Hearings, Reports and Prints of the Senate Committee on the Judiciary

13 docketed cases against pipelines concerning all matters in this time period. Since 1969 until September 30, 1974, 15 more cases protesting tariffs of pipelines were filed with the ICC's Suspension Board; two protests resulted in full suspension and two in partial suspension.123 A later tabulation shows 18 cases through January 1975.124 A closer examination of these cases reveals that only two cases involved pipelines owned by majors for the shipment of oil; all the other cases involved either the shipment of oil on independent pipelines or the shipment of other products (propane, liquid fertilizer, butane or anhydrous ammonia).125 Thus as exChairman Stafford concluded in February 1973, "Historically, our files reveal very few complaints with respect to alleged discriminatory rates and practices of pipelines.126

With a dearth of complaints and little initiative, the ICC has done little to consider the problems of pipelines. It has rectified some of the more egregious practices of the pipeline companies, but it has done little to supervise the day-to-day operations of the pipelines, nor rectify those practices that keep nonowners from utilizing pipelines to a greater degree.127

F. State Regulation

State regulation, the first attempt at control of pipelines, has developed into various forms of regulatory efforts. Regulation may consist of common carrier requirements for intrastate pipelines, or common purchaser requirements often tied to conservation schemes. Each of these will be discussed briefly.

The earliest state regulation for pipelines dates back to the late 1870's and 1880's and focuses on the struggle between the pipelines and the railroads. The major obstacle encountered by pipeline owners in those days was the inability to acquire rights-of-way to build the pipelines. The pipelines struggled to acquire their right of eminent domain in order to acquire rights of way across railroad lands. In 1878, New York passed an eminent domain bill tying a common carrier requirement to any pipeling exercising that right.128 A "freepipe line law" passed in Pennsylvania, the most important producing state at that time, in 1883, granting the right of eminent domain to pipelines and also tying the common carrier requirement to the pipeline.129 By 1906, ten states had conferred the right of eminent domain in pipelines and most of these states also imposed some form of common carrier requirement.130

The early oil producers regarded eminent domain legislation as a major step in solving their oil transportation problems and a significant step in resisting the power of Standard Oil.131 As a consequence they welcomed the legislation as well as the common carrier require

123 Howry, Simon, Baker & Murchison, "Petroleum Pipelines in the United States, Built and Owned by Oil Companies, Promote Competition and Are in the Public Interest," Sept. 30, 1974 at 104; Consumer Energy Act at 594.

124 Ind. Reorg., Part 9 at 631.

1 Id. Part 9 at 654.

120 Consumer Energy Act at 621-23 and Ind. Reorg., Part 9 at 631; see also, Market Performance at 896.

17 The latest ICC proceedings will be treated in Recent Directions, infra.

128 Johnson at 21.

129 Id.

130 Id., the ten states were. California. Colorado, Indiana, Kentucky, New York, Ohio, Pennsylvania. Texas, West Virginia and Wyoming; Id. n. 1.

131 Id. ah 20.

ments attached to it. But it is clear that state common carrier requirements up to 1906 had little impact generally on outside use of pipelines and specifically had little impact on the use of Standard affiliated pipelines by outside shippers."

132

By 1931, 21 states had laws relating to common carrier responsibilities of crude or product pipelines or both.138 State courts had found several methods for justifying the imposition of common carrier requirements on pipelines. The most common were voluntary dedication to public use or as a result of public grants.134 Voluntary dedication to public use meant that if a pipeline transported oil for others for hire or consideration, this would be enough for common carrier requirements to attach under state law.135 Common carrier obligations also could arise from public grants, such as the right of eminent domain; 136 the right to pass through public property; 187 and the right to do business in the state (general business legislation).138 Despite the prevalence of common carrier requirements for state pipelines, regulation of the pipelines up until 1931 was largely pro forma, with a few significant exceptions.139

A fundamental change occurred in pipeline regulation during the thirties with the introduction of state conservation laws. The chief aim of early conservation programs was the prevention of "physical waste." Many oil producing States enacted legislation designed to curb the most obvious wasteful production practices; while State conservation regulatory bodies gradually developed the concept of "maximum efficient rate" (MER): the maximum sustainable rate at which oil can be withdrawn from a reservoir without detriment to ultimate recovery.140 The next step in the development of conservation schemes was the prevention of "economic waste" through the implementation of prorationing schemes to limit the amount of production from producing fields. Such market demand prorationing laws limited production to the anticipated demand for the State's oil at prevailing prices. But the success of individual State efforts, and each of the major producing states-Texas, Louisiana and Oklahoma-had upon market demand prorationing laws, was limited by each State's inability to control the flow of oil from States outside of the market demand system and from foreign countries. The market demand States also lacked the ability to enforce local production rules where the oil produced in violation of the law could be moved out of the State before the violation was uncovered.141

The State prorationing system never would have been effective were it not for the cooperation and enforcement of the Federal Government. For many years the Bureau of Mines calculated total industry demand for each State. The Bureau of Mines forecasts were used by the States to create total production quotas. In addition, these quotas were based upon the nominations made by the purchasing companies within the

states, usually the major oil companies. Since the allocations for production were based on these figures, the major oil companies were able to maintain a substantial degree of control over the production in each state.142 The National Industrial Recovery Act created a mechanism for the control of "hot oil," that is, oil produced in excess of market demand prorationing. After the NIRA's demise in 1935, legislation was passed to control the flow of hot oil.143

Along with this overall production prorationing, the States implemented common purchaser laws that required the purchasers of crude oil to purchase oil on a nondiscriminary basis, i.e., from wells in their vicinity according to the MER of each well or according to market demand as determined by the State regulatory agency. The ratable purchases were to be accomplished without favoring the purchaser's own production.144 In theory the impact upon pipelines should have been substantial, since pipelines owned by the major oil companies who were also the crude oil purchasers had to transport the oil purchased by the oil company's purchasing affiliate.145 But all this really meant, however, was that producers had a market for their oil at the wellhead, since state common carrier status did not necessarily open pipelines to outside use because pipelines had found that high rates and restrictive regulations could be used to keep unwanted business off their lines.146 Moreover, purchasers found various ways to get around the common purchaser statutes. One mechanism was to avoid being the initial purchaser. Thus if an oil company did not extend its pipelines to wells of independents, the independent producer was forced to sell to a trucking company which became the initial purchaser. In this way, the oil company purchaser uses the trucker as a buffer and purchases only what it wants from the trucker even if it is less than market demand allocation.147 AElso, the oil company purchaser simply could refuse to accept the proffered oil and take less than the amount the independent producer was permitted to produce under State prorationing allocations. The later technique, usually called purchaser prorationing, was challenged by State authorities, who were successful in their efforts. 148 But in the meantime, until the administrative process ran its course, independent producers could be restricted in their ability to produce. Although State regulation is intended to assist the independent producer and shipper, the effectiveness of such regulation is open to doubt. With little or no rate regulation, and little or no enforcement or existing laws, intrastate pipelines appear to be free to operate as they see fit with little active oversight by state regulatory agencies.

142 PICA at 78.

143 Act of February 22, 1935: 49 Stat. 30; 15 U.S.C. section 715-715m; commonly known as the Connolly Hot Oil Act; PICA at 77.

144 Johnson at 102, 3d AG report at 69.

145 Johnson at 102; Beard at 127.

148 Johnson at 103.

147 3d AG report at 69.

148 Id. at 70.

VI. ANTITRUST AGENCY EFFORTS TO DEAL WITH PIPELINES

The previous sections reviewed the unsuccessful attempts of the ICC and state agencies to control all pipelines. The Department of Justice has also attempted to curb some abuses. However, as this section would indicate, Justice Department attempts have been met with frustration. The history of the last 35 years has indicated that a case-by-case approach has achieved absolutely nothing concerning an antitrust impact upon pipelines. This section will indicate these efforts.

A. Mother Hubbard case

In April 1938, President Roosevelt asked Congress to authorize an investigation into the problem of monopoly in the economy. Congress quickly passed a resolution providing for the Temporary National Economic Committee (TNEC) to study monopoly and the concentration economic power. These hearings provided a forum for the Department of Justice to gain detailed knowledge of the oil industry.2 In 1939, Assistant Attorney General for Antitrust, Thurman Arnold, indicated that the Division was planning an antitrust action against the entire oil industry; however, his plans were complicated by the outbreak of World War II.3

The Department had prepared a draft complaint against the 22 major oil companies and 379 of their subsidiaries and affiliates. The draft was a sweeping indictment of the oil industry, effectively charging the 22 companies and their trade organization, the American Petroleum Institute, with domination of the entire oil industry which was attributable to their ownership or control of industry activities from the production of crude oil to its sale to the consumer.

By the time the draft complaint had been prepared, war had broken out in Europe and the President had appointed a Council of National Defense. The draft complaint was referred to this organization and specifically to the Oil Industry Advisory Commission, comprised of 11 members, nine of whom were affiliated with Standard Oil of New Jersey or Shell Oil Company, both of which were under attack in the proposed suit. The draft complaint requested various forms of injunctive relief, but most importantly it requested divorcement of marketing and transportation facilities.

The Oil Industry Advisory Commission recommended that the divorcement proposals be deleted, since they would upset the oil industry efforts to cope with the impending national emergency. These

Books