Thus, while antitrust divestiture would not have affected the construction of Colonial, which had already occurred, it might deter the construction of future pipelines, if it were true that these pipelines could only be financed through joint ventures of competing oil companies.

There are grave empirical and theoretical difficulties with this theory. As stated earlier, Colonial was originally planned to extend north only to Richmond. In 1961 four of the proposed owners-Indiana Standard, Phillips, Cities Service, and Continental-threatened to withdraw from the group and, having attracted Mobil to their fold, planned to build their own separate pipeline from Texas to New Jersey. Texaco, Gulf, Sinclair, and Pure then agreed to extend the line to New Jersey.

In light of that development, it is difficult to argue that a pipeline such as Colonial could have been built only through the combination of all nine of its present owners.

Previous testimony before this subcommittee revealed that in 1969 Williams Bros. solicited throughput commitments for an independently-owned gulf coast to Tulsa line from virtually every significant potential shipper in the area. Not a single substantial commitment was obtained. Yet shortly thereafter, oil companies whom Williams Bros. Co. had solicited announced their own plans to build the jointly owned Explorer Pipeline for the gulf coast through Tulsa and northward. In fact, the preliminary plans for the Explorer Pipeline had been developed prior to Williams Bros.' offer to build the gulf coast to Tulsa route independently. Thus, an experienced independent pipeline company wanted to build the line. The need for the line was established by the fact that it was later constructed, but the competing oil companies insisted that they own the line themselves.

A similar example-this is the third one-concerns the Olympic Pipeline joint venture in the Pacific Northwest. In the early 1960's the Southern Pacific Railroad inquired of potential shippers how much they would ship through a pipeline which the railroad would build and into which it had put considerable planning. No throughput commitments were even requested. The railroad would absorb the risk itself. Shell, Texaco, and Mobil responded that they had no need for the proposed pipeline, although at the very same time they were planning a joint venture to build it themselves, which they did.

The truth of the matter is not that independent pipeline companies cannot obtain pipeline financing, but that the major oil companies will never tender the necessary throughput commitments as long as monopoly gains lure them to build their own joint venture pipelines. It is economically ludicrous to presume that independently-owned oil pipelines will not be built, as long as three conditions prevail :

(1) vigorous Government antitrust enforcement prevents the oil companies from owning pipelines themselves,

(2) there is oil that needs to reach markets, and

(3) pipelines are the lowest cost means of getting that oil to these markets.

In that situation the major oil companies would have no choice but to guarantee independent pipeline companies the necessary throughputs to obtain construction financing, unless they were willing to forego

profitable markets or to throw away their money by relying upon more expensive transportation. And the latter alternative, if it consisted of a concerted refusal to deal wtih an independent pipeline, would also violate the antitrust laws.

So much for the disincentive argument.

Both Mr. Turner and Edwin Zimmerman, his top assistant who succeeded him in 1968 as head of Antitrust, used as another excuse for their inaction the argument, pressed by Colonial in the Department of Defense and on both Attorneys General Kennedy and Katzenbach, that a gulf coast-eastern seaboard pipeline was needed in case our tankers plying that route were attacked by enemy submarines. Yet just over a year after he left the Justice Department, Turner was telling my law school class in economic regulation that if the Government determines that it should provide a service for the benefit of society in general, such as national defense, by far the most efficient means of accomplishing this objective is through a direct subsidy rather than by intervention in the market mechanism which distorts competitive prices and misallocates scarce economic resources.

Precisely such an intervention in the market mechanism would have been brought about by the Antitrust Division's inaction in prosecuting of Colonial Pipeline case because of the degree of concentration and control that the pipeline would have afforded and has afforded.

If, as Colonial contends, the Government had as early as 1945 considered this pipeline vital to the security of the eastern seaboard, the Government certainly would not have waited for Colonial to begin construction in 1962. Likewise, the Government would surely have provided loans or subsidies to the two private efforts to build this pipeline during the early 1950's which failed because Colonial's owners would not guarantee the throughputs to secure financing.

It would be surprising if the military's civilian superiors gave much weight to the national defense argument for Colonial.

In the first place, in a world whose major powers are armed with nuclear weapons, it is unlikely that any hostile foreign nation would survive long enough to mount submarine attacks against our oil tankers; certainly no hostile foreign nation would begin an attack on the United States by seeking to sink our tankers.

Second, it would be considerably easier for an enemy to knock out the Colonial Pipeline than for its submarines to destroy 70 or so 50,000 deadweight ton tankers with the same aggregate oil-bearing capacity as Colonial's.

Some other arguments against national defense action are set forth in the margin.3

It should be observed that the national defense concern related to the need for a single pipeline carrying oil from the gulf coast to provide industrial and military security to the eastern seaboard was other

Third, because of Colonial's competition, much of the gulf coast-eastern seaboard tanker trade has been laid up or diverted, and fewer new tankers have been built in light of Colonial's sapping of demand for them. Pipeline competition has also quickened the trend toward larger tankers with lower unit costs. But our national defense also requires sufficient numbers of relatively small tankers-under 40,000 deadweight tons to carry petroleum products to the small, out-of-the-way and underdeveloped ports near which our troops always seem to be fighting. Large tankers, even if they could get into these ports, carry far too much fuel for the storage facilities generally available. This danger in the trend toward larger tankers was recently pointed out by Admiral Chase of the Military Sealift Command.

wise dependent upon tankers. Since Colonial had already been built by 1965, when Turner considered the case, any national security objective had already been accomplished and would have been unaffected by a mere transfer of ownership to an independent pipeline company through antitrust divestiture.1

Yet at no time did Turner indicate with finality that he was either for or against the case. He seemed to proceed as if the matter were a leisurely intellectual exercise. Every possibility was to be explored which might result in an even stronger case. The refrain "whatever happened to the Colonial Pipeline" became an in-house joke among the Antitrust Division staff.

As on other occasions, Turner did not trust the competence of his own staff to dally in such pursuits. In 1965 he asked Paul MacAvoy, then on the staff of the Council of Economic Advisers, to take a look at the proposed Colonial complaint and an internal staff memo discussing it. MacAvoy was told by Turner that the complaint had come to him in such a prolix economic form that he had trouble understanding what the issues actually were.

After reviewing the complaint and memo, MacAvoy wrote Turner suggesting questions that should be asked of Colonial's owners in ascertaining whether their overall market shares had remained stable, one of the anticipated consequences of the joint venture ownership arrangement.

It was not until 1967, when MacAvoy had returned to MIT, that he received any response at all from the Antitrust Division to his letter. At that time it was decided that he and William Comanor, a Harvard economist who was then leaving the Division after being Turner's adviser, would conduct a study to determine whether Colonial's control over transportation had in fact resulted in higher than competitive prices for petroleum products.

I am submitting for the record a copy of a memorandum submitted by MacAvoy and Comanor describing the objectives of their inquiry. (The memorandum follows :)

PROPOSAL FOR A STUDY OF THE ECONOMIC EFFECTS OF COLONIAL PIPELINE

This study would seek to detect oil products prices higher than the competitive at a result of the pipeline's control of transportation in certain markets. Such detection should be possible if the transporter has market power, and if the Sherman or Interstate Commerce Acts are not sufficient deterrents to the use of power to increase profits.

To begin with, Colonial must have substantial power to control the supply of oil transportation services in some of the relevant markets. For purposes of a study of price setting at wholesale and retail for both gasoline and distillate,

Turner's other excuses were just as petty. When several businessmen came to him and Zimmerman privately to complain of injury from another joint venture pipeline, but in terms applicable to Colonial, Turner dismissed their words as having been put into their mouths by staff attorneys eager to bring suit. Considering the frustration that Antitrust Division attorneys have experienced in trying to obtain testimoney against joint venture pipelines from businessmen terrified by the prospects of retaliation by the dominant oil company owners, the notion that several businessmen would take this risk by complaining to an Assistant Attorney General merely as a stand-in for a gung-ho staff attorney is hardly tenable.

In 1966 when the Maritime Trades Department of the AFL-CIO finally abandoned in despair its complaints against Colonial which it had been vigorously pressing since 1962, Turner was free to argue, and did, that Colonial could not be a very important case because the groups it was supposed to be injuring were not complaining.

One former trial attorney insists that Turner once even suggested that it might not be appropriate to file the antitrust case while a grand jury inquiry into criminal aspects of Colonial's activities was still underway in Newark. This culminated in the 1967 indictment of Colonial, its president, and two other top executives for bribery and conspiracy in obtaining a building permit and easements from officials of Woodbridge, N.J.

a relevant market consists of any area in which the overlap between pipeline and other transporters is different from the overlap in adjoining regions. There must be a number of markets in this instance; in the eight State region, there must be overlapping services of the two pipelines and bulk tankers in one or two States in the Gulf Coast region and in one or two States on the Eastern Seaboard. In the States between, however, the overlap may be limited to that between Colonial and the smaller pipeline [Plantation Pipeline]. Then Colonial's control of the supply of service could well be more extensive in four middle States or Colonial could have power to control supply in some "middle States market." This possibility can be ascertained by studying the concentration in shipments in these states as compared to surrounding states.

How can the power be utilized to set high-than-competitive prices for gasoline and distillate? There are a number of possibilities, assuming that ICC regulation limits transport rates to average equality to historical average costs-so that direct control of final prices by control of transport rates is an ICC matterthere are two means of control outside of ICC jurisdiction that require consideration.

The first follows from integration of transportation and refining marketing. By refusing to deal with more than the select group of refiners-marketers with which it is integrated, the pipeline can transfer its control from the transportation level to the refining level. There should be evidence of (1) exclusion of refiners from using the pipeline, (2) an increased profit margin at the refining-marketing level for the same conditions of demand and production as elsewhere. For one, it ought to be possible to detect a higher price-cost margin during last winter in the middle four States than in the coastal States, accounting for population, weather, refineries by size, differences.

The less obvious possibility is that the pipeline was used not to guarantee control for a select few in refining or marketing but rather to stabilize market shares of the existing producers in the area. Control of shares of a fairly large number of existing refiners may have the same effect as complete control of transport-because rigidity in shares makes any policy foolish other than that of adherence to the "general" price set by the regional leader.

The problem is to detect a control mechanism. It would be extremely difficult to detect interfirm transfers to maintain shares from the results because of actual exchanges between refiners: shifts of excess supplies from one location to the other may be simple competitive arbitrage-similar to that in grain movements between firms in Kansas City and those in New York to meet seasonal consumption demands. But there is some hope that stability of firms' shares of sales in various metropolitan regions would contrast with market arbitrage which causes large variations in firms' shares. For example, a pattern of continuous transfer of 94 octane from Company A to Company B in location 1, and the reverse in location 2, would follow from a market sharing agreement while a shipment from 1 to 2 to meet short-term excess demand at 2 could be expected to cause large fluctuations in the share of B at 2. This is impressionistic, but an impressionistic study sometimes leads to generally-accepted conclusions that reducing market price fluctuations is different from stabilizing firms' shares of sales so as to control the general level of prices.

Complementary evidence is provided by the study of price-cost margins mentioned above. Findings that there has been increased stability in shares at locations where firms have experienced higher profit margins would indicate more convincingly that control of transportation implied control of gasoline prices. (Note: a finding that prices have been more stable than previously is another matter; there has already been mention in the trade press of this, with the conclusion that Colonial has helped provide stability where chaos had reigned, but the stability could be either reduced month-to-month fluctuations or stability at the cartel price level).

The study requires statistics on shipments, the identity of sender, receiver. and transporter, the transport rate, the regional wholesale and resales prices-all on a monthly basis. Our personal impressions are that it will disclose increased control of wholesale gasoline and heating fuel prices in some locations in the central four States.

We will prepare and submit a completed report on or before November 30, 1967. PAUL MACAVOY,

Associate Professor of Management, Sloan School of Management, Massachusetts Institute of Technology.

WILLIAM COMANOR,

Assistant Professor of Economics, Department of Economics, Harvard
University.

Mr. MOORE. One of these objectives was to ascertain whether the market shares of the owners had stabilized. Yet by that time the Antitrust Division trial staff had already determined that stabilization had occurred.5

In any event, MacAvoy and Comanor never completed their study. Since massive data were needed, new civil investigative demands were issued to Colonial's owners in 1967. Most of the companies replied that they lacked the kinds of data requested. Instead, they purported to send what they had, which in one case was 400 pounds of documents. Since it was too expensive to put this data through computer analysis and since meaningful results were not guaranteed in any event-the study was abandoned and the data shipped back to Washington.

Then in 1968 Gordon Spivack, one of Turner's top assistants before departing for Yale Law School, made a report as a consultant to Zimmerman, recommending that the case be brought on the theory that competing refiners were excluded by Colonial's joint ownership. Again, nothing happened.

In the final analysis, the case was too big and its precedent too foreboding for the Turner-Zimmerman regime to come to grips with. The historical orientation of the Antitrust Division was and is such that, while it is amply prepared for simple price-fixing and merger cases, the complex, structural problems of our economy are still pie in the sky, as far as they are concerned.

Ironically, it was Turner himself who set out to tackle these cases by putting his staff to work developing legal theories against shared monopolies. He was a brilliant and sincere man but a poor administrator. None of those cases were ever filed."

The Justice Department in its statement before the subcommittee today still displays Turner's brand of paralysis, fearing that to bring a case against Colonial would lay open most of the major oil pipelines throughout the country to similar antitrust attack. Justice observes that for more than 30 years the oil industry has been organizing and operating a transportation system heavily dependent upon such joint venture pipelines-as if 30 years of neglect in Government antitrust enforcement justifies more neglect.

No one denies that high volume pipelines are efficient and costreducing. But that is not the issue, which is whether independently owned pipelines can be just as efficient and just as cost-reducing as jointly owned pipelines.

It is noteworthy that the overall objective of measuring Colonial's precise impact on prices is generally at odds with the modern philosophy of antitrust enforcement which Turner himself pioneered. The trend, as exemplified by Turner's merger guidelines, has been to lay down per se rules of illegality, increasingly defined in structural terms such as market shares or concentration ratios. In this fashion enforcement officials can avoid detailed and expensive investigations as to whether each particular case may or may not be an exception to the rule that the conduct or structure in question generally produces anticompetitive results.

(EDITOR'S NOTE. The Merger Guidelines referred to in the above footnote, issued by the Justice Department in 1968 and still in effect today, appear in appendix I.)

In the last weeks of the Johnson administration, Zimmerman reluctantly allowed one small action in the nature of a joint venture pipeline case to go forward. The case involved Continental's Glacier Pipeline and Jersey Standard's Silvertip Pipeline. These two crude lines poured into the refining center at Billings, Mont.-Glacier running southward from the Canadian border above Great Falls and Silvertip running northward from the Elk Basin in Wyoming. Continental and Jersey Standard already owned 80 percent of the Yellowstone refined products line running westward out of Billings. They proposed to merge the Glacier and Silvertip crude lines into a single system in which each company would have a 50-percent interest. When the parties were notified that a sult was about to be filed, they submitted a formal letter abandoning their project.