profits. With all four rules working, and it is absolutely essential that all four rules work together otherwise the end result may be worse than without the rules, an approximation of a competitive environment can be achieved with the adverse effects of integrated oil company ownership minimized.21

The approach outline in the Deepwater Port report has been endorsed in subsequent statements by Assistant Attorneys General Donald I. Baker and John H. Shenefield. Assistant Attorney General Baker, stated with respect to pipelines on the Outer Continental Shelf that the adverse effects resulting from integrated oil company ownership of pipelines could be prevented by prohibiting ownership of pipelines by such companies.22 In the alternative, he endorsed the competitive rules approach.23 Assistant Attorney General Shenefield also subscribed to the vertical integration downstream excess profits theory and has indicated that ownership by integrated oil companies of pipelines may have to be prohibited.24 Attorney General Griffin Bell has also stated his own agreement with the position supporting oil pipeline divestiture.25

This development bodes well for future enforcement efforts by the Department of Justice or for legislation to accomplish similar goals. The Department apparently has not determined whether a litigated or legislative solution is the most appropriate, but it appears that divestiture as the ultimate remedy (or a competitive rules approach achieving the same result) will be the most likely result of future Department of Justice efforts.

It is important to note that a competitive rules approach in theory may accomplish similar goals as outright divestiture; however, the reality of implementation may be quite different. In the deepwater port licensing process, the Department of Transportation accepted the Department of Justice's recommendation that a set of competitive rules be applied to the Loop and Seadock licenses for deepwater ports. The implementation of these rules created severe problems, however. While the Department of Justice worked closely with the Department of Transportation, the latter was the final arbiter concerning all matters. Thus what appeared appropriate from Justice's viewpoint inimplementing the rules, was not necessarily accepted by Transportation. With advocates for the ports constantly arguing and urging to water down the rules, the final conditions of the license accepted by Loop substantially dilutes the full impact of the competitive rules. Thus it may be a rather easy matter for the oil company owners to evade the full intent of the rules and thwart the intended effect of the competitive rules.

21 Id. at 106-108.

22 Assistant Attorney General Baker also indicated his firm belief that oil companies should be divested of pipeline ownership across the board. When asked by Senator Kennedy "Do you support pineline divestiture?" he responded: "Personally, yes I do. Integrated oil company pipeline divestiture. I think the case is quite compelling for that." [Oversight of Antitrust Enforcement. Hearings before the Subcommittee on Antitrust and Mononoly. U.S. Senate, 95th Cong., 1st sess., May, 3, 4, 5, 11, and 12, at 321, hereinafter cited as "Antitrust Oversight"].

23 Testimony of Assistant Attorney General Donald I. Baker before the Ad Hoc Select Committee on the Outer Continental Shelf, concerning H.R. 1614, Apr. 5, 1977, mimeograph, 14-15.

24 Testimony of Assistant Attorney General John H. Shenefield before the Energy and the Environment Subcommitteee of the Committee on Interior and Insular Affairs, U.S. House of Representatives, concerning H.R. 5709, June 21, 1977, mimeograph at 10-12. See also Hearing on the Confirmation of the Hon. John H. Shenefield to be Assistant Attorney General Committee on the Judiciary, U.S. Senate. Aug. 5, 1977, at 57 (unpublished transcript), where Mr. Shenefield states his personal support for pipeline divestiture. 25 Antitrust Oversight at 455.

Such a result is possible whenever the competitive rules are used instead of an outright prohibition of oil company ownership. Moreover, in the deepwater port situation, the Department of Transportation will have continuing responsibilities to monitor the activities of the ports. In a litigated context, or some other context, who would monitor pipeline activity? The Courts? The Department of Justice? Some other agency? It is likely that no court would want the responsibility of continuing supervision. Putting such responsibility in the Department of Justice, an enforcement agency, may mean that little supervision or corrective action will result.26 Moreover, it is by no means certain that a court would accept all the competitive rules or apply them effectively. Partial applications of the rules may be worse than no application. Thus the competitive rules approach is fraught with pitfalls; a legislative solution may be more realistic and workable.

2. ALASKA NATURAL GAS TRANSPORTATION REPORT

In July 1977, the Attorney General submitted his report to the Congress and to the President on the transportation of natural gas from Alaska.27 These reports analyzed the competitive impact of the three possible methods of transporting natural gas from the north slope of Alaska. In its analysis, the Department of Justice determined that oil company ownership or control of the pipeline, in some cireumstances, may lead to excess profits at the wellhead price of Alaskan natural gas. As a consequence, the Department recommended that Alaskan producers of natural gas be prohibited from owning or in any manner participating in the pipeline project. The President adopted this recommendation in his recommendation to Congress on the selection of a pipeline project.28

C. Result of Public Efforts

It is apparent from the foregoing that a great deal of attention has been devoted to the pipeline industry and its problems. Regulatory agencies, antitrust agencies, and the Congress each have considered the problem and have attempted to implement policies in order to alter the direction of the industry, making it more accessible to independent companies not owning pipelines. It is clear from these efforts that little has been accomplished.

Pipelines overwhelmingly still are owned or controlled by integrated oil companies. Although rates and minimum tenders have been lowered, access to the pipelines is controlled by integrated oil companies and is permitted only in limited instances. Rate regulation has been imperfect, permitting oil companies to reap huge profits from their ownership of the pipelines. Antitrust efforts have been totally ineffectual, with the consent decree providing little solace to the independent segment of the industry. Congressional efforts have been enlightening, leading to some action by the ICC or the antitrust agencies or providing some pressure on the oil companies for a change in oper

28 Compare the history of the consent decree and its enforcement.

27 Report of the Attorney General pursuant to section 19 of the Alaska Natural Gas Transportation Act of 1976, July 1977, and Report of the Attorney General to the President of the U.S. pursuant to section 6 of the Alaska Natural Gas Transportation Act of 1976, July 1977.

Decision and report to Congress on the Alaska Natural Gas Transportation System, Executive Office of the President, Energy Policy and Planning, Sept. 22, 1977.

ations. But in the long run, neither Congress, the antitrust agencies, nor the ICC have altered the direction of the development of the industry nor the mode of operation by the integrated oil companies. They have managed the pipelines to their own liking, accommodating to each new threat as it came along and turning it into their advantage. 70 years of regulation have not corrected many of the anticompetitive results of pipeline ownership by integrated oil companies which Congress recognized at the beginning of the century.

It is equally clear that corrective measures are required if nonowners are to take advantage of the sizeable economies provided by pipeline transportation and if these economies are to be passed along to the consumer in the form of lower prices. Regulation has failed. Antitrust efforts have failed. Congressional oversight has failed. It is essential that a solution be found that will solve this longstanding problem. Some form of divestiture of pipelines from the remaining segments of the industry is necessary. Anything short of this solution will be doomed to failure, since the integrated oil companies will adapt it to their goals and use it as a shield to ward off more drastic attempts to make their pipelines truly available to all potential users.

IX. CONCLUSIONS

Petroleum pipelines are natural monopolies. As natural monopolies they have been treated in the law as regulated common carriers. But unlike other common carriers they have escaped the traditional prohibition on shipper ownership. The exemption of oil pipelines from this prohibition is without justification. In pipeline transport, as elsewhere, there exists a basic conflict between the interest of a firm as owner of a common carrier facility and the interest of a firm as shipper. The common carrier obligation to treat all shippers equally is simply inconsistent with a firm's practical motivation to advance its own commercial interests. It is unreasonable to expect a firm to resist the myriad of incentives and opportunities to provide itself with advantages over its competitors who also must use its facilities.

One of the most important disadvantages the integrated pipeline owner can inflict on its rivals is the requirement that they pay excessive tariffs. The integrated owners must, of course, also pay the high tariffs. But the high tariffs are only transfer payments for the integrated owners who, in an economic sense, still benefit from the low transportation costs. For the nonowner shipper, however, the high tariffs represents a real cost disadvantage. In effect the nonowner must subsidize the transportation of its competitors.

The integrated owners of pipelines have in fact exploited their advantages. Integrated company ownership of petroleum pipelines has had a substantial impact on the ability of nonintegrated refiners and marketers to compete with the pipeline owners in the marketplace for petroleum products. Control of crude oil pipelines has enabled these vertically integrated oil companies to gain control of crude oil production greatly exceeding their own refinery needs and has worked to prevent the formation of a domestic crude oil market. Their operation of petroleum pipelines allows them to control the distribution and flow-and consequently influence the price of refined petroleum products. The lower real costs of pipeline transportation have not been translated into lower consumer prices, but merely into higher oil company profits. Oil company ownership of petroleum pipelines has demonstrably failed to make petroleum pipelines a practical transportation alternative for many smaller refiners and marketers trying to compete with the pipeline owners.

The current system of common carrier regulation has totally failed to deal with these problems. Moreover the regulatory agencies lack the legal authority to prevent integrated oil companies from restricting pipeline throughput capacity in order to maximize downstream profits. It is, perhaps, conceivable that a regulatory scheme could be devised which in theory could control the behavior of shipper owners. But it would necessarily involve massive regulatory intervention in every aspect of pipeline operations. It is improbable that such a scheme could be effective in practice. This is particularly true with regard to

the construction and expansion of throughput capacity. Neither the history of pipeline regulation nor the history of regulation in other industries suggests that such a massive and complex system could successfully serve the public interest.

Subjecting petrolcum pipelines to the commodities clause of the Interstate Commerce Act cannot effectively resolve the problems created by oil company ownership of pipelines. Such an approach would be hard to police, given the prevalence of exchange within the industry, and in fact, would encourage reciprocal dealing among pipeline owners. More importantly, a commodities clause would still leave many refiners and marketers dependent upon competitors for a service essential to their ability to compete.

There thus remains only one practical and effective solution to the grave competitive problems inherent in oil company ownership of petroleum pipelines: to prohibit oil companies from owning petroleum pipelines and to require divorcement of existing pipelines from oil company ownership.

FOOTNOTE ABBREVIATIONS

AOPL: "Pipeline Transportation: A Review of the Oil Pipeline Industry." Association of Oil Pipe Lines, Washington, D.C., June 4, 1975, Revised by Exxon Pipeline Co., April, 1976.

Loos: Loos, John L., Oil on Stream! A History of Interstate Oil Pipe Line Company, 1909-1959, Louisiana State Univ. Press, Baton Rouge, 1959. Wolbert: Wolbert, Jr., George S., American Pipe Lines, Univ. of Okla. Press, Norman, Okla., 1952.

Consent Decree report: Antitrust Subcomm. (Subcomm. No. 5) of the House Comm. of the Judiciary, Report on the Consent Decree Program of the Department of Justice; 86th Cong., 1st Sess., January 30, 1959.

Rostow & Sachs: Rostow, Eugene V. & Arthur S. Sachs, Entry Into The Oil Refining Business: Vertical Integration Re-examined, 61 Yale L. J. 856 (1952). Oil Marketing Divorcement: Hearings on H.R. 2318, Oil Marketing Divorcement, Before Subcomm. No. 3 of the House Comm. on the Judiciary, 76th Cong., 1st Sess.. 1939.

Marketing Practices: Hearings pursuant to S. Res. 334, Marketing Practices in the Gasoline Industry, Before the Subcomm. on Antitrust and Monopoly of the Senate Comm. of the Judiciary, 91st Cong., 2d Sess., pts. 1-3, 19711972. 2d AG report: Second 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, September 1, 1957.

Consumer Energy Act: Hearings on S. Con. Res. 31, et al., Consumer Energy Act of 1974, Before the Senate Comm. on Commerce, 93d Cong., 1st Sess., Ser. No. 93-63, pts. 1-4, 1973-1974.

NET: Congressional Research Service, National Energy Transportation, Volume I, Current Systems & Movements, Pub. No. 95-15, Senate Comm. on Energy and Natural Resources and Senate Comm. on Commerce, Science, and Transportation, 95th Cong., 1st Sess., 1977.

Oil and Oil Pipe Lines: Hearings on H.R. 9676 and H.R. 8572, Oil & Oil Pipe Lines, Before the House Comm. on Interstate & Foreign Commerce, 73d Cong., 2d Sess., 1934.

Johnson: Johnson, Arthur M., Petroleum Pipelines and Public Policy, 1906–1959, Harvard Univ. Press, Cambridge, 1967.

Mitchell, ed.: Mitchell, Edward J., editor, Vertical Integration in the Oil Industry, American Enterprise Institute for Public Policy Research, Washington, D.C., 1976.

Fortune, August 1977: Morner, Aimee L., "For Sohio, It Was Alaskan Oil-Or Bust," Fortune, August 1977, 172–184.

PICA: Senate Comm. on the Judiciary, Petroleum Industry Competition Act of 1976, S.Rep. No. 94–1005, 94th Cong., 2d Sess., 1976.