mittments have been made, the ports do not plan to admit new owners. Recommendation: Even after construction or operations commence, the ports must continue to provide open ownership to all shippers. The proper measure of the price of new ownership is a share of repl cement cost less economic depreciation proportionate to expected throughput. 20. The equalization of cash calls during much of the design phase of both ports, though subject to eventual readjustment, required substantial investments by smaller companies and served to dissuade many of them from either joining or continuing to participate in the ports. Presently the priceof participation is a payment equal to all the prior inequit-. able advances and also the proportionate advances. Thus, Recommendation: Prospective participants should not be forced to pay for the inequities now past. any port cash call value attached to shares purchased for participation at present should be based, as will the adjustment of cash advances, upon the purchaser's expected proportionate share of the project. The Secretary should condition the license to require the shareholders' agreements to be modified to eliminate this problem, and to require affirmative efforts to be undertaken to broaden the base of each project with new owners on this revised basis. 21. The shareholders' agreements unreasonably restrict the rights of present shareholders to sell their shares with. extraordinarily broad preferential purchase rights. Such shareholder rights of purchase are contrary to the open ownership rule. Recommendation: The Secretary should condition the license to eliminate these needless and counterproductive restrictions. When a sale does take place, the ICC valuation appears to be a valid basis upon which to base the transfer price. In any event, any retained earnings above the presently allowed 7% should not be included in the transfer price. Rule 4: The ownership shares of the deep- 22. The shareholders' agreements provide for a single redistribution of shares after five years of port operations based upon throughput for the last three of those years. Recommendation: In order to provide appropriate procompetitive incentives, the Secretary should condition the license upon modification of the readjustment rule to provide for frequent share redistributions, preferably every calendar year, so that each owner's share equals his share of average throughput. Findings and Recommendations Concerning 23. Tariff levels are dependent upon the estimated throughput of the ports and their construction costs. Tariff calculations are based upon the assumption of a maximum dividend return under the Consent Decree -78 of the ICC valuation. The ICC's formula for calculating returns omits payments of interest to the holders of debt. As a result, pipeline companies have been encouraged to highly leverage their investments, with up to 90% debt, thereby permitting an artificially high, excessive rate of return. The Consent Decree and ICC regulation have therefore been largely ineffectual. 24. Debt financing backed by throughput agreements permits the owners to have off-balance sheet treatment of their obligations, which are generally described in footnotes to contingent liabilities as essentially risk-free. Returns on total investment (equity plus debt) will be well above the industrial average as well as above the returns of public utilities and the rest of the regulated transportation industry. The result is a higher tariff than would normally be allowed were it not for the present form of financing, which is molded to take maximum advantage of present regulatory policy. Recommendation: The preferable solution to exces- 25. based upon the correct formula: the sum of net The income from reserves set aside for deferred taxes and investment tax credits will apparently be redistributed to the owners over and above the earnings allowed under current Consent Decree limitations. This appears to be a violation of the spirit, if not also the letter, of the Consent Decree. Recommendation: The advantages of such income items should be spread evenly to all port users through reductions in tariffs and not distributed just to owners. The licenses should be conditioned to provide for reductions in tariffs as a result of these income generating factors. 26. Neither LOOP nor SEADOCK has adopted cumulative voting for its shareholders, and have instead instituted a oneshareholder-one-director approach. This gives the smaller shareholder a greater voice in operational policy and other matters. Recommendation: This policy should be continued and the license expressly conditioned thereupon. Findings and Recommendations of General 27. In general, the corporate entities of LOOP and SEADOCK are the embodiment of the interests, motivations and concerns of the small groups of shareholders which totally control them. Recommendation: In order to fully and effectively implement the foregoing recommendations, the Secretary should ensure that for each license the shareholders (or, in the case of shareholders that are pipeline company subsidiaries, the corporate parent) of the respective deepwater port corporations are made parties to the license, thereby becoming directly responsible for its performance. In this regard we endorse Article 21 of the Draft License. 28. A number of the foregoing recommendations involve either the imposition of specific operating requirements or continuous monitoring of the ports by the Secretary. Others are self-enforcing. In either case the Deepwater Port Act of 1974 provides the Secretary with all the necessary power to implement and enforce these recommendations. Recommendation: In order to effectively implement and enforce the foregoing recommendations, administrative procedures for the exercise of the Secretary's continuous review function must be established. Articles 23 and 24 of the Draft License are designed to accomplish this and we endorse the approach suggested by those provisions. Consonant with the policies underlying the antitrust review requirement of the Act, the Secretary should, in appropriate cases, consult with and obtain the advice of the Attorney General on the antitrust implications of matters that arise in the course of such continuous review. 29. Subject to the foregoing, the Attorney General has no objection to issuance of the proposed licenses for deepwater port construction and ownership by LOOP and SEADOCK. It is our opinion that the issuance of either or both licenses, if in substantial compliance with our recommendations, will not, within the meaning of section 7(a) of the Act, 33 U.S.C. $1506(a), "adversely affect competition, restrain trade, promote monopolization, or otherwise create a situation in contravention of the antitrust laws." TRANS-ALASKA PIPELINE SYSTEM: Joint Prehearing Brief JOINT PREHEARING BRIEF OF THE STATE OF ALASKA AND THE ARCTIC SLOPE REGIONAL CORPORATION The State of Alaska, the United States Department of Justice, and the Arctic Slope Regional Corporation, parties and protestants in this proceeding, respectfully submit this joint pre-hearing brief to the Honorable Max L. Kane on the issues that must be decided in Phase I of this proceeding. INTRODUCTION AND SUMMARY The parties joining in this prehearing brief have initiated this proceeding in order to challenge and thereby seek an adjudication that the initial rates filed for crude oil transportation by the Trans-Alaska Pipeline System ("TAPS") violate Section 1(5) of the Interstate Commerce Act ("ICA"). That provision requires that common carriers engaged in the transportation of oil by pipeline charge only "just and reasonable" rates. 49 U.S.C. § 1(5). Our contention that Section 1(5) is contravened by the TAPS rates is based upon an analysis of the applicable statutory authority for the regulation of crude oil pipelines, the latest and most widely accepted theories of economic regulation and the congressional mandates to the Federal Energy Regulatory Commission ("F.E.R.C." or "Commission") as embodied in the National Transportation and National Energy Policies. As the first step in the 1/ 1/ 49 U.S.C. preceding § 1; Department of Energy Organization Act, Pub. L. No. 95-91, § 102, 91 Stat. 565 (Aug. 4, 1977). |