1954 for $20,629,500; in 1954 and 1955, for $20,931,200; in 1954-9 for $24,506,800; etc., through leases originally sold from 1954 through 1972 for accumulative total amount of bids of $306,501,000. Of the leases still held in 1973, table 9 shows that Gulf, Shell, Signal, and Exxon hold leases sold in 1954 for $38,683,500. This $38,683,500 represents 72% of all the bids paid for 1954 leases which are still held in 1973.

The bonus values shown for each company in table 9 do not include bonuses paid by joint bidders. In fact, the 1973 owners may not have been among the original bidders on the leases sold in a given year. Thus, table 9 gives a picture of current ownership instead of original ownership. In 1973, then, table 9 shows that Shell, Chevron, Texaco, and Gulf own leases sold through 1972, which account for 29% of total bonuses paid through 1972, for leases which are still owned in 1973. Thus, when, the joint bidders are ignored, the top four holders of 1972 leases (as measured by cumulative bonus bids paid through 1972) have a concentration ratio of 29%. Conversely, for leases still held in 1973, 71% of the leases (as measured by cumulative bonus payments made through 1972) are held by companies other than the top four.

The trend in these concentration ratios of cumulative bonus bids paid is of particular significance. Table 9 indicates a fairly steady decline in these ratios from 72% to 29%. This significant decline in share of cumulative bonuses necessarily means that the share in bonus for any one year was typically below the share in bonuses cumulative to that year. There can be little question, therefore, that table 9 indicates a great deal of new entry into the Louisiana Federal offshore area. This is quite a different picture from that gained by looking at "primary firms and affiliates" as shown by Wilson.

Concentration ratio for each year equals value of bonus bids paid cumulative to each year for leases held by top 4 companies in 1973 over value of bids paid cumulative each year for all leases sold in that year and which are still held by somebody in 1973.

Source: Geological Survey Data Bank in sec. 8 (undisputed Federal lands) offshore Louisiana leases.

One final piece of information which relates to ease of entry and concentration of ownership on the OCS is shown in table 10. Table 10 shows the number of firms holding leases in 1973 which were originally sold in previous years. For example, Column 2 indicates that 21 firms are holding leases in 1973 which were originally sold in 1954. Also 120 firms are holding leases in 1973 that were originally sold from 1954 through 1972. Column 3 shows the 1973 ownership pattern after adjusting for ownership by subsidiaries of other firms.

Thus, by 1973, there are 102 different companies holding Section 8 OCS Louisiana leases. Since Section 8 Louisiana leases represent only a part of the total offshore leases, the number of firms holding 1972 offshore leases in 1973 is undoubtedy greater than 102. Clearly, with over 100 different companies entering the offshore Louisiana area, the barrier to entry cannot be too great.

The significance of the conclusion that entry is comparatively easy is that the likelihood of effective market power existing in the industry is reduced. The reason, as explained above, is that any attempt to raise price above marginal cost is likely to be greeted by considerable entry into the industry, and resultant supply expansion which tends to drive the price back to marginal cost. While the above evidence has been primarily concerned with the ease of new entry into the industry, the conclusions apply equally as well to expansion of activities by firms already in the industry. Thus, a supply response to a price artificially raised above marginal cost could be expected to come both from new entrants and from expansion of activities of existing firms whose output is not controlled by the output-restricting firm or firms.

The history of the unregulated intrastate compared to the regulated interstate natural gas markets provides further evidence concerning the competitive nature of the natural gas producing industry. Ture says,

"Economic analysis leads to the counclusion that prices in two markets should, in general, be quite close if the gas producing industry is highly and effectively competitive and if the FPC ceiling price is at least high enough to clear the market; if the industry, rather, is highly noncompetitive, substantial differences between the prices in the two markets should generally prevail." (p. 12)

TABLE 9.-Concentration ratios of top 4 owners, as of 1973, as indicated by bonus bids paid on sec. 8 (undisputed Federal lands) offshore Louisiana leases sold in different years

1954:

Thousands 1955:

Gulf

Shell

Signel

Exxon

Thousands $20,931.7

13, 450.0

10, 750.1

8,963.4

Total (49 percent) 54,095. 2

58,380.9

44, 828.0

25, 995.1

21.201.2

TABLE 10.-CUMULATIVE NUMBER OF COMPANIES WHICH, IN 1973, OWNED AT LEAST SOME SHARE IN UNDISPUTED FEDERAL OFFSHORE LOUISIANA LEASES, ISSUED DURING OR PRIOR TO THE INDICATED YEAR

Note: The above series is a good index of the number of companies who have acquired interest in leases during or prior to the indicated years. It is not, however, exactly identical to this number of companies. For instance, some 973 cwners of leases may not have been the original purchasers. It is not clear whether the number of companies acquiring leases in a given year is likely to be greater or less than the number of companies owning, in 1973, leases acquired in the given year. The difference is not likely to be great, however. Secondly, some of the leases purchased in any year prior to 1968 may no longer be owned in 1973, if the leases turned out to be unproductive. Thus, the number of companies purchasing leases in years prior to 1968 is likely to be greater than the number of companies now owning leases purchased in those years. Source: Geological Survey Data Bank on Sec. 8 (undisputed Federal lands) Offshore Louisiana Leases.

It should also be added, as implied by the italicized part of this quotation, the price in the intrastate market will also be substantially different (higher) than the price in the interstate market if the interstate price set by the FPC is not high enough to clear the market. In such a situation, excess demand from the interstate market will flow to the intrastate market, driving up the prices in the unregulated market.

Ture compares wellhead prices for interstate and intrastate contracts within four regions for the years 1966-1969 (Ture, p. 13). The average interstate price (for onshore Louisiana 1966–1969, Texas Gulf Coast 1966-1969, Rocky Mountain 1966, 1968-69, and Permian Basin (1966-69) is 17.14 cents per MCF. The comparable average intrastate price is 17.47 cents per MCF, less than 2 percent higher.

In more recent years, however, the price in intrastate markets has been considerably higher than the price in the interstate market. This should not be misconstrued, however, as the effect of a sudden exercise of market power, since as pointed out above, there is another equally plausible explanation. The higher intrastate price may be caused by the excess demand over supply in the interstate market, at the prevailing regulated price. This excess demand could be expected to spill over into the unregulated market, bidding up prices in that market. In summary, the behavior of the intrastate market is consistent with what would be expected if there is no exercise of market power in the gas industry.

Finally, Wilson implies that there is a sign of the monopolistic nature of the gas producing industry by pointing to the increased profits of the petroleum companies from the first quarter of 1972 to the first quarter of 1973. He says, To an economist it is interesting, though not surprising, that the 'energy crisis' has not created obvious financial difficulties for these firms. In fact, recent evidence suggests quite the opposite. Many of these companies experienced record profit levels in the first quarter of 1973. Table 2 presents information on after tax profits in this most recent quarter as compared with the first quarter of 1972. Every company, without exception, experienced substantial improvement, and the average earnings increase was between 25 and 30 percent." (p. 10)

In fact, rapidly rising profits would be exactly what one would expect to see in a competitive industry facing an excess demand for its products. This is the very force that a free market must depend upon to reestablish an equilibrium between supply and demand. Rising prices and profits are the signals given by the market place to increase production and build new plants in order to satisfy increased demand.

Given the shortage situation facing the energy industry, it is only surprising that profits did not increase even more rapidly. Wilson shows petroleum industry profits, after taxes, to be increasing an average of 28.7% between the first quarter of 1972 and the first quarter of 1973. Table 11, below, is taken form the Survey

of Current Business and shows corporate profits after tax for all corporations increasing from $52.2 billion to $66.9 billion, for an increase of 28.2%. Thus there is virtually no difference between the growth in petroleum industry profits and the profits of all manufacturing.

TABLE 6.-NATIONAL INCOME BY TYPE OF INCOME (1.10)

(in billions of dollars)

After considering the theoretical and empirical evidence concerning the competitive nature of the natural gas producing industry, there are few, if any, firm facts to suggest that the industry could extract monopoly profits from the American public if natural gas wellhead prices were deregulated. On the con trary, such evidence as the lack of barriers to entry to production, the lack of control of a large share of the production by a few firms, the large number of producing firms, and the actions of the unregulated intrastate gas market all point to the existence of an existing and continuing workably competitive natural gas producing industry. Much of the information put forth as evidence to the contrary, by those who argue for continued and increased wellhead price regu lation, was found to be irrelevant and misleading without further detailed analysis. Since there is every indication that the natural gas producing industry is workably competitive, there is no justification for continued natural gas wellhead price regulation. Plans for price deregulation should be instituted as rapidly as possible.

By maintaining artificially low prices, the heart of the self regulating free market system is eliminated. There is not a signal, until it is too late and

physical rationing occurs, to tell consumers that gas is becoming dearer and they should switch to other fuels or restrict the consumption of the gas they purchase. On the other side of the market, there is no signal to existing and potential producers that natural gas production should be increased because there are no increased profits to attract new investment. Continued regulation will only serve to perpetuate the misconception by the American consumer that natural gas is much more inexpensive than it really is, relative to other fuel sources.

Ever increasing concentration of production in the natural gas producing industry can be guaranteed by maintaining wellhead prices at artificially low levels. Such low prices gradually force all but the lowest cost producers (those whose costs continue to be less than the set price) out of the market place. Such a policy also acts as a barrier to the entry of new firms to an industry. The resulting increasing concentration may then appear to require even greater regulation because it appears that the monopoly power of the industry is increasing. The outcome of this type of circular reasoning and self-fulfilling prophecy is obvious.

Evidence that exactly this type of circular reasoning is already taking place can be found in the arguments made by Wilson and others who are now calling for the regulation of the intrastate natural gas market. In fact, regulation of the intrastate prices would remove the last remaining evidence of just how badly the artificially low set prices are distorting the interstate market for natural gas.

REASONS WARRANTING THE REJECTION OF A PROPOSAL TO RESTRUCTURE INTERSTATE GAS PIPELINES AS "COMMON CARRIERS" RATHER THAN BUYERS AND SELLERS OF GAS (CONTRACT CARRIERS)

INTRODUCTION

The proposal has been made that interstate natural gas pipeline companies be restructured as common carriers rather than buyers and sellers of gas. This memorandum advances reasons in opposition to the merit or legality of such a proposal.

I. WHAT IS A COMMON CARRIER?

At common law, whether a transportation agency is a common carrier depends, not upon its corporate character or declared purposes but, upon what it does, U.S. v. Calif. 297 U.S. 175, 181; U.S. v. Brooklyn Terminal, 249 U.S. 296, 304. The distinctive characteristic of a common carrier is that he undertakes to carry for all people indifferently and holds himself out as doing so. McCollum v. U.S., (C.C.A. 9th) 208 F. 373, Cert. den., 266 U.S. 606.

"The real test as to whether a man is a common carrier is whether he has held out that he will, so long as he has room, carry for hire the goods of every person who brings goods to him to be carried. (Georgia Life Ins. Co. v. Easter, 189 Ala. 472, 66 So. 514).

In Weade v. Dichmann, Wright & Pugh, 69 S. Ct. 1326, the Supreme Court stated (p. 1329):

"The duty of a common carrier, *** is to transport for hire whoever employs it." (Emphasis supplied).

Also, in American Truck Ass'ns. v. Atchinson, T. & S.F. Ry., 87 S. Ct. 1608, at page 1613, the Court stated:

"From the earliest days, common carriers have had a duty to carry all goods offered for transportation. See, e.g., New Jersey Steam Nav. Co. v. Merchants' Bank of Boston, 6 How. 344, 382-383, 12 L. Ed. 465 (1848)." (Emphasis supplied). Contrary to the foregoing, regulated interstate natural gas pipeline companies not only do not have a duty to carry all gas offered for transportation but, in fact, have not and do not hold themselves out to be common carriers. Since the location, plan, and design of these transmission systems were developed so as to fulfill the obligations they have and do undertake to carry natural gas to interstate consumer markets, their dedication to the needs of their customers precludes the use of such pipelines on a common carrier basis.

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