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UNITED STATES OF AMERICA
PETITION FOR THE INITIATION OF A
The purpose of this petition is to request the Federal Trade Commission ("Commission") pursuant to 5 U.S.C. § 553 and 16 C.F.R. § 1.25 to initiate a rulemaking proceeding
to proscribe as unfair methods of competition certain forms
of petroleum pipeline ownership. Specifically, I request the Commission issue a trade regulation rule declaring it to be
an unfair trade practice for an oil company to have any owner
ship interest in petroleum pipelines of certain classes.
The Commission has authority under Section 5 of the Federal Trade Commission Act, 15 u.s.c. § 45 and 16 C.F.R. & 45,
to prohibit "unfair methods of competition in or affecting
While pipelines themselves are exempted from the
Commission's jurisdiction to the extent they are common carriers as defined in Section 5(a) (6) of the FTC Act, parent companies
of such carriers are not exempt.
The Commission may proceed
against parents and affiliates of, or parties acting in
concert with, persons exempted from the Commission's juris
The Commission has authority under Section 6 (g)
of the FTC Act to proceed by way of rulemaking in lieu of
That section empowers the Commis
sion to issue rules defining unfair methods of competition, violations of which would constitute violations of Section 5 of the FTC Act. ** This method is especially appropriate where
an elaborate factual record need not be developed.
the debate over the competitive consequences of petroleum pipeline ownership by integrated oil companies will involve predominantly issues of competitive theory, with disputes of fact playing a less significant role, rulemaking rather than adjudica
tion is the most efficient way to address this question.
The question whether divestiture for competitive
purposes can be ordered in an administrative rulemaking pro
ceeding was dealt with by the Supreme Court this year in FCC v. National Citizens Commission for Broadcasting (June 12, 1978,
In that case, the Court upheld an FCC rule dealing
with the "cross ownership" of television and radio stations by
*/ Perpetual Federal Savings & Loan Ass'n., Docket No. 9083, Final order to Cease and Desist, 3 Trade Reg. Rep., 21,371 (December 6, 1977) (appeal pending). Exxon Corp. et al., Docket No. 8934, Order Deying Respondents' Motion to Strike Allegations Re Pipelines or to Stay this Proceeding Re Pipelines, July 3, 1978; Order Denying Respondents' Motions to Strike Pipeline Allegations, Etc., October 16, 1974; Order Denying Respondents' Motions Regarding Governmental Action and Primary Jurisdiction, December 3, 1974. **/ National Petroleum Refiners' Ass'n v. FTC, 482 F.2d 672 (D.c. Cir. 1973), cert. denied, 415 U.S. 957 (1974).
newspapers; the FCC rule required divestiture in sixteen cases. The court upheld the divestiture requirements, thus establishing
a clear precedent for dealing with industry-wide structural
problems through rulemaking.
The Commission has long held that divestiture is
within its power when this remedy would advance the public interest.*/
Harm to the Public Interest
The specific unfairness on which this petition is
grounded involves the relationship between pipelines and their oil company owners, and the inherent competitive advantages that accrue to the oil companies as a result of such ownership.
As will be discussed below, the public interest is injured in
First, consumers must pay higher prices for petroleum
products because integrated oil companies are able to exploit the monopoly power inherent in their pipeline ownership. Second,
competition between oil companies is injured because the system of integrated oil company ownership virtually by definition places disadvantages on the non-owner shipper in terms of both
costs and access to the lines.
This unfairness does not depend
upon a specific pattern of behavior; it is the inevitable result
of shipper owne
nership of common carrier pipelines.
In re Ekco Products, 65 FTC 1163, 1213 (1964), aff'd
Vertically integrated oil companies are owners of the vast majority of petroleum pipelines. This control extends to all three types of pipeline: gathering lines carrying crude
oil from wells to intermediate storage tanks; crude oil pipe
lines carrying crude from producing areas to refineries; and
product pipelines carrying refined products from refineries
or terminals to markets.
A study prepared by the ICC staff
showed that in 1975, the top 20 vertically integrated oil com
panies controlled 74.2 percent of total pipeline operating
That same study found that the top twenty integrated
oil firms accounted for 94.5 percent of all crude barrel-mile movements and 78.1 percent of product barrel-mile traffic. */
of the 90 petroleum pipeline companies which reported
$500,000 or more annual revenues in 1975, a full 81 were owned
either by vertically integrated oil companies (50.8 percent)
or by joint stock companies affiliated with one or more ver
tically integrated oil companies (36.2 percent).
Petroleum pipelines are natural monopolies.
omies of scale are usually such that maximum efficiency may be
realized when only one pipeline serves a particular geographic
Competition between pipelines would, therefore, result
These data, as well as other relevant factual material, are set out in the Staff Report of the Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary, 95th Cong., 2nd Sess., Report on Oil Company Ownership of Pipelines 56 (Comm. Print 1978), which is attached to and made a part of this
in waste and inefficiency. The natural monopoly inherent in pipeline transportation has been recognized by the law since the passage of the Hepburn Act in 1906. That Act brought
petroleum pipelines under the regulation of the Interstate Commerce Commission. It rquired them to provide transportation upon reasonable request and to establish just and reasonable
Historically, however, pipeline regulation has been a failure. ICC regulation has ensured neither equitable rates
nor nondiscriminatory access. Over the seventy-two years that it had jurisdication over pipelines, the ICC dealt with the
access problem only twice, each time to require a reduction of
minimum tender offers.
While the ICC has regularly explained
its inactivity in this area by asserting that there have been no complaints from the industry, there is considerable evidence that access to pipelines has been a chronic competitive problem.
In 1967, the Attomey General's Report on the Interstate Oil
Compact found that the nonowner shippers confronted serious obstacles in gaining access to common carrier crude pipelines:
...outsiders simply are unable to use