No. 35533'

PETROLEUM PRODUCTS, WILLIAMS BROTHERS
PIPE LINE COMPANY

Decided December 3, 1976

On reconsideration, ultimate conclusions of division 2 in prior report herein, 351 I.C.C. 102, affirmed.

1. In dockets No. 35533, No. 35533 (Sub-No. 1), and No. 35533 (Sub-No. 2), increased pipeline rates on petroleum 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 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. 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 or otherwise unlawful. Proceeding discontinued.

4. In docket No. 35720, assailed pipeline rates on petroleum products from and to points in the Southwest and Midwest found not shown to be unjust and unreasonable or otherwise unlawful. Complaint dismissed.

Appearances as shown in prior report.

REPORT OF THE COMMISSION ON RECONSIDERATION

BY THE COMMISSION:

This matter was reopened for reconsideration by the entire Commission on its own motion on December 4, 1975. Concurrently, a petition filed by protestants/complainants for a declaration of general transportation importance was denied. Statements of argument and reply statements have been filed by the parties.

'Also embraces dockets No. 35533 (Sub-No. 1), Petroleum Products to Ill., Iowa, 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 Midwest, fourth-section application No. 42327, Pipeline Rates-Petroleum Products from the Southwest, and docket No. 35720, American Petrofina Company of Texas, et al. v. Williams Brothers Pipe Line Company, et al.

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 Company3 (WBPL) proposed to establish increased pipeline local rates and in connection with certain pipeline carriers increased pipeline joint rates on petroleum products, from and to certain points in the Southwest and Midwest. Upon joint protest filed by certain shippers' (Shipper Group) the investigations in dockets No. 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, respectively.

By fourth-section application No. 42327, WBPL seeks authority to establish and maintain the rates under investigation 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 Oklahoma, Kansas, Nebraska, and Minnesota, and by defendants Explorer and WBPL from Lake Charles, Port Arthur, and Pasadena, were and are unjust and unreasonable, unjustly discriminatory, and unduly and unreasonably preferential and Postponed from March 1, 1972.

'The name of Williams Brothers Pipe Line Company has been changed to Williams Pipe Line Company. However, the former name is used in this report, as is consistent with the record and with the usage employed in the previous decisions.

'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., National Cooperative Refinery Association, and OKC Corporation. A statement of argument and a reply statement, following the Commission order reopening this proceeding, were filed jointly by these parties, except American Petrofina, Bell Oil & Gas, and OKC Corporation.

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 pay reparations in excess of $10,000 (approximately $5 million a year since August 20, 1970), plus interest, and costs and reasonable attorneys' fees.

A description of the parties and the rate issues, taken from the report of the Administrative Law Judge, is set forth in the appendix hereto. In an initial decision served June 6, 1974, the Administrative Law Judge found that the proposed increased rates were lawful, that the fourth-section application should be granted, that the proposed initial joint rates were not shown to be unlawful, and that the rates assailed in the complaint were not shown unlawful.

Upon exceptions of the Shipper Group, the ultimate conclusions of the Administrative Law Judge were adopted by division 2 (Commissioner Corber dissenting), in a decision reported at 351 I.C.C. 102, served November 5, 1975. The division concluded that the reasonableness of WBPL's overall earnings should be measured by the standard of a 10-percent return on valuation as employed in Petroleum Rail Shippers' Assn. v. Alton & S.R., 243 I.C.C. 589 (1941). It found that WBPL's rates of return on valuation for 1972 and 1973 were 8.83 and 8.57 percent, respectively. Thus, the division concluded that the challenged rates were reasonable. It also found that no preference and prejudice had been shown as between the proposed joint rates of Explorer and WBPL and the local rates of WBPL.

As noted, we denied the Shipper Group's petition for a declaration that these proceedings involve matters of general transportation importance. While a number of fundamental policy questions have been raised by the Shipper Group, we are of the opinion that, for reasons stated below, such matters are beyond the proper scope of this proceeding.

Nevertheless, because of the relative dearth of precedent concerning petroleum pipeline rates, and in view of the substantial sums of money at issue here, we concluded that these proceedings merit consideration by the entire Commission. Accordingly, we reopened these proceedings for reconsideration on the present record. In order to obtain the views of the parties with respect to issues that they believed to arise from the decision of division 2, we allowed the filing of statements of argument and replies thereto.

Such statements have been filed by protestants/complainants-the Shipper Group-and by respondents/defendants WBPL and Explorer.

The Shipper Group argues that the division's decision is wrong in several basic respects. Its objections go to the use of a valuation rate base, to the use of a 10-percent return standard, to the manner of calculation of revenues, expenses, and taxes, and to the finding that preference and prejudice were not shown. It also contends that the division should have made findings going back to 1970 in order to dispose of the complaint. Finally, it requests oral argument, stating that "[t]he issues in this proceeding go to the essence of regulation." WBPL supports both the reasoning and the result of division 2's report. However, it argues that it is entitled, not only to a 10percent return on its valuation, but also to a fair return on the amount of capital that it has actually invested. Thus, it objects to a statement in the report that its actual net investment cannot be accepted as the rate base. It also notes that a page appears to have been omitted from the excerpts of the Administrative Law Judge's report that were reprinted in the division's decision.

Explorer indicates that its interest is limited to the division's findings concerning the lawfulness of the joint rates. It fully supports those findings.

At the outset, we will deny the shipper's request for oral argument. The issues have been extensively briefed in the various pleadings filed in this proceeding, and there appears to be no necessity for the oral presentation of further argument.

As noted by WBPL, a portion of excerpts from the Administrative Law Judge's report appears to have been inadvertently omitted from the division's decision. To correct that omission, and for convenient reference, those excerpts are reprinted in full in the appendix to this report.

DISCUSSION AND CONCLUSIONS

Upon review of this matter, we conclude that the criteria employed by division 2 are the proper ones to use for this proceeding, and that, tested by these criteria, the overall rate level of WBPL has not been shown unjust and unreasonable during the period at issue in the complaint. We further conclude that the proposed increased rates have been justified, and that the proposed initial joint rates have not been shown unlawful. The particular points at issue will be discussed individually.

It is alleged both in the complaint and in the investigation proceedings that the general level of WBPL's rates is so high as to be unjust and unreasonable. In order to test these allegations, it is necessary to examine WBPL's earnings under those rates.

The standard employed by division 2 for this purpose was a 10percent return on valuation. Questions have been raised in this proceeding both as to whether the carrier's valuation is the proper rate base, and as to what rate of return should be permitted.

The rate base.-The three choices of rate base discussed in this record are original cost, valuation, and actual investment. The original cost rate base would be the original cost of the carrier's properties at the time they were put into common carrier service, less the amount of depreciation expense that has been charged against those properties to date. The valuation rate base would be the value of the carrier's properties found by the Commission pursuant to the requirements of section 19a of the Interstate Commerce Act. The actual net investment rate base would be the value of the carrier's properties recorded in its books, relecting, not the original cost of those properties, but rather the price paid for them by Williams Brothers in acquiring the pipeline from its previous owner, Great Lakes Pipe Line Company (GLPL).

The practical differences between these rate bases are not insignificant. As noted by division 2, at the end of 1966 (the year of the purchase from GLPL), these properties had a net original cost of $101.1 million, a valuation of $167.6 million, and represented an actual net investment of $287.8 million. If a 10-percent return standard were applied to each of these bases, the allowed earnings would be about $10 million, $16.8 million, and $28.8 million, respectively. While the year 1966 is not now in issue, differences of comparable magnitude would appear for later years.

The Shipper Group argues that the use of an original cost rate base is proper in that it compensates investors for their contributions of capital to public service. It states that, in the case of this pipeline, the capital so devoted was the predecessor's original cost of carrier property of $175,839,059, plus WBPL's cost of subsequent prudent additions to the property, less accrued depreciation, including $91,359,860 of depreciation expenses recouped by the prior owners. The Shipper Group opposes the use

'The issues in both the investigation and the complaint proceedings concern the reasonableness of WBPL's overall rate level, and not of particular rates apart from the overall level. WBPL's general rate structure has been in existence for many years, and the record indicates no desire for disruption of the established rate relationships.