Appendix — Williams Pipe Line Co. v. Federal Energy Regulatory Commission

ILE n-

AUG 80 1978

| MICHAEL RODAK, JR, CLERK

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 23

No.. .78-"E 8 a 352

WILLIAMS PIPE LINE COMPANY AND

EXPLORER PIPELINE COMPANY,

Petitioners

Vv.

FEDERAL ENERGY REGULATORY COMMISSION,

UNITED STATES OF AMERICA, and

FARMERS UNION CENTRAL EXCHANGE, ET AL

Respondents

APPENDIX TO THE PETITION FOR

A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Of Counsel: ROBERT G. BLEAKNEY, JR.

DAVID M. SCHWARTZ HARVEY E. BINES

ROBERT L. CALHOUN SULLIVAN & WORCESTER

SULLIVAN & WORCESTER 100 Federal Street

1025 Connecticut Ave., N.W. Boston, MA 02110

Washington, D.C. 20036 (617) 338-2903

JOHN S. ESTILL, JR. Attorneys for Williams Pipe

HALL, EsTILL, HARDWICK, Line Company

GABLE, COLLINGSWORTH DONALD W. MARKHAM

& NELSON JONATHAN B. HILL

4100 Bank of Oklahoma MARKHAM AND HILL

Tower Suite 708

Tulsa, Oklahoma 74103 1000 Vermont Avenue, N.W.

Of Counsel: Washington, D.C. 20005

HowarpD D. McCLoup (202) 628-2433

P.O. Box 2650 Attorneys for Explorer Pipe

Tulsa, Oklahoma 74101 Line Company —

APPENDIX

TABLE OF CONTENTS

Farmers Union Central Exchange v. Federal Energy

Regulatory Commission, F.2d , 76-2188 (D.C.

SRA Eas 18,9 ne ON

Petroleum Products, Williams Brothers Pipe Line

Company, 351 1.C.C. 102 (1975) ......... eee

Petroleum Products, Williams Brothers Pipe Line

Company, 355 1.C.C. 479 (1976) ............cccccececceeeeees

Petroleum Products, Williams Brothers Pipe Line,

BUG. DOE, SINSCHME RPDGRIOOM, ..0........cciccccsncsecccssserccssessess

— Suspension Case No. 67214, Certified Copy of

cache dine abies cance cae Aaa al de sider avd leit dbcooadaiasaensencvensivs

ICC Fourteenth Supplemental Fourth Section

Ra IATA SI Se ne NL

Remarks by John H. Shenefield Before Sections of

American Bar Association, August 8, 1978.............

Order of U.S. Court of Appeals, D.C. Circuit, July

25, 1978, denying petition for rehearing.................

Order of U.S. Court of Appeals, D.C. Circuit, Aug.

4, 1978, staying mandate to Sept. 1, 1978................

FERED en Ed a

Page

Appendices

——————— SC

A-1

Notice: This opinion is subject to formal revision before publication in the

Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify the

Clerk of any formal errors in order that corrections may be made before the

bound volumes go to press.

United States Court of Appeals

FOR THE DISTRICT OF CULUMBIA CIRCUIT

No. 76-2138

FARMERS UNION CENTRAL EXCHANGE, ET AL.,

PETITIONERS

¥.

FEDERAL ENERGY REGULATORY COMMISSION*

and THE UNITED STATES OF AMERICA

WILLIAMS PIPE LINE Co.

EXPLORER PIPELINE CO., INTERVENORS

Petition for Review of an Order of

the Interstate Commerce Commission

Argued April 5, 1978

Decided June 27, 1978

John M. Cleary, with whom Frederic L. Wood was on

the brief, for petitioners.

* Substituted as respondent agency in place of the Inter-

state Commerce Commission by virtue of Public Law 95-91,

§402(b), 91 Stat. 584 (August 4, 1977) and Executive order

No. 12009, 42 Fed. Reg. 46267 (September 15, 1977).

Bills of costs must be filed within 14 days after entry of judgment. The court

looks with disfavor upon motions to file bills of costs out of time.

A-2

Ron M. Landsman, Attorney, Department of Justice,

with whom John J. Power, III, Attorney, Department of

Justice, was on the brief, for respondent, the United

States of America.

Christine N. Kohl, Attorney, Interstate Commerce

Commission, with whom Mark L. Evans, General Counsel,

and Charles H. White, Jr., Associate General Counsel, were

on the brief, for Interstate Commerce Commission.

J. Paul Douglas, Attorney, Federal Regulatory Com-

mission, with whom Philip R. Telleen, Attorney, Federal

Regulatory Commission, was on the pleadings, for re-

spondent, Federal Regulatory Commission.

Robert G. Bleakney, Jr., with whom David M. Schwartz

and Robert L. Calhoun were on the brief, for intervenor,

Williams Pipe Line Company.

Donald W. Markham, with whom Jonathan B. Hill was

on the brief, for intervenor, Explorer Pipeline Company.

Also Hanford O’Hara, Attorney, Interstate Commerce

Commission, entered an appearance for Interstate Com-

merce Commission.

Also Robert B. Nicholson and Andrea Limmer, At-

torneys, Department of Justice, entered appearances for

respondent, United States of America.

Before MCGOWAN, LEVENTHAL and WILKEY, Circuit

Judges.

Opinion ter the Court filed by Circuit Judge

McGOowWAN.

McGowaN, Circuit Judge: Petitioners, a group of oil

shippers, challenge an order of the Interstate Commerce

Commission (ICC) sustaining (1) increased rates filed by

intervenor William Pipe Line Co. (Williams) and (2) joint

rates initiated by Williams and intervenor Explorer Pipe-

line Co. (Explorer), as against claims that the former are

A-3

unreasonably excessive, see 49 U.S.C. §1(5)(a), and the

latter are discriminatory, see id. §2, and illegally prefer-

ential, see id. §3(1).

This review proceeding is unique in that, while pend-

ing before us awaiting briefing and oral argument,

jurisdiction over the rates in question was transferred by

Congress from the ICC to the Federal Energy Regulatory

Commission (FERC), and the latter has been substituted

for the ICC as the respondent agency. FERC has advised

this court that it takes no position with respect to the

merits of the order under attack, and urges us rather to

forego adjudication on the merits in favor of a remand of

the case to it so that it can formulate, independently to

the ICC, the regulatory principles it finds to be suitable for

application in this new area of responsibility committed to

it. The United States, a statutory respondent, purporting

to see deficiencies in the ICC’s decision, supports FERC’s

remand request.

The court, now having had the benefit of full briefing

and oral argument of the merits by all parties except

FERC, has concluded, to the extent and for the reasons

hereinafter appearing, to remand the case to FERC for -

determination by it, under its new authority, of the

compatibility of the subject rates with 49 U.S.C. §1(5) (a),

and, in light of its findings thereon, for examination of

the preference issue under id. §3(1). As to the existence

of discrimination, however, petitioners’ failure properly to

raise the issue before the ICC mandates our affrmance of

that agency’s decision insofar as it is based on id. §2.

I

Williams, an independent common carrier, is a rela-

tively new entrant in the oil pipeline transmission in-

dustry, having begun doing business in 1966 with the

A-4

purchase of Great Lakes Pipe Line Co. (Great Lakes). It

acquired the physical assets of Great Lakes from eight

petroleum producer-owners for $287.6 million—the high-

est among the competitive bids received.1 The pipeline

system thus acquired serves a large portion of the Mid-

west, with connections in such producing and refining

cities as Tulsa, Fargo, Lincoln, and Topeka, and in such

consuming cities as East St. Louis, Chicago, and Min-

neapolis. By interconnecting with intervenor Explorer

Pipeline Co. (Explorer) at Tulsa, Williams also may con-

nect refineries located along the Gulf Coast of Texas and

Louisiana with consumers in the Midwest.

Petitioners are a group of oil producers and refiners

located primarily in the Great Plains area who historically

have used the Great Lakes-Williams pipeline system to

transport their petroleum products to the Midwest. In

late 1971 and early 1972, Williams informed them that it

was raising its rates by approximately 15 percent (or 3

cents a barrel) across the board. At the same time as it

generally increased its rates, Williams, together with

Explorer, initiated joint rates for through service from the

Gulf Coast to the Midwest. These joint rates are uni-

formly 9.5 cents a barrel lower than the combination of

Williams’ and Explorer’s local rates.

Shortly after the appropriate tariffs were filed with

the ICC, petitioners made them the subject of complaints

under the provisions of the Interstate Commerce Act

which, inter alia, regulates oil pipeline rates, 49 U.S.C.

1The ICC did not approve this sale for the reason that, unlike its

regulatory authority with respect to other common carriers such as

railroads, its jurisdiction over oil pipelines does not extend to the sale or

acquisition of a pipeline company. See 40 U.S.C. §5(13); p. 9 infra. —

Although petitioners do not appear to claim that the price paid was

irrational, they do insist that it was subject to the inflationary trend

that has recently affected the American economy. The exact relation-

ship of the price to the “fair market value,” replacement cost, and

reproduction cost of the Great Lakes enterprise is subject to dispute.

A-S

§1(1)(b). Petitioners’ protests led the ICC to initiate

investigations into the lawfulness of both sets of rates,

although the disputed rates have remained in effect with-

out suspension since their inception, pending the outcome

of these proceedings. Although many claims were origi-

nally raised by the parties, the course of administrative

consideration has left three major issues of import on

appeal.

First, petitioners argue that Williams’ rate increases

for the transportation of oil in the area formerly served by

Great Lakes are unreasonable under id. §1(5)(a),2 because

they are derived from an inflated valuation rate base? and

allow an excessive rate of return on that rate base (10%);

and further because certain operating expenses‘ and tax

2In relevant part, 49 U.S.C. §1(5)(a) provides:

All charges made for any service rendered or to be rendered in

the transportation of... property,...or in connection therewith,

shall be just and reasonable, and every unjust and unreasonable

charge for such service or any part thereof is prohibited and

declared to be unlawful....

3A valuation rate base allows the carriers to receive a return on

the present “fair value” of all of its property devoted to public use. The

Interstate Commerce Act, as amended by the Valuation Act, 37 Stat.

701 (1913), gives the ICC broad authority to “investigate, ascertain, -

and report the value of all property owned or used by” regulated

carriers, 49 U.S.C. §19(a), based, inter alia, on “the original cost to date

[of public assets], the cost of reproduction new, the cost of reproduction

less depreciation, and an analysis of the methods by which these several

costs are obtained, and the reason for their differences, if any.” Jd.

§19a(b). It is generally accepted that in inflationary times the above

formula will produce a rate base greater than one derived from

“original cost” less depreciation to date of all assets committed to

common carrier service, and lower than one derived from the reproduc-

tion cost (present cost of reproducing the same physical assets), the

replacement cost (present cost of building a like enterprise taking

advantage of modern technology), or the going concern value of the

business enterprise as it might appear to an arm’s-length purchaser.

‘Petitioners object to Williams’ inclusion of two items in the

operating expenses for which it is entitled to compensation by way of

rate revenues. First, Williams computed its depreciation charges by

assuming that its wasting assets had a value equal to the price it paid

Great Lakes in 1966 for the purchase of the pipeline, $286.7 million, plus

A-6

allowances used by Williams in computing its rates were

unreasonable. Second, petitioners claim that by charging

them local rates to transport their oil from the Great

Plains to the Midwest while charging the Gulf Coast

shippers less (per mile)—under the joint Williams-

Explorer rates—to transport their oil to the same destina-

tions, intervenors are giving the Gulf Coast shippers an

unjust preference. Jd. §3(1).6 Finally, petitioners argue

amounts spent since 1966 in adding new physical assets to the system.

Petitioners consider this depreciation base excessive both because the

purchase price as of 1966—due to inflation—is much higher than the

sum of the monies actually spent over the years by Great Lakes in

putting the physical assets in place, and because that depreciation base

allegedly did not account for the fact that Great Lakes had already

been compensated for almost $100 million worth of depreciation by way

of prior rate revenues. Second, petitioners argue that payments by

Williams to two affiliated companies for terminal leases and adminis-

trative services were unreasonably excessive, allegedly suggesting

intracorporate extravagance that should not be charged to rate payers.

5In figuring its tax costs, Williams used the “normalization”

method. Under this method, a regulated business accelerates its

depreciation schedule for tax purposes, but figures its tax costs for

ratemaking purposes as if it were paying the higher taxes required by

a straight-line depreciation schedule. The difference between the two

amounts is placed in a deferred tax reserve account, out of which the

taxes are eventually paid, but on which the business in the meantime

collects interest. See 26 U.S.C. §167(1)(3)(G). Alternatively, Williams

could have reflected its present tax savings from accelerated deprecia-

tion in lower current costs for ratemaking purposes. This latter

method allows current tax savings to “flow through” to current

ratepayers, while burdening future ratepayers with the deferred taxes

when they come due. Normalization, on the other hand, allows the

current benefits and future burdens to be shared more equally by

current and future ratepayers. See generally The Second National

Natural Gas Rate Cases, No. 76-2000, et al., slip op. at 29-39 (D.C. Cir.

June 16, 1977). Petitioners contend both that the ICC should better

explain its deviation from its past insistence on the “flow through”

method of computing costs, and that it should take measures to assure

that ratepayers will bencfit from the interest revenues accruing to

Williams’ deferred tax account.

6 In relevant part, 49 U.S.C. §3(1) provides:

It shall be unlawful for any common carrier subject to the

provisions of this part to make, give, or cause any undue or

unreasonable preference or advantage to any particular...

territory...in any respect whatsoever; or to subject any

A-7

that by unevenly dividing the joint rate revenues with

Explorer, Williams is giving the eight Gulf Coast shippers

that jointly own Explorer a discriminatory rebate. Id.

§2.7 Petitioners asked the ICC to order Williams to low-

er—and Williams and Explorer to readjust—the rates in

question, and to pay reparations plus interest, costs, and

attorneys’ fees.

Petitioners do not contest the propriety of the proce-

dures used by the ICC in adjudicating their complaints.

The administrative law judge announced his decision

favorable to Williams on June 6, 1974, after holding

several days of formal hearings in 1972 and 1973 and after

considering copious written submissions. Petroleum Prod-

ucts, Williams Bros. Pipe Line Co. (unpublished initial

decision) {hereinafter referred to as Jnitial Decision and

cited to Joint Appendix (JA)]. Exceptions were filed by

the petitioners on both sets of issues, thereby entitling

them to consideration by a three-commissioner division of

the ICC. On the basis of the record as well as the

exceptions and replies filed by the parties, the division, one

commissioner dissenting, accepted the findings of the

administrative law judge. Petroleum Products, Williams

particular... territory ...to any undue or unreasonable prejudice

or disadvantage in any respect whatsoever: Provided, however,

That this paragraph shall not be construed to apply to dis-

crimination, prejudice, or disadvantage to the traffic of any other

carrier of whatever description.

749 U.S.C. §2 provides:

If any common carrier subject to the provisions of this part

shall, directly or indirectly, by any special rate, rebate, drawback,

or other device, charge, demand, collect, or receive from any person

or persons a greater or less compensation for any service rendered,

or to be rendered, in the transportation of passengers or property,

subject to the provisions of this part, than it charges, demands,

collects, or receives from any other person or persons for doing for

him or them a like and contemporaneous service in the trans-

portation of a like kind of traffic under substantially similar

circumstances and conditions, such common carrier shall be deemed

guilty of unjust discrimination, which is prohibited and declared to

be unlawful.

A-8

Bros. Pipe Line Co., 355 1.C.C. 102, 126 (1975) [hereinafter

referred to as Williams I}.

Petitioners next asked the entire Commission to

reconsider the case, arguing that it involved “matters of

general transportation importance”—the standard that

must be met to secure reconsideration by the full Commis-

sion. Although asserting that the issues did not rise to the

requisite level of importance, the full Commission felt that

reconsideration of the record, as supplemented by written

submissions by the parties, was merited “because of the

relative dearth of precedent concerning petroleum pipe-

line rates, and in view of the substantial sums of money at

issue....” Petroleum Products, Williams Bros. Pipe Line

Co.. 355 1.C.C. 479, (1976) [hereinafter referred to as

Williams II]. In an opinion filed December 3, 1976, the

full Commission, one commissioner dissenting and two not

participating, affirmed the findings of the administrative

law judge and the division, id., and petitioners sought

direct review by this court. !

II

A.

In 1906, the Interstate Commerce Act of Feb. 4, 1887,

c. 104, 24 Stat. 379, was amended by the Hepburn Act to

include companies engaged in the “transportation of

oil... by pipe line” among the common carriers subject to

regulation thereunder. Act of June 29, 1906, c. 3591, $1, 34

Stat. 584. Yet, while pipeline companies joined railroads,

and were later joined by motor carriers, as regulatory

subjects of the Interstate Commerce Act, those companies

never faced the degree of regulation to which the vehicu-

lar common carriers were subject. Thus, while under the

same duty as railroads and/or motor carriers to furnish or

allow continuous transportation, 49 U.S.C. §§1(1), 1(4), 7,

ee

A-9

to establish, file, and publish reasonable, nondiscrimina-

tory rates subject to ICC approval, id. §§1(5), 3(1), 4(1), 6,

15(1), to avoid certain pooling relationships, id. §5(1), to

file certain financial reports, and to use certain accounting

procedures subject to ICC specifications, id. §§20(1), (2),

(4), (5), pipeline companies have none of the special

obligations imposed upon the vehicular regulatees under

the Act concerning acquisitions, mergers, corporate affil-

iates, uniform cost and revenue accounting, issuance of

securities, and corporate or financial reorganizations. Jd.

§§5(2)-(13), 20(3), 20a, 20b, 20c. For this reason, we may

intuit a congressional intent to allow a freer play of

competitive forces among oil pipeline companies than in

other common carrier industries and, as such, we should be

especially loath uncritically to import public utilities no-

tions into this area without taking note of the degree of

regulation and of the nature of the regulated business.

See J. BONBRIGHT, PRINCIPLES OF PUBLIC UTILITY RATES

4-5 (1961).

Consequently, beyond the general outlines of the

Interstate Commerce Act, and the specific provisions

therein dealing with ratemaking, see notes 2, 6 & 7 supra,

we have little to rely on in constructing a theory of oil °

pipeline ratemaking. Although the Act, as amended by

the Valuation Act, 37 Stat. 701 (1913), does provide the

ICC with the wherewithal to gather the information

necessary to determine the “valuation” of railroads and oil

pipeline companies, 49 U.S.C. §19a, see note 3 supra, we see

nothing in the Valuation Act that requires the agency to

translate its valuation authority into a mandatory

approach to ratemaking or that makes a valuation

approach inevitably reasonable.®

® Congress passed the Valuation Act at a time when the Supreme

Court appeared to require ratemaking to proceed from some type of

valuation base. See, e.g., Smyth v. Ames, 169 U.S. 466, 546-47 (1898).

The exact components of “fair value” were still “undergoing modi-

fication” in the courts as of 1913, however. 49 Cong. Rec. 3796 (1913)

A-10

ICC precedent provides little additional guidance as

to appropriate ratemaking methodology for the oil pipe-

line industry. In the four published opinions in which it

has heretofore discussed oil pipeline ratemaking, the ICC

adopted the valuation rate base without discussion, or

even explicit recognition, of alternative bases. Reduced

Pipe Line Rates and Gathering Charges, 243 I.C.C. 115

(1940) [hereinafter Reduced Rates I], reopened, 272 I.C.C.

375 (1948) [hereinafter Reduced Rates II]; Petroleum Rail

Shippers’ Ass'n v. Alton & So. R.R., 248 1.C.C. 589 (1941);

Minnelusa Oil Corp. v. Continental Pipe Line Co., 258 I.C.C.

41 (1944). Nonetheless, the ICC’s use in the 1940’s of the

(remarks of Sen. La Follette). In putting its gloss on the Smyth

doctrine, the ICC wished to include original cost of physical assets as

one factor relevant to valuation, but found itself stymied by the

railroads’ refusal to supply it with the information necessary to

determine that cost. Jd. at 3795-96. Consequently, Congress enacted

the Valuation Act to give the agency the necessary information-

gathering ability with respect to original cost, as well as to the more

easily determined cost of reproduction new. Jd. at 3796. The drafters,

however, were decidedly not “prepared ... to set the boundaries and fix

the limits [of ratemaking] absolutely by statute.” Jd. Their mission

was merely to allow the necessary facts “to be secured for the enlight-

enment of the Commission and the courts.” Jd.

Once the Supreme Court made clear its willingness to countenance

any ratemaking approach that enabled investors to cover operating

expenses and capital costs without burdening consumers with ex-

orbitant rates, see, e.g., FPC v. Hope Natural Gas Co., 320 U.S. 591, 603

(1944), even the historical link between ratemaking theory and the

valuation-computation authority given ICC by the Valuation Act was

broken. After that time, in fact, the apparent endorsement by the

Valuation Act’s drafters of significant reliance on original cost as a

rate base stands as an equally strong indication that past investment

rather than present value should predominate in ratemaking method-

ology. See, e.g., 49 Cong. Rec. 3795 (remarks of Sen. La Follette). The

important point, however, is that in passing the Valuation Act,

Congress explicitly refused to endorse any ratemaking theory, and, in

fact, its complete preoccupation with railroads and its understandable

failure to predict the inflationary economy of a half century later make

its deliberations on the Act largely irrelevant to oil pipeline rate-

making in the 1970’s. Consequently, to the extent that the ICC finds a

mandate for “fair value” ratemaking in the Valuation Act, we dis-

agree. See Williams J, supra, 351 I.C.C. at 114. But see Initial Decision,

supra, JA at 1605-06.

A-11

“fair value” method is not hard to explain—and in that

explanation lies an important reason to reexamine the

continued viability of the decisions announced during that

era.

The ICC’s primary experience with ratemaking prior

to the 1940’s involved railroads, as to which a landmark

Supreme Court case had appeared to mandate the fair

value method of ratemaking. Smyth v. Ames, 169 U.S. 466,

546-47 (1898); see note 8 supra. See also St. Louis &

O'Fallon Ry. Co. v. United States, 279 U.S. 461 (1929).

Subsequently, the Supreme Court’s endorsement on this

method was extended to other areas. E.g., Southwestern

Bell Tel. Co. v. Missouri Pub. Serv. Comm'n, 262 U.S. 276

(1923). Although under the impetus of Justice Brandeis’

concurring opinion in the last-cited case, id. at 289-312,

the Supreme Court during the 1930’s began to coun-

tenance experimentation with other ratemaking ap-

proaches, e.g., Railroad Comm'n of California v. Pacific Gas

Co., 302 U.S. 388, 399 (1938), by this time the ICC had

established a firm practice of using the valuation method.

E.g., Petroleum Rail Shippers, supra. Thus, the ICC prac-

tice, reflected in the four pipeline rate cases cited earlier,

of using a valuation rate base had become ensconced in |

that agency’s decision by 1944, when the Supreme Court

decisively reversed its field and became openly critical of

talismanic reliance on “fair value.” F’PC v. Hope Natural

Gas Co., 320 U.S. 591, 601 (1944). Moreover, between the

time that Hope’s implications became clear and the ICC’s

consideration of this case, that agency did not have

occasion to discuss the principles of oil pipeline rate-

making.® As such, we are left to draw our conclusions

about this case based on a series of ICC opinions that arose

®The ICC has explained the “dearth of precedent concerning

petroleum pipeline rates,” Williams IJ, supra, 355 I.C.C. at 481, as in

part a function of the ownership of many of the pipelines by shippers.

See Reduced Rates I, supra, 243 1.C.C. at 1388-39. Thus, shippers, who

generally are the complainants before the ICC in rate cases, are often

responsible for, rather than affected by, potentially unreasonable oil

A-12

in a ratemaking environment that has since been dra-

matically altered by the Supreme Court.1°

In addition to the significant changes in the relevant

legal environment since the ICC’s 1940’s decisions, impor-

tant economic transformations have occurred. First, that

agency’s only actual comparison in the 1940’s of the

“valuation” of pipeline assets and the actual investment

therein “as carried on [the pipeline companies’) books”

(i.e., apparently, original cost) shows that in a majority of

cases “the valu[ations] found by the Commission were

materially lower than the carriers’ investment....” Re-

duced Rates I, supra, 243 1.C.C. at 188 (emphasis added).

This 1940’s situation is in marked contrast to that

experienced in today’s inflationary economy wherein

valuation typically exceeds investment by a substantial

amount."!

pipeline rates. Two of the ICC’s four precedents in this area, in fact,

derive from nonadversary, ICC-originated investigations. Reduced

Rates I, supra; Reduced Rates I], supra.

Railroad rate-setting—another major source of ICC jurisdiction

over rates—has also presented the agency with limited opportunity for

developing post- World War II ratemaking theory, because the general

decline of the rail industry has made academic the problem of unrea-

sonably high rates of return. Nonetheless, in this proceeding, the ICC

acknowledged that in those railroad ratemaking cases that have

considered the issue since the early 1950's, the Commission has aban-

doned the valuation base, due to the difficulty of determining reproduc-

tion cost. Williams I, supra, 351 I.C.C. at 114-15 (discussing Increased

Freight Rates, 1951, 297 I.C.C. 17, 25 (1955)). See Net Investment

—Railroad Ratebase and Rate of Return, 345 I.C.C. 1491, 1514-20, 1604

(1976); Brief for Interstate Commerce Commission, at 13-14. Instead,

railroad ratemaking has focused on original cost, present value of land

and rights, and working capital needs. See also Increased Rates and

Minimum Charges Within, From, and to the South, 335 I.C.C. 77, 97

(1969) (using original cost and rejecting valuation ratemaking for

motor carriers).

10 To the extent that the Valuation Act encouraged the ICC to use

the “fair value” method, it, too, is a product of Smyth v. Ames, and has

limited relevance to ratemaking theory since Hope. See note 8 supra.

1! See note 3 supra. For example, in this case, a valuation rate base

would require a return on $167.6 million, while an original cost base

would require a return on $101.1 million. Williams I, supra, 351 I.C.C.

at 108.

<0 ae? thal ~-ewecaanilll

A-13

Second, based on rather detailed analyses of economic

conditions facing the industry in the 1940’s, the Commis-

sion’s 1940’s decisions determined that oil pipeline rates

should allow carriers to recover operating expenses plus no

more than either an 8 percent return on value for trans-

mission of crude oil or crude oil plus refined petroleum

products, Reduced Rates II, supra, 272 1.C.C. at 376, 384

(rates upheld actually producing 7.6 percent rate of re-

turn); Minnelusa, supra, 258 I.C.C. at 54; Reduced Rates IJ,

supra, 243 I.C.C. at 142, or a 10 percent return on value for

transmission of gasoline. Petroleum Rail Shippers, supra,

243 1.C.C. at 663. The ICC pointed out that by 1940’s

standards these rates of returns were

somewhat larger...than... would be reasonable to

expect would be applied in industries of a more stable

character, where the volume of traffic is more accu-

rately predictable.

Minnelusa, supra, 258 I1.C.C. at 54, accord, Petroleum Rail

Shippers, supra, 243 I.C.C. at 661-62; Reduced Rates I,

supra, 243 I.C.C. at 142.

In the Commission’s estimation, these “somewhat

larger” rates of return were justified on the one hand by

the need to attract capital to the oil pipeline industry ~

despite the higher-than-normal risks faced by carriers of

petroleum products,'2 and especially of gasoline,'3 and on

12 The special “hazards” adverted to by the ICC were the pipelines’

total dependence on one commodity that flows in only one direction and

that must flow in consistently large quantities to be economical, the

depletable nature of that commodity, and its exposure to large and

unpredictable fluctuations in availability depending upon the discovery

of new oil fields. See Petroleum Rail Shippers, supra, 243 I.C.C. at 661;

Reduced Rates I, supra, 243 1.C.C. at 122-23. Interestingly, the

Commission seemed much more moved by the concern that the opening

of new domestic fields would rearrange distribution lines than that

domestic oil reserves would in fact be depleted in the near future. See

id.

13 In addition to the general “hazards” of the oil pipeline industry

discussed in note 12 supra, gasoline transmission by pipeline faced

A-14

the other hand, by the need to keep rates low enough to

forestall the dangers of oligopolistic control of the oil

pipeline industry by the big producers.'4 Other factors

considered by the ICC were the possibility of price fixing'5

and a history of “enormous” profits,'® the cost effects of

greatly increased taxation during the 1930’s,'7 the in-

creased demand for oil products, the improved technology

of pipeline transmission precipitated by World War II,'®

and the prediction that economic forces would cause rates

to drop regardless of ICC action.'9 Notably, aside from

brief discussions of increased labor costs, the ICC’s deci-

sions make clear the operating costs other than taxes were

relatively free from inflationary (or deflationary) in-

fluences from 1937 to 1947.20

special risks of its own. Most importantly, such transmission was in its

“initial stages” in the 1940’s—adequate pipeline technology only re-

cently having been developed—and its “speculative” nature prevented

financing through bond issues. Petroleum Rail Shippers, supra, 243

I.C.C. at 599-600, 661. Although the ICC never said so explicitly, these

special hazards apparently dictated its use of the 2% higher rate of

return for gasoline transmission than crude oil transmission.

It is noteworthy that by 1948, the ICC was no longer willing to

accept the “general assertion that rates for pipe-line service should

make allowance for the need of [higher] earnings in view of the

material hazards of the business.” Reduced Rates II, supra, 272 I1.C.C. at

381. Nonetheless, having made this observation, the ICC continued to

utilize the 8% rate of return maximum that it developed at a time when

it did accept the industry’s “higher risks” assertion. Jd. at 376, 384.

14 See Reduced Rates I, supra, 248 I.C.C. at 138-39.

15 Jd. at 125, 139.

16 Jd. at 130-42. The ICC found it troubling that despite rate

reductions in the 1930’s caused by pressures from state public utilities

commissions and by increased taxes on profits, and despite the depres-

sion, the average oil pipeline company under investigation between

1934 and 1938 earned a 14% rate of return on value—and some of those

companies earned as high as 45%. Jd. at 125, 141-42.

17 Id. at 129; Reduced Rates IJ, supra, 272 I.C.C. at 382.

18 Reduced Rates I], supra, 272 1.C.C. at 377-80.

19 Reduced Rates IJ, supra, 243 1.C.C. at 127; Reduced Rates II, supra,

272 1.C.C. at 381.

20 See Reduced Rates I, supra, 243 1.C.C. at 129; Reduced Rates IJ,

supra, 272 i.C.C. at 381.

A-15

To the extent that economic conditions facing the oil

pipeline industry have changed since 1948—and, in light

of modern onslaught of inflation, petroleum shortages,

and reliance on imports, as well as the maturing of the

industry itself, we may readily assume they have—the

conclusions of the ICC in its earlier cases as to appropriate

rates of return are equally as much artifacts of a bygone

era as is its reliance then on a valuation rate base.

Finally, the ICC’s 1940’s cases recede even further

into the background when it is realized that the ICC has

been replaced by FERC as the government agency

charged with watching over oil pipeline rates.21 The

transfer of authority to FERC occurred during the pend-

ency of this petition pursuant to the Department of

Energy Organization Act (the DOE Act), Pub. L. No. 95-

91, §402(b), 91 Stat. 584 (1977), effectuated, Executive

Order No. 12009, 42 Fed. Reg. 46267 (Sept. 15, 1977),

implemented, 42 Fed. Reg. 55534 (Oct. 17, 1977).

Although, the DOE Act provides that litigation com-

menced before the transfer shall continue, with “appeals

taken, and judgments rendered ...as if this Act had not

21In fact, it was FERC (in its previous incarnation as the Federal

Power Commission) that, by deviating from “fair value” ratemaking,

inspired the Supreme Court’s holding that valuation is not the sine qua

non of “just and reasonable” ratemaking. See FPC v. Hope Natural Gas

Co., 320 U.S. 591, 601 (1944). In that case, the Commission had used a

modified original cost method in determining that the rates charged by

a producer-distributor of natural gas were unreasonably high. The

Fourth Circuit overturned the Commission’s order in part because it

felt that the rate base should reflect the valuation of the property.

Hope Natural Gas Co. v. FPC, 134 F.2d 287 (4th Cir. 1943). In

reversing the Fourth Circuit, the Supreme Court noted that basing

rates on present value, which in turn is a function of expected rate

revenues, is analytically unsound. 320 U.S. at 601. Without endorsing

“any single formula,” the Court made clear that it would uphold rates

set by any methodology (including one beset by “infirmities”) if the

“end result” allowed a return on equity “commensurate with returns on

investment in other enterprises having corresponding risks,” and

“sufficient to assure confidence in the financial integrity of the enter-

prise, so as to maintain its credit and to attract capital.” Jd. at 603.

A-16

been enacted,”22 as regards the substantive adminis-

trative law applicable in this case, the transfer further

unsettles the foundations on which we must adjudicate

this petition. Thus, it removes the stabilizing influence of

the courts’ usual desire to afford an administrative agency

some latitude over time to develop its own approach to the

regulatory tasks delegated to it by Congress. See Permian

Basin Area Rate Cases, 390 U.S. 747, 790 (1968). Here, the

transfer of authority has deprived us of even the possi-

bility of endorsing ICC’s attempt to develop such an

approach, and, in fact, has created the likelihood that

anything we say will inhibit FERC from freely developing

its approach in the future. That FERC has refused to

adopt the ICC’s position in this case, and—joined by the

Antitrust Division of the Department of Justice—has

asked that the case be remanded to it, illustrates this

problem.23

22 Pub. L. No. 95-91, §705(c)(2), 91 Stat. 607 (1977). For this

reason, a panel of this court denied the motion of FERC to have the

case automatically remanded to it, following the transfer of authority

from the ICC. Farmers Union Central Exchange v. FERC, No. 76-2138

(D.C. Cir. Nov. 21, 1977). Section 705(c)(2) required the panel to treat

the motion as if it were made by the ICC. And, absent some special

showing of “legal blemish”—or of a supervening change in the law, a

“significant change in conditions or newly-discovered evidence” —we

are generally reluctant to remand an agency’s decision to it for

reconsideration after the statutory time for agency reconsideration has

passed and a petition for review has been filed with us. Greater Boston

Television Corp. v. FCC, 463 F.2d 268, 290 (D.C. Cir. 1971); see NLRB v.

Food Store Employees Union, Local 347, 417 U.S. 1, 10 n.10 (1974);

Braniff Airways, Inc. v. CAB, 379 F.2d 453 (D.C. Cir. 1967). In such

cases, it is recognized that the winning party has an interest in the

opportunity to defend the agency’s origina! determination.

This rule, however, does not apply where, as here, the winning

party below (joined, in fact, by one of the agencies involved) has had

the opportunity to defend the agency's decision before us, see the note

23 infra, and where that defense has not removed apparent “legal

blemish|es]” in that decision that have surfaced during our consid-

eration.

23 In successfully seeking remand before oral argument, see note 22

supra, FERC refused to take a position in this case. Accordingly, the

Court approved the ICC’s filing of a brief in support of its decision, and

ee

A-17

This background should explain our reluctance to

embark on the first federal judicial foray into the area of

oil pipeline ratemaking.24 In this endeavor, beyond the

statute’s admonition that rates be “just and reasonable,”

we must rely almost entirely on the ICC’s opinions in this

case. Moreover, as the next section demonstrates, those

opinions are characterized by analytical difficulties that

undermine their usefulness in resolving the overall rea-

sonableness of the assailed rates.

B.

The parties have joined issue over the ICC’s treatment

of five criteria they deem crucial to the reasonableness of

Williams’ rate increases: rate base, rate of return, depre-

ciation costs, tax treatment, and certain items of oper-

ating expenses. See notes 2-5 supra and accompanying

text. In reaching our conclusion that the ICC’s decisions25

present problems that impel us to remand the reason-

ableness issue to its successor, FERC, we find it necessary

to dwell on only the first three of these criteria.

Despite petitioners’ insistence on original cost less -

depreciation of all of Williams’ assets used in transmitting

ordered it to participate in oral argument on the merits. Farmers

Union Central Exchange v. FERC, No. 76-2138 (D.C. Cir. April 5,

1978).

24 Although the first, it almost assuredly is not the last in light of

the dramatic recent expansion in this nation’s reliance on oil pipeline

transmission. See Mobil Alaska Pipeline Co. v. United States, 557 F.2d

775 (5th Cir.), affd sub nom. Trans Alaska Pipeline Rate Cases, 46

U.S.L.W. 4587 (U.S. June 6, 1978) (involving preliminary questions of

ICC’s authority to set initial rates for the Trans Alaska pipeline).

28 Although the full ICC eventually passed on petitioners’ claims,

its opinion (Williams JI) essentially supplements the opinion of a

three-commissioner division of the agency ( Williams J) which, in turn,

adopts the findings of the administrative law judge’s Initial Decision.

See Williams IT, supra, 355 1.C.C. at 482; Williams J, supra, 351 I.C.C. at

126. Hence, all three opinions will be examined herein.

A-18

oil (7.e., $101.1 million), and Williams’ somewhat tentative

advocacy of purchase price ($287.8 million) as the appro-

priate rate base, the ICC used a “valuation” base. Wil-

liams I, supra, 351 I.C.C. at 108. This it calculated to be

$167.6 million, id., based primarily on two factors listed in

the Valuation Act, 49 U.S.C. §19a—original cost, and the

cost of reproduction new.26 All three decision based their

analyses of the rates on the percent return they allowed

on valuation, so that the importance to all three of the

valuation rate base cannot be gainsaid.27

26 See Williams I, supra, 351 I.C.C. at 111. See also Williams Bros.

Pipe Line Co., 338 1.C.C. 549 (1970) (most recent published valuation by

ICC of Williams).

Other factors considered in the ICC’s complex valuation formula

include reproduction cost new minus depreciation, going concern value,

present value of land and rights-of-way, and working capital. See

Williams I, supra, 351 I.C.C, at 111-12. See generally note 3 supra.

27 See Initial Decision, JA at 1609; Williams J, supra, 351 I.C.C. at

105; Williams IJ, supra, 355 I.C.C. at 483-84.

Reference was made by the administrative law judge to the “end

result” doctrine of FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944),

see notes 8 & 21 supra. See JA at 1606-08. Nonetheless, having

attempted to show that an original cost base might impair Williams’

financial integrity—a concern reflected in Hope—he failed to discuss

what “returns [characterize] investments in other enterprises having

corresponding risks,” and whether Williams’ rates allow returns “com-

mensurate” therewith. 320 U.S. at 603; see JA at 1607-08. Nor did his

mention of Williams’ contention, JA at 76, 2622, that a 14% return on

equity is “necessary and... fair,” serve this purpose, because he made

no such finding to that effect, nor did he find the rates actually allowed

that, or any other return (the only relevant testimony, not relied upon,

showed an actual return on equity of between 10.9 and 12.5%), nor did

he reply in any way on the 14% figure. Jd. at 1608, 1609. Even more

telling. neither the three-commissioner division nor the full Commis-

sion paid even this exiguous attention to Hope or to the actual cost of

equity capital to Williams. See Williams J, supra, 351 I.C.C. at 114.

See Southwestern Bell Tel. Co. v. Missouri Pub. Serv. Comm’n 262

U.S. 276, 289-312 (1923) (Brandeis, J., concurring), for the classic

critique of the fair value rate base, characterizing that methodology as

“vicious|ly] circ{ular]"” from an analytical standpoint, difficult to

administer given the vagaries of determining reproduction or replace-

ment cost, and likely to impair capital or produce windfal!! profits in,

respectively, deflationary or inflationary times. See also FPC v. Hope

Natural Gas Co., supra, at 601.

————

A-19

Most prominent among the three opinions’ ex-

planations of the use of the “fair value” method was that

as the “traditional,” “customar[y],” and “well-established

practice” of the ICC in oil pipeline cases, valuation

ratemaking has “withstood the test of time.” Jnitial

Decision, supra, JA at 1608; see id. at 1605; Williams I,

supra, 351 I.C.C. 105, 107, 118, 114; Williams IJ, supra, 355

I.C.C. at 485. In support of this “tradition,” however, the

opinions (when they cite any support at all) list only (1)

the 1940’s oil pipeline cases discussed above, (2) the

Commission’s history of computing valuations under the

Valuation Act, and (3) the fact that the Commission’s

mandatory accounting procedures for pipelines, see Uni-

form System of Accounts for Pipeline Companies, 337 1.C.C.

518, 528 (1970), are geared to the use of a valuation rate

base. See Initial Decision, supra, JA at 1605, 1608; Wil-

liams I, supra, 351 1.C.C. at 107, 113.

As our previous discussion indicates, however, these

three indicia of a tradition of fair value ratemaking are

weak and outmoded. Both the oil pipeline precedents and

the history of valuation computations under the Valuation

Act are in large measure products of a bygone era of

ratemaking ushered in by the Supreme Court in Smyth v. .

Ames in 1898 and ushered out by that same body in Hope

Natural Gas in 1944. See notes 8-10 supra and accom-

panying text. To the extent that the ICC’s accounting

rules derive their valuation focus from the 1940’s prece-

dents and the Valuation Act, see Uniform System of

Accounts, supra, 337 I.C.C. at 523, they, too, are subject to

this same criticism.

Moreover, each of the three indicia suffers from in-

firmities of its own. First, even if we assume under Hope

that valuation ratemaking might be capable of producing

a viable “end result,” there is no assurance in the Commis-

sion’s 1940’s precedents—born as they were of peculiar

post-depression, World War II, and post-War economic

A-20

conditions—that such a result will occur in the 1970's.

Second, the Commission itself has seen fit to abandon its

so-called tradition of valuation computation and rate-

making based thereon in the railroad area, which is

equally subject to the Valuation Act. See note 9 supra.

Finally, the ICC decision setting forth pipeline accounting

rules states explicitly that it is

concerned... with accounting rules which are not

necessarily dispositive of the manner in which expen-

ditures will be treated in a proceeding to determine

the reasonable level of particular rates.

Uniform System of Accounts, supra, 337 I.C.C. at 523. This

last- quoted caveat should hardly have to be express. After

all, it is rates, not bookkeeping, that the statute requires

to be reasonable, and there is no assurance of record, at

least, that reasonable accounting measures translate

automatically into reasonable rates.

In sum, we are not persuaded by the Commission’s

conclusion that “consistency and fairness” dictate

resurrection of the “fair value” method last used thirty

years ago. Williams II, supra, 355 I.C.C. at 484. To the

extent that the method was wrongly grounded in the law

at that time, it is no better off now. To the extent that it

may have been rightly grounded in the economics of that

day, the ICC has provided us with no reason to believe that

three decades have not changed the situation. And, to the

extent that Williams, having nothing else to depend on

but the earlier cases, justifiably relied on them in adopting

its rates, see id., the solution is not to perpetuate that

reliance, but to end it prospectively, without allowing

reparations based on its occurrence in the past.?6

28 See note 35 infra. Of similar effect is the ICC’s argument that

the valuation method is so well established that it may only be revised

by way of a rulemaking proceeding in which all interested parties may

take part. Initial Decision, supra, at 1605; Williams I, supra, 351 1.C.C.

# —_—-

A-21

Aside from the above arguments, the three ICC opin-

ions mentioned but one other justification for the “fair

value” method: the need for a ratemaking theory respon -

sive to inflation.22 We have no quarrel with the ICC’s

aspirations on this score. The Supreme Court has in-

dicated that rates must be high enough to allow the

regulatee to attract capital, and investors will be unlikely

to invest if their earnings will not keep abreast of, and

have some chance of exceeding, the rate of inflation. See

FPC v. Hope Natural Gas Co., supra, 320 U.S. at 603.

Nonetheless, the ICC’s failure to assess the actual effects of

inflation on Williams’ ability to attract capital, and its

apparent “double counting” of concerns about inflation,

at 112-13, Williams IJ, supra, 355 1.C.C. at 484. Although the agency’s

premise that the valuation method is well-established may be doubtful,

we do not question the agency’s discretion to choose between adjudica-

tory or quasi-legislative means of adopting a new methodology for the

future. Nonetheless, petitioners have challenged Williams’ past rates as

unreasonable, and section 1(15)(a) of the Interstate Commerce Act

states that no unreasonable rate may stand. The ICC could have, but

did not, hold this case in abeyance pending completion of a broad

rulemaking proceeding that it had initiated to review its oil pipeline

ratemaking theory. See Ex Parte No. 308, Valuation of Common

Carrier Pipelines (order served Jan. 9, 1977), transferred to FERC, 42

Fed. Reg. 55534 (1977). Instead, it adjudged Williams’ rates to be

reasonable, based in part upon a “fair value” rate base. It is accord- °-

ingly of no solace to petitioners—or to us in reviewing their petition

—that at some time in the future, the Commission (or its successor )

may, by rulemaking, adopt a wholly different approach.

29 See Initial Decision, supra, JA at 1607, 1608; Williams J, supra,

351 I.C.C. at 111, 117. The degree to which the ICC’s valuation rate base

responds to inflation is a matter of doubt. The administrative law

judge opined that it “only partially reflects inflation since it considers

both the original cost to the first investor and the reproduction cost

new, not just the latter.” Initial Decision, supra, JA at 1607. Nonethe-

less, by including the cost of reproduction new rather than that of

replacement, see Williams I, supra, 351 I.C.C. at 109-10, 111; note 8

supra, the valuation formula is weighted rather heavily toward in-

flation. That is to say, since reproduction new reflects the higher prices

characteristic of modern materials, without also reflecting the effi-

ciencies of modern technology—as would replacement cost—it over-

emphasizes inflation’s effect on the hypothetical cost of reconstructing

the plant.

A-22

see pp. 26-27 infra, cast a shadow over its conclusion that a

valuation rate base properly reflects inflation.

We find the ICC’s discussion of rate of return equally

problematical. Here the total emphasis is on the 1940’s

precedents: because 8-10 percent was a viable return for

carriers of petroleum products from 1940 to 1948, it is said,

so must it be today.°° Even more so than the choice of a

reasonable rate base methodology, a “reasonable rate of

return” determination must be the product of the eco-

nomic moment. As noted earlier, the ICC’s choice in the

1940’s of the 8 and 10 percent figures turned on such

“hazards” as the infancy of the gasoline industry, the

likelihood of disruptive discoveries of new oil fields and the

unidimensional nature of the product market served by

pipeline carriers, as well as on such factors as unduly high

profits in the past, high taxes, and a rapidly expanding

economy relatively free of inflation. See notes 12-20 supra

and accompanying text. Absent some accompanying

assessment of how this complex of relevant factors has

changed in thirty years, the ICC’s reliance on its anti-

quated precedents in determining a reasonable rate of

return differs little from a rule that would require modern

automobile accident damages to conform to those awarded

by juries in 1940.3

30 See Williams I, supra, 351 I.C.C. at 105-06; Williams IJ, supra,

355 1.C.C. at 483, 487. The Commission found that Williams’ rates

produced rates of return (on valuation) of between 8 and 9%.

31 For example, the Commission in the 1940's held the line for crude

oil transmission companies at an 8% rate of return, but allowed gasoline

carriers to receive 10%. The only discernible reason for the disparity

was the infancy of the gasoline transmission industry. See note 13

supra. This special “hazard” having presumably matured out of the

picture over the last three decades, we might well have expected the 8%

ceiling to be applied to gasoline as well as crude oil carriers—in which

case Williams’ rate of return would be excessive. See note 30 supra.

Nonetheless, no explanation is forthcoming from the ICC for its

continued reliance on the 10% figure, despite the absence of an

important factor used in ascertainment thereof.

This is not to imply that we think an 8 or 10% rate of return is

% ——

wt ne et eds

Peale He baa Ls ERS eS

iin sear

A-23

Finally, we come to the depreciation charges allowed

Williams as a cost that it may recoup through its rates.

Just prior to Williams’ purchase of Great Lakes, it secured

a Commission opinion that the Commission’s accounting

instructions for pipeline carrier property accounts, 49

C.F.R. §1204-3-1 et seg., applied to the purchase. JA at

202, 205. Under those instructions, Williams recorded its

full purchase price of $287.6 million in its property ac-

count. Although the ICC informed Williams that this

opinion did “not prejudice the Commission’s continuing

rights and _ responsibilities with regard to...rate

determinations that may come before it,” JA at 205,

Williams used this same method of valuing its wasting

assets when calculating depreciation expenses for rate-

making purposes. Allowing this revaluation, for rate-

making as well as accounting purposes, of the Great

Lakes-Williams property not only greatly increased

depreciation charges from that point forward, but it also

withdrew any recognition that rate payers had already

been charged almost $100 million for depreciation by

Great Lakes.

In upholding this operating expense calculation, the

Commission did little more than (1) note the calculation’s ,

congruence with its reporting and accounting rules, espe-

cially as discussed in Uniform System of Accounts, supra,

and (2) point out the inability of petitioner’s reeommen-

ded original cost approach to keep pace with inflated

property values. Williams II, supra, 355 I.C.C. at 489.

Once again, we cannot countenance the ICC’s current

unexplained insistence on irrevocably hitching its rate-

making theory to its accounting rules. This linkage is

especially troublesome because, when it wrote those rules,

necessarily excessive. Such modern “hazards” as inflation and the

uncertain availability of foreign oil, as well as special risks facing

Williams, see JA at 184-90, 2575-81, may well warrant the opposite

conclusion. Our point is simply that the ICC’s criterion for reason-

ableness—blind adherence to 1940’s standards—is unconvincing.

A-24

the Commission expressly denied them any such con-

trolling impact on rates. See p. 22 supra. It supported

that express denial of linkage with a reminder that the

ICC traditionally did not tie rates to “investment as

shown on the carriers’ books, but rather [to] ... valuations

[computed] pursuant to the [Valuation Act].” Uniform

System of Accounts, supra, 337 I.C.C. at 523. Hence, we are

left with the additional unexplained anomaly of a valu-

ation rate base coexisting with a purchase price deprecia-

tion base—hardly an “accepted .. . practice[ ].’’2

The final irrationality is that the depreciation basis

used, unlike original cost, valuation, and other possible

approaches, allows depreciation charges, and thus the

rates, to change dramatically from one day to the

next—so long as a purchase of the assets intercedes. —even

though the cost of the carriers’ public service has not

actually changed. It is true that occasional acquisitions of

carriers at prices deemed currently reasonable might

serve as a mechanism for accurately reflecting inflation’s

impact on the value of such enterprises. We have our

doubts, however, about either the desirability of encour-

aging acquisitions solely for this purpose, or of depending

on their unpredictable occurrence to serve this function.

In any case, the ICC in this case purports to have recog-

nized inflation in figuring rate base (and perhaps even

rate of return, see Williams IJ, supra, 355 I1.C.C. at 487), so

that a further inflation adjustment by way of increased

depreciation charges would seem precipitous and itself

unduly inflationary. See p. 23 supra.

The foregoing discussion illustrates our unease with

the ICC’s findings regarding rate base, rate of return, and

depreciation costs. Those three criteria, in turn, are

important enough that doubts as to them must infect our

32 A major determinant of ICC’s reporting rules were “accepted

accounting practices.” Uniform System of Accounts, supra, 337 I.C.C. at

522.

A-25

view of the Commission’s ultimate finding of reason-

ableness.33 Nonetheless, were this a normal case, the

limited scope of review under which we operate in these

proceedings might require us to look beyond ICC’s ration-

ale to the record itself, before we would be prepared to

disapprove the Commission’s ultimate holding. See, e,g.,

Permian Basin, supra, 390 U.S. at 766-67 (rate must be

upheld if total effect is reasonable); FPC v. Hope Natural

Gas Co., supra, 320 U.S. at 603 (rate must be upheld, even

if subject to theoretical “infirmities,” if “end result” is

reasonable); The Second National Natural Gas Rate Cases,

No. 76-2000, et al., slip op. at 18 (D.C. Cir. June 16, 1977)

(“basic ... requirement [is] that there be support in the

public record for what is done.’’).

But this is not a normal ratemaking case—in large

measure because we are at something of a loss to know

what to look for should we resort to the public record. The

lack of viable precedents in this area and thus of some

semblance of established ratemaking theory undercuts

any confidence we have that we can make a “reason-

ableness” determination in the absence of some signifi-

cant assistance from the agency formerly charged with

making that determination in the first instance. More-

over, the record appears to be incomplete in certain -

significant respects. See note 27 supra. What clinches our

decision to remand on the reasonableness issue, however,

is the fact that the agency now charged with that respon-

sibility, FERC, has requested a remand so that it may

begin its regulatory duties in this area with a clean slate.

While “infirmities” in an agency’s methodology may not

prevent us from affirming its otherwise supportable “rea-

sonable rate” determination, see FPC v. Hope Natural Gas

Co., supra, 320 U.S. at 608, such “legal biemishes” may

33 See Permian Basin Area Rate Cases, 390 U.S. 747, 790 (1968).

For this reason, we do not find it necessary to address petitioners’

further challenges based on Williams’ tax treatment and computation

of certain operation expenses. See notes 4 & 5 supra.

A-26

justify us in honoring that agency’s (or its successor’s)

request that we remand its decision for reconsideration.

Greater Boston Television Corp. v. FCC, 463 F.2d 268, 290

(D.C. Cir. 1971); note 22 supra.

Under the circumstances presented herein, it seems

logical both to avail ourselves of some additional expertise

before we plunge into this new and difficult area, and to

allow the relevant administrative agency to attempt for

itself to build a viable modern precedent for use in future

cases that not only reaches the right result, but does so by

way of ratemaking criteria free of the problems that

appear to exist in the ICC’s approach. See note 24 supra.

Cf. Permian Basin, supra, 390 U.S. at 790 (“breadth and

complexity of the [agency’s ratemaking] responsibilities

demand that it be given every reasonable opportunity to

formulate methods of regulation appropriate for the solu-

tion of its intensely practical difficulties.’’)

We realize that this disposition is at the expense of

important finality concerns, embodied herein by inter-

venor Williams Pipeline Co. which has already faced six

years of litigation and continues to face the possibility of

reparations back to 1972 should its increased rates ultima-

tely be found unreasonable. In subordinating those con-

cerns to the public interest in an orderly ratemaking

environment for oil pipeline transmissions, we rely on

assurances from counsel for FERC that the agency will

move this case through its ratemaking procedures with

dispatch. Moreover, because Williams is hereby being

exposed to the possibility of future operations under an

unreasonable rate, not because of its own actions freely

taken in the past, but because of FERC’s quasi-legislative

action** taken—with our sanction—with an eye to the

future activities of all oil pipeline carriers, we are com-

forted by the apparent applicability of the rule that

% That is, seeking remand for reconsideration.

it allah ana Delia

A-27

reparations are generally not available when the subject

rates were in force as a result of quasi-legislative actions

of a regulatory agency.%5

For all of the foregoing reasons, we remand the case

to FERC for determination of the reasonableness of Wil-

liams’ rates pursuant to 40 U.S.C. §1(5)(a). Asa result of

the necessity of remanding this issue, we are also con-

strained not to decide the preference/prejudice issue un-

der 49 U.S.C. §3(1). See note 6 supra and accompanying

text. This latter issue involves, inter alia, questions of (1)

whether a disparity exists between Williams’ local rates

and the through rates it has jointly initiated with Explor-

er, (2) if so, whether petitioners are competitively dam-

aged thereby, and (3) if so, whether cost differentials, or

other “transportation conditions,” justify the disparity.

See State of New York v. United States, No. 76-4085, slip op.

at 2134 (2d Cir. 1977); Chicago & E. Ill. R.R. v. United

States, 384 F. Supp. 298, 300-01 (N.D. Ill. 1974) (three-

judge court), affd mem., 421 U.S. 956 (1975). Since, on

remand of the reasonableness issue, FERC will undoubt-

edly obtain additional evidence and conceivably could

order that Williams lower its local rates, the nature of each

35 See, e.g., Arizona Grocery Co. v. Atchison, Topeka & Santa Fe Ry

Co., 284 U.S. 370, 385, 389 (1932); Moss v. CAB, 430 F.2d 891, 895-96 &

n.24 (D.C. Cir. 1970); cases discussed in id. at 897-99 nn.29-33.

The exact confines of this rule need not be explored herein.

Accordingly, we need not decide now whether the rule might also

protect Williams from reparations for the period from 1972 until the

issuance of this decision. That possibility arises because, as the ICC

recognized, see text accompanying note 29 supra, Williams’ actions in

this case have partaken (to an unspecified degree) of a justifiable

reliance on ICC precedents from the 1940’s, and especially on language

in its 1971 Uniform System of Accounts order that support a valuation

rate base, an 8-10% rate of return, and a purchase-price depreciation

basis. Although these sources may embody questionable notions about

ratemaking, they do represent the expectations of the ICC concerning

future rate activity and, as such, may be seen as binding on a regulatee

within the ICC’s authority until they are publicly revised. Cf. Atlantic

Coast Line R.R. Co. v. Florida, 295 U.S. 301, 311-12 (1935).

A-28

of these three questions might change significantly on

remand, so that any examination by us would be pre-

mature. Accordingly, FERC should also fully reconsider

the section 3(1) issue.%¢

Ill

Petitioners also challenge the joint rates filed by

Explorer and Williams, claiming that they work an illegal

discrimination under section 2 of the Interstate Com-

merce Act, 49 U.S.C. §2. Section 2 prohibits a carrier from

granting a special rate or rebate to any shipper. See note

7 supra. The aim of this provision is to prevent personal

favoritism from affecting rates. See Louisville & Nashville

R.R. Co. v. Mottley, 219 U.S. 467, 478 (1911); Wright v.

United States, 167 U.S. 512, 518 (1897).

36 In addition to examining this issue in light of whatever new

evidence it develops, FERC should pay special attention to three

questions that appear to us to be central to the §3(1) determination.

First, is the ICC correct in assuming that even if a disparity between

local and through rates exists and destroys some of petitioners’ geo-

graphical advantage over the Gulf Coast shippers, petitioners partial

retention of that advantage forestalls any finding of competitive

injury? Williams J, supra, 351 1.C.C. at 119-20. Is that assumption

correct even if the advantage retained is solely one in transportation

costs but not one in net drilling -plus- refining -plus- transportation

costs—i.e., even if, overall, petitioners’ products end up costing more

than those originating in the Gulf Coast area? Cf. A. Lindberg & Sons,

Inc. v. United States, 408 F. Supp. 1032, 1087-38 (W.D. Mich. 1976);

Chicago & E. Ill. R.R. Co. v. United States, supra, 384 F. Supp. at 301

(both cases suggesting that any showing of (a) actual competition

between the parties subject to the rate disparity, and of (b) some effect

on that competitive situation caused by the disparity, will suffice).

Second, does petitioners’ showing that the ratio of rates to cost for

transporting local products under the local rates was much higher than

that same ratio for through products under the joint rates belie the

existence of “transporation conditions” that justify the disparity

between local and through rates? Finally, does the decision in Texas &

Pac. Ry. v. United States, 289 U.S. 627 649-55 (1933), protect Williams

and Explorer from liability in this case because of their inability to

control the other’s rates? Cf. Ayrshire Collieries Corp. v. United States,

335 U.S. 573 (1949); New York v. United States, 331 U.S. 284 (1947).

ee DARPA ees ee Na

A-29

Section 2 normally requires proof that despite a like

kind of traffic moving under substantially similar circum-

stances, two shippers are being charged different prices.

It has been accepted for at least ninety years that proof

that a carrier charges shippers less for through goods than

for those moving locally does not, without more, establish a

violation of section 2. E.g., Union Pac. R.R. Co. v. United

States, 117 U.S. (1886); Texas & Pac. Ry. Co. v. ICC, 162

U.S. 197 (1896). Hence, petitioners cannot rest on proof

that the joint Explorer- Williams rates are lower than the

combination of their local rates.

Beyond introducing such clearly insufficient proof,

petitioners note that together the bulk of the Gulf Coast

shippers served by the Explorer- Williams interconnection

own Explorer. Petitioners attempt to turn this affiliation

into a rebate by challenging the division of rates between

the two intervenors. They argue that by taking less than

its due, Williams has left more to Explorer and to its

shipper-owners (through dividends) than is their due,

and accordingly has rebated some of the rates that Wil-

liams otherwise would have collected. Petitioners support

this allegation with evidence allegedly showing that under

the Explorer- Williams division of the joint rates Explorer .

receives the same price for transporting through oil as it

does for transporting local oil under its individual rates,

while Williams allegedly receives 9.5 cents per barrel less

for through oil transported under the joint rates than it

does for local oil transported over the same route under its

individual rates. Thus, it is argued, Williams bore the full

brunt of the “shrinkage” in through rates vis-a-vis the

combined local rates, instead of dividing that shrinkage

equally with Explorer.

Although dicta in Supreme Court cases suggest that

divisions of rates between carriers is a matter between

themselves, leaving shippers without standing to chal-

A-30

lenge them before the ICC,37 there also exist precedents

for the view that unequal divisions of rates in situations

involving shipper-owned carriers can result in rebates to

the controlling shippers that are illegal under section 2.

The Tap Line Cases, 234 U.S. 1, 28-29 (1914) (dicta); see

Divisions Received by Brimstone R.R. & Canal Co., 68 1.C.C.

875, 386-88 (1922), rev'd on other grounds, Brimstone R.R.

& Canal Co. v. United States, 276 U.S. 104 (1928).

Unfortunately, petitioners did not discover these lat-

ter precedents and mold them into a coherent argument

until they filed their reply brief in this court. Reply Brief

of Petitioners, at 20-22; cf. Brief of Petitioners, at 44; JA

at 1526-32; 3789-95; 1703-08, 1891-92. To the extent that

petitioners’ somewhat muddled arguments before the ICC

implied that Williams’ joint rates were “a clear revenue

drain” on Williams and thus unreasonably low under

section 1(5), JA at 1528, the ICC found otherwise and

petitioners have not appealed that finding before us. To

the extent that petitioners appeared to be arguing “that

the lesser combination rate is, itself, a form of dis-

crimination exercised by” Williams, JA at 1527, they

appeared merely to be repeating their argument under

section 3(1) that the combination rates were preferential

to Gulf Coast shippers and prejudicial to themselves.

Hence, while we do not necessarily agree with the admin -

istrative law judge that whether “one carrier (public- or

shipper-owned) is shortchanged in divisions with another

carrier (public- or shipper-owned) is a matter a's

between the carriers [and one that is] foreign to the issue

whether the joint rates...are discriminatory,” we do

agree that in this case the issue was not properly raised.%8

Accordingly, the ICC is affirmed on this issue.

37 Great No. Ry. Co. v. Sullivan, 294 U.S. 458, 463 (1935); Louisville

& Nashville R.R. Co. v. Sloss-Sheffield Steel & Iron Co., 269 U.S. 217, 234

(1925).

38 Initial Decision, supra, JA at 1594; see id. at 1592-94; 1605. In

the two Supreme Court precedents relied upon by the administrative

~ et Sw ow

a

+ eee ene,

A-31

The case is remanded to FERC for determination by

it of whether Williams’ rates are reasonable and whether

those rates in relation to the combined Williams- Explorer

rates create an illegal preference. In other respects, the

decision of the ICC is affirmed.

It is so ordered.

law judge for the proposition that “division of a joint rate is a matter of

no concern to a shipper,” id. at 1592; see note 37 supra, no shipper-

owned carrier was involved. In both cases, shippers challenged joint

rates as unreasunable under §1, and the division of the rates had no

impact on their overall reasonableness, as the Court noted in both cases.

Great No. Ry. Co. v. Sullivan, supra, 294 U.S. at 463; Louisville &

Nashville R.R. Co. v. Sloss-Sheffield Steel & Iron Co., supra, 269 U.S. at

234. Hence, they do not appear to disapprove of the dicta in The Tap

Line Cases, supra, 234 U.S. at 28-29, suggesting that, in a case under §2

in which shipper ownership of a carrier is relevant to the existence of

discrimination, the division of joint rates may be a matter of impor-

tance to the allegedly injured shippers. The ICC, in fact, has allowed a

shipper to intervene in a division-of-rates case on precisely this theory.

Divisions Received by Brimstone R.R. & Canal Co., 68 I.C.C. 875, 376

(1922), rev'd on other grounds, Brimstone R.R. & Canal Co. v. United

States, 276 U.S. 104 (1928). See id. at 386, citing The Tap Line Cases,

supra.

In reviewing the ICC’s Brimstone decision, however, the Supreme *

Court did conclude that the ICC had no authority to order the

retrospective redivision of joint rates; the Commission’s authority with

respect to rate divisions, derived from 49 U.S.C. §15(6) (a), as amended,

Pub. L. 94-210, §201, 90 Stat. 34 (1976), is entirely prospective.

Brimstone R.R. Co. v. United States, 276 U.S. 104, 121-23 (1928); see

Baltimore & Ohio R.R. Co. v. Alabama Great So. R.R. Co., 506 F.2d 1265,

1268-69 (D.C. Cir. 1974). Consequently, by affirming the Commision on

the ground that petitioners failed properly to raise this issue before the

ICC, we have not foreclosed them from raising it again before the ICC’s

successor (FERC) and from receiving precisely the prospective redress

to which they would potentially be entitled were we instead to remand.

Williams, of course, would be free at that time to interpose the defense

that whatever special treatment was accorded Explorer’s owners was

required by the need to meet competition from Explorer and other

carriers. See, e.g., McGraw Elec. Co. v. United States, 120 F. Supp. 354,

361-62 (E.D. Mo.) (three-judge court), aff'd mem., 348 U.S. 804 (1954);

JA at 1888, 2574.

B-1

Served November 5, 1975

30825

INTERSTATE COMMERCE COMMISSION

No. 35533

PETROLEUM PRODUCTS, WILLIAMS BROTHERS

PIPE LINE COMPANY

B-2

No. 35533!

PETROLEUM PRODUCTS, WILLIAMS BROTHERS

PIPE LINE COMPANY

Decided October 10, 1975

1. In docket No. 35533, No. 35533 (Sub-No. 1), and No.

35533 (Sub-No. 2), increased pipeline rates on petro-

leum products from and to points in the Southwest and

Midwest found just and reasonable and otherwise

lawful. Proceedings discontinued.

2. In fourth-section application No. 42327, authority

granted to establish and maintain the increased pipe-

line rates on petroleum products from certain points in

New Mexico, Texas, Oklahoma, and Kansas to certain

points in Illinois, lowa, and Missouri without observing

the long-and-short-haul provisions of the Interstate

Commerce Act.

3. In docket No. 35540, initial pipeline joint rates on

petroleum products from Lake Charles, La., and Port

Arthur, and Pasadena, Tex., to points in the Midwest

found not shown to be unjust and unreasonable and

otherwise unlawful. Proceeding discontinued.

4. In docket No. 35720, assailed pipeline rates on petro-

leum products from and to points in the Southwest and

1 Also embraces docket Nos. 35533 (Sub-No. 1), Petroleum Prod-

ucts to Ill., lowa, and Mo., Williams Brothers Pipe Line Company, No.

35533 (Sub-No. 2), Petroleum Products, Williams Brothers Pipe Line

Company, No. 35540, Petroleum Products, Louisiana & Texas to Mid-

west, fourth-section application No. 42327, Pipeline Rates—Petroleum

Products from the Southwest, and Docket No. 35720, American Petro-

fina Company of Texas, et al. v. Williams Brothers Pipe Line Company,

. etal.

B-3

Midwest found not shown to be unjust and unreason-

able and otherwise unlawful. Complaint dismissed.

Robert G. Bleakney, Jr., Robert L. Calhoun, John S.

Estill, Jr., and David M. Schwartz for a respondent in

docket Nos. 35533, No. 35533 (Sub-No. 1), No. 35533 (Sub-

No. 2), and No. 35440, for applicant in fourth-section

application No. 42327, and for a defendant in docket

No. 35720.

Donald W. Markham and Howard D. McCloud for a

respondent in docket No. 35440 and a defendant in docket

No. 35720.

John McCleary, John F. Donelan, and Frederic L. Wood

for protestants in docket Nos. 35533, No. 35533 (Sub-

No. 1), No. 35533 (Sub-No. 2), fourth-section application

No. 42327, and docket No. 35440 and for complainants in

docket No. 35720.

REPORT AND ORDER OF THE COMMISSION

DIVISION 2, COMMISSIONERS BROWN, HARDIN, AND CORBER

BROWN, Commissioner:

By schedules filed to become effective December 26,

1971, in docket No. 35533, January 27, 1972, in docket

No. 35533 (Sub-No. 1), and March 25, 19722 in docket No.

35533 (Sub-No. 2), respondent, Williams Brothers Pipe

Line Company (WBPL) proposed to establish increased

pipeline local rates and in connection with certain pipeline

carriers increased pipeline joint rates on petroleum prod-

ucts, from and to certain points in the Southwest and

Midwest. Upon joint protest filed by certain shippers?

2 Postponed from March 1, 1972.

2 American Petrofina Company of Texas, Bell Oil & Gas Company,

Farmers Union Central Exchange, Inc., Farmland Industries, Inc.,

CRA, Inc., Kerr-McGee Corporation, Midland Cooperatives, Inc., Na-

tional Cooperative Refinery Association, and OKC Corporation.

B-4

(Shipper Group) the investigations in docket Nos. 35533,

No. 35533 (Sub-No. 1), and No. 35533 (Sub-No. 2) were

instituted on December 23, 1971, January 24, 1972, and

March 7, 1972, respectively, concerning the lawfulness of

the schedules which became effective on December 26,

1971, January 27, 1972, and March 25, 1972, also respec-

tively.

By fourth-section application No. 42327, WBPL seeks

authority to establish and maintain the rates under in-

vestigation in docket No. 35533 (Sub-No. 1) without

observing the long-and-short-haul provisions of section 4

of the Interstate Commerce Act.

In docket No. 35540, by schedules filed to become

effective January 8, 1972, respondent Explorer Pipeline

Company (Explorer) and WBPL proposed to establish

initial pipeline joint rates on petroleum products, from

Lake Charles, La., and Port Arthur, and Pasadena, Tex.,

on the lines of Explorer to certain points in the Midwest

on the lines of WBPL. Upon joint protest of the Shipper

Group this proceeding was instituted on January 7, 1972,

into and concerning the lawfulness of the schedules which!

became effective on January 8, 1972.

In docket No. 35720, by joint complaint filed August

23, 1972, the complainants, Shipper Group, allege that the

pipeline rates charged on petroleum products to points in

the Midwest by defendant WBPL from points in Okla-

homa, Kansas, Nebraska, and Minnesota, and by defend-

ants Explorer and WBPL from Lake Charles, Port Arthur,

and Pasadena, were and are unjust and unreasonable,

unjustly discriminatory, and unduly and unreasonably

preferential and prejudicial in violation of sections 1(5), 2,

and 3(1) of the Interstate Commerce Act. Complainants

seek an order requiring defendants to cease and desist

from the alleged violations of the act, to establish and

maintain just and reasonable rates and charges, and to

OK. nally aera iis 8 SP et The ata 10 Ct UB

ee a oe i

B-5

pay reparations in excess of $10,000 (approximately $5

million a year since August 20, 1970), plus interest, and

costs and reasonable attorneys’ fees.

The Administrative Law Judge, in an initial decision

served June 6, 1974, found:

(1) That in docket Nos. 35533, No. 35533 (Sub-

No. 1), and No. 35533 (Sub-No. 2), the increased

pipeline rates on petroleum products from and to

points in the Southwest and Midwest were just and

reasonable and otherwise lawful;

(2) That in fourth-section application No. 42327

authority should be granted to establish and maintain

the increased pipeline rates on petroleum products

from certain points in New Mexico, Texas, Oklahoma,

and Kansas to certain points in Illinois, Iowa, and

Missouri without observing the long-and-short-haul

provisions of the Interstate Commerce Act;

(3) That in docket No. 35540, the initial pipeline

joint rates on petroleum products, from Lake Charles,

La., and Port Arthur and Pasadena, Tex., to points in

the Midwest had not been shown to be unjust and

unreasonable and otherwise unlawful;

(4) That in docket No. 35720, the assailed pipe-

line rates on petroleum products from and to the

Southwest and Midwest had not been shown to be

unjust and unreasonable and otherwise unlawful.

Before discussing the exceptions, we adopt the Ad-

ministrative Law Judge’s findings concerning the parties

and certain rates issues and we set these out in appendix

A.

Exceptions to the initial decision of the Adminis-

trative Law Judge were filed by protestants/complainants

and they will be discussed hereinafter in detail. Replies to

B-6

the exceptions were filed by respondents/defendants. The

essence of the replies to the exceptions is that the ex-

ceptions are without merit; the rates and earnings of

WBPL are not unlawful; and the conclusions and findings

of the Administrative Law Judge in his initial decision are

correct and should be adopted by the Commission. The

replies, accordingly, will not be discussed, in detail except

in connection with exception 30.

Before discussing the exceptions individually, we

should note the basic areas to which they pertain. The

first four exceptions are general ones. Exceptions 5

through 20 and 30 go to the issue of reasonableness. It is

alleged that the Administrative Law Judge erred in

concluding that the increased pipeline rates from and to

points in the Southwest and Midwest were just and

reasonable and that the rates brought in issue were not

shown to be unjust and unreasonable. Exceptions 21

through 28 deal with the issue of preference and prejudice

involving the initial joint pipeline rates of Explorer and

WBPL from three gulf coast origins served by Explorer

to 45 midwestern destinations served by WBPL. In

exception 29, these joints rates are also alleged to be

discriminatory.

Exceptions 1, 2, 3,and 4.—Exceptions l, 2, 3, and 4 are

merely general exceptions taken to the ultimate con-

clusions reached by the Administrative Law Judge in the

initial decision. The specific exceptions are discussed in

detail hereinafter.

As mentioned above, exceptions 5 through 20 and 30

pertain to the reasonableness of rates. In particular,

exceptions 5, 6, and 7 refer to statements found in the

Summary and Findings of the initial decision (p. 23),

which are alleged to be the only statements that could be

arguably aimed at supporting the ultimate conclusions of

reasonableness.

)

Ae te SaaS he — CB a BP ell A ne Rt NORE | Ale EPO BA 34

it isocratic an i osaa tsk: Sed ee OE De ~ eB Hh Kh Lees +

B-7

Exception 5.—Protestents/complainants here object

to the Administrative Law Judge’s finding that “None of

the shipper group question WBPL’s rate structure.”

Our comments.—The shipper group did question the

joint WBPL-Explorer rates and argued that these rates

were not just and reasonable. This question becomes moot,

however, in view of the Administrative Law Judge’s

finding that the disparity between the level of WBPL’s

rates and the joint rates is shown to be warranted.

Exception 6.—In this exception, issue is taken to the

finding that “There is no legal requirement that the same

percentage of profit be secured from each type of oper-

ation of a transportation company.”

Our comments.—This was based on Northern Pacific

Ry. Co. v. North Dakota, 236 U.S. 585, 598-99 (1915), and

the exception is without merit.

Exception 7.—Protestants/complainants allege that

the overall earnings of WBPL are excessive, as shown by

use of the capital cost factor of 5.98 percent.

Our comments.—The traditional method of determi-

ning the reasonableness of rates for pipeline products is

the rate of return on the Commission’s validation of

pipeline property. The Commission held that a 10-percent

rate of return was reasonable.4 See Petroleum Rail Ship-

pers’ Assn. v. Alton & S.R., 243 I.C.C. 589 (1941). Based on

this standard, the overall earnings of Williams Brothers is

clearly not excessive. WBPL’s rates of return on valuation

are 8.83 and 8.57 percent for 1972 and 1973. See appendix

B. It should be noted that the revenues used in these

computations reflect the increased rates requested by

WBPL. Thus, using Commission precedent the Adminis-

“The Commission found that a 8-percent rate of return was

reasonable for crude petroleum in Minnelusa Oil Corp. v. Continental

Pipe Line Co., 258 1.C.C. 41 (1944).

B-8

trative Law Judge’s findings regarding the reason-

ableness of the rates are correct and are hereby affirmed.

However, protestants/complainants have in their presen -

tation in this proceeding raised certain considerations

pertaining to rate of return of pipelines that have broad

implications affecting the entire pipeline industry. Thus,

while it is not necessary in this proceeding to resolve these

broader issues, the division proposes to recommend to the

entire Commission that the Ex Parte No. 308, Valuation of

Common Carrier Pipelines, be expanded to include the rate

of return issue, i.e., whether the 8-percent and 10-percent

rate of return on crude petroleum and petroleum products

are still the proper measure of reasonableness.

Exception 8.—Protestants/complainants contend that

the record fails to support the method or accuracy of the

development of the weighted average ratios of rate to cost

shown in appendices A and B to the initial decision. Their

objection here is that the Administrative Law Judge

found these ratios to be “weighted averages,” without

documented evidence thereof.

Protestants/complainants also state that there was no

justification presented in this proceeding for revenues in

excess of the overall total cost of service. They also

contend that the rates must be reduced by a minimum of

15 percent.

Our comments.—The Administrative Law Judge

clearly stated that appendices A and B were WBPL’s

comparisons of rates to the 1972 cost levels. He also stated

that the composite capital cost return percentage of 8.31

percent used in appendix B was inappropriate. It is true

that although the sworn testimony of WBPL’s witness is

entitled to some weight, protestants/complainants should

have had access to the figures which would have explained

the weighting process. As seen in the discussion of the

previous exception, however, there is sufficient evidence to

BR Sted at Lng TINE. Cy EL saat Oy LOO ho NS Se

Susans

B-9

support the Administrative Law Judge’s conclusion that

the rates were reasonable. See appendices B.

Exception 9 through 19.—The protestants/complain-

ants contend that the Adminstrative Law Judge com-

mitted error in his adoption without critical evaluation, of

the Commission’s valuation as a fair value rate base. We

shall comment on each of these exceptions, but, first, will

provide some background on the Commission’s valuation

method and its use by WBPL in these proceedings.

Prior to purchase by WBPL, the pipeline facilities in

question were owned and operated in common carrier

service by Great Lakes Pipe Line Company. The date of

purchase was March 29, 1966. Subsequent to this acquisi-

tion, additional properties were constructed and a delivery

terminal purchased from Cometa Corporat’ n at Nebraska

City, Nebr.

The investment of WBPL in carrier property, in-

cluding land and rights-of-way, as of December 31, 1966,

was stated in its records as $293,583,099. An audit by the

Commission of WBPL’s records indicated that after minor

adjustments, the proper investment in carrier property

should have been $293,389,478. The records examined also

indicated that the recorded investment in the carrier

property purchased from Great Lakes Pipe Line Company

exceeded the original cost by $108,988,501. An audit of

Great Lakes Pipe Line Company’s records indicated that

on the date of sale its investment in carrier property,

including land and rights-of-way, was $174,839,059. In

other words, WBPL’s recorded investment, including land

and rights-of-way as of December 31, 1966, amounted to

$293.6 million. Of this amount, $283.8 million represented

the purchase cost of the Great Lake’s properties, and the

remaining amount of $9.8 million represented new

construction.

Further, the Commission permitted WBPL to record

on its books the price actually paid and allowed it to accrue

B-10

depreciation expense based on this actual investment. In

fact the Commission changed its accounting rules to

permit this action. In Uniform System of Accounts for

Pipeline Companies, 337 I1.C.C. 518, 522-523 (1970) the

Commission stated:

... Pipeline companies may construct or extend

facilities at will; no certificate or other franchise is

required. They are not monopolistic or free from

competition, and we affirm the division’s finding that

it would be inappropriate to require the purchaser to

record depreciable property at its net ook value to

the seller.

As for ratemaking considerations, the amend-

ments hereinafter set forth will insure that property

accounts are not inflated by nondepreciable items.

Moreover, we are concerned here with accounting

rules which are not necessarily dispositive of the

manner in which expenditures will be treated in a

proceeding to determine the reasonable level of

particular rates. Jt should also be noted that rate of

return for pipelines is customarily determined, not by

investment as shown on the carrier’s books, but rather

on the basis of the Commission’s valuations pursuant to

section 19a of the act... {Emphasis added. ]

The critical question in this proceeding resolves down

to what is a proper rate base from which one can measure

a fair return with respect to pipelines. The protest-

ants/complainants claim that for the purpose of rate-

making and measuring the reasonableness of pipeline

rates, the use of an original cost rate base is preferable to

the use of any valuation rate base. The respond-

ents/defendants claim they should be treated no differ-

ently than other pipelines and the Commission would be

correct in using a valuation rate base. However, they

concede that if the Commission should consider a net book

Be ib i a ae

B-11

cost it should be based on net investment and not on net

original cost. The question resolved down to which of

three alternative bases, or variations thereof should the

Commission give consideration to for the purpose of

ratemaking and measuring the reasonableness of pipeline

rates: (1) valuation rate base; (2) net investment rate

base; or (3) net original cost rate base.

Based on these three alternative methods, the various

rate bases for WBPL for the period ending December 31,

1966, would be as follows:

Million

C1) Vaiwntien? .......csccerc.: $167.6

(2) Net investment’ ......... 287.8

(3) Net original cost? ....... 101.1

‘Taken from ICC Valuation Docket No. 1423 (1966

report.)

2 Estimate based on original cost of $174.8 for prop-

erty purchased from GLPL less accrued depreciation of

$83.4 million plus original cost of $9.7 million for property

added after purchase.

It is obvious that neither WBPL nor any prudent

party would invest $293.4 million in property that had a

rate base of about $100 million. In fact, protestants/

complainants’ principal witness admitted that WBPL

could not service its debt based on a net original cost rate

base. Therefore, the net investment cannot be accepted as

the rate base. On the other hand, the valuation rate base

produces a reasonable base from which to measure rate of

return and subsequently the reasonableness of rates. The

valuation rate base falls between the net original cost and

the net investment bases. The Administrative Law Judge

concluded that WBPL’s rate base, predicated on the Com-

mission’s valuation, vas reasonable and an equitable base

from which to measure rate of return.

B-12

With this background, we will proceed to discuss

individually the protestants/complainants’ exceptions 9

through 19. These 11 exceptions are to various statements

that the Administrative Law Judge made with respect to

the admission and use of valuation as a rate base for

pipelines.

9. The Administrative Law Judge stated that “The

witness making the estimated Commission valuation was

fully qualified to do so and his reliance upon Commission

reports may not be properly questioned.” (Page 10 of the

initial decision. )

The protestants/complainants attempted to have the

defendants/respondents’ principal witness disqualified as

an expert witness and consequently his statement and

exhibits on the computation of the valutaion rate base for

years 1967-1969 and his use of the valuations as found by

the Commission for the years 1966, 1970, 1971, 1972 dis-

allowed. Their objections were on both procedural grounds

and on the merits as to the validity and weight to be given

to such data.

Our comments.—With respect to the exhibits sub-

mitted by the defendants/respondents’ principal witness,

our analysis of the data contained therein shows such data

to be acceptable in theory and principle. Although the

protestants/complainants state that “The record clearly

shows that Mr. Hines was not competent to offer such

exhibits,” they nevertheless, admit that he testified in a

prior proceeding and apparently submitted information

predicated on valuation concepts.

10. The Administrative Law Judge stated that “The

matter of compliance with the Administrative Procedure

Act, 5 U.S.C. Section 553, in the valuation proceedings is

not a matter for consideration here, but must be raised in

those proceedings.” (p.10.)

+ RRR so ie i Re

B-13

Protestants/complainants allege that this statement

is erroneous as it effects the 1966 docket.

Our comments.—Inasmuch as protestants/complain-

ants made no attempt to protest the 1966 docket, it may

not be brought into question at this time.

11. The Administrative Law Judge stated that “The

matter of defects in the Commission’s Valuation process

raised by the shipper group has no place here.” (p. 18.)

The protestants/complainants claim the valuations

relied upon by WBPL should be rejected because of the

numerous defects allegedly existing in the valuation pro-

cess. The numerous defects refer to the protestants/

complainants’ theories with respect to the various ele-

ments and the weighting used in determining valuations.

Our comments.—(a) A great deal of criticism is di-

rected to the development of Cost of Reproduction New,

one of the seven elements considered by the Commission

in its determination of a valuation. Cost of reproduction

new is the estimated cost of reproducing substantially the

identical property constructed in a prior period at a price

level as of a subsequent date. In all pipeline valuations the

Commission uses a base period of 1947 and through the use

of indexes estimates the cost of identical property at some

later date. As an example, assume that for steel-line pipe

of 10-inch diameter the Commission established a 1947

period price of $2.01 per lineal foot. To determine a 1973

period cost for this same pipe, the Commission’s index for

steel-line pipe would be applied to the 1947 period cost. In

this case the 1973 period index would be 225, and, there-

fore, the 1973 period cost would be 2.25 times the 1947

period cost, or $4.52 per lineal foot.

The principles applied are based on sound engineering

techniques recognizing the cost differentials between a

predetermined base period and a current period. It

B-14

recognizes this through a statistical analysis of changing

price patterns and construction techniques and converts

these patterns to a statistical index series that measures

the deflationary power of the dollars invested in common

carrier facilities. These are the same techniques used by

economists and statisticians, including- the Bureau of

Labor Statistics, to measure various changes in costs as

shown in their publications. These techniques are also

used by appraisers in determining the current market

value of land and industrial properties.

As previously stated, this is only one of the elements

of costs that would be considered in the determination of a

value for this pipe. Its original cost, as well as its

estimated cost due to the physical wear and tear that has

occurred to the pipe because of use, are also given weight

in the determination of its estimated value. Again,

assuming certain factors for 10-inch pipe, as cost of

reproduction new to be $4.52; original cost to be $3.10; and

its physical condition estimated to be 80 percent, which

would make its cost of reproduction new less depreciation

equal 0.80 x $4.52, or $3.62. Therefore, the Commission’s

estimated value of this pipe would be based on these three

elements.

(b). The protestant:s/complainants also allege that:

The basis for estimating the cost of reproduction

new is not reliable. First we submit that the whole

process has been so tainted by contacts between

industry representatives and Commission personnel

through the “pipeline advisory committee” which

were in essence, ex parte contacts between a select

group of industry representatives without notice to

the public or participation in the proceedings by rate

payers.... While the Commission might be said to be

representing the public, there is no assurance that that

was the case. [Emphasis added. ]

B-15

The protestants/complainants provide no proof for

such accusations. Moreover the pipeline Advisory Com-

mittee on Valuation was established in accordance with

procedures laid down by law. Its primary purpose is to

assist the Commission in obtaining accurate information

on current costs of pipeline construction. Since 1973, these

meetings have been held with public notice and protes-

tants/complainants attended and participated in at least

two of these meetings. Protestants/complainants have

always had the opportunity to nominate a representative

on the committee but have not elected to do so.

(c). The protestants/complainants state that there is

no indication that any prudent man would consider repro-

ducing the WBPL system on the basis of the extremely

high reproduction costs estimated. It is not clear what

this means. However, it seems to imply that the Commis-

sion’s valuations are solely a function of reproduction cost

new which is not the case. Secondly, if a prudent man

wished to construct the pipeline at current year’s cost, this

would be a fair approximation of what the costs would be.

(d). Other defects in the valuation process alleged by

the protestants/complainants include such items as

weighting of original cost and reproduction cost, condition

percent, going concern value, present value of land, and

present value of rights-of-way. These defects are all

theory and not fact and are based principally on the

grounds that they have the direct effect of increasing the

valuation. In answer, we point out that the following:

Original cost and reproduction cost.—The act specific-

ally requires that consideration be given to cost of repro-

duction new, cost of reproduction new less depreciation,

and original cost. Congress did not spell out the weight to

be given each of these elements of value but left it to the

discretion of the Commission to determine how much

weight should be given to each.

B-16

Value.—In its determination of value, the Commis-

sion first of all has elected to give major consideration to

two elements, cost of reproduction new and original cost.

The Commission’s position has been that the value of the

property before depreciation should lie between these two

elements of cost, and it elected to weight the two together

based on each one’s percentage relationship to the sum of

the two. In other words, during a period of inflation, cost

of reproduction new would naturally be given the greater

weighting while during a recession original cost would be

given the greater weighting. There are numerous ways in

which these two elements could be weighted. However,

the Commission considered this to be the most equitable

and consequently has used this approach in all of its

valuations both for railroads and pipelines.

Condition percent.—In their criticism of the Commis-

sion’s use of condition percent in lieu of accrued deprecia-

tion, it is apparent that the protestants/complainants do

not understand the valuation process and what the Com-

mission. is attempting to accomplish. The Commission

must find a value of the property due to physical wear and

tear. Exact engineering measurements could be done to

accomplish this; however, the cost would be prohibitive.

Therefore, the Commission has elected to measure this

physical wear and tear mathematically. This condition

percent factor as used by the Commission is a function of

the remaining probable life of an item of property at any

attained age and its total probable life at that age. The

Commission considers the application of this value to the

cost of reproduction new, to produce a reasonable estimate

of the cost of the property in its present condition.

Going concern value.—In its determination of valu-

ations, the Commission gives consideration to going con-

cern value without showing a definite amount for these

intangible values. However, an amount is added for the

intangible value of going concern of 6 percent of the

B-17

value, before adding an amount for present value of land,

present value of rights-of-way, and working capital. This

is considered to represent the value of an operating plant

as compared to a nonoperating plant, and the amount of

investment upon which those devoting property to the

public service are fairly entitled to earn the stipulated

return.

Present value of land.—The protestants/complain-

ants’ objection to use of present value of land has no merit

since the act specifically requires that the Commission find

and give consideration to its value in the determination of

a valuation. Their only argument against its use is that

during times of inflation its cost could be greater than the

original cost.

All valuation elements.—In Ex Parte No. 308, the

Commission will address itself to each of the seven ele-

ments it considers in the development of a valuation.

These are (1) original cost, (2) cost of reproduction new,

(3) cost of reproduction new less depreciation, (4) going

concern value, (5) present value of land, (6) present value

of rights-of-way, and (7) working capital. Since the

Commission applies the same procedures equally to all

pipeline carriers under its jurisdiction, there is no reason

to single out one carrier and apply different procedures. If

the Commission should elect to change its methodology of

performing valuations in Ex Parte No. 308, the new

methodology will be applied to all carriers equally and on

the same basis.

12. The Administrative Law Judge stated that: “The

valuation process, pursuant to Section 19a has been em-

ployed by the Commission for many years, and on railroad

rag sa valuations has withstood many challenges.”

p. 18.

Our comments.—This is a true statement of fact and is

documented in the printed “Valuation Reports” of the

B-18

Commission. In the initial valuation of the railroads the

Commission made some 1,825 individual carrier valuations.

Many of its decisions and the methods employed by it were

subjected to challenges. In its initial valuations of pipe-

lines in 1934 there were 82 carriers for which it made

valuations, and many of these carriers protested the

Commission’s findings and challenged its methods of

doing valuations.

13. The Administrative Law Judge stated that: “Any

question involving the valuation process should be deter-

mined in a rulemaking proceeding at which all affected

persons are allowed to present their views.” (p. 18.)

Our comments.—The protestants/complainants in this

proceeding cannot plead ignorance of the Commission’s

valuation process as most of them are subject to the same

section 19a requirement and have been served with valu-

ation reports. Our comments on exception 11, are also

applicable here.

The valuation process follows preestablished proce-

dures in other Commission proceedings. In Ajax Pipe Line

Corporation, 50 Val. Rep. 1 (1949), the Commission set

forth its statement of methods for the determination of

its valuation for pipelines. Any alternation of this process,

must be accomplished through a proceeding dealing with

the subject so that all affected parties may be heard. For

this reason, Valuation Docket No. 1423 (1971, 1972, and

1973 Reports) were separated from Ex Parte No. 308.

14. The Administrative Law Judge stated that: “The

consistent past use of a valuation rate base for oil pipelines

was recognized by the Commission in Uniform System of

Accounts for Pipeline Companies.”

Our comments.—That decision supports the statement

of the Administrative Law Judge, as set forth in the

background discussion of exceptions 9 through 19, above.

B-19

In addition, pipeline valuations are currently being done

on an annual basis for all carriers subject to the Commis-

sion’s jurisdiction. In each valuation docket, the amount

found to be the value for ratemaking purposes is stated,

and is similar to the one shown below for WBPL:

Final value for ratemaking purposes of the prop-

erty of the Williams Brothers Pipe Line Company,

owned and used for common carrier purposes, found

to be $167,605,000 : as of December 31, 1966.

15. The Administrative Law Judge’s assertion that

the final valuation meets the attributes considered to be

desirable for a rate base. (p. 20.)

Our comments.—These attributes are (1) it should be

readily determinable as of any date; (2) it should remain

stable regardless of fluctuations in construction costs; (3)

it should be readily defended as to correctness of amount

in court actions; (4) its use should result in reasonably

stable rates; (5) it should serve as a guide not only for the

determination of rates, but for the issuance of securities

and for authorization of purchase and sale of property;

and (6) its use should result in justice to both the owner

and its shippers. This would be the ideal rate base and we

consider that the valuation rate reflects as many of these

attributes as any rate base which could be used.

16. The Administrative Law Judge’s assertion that

“the Commission methodology of determining valuations

has withstood the test of time and the challenges of the

railroads and the pipelines.” (p. 21.)

Our comments—Our comments on exception 12 also

apply to this exception.

17. The Administrative Law Judge stated that: “The

fair value rate base here meets the end result doctrine of

the Hope Natural Gas case. (p. 21.)

B-20

Our comments—Many have read into the Supreme

Court decision in Hope Natural Gas, 320 U.S. 591, that the

only proper base from which to measure rate of return is a

net original cost base, and in the instant proceeding the

protestants/complainants are in fact attempting to have

this position adopted. However, section 19a of the act has

had no material amendments since its enactment on

March 1, 1913. Until such time as it is amended, the

Commission, in administering the act, must consider all

the elements of value detailed in section 19a. Therefore, a

carrier may show the value of its property and the rate of

return thereon in any ratemaking proceedings before this

Commission.

The protestants/complainants contend that this Com-

mission has long ago rejected, for ratemaking purposes,

reliance upon principles which are of the essence of the so-

called valuations. In support of their argument they point

out that in Ex Parte No. 175, Increased Freight Rates, 1951,

284 I.C.C. 589 (1952), in its report on further hearing, 281

I.C.C. 563, et. sg., the Commission stated that estimates of

values of the class I railroad properties should be based

upon our estimates of original cost (except land and

rights), the present value of lands and rights, and an

allowance for working capital less recorded amounts for

depreciation and amortization. However, to the contrary,

the Commission was there attempting to apply the prin-

ciples as enumerated in section 19a. At that time it did

not have updated valuations for all class I line-haul,

switching, and terminal railroads, nor did it have the

personnel to compile the valuations. Regardless, it did not

elect to use the single element of value (net original cost)

in its determination of proper rates.

18. The finding by the Administrative Law Judge

that the “best measurement of the reasonableness of the

rates” consists of a capital cost factor “applied on the fair

value rate base.” (p. 22.) [Emphasis added. ]

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B-21

Our comments.—Our comments on exception 7 also

apply to this exception.

19. The Administrative Law Judge’s characterization

of “final value” figures which have not been the subject of

a final valuation in accordance with proper procedures

under the Administrative Procedure Act. (p. 20.)

Our comments.—The Commission issues a tentative

report in which it refers to the single-sum value that it

finds as “final value for ratemaking purposes.” (See

exception 14 above.) By provision of section 19a(h), the

tentative valuation report becomes final if no protest is

filed within the time allowed by statute. The history of

the various valuation reports for WBPL (Valuation Docket

No. 1423-1966 through 1973) is as follows:

The Commission served its tentative valuation report

(Valuation Docket No. 1423-1966 Report) for WBPL on

September 29, 1970. There were no protests to the

tentative report and it became final on November 9, 1970.

The Commission did not prepare tentative valuation

reports for WBPL for the years 1967, 1968, and 1969.

However, it did prepare a report as of December 31, 1970,

which included all of the changes to the physical proper-

ties that had occurred during the years 1967 through 1970.

A tentative valuation report (Valuation Docket No. 1423-

1970 Report) was served on November 21, 1972. On

December 22, 1972, a protest was filed by the protes-

tants/complainants against the tentative valuation re-

port. The Commission, Division 2, Acting as an Appellate

Division, by its order of March 13, 1973, rejected the

protest on the basis that only parties entitled under

section 19a(h) of the act to be served by the Commission

with notice of tentative valuations are authorized to file

protests against the findings in the tentative valuation

report. On April 19, 1973, a notice was served on all

B-22

parties stating that report of the Commission and the

valuation found therein was final.

The Commission on August 1, 1973, served its 1971

tentative valuation: report (Valuation Docket No. 1423-

1971 Report); on May 3, 1974, its 1972 tentative valuation

report (Valuation Docket No. 1423-1972 Report); and on

December 18, 1974, its 1973 tentative valuation report

(Valuation Docket No. 1423-1973 Report). The protes-

tants/complainants filed a petition for leave to intervene

in all three proceedings. Their petitions were granted5

and they filed protests.

The Commission on August 1, 1973, served its 1971

tentative valuation report (Valuation Docket No. 1423-

1971 Report); on May 3, 1974, its 1972 tentative valuation

report (Valuation Docket No. 1423-1972 Report); and on

December 18, 1974, its 1973 tentative valuation report

(Valuation Docket No. 1423-1973 Report). The protes-

tants/complainants filed a petition for leave to intervene

in all three proceedings. Their petitions were granted5

and they filed protests.

Since the Commission has not disposed of these latter

protests the protestants/complainants claim that the

single-sum figures in the tentative reports are not “final.”

The protestants/complainants are dealing in semantics

and, as above indicated, regardless of the use of the

terminology of “final value” for valuation, the tentative

5 This was pursuant to order of March 138, 1973, to the effect that:

...in the future, notice be published in the Federal Register that a

tentative valuation of a particular carrier’s property is under consid-

eration by the Commission; that the notice shall provide that interested

parties, pursuant to Rule 72 of the Commission’s General Rules of

Practice, 49 C.F.R. §1100.72 may file an original and three copies of a

petition for leave to intervene and if granted thus come within the

category of “additional parties as the Commission may prescribe”

under section 19a(h) of the Act thereby enabling the party to file a

protest; and that the notice shall further specify the carrier’s address so

that service of the petition to intervene can be made upon the carrier.

B-23

reports do not become final except in compliance with the

provisions of section 19a of the act, which are as follows:

(h) Whenever the Commission shall have com-

pleted the tentative valuation of the property of any

common carrier, as herein directed, and before such

valuation shall become final, the Commission shall give

notice... stating the valuation placed upon the sev-

eral classes of property of said carrier, and shall allow

thirty days in which to file a protest of the same with

the Commission. If no protest is filed within thirty

days, said valuation shall become final as of the date

thereof.

(i) If notice of protest is filed the Commission

shall fix a time for hearing the same....If after

hearing any protest of such tentative valuation under

the provisions of this part the Commission shall be of

the opinion that its valuation should not become final,

it shall make such changes as may be necessary, and

shall issue an order making such corrected tentative

valuation final as of the date thereof....

Therefore, it is clear that the tentative valuation does not

become final until the provisions of the statute are com-

plied with.

Exception 20.—The protestants/complainants con-

tend that the Administrative Law Judge “In an attempt

to support his erroneous use of the ‘valuation rate

base’... relied heavily upon contentions that such a rate

base is a workable method for preventing capital exhaus-

tion and for coping with attrition of earnings.” They

further contend that if any consideration is to be giv-

en...to the concept of ‘capital exhaustion’ it only would

be applicable to the unrecouped balance of the capital

originally invested ...an amount which, by the time the

line was sold by GLPL to WBPL in 1966, amounted to

$91,359,860.”

B-24

Our comments.—The Administrative Law Judge is

correct, since a valuation rate base is a workable method

for preventing capital exhaustion. This has become clear

in recent years due to the spiraling rate of inflation and

can be illustrated using the Commission’s own series of

index numbers for pipeline construction. Using 1947=

100, the annual indexes for the past 8 years (1966-1973),

the period during which WBPL has been in operation as a

common carrier, are as follows:

1973—235 1969—191

1972—221 1968—187

1971—211 1967—181

1970—198 1966—179

This means that for every $1.79 spent for plant in

1966 it would require $2.35 to buy the same equivalent

plant in 1973. In other words, at the end of the 8-year

period, $1.79 would have been recouped through deprecia-

tion charges and would short fall by $0.56 with respect to

the amount required to replace the plant. Since a valu-

ation rate base reflects to some degree the inflated cost of

plant through the cost of reproduction new value, it

consequently helps to prevent capital exhaustion and

attrition of earnings.

The issue of preference and prejudice will be discussed

in exceptions 21 though 28. This issue involves the initial

joint pipeline rates of Explorer and WBPL from three gulf

coast origins—Lake Charles, La., Pasedena, Tex., and Port

Arthur, Tex.,—to 45 midwestern destinations served by

WBPL. It is alleged that the rates are prejudicial to the

Midcontinent shippers who use WBPL’s rates to these

same destinations from Midcontinent origins. At the

time of the hearings, the initial joint rates were uniformly

9.5 cents a barrel less than the combination of Explorer’s

and WBPL’s rates, a difference that by subsequent tariff

filings has become 6.5 cents a barrel. The Administrative

Sr canege areas ah ih TC sai i ANE SS see Io stains ald ani it il a!

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B-25

Law Judge found that the disparity between the level of

WBPL’s rates and the joint rates did not support a finding

of preference and prejudice since WBPL’s rates are

substantially lower than the joint rates to the same

destinations, no competitive advantage accrues to the

shippers at the joint rates, and no showing of injury was

made.

Exception 21, 22, and 23 shall be considered together

and pertain to whether the disparity in rates is justified

by transportation conditions.

Exception 21.—The protestants/complainants except

to the Administrative Law Judge’s statements that Ex-

plorer’s and WBPL’s “operations differ in material re-

spects” and that “the differences account for the mainte-

nance of a lower level of rates by Explorer.” The Adminis-

trative Law Judge stated that these differences were part

of the reason why the Explorer-WBPL joint rates were

lower than WBPL’s local rates. Protestants/complainants

argue that the Administrative Law Judge did not quan-

tify what the differences are.

Exception 22.—The protestants/complainants except

to the statement that “the combined Explorer WBPL

factors in the making of the joint rates differ from the

WBPL factors in the making of the WBPL rates.” They

argue that the statement is also unquantified.

Exception 23.—The protestants/complainants except

to the Administrative Law Judge’s justification for the

differences in rates based upon “factors other than cost”

which factors “include a deterrent® to the extension of its

pipeline by Explorer, increased load through WBPL’s lines

tending to reduce WBPL’s cost, and water competition.”

Here, too, they allege that the Administrative Law Judge

did not quantify these differences.

6 Misspelled as “determent” in the initial decision.

B-26

Our comments.—Protestants/complainants concede in

their brief on exceptions that there are some differences

between Explorer’s and WBPL’s operations, although

these differences do not justify the magnitude of the rate

disparity. We believe they do.

Explorer has a large (28’’) diameter, fully automated

pipeline which results in significant cost savings when

compared to WBPL’s smaller and older lines. Even though

Explorer’s volume is currently well below the level re-

quired for optimum operating efficiency, there is evidence

of record that even at this level Explorer’s system oper-

ating costs for the year 1972 were significantly lower than

WBPL’s (46.74 cents per 1,000 barrels-miles versus 55.59

cents). At optimum capacity the unit cost of trans-

portation through the 28-inch line will te less than half

the cost of transportation through the 12-inch line.

Furthermore, the threat of competitive entry by new

pipelines and water carriers were an important consid-

eration in determining the level of rates. Finally, the

joint rates were established to aid in providing new

markets for gulf coast origin products and will help in

meeting the increased demand for petroleum products

which the midcontinent shippers cannot meet because

crude oil production there has not © 2pt pace with demand

and there has been a decline in refinery capacity. (Docket

No. 35720, Ex. 58, p 7.)

Exceptions 24, 25, and 28 shall be considered together.

Exception 24.—Protestants/complainants except to

the Administrative Law Judge’s finding that “the Shipper

Group [protestants/complainants] continues to enjoy a

substantial rate advantage over gulf refineries to points

served by WBPL.”

Exception 25.—Protestants/complainants except to

the Administrative Law Judge’s finding that “the con-

tentions of the Shipper Group to the contrary notwith-

B-27

standing, the shippers in the Shipper Group have not been

affected by the joint rates.”

Exception 28.—Protestants/complainants except to

the finding that “no competitive advantage accrues to

shippers at the joint rate and no showing of injury is

made.”

Protestants/complainants allege that they have been

and are being injured by the relative disparity in the rate

level. By having to pay a greater revenue per mile of

transportation, they maintain that they are able to pur-

chase less transportation for a given dollar of ex-

penditures than purchased by their gulf coast competitors

under the joint-line rates.

Our comments.—The Administrative Law Judge was

correct in finding that the protestants/complainants have

not met their burden in showing that they have suffered

injury. Standing by itself, their claim that they have to

pay greater revenue per mile of transportation and thus

are able to purchase less transportation for a given dollar

of transportation is too vague. It is clear that protes-

tants/complainants have shipped substantially the same

volume of petroleum products under the local rates as prior

to the establishment of the joint-line rates. This fact is

conceded by protestants/complainants, on page 62 of their

exceptions, that they

... have substantially the same volume of petro-

leum products to the points served by WBPL in 1971

and 1972....

Finally, the disparity in rates favors the protestants/

complainants. Gulf coast shippers using the joint rates

must pay from 13.5 to 15.5 cents (now 21.5 to 23.5 cents

due to subsequent tariff filings) per barrel more than do

the midcontinent shippers in order to shin petroleum

products to the same destinations with the result that

B-28

protestants/complainants still have a substantial advan-

tage in transportation costs.

Exception 26.—Exception is taken to the Adminis-

trative Law Judge’s statement that “in the present

energy crisis even a claim of competition by_refiners would

be ludicrous.” Protestants/complainants allege that this

statement is without foundation in the record and that,

instead the record shows intense competition among all

refiners.

Our comments.—We agree with the protestants/

complainants that there is evidence in the record that

shows competition among refiners.

Exception 27.—Exception is taken to the summary

finding that “the disparity between the level of WBPL’s

rates and the joint rates is shown to be warranted and

does not support a finding of preference and prejudice.”

Protestants/complainants’ evidence consists of the

local rates on refined petroleum products from the repre-

sentative refining point of Tulsa, Okla., to Midwest desti-

nations, in comparison with the joint through rates on

petroleum products from gulf coast refineries through the

interchange point of Tulsa, to the same Midwest destina-

tions. The joint rates were as much as 15 cents per barrel

higher than the local rates depending upon the origin of

the joint rates. However, if the combination of inbound

local on crude petroleum of 25 cents a barrel to Tulsa, plus

the outbound local on the petroleum products is compared,

then the combination of locals is 9.5 cents (now 6.5 cents

due to subsequent tariff filings) per barrel higher than the

joint rate. Protestants/complainants make the foilowing

comparisons in attempting to show that they have been

unduly prejudiced:

1. Revenue per barrel mile—a gulf origin com-

pared with Midcontinent Group III origins.

B-29

2. Rates to costs ratios—ratios of WBPL local

rates to movement costs from Tulsa compared with

ratios of joint WBPL-Explorer rates to joint-

movement costs from certain gulf origins.

3. Rates to costs ratios—ratios of WBPL local

rates to total cost from Tulsa compared with ratios of

joint WBPL-Explorer rates to total joint costs from

certain gulf origins.

Our comments.—To support a finding of a violation of

section 3(1), it must be shown (1) that there is a disparity

in rates, (2) that the complaining party is competitively

injured, (3) that the defendant carriers are the common

source of both the allegedly prejudicial and preferential

treatment, and (4) that the disparity in rates is not

justified by transportation conditions. Chicago Board of

Tradé v. Illinois Central R. Co., 344 I.C.C. 818, 830-1

(1973); Big River Industries, Inc. v. Aberdeen & R.R. Co.,

329 I.C.C. 539.

The Commission has stated: “The principle that dif-

ferences in rates alone do not establish undue preference

and prejudice is too well known to require extended

discussion.” Southeastern Assn. of R. & Util. Commrs. v. A.,

T.& S.F. Ry., 321 1.C.C. 519, 553 (1964). There is no legal

requirement under the act that a carrier maintain all of

its rates on the same per-mile basis or that joint rates

equal the combination of the local rates. St. Louis South-

western Ry. v. United States, 243 U.S. 136, 139-40.

The protestants/complainants have not shown that

they have been competitively injured; furthermore, the

rate disparity has been shown to be justified by trans-

portation conditions.

Furthermore, there is no section 3(1) violation, be-

cause the protestants/complainants have not shown the

common control element. As the Supreme Court stated in

B-30

Texas & Pac. Ry. v. United States, 289 U.S. 627, 650 (1933),

in order to have a violation of section 3(1), the carrier or

carriers involved:

... must effectively participate in both rates, if an

order for correction of the disparity is to run against

it or them. Where an order is made under §3 an

alternative must be afforded. The offender or offen-

ders may abate the discrimination by raising one

rate, lowering the other, or altering both....The

situation must be such that the carrier or carriers if

given an option have an actual alternative.

Protestants/complainants simply state that such control is

“obvious” because WBPL participates in both the local and

joint rates. But this fact, however, does not constitute the

control element according to the Texas & Pacific case.

Neither WBPL or Explorer controls both sets of rates.

WBPL controls its own local rates, but it does not control

the joint rates: to raise the joint rates would require the

concurrence of Explorer. Its only effect over the joint

rates would be to withdraw from the agreement and

cancel the rates. Hence, in this instance, the same carrier

or carriers cannot “abate the discrimination by raising

one rate [here the joint rates], lowering the other [here

the local rates}, or altering both.”

Finally, protestants/complainants are barred from

section 3(1) relief because as the Commission held in City

of Moorhead v. Great Northern Ry. Co., 172 I.C.C. 38, 43

(1931):

Fundamentally, undue prejudice can not exist

unless the resulting injury will cease upon removal of

the prejudice regardless of the manner of its removal.

Duluth Chamber of Commerce v. C., St. P., M. & O. Ry.

Co., 122 1.C.C. 739, 742. In cases where parity was

sought only by reductions, we have regarded the

allegations of undue prejudice as withdrawn. Boise

B-31

Payette Lumber Co. v. A. & S. Ry. Co., 146 1.C.C. 457,

462.

Protestants/complainants do not want the joint rate in-

creased; instead, they are seeking only reductions in the

WBPL local rates. Thus, under the Commission’s holding

in City of Moorhead, the protestants/complainants charges

of a section 3(1) violation must be found to have been

withdrawn.

Exception 29.—Protestants/complainants allege that

the Administrative Law Judge erred in failing to find

that there is discrimination in favor of the shipper-

owners of Explorer under the joint line rates. As men-

tioned above, the joint through rates were 9.5 cents per

barrel lower than the compared combination of local rates.

Protestants/complainants argue that the 9.5-cent differ-

ential on joint rates, as well as certain additional terminal

costs on the joint route beyond Tulsa, is absorbed by

WBPL. This is allegedly accomplished by giving the

shipper-owned Explorer pipeline a greater divisional rev-

enue share than is justified on a pro rata cost basis under

joint-line rates.

Our conclusions: The joint rates are already lower

than the combinations of local rates and, therefore, there

is no differential to be absorbed by the joint-line carriers.

Furthermore, a division of joint rates does not have to be

based strictly on a pro rata cost basis, and, whatever the

divisional basis it is a matter between the carriers. This

was emphasized by the Administrative Law Judge on

page 18 of his initial decision, as follows:

Discrimination.—The Shipper Group contends

that WBPL discriminates against...shippers and

against nonowners of Explorer in violation of section

2 of the act. The Shipper Group claims that WBPL

gives Explorer an advantage by joint rates which are

9.5 cents a barrel lower than the combination rates

B-32

and argues that since Explorer is shipper owned, the

advantage to Explorer is a discrimination in favor of

Explorer’s shipper-owners. The wrong prohibited by

section 2 is a discrimination between shippers. Wight

v. United States, 167 U.S. 512. Explorer is a separate

entity from its shippers. It is a common carrier and

its arrangements with WBPL are not matters within

the purview of section 2.

Exception No. 30.—Protestants/complainants take

exception to certain operating expenses which were con-

sidered in determining the reasonableness of the overall

rates.

(a) Litigation exrpenses.—The expenses incurred by

WBPL during 1972 in connection with this litigation

before the Commission, and including the related court

proceeding before the District Court in Kansas City in

docket No. KC-3513, approximated $200,000.

Protestants/complainants contend it is improper to

include the entire amount of rate case litigation expenses

for the determination of lawfulness of rates in the year in

which they were incurred. It is their contention that

these expenses should be amortized over a period of at

least 5 years.

Respondents/defendants concede that sometimes in

cases involving rate increase proposals of public utilities,

the litigation expense is amortized over a period of time,

but that the practice is not universal. Even where the

expense is amortized, it reflects an attempt to estimate

the time between the utility’s present rate proceeding and

the next one. They contend that in view of the uncer-

tainties of the Nation’s economy, the declining trend of

WBPL’s rate of return, and other imponderables affecting

the oil business, such an estimate would be impossible for

WBPL to make. Additionally, the entire $200,000 con-

stitutes a relatively small proportion of WBPL’s total

B-33

operating expenses, which in 1972 were over $32 million,

and would have a relatively insignificant impact on its

rate of return. In any event, they point out that there is

no justification in the record for any disallowance of this

expense, in whole or in part.

Our comments.—We agree with respondents/de-

fendants that it would be virtually impossible to estimate

the time between the present proceeding and any future

proceeding WBPL might be involved in. Furthermore, it

would be improper to amortize or disallow any of these

litigation expenses since: a portion of these incurred

expenses were not specifically related to the instant liti-

gation; there is no substantive evidence on which to base a

period of amortization; the expense has not been shown to

be excessive; and the amount of expense paid to the same

transportation consultant and legal firm in 1973 exceeded

the amount paid during 1972.

(b) Payment to an affiliate.—Protestants/complain-

ants contend that the $600,000 payment to the Willbros

Terminal Company for the lease of tanks at West Tulsa,

Okla., should not be allowed as an operating expense in

this proceeding because: (1) it constitutes payment to an

affiliated company not shown to have been accomplished

pursuant to competitive bidding; (2) the use of the tanks

is unrelated to the rates at issue in the rate increase cases;

and (3) the payments are excessive. They further allege

that since all maintenance and operating expenses for

these tanks are incurred by WBPL, lease payments are

obviously excessive. The lease expense was apparently

incurred solely for the purpose of providing service under

the joint-line rates, which is not related to the rates

charged the Midcojitinent or other producers. Finally,

protestants/complainants believe that this expense should

be totally disallowed because it reflected a reversal of

previous tends in the cost per unit of output incurred by

WBPL. For a number of years WBPL’s cost of service

B-34

showed a steady reduction or had at least not stabilized.

The reversal of this downward trend in 1972 is highly

suspect according to protestants/complainants.

Respondents/defendants state that the tanks in

question are used in connection with the performance of

joint-line service by WBPL and Explorer. Also, it is

pointed out that by having the terminal built by its

subsidiary rather than in its own name, WBPL is able to

effect a savings in ad valorem taxes of $50,000 per year.

Respondents/defendants emphasize that no impropriety

in the leasing arrangement has been shown.

Our comments.— While the use of the tanks at West

Tulsa may not be related to the rate increases at issue,

they are used in connection with the performance of

joint-line service by WBPL and Explorer. It would be

more desirable to have a separation of WBPL’s operating

costs by districts and between terminal and line-haul.

However, such a separation was not made and protes-

tants/complainants did not object to respondents/

defendants’ barrel-mile method of applying costs. In the

absence of such a separation of all of the operating

expenses, it would be inappropriate to disallow this ex-

pense from the system-average cost of service solely on

the ground that the tanks in question are not used by one

group of shippers. Finally, the protestants/complainants’

allegation that the lease payments are excessive is unsup-

ported by any factual data.

(c) Payments to parent company.—WBPL is a wholly

owned subsidiary of the Williams Brothers Company to

which during 1972 WBPL paid $626,147 for “adminis-

trative services” (computers, management services, use of

airplanes, et cetera). This was an increase from $595,570

in 1971, and the justification was that the cost of services

rendered by the parent company had increased. Accord-

ing to protestants/complainants, allowable expenses for

B-35

this item should not include what would appear to be

profits to the parent. For example, the parent reported

that its costs and operating expenses were 70.8 percent of

sales and service revenues. Therefore, WBPL’s claimed

expense for “administrative services” in the form of

payments to its parent company should be reduced by at

least 30 percent.

Respondents/defendants again point out that protes-

tants/complainants have not supported their allegations

with proof and, therefore, these payments to the parent

company may properly be inciuded by WBPL as expenses.

Our comments.—Protestants/complainants allegation

is mainly to the effect that the increase in payment to the

parent company from 1971 to 1972 was unusual and,

therefore, excessive. In fact, payments to the parent have

increased every year since 1966, and the increase in

payment from 1970 to 1971 was almost three times the

amount from 1971 to 1972; the latter payment represent-

ing an increase of only 5 percent. In summary, protes-

tants/complainants have not shown that this payment is

excessive for the services provided, nor that the Williams

Company is earning excessive profits by providing these

services for WBPL. Therefore, there is no justification on

this record for disallowing any portion of this expense.

(d) Depreciation.—Protestants/complainants submit

that annual accruals for depreciation should be premised

upon an original cost, not the purchase price. They

contend that if the purchase price is used as a depreciation

base for the recovery of the investment from ratepayers,

through the charging of a depreciation expense as a part

of the cost of service, the ratepayers would have to provide

revenues for depreciation expense in the amount of $287.4

million (the purchase price in 1966) plus the $91,359,860 of

previously accrued depreciation on the books of the pre-

decessor company.

B-36

Respondents/defendants emphasize that WBPL’s

depreciation expenses are based upon its actual in-

vestment in depreciable property. They claim that having

paid a price for the property which no one on this record

claims to be imprudent, WBPL should be allowed to reflect

its depreciation expense based upon its actual investment.

They rely on the first paragraph set forth above from

Uniform System of Accounts for Pipeline Companies, supra,

in connection with the background discussion of ex-

ceptions 9 through 19, especially that:

It would be inappropriate to require the pur-

chaser to record depreciable property at its net book

value to the seller. (337 I.C.C. 518, 522.)

On this basis, respondents/defendants argue that it would

be improper to deny WBPL the right to recover its actual

depreciation expenses where its actual investment has not

been shown to be unreasonable.

Our comments.—We agree with respondents/de-

fendants that use of the original cost to determine the

annual accruals for depreciation would, in the case of

WBPL, be improper. This approach would ignore the

actual investment in the pipeline by its current owners as

established by this Commission. The basis for WBPL’s

actual investment in depreciable property has already

been established by the Commission’s Order in Uniform

System of Accounts for Pipeline Companies, supra.

(e) Income taxes.—WBPL projected several alterna-

tive methods of computing taxes as an element in oper-

ating costs, including taxes incurred during a given year

but deferred. In this regard, protestants/complainants

allege that only the taxes actually paid should be allowed

as a cost of doing business chargeable to the ratepayers,

since there is no cost until such taxes are actually paid.

This would not include deferred taxes which are saved and

not paid.

B-37

Respondents/defendants state that WBPL’s pre-

decessor, Great Lakes Pipeline Company, had none of the

beneficial tax consequences of WBPL from their purchase

price, and paid a high tax rate over the 5 calendar years

prior to the purchase ranging up to 50 percent. WBPL’s

deferred taxes must be paid eventually and it commenced

paying substantial Federal income taxes in 1972. Because

of the unique considerations in this case, respond-

ents/defendants contend that the use of a statutory

Federal income tax rate for measuring WBPL’s earnings

is the only fair approach, regardless of deferral of certain

taxes.

Our Comments.—We agree with respondents/de-

fendants that the use of a statutory Federal income tax

rate is appropriate in computing the rate of return on

valuation in this proceeding, and this statutory tax rate

has been applied in appendix B. However, if Ex Parte No.

308 is broadened, as heretofore discussed, all parties will

have an opportunity to present their views on the issue of

the most appropriate tax rate (i.e., statutory, actual, or

some other method such as actual plus an allowance for

deferred taxes) for use in computing the rate of return.

ULTIMATE FINDINGS

In summary, we find the exceptions, on the whole, to

be without merit and we adopt the findings of the Admin-

istrative Law Judge. Thus, we find that in docket No.

35533, No. 35533 (Sub-No. 1), and No. 35533 (Sub-No. 2)

the rates are just and reasonable and otherwise lawful; in

fourth-section application No. 42327 authority be granted

to establish and maintain increased rates without observ-

ing the long-and-short-haul provisions of the Interstate

Commerce Act; in docket Nos. 35549 and 35720 the rates

are not shown to be unjust and unreasonable and other-

wise unlawful.

B-38

COMMISSIONER CORBER, dissenting:

In my view a convincing case has not been made

that the rates of WBPL are just and reasonable. In

addition, I would institute an investigation broader in

scope than that contemplated by the expansion of Ex

Parte No. 308, Valuation of Common Carrier Pipe-

lines.

Reasonableness of WBPL Rates

The traditional criteria of proper ratemaking have

always borne a strong resemblance to the criteria of the

competitive market. That is, since marketplace com-

petition has been found to be ineffective against monopoly

pricing by common carriers, regulation has attempted to

approximate the economic benefits of competition when

determining a proper level of rates. The principal bench-

mark for “just and reasonable” rate levels has been cost of

production, including the necessary return to capital.'

The theoretical ratemaking goal has been found to be

unattainable in practice for modes other than pipelines.

The carriers and the Commission have found that rates at

a full-cost level will effectively embargo movement of

certain commodities. As a consequence, the Commission

has not interfered with some rates set below a full-cost

level in order to facilitate the free flow of interstate

commerce and some rates set above full cost (to assure the

compensativeness of carrier operations). This ratemaking

flexibility has become familiarly known as the zone of

reasonableness.?

1A. KAHN, THE ECONOMICS OF REGULATION 68 (1970). In

traditional economic terms, pure competition will produce prices

(rates) at a level equal to shortrun marginal or incremental cost.

2 See Atchison, T. & S.F.R. Co. v. Wichita Bd. of Trade, 412 U.S. 800,

814 (1973); United States v. Chicago, M., St. P. & P.R. Co., 294 U.S. 499,

506 (1935).

B-39

The rationale which justifies departure from the ideal

of rate levels approximating those existing under com-

petitive conditions, however, has no logical applicability to

pipeline carriers in the normal situation. Whereas other

carriers transport a variety of commodities, pipeline car-

riers are essentially single-product carriers. For example,

in 1974 the transportation of petroleum products account-

ed for 97.3 percent of the total barrels transported by

WBPL and 98.7 percent of its total operating revenue.?

Therefore, carrier rate levels. as reflected in carrier reve-

nue, departing significantly from a total cost basis are not

justified.

Previous Commission cases support the close correla-

tion between pipeline rates and total cost of service. In

Reduced Pipe Line Rates and Gathering Charges, 243 I.C.C.

115 (1940), the Commission found the rates of 21 pipeline

respondents to be unjust and unreasonable based on a

comparison of carrier revenues with carrier costs, in-

cluding an 8-percent return on value.

In Minnelusa Oil Corp. v. Continental Pipe Line Co.,

258 1.C.C. 41 (1944), the Commission found certain pipe-

line rates to be unjust and unreasonable. The Commission

stated, “[|WJe conclude that just and reasonable rates on

this [pipeline] traffic are rates based substantially on the

cost of service ...and fair return on value.’’4

The majority accepts the principal that operating

expenses plus cost of capital identify a reasonable rate

3 These statistics were obtained from WBPL’s 1974 Annual Report

to the Commission. The actual figures are:

Crude Products Total

Barrels transported 4,585,222 166,403,882 170,989,104

revenue $879,574 $67,410,076 $68,289,650

4 258 I.C.C. at 57.

B-40

level, and then applies that principle in appendix B. I

cannot accept those calculations for the following reasons:

1. The majority uses the Commission’s tentative valu-

ations for the years 1972 and 1973 as the fair value rate

base. Section 19a(i) of the act accords prima facie validity

to all final valuations in all proceedings under the act.

Tentative valuations, however, are accorded no special

status and must be proved on the record before they can

be accepted. No party presented any evidence to support

the tentative valuations, nor indeed did any party chal-

lenge the valuation which the Administrative Law Judge

employed. Therefore, I must conclude that an element

crucial to the majority’s conclusion that WBPL’s rates are

reasonable is not supported by substantial evidence.

2. The valuation on which the majority relies includes

the value of property which WBPL uses but does not own.

At the same time, the operating expenses include rental

payments on this property. The reason why the valuation

is used as a rate base is to enable the Commission to assure

a fair return on carrier investment. However, the carrier

has no investment in rental property. Therefore, the

majority permits a return on property which WBPL does

not in fact own.

3. My colleagues calculate WBPL’s rate of return

using the statutory income tax rate rather than income

taxes actually paid.s In Ex Parte No. MC-82, New Proce-

dures in Motor Carrier Rev. Proc. The Commission re-

jected the use of the deferred method of income tax

accounting in determining carrier revenue need. Ex

Parte No. MC-82 explicitly relies upon Accounting for

Federal Income Taxes? in which the Commission stated,

5 Income taxes at the statutory level were $6,961,854 in 1972, and

$7,667,142 in 1973. Income taxes actually paid were $2,062,000 in 1972,

and $3,079,375 in 1973.

6 351 I.C.C. 1, 51-52 (1975); 339 I.C.C. 324, 339 (1971).

7318 I1.C.C. 803, 807 (1963).

B-41

“The present day shipper should not be required to provide

from current freight rates for possible increased taxes of

the indefinite future.” The difference between actual and

statutory taxes is far from insignificant, representing

over 24 percent of income after taxes in 1972, and over 22

percent of income after taxes in 1973. I believe that actual

taxes should be used in calculating WBPL’s rate of return.

4. The carrier’s revenue in appendix B has been

reduced by the amount of “Incidental revenue” listed

under Operating Revenue Accounts in WBPL’s annual

report. No reason is given for this reduction, and I see no

basis for assuming that this revenue is not derived from

property the value of which is part of the rate base.

Table I below shows the calculation of a maximum

reasonable rate level based on a 10-percent return on

value found reasonable in Petroleum Rail Shippers’ Assn.

v. Alton & S.R& The 1972 valuation in table I is that

supported by the record, used by the Administrative Law

Judge, and accepted by the parties. No evidence was

presented establishing a valuation for 1973; however I will

accept arguendo the 4-percent increase in the valuation

reflected in the majority’s figures. Thus, my 1973 valu-

ation is $233,883,520. The taxes shown in table I are the

actual income taxes paid in 1972 and 1973. Finally,

revenue has not been reduced by the amount of “In-

cidental revenues.”

8 245 I.C.C. 589 (1941).

351 1.C.C.

B-42

TABLE [

1972 1973

Valuation .. eee eee $224,888,000 $223,883,520

Operating expenses _. PEN 32,754,442 34,651,281

Taxes a 3 Piet poke 2,062,000 3,079,375

Revenues a 60,523,560 63,309,474

Income after taxes... a 25,707,118 25,578,818

Rate of return on

valuation—(percent)............. 11.4 10.9

Return at 10-percent valuation... 22,488,800 23,388,352

Excess revenue hs 3,218,318 2,190,466

It should be noted that the Administrative Law Judge

did not use a 10-percent return on value to measure the

cost of capital. Instead, he used a 5.98-percent capital cost

factor applied to the fair value rate base. Even WBPL did

not argue for a rate return as high as 10 percent on value;

the carrier computed its cost using capital cost factors of

8.138 and 8.31 percent for 1971 and 1972, respectively.

Tables II and III below show the carrier’s actual rates of

return on valuation for 1972 and 1973 compared with the

rates of return which the Administrative Law Judge and

WBPL, respectively, contended were reasonable.

TABLE II

1972 1973

Income after taxes $25,707,118 $25,578,818

Rate of return on

valuation—(percent) 11.4 10.9

Return at 5.98-percent valuation 13,448,302 13,986,234

Excess revenue 12,258,816 11,592,584

B-43

TABLE III

1972 1973

Income after taxes... $25,707,118 $25,578,818

Rate of return on

valuation—(percent).. 11.4 10.9

Return at 8.13-percent valuation... 18,283,394 a

Return at 8.31-percent valuation — 19,435,721

Excess revenue ................... ces, 7,423,724 6,143,097

Even accepting the most liberal approximation of the

cost of capital, the carrier’s revenues are shown to exceed a

reasonable level.

Pipeline investigation.—In their comments on ex-

ception 7, my colleagues propose to expand Ex Parte No.

308, Valuation of Common Carrier Pipelines, to include a

determination of a proper rate of return. The suggestion

that pipeline structure and practices deserve closer scru-

tiny is certainly laudable. Nevertheless, the majority’s

proposal does not go as far as even the limited evidence

presently at our disposal seems to warrant.

The majority’s proposal assumes that the Commission

is wedded to the notion that a reasonable rate of return

ought to be determined as a function of the Commission’s

valuation. Perhaps a better method would calculate rea-

sonableness on the basis of return on shareholders’ equity

or a combination of such return with costs of debt. Such

alternatives should be the subject of further Commission

consideration.

The Shipper Group contended that Explorer had en-

tered into joint-rate and divisions agreements with

WBPL which favor Explorer’s shipper-owners® and dis-

’ ®The Explorer Pipeline Co. is wholly owned and directly controlled

by Toronto Pipe Line Co., Shell Pipe Line Corp., Texaco, Inc., Sun Oil Co.

of Pennsylvania, Continental Oil Co., Cities Service Co., Phillips In-

vestment Co., and APCO Oil Corp.

B-44

criminate against nonowning shippers. The majority

quite correctly rejected the contention that the divisions

and joint-rate agreements constituted discrimination for

the purposes of section 2 of the act. However, section 11 of

the Clayton Act’ gives jurisdiction to the Commission to

enforce compliance, inter alia, with section. 7'' of the same

act. Section 7 reads, in pertinent part:

That no corporation engaged in commerce shall

acquire...the whole or any part of the assets of

another corporation engaged also in commerce,

where...the effect of such acquisition may be

substantially to lessen competition, or to tend to

create a monopoly.

If the allegations of the Shipper Group are true, they

could constitute evidence that ownership of common car-

rier pipelines by oil company shippers, upon which the

carriers depend so heavily for financial support,'? gives

those shippers an unfair competitive advantage, tending

substantially to lessen competition in violation of the

Clayton Act. In my opinion, this matter warrants further

study in a general investigation.

The Commission has jurisdiction, concurrent with the

Justice Department, to enforce the Elkins Act’? prohibit-

ing a carrier from granting rebates to individual shippers

directly or indirectly. A cursory examination of pipeline

annual reports for the year 1972 reveals rates of return on

shareholders’ equity ranging up to more than 200 percent.

In many instances these returns accrue to the benefit of

shippers. Extraordinary rates of return might, on closer

10 15 U.S.C. §21.

115 U.S.C. §18.

12 For example, APCO Oil Corp., Cities Service Co., Continental Oil

Co., Gulf Oil Corp., Phillips Petroleum Co., Shell Oil Co., Sun Oil Co. of

Pennsylvania, and Texaco, Inc., have obligated themselves to Explorer

Pipeline Co. in the form of throughput and cash deficiency agreements.

1349 U.S.C. §41 et seg.

=

B-45

examination, be found to constitute rebates in violation of

the Elkins Act. This matter too deserves closer scrutiny.

Finally, as evidence of the concern shared by the

Congress, regarding pipeline practices, I will quote briefly

from a Report's of the Subcommittee on Special Small

Business Problems to the House Select Committee on

Small Business, entitled “Anticompetitive Impact of Oil

Company Ownership of Petroleum Products Pipelines.”

The Report reads, in part:

Based on the analysis of testimony, evidence and

other available information, the subcommittee makes the

following recommendations:

A. That the Interstate Commerce Commission:

(1) Initiate a comprehensive investigation of the

structure and operation of joint venture petroleum

pipelines in order to determine the extent to which

such pipelines operate as true common carriers.

: (2) Investigate the possibility of discrimination

in pipeline rates by segments with respect to the

entire pipeline industry.

(3) Investigate practices regarding the setting

of joint through pipeline rates and the resulting legal

relations thus created, according particular attention

to possible discriminatory practices. '

(4) Investigate the failure of joint venture pe-

troleum pipelines to provide common terminal facil-

ities for the use of a shipper, either for input or

delivery, in order to determine if such failure con-

stitutes discriminatory conduct.

(5) Investigate the possibility of violations of the

merger provisions of section 7 of the Clayton Act by

4 House Report No. 92-1617.

B-46

joint ventu e petroleum pipelines, utilizing informa-

tion on file at the Department of Justice.

I agree with the thrust of these recommendations and

would institute an investigation of much broader scope

than is suggested in the report of the majority.

It is ordered, That the investigation in dockets No.

35533, No. 35533 (Sub-No. 1), No. 35533 (Sub-No. 2), and

No. 35540, be, and they are hereby, discontinued and that

the complaint in docket No. 35720, be and it is hereby

dismissed; and that the following fourth-section order

No. 20281 is hereby entered:

FOURTH SUPPLEMENTAL FOURTH SECTION ORDER NO. 20281

PI? ELINE RATES—PETROLEUM PRODUCTS

FROM THE SOUTHWEST

It is further ordered, That fourth-section application

No. 42327 be, and it is hereby approved; that the appli-

cants herein be, and they are hereby, authorized to estab-

lish and maintain the rates proposed in the application for

the transportation of petroleum products over their direct

pipeline routes, from and to points named in the appli-

cation, namely, from certain points in New Mexico, Texas,

Oklahoma, and Kansas, to certain points in Illinois, Iowa,

and Missouri, and to maintain higher rates to inter-

mediate points; Provided that rates from or to such higher

rated intermediate points shall not be increased except as

may be authorized by this Commission nor exceed the

lowest combination of rates subject to the Interstate

Commerce Act.

By the Commission, Division 2.

ROBERT L. OSWALD,

(SEAL) Secretary.

-_

-

B-47

APPENDIX A

The parties

WBPL.—WBPL is principally engaged in the trans-

portation of petroleum products. It also handles relatively

small volumes of crude oil and liquid fertilizer. The

nucleus of its system was constructed in the early 1930's

by its predecessor, Great Lakes Pipe Line Company

(GLPL), a corporation then owned by eight oil companies.

The basic system consisted of 1,288 miles of pipeline

extending from refineries at six points in Kansas and

Oklahoma to Kansas City, Kans., Des Moines, and Iowa

City, lowa, Omaha, Nebr., Minneapolis, Minn., and Chi-

cago, Ill. Over the years various segments of the original

system were looped with one or more parallel lines which

could be tied into existing pump station facilities. After

World War II a northwest leg, extending from Kansas

City to Omaha and on to Grand Forks, N. Dak., was added.

In 1965, GLPL had 6,228 miles of pipeline directly con-

nected to 17 refineries and to 14 other pipeline systems. It

operated 20 common carrier terminals and connected with

18 shipper-owned terminals. It served 33 shippers and

transported 114,884,000 barrels of petroleum products.

WBPL acquired the assets of GLPL on March 29, 1966.

By the end of 1971, WBPL had made seven extensions to

the system and two additional loop lines, one from Barns-

dale, Okla., to Eldorado, Kans., to St. Joseph, Mo., to Des

Moines and the other from Des Moines to Mason City,

Iowa. At the end of 1971, WBPL had 7,498 miles of

pipeline which connected with 14 other pipeline systems.

It operated 30 common carrier terminals and connected

with 29 shipper-owned terminals. It served 50 shippers

and transported 156,846,000 barrels of petroleum products.

Additional data concerning WBPL’s organization and

operations are set forth in Valuation Docket No. 1423,

William Bros. Pipe Line Co., supra.

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Explorer.—Explorer was incorporated on September

27, 1967. It was organized for the purpose of constructing

and operating a common carrier pipeline of refined petro-

leum products from the gulf to Chicago, Ill. Construction

commenced in 1970 and was completed in 1972. The first

section of the line became operational on October 26, 1971,

from Lake Charles, Port Arthur, and Pasadena to Hous-

ton, Grapevine, and Irving, Tex. On January 8, 1972, the

line was opened to Tulsa permitting inauguration of joint-

line service was WBPL. In late May 1972 the final section

into Hammond, Ind., was opened and became operational

in late June. Construction of four delivery points in St.

Louis, Mo., and Peotone, Ill., continued into the second half

of 1972. The system became fully operational in late 1972.

Shipper group.—OKC Corporation did not introduce

any evidence.

American Petrofina Company of Texas operated three

refineries and markets refined petroleum products in 24

States. Its primary use of WBPL is from its refinery at El

Dorado, Kans. This refinery has a daily capacity of 22,500

barrels of crude oil. The other refineries at Mount Pleas-

ant and Big Springs, Tex., have daily capacities of 26,500

and 60,000 barrels, respectively. In the period from

August 23 through December 31, 1970, it shipped 2,429,427

barrels by WBPL on which it paid charges of $923,210. In

1971 its shipments and charges therefor totaled 7,518,891

barrels and $2,737,077. The 1972 figures are said to

approximate 1971 totals.

Bell Oil & Gas Company has merged with Vickers

Petroleum Corporation which is owned by Swift and

Company. Vickers operates a 30,000-barrels-a-day refin-

ery at Ardmore, Okla. (formerly Bell Oil & Gas refinery),

and has about 750 miles of pipeline for gathering crude oil.

Refined products are shipped at three-line joint rates

from Ardmore via the Bell Oil & Gas Company (a short

products line owned by Vickers) to Ardmore Junction,

a .

ea ed aut

2 TORR Ama TEES

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Okla., thence via ARCO Pipe Line Company to Kansas

City, and thence via WBPL to some 30 points on the lines

of WBPL. The joint rates are named in ARCO Pipe Line

Company Joint Tariff No. 166, I.C.C. No. 124. The joint

rates in that tariff are not the matter of investigation or

complaint here. Bell Oil & Gas and/or Vickers ; \id WBPL

total transportation charges of $414,827.16 and

$1,280,491.87 for the transportation of 756,495 and

2,519,601 barrels of petroleum products, respectively, in

the period August 23 through December 31, 1970, and

January 1 through December 31, 1971, also respectively.

Whether such payments and transportation were covered

by the ARCO tariff or the rates at issue here is not a

record.

National Cooperative Refinery Association (NCRA)

operates a refinery at McPherson, Kans., with a capacity

of 45,000 barrels a day. It provides its owner-cooperatives

with an organization and operation to supply petroleum

products. It distributes its products via WBPL and other

pipelines to its owner-cooperatives which then distribute

through local cooperatives and ultimately to their individ-

ual farm family members. Approximately 30 percent of

NCRA is owned by Farmland Industries, approximately

30 percent by Farmers Union Central Exchange, Inc., and

approximately 5 percent by Midland Cooperatives, Inc., all

of whom are protestants-complainants here. NCRA owns

an interest in Jayhawk Pipeline, a crude oil pipeline

subject to this Commission’s jurisdiction. NCRA

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