placement through to their day-to-day operations, pipelines are intended by their owners to serve solely the needs of their owners. While independents may demand access to a pipeline, their needs play no part in determining where a pipeline should be built, what markets it should serve, what its capacity should be, what storage and terminal facilities it should provide, or what its operating rules and regulations should be. As long as the pipeline does not discriminate between shippers who, despite these obstacles, have gained access to the line, the pipeline satisfies its limited common carrier obligations. The fact that its tariff regulations, placement, capacity, and lack of storage and terminal facilities, may in themselves make the line inaccessable to independent refiners and marketers is irrelevant.

Licensing and tighter regulation of pipelines may reduce existing abuses of pipelines but they cannot create the competitive incentives necessary for growth and development of a transportation industry responsive to market demand, the transportation needs of the petroleum industry as a whole (rather than only that of the select owners), and the petroleum supply requirements of our country. Freeing pipelines from the control of their owner-shippers can provide such incentives. Most importantly, it can do so without substituting the judgment of Government regulators for that of the business community.

PREPARED STATEMENT OF JOHN G. WOFFORD

On behalf of Secretary Brock Adams, I would like to thank this subcommittee for inviting the Department of Transportation to provide our experience and observations concerning the question of pipeline ownership by integrated oil companies.

The main involvement of the Department in the economic regulatory matters of oil pipelines has been in relation to the applications to the Department for deepwater port licenses under the Deepwater Port Act of 1974 ("Act"), Public Law 93-627, 33 U.S.C. section 1501, et seq. As you know, a deepwater port is an offshore facility at which an oil tanker can moor for the purpose of unloading its oil. The oil goes by submarine pipeline onto shore for storage and distribution to refineries throughout the country. When such a port is located far enough offshore that the water is 90-100 feet deep, very large crude carriers (VLCCs) will be able to use the port and bring their oil directly to the U.S. Presently, our ports can only accommodate smaller vessels, which means that either the entire voyage is by smaller vessel, or the oil is transferred at some point by lightering or transshipment from VLCCS to smaller vessels. The Deepwater Port Act was enacted for the purpose of permitting the U.S. to receive oil directly from VLCCs, which would allow the Nation to take advantage of the environmental and safety benefits, and the transportation economies of scale, of VLCCs.

The Act established this Department as the licensing agency for deepwater ports. In order to provide a "one-window" application procedure while assuring that all appropriate agencies have input into the process, the Department, rather than the license applicant, is required by the Act to seek the advice of several agencies. Inasmuch as the Department must make the final licensing decision in each instance, the Act required the Department to consider, among other things, the economic regulatory aspects of deepwater ports. This is the first statutorily required involvement by the Department in the economic-as opposed to safety-regulatory affairs of pipelines.

The problems presented by oil company ownership of deepwater ports and by oil company ownership of pipelines generally are similar in certain respects because of the inherent competitive advantage for owners who ship their own oil; because deepwater ports and pipelines are a natural monopoly; because deepwater ports and pipelines which are jointly owned by several oil companies present the potential for oligopolistic abuses. Consequently, the experience of this Department in relation to the deepwater port applications by integrated oil companies might be informative to this subcommittee in its consideration of the problems presented by oil company ownership of pipelines.

In the development of the Act, there was considerable pressure to exclude oil companies from deepwater port ownership. However, the countervailing concern was expressed that no entity other than oil (34)

companies might be willing or able to provide the $600-800 million necessary to build a port.

In order to respond to both concerns, the Act at section 5(i) (2), 33 U.S.C. section 1504 (i) (2), established priorities of ownership by which, in effect, oil companies are generally eligible for ownership only if no one else applies:

In the event more than one application is submitted for an application area, the Secretary [of Transportation], unless one of the proposed deepwater ports clearly best serves the national interest, shall issue a license according to the following order of priorities:

(A) to an adjacent coastal State (or combination of States), any political subdivision thereof, or agency or instrumentality, including a wholly owned corporation of any such government;

(B) to a person who is neither (i) engaged in producing, refining, or marketing oil, nor (ii) an affiliate of any person who is engaged in producing, refining or marketing oil or an affiliate of any such affiliate;

(C) to any other person.

To date, the only applicants for a deepwater port license have been two corporations established principally by oil companies for the purpose of building, owning, and operating deepwater ports.1

In view of the establishment of ownership priorities in the Act, the issue to be addressed by this Department when the two applicants sought deepwater port licenses was not whether oil companies could own deepwater ports generally, but whether it would be in the national interest, as required by section 4 (c) (3) of the Act, 33 U.S.C. section 1503 (c) (3), for the specific applicants to own the specific ports for which application was made.

Before issuing a deepwater port license under the Act, this Department was required by Sections 4 (c) (7) and 7 of the Act, 33 U.S.C. Sections 1503 (c) (7) and 1506, to receive the opinions of the Federal Trade Commission and the Attorney General as to whether issuance of the license would "adversely affect competition, restrain trade, promote monopolization, or otherwise create a situation in contravention of the antitrust laws." Upon being consulted by this Department pursuant to this requirement, the Justice Department recommended the following four competitive rules, and the Federal Trade Commission recommended similar rules, for adoption by the Secretary as conditions in a deepwater port license to the oil company applicants:

1. Deepwater ports must provide open and nondiscriminatory access to all shippers, owner and nonowner alike.

2. Any deepwater port owner or shipper providing adequate throughput guarantees at the standard tariff can unilaterally request and obtain expansion of capacity.

1 These applicants were LOOP, Inc. (an acronym for Louisiana Off-Shore Oil Port). and Seadock, Inc. At the time the applications were filed, LOOP was owned by Ashland Oil, Inc.; Marathon Oil Co.; Murphy Oil Corp.; Shell Oil Co.: Texaco, Inc.; and Union Oil Co. of California (which withdrew from LOOP before the license was accepted) and Seadock was owned by Cities Service Co.; Continental Pipe Line Co. (a subsidiary of Continental Oil Co.); Crown-Seadock Pipeline Corp. (a subsidiary of Crown Central Petroleum Corp.); the Dow Chemical Co.; Exxon Pipe Line Co. (a subsidiary of Exxon Corp.); Gulf Of Corp.; Mobil Oil Corp.; Phillips Investment Co. (a subsidiary of Phillips Petroleum Co.); and Shell Oil Co.

3. Deepwater ports must provide open ownership to all shippers at a price equivalent to replacement costs less economic depreciation.

4. The ownership shares of the deepwater ports' owners must be revised frequently (annually) so that each owner's share equals his share of average throughput.

These recommendations were intended primarily to assure that the Government-granted monopoly deepwater port franchise would not be abused by the oil company owners. More particularly, these terms and conditions were intended to help assure that the common carrier status imposed on deepwater ports by section 8 of the Act, 33 U.S.C. Section 1507, would be meaningful.

In order to satisfy the obligation in the Act to protect the national interest in the issuance of deepwater port licenses, this Department incorporated as license conditions most of the Justice Department and FTC recommendations.

A. ACCESS

With respect to access, two potential problems were presented: nondiscriminatory access to the port itself, and nondiscriminatory access to the downstream pipelines which are owned or controlled by the owners of the port.

Concerning access at the port itself, the license issued to LOOP, Inc. (the only deepwater port license now in effect), contains several safeguards:

1. Article 6 of the license requires review and approval by this Department of the Operations Manual to control the imposition of conditions of service by the licensee. We will consult and cooperate with the Justice Department and the FTC on all matters in the operations manual which relate to conditions of service and limitations imposed on vessels calling and cargoes tendered.

2. Article 11 of the license requires the proration policy of the port, applicable when cargoes tendered exceed capacity, to be included in the Operations Manual and similarly reviewed. We also will conduct public hearings, as suggested by the FTC, if after examination of any proposed limitations, the FTC deems such hearings necessary.

3. To provide guidance on the reasonableness of any conditions imposed by the licensee, and to be generally responsive to the particular recommendations of the Attorney General, we have included in the LOOP license specific requirements ensuring nondiscrimination in vessel handling (article 10) and in acceptance of cargoes and storage segregations (article 12).

4. Article 11 of LOOP license contains as an explicit condition a general prohibition against discrimination, prohibiting either a licensee or owner from discriminating against shippers or owners of oil in the facilities furnished, services rendered, or rates charged, so as to make available the remedies of the Deepwater Port Act for discriminatory behavior.

Access to inland pipelines proved to be one of the most difficult issues to resolve. In order for the requirements of nondiscriminatory access to be effective, it is necessary that the inland distribution system from the port be accessible as well. This proved to be a difficult. problem because of the impossibility of defining in advance for all situations a geographic limit beyond which inland pipelines would

not be affected, and the oil companies feared that the Department might use the Deepwater Port Act to extend its reach to pipelines throughout the country. In practice, of course, this Department is not looking to become the nation's economic regulator of oil pipelines, and has no intention of attempting to reach pipelines throughout the country. The resolution of this issue is reflected by Article 16 of the LOOP license, which provides, in part:

The Licensee shall establish with such common carrier pipelines as are owned or controlled by the Owners of the Licensee and their affiliates, or any of them, fair and adequate arrangements as may be reasonably required for the transportation of oil from the port complex to inland points served by such pipelines. Any requirements in such arrangements for minimum tender, shipment specification, or other conditions of shipment shall not be more restrictive than the conditions of shipment for the port complex, except such requirements that may be justified by pre-existing physical limitations connecting facilities which cannot be readily corrected without substantial investment. . . . In addition, article 16 contains requirements relating to pipelines constructed after the license is issued which are owned or controlled by a port owner, and which will or reasonably could provide a connection between the port and any common carrier pipeline, in order to help ensure that such pipelines will be, and will be operated as, common carriers. Article 16 also requires the licensee to use its best efforts to help assure that access to common carrier pipelines which will or reasonably could provide a connection with the port, but which are not owned by any owner of the port, will not be more restrictive than access to the port itself. Finally, article 14 of the LOOP license requires provision of storage and other facilities for delivery to connecting pipelines. This obligation is not now required by the Federal Energy Regulatory Commission, but is part of the duties of common carriers such as the port.

B. CAPACITY; OPEN OWNERSHIP

In order to assure that the port can accommodate sufficient capacity to respond to the reasonably expected needs of both owners and nonowners, several conditions were incorporated in the LOOP license. These conditions are closely related to the question of open ownership because open ownership helps to reduce the likelihood of capacity restrictions which would adversely affect nonowners. As a result of these concerns, the license contains the following safeguards:

1. Article 15 of the license requires LOOP, at a minimum, to expand its facilities to the full extent contemplated by its application, if the needs of shippers which are willing to make throughput commitments can be served only by such expansion.

2. Article 15 of the license authorizes the Secretary to compel expansion of capacity by an additional 25 percent if demand is evidenced by commitments of shippers for throughput and if the Secretary finds that expansion is technically practicable, economically reasonable, financially feasible and environmentally sound.

3. Article 15 provides that any shareholder or group holding more than half of the outstanding stock must be able to authorize the corporation to expand the facilities.