UNITED STATES OF AMERICA 68 FERC 61,136
FEDERAL ENERGY REGULATORY COMMISSION
OPINION NO. 391
Williams Pipe Line Company ) Docket Nos. IS90-21-002,
) IS90-31-002, IS90-32-002,
) IS90-40-002, IS91-1-002,
) SP91-3-002, SP91-5-002,
) IS91-21-002, IS91-28-002,
) IS91-33-002, IS92-19-001
) and OR93-1-000
Enron Liquids Pipeline Company ) Docket Nos. IS90-39-002,
) IS91-3-000 and
) IS91-32-000 (Phase I)
OPINION AND ORDER ON INITIAL DECISION,
ON MOTION PROPOSING RATE STANDARDS, AND
ON COMPLAINT AND PROTEST
Issued: July 28, 1994
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Williams Pipe Line Company ) Docket Nos. IS90-21-002,
) IS90-31-002, IS90-32-002,
) IS90-40-002, IS91-1-002,
) SP91-3-002, SP91-5-002,
) IS91-21-002, IS91-28-002,
) IS91-33-002, IS92-19-001
) and OR93-1-000
Enron Liquids Pipeline Company ) Docket Nos. IS90-39-002,
) IS91-3-000 and
) IS91-32-000 (Phase I)
APPEARANCES
Lawrence A. Miller, David M. Levy, Kevin Hawley, Lorrie M.
Marcil, Randolph M. Duncan, William J. Collinsworth, and David P.
Batow for Williams Pipe Line Company
Keith R. McCrea, Patrick H. Corcoran, Michael T. Mishkin,
Michele F. Joy, and Paul F. Forshay for the Association of Oil
Pipe Lines
Gordon Gooch and Dena Wiggins for Texaco Producing, Inc. and
Texaco Refining and Marketing, Inc.
John W. Griggs, Thomas L. Albert, Debra B. Adler, Eric W.
Doerries, and Eric A. Eisen for Conoco Inc.
James P. Zakoura and Edmund S. Gross for Farmland
Industries, Inc.
J. Curtis Moffatt, Howard E. Shapiro, Cheryl M. Feik, and
Pamela Anderson for Kaneb Pipe Line Operating Partnership, L.P.
John M. Cleary, Richard D. Fortin, and Susan G. White for
Kerr-McGee Refining Corporation
David D'Alessandro, Richard A. Solomon, and Kelly A. Daly
for Total Petroleum, Inc.
Irene E. Szopo, Joanne Leveque, Richard L. Miles, William J.
Froehlich, and Dennis Melvin for the staff of the Federal Energy
Regulatory Commission
TABLE OF CONTENTS
I. Background . . . . . . . . . . . . . . . . . . . . . . . 2
A. Williams' System . . . . . . . . . . . . . . . . . 2
B. Procedural History and Bifurcation of Proceedings . 3
II. Discussion . . . . . . . . . . . . . . . . . . . . . . . 4
A. Phase I - Phase II: Proper Scope of This
Proceeding . . . . . . . . . . . . . . . . . . . . 4
B. Market Power . . . . . . . . . . . . . . . . . . . 6
1. Price Increase Definition . . . . . . . . . . 6
2. Product Market . . . . . . . . . . . . . . . . 10
3. Geographic Markets . . . . . . . . . . . . . . 11
4. Use of BEAs . . . . . . . . . . . . . . . . . 13
C. Analysis of the Relevant Markets . . . . . . . . . 13
1. Market Concentration Screens (HHIs) . . . . . 13
a. Appropriate Screen (1800 vs. 2500) . . . 14
b. Measurement of Market Shares in
Calculating HHIs . . . . . . . . . . . . 16
(1) Delivery vs. Capacity . . . . . . . 16
(2) Measuring Capacity . . . . . . . . . 19
2. Factors Includable in HHI Calculations . . . . 20
a. Other Pipelines . . . . . . . . . . . . . 20
b. Barges . . . . . . . . . . . . . . . . . 23
c. Refineries . . . . . . . . . . . . . . . 23
d. External Sources Linked By Trucks . . . . 24
e. Potential Competition . . . . . . . . . . 26
3. Other Factors Bearing on Competition . . . . . 27
a. Market Share . . . . . . . . . . . . . . 27
b. Exchanges . . . . . . . . . . . . . . . . 29
c. Excess Capacity . . . . . . . . . . . . . 31
d. Integrated Company Issues . . . . . . . . 32
e. Buyer Power . . . . . . . . . . . . . . . 33
f. Profitability . . . . . . . . . . . . . . 33
D. Commission Examination of BEAs . . . . . . . . . . 34
1. Markets with Low HHIs . . . . . . . . . . . . 34
a. Wausau, Dubuque, Davenport, and Columbia . 36
(1) Wausau . . . . . . . . . . . . . . . 36
(2) Dubuque . . . . . . . . . . . . . . 37
(3) Davenport . . . . . . . . . . . . . 37
(4) Columbia . . . . . . . . . . . . . . 38
b. Springfield (MO), Eau Claire, Des
Moines, Kansas City, Lincoln, Fargo, and
Grand Forks . . . . . . . . . . . . . . . 38
(1) Springfield (MO) . . . . . . . . . . 39
(2) Eau Claire . . . . . . . . . . . . . 39
(3) Des Moines . . . . . . . . . . . . . 40
(4) Kansas City . . . . . . . . . . . . 40
(5) Lincoln . . . . . . . . . . . . . . 41
(6) Fargo . . . . . . . . . . . . . . . 41
(7) Grand Forks . . . . . . . . . . . . 42
- ii -
2. Markets With HHIs Above 2500 . . . . . . . . . 42
a. Minneapolis/St. Paul and Topeka . . . . . 43
(1) Minneapolis/St. Paul . . . . . . . . 43
(2) Topeka . . . . . . . . . . . . . . . 43
b. Duluth, Rochester, Sioux City, Omaha,
Grand Island, Sioux Falls, and Aberdeen . 44
(1) Duluth . . . . . . . . . . . . . . . 44
(2) Rochester . . . . . . . . . . . . . 45
(3) Sioux City . . . . . . . . . . . . . 45
(4) Omaha . . . . . . . . . . . . . . . 46
(5) Grand Island . . . . . . . . . . . . 46
(6) Sioux Falls . . . . . . . . . . . . 47
(7) Aberdeen . . . . . . . . . . . . . . 47
3. Markets With HHIs Between 1800 and 2500 . . . 47
a. Quincy . . . . . . . . . . . . . . . . . 48
b. Cedar Rapids, Waterloo, and Ft. Dodge . . 48
E. Discrimination Claims . . . . . . . . . . . . . . . 49
1. General Objections to the ALJ's Rulings on
Discrimination Claims . . . . . . . . . . . . 49
2. Group 3 . . . . . . . . . . . . . . . . . . . 52
3. North/South . . . . . . . . . . . . . . . . . 53
4. Urban/Rural Issue . . . . . . . . . . . . . . 54
5. Volume Incentive Discounts . . . . . . . . . . 55
6. Proportional Rate Discounts . . . . . . . . . 56
7. Fungibility . . . . . . . . . . . . . . . . . 56
III. Proposed Rate Standards for Phase II . . . . . . . . . . 57
A. The Proposed Rate Standards . . . . . . . . . . . . 57
B. Positions of the Parties . . . . . . . . . . . . . 58
C. Discussion . . . . . . . . . . . . . . . . . . . . 62
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: Elizabeth Anne Moler, Chair;
Vicky A. Bailey, James J. Hoecker,
William L. Massey, and Donald F. Santa, Jr.
Williams Pipe Line Company ) Docket Nos. IS90-21-002,
) IS90-31-002, IS90-32-002,
) IS90-40-002, IS91-1-002,
) SP91-3-002, SP91-5-002,
) IS91-21-002, IS91-28-002,
) IS91-33-002, IS92-19-001
) and OR93-1-000
Enron Liquids Pipeline Company ) Docket Nos. IS90-39-002,
) IS91-3-000 and
) IS91-32-000 (Phase I)
OPINION NO. 391
OPINION AND ORDER ON INITIAL DECISION,
ON MOTION PROPOSING RATE STANDARDS, AND
ON COMPLAINT AND PROTEST
(Issued July 28, 1994)
On January 24, 1992, the Administrative Law Judge (ALJ)
issued an initial decision (ID) in Phase I of this proceeding,
which arises from tariffs filed by Williams Pipe Line Company
(Williams) proposing changes in rates for movements of crude oil,
petroleum products, and propane. 1/ It is only the rates for
transportation of petroleum products that remain in dispute here.
The parties filed exceptions to the ID and briefs opposing the
exceptions. 2/ With respect to the ID, the Commission
1/ Williams Pipe Line Co., 58 FERC 63,004 (1992).
2/ Briefs on exceptions were filed by the following parties:
Association of Oil Pipe Lines (AOPL); Farmland Industries,
Inc. (Farmland); Kaneb Pipe Line Operating Partnership, L.P.
(Kaneb); Kerr-McGee Refining Corporation (Kerr-McGee);
Texaco Refining and Marketing, Inc. (Texaco); Total
Petroleum, Inc. (Total); Williams; and the Commission staff
(staff).
Briefs opposing exceptions were filed by AOPL, Kaneb, Kerr-
McGee, Texaco, Total, Williams, and staff.
(continued...)
Docket No. IS90-21-002, et al. - 2 -
generally affirms the standards established by the ALJ in his
market power analysis, but reverses the ALJ's findings relating
to market power in certain of Williams' markets.
On June 5, 1992, Williams filed a motion proposing rate
standards to apply to Phase II of this proceeding. Various
parties filed responses. As discussed below, the Commission
denies Williams' motion to establish rate standards for Phase II
of this proceeding.
On October 5, 1992, Kerr-McGee, Texaco, and Total filed a
complaint and protest seeking to preserve their previous
challenge to Williams' proposed rates in light of the pendency of
the Energy Policy Act of 1992 (1992 Act). 3/ Williams filed an
answer to the complaint and protest, stipulating that the rates
in question are clearly subject to protest, investigation, or
complaint within the meaning of section 1803 of that act and
urging the Commission not to open proceedings on the complaint.
We will not grant the complaint and protest because the rates in
this proceeding are clearly subject to protest, investigation,
and complaint as contemplated by the 1992 Act.
I. Background
A. Williams' System
Williams describes itself as a major independent transporter
of refined petroleum products, crude oil, and propane in the Mid-
Continent region. According to Williams, its system includes
more than 8,000 miles of pipeline linking over 100 origin and
destination points in Illinois, Iowa, Kansas, Missouri, Nebraska,
North Dakota, Oklahoma, South Dakota, Minnesota, and Wisconsin.
The pipeline serves, directly or indirectly, six major refining
centers: Chicago, St. Louis, the Texas Panhandle, the Gulf Coast,
Oklahoma/Kansas, and the "Northern Tier" (North Dakota,
Minnesota, and Wisconsin). The Williams system also includes 37
terminals in the Mid-Continent region.
2/(...continued)
Conoco Inc. (Conoco), one of the original parties to this
proceeding, filed a notice of withdrawal on February 22,
1993.
3/ Section 1803 of the Energy Policy Act of 1992, Pub. L.
No. 102-486, 1803, 106 Stat. 2776 (1992) provides that
certain rates of oil pipelines are deemed to be just and
reasonable if they are not subjected to protest,
investigation, or complaint within a year of the date of
enactment, which was October 24, 1992.
Docket No. IS90-21-002, et al. - 3 -
B. Procedural History and Bifurcation of Proceedings
This proceeding commenced with the January 16, 1990 filing
by Williams of three tariffs (FERC Nos. 49, 50, and 51).
Williams proposed to increase its transportation rates by an
average of 13 percent. Williams states that the proposed tariffs
represent the first significant increase in its rates since 1985
when the Commission approved a settlement freezing both the level
and structure of Williams' rates for five years. 4/ The ID
fully sets out the history of this proceeding, which will not be
repeated here. 5/
Williams elected to bifurcate this proceeding consistent
with the procedures adopted by the Commission in Buckeye Pipe
Line Company. 6/ The purpose of the two-phased approach is to
give the pipeline an opportunity to demonstrate that a detailed
review of cost-of-service data is not necessary to establish its
rates. In Phase I of such a proceeding, the pipeline has the
opportunity to prove that it does not have market power in the
relevant markets and is, therefore, entitled to "light-handed"
regulation. In the separate Phase II of such a proceeding, the
Commission is to review the cost data in light of the market
power determination and to establish just and reasonable rates
for the pipeline.
The ID is limited to the first phase of the Buckeye
bifurcated approach. The ALJ's preliminary review of 32 markets
caused him to conclude that Williams likely has market power in
nine markets. 7/ The ALJ also reviewed four other markets
where he determined that caution warranted closer
examination. 8/ Based on his examination of these thirteen
markets, he concluded that Williams failed to show that it lacked
market power in Duluth, Rochester, Cedar Rapids, Waterloo, Ft.
Dodge, Sioux City, Omaha, Grand Island, Sioux Falls, and
Aberdeen. Therefore, in Phase II of this proceeding, just and
4/ Brief on Exceptions of Williams Pipe Line Co. at 2.
5/ 58 FERC 63,004 at 65,004-05.
6/ 44 FERC 61,066 (1988) (Buckeye I); order on reh'g, 45 FERC
61,046 (1988) (Buckeye II); Opinion and Order on Initial
Decision, 53 FERC 61,473 (1990) (Opinion No. 360); order
on reh'g, 55 FERC 61,084 (1991) (Opinion No. 360-A).
7/ Those markets are Duluth, Minneapolis/St. Paul, Rochester,
Sioux City, Topeka, Omaha, Grand Island, Sioux Falls, and
Aberdeen.
8/ Those markets are Quincy, Cedar Rapids, Waterloo, and Ft.
Dodge.
Docket No. IS90-21-002, et al. - 4 -
reasonable rates would be established for Williams' services in
these markets. As we will discuss in greater detail below, we
have reviewed the evidence supporting the ALJ's determinations
relating to Williams' market power and have reached different
conclusions in certain instances.
II. Discussion
A. Phase I - Phase II: Proper Scope of This Proceeding
In limiting the ID to the first phase of the bifurcated
approach, the ALJ rejected arguments that, in the earlier
suspension order in this proceeding, the Commission had not
objected to Williams' plan to litigate a broad array of issues
beyond market power in Phase I. 9/ The ALJ also rejected a
contention that a broad Phase I was warranted by a "close nexus"
between market power issues and the ultimate issue of rate
reasonableness, reasoning that because such a relationship always
exists, acceptance of this argument would transform a Phase I
proceeding into a far-reaching exploration of cost-oriented rate
design details, blurring the meaningful line obviously intended
by the Commission. 10/
The ALJ ruled that consideration of long-run/short-run costs
and floors would be addressed more appropriately following the
Commission's findings on market power and development of a Phase
II cost record. 11/ Finally, he rejected the contention that
the parties had agreed to Williams' plan for broad litigation as
more expeditious and efficient, citing a stipulation among the
parties concerning admission of rate design evidence in
Phase I. 12/
Because the ALJ declined to adopt Williams' original rate
standards proposal in lieu of a market power evaluation and
determined the proposal to be beyond the scope of Phase I,
Williams filed a motion seeking Phase II application of the same
standards in those markets found not workably competitive. A
number of parties who oppose Williams' motion advance the
procedural objections previously raised against the rate
standards proposal in Phase I. For this reason, our discussion
9/ 58 FERC 63,004 at 65,006, citing the Commission's order on
reconsideration of the suspension order issued in this
proceeding, Williams Pipe Line Co., 52 FERC 61,084 (1990).
10/ 58 FERC 63,004 at 65,006.
11/ Id.
12/ The stipulation is quoted at 58 FERC 63,004 at 65,008.
Docket No. IS90-21-002, et al. - 5 -
here will address both the proper scope of Phase I and the
procedural objections to Williams' motion.
Williams and AOPL urge the Commission to adopt rate
standards prior to Phase II. Their position is premised on the
argument that the parties were aware of Williams' intent to
litigate a broad array of issues in Phase I and further, that
while not all parties submitted particular cost evidence, all
parties did submit extensive evidence concerning appropriate
ratemaking methodologies.
Kaneb, while supporting Williams' desire to litigate a broad
array of issues in Phase I, attacks Williams' proposal as
permitting Williams to exclude or discipline competition, thereby
improperly preserving and extending its market power. Kaneb also
states that the ALJ misapplied Buckeye and erroneously concluded
that rate design issues have no place in the market power
assessment of individual markets. Finally, Kaneb contends that
the ALJ misperceived its arguments as merely seeking a rate floor
to protect itself.
In its motion, Williams asserts that Commission adoption of
its standards prior to Phase II would be consistent with Buckeye.
Kaneb disagrees, stating that while rate standards were discussed
in Phase I of this proceeding, such standards were not discussed
in Phase I of Buckeye. Kaneb also argues that the link between
rate design and market power that is present in this case was not
present in Phase I of Buckeye. Finally, while claiming that
rejection of Williams' motion will not foreclose any party from
challenging or developing any cost evidence relevant to other
rate designs in Phase II, Kaneb asks the Commission to consider
the alternative ratemaking proposals presented in Phase I to
establish the rate minimums and maximums to be applied in Phase
II.
Farmland, Kaneb, Kerr-McGee, Texaco, Total, and the staff
ask the Commission to strike or disregard Williams' motion as
procedurally improper, relying heavily on the stipulation among
the parties that ratemaking standards would be considered in
Phase II.
Additionally, Kerr-McGee argues that the ALJ erred in
failing to require Williams to carry its burden of proof that it
lacks significant market power under the standards set by Farmers
Union Central Exchange, Inc. v. FERC (Farmers Union II). 13/
Williams, however, counters that the record in this case
13/ 734 F.2d 1486, 1530 (D.C. Cir. 1984), cert. denied sub nom.,
Williams Pipe Line Co. v. Farmers Union Central Exchange,
Inc., 469 U.S. 1034 (1984).
Docket No. IS90-21-002, et al. - 6 -
demonstrates that its markets have been carefully and
systematically defined and evaluated.
We affirm and adopt the ALJ's decision to limit the scope of
Phase I of this proceeding to a determination of Williams' market
power in the relevant markets and his refusal to accept Williams'
rate standard proposal. The voluntary stipulation of the parties
cited above clearly represents their understanding concerning the
admission of the cost data in Phase I. We also reject Kaneb's
contention that the issue of Williams' rate design is so
intertwined with the issue of market power that it must be
considered in Phase I of this proceeding. The procedure
established by the Commission in Buckeye represents a reasonable
and efficient method of case management in a complex oil pipeline
rate proceeding, particularly where the parties will have ample
opportunity to challenge the justness and reasonableness of the
pipeline's proposed rates in Phase II. Further, in the context
of Phase II, the ALJ will be better able to examine the floor
requested by Kaneb.
Although we will not rule on the merits of Williams'
proposed rate standards in the context of our review of Phase I
of this proceeding, we will address below Williams' motion to
establish rate standards prior to Phase II.
B. Market Power
1. Price Increase Definition
The ALJ defined market power as "a firm's ability to sustain
a price increase over a significant period of time, or to exclude
competition." 14/ He also stated that Williams' hypothetical
15 percent increase over its proposed rates 15/ had not been
satisfactorily tested on the record, basing his conclusion on
Williams' admission that the impact of such an increase had been
studied only in three markets where Williams' witness felt market
concentration warranted further scrutiny. 16/ According to
14/ 58 FERC 63,004 at 65,008.
15/ Williams argued that the test should be its ability to
sustain a 15 percent increase above its proposed rates over
a period of two years. Brief on Exceptions of Williams Pipe
Line Co. at 26. In support of its position, Williams cited
the testimony of its witness Schink and the staff's witness
Alger.
16/ The market areas are referred to as BEAs, which are areas of
the contiguous United States that have been established by
the Bureau of Economic Analysis of the U.S. Department of
(continued...)
Docket No. IS90-21-002, et al. - 7 -
the ALJ, neither the Department of Justice (DOJ) Merger
Guidelines 17/ nor the DOJ's study, "Oil Pipeline
Deregulation" (Deregulation Study) 18/ announced or applied a
particular numerical test. Finally, the ALJ stated that the
Commission's finding a 15 percent definition to be "adequate" in
Buckeye did not mandate that or any other specific percentage for
all cases.
Williams, AOPL, and Kerr-McGee contend that the ALJ should
have adopted a specific price increase threshold in his market
power analysis. While Kerr-McGee argues in favor of five
percent, Williams and AOPL recommend 15 percent. AOPL argues
that the five percent "small but significant and non-transitory
increase in price" (SSNIP) advocated by the shippers fails to
recognize that transportation rates are only a small component of
petroleum product prices. AOPL and Kerr-McGee seek support for a
specific percentage in natural gas orders issued by the
Commission. 19/ According to AOPL, in light of the fact that
wellhead commodity prices are a significant portion of the
delivered cost of natural gas, the Commission's approval of a
SSNIP of five to ten percent in those cases supports adoption of
an even higher price threshold in the assessment of oil pipeline
market power.
Williams also asserts that the 15 percent increase should be
based on the proposed rates at issue in this proceeding. Staff
disagrees with Williams, pointing out that the proposed rates
have not yet been found to be just and reasonable. The staff
also claims that even if 15 percent over the proposed rates is
16/(...continued)
Commerce and are intended to represent actual areas of
economic activity. The ALJ noted that each BEA has at its
center a major city that is the traditional hub of economic
activity for the entire BEA. 58 FERC 63,004 at 65,008-09
n.5.
17/ In an attempt to establish uniformity in analyzing mergers,
the Antitrust Division of the DOJ issued a set of merger
guidelines in 1984 that include a proposed framework for
identifying relevant product and geographic markets. These
guidelines were updated by the Department of Justice and
Federal Trade Commission Horizontal Merger Guidelines that
were issued April 2, 1992 (1992 Merger Guidelines).
18/ U.S. Dep't of Justice, Oil Pipeline Deregulation (1986).
19/ AOPL cites Transcontinental Gas Pipe Line Corp., 55 FERC
61,446 at 62,396-97 n.27 (1991). Kerr-McGee also cites
the Transco order as well as ANR Pipeline Co., 56 FERC
61,293 at 62,224 n.6 (1991) in support of its position.
Docket No. IS90-21-002, et al. - 8 -
the correct measure, Williams only presented such evidence for
three markets, thus failing to carry its burden of proof. 20/
Williams relies on Buckeye in support of its position.
Kerr-McGee, however, distinguishes Buckeye, claiming that the 15
percent threshold adopted in that case was the product of an
agreement among the parties. Williams and AOPL acknowledge the
five percent threshold utilized in the 1984 Merger Guidelines,
but they emphasize that the appropriate threshold depends on the
industry in question.
Williams, AOPL, Kerr-McGee, Texaco, and Total all cite
different portions of the record in support of their positions
regarding Williams' ability or inability to sustain a price
increase. For example, Williams claims that the record contains
evidence that would have allowed the ALJ to test the effect of a
15 percent increase in those markets that he subjected to further
analysis. Williams also complains of rate decreases in the BEAs
where it was found to have market power, as well as a systemwide
decrease of 6.6 percent. 21/ Kerr-McGee, on the other hand,
cites recent tariff filings by Kaneb and ARCO proposing increased
rates, suggesting that Williams' success in this regard has
encouraged other firms to seek higher rates. Kerr-McGee also
points out that, even though Williams' proposed rates had been in
effect for 10 months when the hearing ended, the record contains
no evidence that Williams lost traffic to competitors or was
forced to lower its rates due to competition.
We will affirm the ALJ's decision because we conclude that
he properly rejected any specific rate increase as a litmus test
for market power. The ability to sustain a rate increase per se
does not indicate market power, any more than the existence of
competition prevents a rate increase. Relative rate changes for
a given service in a given market must be examined, which the
parties generally have not done in this proceeding. As noted by
the ALJ, Williams studied the impact of a hypothetical rate
increase in only three of its markets where market concentration
suggested further scrutiny, 22/ and no other party attempted
such an analysis. Thus, the ALJ properly relied more on the
20/ Williams admits that it submitted evidence of its inability
to sustain a 15 percent increase in the three BEAs where its
unadjusted Herfindahl-Hirschman Index (HHI) suggested that
Williams lacked market power.
21/ Williams' claim that its rates have decreased assumes that
its rates are measured in real terms and assumes a nine
percent rate of inflation.
22/ The ALJ listed the Duluth, Ft. Dodge, and Sioux Falls BEAs.
58 FERC 63,004 at 65,009.
Docket No. IS90-21-002, et al. - 9 -
presence or absence of competition in a given market as an
indicator of the ability to sustain a rate increase in that
market. This approach is consistent with Buckeye.
The natural gas orders cited by the parties do not require a
different result. The Transco and ANR orders involved requests
to implement Gas Inventory Charges (GICs), and the Transco order
was issued in the context of a settlement. The Transco order
describes a significant increase as five to ten percent,
declining to adopt a specific number. 23/ And the ANR order,
while establishing a 10 percent threshold, acknowledges that the
Merger Guidelines do not mandate a specific number. 24/ We
are not persuaded that our decisions in those cases require
adoption of any specific number in this proceeding.
Our determination not to require a specific rate increase
threshold in this case is further supported by the 1992 Merger
Guidelines. An examination of the guidelines makes it clear that
a specifically quantified price increase threshold is not
required in a market power analysis. Market power is defined
therein as "the ability profitably to maintain prices above
competitive levels for a significant period of time." 25/ The
1992 Merger Guidelines treat the SSNIP as "a methodological tool
... [and] not a tolerance level for price increases," 26/
and, while stating that a five percent price increase lasting for
the foreseeable future will be employed in most contexts, the
guidelines clearly state that the SSNIP will depend on the nature
of the industry being examined and may be larger or smaller than
five percent. 27/ As stated in the introduction to the
guidelines, "mechanical application ... may provide misleading
answers to the economic questions." 28/ The same is true of
our market power analysis in the context of an oil pipeline rate
case -- a great deal of judgment is involved in order to examine
and weigh all the factors in a number of markets. Where, as in
this case, the ALJ's determination not to reduce the rate
increase factor to a numerical absolute is reasonable, we will
not overturn it.
23/ 55 FERC 61,446 at 62,397 n.27.
24/ 56 FERC 61,293 at 62,224 n.6.
25/ 1992 Merger Guidelines at 4.
26/ Id. at 7.
27/ Id. at 14.
28/ Id.
Docket No. IS90-21-002, et al. - 10 -
2. Product Market
The ALJ observed that all parties agreed that the relevant
product is "pipelineable petroleum products," but he added the
word "delivered," reasoning that the "delivered product embodies
both the physical product and any necessary transportation to get
the product to the relevant geographic market." 29/
Kerr-McGee claims the ALJ's definition of the relevant
product market is contrary to Commission precedent. Kerr-McGee
also asserts that producers and shippers, as the class intended
to be protected by oil pipeline regulation, are most directly
affected by the cost of transportation, not the delivered price
of the petroleum products, and that the Commission's primary
concern in a market power analysis is that the customers have
genuine alternatives to buying the seller's product. 30/ AOPL
and the staff oppose Kerr-McGee's exception, contending that the
adopted relevant product market is consistent with Buckeye and
that transportation is not a separate product from refined
petroleum products.
We will affirm the ALJ's definition of the relevant product
market. By adding the word "delivered," the ALJ has acknowledged
that a large volume of product arrives in Williams' markets via
other modes of transportation and through exchanges, which may or
may not include actual transportation. Our decision here is not
in conflict with Buckeye; as we stated in Opinion No. 360, "the
relevant product market is the transportation of refined
petroleum products from all origins to a particular
destination." 31/
Our decisions in electric cases are distinguishable. For
example, in the Northeast Utilities case cited by Kerr-McGee, we
specifically distinguished Buckeye and emphasized a critical
difference between electric transmission services and petroleum
product transportation, which is the fact that electricity can
only be delivered by transmission lines, while petroleum products
29/ 58 FERC 63,004 at 65,009.
30/ Kerr-McGee cites Public Service Co. of Indiana, Opinion No.
349, 51 FERC 61,367 (1990); order on reh'g, Opinion No.
349-A, 52 FERC 61,260 (1990).
31/ 53 FERC 61,473 at 62,664. We also stated in Opinion No.
360-A that we would continue to determine the relevant
geographic and product markets on a case-by-case basis, at
least until we gained some experience with light-handed
regulation. 55 FERC 61,084 at 61,260.
Docket No. IS90-21-002, et al. - 11 -
may be delivered in a variety of ways. 32/ Similarly,
differences in oil and gas transportation make Kerr-McGee's
reliance on Order Nos. 436 and 500 unpersuasive. As we noted in
Order No. 436, "[t]here is no known method by which gas in large
quantities can be transported except by pipelines. Oil may be
moved in pipe lines, tank cars, trucks, and water-floated barges
or 'tankers' and packaged in barrels and other small containers
for transport by various means." 33/ The same is true of
petroleum products.
Further, Kerr-McGee's efforts to focus exclusively on the
producers and shippers misses the point. We are indeed concerned
that they have genuine alternatives to utilizing Williams'
transportation services. In this case, however, it is undisputed
that those parties have a variety of genuine alternatives
available to them, depending on the particular market in
question. Barges, proprietary pipelines, refiners, trucks, and
other alternatives may bring different amounts of product into a
particular market, but all of these transportation options and
Williams compete for the same dollars in that market.
3. Geographic Markets
The ALJ adopted the destination approach in determining the
geographic scope of the markets. He stated that a focus on
destination correctly recognizes the shipper-customer's real
concern, which is the delivered product and its price, rather
than factors such as origin, route, and mode of transportation.
The ALJ also stated that use of destinations recognizes the role
of exchanges in Williams' markets, and he noted that whatever
their competitive significance, they should not be excluded at
the threshold by definitional strictures. Finally, the ALJ
stated that the evidence supports a destination market review and
that destination markets were utilized in Buckeye. 34/
Texaco urges the use of corridors in determining the
relevant geographic markets. Texaco argues that the rates for an
oil pipeline are stated in terms of receipt points (origins) and
delivery points (destinations), and because rates to a
destination vary by point of origin, the fact that a destination
may be served by several pipelines with unused capacity is
32/ Northeast Utilities Service Co., Opinion No. 364-A, 58 FERC
61,070 at 61,191-92 (1992).
33/ Regulation of Natural Gas Pipelines After Partial Wellhead
Decontrol, 50 Fed. Reg. 42,408 (October 18, 1985), FERC
Stats. and Regs. Regulations Preambles 1982-1985 30,665 at
31,475 (October 9, 1985).
34/ 58 FERC 63,004 at 65,009-10.
Docket No. IS90-21-002, et al. - 12 -
irrelevant to a shipper who has only one option to ship from his
refinery to that destination. In this "captive" situation,
Texaco asserts that the shipper may be subject to higher rates
that will subsidize lower rates from origins where the pipeline
faces competition. According to Texaco, by rejecting corridors,
the ALJ failed to follow Buckeye.
Williams, AOPL, and staff support the use of destination BEA
markets. AOPL agrees that this approach recognizes the evidence
of the shippers' reliance on exchange transactions; in other
words, refineries do not supply all of their destination markets
by shipping product in their own name in pipelines. AOPL also
states that Texaco in fact relies heavily on exchanges in the
destination markets served by Williams. Staff argues in favor of
destination markets for practical reasons; there literally could
be thousands of corridors.
We will affirm the ALJ's use of destination markets. We
agree that the real economic concern of the shippers is the
delivered product and its price rather than whether the product
travels between specific locations via pipeline. Limiting
geographic markets to specific origin/destination pairs would
fail to recognize this factor and also would eliminate from
consideration competitive suppliers who bring product to the
markets without utilizing the specific corridors. Similarly, we
are unwilling to eliminate exchanges from consideration in our
determination of the appropriate geographic markets, although, as
we will discuss more fully below, we will not accord a great deal
of weight to such transactions in our post-screen review of
Williams' individual markets. Many exchanges do occur in
Williams' markets, and as AOPL points out, even a shipper such as
Texaco, which claims to be "captive" at a particular location,
has the exchange option available to it. We note too that
Total's manager of supply testified that exchanges are always
available as an alternative to shipment on Williams'
system. 35/
In addition, Texaco's suggestion that using destinations is
inconsistent with Buckeye is simply incorrect. In Opinion
No. 360, the Commission stated that "[t]he primary purpose of the
geographic market definition is to identify an area in which the
price of the relevant product is largely determined by the buyers
and sellers within the area." 36/ The Commission also cited
the presence of competitive trucking within a BEA as
35/ Brief of the Association of Oil Pipelines Opposing
Exceptions to Initial Decision at 25.
36/ 53 FERC 61,473 at 62,665.
Docket No. IS90-21-002, et al. - 13 -
disciplining a price increase by a pipeline to one point. 37/
Thus, in Opinion No. 360, the Commission adopted the larger
geographic areas represented by BEAs as the relevant geographic
markets, recognizing that BEAs are "convenient, easily identified
and have been used in past studies of the oil pipeline industry." 38/
4. Use of BEAs
The ALJ defined Williams' destinations as the relevant BEAs.
He noted that the BEAs are intended to represent actual areas of
economic activity and have been recognized in Buckeye and past
studies of the oil pipeline industry. 39/
Kerr-McGee states that it does not accept the correctness of
using BEAs as properly defined geographic markets for pipelines
generally or for Williams in this proceeding. Kerr-McGee urges
the Commission to make it clear that the use of BEAs is not a
given in any oil pipeline case, and that the appropriate
procedure is to start with the location of each of the terminals
of the pipeline in issue.
We will affirm the ALJ's adoption of BEAs as the relevant
geographic markets in this case. Although our ruling here is
limited to this case, we note that BEAs were also endorsed by the
Commission in Buckeye as the appropriate means for identifying
the pipeline's geographic markets. 40/ Further, as the ALJ
found, BEAs have been used in studies of the oil pipeline
industry and are reasonably representative of the markets in
which competition for Williams' transportation service
occurs. 41/
C. Analysis of the Relevant Markets
1. Market Concentration Screens (HHIs)
As the ALJ noted, the Commission uses the HHI as an initial
screen for assessing market concentration in each market. Citing
Buckeye, the ALJ explained that the HHI calculates market
concentration by summing the squares of the individual market
shares of all firms included in the market, with a higher HHI
37/ Id.
38/ 53 FERC 61,473 at 62,665.
39/ 58 FERC 63,004 at 65,010.
40/ 53 FERC 61,473 at 62,665.
41/ 58 FERC 63,004 at 65,010.
Docket No. IS90-21-002, et al. - 14 -
number indicating a greater need for concern about market
power. 42/
a. Appropriate Screen (1800 vs. 2500)
In this instance, the ALJ considered only two numbers: 2500,
as urged by Williams, versus 1800, as argued by the staff and
shippers. The ALJ adopted a 2500 HHI screen, partly on the basis
that the DOJ utilized this number in its Deregulation
Study, 43/ although he acknowledged that the DOJ employed a
screen of 1800 in its Merger Guidelines. 44/ According to the
ALJ, the examination of market power in this case was closer in
purpose to the Deregulation Study than to the question of merger.
Further, the ALJ dismissed the shippers' argument that a screen
of 1800 was used in Buckeye. He stated that while HHIs in
various markets were examined in that case, no particular number
was adopted. The ALJ also ruled that the record in this case was
not adequate to permit a definitive ruling about tacit collusive
behavior. 45/
The parties are divided on the value and application of
Commission precedent relating to HHIs. Kerr-McGee and Total
argue that, although the Commission did not explicitly adopt a
particular HHI value in Buckeye, the use of 1800 is fairly
inferable from that case because the Commission cited the DOJ's
use of 1800 in the Merger Guidelines 46/ and noted that the
same figure had been employed in natural gas cases decided by the
Commission. 47/ In response, however, Williams and AOPL argue
that no meaningful inference about the appropriate level of the
HHI screen threshold can be drawn from the Commission's decision
in Buckeye. AOPL also distinguishes the natural gas cases cited
by the shippers and the staff as involving proposed GICs in the
context of either a paper hearing or a settlement. AOPL reasons
that in these cases the Commission did not discuss the
42/ 58 FERC 63,004 at 65,010.
43/ Deregulation Study at 29-31.
44/ 1992 Merger Guidelines at 28-29.
45/ 58 FERC 63,004 at 65,012.
46/ 53 FERC 61,473 at 62,667 n.46.
47/ Id. at 62,661 n.15. Kerr-McGee, Total, and the staff also
cite other natural gas cases, including ANR Pipeline Co., 56
FERC 61,293 at 62,225 (1991); Transcontinental Gas Pipe
Line Corp., 55 FERC 61,446 at 62,393 (1991); and Utah
Power & Light Co., 45 FERC 61,095 at 61,286 n.127 (1988),
order on reh'g, 47 FERC 61,209 (1989).
Docket No. IS90-21-002, et al. - 15 -
development of the methodology for conducting a market power
analysis. Finally, AOPL notes that oil pipelines differ from gas
pipelines in that they are not now and never have been franchised
monopolies; according to AOPL, competition has always been a
factor in the oil pipeline industry, where sales of crude oil and
petroleum products were "unbundled" from transportation in 1906.
Kerr-McGee, Total, and the staff challenge the ALJ's
reliance on the DOJ's Deregulation Study. Kerr-McGee argues that
the study is not entitled to deference in this case. Total
contends that application of the Deregulation Study methodologies
in this case results in distortions because the ALJ included
external sources, some of which are far in excess of the 70-mile
limit he established. AOPL and Williams, however, dismiss Kerr-
McGee's challenge to the Deregulation Study, noting that even if
light-handed regulation achieves a more modest reduction of
regulatory burdens than complete deregulation, those burdens
should still be avoided.
Next, Kerr-McGee complains that the use of an HHI of 2500
eliminates from scrutiny some markets that display
characteristics of market power, such as market share and
barriers to entry, thereby relieving Williams of the burden of
proving its lack of market power. 48/
Williams, on the other hand, argues that while the ALJ
purported to adopt a 2500 HHI screen, he failed to apply that
screen properly. According to Williams, the ALJ erred by
subjecting markets between 1800 and 2500 to a 70 percent market
share screen. Further, reasons Williams, to allow market shares
to override a below-2500 HHI is antithetical to the very concept
of a screen as an irrebuttable presumption of lack of market
power. Williams also contends that the appropriate threshold
turns on the likelihood that a firm will exercise market power
through collusive or interdependent behavior at a given level of
concentration, which it claims is unlikely in the oil industry.
We find the ALJ's decision to use an HHI value of 2500 as an
initial screen to be adequate in this case in light of his
examination of other factors. Although the ALJ initially used
the screen to identify markets that might warrant further
scrutiny for market power, he also looked at markets with HHIs
between 1800 and 2500 and found some of these to be competitive
based on other factors, such as market share and lack of
competition from external and internal sources. We emphasize too
that the HHI is merely an analytical tool, and whatever the
48/ Kerr-McGee lists Eau Claire, Des Moines, Kansas City,
Columbia, Lincoln, Fargo-Moorhead, and Grand Forks, as
markets in which Williams has a market share of 49 percent
or more.
Docket No. IS90-21-002, et al. - 16 -
number utilized, it does not serve as an irrebuttable
presumption. In this proceeding, the ALJ applied the HHI screen
somewhat more stringently than we did in Buckeye. In our
analysis below, we will follow more closely the approach utilized
in Buckeye, using the HHI as an indicator to be evaluated along
with other factors.
b. Measurement of Market Shares in
Calculating HHIs
(1) Delivery vs. Capacity
The ALJ pointed out that the market shares to be squared in
calculating the HHIs can be measured either by delivery or by
capacity, but he concluded that the use of capacity-based shares
is reasonable under the circumstances of this case. While he
recognized that the Commission relied on delivery shares in
Buckeye, he also emphasized that the Commission did not establish
an absolute policy in favor of delivery-based shares.
Acknowledging the inherent imprecision in the use of capacity
data, the ALJ stated that such data could be modified to conform
to known consumption, stressing that practical considerations and
judicial guidelines do not require perfection. The ALJ's ruling
is based on three additional factors: (1) the availability of
evidence relating to capacity shares; (2) the relationship
between market power and capacity shares; and (3) the DOJ's
reliance on capacity shares where the product is homogeneous and
delivery data are unavailable. 49/
Total and Kerr-McGee argue that the absence of delivery data
from suppliers does not prevent calculation of delivery-based
HHIs because Williams introduced the company's delivery shares
and also provided estimated consumption, by county, for each of
the states, then for each of the BEAs. Kerr-McGee characterizes
the consumption figures as a surrogate for total deliveries,
providing evidence of Williams' market share. In response,
however, AOPL and Williams, who support the use of capacity data,
argue that the delivery data described by the shippers are
inadequate for the purpose of calculating the HHIs.
Williams asserts that the Commission has used the equivalent
of capacity data (divertible supply) in analyzing market power in
natural gas cases, 50/ and Williams claims that the Merger
Guidelines also prefer capacity-based measures of market power
where the commodity is homogeneous. Kerr-McGee disagrees that
49/ 58 FERC 63,004 at 65,010-11.
50/ Williams cites Transcontinental Gas Pipe Line Co., 55 FERC
61,446 at 62,391-93 (1991); El Paso Natural Gas Co., 49
FERC 61,262 at 61,909 (1989).
Docket No. IS90-21-002, et al. - 17 -
the products in this case are homogeneous, claiming support in
the "discrimination" reflected in Williams' tariffs, which Kerr-
McGee contends is evidence of market power. 51/
Total contends that the ALJ erred in his restriction on the
use of delivery data to markets where Williams was shown to have
a market share of 70 percent or more. Total argues that
witnesses for the staff and the shippers agreed that where both
delivery-based and capacity-based data are available, both should
be used as a check, and where either calculation exceeds the
screen in a market, further examination is warranted. 52/
Total cites the case of the Des Moines BEA, where the capacity-
based HHI is slightly below the 1800 threshold, but where
Williams is the dominant firm in the market, with a 78 percent
share of deliveries. In that case, the minimum delivery-based
HHI is 6084. Exhibit A to Total's Brief on Exceptions purports
to review the minimum delivery-based HHIs and staff capacity-
based HHIs for 24 markets contested by the intervenors.
According to Total, by utilizing both methods, 19 of those
markets are shown to have an HHI higher than the 2500 threshold
adopted by the ALJ. Total asserts that these markets also
include trucking beyond the 70-mile limit adopted by the ALJ, but
when the HHIs are adjusted for demonstrable imprecisions and to
eliminate sources beyond 70 miles from the BEA borders, the true
extent of Williams' highly concentrated market power is revealed.
AOPL states that where capacity data instead of delivery
data are employed to calculate market shares, the capacity data
should be used for the initial HHI screening purposes as well as
the post-screen market review. AOPL also argues that the two-
tiered approach exaggerates the significance of market share and
defeats the very purpose of the HHI as a screening device.
According to AOPL, a market power analysis should focus not on
market share, but on market behavior -- the potential competitive
response of the market to any attempt by an oil pipeline to
exercise market power. AOPL argues that the ALJ erred in
suggesting that, when measuring market share, it is appropriate
to rely on capacity data only when delivery data are not
available.
51/ According to Kerr-McGee, there is discrimination between
large and small shippers through volume discounts;
discrimination through differential and greater increases
from the south versus the Northern Tier; proportioned rate
discrimination on volumes that go through terminals to
designated counties beyond the terminals as contrasted to
other destinations. These issues are addressed later in
this order.
52/ Total cites Tr. 51/9038 (Means); Tr. 41/6877 (Alger).
Docket No. IS90-21-002, et al. - 18 -
We will affirm the ALJ's decision to utilize capacity data
in calculating the HHIs in this case. While use of capacity-
based data may result in some imprecision, a market power
analysis in general is not an exact calculation and, as we have
stated, requires skilled judgment in weighing and balancing the
numerous factors.
Additionally, the ALJ correctly read Opinion No. 360,
affirmed in Opinion No. 360-A, as enunciating no policy that
precludes the use of capacity-based data in the HHI
calculation. 53/ The reasons cited by the ALJ in support of
his determination to utilize capacity-based data 54/ are
sufficient to warrant our affirmation of his decision.
The 1992 Merger Guidelines also are consistent with our
decision here. In describing the general approach to be taken in
calculating market shares, the guidelines note that "[m]arket
shares can be expressed either in dollar terms through
measurement of sales, shipments, or production, or in physical
terms through measurement of sales, shipments, production,
capacity, or reserves." 55/ Further, while dollar sales or
shipments will be employed where firms are distinguished
primarily by differentiation of their products, the guidelines
prescribe the use of physical capacity or reserves if these
measures most effectively distinguish the firms. 56/ Despite
Kerr-McGee's arguments to the contrary, the petroleum products
transported here are not sufficiently distinguishable to cause us
to rely on delivery data.
Finally, contrary to AOPL's assertion, we believe that the
use of capacity data in the HHI screens and delivery data in
determining the market share does not produce a distortion and
instead permits each methodology to offset the inherent
53/ In Opinion No. 360, we stated, "We also conclude that the
use of delivery data ... is the best method for calculating
HHIs here." 53 FERC 61,473 at 62,667. In Opinion No.
360-A, we further stated, "Although the Commission
determined that the use of deliveries data was the best
method for calculating HHIs in the Buckeye case, we readily
acknowledge that circumstances may be different on other
pipelines, and they are free to propose using delivery data
or any other appropriate data for the purposes of
calculating HHIs." 55 FERC 61,084 at 61,261.
54/ 58 FERC 63,004 at 65,012.
55/ 1992 Merger Guidelines at 25.
56/ Id.
Docket No. IS90-21-002, et al. - 19 -
deficiencies of the other. Accordingly, we find no reason to
reverse the ALJ's use of capacity data in calculating the HHIs.
(2) Measuring Capacity
The ALJ adopted the method of calculating and measuring
"effective" capacity that was proposed by the staff's witness,
Dr. Alger. 57/ According to the ALJ, this method represented
a middle ground between the shippers' use of "actual" or
"unadjusted" capacity of all internal sources, which produced
larger HHI numbers, and the company's use of "adjusted" capacity,
which trimmed down capacity to reflect divided shares of actual
consumption and gave full consideration to the capacity of all
external sources, 58/ thereby producing smaller HHIs. 59/
Kerr-McGee and Texaco object to the ALJ's decision.
Referring to the 1992 Merger Guidelines, Kerr-McGee argues that
there is a need to distinguish between uncommitted entrants and
committed entrants, 60/ and states that Williams has failed to
support the capacities of those it wishes to include as
uncommitted entrants. According to Kerr-McGee, the large sunk
investment cost required for a pipeline terminal undermines the
validity of capacity-based comparisons. Staff, however, supports
the ALJ's decision as the best practical measure of capacity
under the circumstances, and Williams asserts that because
shippers determine where they will market product and thus how
57/ Dr. Alger explained that the actual capacity is the total
physical capacity that could serve the market, while the
effective capacity is the actual capacity or total
consumption if that is smaller. Ex. 619 at 61.
58/ External sources are sources located outside a BEA.
59/ 58 FERC 63,004 at 65,012.
60/ The 1992 Merger Guidelines define uncommitted entrants as
"firms not currently producing or selling the relevant
product in the relevant area ... [who are considered] as
participating in the relevant market if their inclusion
would more accurately reflect probable supply responses."
The 1992 Merger Guidelines further state that "[t]hese
supply responses must be likely to occur within one year and
without the expenditure of significant sunk costs of entry
and exit, in response to a ... [SSNIP]." 1992 Merger
Guidelines at 20-21. Committed entrants are distinguished
by the fact that they must commit substantial sunk costs,
which make entry irreversible in the short term without
forgoing that investment. The likelihood of their entry is
to be evaluated in light of their long-term profitability.
1992 Merger Guidelines at 9 n.7.
Docket No. IS90-21-002, et al. - 20 -
supply capacity is deployed, available capacity best depicts the
likely response to an exercise of market power. 61/
We will affirm the ALJ's decision on this issue. Use of
actual or unadjusted capacity would produce unrealistically high
HHI numbers, 62/ and use of adjusted capacity, as proposed by
Williams, overstates the capacity of all external sources and
produces smaller and equally unrealistic HHIs. 63/
2. Factors Includable in HHI Calculations
a. Other Pipelines
The ALJ included private pipelines and certain pipelines
without terminals in the particular BEA in calculating the HHIs.
He rejected three countervailing arguments raised by the
shippers. First, he rejected the notion that pipelines could
only compete if they served exactly the same points, reasoning
that under this narrow theory, virtually every pipeline would
have market power unchecked by any other line. Second, the ALJ
included private lines in the HHIs, basing his ruling on the
Buckeye decision and on the Deregulation Study, which treated
private lines as competitive with Williams. Third, the ALJ
accepted the staff's contention that pipelines running through
BEAs should be included in the calculation only where
construction of new terminals could occur economically. He
declined to adopt the positions of Williams or the shippers,
reasoning that it is unrealistic and inconsistent with the record
either to include all pipelines running through a BEA or to
assume that no new terminals would be built. 64/
61/ Tr. 28/3881-83.
62/ The ALJ cited the testimony of the shippers' witness Dr.
Shepherd who admitted that his use of actual or unadjusted
capacity produced HHI numbers that were "embarrassing," "may
well be too high . . . may be overstated and in some degree
it is overstated." 58 FERC 63,004 at 65,012.
63/ The ALJ pointed out that use of Williams' adjusted capacity
"gave full play to the capacity of all external sources seen
as capable of bringing product into the BEA from outside."
According to the ALJ, this tended to produce smaller HHIs.
Significantly, Williams' expert agreed that staff witness
Alger's HHI calculations should be adopted. 58 FERC
63,004 at 65,012.
64/ 58 FERC 63,004 at 65,013-14.
Docket No. IS90-21-002, et al. - 21 -
Total argues that the effort to determine whether a
potential competitor without a terminal would actually enter a
market is speculative. However, Total contends that potential
competition should be considered as part of the detailed analysis
after calculating the HHI screen.
In response, AOPL and Williams maintain that the ALJ
properly accounted for the capacity of potential competitive
sources by including such sources as private pipelines and
pipelines without existing terminals. AOPL states that the 1992
Merger Guidelines make it clear that firms likely to respond to a
SSNIP should be included as market participants as long as their
supply response is likely to occur within one year and without
the expenditure of significant sunk costs of entry and exit.
Williams contends that the cost of building a new terminal is
insignificant compared to the cost of building a new pipeline,
although a number of new pipelines have been constructed or
converted in recent years in Williams' markets. According to
Williams, the competitive threat posed by such relative ease of
entry for terminals clearly constrains any attempted exercise of
market power by it. Further, Williams contends that the HHIs
relied on by the ALJ did not automatically include pipelines
without terminals.
Next, Total asserts that the ALJ erred by including in his
HHI calculations capacity committed to other markets. For
example, Total states that evidence was presented that the
primary purpose of Amoco's pipeline is to ship Amoco's products
from its refineries to its branded stations. Total also contends
that the merger guidelines recognize that a firm's capacity may
be so committed elsewhere that it would not be available to
respond to an increase in price in the market. In that case,
according to Total, the DOJ would include a smaller part of the
firm's available capacity.
AOPL rejects Total's argument that reliance on capacity
overstates a firm's ability to deliver and fails to account for
the degree to which capacity is committed elsewhere. AOPL
acknowledges some imperfection in the calculation, but AOPL
contends it is not a fatal flaw in the ALJ's analysis. According
to AOPL, for each of its markets, Williams adjusted the capacity
of existing suppliers and potential entrants to a level
consistent with market demand and assigned an equal market share
to each source, subject to the constraint that no source was
assigned a market share imputing a volume of deliveries greater
than its capacity. Thus, the calculations correct for any bias
that may be inherent in reliance on capacity data.
We agree with the ALJ's middle ground approach in including
pipelines without terminals in markets where such construction
likely could occur with economic success. Merely because an
assessment of this nature is somewhat inexact does not mean that
Docket No. IS90-21-002, et al. - 22 -
the Commission should adopt a rigid rule of either including or
excluding such pipelines in calculating the HHIs. Based on their
considerable experience in evaluating such situations, the DOJ
and the Federal Trade Commission (FTC) established a group of
factors to be examined. For example, the 1992 Merger Guidelines
list timeliness, likelihood, magnitude of the entry, and
character and scope of the entry. The guidelines then speak in
greater detail of the considerations involved in assessing each
of these factors. In assessing the need for light-handed
regulation in a proceeding such as this, the Commission also has
the expertise to assess these factors and determine where
potential construction of a terminal is likely.
We also agree that it was proper for the ALJ to include
private pipelines. As the ALJ pointed out, the Deregulation
Study included such lines as competitors, as we did also in
Buckeye. 65/ Clearly, the ultimate customers in destination
markets have the option of purchasing product that is delivered
from these suppliers. Further, the ALJ's decision is not at odds
with the statement in the 1992 Merger Guidelines that a firm's
capacity may be so committed elsewhere that the capacity likely
would be unavailable to respond to a price increase in the
market. Even though existing capacity may be committed, the 1992
Merger Guidelines make it clear that uncommitted supply responses
may occur, in part, "by the construction or acquisition of assets
that enable production or sale in the relevant market." 66/
It is foreseeable that a firm with its capacity fully utilized to
serve a particular market would be in a position to consider an
expansion of its assets to serve that market. Expansion of
current assets to increase market share differs from initial
entry into a market by a firm which does not already have a
customer base. As evidence in the record demonstrates, 67/
and as the ALJ noted, 68/ new pipelines have been built or old
ones converted in Williams' markets when it was profitable to do
65/ For example, we recognized that Buckeye faced competition
from Inland, a private pipeline, in the Columbus BEA. 53
FERC 61,473 at 62,670.
66/ 1992 Merger Guidelines at 22.
67/ Williams cites the following: (1) Koch Pipe Line from Pine
Bend to Milwaukee and Madison, WI; (2) Koch Pipe Line from
Pine Bend to Minneapolis Airport; (3) Heartland Pipe Line
from McPherson, KS origins to Lincoln and Des Moines;
(4) Kansas City Pipe Line from El Dorado to Kansas City;
(5) Razorback Pipeline from Mt. Vernon, MO, to Rogers, AR;
and (6) the Cenex Pipeline in North Dakota. Brief on
Exceptions of Williams Pipe Line Co. at 65.
68/ 58 FERC 63,004 at 65,014.
Docket No. IS90-21-002, et al. - 23 -
so. We will assess the potential impact of other pipelines in
our detailed examination of the individual BEAs.
b. Barges
Rejecting the shippers' arguments that barge deliveries
should not be included in the calculations because they consisted
of irrelevant product, were subject to freeze-ups, and were of
insignificant volume, the ALJ held that barges may be competitive
in certain markets. 69/
Total contends that the ALJ erred by relying on HHIs that
include barge competition from areas of the Mississippi that are
subject to freeze-ups. Further, although the ALJ stated that
barges compete with Williams in some BEAs, Total asserts that the
ALJ never examined the impact of barge competition in other BEAs
where the inclusion of inflated barge capacity in the initial
HHIs caused the HHIs to fall below 2500.
Williams asserts that the ALJ correctly included barges in
calculating the HHIs. Williams claims that both the staff and
the Deregulation Study recognized barges as a significant
competitive constraint on Williams. Williams also argues that
the Army Corps of Engineers reports that freeze-ups do not affect
terminals south of Bettendorf and that even as far north as the
Twin Cities, barges can operate all but two to three months per
year. Further, according to Williams, internal barge sources
were included in the HHIs based on deliveries and were included
only to the extent they serve a BEA.
We will affirm the ALJ's ruling that, as a general matter,
barges may be competitive alternatives to Williams in certain
markets. Total repeats the arguments previously rejected by the
ALJ, and we reject them for the reasons that the ALJ did.
c. Refineries
Citing Buckeye, 70/ the ALJ ruled that refineries should
not be excluded automatically in the HHI calculations. He stated
that any reason to disregard a refinery in a particular BEA could
be reviewed in the context of that market. 71/
No party excepted to this ruling; however, Kerr-McGee
challenges a statement in Williams' brief on exceptions that
refineries divert massive volumes from Williams and force
69/ 58 FERC 63,004 at 65,014-15.
70/ 53 FERC 61,473 at 62,666.
71/ Id. at 65,014.
Docket No. IS90-21-002, et al. - 24 -
Williams to short-haul much of its volume. Kerr-McGee states
that Williams has failed to show a "massive diversion" of volumes
from the Williams system to an extent that Williams' prices have
or will be restrained. 72/
We will affirm the ALJ's ruling. While we agree that no
"massive diversion" has been demonstrated, in the context of a
particular market, a refinery may be a competitive alternative to
Williams, depending on the situation in that BEA.
d. External Sources Linked By Trucks
The ALJ determined that truck-delivered capacity should be
included in a market's HHI calculation to the extent that trucks
could effectively carry products from the outside source into the
BEA. The ALJ acknowledged that the DOJ's Deregulation Study did
not include these extra-BEA sources, but he attributed that to
the DOJ's apparent belief that a truck could operate economically
only within a 50-mile radius of its origin. However, the ALJ
determined that the distance trucks travel is a factual matter
and that the record in this case contained substantial evidence
of longer truck trips. In his view, such evidence refutes the
argument that the high costs of trucking preclude it from serving
as a discipline to price increases. For example, Williams
submitted a survey of tank truck drivers, which the ALJ, while
recognizing its flaws, found to discredit the 50-mile limit/no
external sources theory. However, he agreed that there are
limits, and he found that trucks could be cost-competitive at a
range of approximately 65 to 70 miles. The ALJ also determined
that, as a general proposition, these external sources should be
included in the HHI calculation because adjustments could be made
in specific BEAs to exclude excessive reliance on
trucking. 73/
Texaco argues for a 50-mile limit, contending that some
evidence of longer hauls does not prove that such longer hauls
are economical. Texaco states that Williams' own evidence shows
that the vast majority of truck trips are less than 75 miles.
Further, Texaco claims that the only independent trucking company
witness testified that the average trip is 30.26 miles.
On the other hand, Williams and AOPL both argue for a larger
range for truck competition. Williams states that the starting
point should have been in excess of 100 miles, depending on the
market. And Williams and AOPL contend that the ALJ committed a
mathematical error that considerably understates the limit for
competitive truck movements. AOPL also asserts that the ALJ
72/ Brief of Kerr-McGee Refining Corp. Opposing Exceptions at 4.
73/ 58 FERC 63,004 at 65,015-17.
Docket No. IS90-21-002, et al. - 25 -
failed to recognize and take into account the fact that feasible
trucking distances may be different in urban and rural markets.
Kerr-McGee and Total also claim error in the ALJ's inclusion
of capacity from sources beyond 70 miles. According to Total,
the ALJ compounded the problem by failing to recognize that
inclusion of these sources in the HHI calculations reduced some
of the screens to a level that exempted those markets from
further analysis. Specifically, Total states that this caused
the ALJ to eliminate five markets where the unadjusted screens
were below 2500. 74/ Williams contradicts this claim, stating
that witnesses included external sources on a conservative,
county-by-county basis. Further, where these sources served only
a portion of a BEA, they were assigned a market share on that
basis.
Staff supports the ALJ's determination and argues that he
merely recognized that, as trucking distances increase, the
effect of trucking competition decreases. Realizing that a
finding of market power will to a great extent deregulate a BEA,
staff contends that it is better to err on the conservative side.
It is clear from the record, evidenced by the numerous
examples cited by the ALJ, that a considerable amount of product
arrives in Williams' markets via trucks. 75/ There is also a
great deal of evidence in the record supporting the ALJ's
conclusion that such truck trips frequently originate more than
50 miles from a particular BEA. 76/ There is no serious
disagreement among the parties on these determinations.
However, we must examine whether the 65 to 70-mile limit
established by the ALJ is appropriate. In some cases it is
reasonable; as with other factors to be considered, inclusion of
such sources in calculating the HHI for a BEA is a question of
judgment. As we indicated above, there is a great deal of
conflicting testimony in the record concerning the economic
74/ Total cites the following BEAs: Minneapolis/St. Paul, Des
Moines, Kansas City, Fargo, and Grand Forks. Brief on
Exceptions of Total Petroleum, Inc. at 25.
75/ 58 FERC 63,004 at 65,015-16.
76/ The ALJ, while noting the weaknesses of Williams' truck
survey, concluded that the truck survey, considered along
with other evidence in the record, discredited the 50-mile
limit. In addition to Williams' truck survey, the ALJ
considered surveys of Amoco stations, studies of bills of
lading, and the testimony of witnesses for Williams and the
shippers. 58 FERC 63,004 at 65,015-16.
Docket No. IS90-21-002, et al. - 26 -
limits of external source competition. 77/ Thus, we are not
inclined to apply a mechanical analysis that utilizes a specific
mileage limit as the basis for excluding external sources.
Likewise, we will not automatically include external sources
whose distance from the border of a BEA may have little bearing
on their economic ability to compete in the major population
centers of the BEA or whose ability to do so cannot be
established by simple extrapolation from a limited sample. In
summary, then, judgments about the validity of external source
competition in a market are best made on a market-by-market basis
in the context of all the facts and mitigating factors in a
particular BEA, which we will address more specifically below.
e. Potential Competition
The ALJ rejected the shippers' "generic" challenge to any
consideration of potential competition, stating that the shippers
were attempting to rehash earlier arguments concerning capacity
versus delivery, use of the trucking surveys, and pipelines
without terminals in particular BEAs. In the ALJ's view, the
Buckeye orders make it clear that potential competition is
properly weighed in the analysis of market power, and he further
reasoned that this factor is particularly appropriate in an
industry where entry is unregulated and, as the record in this
case indicates, several entrants have recently built new lines or
refurbished old ones. The ALJ concluded that if some particular
potential competition is seen as too remote or speculative, it
may be challenged in the context of review of a specific
market. 78/
Kerr-McGee, Total, and Williams oppose the ALJ's ruling.
Williams cites the Mid-Continent area as particularly ripe for
entry into the oil pipeline business because it contains many
idle or underutilized pipelines that can be converted. However,
Williams also asserts that the ALJ properly rejected shippers'
claims that no alternatives were available unless they provided
transportation from the individual shipper's refinery to a
destination; according to Williams, exchanges provide such
access.
77/ For example, as the ALJ noted, the shippers urged a 50-mile
limit based on their reading of the Deregulation Study,
while Williams claimed that trips of 100 to 200 miles are
common. 58 FERC 63,004 at 65,015. Texaco notes that an
independent trucking company witness testified that the
average truck trip is 30.26 miles. Texaco Refining and
Marketing, Inc.'s Brief Opposing Exceptions at 18.
78/ 58 FERC 63,004 at 65,017.
Docket No. IS90-21-002, et al. - 27 -
Kerr-McGee contends that the alleged economic availability
of alternatives within the BEAs does not require a finding that
Williams lacks market power in a substantial number of its
markets. According to Kerr-McGee, Buckeye did not establish
binding precedent as to what factors are to be considered or,
when considered, what the results should be. Staff points out
that there are no absolutes by which to measure whether enough
weight has been given to any particular factor.
We will affirm the ALJ's ruling on this issue; the ruling
does no more than accept potential competition as a relevant
consideration in the market power analysis. And the ALJ
correctly determined that any instances of potential competition
are best considered and evaluated in the context of a specific
market. The arguments raised by the parties on exception are
primarily an effort to discuss other issues previously addressed.
3. Other Factors Bearing on Competition
a. Market Share
The ALJ stated that the next inquiry following the HHI
screening is a determination of Williams' share of the markets
identified for further examination. According to the ALJ, a high
HHI and a high market share indicate market power. 79/
Rejecting the idea that "mechanistic notions of consistency"
require the use of capacity data in the post-screening process,
the ALJ accepted the delivery data presented by Williams. As the
ALJ emphasized, using delivery shares in the post-screen analysis
provides a check and balance that would neutralize imperfections
in the original capacity data. The ALJ also concluded that, for
the post-screen review, a market share of 70 percent would be
"fairly persuasive" of market power, a market share of 50 to 70
percent would "warrant concern" that might be offset by other
factors, and a market share below 50 percent would be "less
troublesome." 80/
Kerr-McGee argues that the ALJ has confused the applicable
market share standards. Kerr-McGee contends that the ALJ placed
too much reliance on the Commission's statement in Buckeye that
the market power inquiry should mirror a monopoly power inquiry.
In Kerr-McGee's view, market power is significantly less than
monopoly power, but the ALJ seems to have utilized the Sherman
Act standards and from that, adopted the 70 percent standard for
market share. Kerr-McGee states that the Commission has
enumerated a variety of factors to be used in the factual
79/ The ALJ cited Opinion Nos. 360 and 360-A.
80/ 58 FERC 63,004 at 65,017-18.
Docket No. IS90-21-002, et al. - 28 -
evaluation of market power, 81/ but Kerr-McGee contends that
selecting the standard against which to judge the factual
findings is a matter of law.
AOPL states that the Commission should determine market
power by deciding whether a firm would have dominance of a
relevant market under the standard of section 2 of the Sherman
Act rather than by applying the more rigorous merger-related
threshold applied under the Clayton Act. AOPL states that even
if the Clayton Act is the correct standard, that is immaterial to
the choice between the two HHI threshold values because the
assessment of market dominance more closely parallels the market
power inquiry in the monopoly contest.
Kerr-McGee next argues that, even if the ALJ correctly
judged Williams' market power against the stringent Sherman Act
standards, he erred in adopting the 70 percent threshold, rather
than the lower thresholds adopted by many courts. According to
Kerr-McGee, the market share threshold should have been set at 30
to 40 percent. Total also challenges the 70 percent threshold,
reasoning that because the merger guidelines utilize an HHI of
1800, a 42.5 percent market share is an indication of market
power because the square of that figure is 1806.
Williams supports the 70 percent market share threshold,
claiming that a market share of that magnitude is required to
establish significant market power. However, Williams also
argues that the ALJ erred in relying solely on delivery-based
market shares and ignoring capacity-based market shares, despite
his acknowledgment that capacity is a better measure of the
ability to respond to a price increase. Williams points out that
the consequences of the ALJ's reliance on delivery data are most
obvious in those markets with HHIs below 2500 because, as a
result of using low market share thresholds, the ALJ found that
Williams has market power in the following BEAs: Duluth, Sioux
City, Omaha, Grand Island, Sioux Falls, and Aberdeen. 82/
Williams concludes that while several of these BEA's satisfy the
81/ These factors include market share, maintenance of market
share despite product or service inferiority, cost
advantages attributable to technology, price leadership,
economies of scale, competitor size and performance, entry
barriers, pricing practices, market stability, cost of truck
transportation between geographic markets, excess capacity,
and potential for increased sales by competitors. 45 FERC
61,046 at 61,162.
82/ In these markets, Williams has delivery-based market shares
of 60 percent, 51 percent, 46 percent, 62 percent, 49
percent, and 49 percent, respectively.
Docket No. IS90-21-002, et al. - 29 -
ALJ's overly-conservative market share threshold, all would be
competitive under a more reasonable threshold.
Finally, AOPL argues that the ALJ overstated the importance
of market structure (including market share) in his post-screen
examination of particular markets and erroneously relied on
Williams' delivery-based market shares for purposes of the post-
screen examination.
We will affirm the ALJ's ruling on this issue. Based on our
review of the record in this proceeding, we find that the ALJ did
not apply an excessively high standard in assessing market share,
nor did he establish an absolute threshold of 70 percent. Even
markets in which Williams' market share is below 50 percent are
not automatically excluded, although they are, in the ALJ's
words, "less troublesome." 83/
Additionally, while we stated in Buckeye that the market
power inquiry for an oil pipeline would "to a large extent mirror
the type of inquiry used by courts in evaluating monopoly
power," 84/ that statement should not be taken to mean that we
will slavishly follow the guidelines of the courts when
circumstances warrant a departure from those guidelines. The
Commission is not empowered to enforce the antitrust laws. As we
stated in the Northeast Utilities order cited by Kerr-McGee, "the
antitrust laws are merely one facet of the broad statutory
concept of the public interest." 85/ And we emphasize that
the market power inquiry for an oil pipeline in Phase I of a
bifurcated rate proceeding is unique and is not suited to a
strict application of the antitrust laws. In this case, we see
no reason to reverse the ALJ's decision that is reasonable and
allows a great deal of flexibility. While it is an important
consideration, to be sure, the determination of market power in a
particular market is but one of the factors to be assessed.
b. Exchanges
The ALJ determined that exchanges should be given little
weight in the post-screening review of the markets. While he
recognized that exchanges occur in substantial volumes, he noted
that they are generally the product of ad hoc negotiations
between the parties. The ALJ stated that the Commission has not
endorsed exchanges as a force which disciplines a pipeline's
market power, and he further indicated that in the instant case,
the evidence tends to show that exchanges do not discipline
83/ 58 FERC 63,004 at 65,018.
84/ 45 FERC 61,046 at 61,162.
85/ 56 FERC 61,269 at 61,998.
Docket No. IS90-21-002, et al. - 30 -
Williams' prices, but instead are negotiated with reference to
them. The ALJ also expressed concern that assigning significant
weight to exchanges would involve some double counting because
the capacity of refineries and other pipelines used for exchanges
in a BEA are already included in the HHI calculations for the
market. 86/
Williams and AOPL argue that exchanges should be entitled to
greater weight, and Williams characterizes exchanges and
buy/sells as the economic equivalents of transportation and
contends that many refineries rely more on these sorts of
transactions than on direct transportation via Williams to
dispose of their refinery output. According to Williams,
exchanges discipline its rates by facilitating access to
alternate sources of product, such as refineries, common carrier
pipelines, proprietary pipelines, and private terminals,
resulting in a complete or partial bypass of Williams. In
contrast, Kerr-McGee, Total, Texaco, and the staff argue that the
mere existence of exchanges does not make them a disciplining
factor because exchanges do not create barrels or additional
competitive sources.
Williams also complains that exchanges "short-haul" it by
allowing shippers to forgo direct transportation to destinations
on the system. Kerr-McGee, however, points out that exchanges
make product available at Williams' origin points for movement
within its system. Further, in Kerr-McGee's view, any short-
hauling that exists has no effect and no competitive restraint on
Williams' pricing activities. Kerr-McGee emphasizes that the
existence of an exchange agreement does not mean that physical
delivery has been accomplished or that possession of the barrels
is taken at the exchange locations. Kerr-McGee states that it is
erroneous to conclude that the volumes shown on exchanges are
actually transported beyond the main terminals to markets in the
surrounding areas.
Williams then asserts that the data in the record on
exchanges reflect a consistent pattern of intense price rivalry
among the alternative sources of product available to Williams'
shippers. Williams contends that the data also prove the
economic viability of external sources found by the ALJ to fall
outside the economic trucking distance from a BEA. Kerr-McGee
disputes this contention, arguing that because most of these
exchanges enter Williams' system, that fact proves Williams'
dominant position in the area.
Although Williams acknowledges that its rates are a factor
in the negotiation of exchange differentials, it contends that a
number of other factors are also involved. Accordingly, Williams
86/ 58 FERC 63,004 at 65,018-19.
Docket No. IS90-21-002, et al. - 31 -
and AOPL assert that the relationship between exchange
differentials and Williams' rates is immaterial to the role of
exchanges as a potential competitive option. Kerr-McGee and
Texaco dispute Williams' claims, stating that evidence in the
record demonstrates that exchange differentials tend to follow
Williams' rates and that this evidence confirms Williams' market
power.
We will affirm the ALJ's conclusion that exchanges should be
entitled to little weight in the post-screening review of the
markets in this case. The potential for double counting exists
where capacity is included in the HHI and then the exchange which
utilizes that capacity is again added into the HHI or considered
a mitigating factor. As the shippers correctly point out, no new
barrels are created; 87/ the exchange merely permits the
transfer of ownership of the product at a specific location. As
Kerr-McGee also points out, exchanges do not always involve the
owner's taking physical possession of the product at the exchange
location, particularly when we recognize that multiple exchanges
of the same barrels may be involved. 88/
We are also persuaded, as was the ALJ, that exchanges tend
to be negotiated with reference to Williams' rates rather than to
discipline those rates. 89/ The regularity with which this
practice occurs, while not of itself proving market power, does
nothing to suggest that Williams' rates are disciplined by
exchange transactions.
c. Excess Capacity
Citing Buckeye, the ALJ concluded that the availability of
excess capacity is a factor to be considered in examining a
particular market. He noted that "[t]he importance of excess
capacity for a given BEA lies not in the mathematical precision
of a particular number, but in its relative magnitude." 90/
Williams claims that the ALJ did not accord sufficient
weight to the evidence of excess capacity in its markets.
According to Williams, Buckeye requires that excess capacity be
evaluated in absolute, not comparative, terms.
87/ E.g., Brief of Kerr-McGee Refining Corp. Opposing Exceptions
at 35.
88/ Id. at 39.
89/ See, e.g., Ex. 741 at 5, 39-40, 43, 47; Ex. 762; Ex. 788,
n.A; Ex. 799 at 18;
90/ 58 FERC 63,004 at 65,019.
Docket No. IS90-21-002, et al. - 32 -
Total and the staff contend that the ALJ gave more than
adequate weight to the evidence of excess capacity in the various
BEAs. Total states that Williams' evidence on excess capacity is
flawed because Williams failed to subtract the capacity committed
to serve the various BEAs and thereby improperly assumed that the
pipeline's full throughput capacity is available to serve each
BEA that the pipeline traverses. Total also states that the
excess capacity is overstated because it includes capacity of
pipelines with no terminals in the BEA and proprietary pipelines
not transporting for unaffiliated shippers.
We will affirm the ALJ's determination on the issue of
excess capacity. While excess capacity is one of a number of
factors to consider in the analysis of pipeline's market power,
staff has correctly pointed out that there is no precise formula
by which to determine whether sufficient weight has been given to
this factor. 91/ In weighing excess capacity, we must
consider not only physical measures (adjusted for throughput and
deliveries), but also the interrelationship of capacity
availability and actual and potential market deliveries compared
to extra-market commitments and increased prices. Statistical
calculations are insufficient for this purpose, and judgment is
needed to avoid mere speculation about what might be possible.
The ALJ recognized that the data were imperfect. Accordingly,
the Commission finds that he properly used these data for
comparative purposes only -- relative to the capacity available
in a particular BEA.
d. Integrated Company Issues
The ALJ rejected Williams' argument that large integrated
companies with pipeline affiliates enjoy a significant
competitive advantage and, therefore, that Williams lacks market
power. The ALJ stated that the record does not support such a
claim and that the Commission has not accepted this proposition
in other cases. 92/
Williams argues that the marginal cost to a vertically
integrated shipper of moving an additional barrel of product on
an affiliated pipeline is merely variable cost -- fuel and power
costs. From that, Williams concludes that an integrated company
will ship via its affiliate as long as its out-of-pocket cost is
lower than the alternative rate. Williams concludes by
disagreeing with the ALJ's analysis of the impact of integrated
91/ Commission Staff Brief Opposing Exceptions at 40.
92/ 58 FERC 63,004 at 65,019-20.
Docket No. IS90-21-002, et al. - 33 -
companies as reflected in Opinion No. 154 93/ and Farmers
Union II. Kerr-McGee states an exception on this point, but
offers no supporting discussion.
We agree with the ALJ that the record in this case does not
support a conclusion that the presence of vertically integrated
companies in Williams' markets justifies less regulation of
Williams. Williams' claims were not corroborated, and the ALJ's
determination finds support in Commission and judicial precedent,
the DOJ Deregulation Study, and a prominent antitrust
authority. 94/
e. Buyer Power
Citing evidence in the record and a Commission statement in
Buckeye, the ALJ concluded that where buyer power is shown, it
should be entitled to some weight. 95/
No party challenged this ruling. We find the ruling to be
appropriate, and we will accept it.
f. Profitability
Given the facts of this case, the ALJ concluded that
Williams' profitability neither proved nor disproved the
existence of market power. According to the ALJ, Williams' rates
of return were within antitrust and Commission guidelines. 96/
Williams argues that the ALJ should not have concluded that
its earnings were a neutral factor. Williams claims that its low
profitability, coupled with the evidence that it faces
significant competition in all of its markets, confirms its lack
of market power. Williams also disputes the ALJ's statement that
monopoly power may be possessed but not exercised, claiming it
does not possess such power and, even if it did and attempted to
93/ Williams Pipe Line Co., Opinion No. 154, 21 FERC 61,260
(1982); reh'g denied, Opinion No. 154-A, 22 FERC 61,087
(1983); opinion and order on remand, Opinion No. 154-B, 31
FERC 61,377, (1985); modified, Opinion No. 154-C, 33 FERC
61,327 (1985).
94/ The ALJ cited the four Buckeye orders, two Texas Eastern
orders (48 FERC 61,108 and 50 FERC 61,218), Farmers
Union Central Exchange, Inc. v. FERC, 734 F.2d 1486, 1507-08
(D.C.Cir. 1984), cert. denied 469 U.S. 1034 (1984), and III
Areeda and Turner, Antitrust Law (1971) at 195-96.
95/ 58 FERC 63,004 at 65,020.
96/ Id.
Docket No. IS90-21-002, et al. - 34 -
conceal the power, there would be no way for it to predict the
"payoff" in the form of light-handed regulation. It finds the
intentional underearnings theory irrational and highly unlikely.
Kerr-McGee and Kaneb support the ALJ's ruling on
profitability. Kerr-McGee emphasizes that Williams does have
market power, as demonstrated by its ability to increase its
rates and effect discriminatory rate structures. Pointing to
evidence in the record that Williams is an inefficient carrier,
Kaneb urges the Commission to find that Williams has market power
even if it is unable to earn its authorized rate of return.
Williams' arguments on this issue are not persuasive. The
mere fact that "evidence of 'supra normal' or 'unreasonably high'
profits is relevant to determining the existence of market
power" 97/ does not mean that a firm's failure to earn its
allowed rate of return proves that it lacks market power. The
ALJ's conclusion that profitability is a neutral factor in this
case is a reasonable one, and we will affirm it.
D. Commission Examination of BEAs
1. Markets with Low HHIs
The ALJ first applied the HHI screen of 2500 and the staff's
method of calculating effective capacity. 98/ By doing so, he
found the following markets to be competitive based on their low
HHIs and did not discuss them separately in the ID: Chicago, St.
Louis, Oklahoma City, Tulsa, Wichita, Springfield/Decatur,
Peoria, Rockford, Wausau, Dubuque, Davenport, Columbia,
Springfield (MO), Eau Claire, Des Moines, Kansas City, Lincoln,
Fargo, and Grand Forks. No party contested the ALJ's findings
with regard to the Chicago, St. Louis, Oklahoma City, Tulsa, and
Wichita markets, and the Commission affirms the ALJ's
determinations that Williams lacks market power in these markets.
Kerr-McGee, Conoco, 99/ and Total (collectively the
"Shippers") contested the finding of a lack of market power in
the Springfield/Decatur, Peoria, and Rockford markets but
provided no analysis in support of their objections. On review,
the Commission affirms the ALJ's finding that Williams does not
have market power in these three markets.
97/ 58 FERC 63,004 at 65,020.
98/ Id.
99/ Although Conoco withdrew from this proceeding on February
22, 1993, Kerr-McGee and Total previously had adopted the
exceptions of Conoco as they related to the individual BEAs.
Docket No. IS90-21-002, et al. - 35 -
However, the Shippers challenged the findings that the
following markets, which were not discussed separately in the ID,
are competitive: Wausau, Dubuque, Davenport, Columbia,
Springfield (MO), Eau Claire, Des Moines, Kansas City, Lincoln,
Fargo, and Grand Forks. The Shippers' principal objections
center on the use of an HHI screen of 2500, the acceptance of
Williams' trucking survey as evidence of competition from
external sources, the mileage limitation established by the ALJ,
and the inclusion of private pipelines as competing suppliers.
While the Commission has found 2500 to be an adequate HHI
for initial screening purposes in this case, choosing any single
HHI value as a threshold for screening markets is much less
important than carefully weighing of all relevant factors that
might contribute to or detract from market power. For that
reason, the Commission has re-examined all of the contested
markets that fell below the ALJ's initial screen, so that no
market has escaped scrutiny. Even an initial screen of 1800
would not have identified the seven markets that the ALJ did not
examine but where the Commission finds Williams to have market
power. This reinforces the Commission's firm belief that
numerical thresholds are inappropriate as a sole measure of
market power or, as Williams argues, an irrebuttable presumption,
and must be coupled with a consideration of other factors. Thus,
in our analysis, the Commission has applied the HHI screen
somewhat less stringently than did the ALJ, employing it more as
an indicator to be evaluated in conjunction with other factors
than as a determinant.
As also discussed in greater detail above, the ALJ
determined that truck-delivered capacity should be included in a
market's HHI calculation to the extent that trucks could
economically bring products from outside sources into a BEA.
The Commission has examined the validity of the 65 to 70
mile limit established by the ALJ, and, while we have found it to
be reasonable in some cases, we have declined to apply a
mechanical analysis utilizing a specific mileage limit for
including or excluding external sources in the individual
markets.
The Shippers object to reliance on Williams' trucking
survey. They also object generally to including as viable market
participants sources beyond 75 miles from a BEA border, and they
recalculated the HHI values for various markets to exclude these
external sources. In many cases, the Commission concurs with
excluding distant sources (for example, those more than 200 miles
and up to 320 miles from the BEA center) without further evidence
of the frequency and number of hauls from this distance.
However, in the case of some larger BEAs, the Commission believes
that truck hauls of approximately 100 miles from the BEAs may
constitute viable competition in certain instances. Thus, in our
Docket No. IS90-21-002, et al. - 36 -
review of the individual markets, as detailed below, the
Commission has recalculated the HHI values for some of Williams'
markets to exclude external sources that the Commission deems
inappropriate absent further documentation. While that may alter
the numerical HHI, it may not be enough to alter the ultimate
determination as to the market's competitiveness.
As discussed above, the Commission agrees with the ALJ's
approach of including private pipelines and certain pipelines
without terminals in calculating HHIs where construction of new
terminals or pipelines likely could occur with economic success.
We recognize, as did the ALJ, that new pipelines have been built
or old ones converted in Williams' markets when it was profitable
to do so.
a. Wausau, Dubuque, Davenport, and Columbia
Based on our analysis of these four markets found to be
competitive by the ALJ because of low HHIs, we have concluded, as
discussed in greater detail below, that the Shippers' challenges
have no merit. In all cases, the Shippers challenge the manner
in which the ALJ calculated excess capacity. As stated
previously in this order, we have found that the ALJ's
consideration of excess capacity in his market assessment was
appropriate.
(1) Wausau
The Shippers challenge the finding that Williams does not
possess market power in the Wausau BEA, pointing out that Koch, a
private pipeline with a terminal in this BEA, is Williams' only
significant competition. The Shippers also argue that this
market concentration indicates market power, despite the fact
that Williams' delivery-based market share is 37 percent.
Additionally, they claim that differentials for exchanges
negotiated with Koch are tied to Williams' rates. And the
Shippers object to the inclusion of external sources that are at
distances ranging from 87 to 130 miles from the BEA, which they
contend distorts the calculation of excess capacity.
Considering Williams' low HHI of 1801 and low market share
of 37 percent, we agree with the ALJ's conclusion that this BEA
is a workably competitive market. The ALJ properly attributed
minor significance to excess capacity. Any effect of external
sources on the calculation of excess capacity and the effect of
that on the competitive character of the market will not be
significant. Finally, we note that Williams is able to achieve
only a 37 percent market share even though, as the Shippers
claim, three alternative sources remain from 44 percent to 83
Docket No. IS90-21-002, et al. - 37 -
percent more costly than shipping on the Williams
system. 100/
(2) Dubuque
The Shippers cite the presence of the Amoco terminal at
Dubuque as well as two other pipeline terminals within 100 miles
of this BEA. However, they argue that these terminals and
pipelines are private and provide no restraint on Williams'
rates. They also claim that the barge terminal at Bettendorf
provides no competition.
We will reject the Shippers' arguments and affirm the ALJ's
finding as to this market. Although the HHI of 2381 is
moderately high, the presence of the other pipeline and barge
terminals within or near this BEA make it likely that they could
respond to a SSNIP imposed by Williams. Our analysis of market
concentration must consider all supply sources that may be
capable of increasing the total supply of product in the market,
regardless of their availability to individual customers.
Moreover, as we have previously stated, private pipelines are
capable of supplying others in a given market, even if they do
not do so normally, particularly if a price increase makes it
financially attractive to expand sales. We have also noted that
pipelines deliver generic product; therefore, there is no
physical impediment to the use of a single pipeline supplier by
two competing distributors. Additionally, we find that the barge
terminal at Bettendorf is close enough to provide competition for
Williams. 101/ Accordingly, Williams' relatively low
delivery-based market share of 39 percent combined with these
factors causes us to find the Dubuque BEA to be a market in which
Williams lacks market power.
(3) Davenport
The Shippers challenge the ALJ's finding that this market is
competitive. They cite three private terminals in Bettendorf
that are served both by Williams and by barges. They also note
the presence of the ARCO pipeline with a terminal in Ft. Madison
and the Amoco pipeline, which does not have a terminal in the
BEA. They challenge Dr. Alger's inclusion of five rather than
eight external sources, which he achieved by combining sources
with the same corporate identity, and they also argue that the
evidence of these sources came from anecdotal evidence. The
Shippers would employ the 70-mile limit for external sources; by
100/ Brief on Exceptions of Conoco Inc. at 71.
101/ See BEA Appendix to the Opening Posthearing Brief of
Williams Pipe Line Co. at 8.
Docket No. IS90-21-002, et al. - 38 -
doing so they contend that only two potentially competitive
external sources should be considered.
The HHI for this BEA is 2048, and Williams' delivery-based
market share is 34 percent. These two factors in combination
tend to indicate that Williams does not possess market power in
this BEA. In addition to the terminals noted by the Shippers,
Williams points out that a fourth terminal, owned by Unoven, is
served by Williams and by barges in this BEA. 102/ Including
this terminal in the calculation would further lower the HHI. As
in our previous analysis, our review of this market includes all
supply sources that are capable of increasing the total supply in
the market, even if they normally do not supply others. And we
will not automatically exclude sources more than 70 miles from
the BEA, as urged by the Shippers. However, even if all sources
more than 100 miles from the BEA are excluded, the HHI would
still be less than 2500. Given the low HHI and Williams'
moderate share of this market, in combination with the presence
of several potential competitors, we will affirm the ALJ's
finding that the Davenport market is workably competitive.
(4) Columbia
The Shippers note that Phillips and ARCO have pipelines with
terminals in this BEA. They also point out that the Amoco
pipeline has no terminal in this BEA and contend that one could
not be built economically. They argue that the external sources
are too distant to serve as economic competition.
The HHI for the Columbia BEA is 1738, and Williams'
delivery-based market share is 49 percent. We find it reasonable
to include Amoco in the calculation of the HHI even though it
does not currently have a terminal in this BEA, given Dr. Alger's
determination that it would be economical for Amoco to construct
such a terminal and the inclusion in his calculation of a return
on investment. 103/ We also note that the distances
attributed by the Shippers to the external sources represent the
distances to the city of Columbia, rather than to areas of the
BEA which they might serve economically. Consideration of these
factors leads us to conclude that the ALJ properly found the
Columbia BEA to be competitive.
b. Springfield (MO), Eau Claire, Des Moines,
Kansas City, Lincoln, Fargo, and Grand Forks
Our review of these seven markets, presumed by the ALJ to be
competitive, causes us to find that Williams has failed to
102/ Brief Opposing Exceptions of Williams Pipe Line Co. at A-13.
103/ See Ex. 627 at 2; Ex. 631.
Docket No. IS90-21-002, et al. - 39 -
demonstrate that it lacks market power in these markets. For the
reasons stated below, the Commission reverses the ALJ's
determinations as to these markets.
(1) Springfield (MO)
The Shippers claim that the Springfield (MO) BEA is not
competitive, pointing out that Williams has two terminals in this
BEA. They also argue that the Explorer pipeline should not be
considered a competitor because it does not have a terminal in
the BEA or nearby. Further, they contend that the Farmland
refinery is at too great a distance to be competitive, even
though it is an internal source, and that the ALJ included
external sources that are more than 75 miles from the BEA.
The HHI for the Springfield BEA is 1317 and Williams'
delivery-based market share is 38 percent. These rather low
figures could indicate that Williams does not possess market
power; however, this is a large BEA and five of the external
sources included in the ALJ's HHI calculation are, in our
judgment, at too great a distance from the BEA border to provide
economic competition. 104/ When these sources, as well as
private pipelines without terminals or the potential for
terminals in the BEA, are excluded from the recalculation of the
HHI, it is over 3000. Thus, we find that Williams has not
substantiated its claim that it lacks market power in the
Springfield (MO) BEA.
(2) Eau Claire
The Shippers state that Koch has a pipeline through this BEA
although it has no terminal. They also note the existence of two
other private terminals connected to the Williams system within
the Eau Claire BEA. The Shippers argue that Dr. Alger's HHI of
2003 is too low and that, although the staff found the market to
be not workably competitive based on Williams' high market share
and the high degree of market concentration, the ALJ ignored this
conclusion. The Shippers also complain that the truck sources
relied on by Williams are based on inadequate data. Further,
they contend that on the basis of the 70-mile limit, the Badger
104/ Kerr-McGee and Williams report different figures as the
distances of these sources. Kerr-McGee cites Phillips at
Kansas City (163 miles); Conoco at Belle, MO (144 miles);
Phillips at Jefferson City, MO (138 miles); Sun at Tulsa, OK
(166 miles); and Shell at Woodriver, IL (243 miles). Brief
on Exceptions of Kerr-McGee Refining Corp. at 46. Williams
claims that the Conoco and Sun terminals are less than 75
miles from the BEA border and that the Phillips terminals
are only 90 miles from the BEA. Brief Opposing Exceptions
of Williams Pipe Line Co. at A-17.
Docket No. IS90-21-002, et al. - 40 -
terminal should be excluded as potential competition. Finally,
the Shippers state that, contrary to Williams' assertions,
exchanges do not discipline its rates in this BEA.
Williams enjoys a 59 percent delivery-based market share in
the Eau Claire BEA. We have recalculated the HHI for this
market, eliminating the Koch pipeline, which has no terminal, and
also eliminating the Badger terminal which, based on the limited
evidence in the record, appears to be at too great a distance --
196 miles -- to serve as competition for Williams. Our
recalculated HHI is over 3000. The high market share coupled
with the high HHI value is strongly indicative of market power.
Because we find no other factors present to offset these
considerations, we conclude that Williams has failed to prove
that the Eau Clair market is workably competitive.
(3) Des Moines
The Shippers' principal objection to the ALJ's finding the
Des Moines market to be competitive is that Williams has a 78
percent delivery-based market share. They claim that based on
the relatively low HHI of 1704, the ALJ declined to review this
market in detail. The Shippers also point out that the DOJ's
Deregulation Study assigned Des Moines an HHI of 5556. 105/
They object to inclusion of external sources that are far more
than 70 miles from this BEA. According to the Shippers, Amoco
provides little competition for Williams in this market and,
further, that a new Conoco terminal on the Heartland Pipeline is
the only practical alternative to Williams in this market.
As stated above, Williams enjoys a 78 percent market share
in this market. While this factor alone would cause serious
concern, we emphasize that our recalculated HHI, eliminating two
external sources, is also high -- greater than 2500. These two
external sources, which are barge terminals at Dubuque and
Bettendorf and are approximately 160 miles from Des Moines, are
too distant to constitute effective competition in this BEA.
Williams has not established any other considerations that would
adequately offset these two high numbers, and thus, we will
reverse the ALJ's ruling and hold that Williams has failed to
prove that it lacks market power in this BEA.
(4) Kansas City
The Shippers ask the Commission to reverse the ALJ's ruling,
given Williams' 63 percent delivery-based market share, the
staff's HHI of 1340, and the fact that external sources included
in the ALJ's HHI calculation are in excess of 90 miles from the
105/ We note, however, that this predated the construction of the
Heartland pipeline.
Docket No. IS90-21-002, et al. - 41 -
BEA border. The Shippers also point to the actual behavior of
the market as demonstrating a lack of competitiveness, noting
that ARCO recently filed to increase its rates in this market.
We have recalculated the HHI to eliminate the sources that
are more than 100 miles from this BEA. The record does not
indicate that they serve as competition to Williams. The
recalculated HHI number is more than 2500, and as we have
previously stated, a high HHI number in conjunction with a high
market share strongly indicates a lack of competition in the
market. Therefore, no offsetting circumstances having been
established, we will reverse the ALJ's determination and find
that Williams has failed to carry its burden of proof in the
Kansas City market.
(5) Lincoln
The Shippers contend that, while four pipelines traverse
this BEA, Williams' delivery-based market share is 65 percent.
They also point to the fact that Williams has been able to
increase its rates in this market.
We have also recalculated the HHI for the Lincoln BEA,
removing the NCRA pipeline, which does not have a terminal in the
BEA, as a potential supplier. Further, Exhibit 627 indicates
that this market would not be competitive even with an NCRA
terminal. The recalculated HHI, which is over 3000, combined
with the high market share, and without evidence of any other
constraints on Williams' rates, causes us to reverse the ALJ's
ruling and find that Williams has not met its burden of proof in
the Lincoln market.
(6) Fargo
The Shippers assert that Williams has market power in the
Fargo BEA. They state that this BEA is served by Kaneb and Amoco
in addition to Williams. In addition, they point out that
Williams has two terminals in the BEA, while Kaneb has one.
Although Cenex has a new pipeline in this BEA, the Shippers
contend that there is no evidence that it will have a terminal in
the BEA. However, although Amoco does not have a terminal in
this BEA, the Shippers urge its inclusion in the HHI calculation
because it is an active exchange partner. Finally, the Shippers
challenge the inclusion of external sources that are at great
distances from the BEA border.
The Fargo BEA covers a large geographic area. Williams
delivery-based market share is 51 percent. The external sources
on which Williams bases its claim of competition appear to be too
distant to constitute viable alternative sources. The Ashland
and Koch refineries are 167 miles from the BEA boundary and 272
miles from its population center, and the Cenex terminal is 129
Docket No. IS90-21-002, et al. - 42 -
miles from the boundary. 106/ Amoco is included in the HHI
calculation as an internal source. 107/ Given Williams'
relatively large market share, a recalculated HHI greater than
3000, and the absence of significant external competition, we
find that Williams has failed to prove that the Fargo BEA is a
workably competitive market.
(7) Grand Forks
The Shippers state that Williams' delivery-based market
share in the Grand Forks BEA is 56 percent. They also claim that
the HHI calculation improperly included four external sources in
excess of 70 miles from the BEA border. 108/
The Grand Forks BEA also covers a large geographic area, and
Williams' 56 percent market share is fairly high. Williams has
not demonstrated that the distant external sources serve as
effective competition, and our elimination of those sources in
excess of 150 miles from Grand Forks results in an HHI greater
than 3000, causing us to find that the Grand Forks market is not
workably competitive. Therefore, we will reverse the ALJ's
decision.
2. Markets With HHIs Above 2500
The ALJ applied the initial HHI screen of 2500 and
determined that high HHIs suggested that Williams likely has
market power in nine BEAs, which he then examined closely. Those
BEAs included Duluth, Minneapolis/St. Paul, Rochester, Sioux
City, Topeka, Omaha, Grand Island, Sioux Falls, and
Aberdeen. 109/ Based on his detailed review, the ALJ
concluded that Williams had failed to show a lack of market power
in Duluth, Rochester, Sioux City, Omaha, Grand Island, Sioux
Falls, and Aberdeen. 110/
106/ See Brief on Exceptions of Conoco Inc. at 78, citing
Williams' BEA Appendix and Ex. 330.
107/ Ex. 621 at 31.
108/ The Murphy, Koch, and Ashland refineries are between 158 and
189 miles from the BEA border. The Kaneb terminal is 98
miles from the BEA border and 173 miles from Grand Forks.
Brief on Exceptions of Total Petroleum, Inc., at 46, citing
Williams' Appendix at 28.
109/ 58 FERC 63,004 at 65,021.
110/ Id. at 65,028.
Docket No. IS90-21-002, et al. - 43 -
a. Minneapolis/St. Paul and Topeka
The Shippers contest the ALJ's findings that Williams lacks
market power in Minneapolis/St. Paul and Topeka. Their
objections again center on the ALJ's use of the 2500 HHI initial
screen, his alleged reliance on Williams' trucking study, and his
inclusion of proprietary pipelines in calculating the HHIs.
(1) Minneapolis/St. Paul
The ALJ found that Williams has only a 35 percent market
share in this BEA. He also noted the presence of two refineries
in the BEA and a competing common carrier pipeline near the
southern boundary of the BEA, concluding that Williams does not
have market power in this BEA. 111/
The Shippers' claim that the Koch and Ashland refineries do
not serve to restrain Williams' rates. According to the
Shippers, these companies responded to Williams' increase by
increasing their exchange differentials. The Shippers also argue
that the ALJ's finding that exchanges are negotiated with
reference to Williams' rates is inconsistent with his finding
that these sources are competitive within the Minneapolis/St.
Paul BEA. The Shippers object to the inclusion of the
proprietary Amoco pipeline in the HHI calculation and argue that
Kaneb's terminal is too far from the Twin Cities to provide
economic competition.
The Shippers' objections to this decision are not
persuasive. Our review of this BEA leads us to agree with the
ALJ. Minneapolis/St. Paul is a large BEA in which Williams has a
relatively low market share. That fact, coupled with the
presence of viable competitors leads us to agree that Williams
does not have market power in the Minneapolis/St. Paul BEA. We
also reject the Shippers' argument concerning exchanges. The ALJ
made no mention of exchanges in the ID, and as we stated above,
the fact that exchanges tend to be negotiated with reference to
Williams' rates neither proves nor disproves market power,
although exchanges may be entitled to some weight in a market
power assessment.
(2) Topeka
The ALJ found that Williams demonstrated a lack of market
power in this BEA even though it has a market share of 46
percent. His decision was based primarily on his determination
that the market share calculation did not include the
111/ Id. at 65,021.
Docket No. IS90-21-002, et al. - 44 -
subsequently-constructed Heartland pipeline and that significant
excess capacity exists in the BEA. 112/
The Shippers assert that Williams is the only pipeline with
a terminal in this BEA. They also claim that the ALJ failed to
remove from his HHI calculation several trucking sources more
than 70 miles from the BEA.
Our review of this BEA causes us to reverse the ALJ. As the
staff's witness Alger notes, external sources relied on by the
ALJ in his finding of lack of market power include Heartland
terminals 75 to 87 miles from the border of the BEA, but 125 to
142 miles from Topeka. 113/ When these external sources are
excluded from the HHI calculation, the resulting HHI value is
3333. Along with Williams' 46 percent market share, this is an
indication of market power that is persuasive and is not
controverted. The Commission finds in this instance that
Williams has not successfully proved that it lacks market power
in the Topeka BEA.
b. Duluth, Rochester, Sioux City, Omaha,
Grand Island, Sioux Falls, and Aberdeen
Williams objects to the ALJ's finding that it failed to show
lack of market power in all seven of these markets, arguing that
the ALJ's conclusions, based primarily on HHI values and market
share data can be overcome by an analysis of other factors in
these BEAs. Williams asks the Commission to consider the
availability of economic alternatives within and outside of the
BEAs, the existence of potential competition, and the effect of a
hypothetical 15 percent SSNIP.
(1) Duluth
The ALJ found that Williams had failed to prove a lack of
market power in this BEA, given its 60 percent market share and
the presence of only one other internal supplier. The ALJ also
found external truck sources to be at too great a distance to
constitute economic competition, and he noted a relatively small
amount of excess capacity in the BEA. 114/
Williams complains that the other internal supplier is a
27,000 barrel per day refinery that is capable of supplying the
needs of the entire BEA. Williams also cites other external
sources that it claims are close enough to portions of the BEA to
112/ Id. at 65,022.
113/ See id., citing Tr. 9739.
114/ 58 FERC 63,004 at 65,021.
Docket No. IS90-21-002, et al. - 45 -
supply it more effectively than Duluth. Additionally, Williams
claims that Conoco has significant buyer power, which accounts
for 45 percent of Williams' shipments into this BEA.
We are not persuaded by Williams' arguments concerning these
potential competitors. These alternatives already have been
included in the HHI values and market share data. Further, as
stated above, we have rejected Williams' hypothetical 15 percent
SSNIP. Thus, we will affirm the ALJ's finding that Williams has
failed to prove a lack of market power in the Duluth BEA.
(2) Rochester
The ALJ determined that Williams had failed to carry its
burden of proof as to the Rochester BEA. The ALJ cited Williams'
86 percent market share as the highest in any of the nine BEAs
that he examined in greater detail. The ALJ also determined that
neither the external sources nor the excess capacity cited by
Williams was sufficient to overcome the huge market
share. 115/
Williams lists as potential competition the Koch and Ashland
refineries that are 51 miles from the BEA border, noting that
Koch has increased its capacity within the last five years.
Williams would also include the Amoco terminal at Spring Valley
and a barge terminal at LaCrosse.
We will affirm the ALJ's decision as to the Rochester BEA
because of the high market share, because of the fact that
alternative sources already have been included in the HHI, and
because we previously have rejected Williams' hypothetical SSNIP.
(3) Sioux City
The ALJ also found that Williams had failed to demonstrate
that it lacks market power in this BEA. Significant in the ALJ's
decision was Williams' 51 percent market share combined with the
fact that Williams was able to increase its business in the BEA
despite a substantial price increase. Further, the ALJ noted
that the DOJ's Deregulation Study expressed serious concern about
Williams' competitive position in all of Iowa, specifically
citing Sioux City. 116/
Williams' argument focuses primarily on the three Kaneb
terminals within this BEA, which have already been considered in
determining the HHI. Thus, on review of the facts relevant to
this BEA, we will affirm the ALJ's decision.
115/ Id. at 65,021.
116/ Id. at 65,022.
Docket No. IS90-21-002, et al. - 46 -
(4) Omaha
The ALJ found the Omaha market not workably competitive and
ruled that Williams had failed to prove a lack of market power in
this BEA. Central to the ALJ's decision was the high market
concentration, despite the presence of Heartland and Amoco
terminals at Des Moines, within trucking distance of the Omaha
BEA borders. The ALJ found that truck trips from these terminals
to Omaha would be long and expensive. Williams' market share is
46 percent, and the ALJ found that, in light of the other
circumstances present in the BEA, that level of market share is
significant. 117/
Our review of the ALJ's ruling leads us to the same
conclusion, despite consideration of the arguments raised by
Williams concerning the existing Heartland, Kaneb, Amoco, and
NCRA terminals and a possible Conoco terminal. Including all of
these sources still results in an HHI of 2786. We also reject
Williams' argument that it has decreased its rates to Omaha
because the alternative sources have created a competitive cap.
As we have previously indicated, a rate increase or decrease per
se does not prove or disprove market power. Thus, we will affirm
the ALJ's determination with respect to the Omaha BEA.
(5) Grand Island
Based on Williams' 62 percent market share, coupled with the
distance of other sources and a less than average amount of
excess capacity, the ALJ found that Williams had not demonstrated
that it lacked market power in the Grand Island BEA. 118/
Williams argues that competition from Kaneb and Farmland
terminals restrains its rates. Williams also notes the presence
of the Heartland pipeline. However, we will affirm the ALJ's
ruling because we agree with his assessment that other pipelines
in the BEA are too far (approximately 140 miles) from the
Williams' Grand Island terminal to serve as effective
competition. Additionally, witness Alger's HHI includes these
sources because he combined internal and external sources
representing the same corporations. Finally, we also note that
the 62 percent market share is the second highest of the nine
markets that the ALJ specifically examined.
117/ Id.
118/ Id. at 65,023.
Docket No. IS90-21-002, et al. - 47 -
(6) Sioux Falls
Williams' 49 percent market share and the relatively low
amount of excess capacity in the Sioux Falls BEA led the ALJ to
conclude that Williams had not proved that it lacked market power
in this market. The ALJ also rejected Williams' reliance on
external sources, reasoning that some of the truck connections
cited by Williams were at too great a distance to serve as
economic competition. Further, the ALJ declined to accept
Williams' reliance on truck connections with Kaneb and Amoco from
terminals outside the BEA because those companies also operated
terminals inside the Sioux Falls BEA and were unlikely to be
competing against themselves for business in the BEA. 119/
We agree with the ALJ that evidence of the alleged
competition cited by Williams is entitled to little weight in
light of these facts. Additionally, as the ALJ noted, the 49
percent market share is close to the 50 percent threshold that
causes us concern. Other factors present in this market are not
sufficient to overcome this market share and the high HHI, and we
will affirm the ALJ's determination.
(7) Aberdeen
The ALJ found that Williams had failed to carry its burden
of proof in the Aberdeen BEA. Williams also has a 49 percent
market share in this market and seeks to rely on external sources
with terminals in the BEA as evidence of competition. 120/
The ALJ noted that some of the external truck connections were
very long -- a Kaneb terminal 116 miles from the BEA border and
refineries 167 miles from the BEA border. Williams cites no
other factors that would overcome these considerations, thus, we
will reject Williams' arguments for the reasons expressed in our
assessment of the Sioux Falls BEA.
3. Markets With HHIs Between 1800 and 2500
Following his examination of the markets with HHIs above
2500, the ALJ then noted that, because Williams has a market
share in excess of 70 percent in certain other markets, an
examination of those markets in which the HHI screen fell between
1800 and 2500 was warranted. Those markets included Quincy,
Cedar Rapids, Waterloo, and Ft. Dodge. 121/ Of these
markets, the ALJ concluded that Williams had failed to show a
lack of market power in Cedar Rapids, Waterloo, and Ft. Dodge.
119/ Id.
120/ Id.
121/ Id. at 65,023.
Docket No. IS90-21-002, et al. - 48 -
a. Quincy
The Shippers do not contest the ALJ's determination with
respect to Cedar Rapids, Waterloo, and Ft. Dodge. They do,
however, contest the finding of lack of market power in Quincy,
claiming that Williams has been able to increase its rates
without suffering a loss of business. The Shippers also claim
that ARCO was not shown to be effective competition and that the
ALJ improperly relied on trucking from Ft. Madison, which is more
than 75 miles away.
The ALJ found that Williams had sustained its burden of
proof in this BEA, despite the fact that its market share is 74
percent and the HHI is 2026. He noted that there is a great deal
of excess capacity in this BEA, and that the DOJ concluded that
water traffic provided competition for Williams at
Quincy. 122/ However, we disagree with the ALJ's assessment
and will reverse his finding of lack of market power in this BEA.
The high market share, coupled with the HHI value in excess of
2000 causes us concern. Further, we note that Williams has the
only pipeline terminal in the BEA, and the staff's witness Alger
determined that it would not be profitable for Amoco, whose
proprietary pipeline transverses the BEA, to build a terminal
there. 123/
b. Cedar Rapids, Waterloo, and Ft. Dodge
The ALJ found that Williams had failed to prove that it
lacked market power in these BEAs. The ALJ relied in part on the
DOJ's Deregulation Study, which concluded that Williams raised
serious competitive concerns in Iowa. 124/
Williams challenges the ALJ's findings as to these BEAs.
Williams claims that external sources at Spring Valley,
Minnesota, and Dubuque, Iowa, provide competition in the Waterloo
BEA, and it also asserts that an ammonia pipeline could be
converted. As to the Cedar Rapids BEA, Williams contends that
the Heartland pipeline makes the Deregulation Study obsolete and,
further, that an Amoco terminal at Cedar Rapids should be
included in the calculation. Williams also argues that Kaneb
competes with it at Milford in a sparsely populated area of the
Fort Dodge BEA.
In Cedar Rapids, where Williams' market share is 81 percent,
Williams is the only common carrier, although Amoco has a
122/ Id. at 65,023-24.
123/ See Ex. 627; Tr. 41/6906.
124/ 58 FERC 63,004 at 65,024.
Docket No. IS90-21-002, et al. - 49 -
pipeline in the BEA. In Waterloo, where Williams' market share
is 99 percent, Williams is the only pipeline of any kind, and in
Ft. Dodge, where the company's market share is 98 percent, there
is another common carrier in the BEA, but it is over 100 miles
from Ft. Dodge. The ALJ also noted that there is a relatively
small amount of excess capacity in these BEAs and that truck
connections cited by Williams are lengthy and entitled to less
weight. 125/ While the market share is generally only one of
the factors to be analyzed in a BEA, the fact that Williams has
such an extraordinarily high market share in each of these
markets has somewhat more significance. The potential
competition cited by Williams is based on a 15 percent SSNIP,
which we have already rejected. Therefore, given Williams'
inability to demonstrate that economic competition exists in
these BEAs, we will affirm the ALJ's rulings as to these BEAs.
E. Discrimination Claims
1. General Objections to the ALJ's Rulings on
Discrimination Claims
The ALJ addressed several claims of discrimination raised by
the intervenors, who also filed exceptions to the ALJ's decision.
We will address general concerns first and then will review
specific exceptions to each ruling.
The first rate discrimination claim addressed by the ALJ
involves Williams' "Group 3" rates, which consist of various
origins in Kansas and Oklahoma that have been priced equally
since 1915. 126/ Under changes proposed by Williams, rates
for service from Oklahoma origins to certain destinations would
increase by five or ten cents per barrel more than service from
Kansas origins. For other destinations, the rates from Oklahoma
and Kansas origins would remain equal. Williams claims it
proposed these changes to equal the variable costs of
transportation from Oklahoma to Kansas via its competitors. The
ALJ found that competitive developments provided sufficient
reasons to eliminate the equalized rate treatment. 127/
Second, Williams historically charged northern origins
higher rates than southern origins. Williams proposed tariffs
increased rates from southern origins without corresponding
increases in rates from the north, making the southern and
northern per mile rates almost equal. Williams proposes to hold
northern rates down primarily because of the prospect of the Koch
125/ Id. at 65,024.
126/ Id. at 65,024-28.
127/ Id. at 65,025.
Docket No. IS90-21-002, et al. - 50 -
refinery creating a competitive presence in the heart of
Williams' service area. The ALJ determined that the potential
for this competition was sufficiently real to support eliminating
the differential between rates for northern and southern
origins. 128/
Third, Williams also proposed different rate increases to
rural and urban destinations. Rejecting claims of
discrimination, the ALJ determined that the proposed rate changes
were driven only by differences in competition among the
markets. 129/
Fourth, Williams proposed a volume contract program that
gives shippers the following volumetric discounts: (1) a five
percent discount for 700,000 through 1,399,999 barrels per year,
(2) a 15 percent discount for 1,400,000 through 2,099,999 barrels
per year, and (3) a 25 percent discount for 2,100,000 or more
barrels per year. In response to claims that the volume
discounts are discriminatory, the ALJ found there is nothing
inherently illegal about volume discounts. 130/ Furthermore,
he determined that the volume discounts were implemented in
response to competition. 131/
Fifth, Williams proposed proportional rate discounts for
destinations that are reachable from competitors' lines. The ALJ
found that these rate differences take on less significance to
the extent they are justified by competition. 132/
Finally, Williams has an "open stock" policy under which a
shipper having sufficient inventories on the pipeline can, upon
tender of product at an origin, withdraw product of like kind
without awaiting the physical movement of the actual batch of
product tendered. Aside from the issue of ratemaking for open
stock (which the ALJ deferred to Phase II), the ALJ upheld the
policy of open stock, finding that it had long preceded the
present rate filing throughout the common carrier pipeline
industry. 133/ He also determined that the policy of open
stock has nothing to do with market power and no relationship to
the rates at issue.
128/ Id. at 65,025-26.
129/ Id. at 65,026.
130/ Id.
131/ Id. at 65,027.
132/ Id.
133/ Id. at 65,028.
Docket No. IS90-21-002, et al. - 51 -
AOPL and Williams contend that the ALJ found the alleged
discriminations justified by Williams' competitive circumstances
alone. Therefore, they argue that the cost data behind the
discriminations and cross-subsidies need not and should not be
further scrutinized in Phase II. In addition, Williams asserts
that the discrimination claims may be resolved fully using the
cost information already in the record. Williams alleges that
the kinds of cost allocations required for Phase II proceedings
are not necessary to resolve these claims.
Kerr-McGee points out that the ALJ deferred to Phase II any
decisions on the cost support for the alleged discriminatory
rates. Kerr-McGee argues that the Commission must review the
relationship between varying rates and the related variable costs
in Phase II to determine whether the magnitude of the alleged
discrimination is justified by the level of competition.
The ALJ cited Associated Gas Distributors v. FERC, (AGD v.
FERC) 134/ for the proposition that competitive
considerations can sustain Williams' burden of justifying
differential rates. 135/ In AGD v. FERC, the United States
Court of Appeals for the District of Columbia Circuit pointed to
the following equity and efficiency considerations in favor of
differential ratemaking:
[t]he equitable argument in favor of such differentials
is that they may benefit captive customers by making a
contribution to fixed costs that otherwise would not be
made at all. (The efficiency argument is that such
differentials will raise total volume closer to the
level it would attain if all sales were priced at
marginal cost.) 136/
The court also pointed out that for nearly 100 years, the
Interstate Commerce Act (ICA) has been interpreted to allow the
Interstate Commerce Commission (ICC) to approve rate
differentials justified exclusively by competition. However, the
court stated that this does not mean that the Commission is free
to uphold every price distinction based on different demand
elasticities. Rather, the court indicated that the Commission
should explore whether rate differentials based exclusively on
competition between transporters with similar cost functions may
force captive customers to bear disproportionate shares of fixed
costs without any offsetting gain in efficiency.
134/ 824 F.2d 981, 1011 (D.C. Cir. 1987), cert. denied 485 U.S.
1006 (1988).
135/ 58 FERC 63,004 at 65,025.
136/ 824 F.2d at 1011.
Docket No. IS90-21-002, et al. - 52 -
The ALJ determined that each of the alleged forms of
discrimination was intended to meet competitive conditions and
was not an abuse of Williams' market power. 137/ However,
the ALJ's findings that the rate differentials are not exercises
of market power does not establish that the rate differentials
are lawful. Concerning each claim of discrimination, the ALJ
reserved the following for evaluation in Phase II: (1) whether
one service cross-subsidizes another and (2) whether differences
in cost justify the alleged discrimination. 138/ We affirm
the ALJ in these determinations.
As discussed earlier in this order, the parties have
reserved their rights to test Williams' cost and cost allocation
evidence in Phase II. Phase I reviewed only Williams' market
power to determine whether competition entitles Williams to be
regulated by something less rigorous than traditional cost-of-
service regulation. Because facts showing Williams' market power
were being produced in Phase I, it is administratively efficient
to consider here whether Williams had the market power to create
discriminatory rates. However, the evidence is not sufficient to
meet the requirements of AGD v. FERC, and the Commission will not
decide in Phase I whether the rate differentials are
discriminatory. Rather, Phase I will make only one discrete
finding: that Williams' alleged discriminatory pricing was in
response to differences in the actual or potential competition
faced by Williams. The Commission will review Williams' rate
differentials in Phase II using the cost information required
there to determine ultimately whether the proposed rates are just
and reasonable or unjustly discriminatory.
2. Group 3
Kerr-McGee takes exception to ending Group 3 rate equality,
alleging that origin rate equality in Group 3 permits the maximum
number of competitors to participate on equal terms in any given
destination market. Kerr-McGee argues that disrupting this
137/ 58 FERC 63,004 at 65,025-28.
138/ The ALJ stated that discrimination claims about the
following rates must be finally decided in Phase II in light
of the cost information to be reviewed there: (1) Group 3
rate differentials, (2) rural versus urban rate
differentials, (3) volume discounts, (4) proportional rate
discounts, and (5) "open stock" rates. The ALJ also
addressed rate increases from southern origins that were not
matched by rate increases from northern origins. In this
case, the ALJ found that cost justification for the
north/south rate structure was not significant because the
rates are being made close to equal on a per-mile basis. 58
FERC 63,004 at 65,025-27.
Docket No. IS90-21-002, et al. - 53 -
equality is unreasonable, unduly preferential, and prejudicial,
because it served as the basis for historical investments, market
evaluations, and marketing decisions. Kerr-McGee also contends
that changing Group 3 rates will cause considerable confusion in
exchange negotiations and differentials. Finally, Kerr-McGee
claims that Williams' rate differentials are not justified by
competitive circumstances.
Williams replies that any commercial disadvantage suffered
by Oklahoma refiners is offset by the cost advantage of their
proximity to crude oil supplies. In any event, although the
change from equalized rates became effective one and one-half
years ago, Williams points out that Kerr-McGee has not offered
any proof of competitive injury from the change in Group 3 rates.
Moreover, Williams asserts, evolving competitive circumstances
warrant an end to Group 3 rate equality. Williams states that
shippers should not have relied on continued rate equality to
make market and investment decisions because, as noted in the ID,
they knew that Williams had tried to change these rates in the
1960's and that it might try again at the end of the 1985-90 rate
moratorium.
The ALJ found that Kansas City and Heartland pipelines (new
competing lines) have captured from Williams significant volumes
from Group 3 origins. He also determined that the potential
competition from a dormant Texaco line was sufficiently likely to
influence Group 3 rates. The ALJ's reasons for concluding that
competition makes Group 3 rate equality no longer appropriate are
adequate for us to decide that the proposed Group 3 rates are not
per se discriminatory. However, the Commission will decide in
Phase II whether the proposed Group 3 rates force captive
customers to bear disproportionate shares of the fixed costs
without any offsetting gain in efficiency and thus, are
discriminatory.
3. North/South
Kerr-McGee claims that Williams' proposed rates prefer the
northern origins in Minnesota and Chicago to the prejudice of
competing Oklahoma and Kansas origins. Kerr-MCGee also states
that the proposed rates must be analyzed on the basis of
comparative costs, not simply mileage, particularly because it
believes that the greater volumes and lower per-mile costs are
from the southern Oklahoma/Kansas origins.
Williams rebuts Kerr-McGee's argument, stating that Kerr-
McGee has not shown an undue preference, prejudice, or unjust
discrimination because it has not shown a disparity in the
resulting rates. It notes that Kerr-McGee has only shown a
disparity in the amount of the rate changes.
Docket No. IS90-21-002, et al. - 54 -
The ALJ found that many pipeline projects had recently been
completed in Williams' market areas, including construction by
Koch. He also decided that the incremental costs of pipeline
construction in the region were low because of under-used crude
and fertilizer lines that could easily be converted into oil
pipelines. We conclude that the ALJ stated sufficient reasons to
find that, due to the effect of competition, differences between
rates in the north and south may no longer be just and
reasonable. However, as discussed above, the Commission will
determine in Phase II whether the proposed North and South rate
changes force captive customers to bear disproportionate shares
of the fixed costs without any offsetting gain in efficiency.
4. Urban/Rural Issue
Farmland argues that these proposed differences are
discriminatory because rural shippers will pay a disproportionate
share of Williams' rate increase. Specifically, Farmland alleges
that Williams proposes to increase rates to rural destinations
17.22 percent on average while decreasing urban discounted rates
11.63 percent on average. Farmland asserts that the urban/rural
rate differentials are not justified by differences in the cost
of providing the services to the respective areas. Finally,
Farmland contends that the proposed rate differentials are not
otherwise justified by differences in transportation conditions,
relative distances, and equalization of competitive opportunities
among customers as well as producers.
Williams avers that Farmland misstates the rate disparity by
comparing rural service at the full base rate to urban service at
the fully discounted rate. Williams also argues that anti-
discrimination requirements apply to disparities in rates, not
rate changes. It contends that statutory prohibitions against
unreasonable preference or prejudice do not apply because rural
and urban areas do not compete with one another. Williams also
argues that rate disparities are appropriate among urban and
rural destinations because it ships more volumes to urban
destinations and does not charge any shipper a different charge
at the same destination. Even if Farmland has established a
prima facie discrimination claim, Williams insists that its
competition justifies the rate differentials.
We note that the ALJ rejected a contention that the proposed
rate increases violate section 3(1) of the ICA, 139/ and he
found no evidence that Williams had singled out any farm or rural
interest or raised rates to any destination merely because it was
rural rather than urban. In addition, the ALJ pointed out that
139/ Section 3(1) prohibits "any undue or unreasonable preference
or advantage to any particular . . . locality . . . region,
district, [or] territory . . . ."
Docket No. IS90-21-002, et al. - 55 -
territorial rate differences can be justified by differences in
territorial conditions. 140/ He found that such differences
existed in this case because Farmland had differentiated the
urban and rural areas by the different types of industry,
activity, or commerce which occur in such areas. Finally, the
ALJ stated that the record showed that Williams' rates were
driven only by competitive considerations and that competitive
inroads may be greater in urban areas.
While the ALJ stated several reasons that argue in favor of
a rate differential, the Commission will decide ultimately in
Phase II of this proceeding whether the proposed urban and rural
rate differentials are discriminatory.
5. Volume Incentive Discounts
Kerr-McGee argues that the volume discounts discriminate in
favor of and grant a preference to large shippers, to the
disadvantage of small shippers. Kerr-McGee alleges that volume
discounts are an illegal rate disparity because different
shippers will pay different charges even though they receive the
same service and the costs of the service are identical.
Texaco maintains that Williams' volumetric discounts are not
discriminatory because Williams will allow shippers to pool their
volumes to qualify for the discount and will offer volume
discounts at all destinations on its system. According to
Williams, volume discounts do not discriminate against or give a
preference to customers because shippers which tender differing
volumes for transportation are not similarly situated customers.
However, even if volume discounts are discriminatory, Williams
asserts that the record amply justifies William's volume
discounts on competitive grounds.
Kerr-McGee contends that the ALJ did not determine where
volume discounts are necessary, identify competitors, or judge
the accuracy of Williams' projections to determine whether
transportation circumstances justify discrimination. Further,
Kerr-McGee argues that the ALJ did not look critically at the
projections of competitors' costs and rates that Williams used to
support the proposed discounts. Thus, Kerr-McGee asserts that
the volume discounts cannot be approved in this phase of the
hearing and on this record. Finally, Kerr-McGee believes that
the ALJ did not address the potential for discrimination in the
volume discount program. In particular, Kerr-McGee objects to
Williams' approach to pooling because Williams will not encourage
pooling by operating the pool or providing the names of pool
operators to smaller shippers that want to join. Kerr-McGee
points out that a pool operator does not have an incentive to add
140/ Citing New York v. U.S., 331 U.S. 284, 299-300 (1946).
Docket No. IS90-21-002, et al. - 56 -
another member to a pool once the 25 percent discount volume
level is achieved. For these reasons, Kerr-McGee concludes that
Williams favors a few large shippers who can receive the
discounts without pooling. If the Commission upholds Williams'
volume discounts, Kerr-McGee advocates standards and conditions
that would allow small shippers to participate in pooling
arrangements.
As discussed earlier, Williams presented compelling evidence
that, in general, significant new pipeline competition has
entered its market. Williams proposes to offer the discounts
throughout its market, not just in competitive locations. For
these reasons, the ALJ did not need to determine where volume
discounts are necessary or identify specific competitors.
Under section 2 of the ICA, whether a rate is unduly
discriminatory turns on whether Williams is providing a "like and
contemporaneous service in the transportation of a like kind of
traffic under substantially similar circumstances and
conditions." Section 3(1) rules out only those preferences that
are "undue." As with the other claims of rate discrimination,
the Commission will decide in Phase II whether the volume
incentive discounts are discriminatory.
Pooling arrangements can enhance a volume discount program
by giving small shippers an incentive to maximize use of the
pipeline. The Commission is concerned whether Williams is
presenting shippers with a realistic opportunity to participate
in pooling. The Commission does not intend to decide the volume
discount issue here and thus need not establish pooling
requirements in Phase I. However, Williams should make proposals
in Phase II that give shippers a realistic opportunity to
participate in pooling.
6. Proportional Rate Discounts
Farmland opposes Williams' proportional rate discounts for
destinations that are reachable from competitors' lines.
Farmland fears that the proportional rate discounts will be
subsidized by revenue from rural destinations. However, the
Commission agrees with the ALJ that such rate differences take on
less significance to the extent they are justified by
competition. As discussed above, the Commission will determine
in Phase II of this proceeding whether the proportional rate
discounts are discriminatory.
7. Fungibility
Kerr McGee opposes Williams' open stock policy. In
particular it protests Williams' proposed rates for service from
the Minneapolis/St. Paul origin group to nine destinations,
contending that Williams can physically provide this service only
Docket No. IS90-21-002, et al. - 57 -
from other origins. Kerr-McGee asserts that such service is
impossible without reverse flow capability, which it says
Williams does not have on this part of its system. In the event
these rates are finally decided in Phase I, Kerr-McGee asks the
Commission to rule that it is unlawful for Williams to publish
rates for services which it cannot physically perform. Kerr-
McGee also contends that such rates are for the advantage of
Minneapolis/St. Paul origin refiners and are therefore
discriminatory.
Williams contends that the ICA does not prohibit filing
rates for movements over routes that cannot be physically
delivered. Williams points out that such services are analogous
to backhaul or displacement service offered by natural gas
pipelines and that such services benefit both Williams and its
shippers. The Commission has long recognized the validity of
backhaul and displacement service. Thus, Williams may publish
rates for open stock service. We will decide in Phase II whether
the proposed open stock rates are discriminatory.
III. Proposed Rate Standards for Phase II
A. The Proposed Rate Standards
In its motion, Williams proposes a standard for adjudicating
in Phase II the maximum reasonable level of rates in any market
not found workably competitive in Phase I. As part of a rate
filing, Williams would have to make two showings: (1) that the
overall earnings generated by the proposed rates do not exceed
the revenue requirement permitted by Opinion No. 154-B and its
progeny, 141/ and (2) that the total of its proposed rates do
not exceed the stand-alone costs of its services in
total. 142/ Williams would have to show that its proposed
rate maximums in total do not exceed the lower of its Opinion
No. 154-B revenue requirement or the stand-alone costs of its
services in total.
In general, stand-alone costs are the minimum costs that an
efficient, low-cost, state-of-the-art pipeline would incur for
facilities if built today to provide services tailored to a
discrete set of customers. Although Williams bears the ultimate
141/ Williams Pipe Line Co., Opinion No. 154-B, 31 FERC 61,377
(1985), modified, Opinion No. 154-C, 33 FERC 61,327
(1985); ARCO Pipe Line Co., Opinion No. 351, 52 FERC
61,055 (1990), reh'g denied, Opinion No. 351-A, 53 FERC
61,398 (1990).
142/ Williams claims that the total stand-alone costs would equal
a rate of return ceiling based on a current replacement cost
rate base for the pipeline as a whole.
Docket No. IS90-21-002, et al. - 58 -
burden of proof on all matters in this case, Williams' proposal
would not require it to perform a separate stand-alone cost study
for each individual service (or combination of services on
Williams' system). Instead, Williams would show that the total
systemwide stand-alone cost would equal a rate of return ceiling
based on a current replacement cost rate base for the pipeline as
a whole. 143/ Shippers would have the right to rebut
Williams' showing of the total stand-alone costs with evidence
that particular Williams' rates exceeded the stand-alone cost of
any individual service or combination of services of the
shippers' choosing, based on whatever configuration the shippers
believed would minimize the stand-alone costs to them. Williams
would then have the burden of refuting any stand-alone cost data
submitted by the shippers and would bear the ultimate burden of
proof.
Williams also proposes a standard for adjudicating in Phase
II the minimum reasonable level of rates in any market not found
workably competitive in Phase I. The minimum standard would be
short-run marginal 144/ or incremental costs. Williams
proposes a one-year time horizon to measure short-term marginal
costs. It states that such short-term costs consist only of
variable fuel and power costs.
The proposal would give Williams the flexibility to charge
any customer any price falling between the maximum and minimum
rate standards. Williams asks the Commission to adopt its
proposed rate standards now, before further evidentiary
proceedings in Part II. Williams does not propose to apply any
ratemaking standard to markets found workably competitive.
Rather, rates in those markets would be assumed to be just and
reasonable on the basis of competition.
B. Positions of the Parties
Williams desires to price its services using "differential"
pricing, which involves pricing different services in varying
143/ The Commission assumes that by "current" cost, Williams
means the assets may be either new plant or depreciated
current plant because an efficient new entrant would not
necessarily purchase all new assets. Ex Parte No. 347 (Sub-
No. 1), Coal Rate Guidelines, Nationwide, 1 ICC 2d 520, 545
(1985), aff'd, Consolidated Rail Corp. v. United States, 812
F.2d 144 (3d Cir. 1987). In addition, the Commission
assumes that Williams means the replacement cost rate base
that an efficient, low-cost, state-of-the-art pipeline would
incur to substitute for Williams' facilities as a whole.
144/ Marginal cost is the cost of producing one more or one less
unit.
Docket No. IS90-21-002, et al. - 59 -
proportions over their marginal costs. 145/ Williams states
that the nature of its costs require that it price in this
manner. Namely, it claims that rates calculated based on fully-
allocated costs would be confiscatory and unworkable because most
of its costs are sunk and common to multiple services, it has
large economies of scale, 146/ and it faces significant and
non-uniform competition in its markets. Texaco 147/ responds
that Williams has not analyzed the costs of and demand for
services to prove that rates based on fully-allocated costs would
in fact be confiscatory.
Williams also declares that rates based on fully-allocated
costs are not economically efficient. If it must price some
services above marginal cost to recover costs, Williams contends
that it would maximize economic efficiency by charging the
highest markups for services whose demand is least sensitive to
an increase in price (i.e., the least "elastic"). 148/
Accordingly, Williams seeks to price services differentially by
setting rates below fully-allocated costs where competition
requires and above fully-allocated costs where the market
permits.
Although some of the protesting parties generally support
the concept of differential pricing (or some form of pricing
flexibility), they dispute whether Williams' rate standards will
produce economically efficient rates. 149/ Texaco challenges
145/ This practice is also referred to as "economic price
discrimination." Coal Rate Guidelines, Appendix A.
146/ In other words, the average cost of service declines as the
size of the plant increases. Coal Rate Guidelines, Appendix
A.
147/ Total and Kerr McGee support Texaco's comments in their
entirety.
148/ This economic rule is known as the "inverse elasticity rule"
or "Ramsey" pricing.
149/ Williams claimed that Dr. Alfred E. Kahn (an expert witness
for Kaneb and Kerr-McGee) agreed that the proposed rate
standards will produce the most economically efficient
rates. Dr. Kahn concurred with the general theory that
rates based on marginal cost will send customers the most
efficient price signals. Tr. 39/6357-58 (Kahn). In
general, Dr. Kahn also agreed with differential pricing.
Ex. 508 at 12; Tr. 39/6360 (Kahn). Nevertheless, Dr. Kahn
did not agree that the proposed rate standards would produce
economically efficient rates when applied to Williams'
(continued...)
Docket No. IS90-21-002, et al. - 60 -
differential pricing or any other pricing mechanism if captive
customers would subsidize service to other shippers and
underwrite the risk of competition for the pipeline's
shareholders. Some of the parties propose alternatives to
Williams' proposal.
Williams maintains that a century of precedent under the ICA
recognizes the need for differential pricing and upholds rates
above fully-allocated costs in captive markets. Williams
believes that its proposed rate standards are consistent with the
ICC's 1985 standards governing the maximum rates for railroads
hauling coal, the Coal Rate Guidelines, 150/ and cases
leading up to and interpreting those standards. Williams asserts
that the maximum rate it proposes will fully satisfy the
Commission's duty under section 1(5) of the ICA to ensure
reasonable maximum rates. Williams insists that its proposed
rate flexibility is not discriminatory because it claims it has
shown the rate disparities are justified by competitive
differences. 151/
Kaneb opposes Williams' proposal, contending that the ICC
never regulated oil pipeline rates using the standards it applies
149/(...continued)
markets. Ex. 508 at 12, n.3; Tr. 39/6431-32 (Kahn).
Because of the possibility of predatory pricing and the
problems created by the differing levels of competition
among Williams' markets, Dr. Kahn did not think that a
minimum rate standard based on short-run marginal cost (even
though combined with the proposed maximum rate standard)
would protect captive customers from paying higher rates
than they would otherwise pay based purely on economic
efficiency or differential or Ramsey pricing. Tr. 39/6431-
32, 6445-47 (Kahn). Instead, Dr. Kahn recommended setting
the minimum standard at long-run incremental costs, although
he warned that even that measure may not be sufficiently
high to protect captive customers. Tr. 39/6448 (Kahn).
Dr. Kahn also opposed Williams' proposal because it assumes
that Williams' marginal costs are limited to variable fuel
and power costs. He submitted that if Williams' system does
not experience congestion costs or incremental capacity
costs, it probably has excess capacity. Ex. 508 at 6; Tr.
39/6421 (Kahn). Dr. Kahn was concerned that Williams has
proposed this measure of marginal costs in order to transfer
to captive customers the costs of excess capacity. Tr.
39/6500-01 (Kahn); Ex. 508 at 9.
150/ See supra note 143.
151/ 49 App. U.S.C. 2 and 3(1).
Docket No. IS90-21-002, et al. - 61 -
to railroads. Citing Farmers Union I, 152/ Kaneb argues that
the ICC's precedent is no longer viable for regulating oil
pipeline rates.
Total objects to Williams' proposal because it concludes
that it would deregulate the antidiscrimination provisions of the
ICA. Texaco argues that Williams' proposal would effectively
deregulate the rates for interstate pipelines because Williams'
proposal does not establish cost-based rates. Texaco also
contends that under Farmers Union II, 153/ rate regulation
should begin with an inquiry into costs. Thus, Texaco says
Williams should prove a cost-of-service and then allocate costs
fairly and properly to the services. However, it does not urge
adopting some preestablished cost-allocation formula, instead it
says Williams should propose one. Then, under Farmers Union II,
it submits that the Commission can adapt the cost allocation
methodology to the requirements of the public interest.
Kerr-McGee and Texaco challenge the use of earnings
generated by Opinion No. 154-B as a maximum rate standard.
Texaco states that, although the individual point-to-point rates
would produce the total Opinion No. 154-B cost of service, this
does not indicate whether individual point-to-point rates are
just and reasonable. Kerr-McGee opposes the Opinion No. 154-B
methodology itself as fundamentally flawed and points out that it
has not been subject to judicial review. Kerr-McGee also objects
to applying an Opinion No. 154-B cap to Williams because
Williams' current rates produce total revenues exceeding a cost
of service calculated using the declining depreciated original
cost of Williams' rate base. Kerr-McGee maintains that a switch
to a trended original cost rate base under Opinion No. 154-B in
the "mid-life" of this very old products pipeline system would
inflate the rate base compared to amounts already recovered.
Thus, it says that the rates produced would be excessive. Kerr-
McGee insists that the parties are entitled to see and evaluate
the level of the proposed rate maximums in light of the review in
Phase II. The staff argues that the ratemaking method that the
Commission applies to gas pipelines offers rate flexibility.
Staff disagrees that Williams' proposed method is more efficient
and less conjectural and believes that the stand-alone method is
too conjectural and complex.
152/ Farmers Union Central Exchange, Inc. v. FERC, 584 F.2d 408
(D.C. Cir. 1978), cert. denied sub nom., Williams Pipe Line
Co. v. FERC, 439 U.S. 995 (1978).
153/ Farmers Union Central Exchange, Inc. v. FERC, 734 F.2d 1486
(D.C. Cir. 1984), cert. denied sub nom., Williams Pipeline
Company v. Farmers Union Central Exchange, Inc., 469 U.S.
1034 (1984).
Docket No. IS90-21-002, et al. - 62 -
Texaco objects to shippers bearing the cost of proving the
stand-alone costs. It points out that, in Phase I alone,
Williams has spent over $8 million for experts for this purpose.
Williams answers that requiring it initially to perform a
separate stand-alone cost study for each service would be
impractical and an unreasonable burden because it offers service
between thousands of origin/destination pairs.
The intervenors also challenge the proposed burden of proof
as contrary to 49 App. U.S.C. 15(7), which places the burden of
proof on carriers in investigations of proposed rates. Williams
responds that this burden of proof fully complies with 15(7) in
that once the shippers' studies are submitted, Williams will bear
the burden of rebutting them and the ultimate burden of
persuasion. According to Williams, this comports with ICC and
the Commission's precedent where the regulated entity bears the
ultimate burden of proof and with general rules of evidence,
under which a party with the ultimate burden of proof, by making
a prima facie showing, may compel its adversary to come forward
with responsive evidence.
C. Discussion
While Williams' motion was pending before the Commission,
the 1992 Act was signed into law. Section 1801 of the 1992 Act
charged the Commission with establishing a simplified and
generally applicable ratemaking methodology for oil pipelines.
Further, section 1803 of the 1992 Act deemed many effective rates
to be just and reasonable. However, it did not deem just and
reasonable rates such as Williams' that had been in effect
subject to protest, investigation, or complaint.
The rate standards proposed by Williams would not only
govern setting base rates in this case, but also would establish
how Williams' rates are judged in future cases. The Commission
has adopted a final rule 154/ that institutes a simplified
and generally applicable ratemaking methodology, pursuant to the
1992 Act. The final rule establishes the method by which oil
pipelines will change their rates in filings beginning January 1,
1995. In this rulemaking, the Commission considered a request by
AOPL, supported by Williams, to establish a stand-alone maximum
rate standard for changing rates. However, the rulemaking
established a rate indexing approach to determine rate changes,
finding that approach more generally applicable than a stand-
alone method. In addition, like the method here proposed, the
indexing method will establish a maximum rate cap under which
pipelines will have pricing flexibility. Because the rate change
154/ Revisions to Oil Pipeline Regulations Pursuant to the Energy
Policy Act of 1992. Order No. 561, FERC Stats. & Regs.
Preambles 30, 985 (1993).
Docket No. IS90-21-002, et al. - 63 -
method adopted in the rule is inconsistent with the stand-alone
method, the Commission will reject Williams' use of the stand-
alone method as the principal basis to justify future rate
changes. Therefore, the only question remaining is what base
rates will be allowed for Williams in this case and will serve as
the basis for Williams' future indexing. The Commission will set
for hearing in Phase II the method to be used for establishing
base rates. 155/ In developing such a method, the ALJ and
the parties should give particular attention to the allocation of
costs between the competitive and noncompetitive markets to
ensure that customers in the noncompetitive markets do not
subsidize customers in the competitive markets.
The purpose of the two-phase procedure established in
Buckeye was to give pipelines the benefit of light-handed
regulation in markets found competitive. For these reasons, the
Commission finds Williams' rates in its workably competitive
markets to be just and reasonable on the basis of competition
alone. No additional review of those markets will be required.
Pursuant to the ICA, Williams must file with the Commission the
rates for its competitive markets and charge the filed
rate. 156/
The Commission orders:
(A) The initial decision is affirmed or modified as stated
in the body of this order.
(B) No further rate review is required of the following
markets where Williams has established that it lacks market
power: Chicago, St. Louis, Oklahoma City, Tulsa, Wichita,
Springfield/Decatur, Peoria, Rockford, Wausau, Dubuque,
Davenport, Columbia, and Minneapolis/St. Paul.
155/ The parties have proposed several alternatives to Williams'
proposal. The Commission is not granting Williams' motion
and therefore need not consider or rule on the validity of
these alternatives at this juncture.
156/ 49 App. U.S.C. 6(1) and (3), respectively. See also
Maislin Industries v. Primary Steel, 497 U.S. 116 (1990) (in
spite of new legislation that significantly deregulated the
motor carrier industry, the Supreme Court found that a
privately negotiated rate, which was lower than a carrier's
filed rate, violated the filed rate doctrine and was
discriminatory due to the carrier's duty to file rates with
the ICC and the obligation to charge only those rates on
file pursuant to 49 U.S.C. 10762 and 10761,
respectively).
Docket No. IS90-21-002, et al. - 64 -
(C) The ALJ is directed to proceed with Phase II of this
proceeding for the purpose of establishing base rates for the
following markets in which Williams has failed to establish that
it lacks market power: Springfield (MO), Eau Claire, Des Moines,
Kansas City, Lincoln, Fargo, Grand Forks, Duluth, Rochester,
Sioux City, Topeka, Omaha, Grand Island, Sioux Falls, Aberdeen,
Quincy, Cedar Rapids, Waterloo, and Ft. Dodge.
(D) Williams' motion proposing rate standards to apply to
Phase II of this proceeding is denied as stated in the body of
this order.
(E) The complaint and protest filed by Kerr-McGee, Texaco,
and Total is denied.
(F) With respect to Williams' markets found to be
competitive, the investigation and refund obligation in this
proceeding are terminated.
By the Commission.
( S E A L )
Lois D. Cashell,
Secretary.