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UNITED STATES OF AMERICA
BEFORE FEDERAL TRADE COMMISSION

PETITION FOR THE INITIATION OF A
RULEMAKING PROCEEDING PROHIBITING
OWNERSHIP OF PETROLEUM PIPELINES
BY PETROLEUM COMPANIES

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.

Jurisdiction

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

commerce."

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

diction. */

The Commission has authority under Section 6 (g)

of the FTC Act to proceed by way of rulemaking in lieu of

case-by-case adjudication.

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.

Because

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,

S.Ct.).

In that case, the Court upheld an FCC rule dealing

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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

two ways.

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

Factual Background

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

revenue.

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.

The econ

omies of scale are usually such that maximum efficiency may be

realized when only one pipeline serves a particular geographic

market.

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

rates.

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
these lines as they could other types
of common carriers. This is probably
due less to direct refusal to accept
outside shipment as to the multiple in-
convenience which an outsider would en-
counter in attempting shipment over a line
designated and geared almost entirely

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