It is apparent from the above that Colonial's rates reduce less sharply than competing tankers and trucks. There is nothing unusual about Colonial's rate structure except that it is by far the lowest cost transportation in the country today. Rates to the New York Harbor area are compensatory and shippers into the southeastern part of the United States are enjoying rates far below anything ever available to them heretofore. It is paradoxical that in this same hearing Colonial was confronted by Mr. Moore on one hand who contends Colonial's rates are too high and on the other hand by witnesses from the Maritime Industry and their labor unions contending that Colonial's rates are so low that intracoastal tankers cannot compete. It is interesting to note that the Ernst and Ernst report, dated June 20, 1962, filed in the record by Mr. Hoyt Haddock, Executive Director of the AFL-CIO Maritime Committee, reflects that tankers were able to compete with Colonial's initial longhaul tariff of thirty-five cents (354) per barrel in 1962, but Ernst and Ernst warned the maritime industry that if they failed to control rising costs, they could lose their competitive position. Ernst and Ernst also pointed out that U.S. flag vessels had been unable to successfully compete with foreign tankers on import-export shipments and there had been a sharp decline in U.S. flag vessel participation in World trade. Except for government protection, which prohibits foreign flag tankers from competing in intracoastal trade, the tanker industry would undoubtedly have lost position in domestic trade long prior to the advent of Colonial. Ernst and Ernst also recognized the inherent advantages of large diameter pipeline transportation over tankers. Fortunately, our national transportation policy preserves the inherent advantages of all forms of transportation. (Preamble preceding Part I, Interstate Commerce Act, 49 USC Section 1). This Committee, above all others, would favor the "better mousetrap" theory rather than attempt to prop up an industry which dug its own grave by strikes, featherbedding and lack of cost control. They should applaud an industry that has provided, without government subsidy or franchise, the cheapest, safest and environmentally cleanest, means of transportation known to man, and has lowered, not raised, its tariffs during a period of runaway inflation. Very truly yours, FRED F. STEINGRABER, President. (The subcommittee notes that in the above statement Mr. Steingraber has gone to elaborate lengths to demonstrate the obviousnamely, the decreasing rates for longer hauls are common in all transportation modes. But as Mr. Wilson of the Justice Department noted in his answer to a written question, No. 3, from the chairman (see page 212 below), "Below-cost selling may under certain circumstances constitute proof of such intent [to monopolize in violation of Section 2 of the Sherman Act]. Substantial variances between rates and costs in different sections of a pipeline where no reasonable economic justification exists, or no need to meet competition is shown, may also support an inference of intent to monopolize." (Emphasis added.) The subcommittee notes that Colonial's effective rate from Atlanta to New York is far below that needed to meet tanker competition. While we are given a needless justification for some permissible variance in rates on different segments, Mr. Steingraber has failed to address the question why these variances are so substantial.) Mr. SMITH. Our final witness today is Mr. Bruce B. Wilson, Deputy Assistant Attorney General, Antitrust Division, Department of Justice. I want to apologize for having you sit in the audience here for an hour or hour and a half waiting for us to get to you. That is the way some of these hearings go. TESTIMONY OF BRUCE B. WILSON, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE; ACCOMPANIED BY WILLIAM J. LAMONT Mr. WILSON. That is all right, Mr. Chairman. I found some of the testimony to be very interesting. Mr. SMITH. You may proceed. Mr. WILSON. Mr. Chairman and members of the subcommittee. Mr. WILSON. Yes; I do. With me this morning is Mr. William J. Lamont of our Public Counsel and Legislation Section. I am pleased to be here today in response to the request of the Chairman for testimony from the Department of Justice on the role played by oil company-owned petroleum product pipelines in the distribution system. At the outset, I would like to express my appreciation to the subcommittee for holding these hearings on this subject. In listening to the testimony this morning, and in reading the statements of the witnesses who have appeared before you during the last 2 days, I am sure that the record of these hearings will be most helpful to us not only in our evaluation of the Colonial question but also in our analysis of the jointly-owned pipeline question generally. We have conducted and are conducting a number of case investigations in this area and we are deeply concerned with the implications for competition which are involved, particularly in the larger joint venture systems. At the outset I should reluctantly point out, as noted in the Chairman's request, that certain legal inhibitions preclude the Department of Justice from discussing many of the facts involved in ongoing specific investigations. For this reason, I cannot, therefore, discuss the specific facts of investigations in progress-Colonial Pipeline, for example. The Antitrust Division has always been oriented toward investigation of possible antitrust violations on a case-by-case basis. In those cases still open to enforcement action, we must protect the rights of possible defendants, we must protect our complainants against possible economic reprisals, and we must observe the legal requirements as to the confidentiality of investigative files. Where investigation proceeds, as it frequently does, by use of civil investigative demands, the documentary materials which are furnished are subject to the Antitrust Civil Process Act, which prohibits disclosure of such material outside the Department, except for use in antitrust enforcement actions. Additionally, in many instances, information in the nature of business secrets is furnished voluntarily, but only on assurance that it will be treated with a simile degree of confidentiality. In order that I may be most helpful to your investigation within these constraints, I can undertake to generalize with respect to some of the possible competitive problems which have appeared over the years in the course of various pipeline investigations we have undertaken. It is to be understood, however, that not all of these problems exist with all of the projects we have studied. First, let me outline the record of our concern with pipelines generally. Doubts concerning pipelines have been a constant part of antitrust history, going as far back as the 1911 Standard Oil case, 221 U.S. 1 (1911). For a period of time efforts to deal with competitive problems were mainly along lines of regulation. The Hepburn Amendment of 1906 gave the Interstate Commerce Commission some regulatory jurisdiction to control what were then considered to be the worst abuses. Subsequently, the Antitrust Division, in major cases filed just prior to World War II, included charges concerning the operation of pipelines by integrated companies-the American Petroleum Institute case (which is affectionately known as "Mother Hubbard") and a case under the Elkins Act. While the former case never came to trial, the Elkins Act case, U.S. v. Atlantic Refining Co., was the subject of a consent decree entered into in the early days of World War II. The Elkins Act charge embodied in that complaint was to the effect that integrated companies operating their own pipelines secured rebates on shipments by their competitors over those lines, by the device of charging high tariffs and then distributing the excess profits as dividends to themselves. The consent decree obtained in that case attempted to limit dividends payable to the owners to a 7-percent return on their investment. It has since proved most difficult to enforce. Though joint venture lines existed to a minor extent before World War II, it was largely the war and the Government's sponsorship of close cooperation in oil supply during the war emergency that turned the attention of the companies to the so-called industry lines. These joint venture pipelines are almost invariably organized and controlled by the large integrated oil companies. For the most part, these pipelines are large diameter and high capacity. They provide efficient modes of transportation at relatively low cost. They are usually financed with a 90-10 debt-equity ratio with formal throughput guarantees by the owners securing the loans. Ownership is usually divided among the owner companies on the basis of expected use, frequently with provision for changes in ownership interest as patterns of use change. A preferential right of purchase usually exists so that ownership cannot be transferred to an outsider without the consent of all owners. Since 1950 the majority of new pipeline construction has been along these lines and now includes over 35 operating lines, together with several more in the proposed or construction stage. Interest in pipeline issues was focused on joint venture pipelines as a special problem just prior to 1963 when the then projected Colonial pipeline was announced. As long known, investigation into that pipeline was begun by the FTC on complaints by competing petroleum. transporters and others. After approximately a year, in 1963, the investigation was transferred to the Department of Justice because FTC discovery powers are limited with respect to common carriers. The Antitrust Division, using compulsory process under the Antitrust Civil Process Act, began an extensive investigation of the formation of the Colonial pipeline. The issues involved were complex, and substantial further investigation was undertaken to 1966 to update the earlier reports in the context of a period of actual operation of the pipeline. A little more than a year ago a further supplementary investigation was authorized, but is not yet completed. During this same period we were confronted with the need to consider a number of other joint venture pipelines. Among the major projects studied were the Gateway (Match) line and the Glacier system, both involving combinations to own and operate existing pipeline facilities. In both of these instances, it was determined that antitrust action was justified. Upon notification to the companies involved of the Division's intention to sue, in both instances the projects were halted. Other investigations opened by the Division pertained to Explorer pipeline and Olympic pipeline-both product lines-and the Trans-Alaska pipeline, involving crude oil. All of these inquiries are still pending. Out of these investigations, we think we have gained considerable insight into the competitive questions posed by pipeline joint ventures, though, of course, the problems vary from line to line and market to market. Let me outline a few of these. The close cooperation needed to plan, construct, and operate these jointly owned pipelines raises several important antitrust considerations, both with respect to the elimination of competition between and among the owner companies and also as to their effect on nonowner competitors. By definition, a certain amount of competition in transportation is likely eliminated among the owner companies, depending upon the extent to which they were individually performing transport services for themselves or others. Because the pipelines are frequently a substitute for existing transportation facilities, other modes of transportation, such as barge and independent pipelines, may be severely affected if the joint venture arrangements operate to commit the owners to the use of the line for their transport needs, and the volume of transport business thereby foreclosed from competition is significant. Since the new pipeline is most probably highly efficient, those outsider oil companies desiring to ship via the line who are denied access to its facilities on an equitable basis may be competitively disadvantaged, although the extent of that disadvantage may or may not be serious to competition from an antitrust standpoint. In this connection, the initial ability of the owner companies to determine the precise points to be linked by the pipeline, the size and expandability of the pipeline, and the location of its input and output facilities, can serve the owners' special advantage and be a detriment to others. Again, though, the impact of this will vary widely according to particular situations. Almost invariably, those jointly owned pipeline companies do not themselves operate either input or output terminals, but simply provide connections to shipper terminals owned by the pipelines' owners or their customers. This may mean the outsider will be under serious handicap, particularly if he is a relatively small operator, because even though he may be able economically to reach the input points, he may not be able to take delivery of his product in his market area. 82-172-72-14 In addition, the nonowner's cost is the tariff rate while the owner enjoys profit on the difference between tariff rate and cost. Although legal restraints exist on the general level of profits which pipelines can earn and distribute, there could be serious questions whether or not these restraints apply to the indirect profit inherent in special facilities for owners' use, and conversely, whether or not this would in fact involve a serious harm to competition. Competition could also be affected in refinery operations. The owner companies, with the ability to influence the location of input points, have a greater flexibility in determining location of refinery operations. The mutuality of relations among pipeline owners, most of whom will be highly desirous of maintaining stability in prices within their market area, might appear to afford a basis upon which any excess product of one owner could be disposed of through the others, thereby eliminating the need to dispose of products on regional spot markets at low prices. The jointly owned pipeline could also affect competition in marketing, though how seriously is again open to question. The planning of the pipeline is preceded by extensive study into supply/demand balances in markets which might act to restrain individual marketing efforts by individual owners. In addition, the pipeline could serve as an opportunity to establish new terminal facilities on a joint basis, and the common cost facility may act as an incentive for owners to pool interests and establish common specifications so that common terminal points can serve as a supply point for several individual companies. As a matter of enforcement policy we are not particularly interested in prohibiting the construction or operation of pipelines unless there is significant competitive harm entailed in that construction or operation. There is nothing which is inherently lawful per se or unlawful per se about a jointly-owned pipeline. The owner companies claim that joint ownership is not only desirable but necessary because of the sizeable financial investments required, and the asserted substantial risks. They observe that joint pipeline ownership has been commonplace in the oil industry since World War II and claim it. would be unfair now to jeopardize these investments by antitrust action requiring alteration of financial arrangements. Whether or not ownership is in fact restricted to a select few is also unclear; the owner companies claim that invitations to join are widespread. And they assert that access to the pipeline is open and available to all without regard to ownership interest. This is a contention difficult to refute when we have few, if any, who will testify that they have been excluded. Finally, the owner companies state that their rate of return under regulated tariffs is not unreasonable, and say ownership confers no significant competitive advantage over nonowners. As can be seen, the merits of these competing considerations bear directly upon the extent of competitive injury, and therefore, the legality of the joint venture pipelines. We lack clear testimony from within the industry and without that, anti-competitive effects are impossible to prove. To the Antitrust Division, of course, a lack of real evidence of competitive injury is critical. The Division cannot file cases simply on mere suspicion, particularly where, as here, a very large and impor |