ANTICOMPETITIVE IMPACT OF OIL COMPANY OWNERSHIP OF PETROLEUM PRODUCTS PIPELINES THURSDAY, JUNE 15, 1972 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON SPECIAL SMALL BUSINESS PROBLEMS Washington, D.C. The subcommittee met, pursuant to recess, at 9:45 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 subcommittee will come to order. The first witness this morning is Mr. Beverly Moore, Corporate Accountability Research Group, Washington, D.C. Will you come forward, Mr. Moore? TESTIMONY OF BEVERLY MOORE, CORPORATE ACCOUNTABILITY RESEARCH GROUP, WASHINGTON, D.C. Mr. MOORE. I have been asked to appear before this subcommittee to discuss the possible anticompetitive consequences of the ownership and operation of the Colonial Pipeline. As the prepared statement indicates, I would like to submit for the record my testimony of January 11, 1972, concerning the Colonial and proposed Trans-Alaskan Pipelines before the Subcommittee on Priorities and Economy in Government of the Joint Economic Committee, together with an exchange of letters between the subcommittee, myself, and Mr. Jack Vickrey of the Colonial Pipeline Company, and relevant excerpts of the testimony in those hearings of Mr. Bruce Wilson of the Antitrust Division of the Justice Department. (Mr. Moore's and Mr. Wilson's previous testimony appear in appendix F. The exchange of correspondence between Mr. Moore and Mr. Vickrey appears in appendix G.) My remarks here will be directed first to the general role of joint venture oil pipelines in cementing together the oligopolistic structure of the domestic oil industry and in facilitating its anticompetitive conduct. Second, to the particular economic arrangements and adverse consequences of oil consumers of the Colonial Pipeline. (127) And third, to the internal deliberations of the government's antitrust authorities which have produced confusion with respect to their enforcement policies concerning joint venture oil pipelines in general and inaction for more than 10 years with respect to the Colonial Pipeline in particular. American consumers spend, directly or indirectly, $70 billion annually for gasoline, heating oil, and other petroleum products. So it is important to realize here the competition as a means of reducing to the lowest possible level the amount of money that is spent on petroleum products. Oil is one of the most potentially competitive commodities on earth. It is found abundantly in many parts of the world and, being a gradable commodity, is potentially marketable without a significant degree of monopoly gain from consumer ignorance created by artificial product differentiation. In the United States, consumers have not been afforded the benefits of this potential competition. We face, at the outset, a domestic market protected by an oil import quota which, by President Nixon's own task force estimate, cost consumers $5 billion in inflated prices in 1970. The domestic industry, vertically integrated from the well to the gas pump, insulated from foreign competition, and subsidized by the tax system to engage in inefficient activities, also fits all the economic criteria for an industry that is concentrated in market structure and oligopolistic in conduct." For a brief description of the oligopolistic nature of the domestic oil industry, I submit for the record an excerpt from the Nader Report on Antitrust Enforcement, The Closed Enterprise System. (The information appears in appendix H.) Mr. MOORE. The essential point to remember, however, is that the anticompetitive effects of the domestic oil industry's structure flow primarily from regional concentration. Although concentration on a national basis is substantial, with the top eight firms controlling 62 percent of refinery runs, it is substantially greater on a regional basis. However, there are 20 oil companies in the United States with assets exceeding $1 billion each. If every one of these companies competed in every geographic area, it would be exceedingly difficult to maintain regional cartel pricing patterns. Thus, our antitrust enforcement policies, if they are to be effective at all, must insure that any given region is accessible to entry by potential competitors who presently market their petroleum products in other regions. The most important means of access to these regional markets is, of course, through the pipelines which serve them. To the extent that access to pipelines is foreclosed, so is competition. Almost every one of the major pipeline systems constructed since World War II is jointly owned by the few companies which dominate the marketing areas which the pipelines serve. From the standpoint of the owners, the arrangement is perfectly natural. If a few companies wish to exploit a market by constructing a joint venture pipeline to it, they will have little interest in inviting all their 1 The Federal Trade Commission recently calculated the monopoly overcharge to oil consumers to be $1.26 billion annually at the refining level. actual and potential competitors to come along with them. Likewise, the owners will have an incentive to lay the line so that it or its feeder spurs will pass in close proximity to their own refineries and marketing terminals, but not to those of their nonowner competitors. The owners will have an incentive to provide input and output facilities, storage tanks, and synchronization geared to their own operations, but again not to those of their nonowner competitors. The result is that, while joint venture pipelines are theoretically common carriers, equally accessible to all, access can be substantially more expensive for nonowners than for owners. This initial disadvantage is widened by the fact that the nonowner must pay the full rate or tariff while the owner actually pays only the pipeline cost, recouping the difference through the pipeline company's dividend payments to him. The rate-cost differential which measures this further degree of discrimination is commonly as high as 20 to 30 percent. In turn, the rate-cost differential helps stabilize market shares within the regional cartel dominated by the pipeline owners. The common stock and thus the dividend shares of these joint venture pipelines are usually aportioned among the owners according to their predicted throughputs, which, of course, are closely related to their market shares in the area to be served by the pipeline. Suppose that one owner defied the mutually understood cartel pricing pattern by lowering his prices and increasing his market share at the expense of the others. He would continue to receive only his fixed dividend share, but would have to pay the rate-cost differential on his increased shipments, thereby increasing the dividend receipts of the nonprice cutters and providing them with a fund to retaliate against him. In addition, parallel pricing by the owners is facilitated by the pipeline's uniform transportation charges. It is also possible that the owners of joint venture pipelines can so synchronize pipeline operations to their own vertically integrated marketing operations so as to dry up the spot market at the destination point. The critical competitive leverage in the oil industry is wielded by the independent refiners, terminal operators, and retail dealers. The so-called private brand dealers are able to undercut the nationally advertised gasolines by 2 to 5 cents per gallon, primarily through more efficient operations and the avoidance of heavy advertising and premiums. If consumers were aware that gasoline is a fungible product, with little difference in quality among competing brands, and if informed consumer demand forced the majors to switch to private brander type operations at 3 cents less per gallon, the annual consumer savings could exceed $2 billion. That figure is indicative of the potentially grave consequences to consumers of joint venture pipeline operations which dry up the source of supply for independent marketers. Moreover, the inflexible commitments generally required of pipeline shippers-in throughput guarantees, investment in facilities, and minimum tender requirements may foreclose the shippers' use of competing transport modes such as tankers and barges. The Colonial Pipeline fits the general pattern just described. By far the largest refined petroleum products pipeline in the United States, Colonial originates in the East Texas refining complex there and makes its way through Atlanta, Washington, and Philadelphia to the New York Harbor area. The 10 integrated oil companies that jointly own Colonial, together with the three joint owners of the smaller Plantation Pipeline, marketed 79 percent of the gasoline in the Southeast, approximately, in 1965. As is commonly the case, Colonial's owners put up only 10 percent of the initial $378 million capital outlay, the remainder being financed through debt secured by the owner's throughput guarantee. Colonial's sustained monopoly profits are unrivaled in the American economy, except perhaps in some segments of the television broadcasting industry. In 1970 Colonial's return on investment was 95 percent before taxes and 70 percent after taxes. If one adds to that a $15.5 million appreciation of equity through debt retirement, the profit rate rises to 140 percent before taxes and 111 percent after taxes. Colonial's rates could be slashed by 30 percent across the board and the pipeline would still be able to earn 13 percent on investment and another 40 percent through equity appreciation. My previous testimony and response to Mr. Vickery's letter, submitted for the record, described Colonial's discriminatory rate structure, the determinants of discriminatory access by nonowners, illustrated by the case of Tenneco and Murphy, and a remarkable stability of the owners' market shares between 1964 and 1970. In conversations spanning the past two years with present and former personnel within the Justice Department's Antitrust Division and with complaining private parties, I have attempted to piece together the reaction of the Government's antitrust authorities to the Colonial and other joint venture oil pipelines. It is a scenario which embraces initial vigor, then fearful indecisiveness, and finally unexplained and confusing policies fraught with political implications. Seven oil companies first agreed to lay a pipeline from Baton Rouge to Richmond in 1960. Late in 1961 Mobil and Indiana Standard joined the group and the proposed route was extended to Texas and New Jersey and shifted to pass closer to Mobil's Beaumont refinery. Throughout 1961 the companies provided their Pipeline Planning Committee with detailed information regarding their gulf coast refining operations and their marketing requirements in the Southeast and Mid-Atlantic. On the basis of this information, the plans were laid for the pipeline's route, diameter, construction, and servicing facilities. The Colonial Pipeline Co. was incorporated in 1962 and construction began.2 In the very early 1960's while Colonial was under construction, the Federal Trade Commission took up the matter at the behest of maritime interests, but in 1962 the case was transferred to the Antitrust Division because common carriers are statutorily exempted from the FTC's discovery powers. A preliminary investigation was followed As part of the compact that evolved, Gulf and Pure surrendered to Colonial their ownership of the Southeastern Pipeline, built under the Pipeline Defense Act of 1940, which picked up refined products delivered by gulf coast tankers to Port of St. Joe on the west coast of Florida and carried them through Southwest Georgia. Atlanta, and into Tennessee. Colonial eventually ripped up Southwestern's 8-inch pipe, but the new 12-inch pipe with which it was replaced stopped in Southwest Georgia 80 to 90 miles north of Port of St. Joe and no longer extended to the sea to service tankers that might compete with Colonial in the Southeast. by the issuance of Civil Investigative Demands, the equivalent of precomplaint subpenas of documents, to Colonial and its nine owners. By late 1964 or early 1965 a proposed complaint had been drafted, approved by William Orrick, the then Assistant Attorney General for Antitrust, and forwarded to Attorney General Nicholas Katzenbach. The relief sought was the divestiture of all Colonial owners except one. While Katzenbach had the case under study, Mr. Orrick was replaced as head of the Antitrust Division by Donald Turner, a Harvard Law School professor. Because the proposed case was a big one which would consume considerable Antitrust Division resources, Katzenbach afforded his new antitrust chief an opportunity to review the case before he would allow it to be brought. Up to that point the Justice Department had acted with rather commendable dispatch, given the complexity of the case and the fact that the Antitrust Division's general lack of experience with joint venture pipeline problems since 1941 in the Elkins Act case. The government had even enlisted some complainants on its side. As previous testimony indicates, the shipbuilders, maritime unions, and tanker operators pressed the Justice Department for action as early as 1962, although the tank owners made their plea privately out of fear or economic retaliation by the major oil companies. Moreover, the Antitrust Division's staff, from top to bottom, was generally enthusiastic, though not unanimous, about having the case brought. The proposed complaint as presented to Turner alleged violations of sections 1 and 2 of the Sherman Act-that is, that the combination of Colonial's joint owners was in restraint of trade and an attempt to monopolize as well as a violation of section 7 of the Clayton Actthat is, that the combination embraced a merger that would tend to lessen competition. As is discussed at length in the Closed Enterprise System, Turner was a brilliant theoretician but a man whose obsession with minute perfectionism led to chronic indecisiveness. His first move was to send the case back to the staff for more study. Ultimately, the case was "studied to death." In conversations with his staff, Turner mentioned several points that he thought should be nailed down. First, he demanded proof that Colonial's owners would pocket rather than pass on to consumers the pipeline's efficiency savings. The analysis submitted by Mr. Maskin to this subcommittee suggests that Colonial's product is sold at the higher tanker-pegged price, and that Colonial's owners thereby gain $152 million annually, exclusive of their pipeline dividends. A quick glance at oil industry trade publications would have informed Turner that Colonial's cost advantage over tankers was not benefiting consumers in lower prices for oil. Turner also wanted to investigate the industry's contention that only through combinations of the major oil companies could the throughput commitments be generated to secure financing of the capital investment necessary for pipeline construction. By 1963 Colonial had already begun partial operation, with full operation commencing in early 1965. |