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cluded with all the other owner's pipelines in its reports to the ICC, the owner can place a higher valuation and receive higher unrestricted earnings on its share of the pipeline. 141
There are some hazards to joint venture participation. An owner shipper may find its shipments exceeding its share of the throughput. Since joint venture dividends are based upon ownership shares, any shipments above the ownership share will be at the tariff rate and transportation savings normally associated with pipeline transportation will be sacrificed, while reducing the cost to ship for the other owners. 142 In addition, if revenues fail to cover all expenses, owners shipping below their commitment may be obligated to be expected to pay cash to cover the deficiencies. This disadvantage is mitigated, however, since the advances are treated as prepaid transportation charges so that future revenue contributions by the owners for tariffs will be reduced by the amount of prior cash deficiency payments.
The proliferation of joint ventures has been recognized to have grave anticompetitive implications.143 An extensive treatment of the anticompetitive nature of joint venture product pipelines appears in the Small Business report. Joint ventures reduce competition among the owners by reducing variations in transportation costs among owners, thereby promoting parallel pricing,144
Joint ventures have a substantial impact upon competing carriers by foreclosing those shipments committed by multiple owners to the joint venture from possible shipment on other carriers, even if the other carriers were more efficient.145 There is an impact on competing shippers who may be denied access to the joint venture due to the route design.146 Also, as indicated above, nonowner shippers using the pipeline pay the tariff while owners pay cost, a sizeable differential up to 20–30 percent.147 Participation in the joint venture also serves to stabilize market shares among the owners, since there is no incentive to ship more than the ownership share because of the transportation cost penalty associated with shipments above ownership share.148 Also the joint venture can affect competing shippers through its effect on the spot market. With the ability to put excess product into several large diameter pipelines and with the cooperation of other owners, excess product either can be exchanged, stored, or otherwise disposed of without the necessity of selling it on the spot market. The ability of independents to compete often depends on spot market purchases. Thus, competition can be further adversely affected.149
The joint venture can have an operational impact upon the ability of nonowners to use the system. Some of these problems were treated above and apply equally to joint ventures. Thus, configuration, line size, expandability, location of input and delivery points, batch size, minimum tenders and other operational procedures can all limit ac
141 AOPL at 44-45. 149 Johnson at 142. 148 O'Mahoney report at 2. 144 Small B 118ine88 report at 12. 145 Id. at 12-13. 146 Td. at 13. 147 Id. at 13. 148 Td. at 13. 140 Id. at 14-15.
cess to the joint venture. 150 In addition, the lack of tankage at input and delivery points is a substantial problem for would-be shippers on large diameter joint ventures. The larger the pipeline's size, the larger the quantity of tankage required to accommodate the large batches normally shipped through the pipeline.151 The ultimate conclusion of the Small Business report is that joint ventures are anticompetitive.152
Others have agreed with this analysis and have urged that joint ventures be prohibited. Thus, one writer has stated :
The frequency of intercompany exposure and participation unquestionably provides opportunities for exchanges of information, a discussion of marketing practices, perhaps some production planning, and perhaps a general forum in which a climate of unanimity with respect to such problems as scarcity, prices, political associations and other pertinent affairs can be
developed.15 In addition to the competitive problems of joint ventures recognized in the Small Business report mentioned above, other observers have noted the inherent limitation on competitive incentives cooperative participation in joint ventures entails. Thus, joint ventures have a similar effect to mergers and may be analyzed as such.154 They further provide a common meeting place leading to common patterns of conduct 155 and a forum for the exchange of information and product planning. 156 Further, they provide a measure of control over exploration and development of new oil fields because of the uncertainty of market access without such transportation.157 Additionally they provide the opportunity for the establishment of coordinated discriminatory tariff structures—higher if not faced with competition from alternate modes of transportation and lower where faced with such competition.158
The Department of Justice has recognized many of these competitive problems in its analyses of joint venture pipelines. 159
D. Traditional Remedies
The competitive problems associated with pipelines have brought forth alternative recommendations for methods to solve these problems. The two most discussed remedies have been divestiture and more effective regulation. Divestiture really takes two forms, the commodities clause approach and the outright divorcement of pipelines. The following discussion will highlight each of these remedies.
160 Id. at 16. 151 Id. at 17. 162 Id. at 29.
163 The American Oil Industry—A Failure of Antitrust Policy, Stanley H. Ruttenberg & Associates, Inc., Washington, 1973, at 57 (Hereinafter cited as “Ruttenberg").
134 Medvin, Norman and Law, Iris J., The Energy Cartel: Big Oil vs. The Public Interest, Prepared for the Marine Engineers Beneficial Association, AFL-CIO, Ruttenberg, Friedman Kigallon, Gutchers & Associates, Inc., Washington, 1975, at 9.
ise Id. at 10.
159 PICA at 112-116: Small Busine88 hearings at 203, Consumer Energy Act at 1023 ; Market Performance, Part 1 at 398. Oil Price Decontrol, Before the Senate Comm. on Interior and Insular Affairs, 94th Cong., 1st sess., ser. 94–23 (92-113), 1975, at 210 (Hereinafter cited as “Oil Price Decontrol”); Deepwater Port report.
1. COMMODITIES CLAUSE
The commodities clause was first proposed as part of the Hepburn Act.160 The commodities clause prohibits companies transporting a commodity from also owning the commodity. Its original purpose was to prohibit railroads from owning the coal they transported while discriminating against other coal producers. This first attempt to apply the commodities clause to pipelines and thereby dissolve the common ownership of pipeline transportation and the ownership of the oil was unsuccessful. Since 1906, there have been many attempts to apply the commodities clause to pipelines with equally little
The ICC conducted an investigation of oil pipelines in the early part of this century and concluded in 1907:
It will probably be found necessary to disassociate in the case of oil, as in that of other commodities, the function of transporta
tion from that of production and distribution.161 A major effort to apply the commodities clause was made during the thirties and forties. It was proposed in 1931 162 in response to the actions of the Prairie Oil and Gas Company. Its pipeline operations were declining as were its oil purchasing operations and as a result the company discontinued general purchases of oil from the MidContinent fields. Representative Homer Hoch of Kansas introduced legislation on January 29, 1931 in response to this problem.163 The bill received the support of the railroads due to their declining revenues from crude and product transportation.164 The introduction of the bill led to House hearings,165 however, no action was taken.166 In the interim, the Prairie Oil & Gas Company's pipeline operations were acquired by Sinclair.
Walter Splawn dealt with the commodities clause problem in his report and concluded that it would be very difficult to apply the commodities clause, since it was unknown who would buy the pipelines nor who would build pipelines into new fields. He, therefore, preferred the regulatory approach.167 Others, however, have since introduced bills to deal with the pipeline problem through imposition of a commodities clause prohibition.168
Senator William E. Borah of Idaho unsuccessfully introduced a series of bills to extend the commodities clause to pipelines in 1934, 1935, 1937,171 and 1939.172 Similar bills were introduced in the House. 173 Eventually Senator Guy Gillette of Iowa joined Senator Borah and jointly they proposed bills extending the commodities clause to pipelines. 174
160 See discussion of this act, supra.
16 Hearings on "Pipe Lines" Before the House Comm. on Interstate and Foreign Commerce, 71st Cong., 3d sess., 1931.
166 Johnson at 218-219. 167 Splaun at LXXVIII. 188 H. R. 8572 was introduced by Rep. Strong of Texas in 1934, see Oil & Oil Pipe Lines. 10 S. 2995, 73d Cong., 2d sess. 170 S. 575, 74th Cong., 1st sess. 111 S. 573, 75th Cong., 1st sess. 172 S. 2181. 76th Cong., 1st sess. 1:3 See Johnson at 269. 154 S. 2181, 76th Cong., 1st sess., 1939 ; see Black at 534–36 for a detailed discussion of
The Borah-Gillette bill not only would have extended the commodities clause to pipelines, but would have closed the gaping loophole in the commodities clause caused by court interpretations of the provision. Thus, the commodities clause did not prevent a railroad from holding some or even all of the stock of a mining, manufacturing or producing company. It did not prevent a railroad company from transporting articles or commodities manufactured, mined or produced by a company some or all of the stock of which was owned by the railroad company. It did not prevent the railroad from owning or operating mines or other manufacturing, mining or producing companies. It did not prevent a holding company from owning some or all of the stock of a railroad company and also some or all of the stock of a producing company which ships over the subsidiary railroad so long as the holding company refrains from going too far in the exercise of its control over the railroad company.175
Despite the loophole in the commodities clause, it has remained an attractive method of separating pipelines from the producers and marketers of the oil. But most proposals would alter the present provision to close the loophole and make the application of the commodities clause effective. Thus, in the TNEC hearings, the FTC and Department of Justice favored the application of the commodities clause to pipelines, 176 it was endorsed again in legislation coming before Congressman Emanuel Celler's House Subcommittee on Monopoly Power of the Committee of the Judiciary during the fifties; 177 it was endorsed by the House Small Business Committee in 1972.178
Even full application of the commodities clause to crude oil and petroleum product common carrier pipelines, however, falls short of correcting the underlying problems of domination of pipelines by major integrated oil companies. Extension of the commodities clause to common carrier pipelines would still have independent shippers dependent upon their major competitors for essential transportation services. Tariff payments by independents would continue to accrue to the benefit of their integrated competitors. Independents who aggressively competed with a pipeline's integrated oil company owner could not expect to secure welcome access to that pipelines to assist its competitive market penetration. Additionally, the historic accommodation by integrated oil companies on one another's transportation facilities for mutual benefit would continue and, indeed, be enhanced if each integrated pipeline owner were compelled to seek out a fellow owner for fulfillment of its transportation requirements. Such a result would further entrench the leverage integrated oil companies command in securing preferred access on other integrated pipelines and thereby serve to promote reciprocal dealings in pipeline access.
Fwthermore, commodities clause regulation would be exceedingly difficult to enforce in the petroleum industry due to the extensive use of exchanges by oil companies for both crude oil and petroleum product supply and distribution activities. Pipeline owners could readily reverse the historic pattern of exchanges and transfer crude oil and petroleum products to nonowners prior to shipment and exchange them back at the pipeline destinations. A shipper's willingness to accommodate a pipeline owner through such exchanges may well serve as a yardstick of his acceptability as a shipper on the pipeline.
175 Black at 532–33. 176 Johnson at 276. 117 Id. at 422. n. 10. 178 Small Business report at 33.
Unlike commodities clause regulation, divestiture offers the advantage of directly divorcing pipelines from other segments of the petroleum industry, thereby terminating the historic domination of pipelines by major integrated oil companies. In recent years the divestiture approach has been extended to apply to other segments of the industry through attempts to create discrete segments of production, refining-marketing and transportation.
Congressional hearings held in 1914 indicated that making pipelines common carriers in fact as well as in law was a long way off, especially without tankage and a market for crude at the delivery end of the pipelines. Oklahoma’s Attorney General West testified that divorcement of pipelines was necessary to accomplish the purposes of the Hepburn Act,179
Divorcement as a relief has been repeatedly advocated by the FTC. In a 1917 report to Congress 180 and in its Annual Report for 1917, the FTC unequivocally recommended divorcement. In 1922, the FTC recommended that Congress pass legislation abolishing common stock ownership of the old Standard Oil combination, a recommendation that effectively would divorce pipelines from the the old Standard Oil Companies.181 In 1927, the FTC reiterated its concerns about pipeline divorcement and recommended divorcement as an alternative to effectively making the old Standard Oil pipelines common carriers, in order to establish free and fair competition in this branch of the petroleum industry.182 In the interim, the La Follette Investigation of 1922-23 recommended divorcement of the ownership of pipelines from the ownership of the oil transported.183 None of these recommendations, however, produced any change in governmental policy.184
The divorcement issue rose to the Presidential level during the early part of Franklin D. Roosevelt's first term. Secretary of the Interior Harold L. Ickes called a conference in early 1933 regarding oil industry problems. A minority 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 prolucing state governors under President Roosevelt's signature indicating the President's support for the idea of divorcement of pipelines,185 The President's letter stated in part:
179 Transportation of Oil by Pipelines, hearings, part 1 before the House Comm. on Interstate & Foreign Commerce. 63 Cong., 2d sess. (1914) [Statement of Attorney General West). See Johnson at 107-108. Johnson indicates that this may have been the first time the term divorcement was used in an antitrust context.
180 FTC, Report on the Price of Gasoline in 1915, at 159-64 (1917). 181 FTC, Petroleum Trade in Wyoming and Montana at 3 (1922). 199 FTC, Prices Profits and Competition at 42 (1927).
183 Senate Subcomm. of the Comm. on Manufacturers, 67th Cong., 4th sess., Report on High Cost of Gasoline and Other Petroleum Products at 3 (1923).
184 Johnson at 18-7. 185 Johnson at 222.