From Oil Pipelines and Public Policy: Analysis of Proposals for Industry Reform and Reorganization, proceedings of a conference sponsored by the American Enterprise Institute for Public Policy Research, 1979, edited by Edward J. Mitchell. Dr. Measday was one of two people commenting on the following papers: "Oil Pipelines: The Case for Divestiture" by Flexner and the API-funded "The Pipeline Undersizing Argument and the Record of Access and Expansion in the Oil Pipeline Industry" by Erickson, Linder, and Peters.
I find myself in a good bit of agreement with what Flexner has said. As an old institutional economist—or noneconomist—I welcome an intellectually, logically coherent theory of undersizing and monopolization in the pipeline industry for oil company ownership.
On the other hand, Erickson and I see things differently. He says that the more people there are as parties to a collusive agreement, the harder it is to agree on a course of action. As a statistical probability, this is quite correct, but it certainly is not a universal law. I think it depends on who is doing it. When I look at the oil industry I see a lengthy history of careful noncompetition in a number of areas.
Erickson says that if undersizing exists, we would expect to find restricted access. Then he shows that the number of shippers on Plantation and Colonial has grown considerably more than that on Williams or Buckeye in terms of the percent of change. What happened was that Colonial and Plantation started with very few nonowner-shippers, and under what I think was pressure from the Justice Department and Congress they permitted nonowners on their lines, which resulted in an enormous rate of growth in the number of shippers. On Williams and Buckeye, where all shippers from the beginning were nonowners, it is hard to get comparable expansion. I am therefore not completely happy with this example as a demonstration of ease of access.
I will agree that access for these lines has increased considerably in recent years. The real question is probably whether the earnings record of Colonial is such that the nonowners have an economic disadvantage with respect to the owners, even though it is still possible for them to get on the line.
On the other hand, I have not seen any growth of nonowner-shippers on crude lines. On several of these lines the producers generally sell their crude to the pipeline, which seems to prefer to carry crude under the title of the line, or the title of the owners of the line, rather than under outside title. There may be an agreement to buy the crude oil at the origin point and sell it back to the producer at the destination point, but this is a tortuous procedure and is probably not true common carriage.
To support his argument that entry into pipeline ownership is not restricted, Erickson has prepared a number of tables that he offers as evidence that almost anybody who wants to can become a pipeline owner. This raises an issue that the Department of Justice commented on in the LOOP and Seadock applications: Is it necessary to become an owner at the very moment that the line starts? What happens if a shipper later decides to become an owner?
On Colonial, I think the only two new owners have been Arco and BP, who split the Sinclair share as part of an antitrust settlement after Arco acquired Sinclair. Given Colonial's earnings record, there is probably not an investment in the economy which would be as attractive. But the agreement still says that stock cannot be transferred to anybody outside without the permission of the owners, so it is pretty hard to get in.
In Table 13, Erickson finds a very sizable shift toward sole ownership of crude lines. I think part of the problem here is that he uses data from the Interstate Commerce Commission. Neither Capline nor TAPS shows up there. In other words, with an undivided interest form of operation each share is reported as a sole ownership line, but the whole line is still a joint operation.
Erickson shows all sorts of entry and then concludes, again, that entry is not restricted. Certainly, independents, in some cases, can and do become pipeline owners. Many lines have independents. But how much influence do the independents have?
The first example I could think of is Four Corners. Arco has sole ownership now, but the original ownership pattern was that Shell owned 25 percent; SOCAL, 25 percent; Gulf, 20 percent; and then Conoco, Arco, and Superior each 10 percent—Superior was the outside independent. The owners assumed that there was going to be enough crude oil production in the Four Corners area to justify the line. When it turned out there was not—and of course the Alaska oil came in, which meant there was no market for Four Corners oil on the West Coast anyway—they had to abandon the line. This is therefore a terrible example. Nevertheless, if, at the time of the agreement on expansion, the other owners had wanted to undersize the line, is there any way that Superior could force an expansion? I am willing to bet that the original agreement said something like 75 percent of the owners had to agree before there could be an expansion. These are the sort of restrictions that I think the Department of Justice has in mind. Even though an independent may have a piece of a line, it is not necessarily going to have the deciding voice on expansion of the line.
Other lines have other types of restrictions. The MCN line offshore will carry oil only for owners, but anybody who wants to ship oil can buy some stock in the line, providing holders of at least 90 percent of the stock agree to let him on. Mobil and Continental each have more than enough stock to blackball anybody. Whether that power has ever been exercised is another question, but this type of restriction does not necessarily show up in the statistics.
The real issue is whether a shipper on the line can earn an ownership share in any way? And, even if he does, does he have anything to say about the sizing or the many other operating characteristics of the line? We have to look at the agreements themselves. Erickson's paper is enormously interesting, but I'm not sure that he has answered all of the basic problems here on the possibilities of monopoly power accruing to the owners of a pipeline.