From the first pipeline built by Samuel Van Syckel to the large diameter pipelines of the present, access by independents to integrated oil companies' pipelines has been deterred through a variety of devices ranging from the outright denials of access prior to the implementation of common carriers laws, to denials due to high rates or onerous service requirements, to the more sophisticated methods used today to keep nonowners from using pipelines.

Therefore, the overwhelming benefit and use of common carrier pipelines has been by shipper-owners to the exclusion of nonowners, thereby severely inhibiting the ability of nonowner independents to compete effectively.

The Splawn report found that 60 percent of integrated companies carry no outside oil in their gathering lines and 50 percent of these same integrated companies carried no outside oil in their trunklines.47 Where there were outside shipments they were typically effected by other large integrated oil companies.48

The TNEC hearings elicited even more dramatic evidence. Over the 1929-38 period, less than 10 percent of crude and less than 20 percent of gasoline transported by pipelines belonged to nonaffiliated shippers.49

While the use of pipelines by nonowners has increased since the thirties, "the percentage of outside shipments remains significantly lower than that which ordinarily would be expected of a transportation service rendered as legal common carriage." 50

The major reasons ascribed to the low usage of pipelines by nonowners is historical. In addition to various tactics employed by owners to preserve pipelines for their own use, independents 'difficulties in securing effective access are compounded by the fact that integrated oil companies' common carrier pipelines are conceived and operated as plant facilities for the convenience of the parent.51 With the industry echoing this statement; with the ICC doing very little to alter this historical development, and with company spokesmen today admitting to such a posture,52 it is little wonder that nonowner use of common carrier pipelines remains the primary preserve of major integrated oil companies.

2. ROLE OF EXCHANGES

In lieu of securing access to major integrated oil companies singly or jointly owned pipelines, independent refiners commonly rely upon negotiating exchanges with the pipeline owners on terms acceptable to the owners.53

Although these privately negotiated exchanges isolate the transactions from common carrier regulations, they afford the nonowner to use of the integrated firm's terminal facilities. The large scale resort by independents to these exchanges, however, is symptomatic of the imposing barriers an independent faces in attempting to assert its right

47 Splawn at LXIII.

48 Id. at LXIIIXLXIV; see also Johnson at 220; Wolbert at 43-44.

40 Wolbert at 44.

Wolbert at 45.

51 Id. at 48. This conclusion was championed by Walter Splawn in his report of 1933 where he stated:

Oil pipe lines are found as a result of this investigation to be plant facilities in an integrated industry. [Splawn at xccviii. ]

32 Ind. Reorg., Part 9 at 637.

3 Consumer Energy Act at 671.

54

as a shipper on major's common carrier pipelines. Through the exchanges, shipments on major owned pipelines continue to be made by the owners. An independent which needs the services of the pipeline turns to an owner of the line and induces the owner to accept crude oil or petroleum products in the possession of the independent proximate to the origin of the pipeline in exchange for a like product at an offtake terminal of the pipeline. An appropriate transportation differential is negotiated.

Contrary to the intent of common carrier regulation, resort to exchanges leaves independents directly dependent upon major integrated oil companies for their transportation needs and leaves these majors with full discretion to select whom they will deal with and to discipline independents for price competition and other unacceptable behavior. Exchanges further serve to stabilize implicit cartel arrangements among the major oil companies.55 Also they keep intermediate markets for crude oil or products thin, giving exchanging companies more influence over price and more control over distribution channels than they would if the oil were sold in an open market rather than exchanged."

3. RATES

The development of independent refining capacity is dependent on transportation costs. Transportation costs are a life and death matter to independent refiners and largely determine their competitive opportunity." As a result, access to pipelines at a reasonable transportation cost will influence substantially the viability of the independent refining sector.

The early years of pipeline operations were bleak ones for independent companies. Prior to the passage of common carrier laws, nonowners simply were denied access to pipelines.58 In later years, after the passage of the common carrier laws, and the realization that the ICC would not enforce those laws in a vigorous manner, pipelines found other methods of excluding nonowners. Quickly pipelines found that rates and regulations could be used to keep unwanted business off their lines as effectively as outright denials, while still complying with the letter of the law.59 The imposition of State or Federal common carrier status did not open pipelines to outside use.60

In 1916, the FTC reported that rates were unreasonably high and were a method for excluding shippers, as well as depressing the price of crude in the Mid-Continent fields.61 Many examples can be found of the effect of the high rate policy of the pipelines. During the twenties and thirties, Shell Pipeline had no outside shippers due to its high rates.62 Sinclair, Standard Oil, Phillips, and Great Lakes followed the same high rate policies, as did all the other integrated oil company pipelines. The rates were so high that they equalled those charged by

63

54 Ind. Reorg., Part 8 at 5931.

55 See Marketing Performance, part 1, at 446.

50 See de Chazeau & Kahn at 412-13.

57 Rostow & Sachs at 903.

58 Harmon at 114-115.

59 Johnson at 103; Harmon at 114–115.

60 Johnson at 103.

61 FTC, Report on Pipe-Line Transportation of Petroleum, 1916, at 445.

62 Johnson at 127-28.

63 Johnson at 136, 258; Loos at 321.

the railroads and therefore there was no competitive advantage to nonowner use of the pipelines.84

Investigations of pipeline practices found that high rates and high service regulations (principally minimum tender requirements) were a deliberate attempt to exclude outsiders from using majors' pipelines.65

66

The ICC launched an extended investigation of pipeline practices in 1934 as a result of congressional and presidential prodding. The ICC found overwhelming proof that rates charged had no relation to cost, but were measured by the benefits derived by the owners. During this same proceeding, oil companies reported that there was a wide spread between rates and costs that gave the owners a decided advantage over nonowner shippers.67

The rationale underlying the integrated oil companies' high-rate policy appears to stem from a desire to control the quantity and price of crude in order to limit competition. Crude pipeline rates were set low enough to prevent effective competition by other methods (truck) and rail) of long distance petroleum transportation and high enough to squeeze independent refiners by forcing them to operate at so low a margin of profit that they could not expand or effectively compete. Similarly, integrated oil companies established product pipeline rates high enough to prevent independent refiners from reaching the populous consuming areas and profitably marketing their products. The independent refiner was restricted to marketing in the area immediately contiguous to producing fields. Thus, the FTC in 1916 found that the margin between pipeline costs and rates was unnecessarily great so that the cost and control of pipelines effectively insulated crude oil markets from competition. This same observation was confirmed 20 years later by the ICC.70

68

The high rates did not hurt the owners, however. The rates they had to pay, although the same as nonowners, were merely bookkeeping transactions. Thus,

it would seem that, formerly, pipe line owners charged initial rates as stiff as the traffic would bear, the amount being determined largely by comparable through rail rates. After the lines had paid themselves out, in the absence of regulation or adverse effects of tax laws, rates were maintained at an unreasonably high level, since the charging of rates to shipper-owners was only a bookkeeping transaction, a figurative shifting of money from one corporate pocket to another, and the higher rates discouraged use of the lines by independents." "1

What was happening was that oil company pipeline subsidiaries merely paid dividends to their owners. The dividends represented

Johnson at 258.

5TNEC Investigation, see Johnson at 279; La Follette investigation, see Johnson at 179; Splawn report lxxvii and Johnson at 220.

Reduced Rates & Gathering Charges, 243 ICC 115. 139 (1940).

See Reply of the Standard Oil Company (Ohio) and National Refining Company to Pipeline Briefs of Exceptions 15, filed July 2, 1936; ICC dkt. 26570, Reduced Pipeline Rates & Gathering Charges.

Wolbert at 13; see also: United States v. American Petroleum Institute, et al.. Civil Action 8524, District Court, District of Columbia, Sept. 30, 1940, TNEC hearings, Wherry; Rostow; Prewitt; 51 Yale L.J.; Harmon at 114-15.

FTC. Report on Pipeline Transportation of Petroleum (1916).

Reduced Rates and Gathering Charges, 243, ICC 115, 139 (1940). See also Beard at 82; 51 Yale L.J., at 1341.

Wolbert at 20-21.

the difference between the tariff paid and the actual cost to ship using the pipeline. Thus by bookkeeping methods, integrated pipeline companies were paying a much reduced rate for their pipeline shipments versus a nonowner who did not receive the dividends. The differences were enormous and created no incentive on the part of nonowners to use the pipelines.72

Rates after 1940 declined substantially due to changes in the tax laws, ICC decisions, the Consent Decree, and competition from new pipelines and alternative modes of transportation.73 Congressional investigators were able to establish the declining level of rates in the forties. But

it is important to note that such results did not come about naturally, but were the result of governmental intervention, and the record of major companies in the absence of any regulation is not calculated to reassure the worried independent operator.75 Rostow, writing in the late forties and early fifties, summarized the effect of the high rate policy of the pipelines:

For the basic fact is that today as in the time of the original Pipe Line cases in 1914, the pipe lines in the petroleum industry do not exist to make money by transporting oil. They exist to transport oil already owned by the carrier major company, and their rate structure is designed to persuade the independent producer of oil to sell his product in the oil fields, at prices dominated by the major company, or the few major companies owning the pipe line or lines in that field. The pipe line rates are such as to discourage the seller from paying the costs of carriage on his oil in order to reach a wider market in the refinery area.76 Rostow and Sachs concluded that the effect of this policy severely inhibited the development of independent pipelines:

In the past, at least, pipe line ownership gave the major companies a powerful voice in the markets for crude. The level of pipe lines rates in relation to field prices provided a distinct incentive for independent producers of crude oil to sell their oil to a major company pipe line owner in the field. Pipeline rates were so high as to discourage independent producers from transporting crude oil through the pipe lines in their own account, to be sold in markets containing more buyers than are available in any producing area. Similarly, the relation between crude prices and pipe line rates helped to keep independent refiners located far from particular fields from purchasing oil advantageously in those fields, and transporting it to their own account via pipe lines. This effect was enhanced by high tender requirements, and other conditions imposed upon the carriage of oil by pipe line companies. Although the oil and gasoline pipe lines have been common carriers in form for many years, they have until recently transported very little except oil or gasoline produced or purchased by other branches of their own companies."

72 Wolbert at 15. See also. Prewitt at 194-196, who observes that earnings were unreasonably large over a long period of time. The total dividends paid in the 1935-1939 period were, in general, larger than the net investment of the pipeline in 1939. Thus pipelines paid for themselves very quickly.

Wolbert at 15-16.

74 Wherry, final at 20.

75 Wolbert at 22.

76 Rostow at 62.

Rostow & Sacks at 882 [Emphasis in original].

As indicated above, rates started to decline in the forties and in aggregate have achieved more reasonable levels. But "the reduction of pipeline rates in recent years and the removal of burdensome minimum tender requirements have not resulted in extensive use of pipelines by the independents." 78

The lowering of rates, however, does not mean that pipelines no longer use rates to exclude nonowners. Pipeline rates are set to meet consent decree standards, but they also rely heavily on the cost of alternative transportation. Explorer, for example, in setting its rates, set a level to earn the maximum allowed under the consent decree but it also set a level no lower than the alternative barge shipments to similar destinations. Even though it was possible to charge lower rates and still earn an acceptable return on investment, it chose not to. Thus, nonowners may not be reaping the full cost efficiencies of pipeline shipments, although the owners would do so through dividend payments.

Moreover, although the ICC has set rate of return ceilings on pipelines-8 percent of ICC valuation for crude pipelines and 10 percent for product pipelines-pipelines are readily able to evade the ceiling. The ceilings cover the return on the total valuation of a pipeline company as computer by the ICC, and therefore leave pipelines free to establish rates higher than the ceiling on pipeline segments in great demand by independent shippers, while holding the overall company's rate of return within the ICC ceiling by charging lower rates on segments used exclusively by the parent.79

Thus, pipeline rates remain above the competitive rate even with regulation and to the extent that the pipelines earn greater than competitive returns on their investment, the independent refiners are put at a cost disadvantage relative to the owner paying cost.80 Small refiners have therefore felt compelled to buy into pipelines in order to assure that they would reecive equal treatment or that they would not be charged an excessive price.81

4. SERVICE REQUIREMENTS

Major integrated oil companies' pipelines can deter would-be shippers through a host of subtle, scarcely detectable discriminations against independent refiners or independent marketers, but the same factors that make it difficult for the ICC to detect and to punish unjustified discrimination will make it difficult for the FTC or private parties to prove its existence in court.82

Market Performance, Part 3 at 899.

Small Business report at 7; Deepwater Port report at 82-83. Colonial Pipeline's rates from Baton Rouge to Atlanta are maintained at a high level since there is no effective competition from alternate modes of transportation, while its rates from Atlanta to New York are proportionately lower since they must compete with tankers.

80 FTC-1973 at 26.

81 PICA hearings at 2149.

Market Performance, part 1 at 444, 448, 453-54; see also, Market Performance, part 2 at 555-56. Commenting on the proposed LOOP Deepwater Port, Ashland Oil Company recognized the significance of these subtle barriers to access :

LOOP is now structured as a stock company, doubtlessly reflecting antitrust implications and while stock ownership implies open shipping, there are many subtle ways that nonowners can, in effect, be locked out by limiting grade, tankage use, batch size, scheduling, etc. Colonial and Explorer clearly inhibit non-owners. [DWPL 845-1 (Ashland internal memorandum, Nov. 17, 1972) at 2.]