INTRODUCTION

During the 95th Congress, a hearing was scheduled before the Subcommittee on Antitrust and Monopoly of the Senate Committee on the Judiciary to address the issue of oil company ownership of pipelines. At the last minute, this hearing was unavoidably canceled, and unfortunately, never rescheduled. However, the testimony prepared by the witnesses was released to the public and became the subject of widespread interest and controversy.

Because of the Judiciary Committee's continuing interest in this subject, we have compiled both the testimony prepared for this hearing, as well as a number of other current documents and articles relating to the question of pipeline ownership.

It is the hope of the committee that this collection of significant, but not readily available, material will provide both the Congress and the public with a better understanding of this complex issue.

(1)

OPENING STATEMENT OF SENATOR EDWARD M. KENNEDY

The Antitrust Subcommittee for over two decades has devoted a great deal of effort to examining vertical integration in the petroleum industry. Today we are taking up a special aspect of that integration: the ownership of pipelines by integrated oil companies.

Pipelines, unlike other aspects of the petroleum business, are natural monopolies. Since the passage of the Hepburn Act in 1906, interstate pipelines have been subject to federal regulation. Under the law they must operate as common carriers and their tariffs must be just and reasonable. Virtually every State imposes some type of regulation on intrastate pipelines. Therefore, while the pipeline issue is part of the general vertical integration question, it is also part of a different and narrower question involving the ownership of a regulated monopoly by some of its own customers.

This is, of course, not a new issue. On the basis of both economic theory and long experience, public policy in this country has repeatedly resolved it by prohibiting such ownership of regulated carriers. In fact, the Hepburn Act as it was originally passed by both Houses of Congress made no exemption for pipelines when it prohibited shipper-ownership of transportation common carriers. Only after a second conference were pipelines exempted from that general prohibition. Senator Lodge of Massachusetts strongly protested this exemption, saying:

I can see no possible reason why the men controlling these great trunklines of pipe should not make a carrying business and be content to carry oil for all producers at a reasonable rate. We make the railroads do it, and I do not see the slightest reason for this change.

In the over 70 years since Senator Lodge made those remarks there have been numerous studies, investigations, and reports on the question of pipeline ownership. The overwhelming weight of authority is on the side of the Senator. After reviewing the evidence and studies on this subject, the Antitrust Subcommittee staff, in a report issued last week, concluded:

There thus remains only one practical and effective solution to the grave competitive problems inherent in oil company ownership of petroleum pipelines: to prohibit oil companies from owning petroleum pipelines and to require divorcement of existing pipelines from oil company ownership.

Historically, the discussion of competitive problems has focused on two basic issues: The first involves restrictions on access by outside shippers. The integrated company which owns a pipeline has a basic conflict of interest. On one hand it has a legal obligation to treat all shippers equally. On the other hand it has the incentive, as well as countless opportunities, to give preference to its own shipments over

(3)

those of its rivals. This need not involve anything as gross as outright denial of access. Rather it is more frequently a question of subtle discriminations in service that generally make it more convenient to sell petroleum to the pipeline owner rather than retain title as a shipper. As the chief economist of one large oil company wrote:

In practice, privately owned carriers have not been readily accessible to non-owners through the use of limiting qualifications such as tender size, batching, tankage, grade restrictions, long term forecasts, etc.

The second basic issue involves the setting of tariffs. It has never been seriously contended that the ICC did a good job regulating pipeline tariffs. It waited 6 years after the passage of the Hepburn Act before it even asked the pipelines to file tariffs. This pace of activity did not change much over the years.

Recently the Justice Department in its Deepwater Ports report and its filings before the Federal Energy Regulatory Commission in the Trans-Alaskan Pipeline rate case raised a very serious question; whether effective rate regulation is ever possible when a pipeline is owned by an integrated company, because the integrated oil company has an overwhelming incentive to make its pipelines too small, and charge too much for their use.

The Department argues that regulation of a shipper-owned pipeline must involve the regulation of capacity-which is not now permitted in the law. If shipper ownership were precluded, however, such massive regulation would be unnecessary. If, as Senator Lodge put it, “the men controlling these great trunklines of pipe should ... make a carrying business and be content to carry oil for all producers at a reasonable rate," then there would be no reason to regulate capacity. A firm dependent wholly upon pipeline revenue would have no incentive to restrict capacity in order to increase the downstream value of its oil. On the contrary, it would have every incentive to expand both its pipeline business and its asset base.

The most frequent objection to divestiture is that the incentive and the capital of the major oil companies are needed to build new pipelines. This argument ignores the obvious fact that pipelines are very profitable. The year 1976 was a record year for pipeline profitability, overall, but some companies turned in downright unbelievable performances. Mobil reported a 26 percent rate of return on its investment in the Mobile Pipe Line Co. Exxon made nearly 37 percent, Shell 81 on its pipelines. Colonial earned a whopping 121 percent for its owners. Overall the cash flow of the pipeline industry came to almost one-half of their operating revenues-a truly amazing financial performance, and one which would easily attract independent investors. In sum, we have three choices. First, we can continue with oil company owned pipeline and with the current ineffective scheme of regulation. This has the obvious disadvantage of permitting the integrated companies unreasonable leverage over their rivals and consumers. Its only advantage is it requires us to do nothing.

Second, we can drastically increase federal regulation. This at least will ensure some protection for nonowner shippers and the consuming public. But the cost will be a staggering amount of regulation, the effectiveness of which in the long run is highly questionable, if history is any guide.