The Report of the Independent Petroleum Association Opposed to Monopoly recommends "the enactment of emergency legislation by Congress divorcing oil pipe lines engaged in interstate commerce from other branches of the oil industry." I am of the opinion that this is a reasonable request and that such legislation should be enacted at as early a date as possible.186 This presidential request led to the introduction of five bills in Congress.18 The National Industrial Recovery Act (NIRA) gave the President the authority to push for better ICC regulation and failing that to push for pipeline divorcement.188 After the NIRA was declared unconstitutional, however, the divorcement issue was relegated to individual efforts by various representatives and senators. Starting in 1934 several proposals came before the Congress. The Cole Committee of the House Committee on Interstate and Foreign Commerce provided a forum for some advocates of divorcement.189 The Borah-Gillette bills of the 1934-39 period presented a variety of proposals for vertical divorcement and commodities clause extension.190 The draft version of the Government's Mother Hubbard complaint requested divorcement of pipelines, although the final version omitted it in deferrence to recommendations of the National Defense Council.191 Throughout the forties and the early fifties Congressmen continued their efforts to divorce pipelines. Congressman Izac introduced a bill in 1945 192 and Congressman Voorhis introduced a bill in 1946.193 Senator Guy Gillette was an ardent supporter of pipeline divorcement. He introduced bills in 1949,194 1954,195 and again in 1956.196 Senator Gillette gained support from the Wherry Committee who recommended divorcement as a remedy,197 as well as Eugene Rostow, who recommended that the Department of Justice pursue a litigated divorcement policy.198 All these proposals for legislative divorcement of pipelines were filed routinely in Congress from the early thirties on, but they made no more progress in the forties and fifties than they did before. Pressure for the divorcement of pipelines throughout this period stemmed from a realization that independent pipelines would provide better access to small shippers, since independents would lower rates and eliminate repressive service requirements in order to maximize shipments. Independent pipelines would be less likely to force sales of crude oil at the wellhead. The cost of transportation advantage gained through ownership of pipelines would be wiped out. Finally, it was noted that divorcement would reduce the ability of the majors to put independents in a price squeeze.199 Thus, legislation was to be 196 S. I. Rosenman, ed., The Public Papers and Addresses of Franklin D. Roosevelt, Vol. II 103-04 (1938-1950); Black at 510. 187 Johnson at 223, n. 62. 188 Id. at 223. 189 Id. at 229-31, 233-34. 190 S. 2995; 73d Cong. 2d sess., S. 573; 74th Cong. 1st sess. S. 1398; 75th Cong., 1st sess., S. 2181: 76th Cong., 1st sess. see Johnson at 268-69. 191 Johnson at 287-88. 192 H.R. 55. 79th Cong., 1st sess., in Johnson at 422. n. 5. 193 H.R. 6972. 79th Cong., 2d sess., in Johnson at 422, n. 6. 198 Rostow at 123-44; see generally Wolbert at 3, n. for congressional efforts to break up of companies and Wolbert at 3, n. 4 focusing on congressional efforts to divorce pipelines. 199 51 Yale L.J. 1354. preferred to litigation since legislation "will obviate the difficulty of detecting actual offenders by prohibiting a kind of business in which offenses are likely to arise." 200 Efforts to bring about a legislated solution have not changed much from the earlier attempts. Congress has renewed its efforts again with a series of proposals to divorce pipelines from other segments of the industry and to divorce the production, refining-marketing and transportation segments from each other, 201 These bills essentially are aimed at increasing competition at each stage of the oil industry, decreasing the potential for abuse by majors; and ending the squeeze the majors have been able to exert upon independents through pipeline ownership.202 Divorcement offers the most effective solution to a continuing industrywide problem, providing relief quickly rather than through years of court battles that necessarily ensue from any litigative approach. 3. REGULATION The regulatory approach has been traditionally relied upon by Congress, through its application of common carrier status to pipelines and through supervision by the ICC and now by the Department of Energy. Despite the application of regulation to pipelines, however, the fundamental problems remain. Nevertheless, supporters of regulation continue to urge that the regulatory approach is valid and workable if only it were made more effective. The access problems were expected to be alleviated through the application of common carrier status. While the Bureau of Corporations concluded that nonowners would be able to use the pipelines if they were made common carriers,203 it later recognized the inefficacy of relief short of divorcement. Other approaches to regulation have urged the adoption of cost based rates as the ultimate panacea. If owners could gain no cost advantage from their ownership of the pipelines and the tariffs were set at levels that truly reflected their economies, nonowners substantially would increase their use of the lines.204 The fallacy to this type of regulation is the supposition that effective regulation can develop cost based rates. Given a dynamic inflationary economy, it would be very difficult to constantly maintain rates that are truly cost based providing a fair return on fair value.20 Harmon has taken the Wolbert approach and carried it even further. He has concluded that pipelines have had almost complete freedom to adjust individual pipeline rates to accomplish the ends of their parents.206 He would implement a rate base reflecting conditions of each individual line and not the overall maximums that presently exist. While he recognizes the cost and difficulty of implementing this ap 200 Judge Learned Hand, in Black at 532. 201 PICA; Ind. Reorg., Parts 8 & 9; Senator Haskell's S. 2260, introduced July 26, 1973 making it unlawful for a producer or refiner to own a pipeline, in Ind. Reorg., Part 8 at 6305-6316; and Senator Haskell's efforts to amend the Mineral Leasing Act, Adt. 1397 to S. 1879, 123 Cong. Rec. Sept. 28, 1977. 202 Johnson, William A., Messick, Richard E., Van Vacter, Samuel, and Wyant, Frank R., Competition in the Oil Industry, Energy Policy Research Project, George Washington University, Washington, 1975, at 36-37. 203 Bureau of Corporations report, in Johnson at 56-57. 204 Wolbert generally; Harmon at 125. 205 See Rostow & Sachs at 883-886. 206 Harmon at 125. proach, he considers it the most enlightened method to reduce the monopolistic advantage of pipelines. 207 The sheer magnitude of the task required to implement Harmon's suggestions is the most obvious reason why they are unlikely to ever be adopted or implemented successfully even if attempted. Such enlightened regulation cannot be expected to successfully deal with the myriad of problems associated with oil company ownership of pipelines. 207 Harmon at 125. V. PIPELINE REGULATION: IN THEORY AND PRACTICE A. Monopoly Characteristics of Pipelines and the Need for Regulation Pipelines, whether owned by oil companies or owned by independents, possess monopoly power. The key to a pipeline's power is technological or natural; that is, pipelines are characterized by increasing economies of scale the phenomenon of continuously falling unit costs with increases in capacity. Because of this phenomenon, usually only one pipeline will serve a particular geographic market.1 As a geographic market develops for crude oil or refined products, sources of product closest to the geographic market normally will be the initial origins of product supply; those sources have a transportation cost advantage over more distant sources. As demand for product expands and nearby sources are strained, product prices will rise, making it profitable for the more distant supplier to service the market as well. The cheapest form of transportation of course will be utilized. If the demand for product from distant sources increases to a sufficient level, a pipeline will become an economical means of transportation compared to alternative modes. As indicated above, this results from the phenomenon of economies of scale. Thus, with growing demand, the unit costs of pipeline transportation eventually will fall below those of any other mode and from then on the pipeline will enjoy a mounting cost advantage. The overland cost advantage is indisputable; the cost advantage over water is less so, but since so much of the country is not accessible by water, pipelines enjoy substantial market power. If left unregulated, the pipeline owner, like any other monopolist, will reap excessive profits, rather than passing them on to the consumer. The price or tariff for using the pipeline will rise above the competitive level, due to the monopolistic characteristics of pipelines. These monopolistic profits will not be eroded by competitive pipeline entry unless and until market demand becomes sufficiently large to accommodate an at least equally efficient pipeline. Also, existing pipelines must have exhausted their economies of scale before other pipelines will enter; the likelihood of this depends on the technical capabilities of existing pipelines, as well as their availability to shippers. Therefore, if left unregulated, pipeline owners will reap monopolistic profits. Efficiencies to be gained from cheap sources of transportation will not be passed on to the consumer, but will redound to the benefit of the pipeline owner. Regulation has been the method used to force cost savings based on scale economies to be passed on to consumers. In some industries, public utility regulation has been resorted to in order to protect the public 1 It is true, of course, that in many areas more than one pipeline has been built to serve the market. Such competing pipelines can coexist because the pipeline was not sized sufficiently large enough to exhaust all the potential volume and the potential economies of scale. Therefore, in those markets with competing pipelines, one pipeline could serve the market if it were large enough. More modern joint venture pipelines have been able to take advantage of these economies of scale and in those markets only one pipeline has been |