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22. The shareholders' agreements provide for a single redistribution of shares after five years of port operations based upon throughput zor the last three of those years.

Recommendation: In order to provide appropriate procompetitive incentives, the Secretary shou o 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 eguals his share of average throughput.

Findings and Recommendations concerning

Tariffs, Financing and Related Matters. 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 pernits the vwners 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 Dolded to take maximum advantage of present regulatory policy.

Recommendation: The preferable solution to exces-
sive port profits would be to lower tariffs rather
than distribute dividends, because the latter ap-
proach has the effect of lowering transportation
costs only to the owners. In any event, close scru-
tiny should be given to the tariffs to assure that
they do not generate any excess earnings for the
owners. The appropriate rate of return for the
ports should be the lesser of either the 78 allowed
by the consent Decree, or a rate that will just se-
turn their true cost of capital as determined by
the ICC and the Secretary, provided the return is

based upon the correct formula: the sum of net
income and debt service, after taxes, divided by

equity plus debt. 25. The income from reserves set aside for deferred tazes 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 itens 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 inco.ne generating factors.

26. Neither LOOP nor SEADOCR 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 Reconnendations of General

Applicability. 27. In general, the corporate entities of LOOP and SEADOCK are tie embodiment of the interests, motivations and concerns of the small groups of share solders 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 conpany 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.?!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
UNITED STATES DEPARTMENT OF JUSTICE, 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 rea

sonable" rates.

49 U.S.C. S 1(5).

Our contention that Sec

tion 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 accep

ted 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

1/ and National Energy Policies. As the first step in the

1/

49 U.S.c. preceding s l; Department of Energy Organization Act, Pub. L. No. 95-91, S 102, 91 Stat. 565 (Aug. 4, 1977). adjudication of this controversy, petitioners submit this pre

hearing brief to set forth the legal and economic issues which

must be determined in this proceeding and to assist the presiding Administrative Law Judge to understand the context and rele

vance of the evidentiary submissions.

After presenting a short introductory history of the TAPS project, including the legislative and regulatory actions

relevant to its development, we set forth the relevant proce

dural history of this proceeding (I).

We then analyze the

statutory bases and policies by which the F.E.R.C. must be guided in regulating oil pipeline rates (II). Next, we dis

cuss the methodology that had been employed by the Interstate

Commerce Commission ("ICC") when it was responsible for oil pipeline rate regulation a methodology which we will demon

strate has little to offer the F.E.R.C. in terms of a workable

and rational system for satisfying its congressionally-delegated responsibility under the ICA and the National Transpor

tation and National Energy Policies (III).

We then explain in detail why this Commission should

reject outmoded ICC methodology in favor of a regulatory methodology based upon a net original cost rate base and, finally, we

set forth the various ratemak ing elements that must be examined

in Phase I of this proceeding in order to permit the Commission

Roman numeral references are to topic headings.

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