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The decree also has many ambiguities and the major interpretation problems stemmed from the inability of the companies subject to the decree to determine the base upon which to pay dividends.43 More importantly, the decree was ambiguous as to whether the limitation applied only to the companies' investment in the pipeline or some other basis. At the time of the entry of the decree, it appeared that the Department of Justice viewed the decree as applying a 7 percent limitation on the capital stock investment in the pipeline companies.44 The companies, too, appeared to accept this same interpretation, so that dividends were to be compensation for the shipper-owners' investment in the pipeline.45 But the decree itself uses the term valuation, not investment, and as a result it became a source of controversy.
This was especially true after Great Lakes Pipe Line was able to obtain the endorsement of a change in its financing after the entry of the decree. Great Lakes was able to refinance the line through the substitution of debt for equity. The consent decree was amended to permit this refinancing, but in doing so it permitted the inclusion of the debt financed property in the base for calculating the 7 percent dividend limitation.46
This change in the way pipelines are financed and its impact upon the consent decree rendered the consent decree useless from the standpoint of its original purpose.*
Facilities financed by borrowing could apparently be added to the valuation base on which permissible dividends could be paid. Interest on the resulting debt could be deducted from transportation revenues as an expense, and the debt retired through depre
ciation allowances.48 Thus the valuation process permitted interest to be treated as an expense, while at the same time the consent decree permitted a return of 7 percent on the entire valuation. The result was an astronomical return on the equity contributed by the owner. As the equity portion grew smaller and eventually to the 10 percent share common in present day pipeline financing, the leverage effect increased the return on the investment. This situation was permitted in the Great Lakes case and thereafter it went unchallenged by the Department until congressional pressure forced a suit to determine whether this was a permissible interpretation.19
The Department of Justice's efforts to enforce its decree was woeful. It took no judicial action until October 1957. During the interim the Department gave a total of 31 official interpretations of the decree 50 and conducted three F.B.I. investigations of the oil pipeline industry.51 Moreover, the Department uncovered numerous violations of the decree and recommendations were forthcoming for prosecution of these violations.52 Despite these known violations, no action was taken until 1957.
43 Johnson at 472. 4 Consent Decree report at 175. 48 PICA at 109; Consent Decree report at 176-78. 47 Consent Decree report at 176. 18 Johnson at 338. 19 See infra. 50 consent Decree report at 180. 51 Id. at 181. 52 Consent Decree report at 181-186.
D. Consent Decree Enforcement On September 19, 1957, the Celler committee announced that it would hold oversight hearings regarding the Department of Justice's enforcement of its consent decrees, with the focus on the pipeline decree and the A.T. & T. decree. Barely a month later, on October 11, 1957, the Department filed several motions in the District Court for the District of Columbia to interpret the pipeline consent decree.
Four motions were filed; however, the most important motion was against the Arapahoe Pipe Line Co. seeking an interpretation of what the "shipper-owner share” of paragraph III of the decree means: whether it referred to only that portion of the investment attributable to the contribution by the shipper-owner or to that portion plus all debt contributions from other sources. The other motions dealt with less important issues of limited consequence."
In 1959 the Supreme Court ruled on the issue. The Court decided that the language of the decree was clear and did not permit the reading of current valuation to mean only the current investment. Moreover, the Court harshly criticized the Department for taking 16 years before making its formal charge.54
As a result of this ruling, the Department of Justice concluded that the limited potential in the decree in the first place was completely vitiated. Assistant Attorney General Lee Loevinger concluded in 1961 that the decree had not put a ceiling on earnings. High rates could be maintained as long as earnings were not paid out; 55 rates could be balanced within the pipeline to maintain high rates in one segment offset by low rates in other segments. 56 And "Under the Supreme Court decision, the decree no longer has eren a limited effectiveness in the case where the shipper-owner investment is a small part of the total
E. Segment Suits With the failure of the Mother Ilubbard case, the Department retreated to a strategy of filing a series of cases in an effort to deal with the various allegations in the Mother Hubbard case. The bulk of these cases dealt with the relationships between the major refiners and the franchised operators of their service stations, and in particular exclusive dealing arrangements."
The most important of the segment cases was United States v. Standard Oil of California,59 that charged Standard Oil of California (Socal) and six other major companies operating on the West Coast with a conspiracy to monopolize and suppress competition at all levels of operation. The relief requested was both injunctive and divorcement of marketing facilities.
53 Consent Decree report at 190-193.
58 U.S. v. Standard Oil Company of California and Standard Stations, Inc., 337 U.S. 293 (1949); Richfield Oil Co. v. U.S., 312. U.S. 922 (1952); rehearing denied 343 U.S. 958 (1952) | U.S. v. Sun Oil Company, Civil Action No. 10493, (E.D. Pa., Jan. 12, 1950), See also Consent Decree report at 147, n. 91 detailing each of these cases.
69 Civil Action No. 11584-C, S.D. Cal., May 12, 1950 ; commonly called West Coast case.
At a pretrial hearing the judge announced that he would not order divestiture even if the Government proved a violation of the Sherman Act. As a result, the Government began consent negotiations with the defendants. In June 1959 an agreement was reached with all of the defendants except Texaco, Inc. The consent decree, which was to run for 15 years, prohibited a variety of illegal behavior, but it did not create a common carrier pipeline system as the original suit proposed, ror, of course, did it divorce marketing operations. The case against Texaco was dropped.co This result has been soundly criticized. One critic has stated :
As for Justice, the track record of that Department in California oil matters is something less than overwhelming. Their West Coast Oil case involving many of the same companies [as in the current FTC Exxon case] was begun in the late forties, hung on without active trial until 1959, when it was settled-still without trial-by a wholly unsatisfactory consent decree, leaving the industry structure just as it was before, and additionally, sealing the records so that any of the pretrial work that was done in that matter is not available to the general public to ascertain how that structure really functions.61
F. Antitrust Investigations Beginning in 1956, the Antitrust Division was given the responsibility to prepare the Attorney General's report regarding the activities of the Interstate Oil Compact Commission. This provided an opportunity for Antitrust Division staff to examine the functioning of various parts of the oil industry with some emphasis on transportation and especially pipeline operations. As a consequence, of the early reports, the 2d, 3rd and 4th 62 contain chapters on pipeline transportation. From this base of information, the Division began greater surveillance of the pipeline segment of the industry.
1. COLONIAL PIPELINE
In 1963, the Division had its first opportunity to investigate a pipeline joint venture. The Federal Trade Commission had opened an investigation into the recently announced Colonial Pipeline, but due to an infirmity in its statute and its inability to obtain information from the companies involved, the investigation was transferred to the Department of Justice in 1963.93 From there on, the story of Colonial is one of frustration and inaction. In 1975, Assistant Attorney General Thomas E. Kauper laid out the tortured history of this investigation:
The Federal Trade Commission began an investigation of the Colonial Pipeline in early 1962. Almost a year later, the FTC
4 PICA at 107. €1 Ind. Reorg., Part 9 at 8. (Testimony of Kenneth Cory, Controller, State of California.)
62 2d AG report; 3d_AG report; Fourth Report of the Attorney General Pursuant to section 2 of the Joint Resolution of July 28, 1955 consenting to an Interstate Compact to Conserve Oil & Gas, Sept. 1, 1959.
63 Small Business report at 9; Small Business hearings at 204 ; Oil Price Decontrol at
transferred the investigation to the Department of Justice, after concluding that questions of monopoly were involved and could be better handled by the Department. The Department's investigation began in January 1963, and a Civil Investigative Demand was served upon Colonial.
In October 1964, the staff sent forward its recommendation for a civil suit against Colonial and its nine owners. This recommendation was based on alleged violations of Section 7 of the Clayton Act and Sections 1 and 2 of the Sherman Act. The elements relied on to support a Section 1 charge would also have constituted the elements of a Section 7 charge, based upon joint venture analysis.
The initial recommendation would have sought divestiture as the primary form of relief coupled with injunctions designed to curb continued unlawful conduct.
Shortly thereafter, the Oflice of Operations, which reviews all such staff recommendations, reviewed the staff recommendation. That office recommended that the Section 2 count be dropped, but did recommend that suit be brought against Colonial and its owners based on the Section 1 and Section 7 theories.
Assistant Attorney General William Orrick, Jr., forwarded the proposed suit to the Attorney General for approval in March, 1965.64 The Attorney General returned the papers to the Antitrust Division upon the appointment of a new Assistant Attorney General for Antitrust, Donald F. Turner, and requested that Turner review the matter prior to the Attorney General's decision.
On June 30, 1965, a special assistant to Mr. Turner reviewed the papers and recommended that a suit against Colonial be brought based on Sections 1 and 2 of the Sherman Act. He concluded that the pipeline was so constructed and operated that competitors of the owners were being foreclosed from using it. Since the pipeline involved significant cost advantages, this placed competitors at a significant disadvantage.
Review continued in July 1965, focusing on the various exchange arrangements created by the owners to facilitate shipments over the pipeline. The reviewers had some difficulty with the uncertain nature of the competitive consequences of these arrangements. As a result, Mr. Turner turned the matter over to the Evaluation Section for its assessment of the case.
On December 28, 1965, the Evaluation Section submitted its conclusion. It concluded that a case should be brought based on Section 1 of the Sherman Act, basing the conclusion on precedents which state that when competitors are denied access to a facility necessary for them to compete on an equal basis, the Sherman Act has been violated. See, United States v. Terminal R.R. Assn. of St. Louis, 224 U.S. 383 (1912) and Associated Press v. United States, 326 U.S. 1 (1945). Evaluation recommended that the Section 7 and Section 2 charges be dropped. However, the Evaluation Section also recommended that the staff conduct additional investigation on the subject of whether nonowners were in fact denied ownership and access to the pipeline.
24 The Attorney General at that time was Nicholas deB. Katzenbach. Since he brought In Turner, it was his view that Turner should have the opportunity to review the case. [Small Busine88 report at 10].
In February 1966, Mr. Turner sought advice from an economist employed in another Government agency on the competitive implications of the Colonial Pipeline. The response was a suggestion that a study be undertaken to determine whether the pipeline had affected prices of petroleum products in the markets served by the pipeline. Shortly thereafter, the Division engaged this economist and another to undertake a study of the effect of Colonial on product prices. 66
The study was to focus on the effect of the various exchange arrangements. Another Civil Investigative Demand was sent to Colonial and its owners requesting the additional information requested to conduct the study. After evaluating the data, the economists concluded that there were insufficient data to reach a meaningful conclusion. Mr. Turner was succeeded by Mr. Edwin Zimmerman as Assistant Attorney General before reaching any conclusion on the various theories and recommendations.
In July 1968, a consultant was asked to reassess the Colonial matter.6. He concluded that the Division should bring a suit based on Section 7 of the Clayton Act. He recommended that the numerous exchange agreements, which had preoccupied so many reviewers, should be dropped from the complaint because of undue complications and delay caused by their inclusion.
Before a decision was reached on that recommendation, Mr. Zimmerman was succeeded as Assistant Attorney General by Richard W. McLaren. Mr. McLaren asked an attorney in the Evaluation Section to take a fresh look at the pending recommendations. That attorney concluded that joint venture pipelines do have anticompetitive effects at the marketing and distribution levels. But he did not recommend instituting a case against Colonial, since there were other pipeline recommendations pending that could accomplish the Division's goals without the undue complications inherent in a case against Colonial and its owners.
Subsequently, the Evaluation Section was asked to prepare policy guidelines the Division could use in assessing pipeline cases in general, and specifically the pending recommendations, including Colonial. In November 1972, the Evaluation Section concluded
hat the economies of scale inherent in pipelines justify large monopoly lines and that joint ownership by shippers may be preferable to independent ownership as it permits the savings to be competed away in marketing competition between the shippers. This raised the question whether a significant case remained against Colonial given the fact that Colonial had apparently permitted nonowners to use the pipeline. It was recommended that the Department close the case unless the staff could establish denial of access to nonowner shippers.
In the interim, Mr. McLaren left the Division and a new Assistant Attorney General Thomas E. Kauper, was appointed. In January 1973, three senior Division attorneys concurred in the analysis of the Evaluation Section. That analysis has been con
66 Panl MacAvoy with the Council of Economic Advisers.
6* The economists were William Comanor of Harvard and Paul MacAroy who had returned to MIT. (Market Performance at 375).
67 The consultant was Gordon Spivack, the former Chief of Operations, who had just left the Department.