relied upon a rate base comprised of the Section 19a valuation as described in the Oak Statement. In none of the four cases did the ICC explain or justify the use of the particular valuation formula employed. While use of the val uation as a rate base was not defended, data presented in each of the three pre-Williams Bros. cases indicate that use of an original cost or prudent investment rate base in most instances would have produced higher returns. That the reverse was true in Williams Bros., i.e., original cost would have yielded lower returns than valuation, demonstrates the effect of changed economic conditions on the elements which constitute the Section 19a valuation. Neither the Oak Statement submitted in Ex Parte 308 nor any of the four reported cases supply the rationale for the rate of return which is applied against the rate base to arrive at allowed revenues. In the three 1940's cases, the 8 and 10 percent returns apparently rested upon findings that pipeline ownership and operation involved unexplained significant risks. The ICC's Williams Bros. decision merely relied upon these prior precedents without undertaking a current analysis of pipeline risk, capital requirements, or capitalizations. In sum, the principles underlying ICC ratemaking methodology are either non-existent, unknown, or so grounded in antiquity as to have no present application to current economic reality or proper ratemaking principles. This reason alone is sufficient to compel rejection of ICC methodology and a fresh analysis of oil pipeline ratemaking. IV. PHASE I ISSUES 130/ As discussed above, on August 17, 1977, ICC Administrative Law Judge Glennon issued a prehearing order bifur cating this proceeding. Under Judge Glennon's order, Phase I will decide the issues of rate base methodology, rate of return and treatment of taxes. Implicit in Judge Glennon's order is a recognition of the necessity of regulating TAPS as a single entity, rather than as a segment of the owner companies' over131/ all pipeline interests. The following discussion sets forth the issues to be decided in Phase I and some of the relevant considerations that should be taken into account for purposes of entering an interim order at the close of Phase I. A. TAPS Should Be Regulated Separately from 132/ A number of the pipeline company respondents own in- terests in more than one pipeline. 130/ See discussion of procedural history of OR78-1 supra at 31-36. 131/ For example, Judge Glennon stated that evidence will be allowed on the special risk and revenue requirements of TAPS. Pre-hearing Order at 7. Such evidence would be insufficient to evaluate the specific revenue requirements for TAPS in light of the risk of the overall pipeline interests of the owner companies. Further, the Hope Natural Gas standard cited by Judge Glennon (id. at 7) contemplates an evaluation of the particular risk factors of the enterprise to determine its justified rate of return. 132/ For example, Sohio Pipe Line, ARCO Pipe Line and Exxon Pipeline own interests in pipelines other than TAPS. purposes, the ICC has required the submission of data reflecting a pipeline company's overall pipeline operations i.e., data covering a pipeline company's interest in all pipelines in which it participates. Nevertheless, it is 133/ evident that effective rate regulation of TAPS must be based upon its particular risks and operating characteristics. For several reasons, it would be singularly inappropriate to treat the owner companies' interests in TAPS as segments of their overall pipeline interests. The competitive and other operational characteristics of TAPS are such as to sharply distinguish it from any other pipeline in which an owner company may now have an interest. TAPS is a new pipeline never before subject to regulatory scrutiny. Further, it represents an enormous investment relative to other pipelines. Its construction costs may be of the same order of magnitude as the entire pipeline investment in the lower 48 states. Moreover, whatever the competitive environment in the lower 48 states, it is clear that the magnitude of the investment, the economics of a 48-inch pipeline and its unique location make the TAPS transportation system a classical natural monopoly and, quite possibly, a legal one as well. 134/ 133/ ICC Annual Report Form P. 134/ See discussion infra, note 194 at 92. The TAPS transportation system may be a de jure monopoly. See generally the Trans-Alaska Pipeline Authorization Act, 43 U.S.C. S 1651 et seq., which throughout contemplates the construction of a single pipeline. Congress nowhere sanctioned, however, the present or any particular ownership configuration for TAPS. The regulation of TAPS as a distinct enterprise is consistent with proper rate making methodology. The controlling standard for rate of return regulation, set forth by the Supreme Court in FPC v. Hope Natural Gas Co., 135/ is that a regulated firm is entitled to sufficient revenue to cover operating expenses and the capital costs of the enterprise. Such capital costs include revenue sufficient to pay debt costs and to provide a return on equity sufficient to attract capital. The latter requirement, that a return on equity sufficient to attract capital be allowed, requires an analysis of the risks of the specific enterprise and the magnitude of the return required to compensate for such risks. B. The Use Of A Valuation Rate Base Including As discussed above, 136/ the ICC Section 19a valuation, which has been relied upon as a rate base in all four pipeline rate decisions, consists of a weighting of original cost and cost of reproduction new. The following discussion will show that an original cost less depreciation rate base should be adopted for TAPS and a valuation rate base rejected. 135/ 320 U.S. 591, 603 (1944). 136/ See discussion of the ICC ratemaking methodology supra at 43-56. 1. The Congressional Intent Underlying Inclusion Of Reproduction Cost In The Section 19a Valuation Does Not Support Its Continued Use Initial Congressional concern about excessive pipe137/ line rates resulted in the passage of the Hepburn Act, which brought petroleum pipelines within the ICC's ratemaking jurisdiction. It was soon recognized, however, that if fair and reasonable rates were to be measured as a return on property dedicated to the public interest, some method for insuring accurate valuation of that property had to be developed. 138/ The Valuation Act was enacted in response to public concern that excessive capitalizations by the railroads were contributing to inflated rates. It was felt that the practice of looking to the liability side of the railroads' balance sheets to determine valuation distorted the rate base, because the value at which debt and equity instruments were carried on the books did not reflect the true value of property dedicated to public use: The confusion, even among rail- simply repre- 137/ 34 Stat. 584 (1906). 138/ 49 U.S.C. § 19a. |