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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1978
- **Citation:** 439 U.S. 995

## Text

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.)

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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

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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/complai

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1625%3A2. Public record. Not legal advice.