later to obtain access to those pipelines essential to keeping your refinery running.22

He concludes that pipeline divorcement is the proper solution to the inequities created by shipper ownership of petroleum pipelines:

... I am convinced that divestiture by all integrated companies of control of common carrier transportation facilities is a practical remedy, well focused on an evil which severely limits the ability of the independent sector of the industry to compete. I say that although Apco owns such facilities.23

To the extent that outside shippers do succeed in obtaining space on the majors pipelines, they do so at the price of subsidizing their competitors, the integrated owners of the pipelines. To the extent that rate regulation is ineffective owners of pipelines have real cost advantages in using their pipelines due to their ownership. Regulation requires that pipelines publish tariffs and collect the tariff from all shippers, including owners. But as long as those tariffs are above competitive rates, the owners will realize some advantage over nonowner shippers to the extent of the difference between the tariff and the actual cost (including a competitive rate of return on owners equity) to ship over the pipeline. The difference between the cost and the tariff is recouped through the payment of a dividend or some other transaction that shifts the differential to the owner.

The pipeline owner realizes a double advantage when nonowners use the pipeline. Besides the direct advantage of effectively shipping at cost while nonowners must ship at the tariff, the owner receives a profit on the outside shipments. The nonowner is contributing to the lower cost reaped by the owner and, in effect, contributing to its own competitive disadvantage. The difference between tariff and cost can be substantial and has recently been estimated to be 20 to 30 percent.24 In 1941 the Justice Department entered into a consent decree covering 78 oil companies whose common carrier pipelines were engaged in crude oil or petroleum product interstate transportation, where the owner used the line for transportation and was entitled to share in its net earnings.25 The consent decree imposed a 7 percent ceiling on annual dividends paid by a pipeline to its shipper owners. The decree was intended to limit the dividends received by these companies from their pipeline operations on the ground that excessive dividends constituted illegal refunds or rebates in violation of the Elkins Act. The Department's objective was to force down tariff rates to a point that would yield a reasonable return to the owners. However, the consent decree uses ICC valuation, including debt capital, rather than equity investment alone, as a basis for computing permissible dividends. Major pipeline projects since the consent decree have been very highly leveraged, typically as much as 90 percent. Thus, while pipeline owners cannot exceed a 7 percent rate of return on valuation, they

22 Seiss testimony at 6234-35.

23 Id. at 6235.

24 Staff of Subcomm. on Special Small Business Problems. Select House Comm. on Small Business, Anticompetitive Impact of Oil Company Ownership of Petroleum Products Pipelines, H.R. Rept. 92-1617, 92d Cong., 2d sess., 1972, at 13. [Hereinafter cited as "Small Business Report."]

25 United States v. The Atlantic Refining Company, Civil No. 14060 (D.D.C., Dec. 23,

may earn as much as 70 percent on equity.26 In addition, of course, there is a tax benefit to borrowing, since bond interest is a deductible. expense, while stock dividends are not. In 1959, the Supreme Court ruled that the language of the consent decree clearly requires that dividend payments be limited only on the basis of pipeline valuation, and not on the owner's equity contribution.27 The consent decree has thus been largely useless as a limitation on the pipeline profits of major oil companies.

Domination of petroleum pipelines has enabled major oil companies largely to stifle the competitive vigor of independent refiners and marketers. Control of crude oil pipelines has been the chief weapon of the majors for protecting their position in the crude oil market, enabling them to expand their control of the domestic crude oil supply far beyond the amount they produce themselves. Crude oil pipeline domination has afforded the major oil companies opportunities for leverage, as well as tremendous bargaining power, in the purchase of crude oil from independent producers. Control over pipelines yields the power of life and death over independent producers. Control over pipelines gives major oil companies the power to discriminate against independent producers and deprive them of a market for oil. It also gives them the power to discriminate against independent refiners by depriving them of access to crude. Independent refiners, dependent upon the major oil companies transportation system, cannot effectively compete with them for the purchase of crude oil, even from leases operated by independent producers.

The majors' control of product pipelines enables them to determine the disposition of a large portion of refined product and limit the competitive marketing behavior of independent refiners and marketers. Shipper-owners of the pipelines can put the independent refiner in a critical and deadly squeeze. Having taken advantage of their control of crude oil pipelines to become the dominant purchasers of crude from producers in the field, the major oil companies have substantial control over the flow and price of crude oil. Independents with limited access to crude must rely heavily on the majors for their supply of crude. Majors on the other hand also control access to marketing outlets. With the ability to set the price of crude high while maintaining stable product prices, the major integrated companes can put a severe squeeze on the independent refiner.

D. Remedies

Common carrier regulation has proven wholly inadequate in curbing the competitive inequities inherent in oil company ownership of petroleum pipelines. Pipelines designed and operated by major oil companies to serve their own needs have simply not functioned as common carriers catering to the transportation needs of the petroleum industry generally. Common carrier regulation is helpless to prevent an oil company pipeline owner from restricting pipeline capacity in order to regulate the price of crude oil or product in the markets

2 See 1975 Industrial Reorganization Act hearings, at 617 (testimony of Fred F. Steingraber, vice chairman of the board, Colonial Pipeline Company).

United States v. Atlantic Refining Co., et al., 360 U.S. 19 (1959).

served by the pipeline. The natural monopoly characteristics of pipelines and their absolute cost advantages relative to other modes of petroleum transportation virtually immunize pipelines from competion. Oil company owners of petroleum pipelines have succeeded, despite common carrier regulation, in using their pipelines to secure anticompetitive advantages or monopoly profits at all levels of the petroleum industry.

Divestiture of pipelines from oil company ownership is long overdue as the only competent solution to this problem. Even before petroleum pipelines were made subject to common carrier regulation by passage of the Hepburn Act in 1906, the need to insulate the transportation function from competitive considerations at other industry levels was widely recognized. The original Senate Hepburn bill made petroleum pipelines, as well as railroads, subject to the commodities clause provision contained in an amendment introduced by Senator Elkins. This commodities clause prohibited common carriers from transporting commodities they own on their transportation facilities. However, the Senate bill went through a series of Senate-House conferences and vigorous oil industry protest succeeded in exempting petroleum pipelines from the commodities clause of the Elkins amendment, which remained applicable to railroads and was enacted into law with the Hepburn Act.

Several attempts were made in both the Senate and the House during the thirties to subject petroleum pipelines to the commodities clause.28 However, no action was taken on any of the bills. Application of the commodities clause to pipelines was also sought in legislation before the House Judiciary Subcommittee on Monopoly Power during the fifties 29 and was most recently endorsed by the House Small Business Committee in 1972.30

Divestiture is preferable to the commodities clause approach. Instead of creating a prohibition against carrying goods owned by the same company, divestiture directly divorces pipelines from other segments of the industry, thereby terminating the historic domination of pipelines by major integrated oil companies.

Extension of the commodities clause to common carrier pipelines would still leave independent shippers dependent upon their competitors for a service essential to their survival. Moreover, continued ownership of their own pipelines would continue the leverage major integrated oil companies command in securing preferred access to pipelines owned by other integrated oil companies. Thus, a commodities. clause approach would encourage reciprocal dealing among oil company owners of pipelines. Further, the extensive use of exchanges at both the crude oil and petroleum product levels of the industry provides a ready vehicle for circumvention of a commodities clause restriction and would frustrate effective enforcement of the prohibition. Before the Hepburn Act was a decade old, pipeline divestiture was being recommended to Congress as the only satisfactory solution to the problem of making petroleum pipelines serve as common carriers.

28 See. e.g., S. 2181, 76th Cong., 1st sess., 1939; S. 573, 75th Cong., 1st sess., 1937; S. 575, 74th Cong.. 1st sess., 1935; S. 2995, 73d Cong., 2d sess., 1934; H.R. 16695, 71st Cong., 3d sess., 1931.

29 Johnson at 422.

30 Small Business report at 33.

Oklahoma's Attorney General West testified before Congress in 1914 that divorcement of pipelines from their oil company owners was necessary to accomplish the purposes of the Hepburn Act.31 In 1917 the FTC unequivocally recommended pipeline divorcement to Congress.32 In 1927 the FTC reiterated its concerns to Congress regarding the necessity of pipeline divorcement. However, these recommendations produced no change in policy.

33

During the early thirties the pipeline divorcement issue rose to the presidential level. Secretary of the Interior Ickes called a conference in early 1933 regarding oil industry problems. A group called the Independent Petroleum Association Opposed to Monopoly issued a minority report recommending divorcement of pipelines. Secretary_Ickes sent a letter to 17 oil producing state governors under President Roosevelt's signature indicating his support for the idea of divorcement of pipelines. This presidential letter led to the introduction of five bills in Congress.34 The National Industrial Recovery Act gave the President the authority to push for better ICC regulation and, failing that, for pipeline divorcement. The NIRA was declared unconstitutional and the divorcement issue was relegated to individual efforts by various Representatives and Senators.

Various proposals for pipeline divorcement were presented before Congress from 1934 throughout the next two decades, most notably bills introduced by several Congressmen in 1945 and 1946, and by Senator Guy Gillette in 1949, 1954, and resurrected in 1956.35 Senator Gillette was supported by the findings of the Special Committee to Study Problems of American Small Business, chaired by Senator Kenneth Wherry, which conducted hearings in 1947 following complaints of a crude oil shortage. The committee found that the same evils that brought about the commodities clause of the Interstate Commerce Act for railroads were prevalent in the transportation of oil by pipeline, especially the transportation cost advantage gained through dividends or bookkeeping transactions. The Wherry Committee recommended divorcement of both crude oil and petroleum product pipelines from the ownership of oil companies. No action resulted from either Senator Gillette's bills or the recommendations of the Wherry Committee.

36

The continuing critical need for pipeline divestiture has been illustrated most recently in congressional forums during hearings conducted by the Senate Antitrust and Monopoly Subcommittee in 1974, 1975, and 1976 on the Industrial Reorganization Act 37 and the Petro

1 Hearings pursuant to H.R. 16581. A Bill to Regulate the Transportation of Oil by Means of Pipe Lines, before the House Committee on Interstate and Foreign Commerce, 63d Cong., 2d sess., 1914, at 7 (testimony of Oklahoma Attorney General West). 32 FTC, Report on the Price of Gasoline in 1915 (Washington, 1917), 164. 23 FTC, The Petroleum Industry Prices, Profits and Competition (Washington, 1927), 42. 24 H.R. 4681 (Disney, Okla.): S. 1579 (McAdoo, Calif.): H.R. 5530 (Ford, Calif.); H.R. 5044 (Maryland, Okla.); S. 1712 (Wagner, N.Y.), all in 73d Cong., 1st sess., 1933.

25 H.R. 55, 79th Cong.. 1st sess.. 1945: H.R. 6972, 79th Cong., 2d sess.. 1946; S. 571, 81st Cong., 1st sess., 1949; S. 3075, 83d Cong., 2d sess., 1954; S. 1853, 84th Cong., 1st sess., 1956.

36 Senate Special Comm. to Study Problems of American Small Business. Oil Supply and Distribution Problems, final report, S. Rept. 25, 81st Cong., 1st sess., 1949. [Hereinafter cited as "Wherry, final".]

Ind. Reorg., parts 8-9.

28-444-78

leum Industry Competition Act,38 both of which would require that pipelines be divorced from oil company ownership. The report issued by the Senate Judiciary Committee following the Petroleum Industry Competition Act hearings concluded that

.. 70 years of experience have proven Senator Henry Cabot Lodge, Sr. was right when he argued that pipelines should be treated like other common carriers and that shipper ownership of the pipelines should be prohibited. There is an inherent conflict of interest between a company as owner of a common carrier pipeline and the same company as a shipper on the pipeline. Decades of experience with the Hepburn Act have demonstrated that the conflict cannot be cured by regulation.39

No action has been taken on either of these legislative proposals. The litigation approach has in the past shown little more promise for success in resolving the pipeline problem than has regulation. Experience to date has shown that efforts by Federal antitrust agencies to attack competitive problems in the petroleum industry on an industrywide basis have been nothing more than exercises in frustration. In 1940 the Department of Justice brought suit against 22 major oil companies and their 379 affiliates, charging violations of the Sherman Act and the Clayton Act, in what has been commonly referred to as the "Mother Hubbard" case. 10 The companies were charged with fixing crude prices and controlling petroleum transportation, distribution, and sales. The proposed remedy was an injunction against continued actions in violation of the antitrust acts. The complaint had specific charges against the companies' practices regarding transportation. In addition to charging violations of the Interstate Commerce Act and the Elkins Act, the complaint was directed at the removal of restraints that violated the antitrust laws on the theory that control by the majors of the common carrier pipelines was a fundamental element of the major companies' efforts to monopolize the oil industry." The complaint specifically alleged that the companies used their control to compel independent producers to sell at the well; their rates were oppressive and onerous; their minimum tenders were unreasonably high; and they failed to provide common carrier terminals for use by independents.42 Finally, it charged that the companies were receiving refunds and rebates of revenues from pipeline operations in violation of the Interstate Commerce Act and the Elkins Act.43

Based on its previous experience with the limited impact of a multitude of piecemeal prosecutions, the Justice Department believed that a comprehensive case of this nature would be a less costly and more conclusive approach to correcting the anticompetitive structure and behavior of the petroleum industry. However, the practical difficulties

as Hearings on S. 2387. Vertical Integration: The Petroleum Industry, before the Subcomm. on Antitrust and Monopoly of the Senate Committee on the Judiciary, 94th Cong., 1st sess., Parts 1-3, Washington, 1975-76. [Hereinafter cited as "PICA" hearings.] 30 PICA at 147-49.

40 United States v. American Petroleum Institute, et al., Civ. No. 8524 (D.D.C.), filed Sept. 30, 1940.

41 Antitrust Subcomm. (subcomm. 5) of the House Comm. of the Judiciary, Report on the Consent Decree Program of the Department of Justice, 86th Cong., 1st sess., 1959, at 141. [Hereinafter cited as "Consent Decree" report.]

42 Id.