang Reduced Pipe Line Rates and Gathering Charge8, 243 ICC 115 (1940). 97 Id. at 136-37.

ICC's 1934 valuation was a suitable yardstick for crude pipelines and it gave the carriers 60 days to show cause why their interstate rates should not be reduced to produce an 8 percent maximum return on valuation.98

The ICC viewed an 8 percent return as adequate in view of the past high returns on the pipelines; dividends between 1929 and 1938 returned to the owners their entire original investment. These profits nullified their argument that a high return was necessary to compensate the pipeline owners for their high risks.

The Commission's rate ruling applied to each pipeline company and not to each pipeline within each company. Thus the 8 percent yardstick was a blanket approach, rather than an individual approach. The Commission declined to regulate the rates en masse as a class, that is applying the yardstick across the board as it had done with railroads, since the Commission recognized that “pipe lines are less truly competitive with each other than is the case with any of the other agencies of transport subject to our jurisdiction." 99 Thus the Commission's view was predicated upon the assumption that pipelines are monopolies in their respective areas and that pipelines have all the earmarks of a public utility. Thus the Commission contended that there is little competition among the carriers and what there is comes from agencies outside the field of common carrier pipelines.100

As a result of this proceeding, pipeline rates were lowered and minimum tender requirements were reduced. It marked the first time the ICC attempted to regulate the practices of the pipelines subject to its jurisdiction

In 1938, a group of independent refiners located in the Mid-Continent banded together to form the Petroleum Rail Shippers' Association. "They complained to the ICC that rail rates were too high and that pipelines rates equalled these rail rates. They were finding it impossible to compete in Midwest product markets. They petitioned the ICC for a reduction in both rail and product pipeline rates.101 The ICC responded by conducting hearings and addressing their complaints in its order of 1941.10

The ICC primarily addressed the shippers complaints by lowering rail rates, but not so low they they would equal the true transportation cost of an owner shipping through its own pipeline. Although this gave some relief to the independents, they were still at a competitive disadvantage.

The Commission also addressed the problem of petroleum product pipelines, primarily the Great Lakes Pipe Line and Phillips Pipe Line. It found that the pipelines' practice of equating pipeline rates to rail rates was unreasonable and ordered that the pipelines lower their rates so that they would earn a maximum of 10 percent return on ICC valuation.103 Also, they ordered that the pipelines should require no more than a 25,000 barrel minimum tender on direct movements and a lower minimum for delayed movements.104 Thus product pipeline rates came under the same type of yardstick regulation applied to crude oil pipelines a year earlier,

89 Id. at 142-44. 99 Id. at 144. 100 Whitesel at 359-60 ; Preroitt at 211. 101 Johnson at 263-267. 102 Petroleum Rail Shippers' A881. V. Alton & Southern R.R., 243 ICC 589 (1941), 103 Id. at 662. 104 Id. at 657.

Yet one contemporary writer found this case not to be of much help to independent refiners:

The action of the Commission in this case in lowering the rates of the railroads and the pipelines cannot be considered a solution of the problem of competing with the integrated oil companies that confronted the independent companies. The maximum rates for rail transportation to the terminal points of the pipe lines were set much higher than the maximum rates for pipe line transportation to the same points. Many of the independents were located several hundred miles from the pipe lines and could not readily make connections with them. Also, where they could reach the pipe lines of the integrated companies, the independent shippers had the expense of erecting storage tanks at both the point of origin and point of destination. The pipe line rates allowed were still high enough to allow the integrated company a considerable advantage over an independent shipper who might use the line, since they permitted the integrated company to employ its capital at the favorable return of ten percent of investment after all operating costs were covered. There was still the difficulty

to the small shipper of meeting a minimum tender requirement.105 In Minnelusa Oil Corp. v. Continental Pipe Line Company 106 the ICC dealt with a complaint by shippers over crude lines that the rates were unreasonable. The Commission rejected the argument that crude lines in the west were higher risk lines and should be permitted a maximum of 10 percent return on valuation and reaffirmed the 8 percent standard for crude pipelines.107

As a result of the Redriced Pipe Line Rates & Gathering Charges order, the Commission held further proceedings to determine whether the pipelines could show cause regarding the minimum tenders and the rates proposed in the Commission's order. The hearing commenced shortly after the outbreak of World War II. The exigencies of the War and the inability of the pipeline companies to supply the requested information moved the Commission to adjourn the hearing. It was not until 1948 that Commission took another look at the pipeline industry and found that the pipelines of the original proceeding had substantially complied with the ICC's 1940 order. Thus it gave the industry a clean bill of health and terminated the proceeding. 108

The ICC, in the meantime, was earnestly proceeding with its valuation efforts and as a result brought several cases to clarify its jurisdiction. In 1936, it ordered the Valvoline Oil Company to file valuation data. The company objected to the ICC's assertion of jurisdiction arguing that the Uncle Sam exception carved out in Pipe Lines cases of 1914 applied to its operation.100 Valvoline argued that it transported its own oil through its own pipeline to its own refiner; however, the

106 Whitearl at 367.
106 258 ICC 41 (1944).
107 T. nt 48: see penerallr. Johnson at 395-97 : Whitesel at 367-69.

108 Reduced Pipe Line Rates & Gathering Charges, 272 ICC 375 (1948); see also Johnson at 397-99.

10+ The Uncle Sam exception applied to a nineline operation gathering oil produced from wells owned by Uncle Sam Oil Company throngh a pipeline owned by the same company to a refinery owned by the same company, even though the oil crossed state lines.

major distinction was that it purchased the oil at the wellhead from independent producers. The ICC ruled that the purchase of oil was sufficient to distinguish the Valvoline situation from the Uncle Sam situation and ruled that the Hepburn Act be applied to the Valvoline Oil Company.110 The Supreme Court affirmed the decision on the same grounds asserted by the ICC.111

The status of ICC jurisdiction over product pipelines had not been clarified, although it was assumed that the ICC had full jurisdiction over such lines. In the early forties it chose to test its jurisdiction in conjunction with its valuation proceedings. In 1941, the ICC ordered the Champlin Refining Co. to file information with the Commission, not including tariffs, in order for its valuation work to proceed. The gasoline carried in Champlin's pipeline came only from its refinery, was carried across state lines only to its terminals. Rates were determined by reference to through rail rates. The ICC ruled that Champlin was required to file the information citing Champlin'e pricine formula for the carriage of its gasoline 112 Champlin disputed the ICC's decision and appealed to the Supreme Court.

The Court, in a five to four decision, held the Uncle Sam exception inapplicable, indicating that the exclusive movement of Champlin's own product was not controlling because the oil is not being moved for Champlin's own use." 113 Justice Jackson's decision gave a broad interpretation to the Hepburn Act:

The controlling fact under the statute is transporting commodities from state to state by pipeline. Admittedly, Champlin is not a common carrier in the sense of common-law carrier for hire. However, the Act does not stop at this but goes on to say that its use of the term 'common carrier' is to include all pipeline

companies. 114 Champlin complied with the ICC's order.

Champlin I merely clarified the ICC's jurisdiction over product pipelines regarding its request for information. It did not clarify its jurisdiction to regulate all pipelines. In 1948, the ICC ordered the same Champlin pipeline to file annual reports, institute a uniform system of accounts pursuant to section 20 and to publish and file rates for the transportation of petroleum products, pursuant to section 6 of the Interstate Commerce Act. The ICC rejected all of Champlin's arguments invoking the Uncle Sam exception and ordered Champlin to comply with the ICC's assertion of jurisdiction. 115

Champlin appealed the decision and the majority declared that the ICC had the power to order Champlin to file annual reports and institute a uniform system of accounts pursuant to section 20, but that the ICC did not have the power in this case to order Champlin to publish and file tariffs pursuant to section 6.116 The Court made a dis


119 Petition of the Valvoline Oil Co. in the Mater of the Valuation of It& Pipe Line, 48 ICC Val. Rept. 10 (1938).

111 Valvoline Oil Co. v. United States, 308 U.S. 141 (1939).

112 Champlin Refining Co., Valuation of Pine Line, 49 ICC Val. Rept. 463 (1942) ; Champlin Refining Co.. Valuation of Pipe Line, 49 ICC Val. Rep. 542 (1944).

Champlin Refining Co. v. United States, 329 U.S. 29, 34 (1946). 114 Td. at 33. 115 Champlin Refining Company Accounts and Reports, 274 ICC 409 (1949).

118 ['nited States v. Champlin Refining Co., 341 U.S. 290 (1951): the judgment of the Court was joined in by six Justices, with only four subscribing to the plurality opinion.

tinction between those provisions allowing the Commission to gather information (section 19(a): valuation data; and section 20: reports and accounting methods) from regulatory provisions (section 6: filing rates and tariffs).

Champlin II raises serious questions about the ICC's jurisdiction to enforce the Interstate Commerce Act. The majority opinion, written by Justice Clark, stated, "There is little doubt, from the legislative history, that the (Hepburn] Act was passed to eliminate the competitive advantage which existing or future integrated companies might possess from exclusive ownership of a pipeline.

." 117 Thus he affirmed. "we may ... assume ... that ... the term 'all pipelines' was meant to impose full regulation on integrated producer pipelines who exploit a competitive advantage simply by refusing to deal with independent producers."

.” 118 But Justice Clark concluded that Congress did not intend to force private carrier pipelines to operate as common carriers for hire, based on the premise that to require otherwise would “make common-carriers for hire out of private pipe lines whose services were unused, unsought after, and unneeded by independent producers, and whose presence fosters competition in markets heavily blanketed by large 'majors.' "119

Thus the plurality opinion, which leaves ICC jurisdiction in a rather confused state, indicated that all interstate pipeline companies are within the jurisdiction of the ICC; the Commission can apply its information provisions (sections 19 and 20) to all such pipelines; but that regulation provisions (such as section 6) cannot be applied to private carriers, but can be applied to public carriers. It was up to the pipelines to ferret out their status in this somewhat confused morass, since the ICC did not attempt to clarify the Supreme Court rulings any further.

The limited nature of ICC intervention into pipeline matters has been commented upon repeatedly. As noted above in 1957, ICC Chairman Owen Clark, testifying before Congress on the pipeline consent decree acknowledged the limited nature of the ICC's pipeline regulation, limiting its concern only with rate questions and to only one operating practice, the minimum tender requirement.120 The House Monopoly Subcommittee found that up until 1957, the ICC had formally considered only six rate cases. Thus even Clark's statement about the focus of ICC's concerns must be evaluated in light of actual ICC activity. Moreover, the consent decree hearings brought out that from the close of the Reduced Pipeline case in 1948 until 1957, the ICC received no complaints at all,121 ascribing this “to a large extent tothe fact that, normally, the larger oil companies are in substance and effect both shippers and beneficial owners of common-carrier lines.” 122

In the 1961-69 period there were 12 petitions and protests regarding new pipeline tariffs considered by the ICC's Suspension Board, with

117 Id. at 397.
118 11. at 298.
119 Id. at 298.
120 ('onsent Decree report at 246 : Consent Decree hearings, 456.

121 Hearings, Consent Decree Program of the Department of J11&tice, Before the Antitrust Subcomm. (Subcomm. No. 5) of the House Comm. on the Judiciary. 85th Cong.. 1st Sess. Ser. No. 9, Oil Pipelines Part I, 1957, at 484 (Hereinafter cited as "Consent Decreehearing'').

122 ICC statement, in Consent Decree report at 247.

« PreviousContinue »