The seven elements discussed above are combined in

to a single sum value according to the following formula described in Oak's testimony. Original cost and cost of reproduction new are weighted, the weights being equal to the ratio of each cost measure to the sum of the two measures. In a period of rising prices, this method of calculation will always result in a greater, weight being given to the cost of reproduction new than the weight given to the original cost. The weighted average is then multiplied by the ratio of the total cost of reproduction new less depreciation to the total cost of reproduction new; this product is in turn multiplied by 1.06 to reflect going concern value. To this final product is added the present value of land, rights-of-way and working 118/ capital.

118/ The combination of the seven elements into a single-sum value may be represented as follows:

mony on cross-examination,

Nowhere in the Oak Statement, nor in Mr. Oak's testi119/ is there any explanation of the economic or regulatory rationale for the calculation of the various elements of value, or for the weight given to any element in arriving at the single-sum value. In fact, it is evident that if any rationale ever existed for ICC valuation methodology, it is no longer relied upon by the ICC in performing its Section 19a responsibilities.

For example, in response to a question concerning the rationale for the condition percent tables used by the ICC for valuation of pipelines, Mr. Oak referred to an ICC study entitled "Depreciation Studies on Certain Items of Depreciable Roadway Property and Equipment for Application to Group Properties." Further questioning elicited the fact

that the study was performed with respect to railroad prop120/

erty.

Significantly, the ICC no longer uses a valuation

121/

rate base in regulating railroad rates.

With respect to the

rationale for the 6 percent going concern value, Mr. Oak testi

122/

fied that he is aware of no rationale for its use.

When

119/ Transcript of cross-examination Jesse C. Oak in Valuation of Common Carrier Pipelines, Dkt. No. RM78-2 [hereinafter cited as "Oak Transcript"].

120/ Oak Transcript at 26, 135.

121/ See discussion infra at 64-65.

122/ Oak Transcript at 150.

asked about the validity of the premise underlying valuation, i.e., that the value of the property should lie between reproduction cost and original cost, Mr. Oak responded: "I think its validity lies in the fact that that is the way it has been 123/ done both for the railroads and for the pipeline valuations." D. The Elkin's Act Consent Decree

A number of respondents in this proceeding have attempted to justify the level of their proposed rates by reference to a consent decree entered on December 23, 1941 in United 124/ States v. Atlantic Refining Co., a suit brought by the

United States against 20 major oil companies and 59 pipeline companies. The complaint sought an injunction against viola

125/

tions of the Elkins Act, which prohibits the payment or
receipt of rebates between shippers and carriers. The com-
plaint alleged that dividends paid by pipeline carriers to
their shipper owners constituted rebates in violation of the
Elkins Act. The consent decree limited the amount of divi-
dends a common carrier could pay in any one year to its ship-
126/
per owners to 7 percent of the pipeline valuation.

123/ Id. at 152.

124/ C.A. No. 14060 (D.D.C. Dec. 23, 1941).

125/ 32 Stat. 847 (1903), as amended by the Hepburn Act, 34 Stat. 584 (1906).

126/ The present heavily leveraged capitalizations of pipelines generally, and of the TAPS carriers specifically, Footnote continued

-

During oral argument before the ICC, several car

riers indicated that their tariffs had been calculated in a

manner designed to conform to the consent decree restric127/

tions.

However, the consent decree was intended to operate solely as a restriction on sums paid by pipeline carriers to shipper owners, and not as a measure of reasonableness of pipeline rates generally. This interpretation of the consent de

cree was affirmed by the Interstate Commerce Commission in

are a result of the dividend payment restrictions imposed by the consent decree. Prepared Direct Testimony of Raymond B. Gary in Dkt. No. OR78-1, at 16-17; Prepared Direct Testimony of D. Laird Willott in Dkt. No. OR78-1, at 7-8. Because recognizable equity returns are limited to a fixed percent of valuation, leveraging permits a pipeline to enlarge returns to actually invested equity. 127/ The carriers stated that their tariffs had been calculated in a manner to allow a 7 percent return on valuation after interest had already been counted as an expense:

Commissioner O'Neil: You are seeking 7 per-
cent on the total valuation plus interest?

Mr. Jordon: Well, we're seeking 7 percent
return on valuation and before we calculate
what that return is--what the net income
figure is--we have taken out interest as an
expense element.

Transcript of Oral Argument (June 27, 1977) at 177-78. See also Transcript at 14-16. As discussed infra at 56, for purposes of calculating sums available for dividend payments, interest is necessarily subtracted. Under the terms of the consent decree the amounts remaining after subtraction of interest which could be paid to shipper owners is limited to 7 percent of valuation.

its June 28, 1977 Order of Investigation and Suspension of the

TAPS rates.

128/

For purposes of determining the amounts available

for payment to equity holders, it is necessary to subtract
all sums unavailable for payment of dividends, including the
cost of servicing debt. For purposes of determining a reason-
able rate of return, however, it is not appropriate to sub-
tract interest, because the allowed rate of return is designed
to compensate both equity and debt holders. The Commission
recognized this distinction:

However, the consent decree standard has
never been employed in a Commission pro-
ceeding as the test of reasonableness of
rates. Its sole legal status is as a
limit on the amount of dividends that
pipelines may pay to shipper owners
without risking prosecution under the
Elkins Act for illegal rebates. More-
over, as a standard of reasonableness,
it has nothing to recommend it from a
conceptual standpoint. Although valua-
tion is some measure of the entire in-
vestment, the consent decree standard
allows a return on valuation to be used
entirely to compensate one segment of the
capital invested. 129/

As discussed above, in the four formal investigations of the reasonableness of pipeline rates, the ICC has

128/ Order of The Interstate Commerce Commission in Investigation and Suspension Dkt. No. 9164, Trans Alaska Pipeline System (Rate Filings) and No. 36611, Trans Alaska Pipeline System (Rules and Regulations) at 6, June 28, 1977.

129/ Id.