ANTICOMPETITIVE IMPACT OF OIL COMPANY OWNERSHIP OF PETROLEUM PRODUCTS PIPELINES TUESDAY, JUNE 13, 1972 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON SPECIAL SMALL BUSINESS PROBLEMS Washington, D.C. The subcommittee met, pursuant to call, at 9:35 a.m., in room 2359, Rayburn House Office Building, Hon. Neal Smith (chairman of the subcommittee), presiding. Present: Representatives Smith, Hungate, and Conte. Also present: John K. Rayburn, subcommittee counsel; and John M. Finn, minority counsel. Mr. SMITH. The meeting will come to order. Over the past 2 years, this subcommittee has been conducting hearings to determine the cause and effect of the energy shortage which confronts our Nation. As part of our energy investigation, we have examined the possible anticompetitive impact on small business and consumers of oil company acquisitions of competing fuel resources such as coal and uranium, and oil company control over the research and development of synthetic fuels. Now we are conducting these hearings beginning this week to determine the possible anticompetitive effects of oil companies jointly owning pipelines which mainly transport petroleum products of the pipeline owners. Mr. Conte testified in the Joint Economic Committee in this regard and raised some very good questions over there. One of the questions we will consider is whether the operation of these joint venture pipelines tends to stabilize market shares and product prices in the geographic areas served by the pipelines' owners. We will investigate charges that the oil products pipelines have had a detrimental impact on independent terminal operators, independent barge and tanker owners, as well as consumers and small business petroleum users. The subcommittee will also seek to determine whether any of these joint venture pipelines have been discriminating against the small nonowner shippers by denying them reasonable access to the pipeline's capacity. During these hearings the subcommittee will hear testimony from spokesmen for an independently owned pipeline company serving the midwest and testimony from a pipeline company-jointly owned by several major oil companies-which is serving the Southeast, Middle Atlantic and Northeast regions of the Nation. We hope to learn how the (1) operation of these pipelines affects the supply and price of energy in the market areas served. Mr. Conte, did you want to make an opening statement? Mr. CONTE. Mr. Chairman, I am grateful for your kind remarks, especially for your leadership and cooperation in launching the investigation that has led to these important hearings today, tomorrow and Thursday. As you mentioned, I first called attention to the serious anticompetitive problems which these joint venture lines create for independent small businesses and the consumer in my testimony before the Joint Economic Committee last January. For the record, I would like to submit relevant excerpts from that statement at the close of my remarks. Mr. Chairman, at the outset of these hearings I must take the unusual step of confessing that I have already formed strong opinions about the anticompetitive impact that, I believe, necessarily follows because of the structure of these joint venture lines. Any joint venture pipeline eliminates competition on transportation among its shipperowners, and because as owners, they receive dividends, they, in effect, pay a cheaper tariff than nonowners who ship on the line, thus further restraining competition. Even without an extensive antitrust background, any attorney, I believe, should recognize the likely presence here of combinations in restraint of trade prohibited by the Sherman Act. Perhaps there is still a question in some minds as to whether or not it is possible to construct and build these pipelines without the huge amounts of capital these major oil companies have available. I believe these hearings will show that joint venture construction is not necessary, and that the lines can be financed, built and run independently. These hearings will also explore areas of special harm that joint venture lines may cause because of the way their routes have been drawn up, apparently to suit only the needs of their owners, and because of various other acts and omissions that have both served to deny equal access to nonowner shippers, and unfairly discriminated against competing carriers. It will be noted during these hearings, Mr. Chairman, that there has not been a great outcry of complaints from these injured businesses. I am convinced that the reason for this is pure and simple fear-fear of reprisals from the pipelines themselves or from their major oil company owners, who happen to be either suppliers of or customers of all those businessmen adversely affected. As you well know, Mr. Chairman, this committee has talked to literally dozens of such businessmen. Many have reluctantly admitted they are being hurt by those joint venture pipelines, but they are afraid to come forward. Their attitude is best expressed by the words of one who said: "I know this pipeline is killing me and my business. But the way it is now, at least I am dying slowly. If I complain, it will be sudden death." Well, Mr. Chairman, I believe these men are wrong. I know this committee will do all in its power to ensure there will be no reprisals. But this pervasive fear does suggest that it is even more essential for responsible government agencies to move forward on their own initiative to investigate these apparent abuses and, if they warrant action-as I believe they do-to take whatever steps are necessary to protect the independent businessman, the consumer, and our free enterprise system. Thank you. (The material referred to follows:) EXCERPT FROM THE TESTIMONY OF MR. CONTE BEFORE THE JOINT ECONOMIC COMMITTEE'S SUBCOMMITTEE ON PRIORITIES AND ECONOMY IN GOVERNMENT AT HEARINGS ON OIL PRICES AND PHASE II, JANUARY 12, 1972 "These hearings examining the relation between oil policy and wage and price controls could not be more timely. When we consider the massive way that Government has now involved itself in the daily economic life of the Nation in order to retard inflation, it is absolutely astonishing that nothing has been done to roll back prices in an industry that has been a pace-setter in the inflation sweepstakes. Indeed, nothing has been done to curb its power to achieve its purpose of even higher prices for all energy sources in the future. Such inaction is inexcusable when we reflect that these prices and this power are the direct result of Government policies which insulate the industry from the normal pressures of free enterprise competition, but provide nothing in its place. "It takes no imagination to list a number of steps that could be taken to reverse runaway oil prices. The President could have a significant and immediate effect on consumer prices either by greatly increasing imports or even eliminating quotas completely, or by suspending the Connally "Hot Oil" Act which makes possible the State production controls that are today employed primarily to maintain high prices. "I need hardly note that such action is not likely. The record of four administrations since the quotas were imposed in 1959 is not encouraging. But while these are the regrettable facts of life today, we must continue to press, as you do here, for a fuller and more realistic understanding of the relationship, or lack of it, between the stated purpose of these controls and their actual effect. "In the meantime, we must also be on the alert for any moves toward further price increases. There are clear signs in the trade press that we can soon expect requests for oil price hikes. We must be prepared to see that the Price Commission resists all such efforts. "We cannot, of course, lay all the responsibility for our present senseless policy on the executive branch. This is why I have opposed oil import quotas in the Congress since 1959. "There are now 90 cosponsors to my bill to abolish oil quotas and a similar number who support my bill to repeal the Connally "Hot Oil" Act. "It is also incumbent upon us to come up with realistic alternatives to the quota system. After studying the proposal of Professors Mead and Sorenson, Congressman Harrington and I introduced a bill, based on that study, with more than 40 cosponsors to create a National Defense Petroleum Reserve. Instead of perpetuating a system which does not enhance our national security but actually threatens it by more rapidly depleting our domestic reserves, we need to examine alterna tives that will truly strengthen our reserve position and, at the same time, inject some healthy competition into an industry so badly in need of it. "As you know, Mr. Chairman, the House Small Business Committee on which I serve as senior Republican has become increasingly concerned about the concentration of ownership of competing fuels. With the strong support of our chairman, Joe Evins, a subcommittee chaired by Neal Smith of Iowa has been conducting an inquiry in this area with particular attention to the movement of oil companies into the coal and uranium business. Major oil companies now control well over 20 percent of domestic coal production and 25 percent of uranium. milling capacity. The coal reserve picture is even more alarming. Humble Oil, for example, controls over 7 billion tons of domestic coal reserves but has opened only one mine. When we add this to the majors' present dominance over the supply of both oil and natural gas, it is not hard to foresee the day when all our basic energy sources will be controlled by a handful of companies, free to manipulate at will the whole range of supplies and prices of the energy on which our entire economy relies. "While we continue to work toward these long-term goals, we must also continue to try to make the present system less intolerable. This is a special burden on those of us from the Northeast who pay the highest fuel prices in the Nation and yet perennially face the danger of inadequate supply as well. The need to end this fuel price and supply squeeze has been the driving force behind our efforts to increase imports of No. 2 home heating oil. The situation is even more serious with respect to residual oil, used by utilities, factories, schools, and hospitals, where increasingly strict air pollution controls have created a great demand for low-sulfur fuel. "In a moment I want to discuss a relatively new development, the direct burning of crude oil by utilties in place of residual which, I believe, could greatly improve the present picture. Before doing so, however, I want to say that concern for declining interfuel competition should not blind us to other anticompetitive mechanisms within the petroleum industry itself. In particular, I refer to the proliferation of joint ventures among large oil companies, especially noticeable in their production and transportation operations. "It is a curious fact that the number of joint ventures between major oil companies should be so great, when you consider that these same majors have such tremendous cash flows and are generally in such strong financial positions that they could hardly plead poverty. When enterprises whose individual assets total billions of dollars say they must pool their resources because of "risks," the public and its representatives, I suggest, should be somewhat skeptical. None of these "risks" in the 25 postwar years have significantly interrupted their unbroken chain of ever improving yearly profit reports. "Take transportation, for example. Every businessman knows that in any industry the movement of raw materials to a factory and of products to a market are a large part of his costs of doing business. Every other industry, however, relies heavily on the public transportation system of regulated carriers. In oil, however, the industry has its own transport system, the pipeline, supplemented by barges and tankers, increasingly owned and operated on a joint venture basis because, they assert, the risks are great, the capital requirements immense. "Here my skepticism suggests the need for careful study. In the more than three-quarters of a century that oil has been transported by pipeline, I am told out of the hundreds built there is one possible example of a pipeline that went broke. Now, the one-half billion dollars that the Colonial Pipeline Co. cost is a lot of capital, but 90 percent of that came as loans from banks and insurance companies-companies not known as takers of great risks-and the 10 percent its nine owners put up was only a small proportion of the routine annual investment program of any one of them. "Why, then, did these companies feel the urge to join hands? I think the testimony given to you yesterday by Mr. Moore suggests some of the answers. By the way, I am pleased this subject was raised in your hearings and I intend to examine your previous testimony closely on this subject. While I hope this committee can pursue the matter further, I also hope to have this problem examined by our Small Business subcommittee. "I am particularly interested in the impact that Colonial has had on the east coast. While any conclusions at this time must be very tentative, indications are that Colonial has served to stabilize both prices and market shares, that, for example, it has been a major cause of increases in No. 2 oil prices in the Northeast, that it has stimulated the epidemic of acquisitions of independent terminal operators by major oil companies since 1959 their numbers have virtually been cut in half-and that it now actually threatens the survival of 90 percent of the American flag fleet of independent tankers. "Among the questions that must be asked about Colonial are these: "(1) Has it been owned and operated in such a way as to stabilize markets and prices? Its nine owners, companies with well over half the refining capacity serving the east coast, sit on Colonial's board and discuss tariff rates, shipping points and the like. Is this too tempting an opportunity to pass up without discussing their individual marketing policies at the same time? 2) Has Colonial, in fact, been operated as a true common carrier available without discrimination to all competitive shippers? Have independent refiners and marketers had a reasonable opportunity to use its services at anything close to equivalent costs? "(3) What effect does Colonial's jointly-agreed-on tariff structure have on transportation competitors? You have had testimony that Colonial's tariff is unfairly designed to make tanker competition from the gulf to New York Harbor impossible. The unusual and growing number of independent tankers laid up shows that something is clearly wrong. There seems to be a growing awareness that the very survival of independent tankers is at stake. Should this happen, the independent terminal operators will be forced to deal exclusively with Colonial. And the major expansion of the line, now underway, seems certain to aggravate the problem. There are many other questions that need to be examined. To cite just one more, what effect has Colonial had on the curious recent history of No. 2 fuel oil supplies to the Northeast? Is it simply accidental that the nearly annual series of shortage dangers began soon after the Colonial Line was pumping all the way to New York? "With so many questions yet unanswered. one cannot be sure about the best solution. As previous witnesses have stated, however, the simplest and most effective answer may be the divestiture of all oil |