UNITED STATES OF AMERICA 71 FERC 61,291
FEDERAL ENERGY REGULATORY COMMISSION
Williams Pipe Line Company ) Docket Nos. IS90-21-003,
) IS90-31-003, IS90-32-003,
) IS90-40-003, IS91-1-003,
) SP91-3-003, SP91-5-003,
) IS91-28-003, IS91-33-003,
) OR93-1-001
Enron Liquids Pipeline Company ) IS90-39-003, IS91-3-001,
) and IS91-32-001
) (Phase I)
and
Williams Pipe Line Company ) IS92-26-000, IS95-2-000,
) and IS95-7-000
OPINION NO. 391-A
OPINION AND ORDER GRANTING IN PART
AND DENYING IN PART REHEARING
Issued: June 6, 1995
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. IS90-21-003,
) IS90-31-003, IS90-32-003,
) IS90-40-003, IS91-1-003,
) SP91-3-003, SP91-5-003,
) IS91-28-003, IS91-33-003,
) OR93-1-001
Enron Liquids Pipeline Company ) IS90-39-003, IS91-3-001,
) and IS91-32-001
) (Phase I)
and
Williams Pipe Line Company ) IS92-26-000, IS95-2-000,
) and IS95-7-000
OPINION NO. 391-A
OPINION AND ORDER GRANTING IN PART
AND DENYING IN PART REHEARING
(Issued June 6, 1995)
On August 29, 1994, Williams Pipe Line Company (Williams)
and the Association of Oil Pipe Lines (AOPL) filed requests for
rehearing and clarification of the "Opinion and Order on Initial
Decision, on Motion Proposing Rate Standards, and on Complaint
and Protest" that was issued by the Commission on July 28, 1994
(Opinion No. 391). 1/ Texaco Refining and Marketing Inc.
(Texaco) also filed a petition for rehearing of Opinion No. 391.
That opinion affirmed and modified an initial decision of the
presiding administrative law judge (ALJ) relating to tariffs
filed by Williams proposing changes in its rates for the
transportation of petroleum products. As discussed below, the
Commission grants in part the requests for rehearing and
clarification and denies the remainder of the requests for
rehearing.
On February 6, 1995, Murphy Oil USA, Inc. (Murphy) filed a
motion in Docket Nos. IS92-26-000, IS95-2-000, and IS95-7-000
1/ Williams Pipe Line Co., 68 FERC 61,136 (1994).
Docket No. IS90-21-003, et al. - 2 -
asking the Commission to sever from those consolidated
proceedings a limited issue involving certain shorthaul rates
filed by Williams. As discussed below, the Commission denies
Murphy's motion.
Background
The background of this proceeding is described in Opinion
No. 391 and will not be repeated here. 2/ Opinion No. 391
addressed exceptions to the ALJ's initial decision in
Phase I 3/ of the proceeding. 4/
In Opinion No. 391, the Commission affirmed the ALJ's
decision to limit the scope of Phase I to a determination of
Williams' market power in the relevant markets. 5/ In defining
market power for these proceedings, the Commission adopted the
ALJ's findings that (1) no specific percentage of price increase
is required as a test for market power; (2) the relevant product
market is delivered pipelineable petroleum products; (3) the use
of destination markets is appropriate for determining the
geographic scope of the markets; and (4) Williams' destinations
are the relevant BEAs. 6/
In analyzing Williams' markets, the Commission accepted the
ALJ's use of the Herfindahl-Hirschman Index (HHI) to develop an
initial screen; however, in its examination of the markets, the
Commission used the HHI less stringently than did the ALJ,
employing it as an indicator to be evaluated along with other
factors. In calculating the HHIs, the Commission affirmed (1)
the ALJ's use of capacity rather than delivery data; (2) his
methodology for calculating and measuring effective capacity; and
2/ Id. at 61,654-55.
3/ Williams elected to bifurcate the proceedings in accordance
with the procedures adopted by the Commission in Buckeye
Pipe Line Co., 44 FERC 61,066 (1988), order on reh'g, 45
FERC 61,046 (1988), 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) (collectively
(Buckeye).
4/ Williams Pipe Line Co., 58 FERC 63,004 (1992).
5/ 68 FERC 61,136 at 61,656.
6/ Id. at 61,658-61. BEAs are areas of the contiguous United
States that have been established by the Bureau of Economic
Analysis of the U.S. Department of Commerce and are intended
to represent actual areas of economic activity. A major
city is at the hub of each BEA.
Docket No. IS90-21-003, et al. - 3 -
(3) where appropriate, the inclusion of private pipelines,
barges, refineries, and potential competition. The Commission
declined to apply a mechanical analysis in assessing the effect
of truck transportation of products from sources outside of a
BEA. 7/
The Commission also evaluated a variety of other factors
bearing on competition, finding that (1) the ALJ had not applied
an excessively high standard in assessing market share; (2)
exchanges should be entitled to little weight in the post-
screening review of the markets; (3) there is no precise formula
by which to determine whether sufficient weight has been given to
excess capacity in the analysis; (4) the evidence does not
support a conclusion that the presence of vertically integrated
companies in Williams' markets justifies less regulation of
Williams; (5) where buyer power is shown, it should be entitled
to some weight; and (6) profitability is a neutral factor in this
case. 8/
The Commission then turned to an examination of the
individual BEA markets. It found that Williams had established
that it lacks market power in the Chicago, St. Louis, Oklahoma
City, Tulsa, Wichita, Springfield/Decatur, Peoria, Rockford,
Wausau, Dubuque, Davenport, Columbia, and Minneapolis/St. Paul
markets. 9/ The Commission also found that Williams had failed
to establish that it lacks market power in the 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
markets. 10/ The Commission directed the ALJ to proceed with
Phase II of the proceedings for the purpose of establishing base
rates for these noncompetitive markets.
The Commission addressed exceptions to the ALJ's rulings on
certain claims of discrimination raised by the intervenors. In
each case, the ALJ had found that the alleged forms of
discrimination were intended to meet competitive conditions and
did not constitute an abuse of market power. The Commission
affirmed the ALJ's reservation for Phase II of the issues of
cross-subsidization and justifiable differences in costs. 11/
Further, the Commission denied Williams' motion proposing rate
7/ Id. at 61,663-70.
8/ Id. at 61,672-75.
9/ Id. at 61,675-78, 61,682.
10/ Id. at 61,679-86.
11/ Id. at 61,688.
Docket No. IS90-21-003, et al. - 4 -
standards to apply to Phase II of this proceeding, indicating
that the method to be used for establishing base rates would be
at issue in the second phase. 12/
Requests for Rehearing and Clarification
Williams argues that the Commission erred in (1) finding
that Williams had failed to show that it lacked market power in
several of its markets; (2) improperly recalculating the HHIs for
Williams' markets by excluding certain external sources; (3)
relying unduly on delivery-based market shares rather than
effective capacity-based market shares; (4) failing to accord the
HHI primary significance over other statistics, specifically
market share statistics; (5) failing to use the HHI as a screen
to identify markets in which Williams should be presumed to lack
significant market power; (6) declining to give sufficient weight
to exchanges; and (7) ignoring evidence of Williams' inability to
sustain profitably a 15 percent price increase.
Williams challenges the Commission's determinations that
Williams failed to demonstrate its lack of market power in the
following nine markets: (1) Springfield, MO; (2) Kansas City; (3)
Lincoln; (4) Quincy; (5) Des Moines; (6) Omaha; (7) Eau Claire;
(8) Fargo; and (9) Grand Forks. Williams also asserts that the
Commission erred in reserving for Phase II further analysis of
the discrimination claims on a cost basis in light of the
Commission's affirmation of the ALJ's decision that Williams
proved that the challenged rate disparities are justified by
competition. Finally, Williams asks the Commission to clarify
that, in Opinion No. 391, the Commission has not ruled on the
merits of Williams' proposed rate standards in any respect and
that the parties have the right in Phase II to rely on the Phase
I record regarding costs and cost standards, subject to the right
of any party to supplement that evidence.
Texaco maintains that the Commission erred in rejecting the
consideration of corridors or origin-destination pairs in this
case. In the alternative, if the Commission believes that
origins are not relevant, Texaco argues that Williams must post a
single rate to each destination from all origins, a rate no
higher than that of Williams' principal competitors. Finally,
Texaco asserts that the Commission erred in finding that Williams
cannot exercise significant market power in those markets in
which the pipeline is responsible for over 45 percent of the
deliveries.
AOPL faults Opinion No. 391 for failing to adhere to the
standards for evaluating market power articulated by the
Commission. Further, AOPL contends that the Commission attached
12/ Id. at 61,695.
Docket No. IS90-21-003, et al. - 5 -
undue importance to market share by calculating that factor based
on delivery data and by ignoring the concept of relative ability
to sustain a price increase over a significant period of time as
a measure of market power. AOPL also asserts that the Commission
erred by requiring rate differentials found in Phase I to be
justified by competitive conditions to be evaluated in Phase II
for possible cross-subsidization, as well as requiring the rate
differentials to be justified based on costs. Finally, AOPL
objects to the Commission's rejection of Williams' proposed use
of the stand alone cost method for Phase II.
Discussion
I. Analysis of Market Power
Williams, AOPL, and Texaco challenge the Commission's
holdings respecting the general concepts employed in the market
power assessment.
A. Exclusion of External Sources
In Opinion No. 391, the Commission declined to apply a
mechanical analysis with a specific mileage limit to exclude
external sources. While the Commission recognized that a great
deal of product arrives in Williams' markets via trucks, many of
which travel from origins more than 50 miles from a BEA, the
Commission examined the 65 to 70 mile limit established by the
ALJ and found that the distance of a source from a BEA might have
little bearing on the economic ability of the source to compete
effectively in the BEA. 13/
Williams acknowledges that the Commission judged the effects
of external competition based on the facts of the individual
BEAs; however, Williams argues that the record does not support
the Commission's unduly conservative conclusions concerning the
effect of truck transportation of petroleum products into
Williams' markets. According to Williams, the intervenors' own
evidence confirmed that trucks compete with pipelines at
distances of 70 and 100 miles, particularly in rural
areas. 14/ Williams also cites the surveys conducted by its
Witness Jones, which Williams claims support its position that
trips in excess of 100 miles are common and that trips in excess
13/ 68 FERC 61,136 at 61,669-70.
14/ Citing the testimony of Conoco's Witness Stockebrand (Ex.
749, Ex. 753, Tr. 46/7921-26); Witness Swerczek (Tr.
47/8228-32); staff's Witness Alger (Tr. 42/7068-128); Ex.
801; Ex. 735; Tr. 45/7803; Tr. 48/8479-81.
Docket No. IS90-21-003, et al. - 6 -
of even 200 miles are not infrequent. 15/ Williams points to
its Witness Bollen's survey of gasoline station operators 16/
and two statistical tests performed by its Witness Schink, all of
which Williams argues confirm the results of Witness Jones'
surveys. 17/
Williams states that the only conflicting testimony
considered by the ALJ concerning the economic limits on truck
transportation was submitted by Kerr-McGee. However, Williams
argues that the ALJ incorrectly interpreted Kerr-McGee's
information in reaching his conclusion that the limit beyond
which trucks generally cannot travel cost-effectively is 70
miles; when corrected, Williams states that the actual effective
range is increased to 90 to 95 miles.
Moreover, continues Williams, in recalculating the HHIs to
reflect what the Commission considered to be reasonable economic
limits on truck movements from external sources, Opinion No. 391
compounds the unduly conservative approach of the ALJ.
Specifically, Williams states that the Commission improperly
accepted the intervenors' position regarding the length of haul
for external sources, which in all cases was claimed to be to the
center of the particular BEA. However, Williams contends that
trucks do not have to penetrate all parts of a BEA to make a
price increase unprofitable. Williams concludes that, because
the effective capacity-based HHI already discounts the
competitive strength of external sources, discarding those
sources entirely, as the Commission did, constitutes an
unwarranted double discounting of external sources, creating the
false impression that there is no competitive impact from sources
serving only part of a BEA.
The Commission grants partial rehearing on this issue. As
will be discussed in greater detail in the context of the
individual BEAs, in reassessing the viability of external
sources, we have carefully examined the record evidence
highlighted by Williams in its rehearing request concerning truck
deliveries to the individual BEAs and the relative costs of
truck, barge, and alternative pipeline deliveries into these
markets. Williams sponsored Exhibits 303-337, which in effect
aggregate and summarize the other evidence it cites in its
request for rehearing, to validate its claim that specified
external sources competitively serve the individual BEA markets
and, thus, should be included in the assessments of those
markets. Williams' exhibits include refinery, truck, and gas
15/ Citing Ex. 295 at 26-27; Ex. 308; Exs. 311-337.
16/ Citing Ex. 501 at 7, 23-24.
17/ Citing Ex. 260 at 126-175.
Docket No. IS90-21-003, et al. - 7 -
station surveys that document truck shipments by origin and
destination, as well as extensive tables for each BEA that
compare transportation costs for Williams with those of a number
of internal and external sources. These cost tables provide
pipeline tariffs and a consistent reference guide to trucking
costs for distances ranging from eight to 425 miles. On
rehearing, the Commission is now persuaded that these comparative
cost tables provide a sound basis on which to evaluate the
ability of external sources to serve a market competitively, as
the comparative costs are highly relevant in determining whether
a source can represent effective competition. We are now
inclined to give less weight to the Kerr-McGee evidence relating
to the economic limits of truck transportation, as it is less
comprehensive. Our revised findings are addressed in the
discussion of the individual BEAs below.
B. Use of Delivery-Based Market Shares
Versus Capacity-Based Market Shares
In Opinion No. 391, the Commission affirmed the ALJ's use of
capacity data in calculating the HHIs for Williams' markets, but
held that use of delivery data as an additional and secondary
indication of market concentration in determining the market
share does not produce a distortion and, in fact, permits each
methodology to offset the inherent deficiencies of the
other. 18/
On rehearing, Williams and AOPL challenge the Commission's
reliance on delivery data. Both emphasize that delivery data
focus on historical events and provide no indication of a future
response to a price increase. AOPL argues that the correct
indicator of market power is market behavior -- the potential
competitive response by the market to any attempt to exercise
market power. According to AOPL, excessive reliance on market
share, particularly when calculated on the basis of actual
deliveries rather than capacity, ignores the potential for
competitive response.
AOPL asserts that a determination of market behavior
requires an evaluation of a host of factors, only one of which is
market share. AOPL also emphasizes the potential ability to
sustain a small but significant nontransitory increase in price
as a key factor in assessing market behavior.
According to AOPL, the Commission's undue reliance on
delivery-based market share information distorts the ultimate
determinations of market power. For regulatory purposes, as
opposed to merger policy, AOPL claims that the focus on market
share should be more on market dominance. Typically, states
18/ 68 FERC 61,136 at 61,665.
Docket No. IS90-21-003, et al. - 8 -
AOPL, federal courts have employed market share thresholds of 60
percent and higher to indicate dominance. 19/
Williams and AOPL assert that the record in this proceeding
demonstrates that delivery data -- especially where competitors
are involved -- are not readily available and are of questionable
accuracy. 20/ In contrast, states AOPL, capacity data tend to
be public information and are more readily verified. AOPL
concludes that, if the Commission continues to use market share
both for HHI purposes and as a separate and discrete screen, then
at least the potential competition afforded by the capacity of
the various competitors in the market should be used for both
purposes.
Although the Commission found delivered pipelineable
petroleum products to be the product in this case, Williams
argues that the product actually is the capacity to supply
19/ Citing U.S. v. Aluminum Company of America, 148 F.2d 416 (2d
Cir. 1945); U.S. v. Grinell Corp., 384 U.S. 563 (1966);
Holleb & Company v. Produce Terminal Cold Storage Co.; 532
F.2d 29 (7th Cir. 1976); Hiland Dairy v. Kroger Co., 402
F.2d 968 (8th Cir. 1968), cert. denied, 395 U.S. 961 (1969).
20/ Citing Tr. 27/3755, 3758, 3760-61; Tr. 32/4836-37. Williams
points out that its delivery data are unavoidably flawed and
incomplete, rendering market shares calculated using these
data highly suspect. Specifically, Williams explains that
delivery data are available only from Williams and not from
any of its competitors. Further, asserts Williams, even the
delivery data it provided cannot be assigned accurately to
BEA markets because of serious reporting errors and
omissions on the bill of lading records that are filled out
by truckers who deliver the product to its final
destination. Williams states that these truckers often
enter home office or billing address locations in the
delivery destination field or report vague destinations,
such as "various." Williams states that all of its pipeline
deliveries to non-Williams off-line terminals are recorded
in Williams' delivery data as being consumed at the site of
these off-line terminals. In fact, maintains Williams,
trucks take this product to locations both inside and
outside the BEA market. Finally, Williams points out that,
in at least two BEAs, it shares terminals with other
companies, making it impossible to determine truck
deliveries by pipeline because bill of lading records do not
provide that information.
Docket No. IS90-21-003, et al. - 9 -
petroleum products in a BEA. 21/ Finally, Williams asserts
that, even if delivery-based market share data have some
probative value, that would not justify simply disregarding
capacity-based market share data which, according to Williams,
demonstrate clearly that Williams lacks market power.
The Commission denies rehearing on this issue. We
acknowledge Williams' concerns regarding reliance on the delivery
data that were available in this case. As Williams has noted,
there are serious deficiencies in the market delivery data
available in this proceeding. First, such data were only
available for Williams' deliveries. Second, delivery data are
not kept in a uniform or consistent fashion that would permit
accurate or uniform analysis. However, those concerns were
taken into account in our choice of capacity as the basis for our
market assessment. Our primary measure of market concentration
was capacity-based, and we used Williams' delivery figures only
as a secondary consideration. We did not, as Williams alleges,
disregard capacity-based market shares, nor did we base any
market finding solely on delivery-based market share. As
discussed below, we have rejected Texaco's argument that we do
so. 22/
We emphasize again that we find it redundant to use a
capacity-based HHI and a capacity-based percentage of a given
market, as though these were two separate measures. They are
not. While expressed differently, both measure Williams' share
of available capacity in the market. Deliveries into a market by
individual pipelines may be somewhat less than their available
capacity. Therefore, it is more informative to compare relative
capacity and relative deliveries when accurate figures are
available. It is even more useful when actual delivered product
costs are also available for comparison. Any serious discrepancy
between relative capacity, relative delivered costs, and relative
delivery-based market shares would cause us to examine a
particular market more closely.
We also believe that our use of capacity-based HHIs
addresses sufficiently the issues raised by AOPL concerning
market behavior and market dominance. AOPL claims that our
consideration of delivery data was misplaced and led the
Commission to ignore the more important market power measure of
relative ability to sustain a price increase over a significant
21/ Williams cites the testimony of Witness Schink, claiming
that because marketers and refiners determine where they
will market product and how capacity is deployed, available
capacity best depicts the likely response to an exercise of
market power. Tr. 28/3881-83.
22/ See infra part I.C.
Docket No. IS90-21-003, et al. - 10 -
period of time. Our use of capacity based HHI's does, contrary
to AOPL's assertion, permit consideration of market responses to
a price increase. Our capacity-based HHI's take into account
both excess and potential capacity, the existence of which in a
market provides the potential for rapid response to a significant
price increase.
AOPL is correct that we did not use as the basis for our
analysis the measurement of specific responses to specific price
increases. The record in this case does not contain data that
would enable us to make the price analysis that AOPL seeks.
The parties have been inconsistent and sporadic in their
exploration of the potential for new entry under sustained price
increases. We are unable to use price increases/potential
capacity as a tool for market definition in this case because
Williams has not presented sufficient evidence on alternatives in
that context. Additionally, there is not sufficient information
on actual costs in the record to permit us to perform the
analysis independently.
In Opinion No. 391, we found the relevant product to be
delivered pipelineable petroleum products, recognizing that a
large volume of product arrives in Williams' markets via other
modes of transportation and through exchanges. 23/ We find no
merit in Williams' argument that capacity is the true product in
this case, which is essentially the same point that Texaco raises
in its contention that the Commission should use corridors in
analyzing the markets in this proceeding. We have consistently
rejected the use of corridors in this proceeding, and find
nothing new in the claims of Williams and Texaco that persuade us
to reverse that position.
C. Weight Accorded Effective
Capacity-Based HHI Statistic
In Opinion No. 391, the Commission affirmed the ALJ's
consideration of Williams' delivery-based market share in markets
identified for further examination by the HHI screening. The
Commission concluded that the ALJ did not establish an
excessively high standard in assessing delivery-based market
share, nor did he establish an absolute threshold of 70 percent
as indicative of market power. For example, the ALJ did not
exclude automatically from examination those markets in which
Williams' share is below 50 percent, although the Commission
pointed out that the ALJ found those markets to be "less
troublesome." 24/
23/ 68 FERC 61,136 at 61,659.
24/ 68 FERC 61,136 at 61,672.
Docket No. IS90-21-003, et al. - 11 -
Williams states that the HHI statistic takes into account
the market shares of all market participants. Therefore, if any
market participant has a large share, the resulting high HHI will
indicate that the market is highly concentrated and that one or
more of the market participants may have market power. A low
HHI, on the contrary, indicates that no participant can have
market power. Thus, reasons Williams, market shares for
individual market participants are relevant only when the HHI
statistic is high.
Williams further states that the effective capacity-based
HHI statistic used by staff also takes into account the number of
companies supplying the market and the capacity of these
companies to do so. Williams explains that, for external supply
sources, the capacity to serve the market is measured not only in
terms of the capacity of the sources but also in terms of the
reach of trucks from these sources into the BEA. According to
Williams, an external source typically serves only a small
fraction of the market, and the effective capacity-based HHI
credits the source only to that extent. Therefore, asserts
Williams, the effective capacity-based HHI appropriately
discounts the competitive influence of external supply sources
relative to internal suppliers. Williams concludes that the
Commission should consider the effective capacity-based HHI as
the primary statistic and should use market share statistics only
when the HHI is high.
Rehearing is denied on this issue. We find that the
question of the weight accorded capacity has been addressed
adequately in our calculations, as reflected in Opinion No. 391.
Although in Buckeye, we relied on delivery data in calculating
the HHIs, we recognized that circumstances might warrant the use
of other appropriate data in other cases. 25/ In the instant
case, we used capacity data because it was more complete than the
delivery data. In fact, delivery data was only available for
Williams and not for other market participants. We also
emphasize again that we have based no market decision solely on
delivery-based market share, but have employed that factor only
as a secondary indicator of market power.
In its request for rehearing, Texaco contends that the
Commission erred in finding that Williams cannot exercise
significant market power when Williams has over 45 percent of the
deliveries in a particular market, such as in the Columbia BEA.
In the alternative, Texaco asks the Commission to reconsider its
arguments relating to the competitiveness of the challenged BEAs
where Williams was allowed to set rates on its own. Texaco
offered no specific examples other than Columbia, which will be
25/ Opinion No. 360, 53 FERC 61,473 at 62,667; Opinion No.
360-A, 55 FERC 61,084 at 61,261.
Docket No. IS90-21-003, et al. - 12 -
addressed below in the context of the individual BEAs. It thus
appears that Texaco's real argument relates to the magnitude of a
price increase in a particular market, rather than to the general
concept of market share. Therefore, the Commission denies
Texaco's request for rehearing on the question of whether a
delivery-based market share of 45 percent or greater can permit
Williams to exercise market power in a market.
D. Use of the HHI as a Screen
Williams asserts that the Commission correctly affirmed the
ALJ's use of a 2500 HHI as an initial screen to identify markets
warranting further scrutiny, but erred in holding that the HHI is
an analytical tool rather than an irrebuttable presumption of
lack of market power. 26/ Although, in its rehearing request,
Williams maintains that an HHI of 2500 should constitute an
irrebuttable presumption that a market is workably competitive,
Williams declines to seek rehearing on this point, but does ask
the Commission to hold that markets with HHI's less than 1800 are
irrebuttably deemed workably competitive. AOPL contends that
such screens do not prejudice the parties' rights, but rather
focus the debate and streamline the proceeding.
Williams asserts that the record in this case supports its
position. Williams cites the testimony of the economic
witnesses, 27/ the Commission's decision in Buckeye, 28/
the Department of Justice study addressing oil pipeline
deregulation, 29/ and the ALJ's decision in this
proceeding 30/ as being in agreement that the HHI alone should
be the initial screen for identifying markets requiring further
analysis. Williams states that the superiority of the HHI as an
index of market power stems from the fact that the HHI, unlike
delivery-based market share, reflects both the number and size of
all firms in the market. 31/ Williams disputes the
26/ See 68 FERC 61,136 at 61,661-63.
27/ Citing Ex. 208 at 3; Ex. 619 at 47; Ex. 932 at 6.
28/ Citing 53 FERC 61,473 at 62,663.
29/ Citing Ex. 18 at 29-31. U.S. Dep't of Justice, Oil Pipeline
Deregulation (1986) (Oil Pipeline Study).
30/ Citing 58 FERC 63,004 at 65,023.
31/ Citing FTC v. University Health, Inc., 938 F.2d 1206, 1211
n.12 (11th Cir. 1991); FTC v. PPG Industries, Inc., 798 F.2d
1500, 1503 (D.C. Cir. 1986); First and First, Inc. v.
Dunkin' Donuts, Inc., 1990-1 Trade Cases, 68,989 at 63,368
(continued...)
Docket No. IS90-21-003, et al. - 13 -
Commission's statement that its approach in this case is
consistent with Buckeye, claiming that the dispute in Buckeye was
between an HHI threshold of 1800 and 2500, rather than whether a
threshold, if adopted, would in fact serve as an irrebuttable
presumption. Further, contends Williams, in Buckeye, the
Commission found all markets with HHIs below 1800 to be workably
competitive.
Rehearing is denied on this issue. An HHI of 1800 merely
indicates that the shippers in a market have at least six good
choices, suggesting that the market is not captive. However, the
Commission continues to believe that, for its purposes in
assessing market power, the HHI should be used as an analytical
tool, along with other criteria, rather than establishing an
irrebuttable presumption of lack of market power when it falls
below a specific number. This practice gives the Commission the
greatest flexibility in discharging its legal responsibilities
under the Interstate Commerce Act (ICA). We are not persuaded
that the parties' claimed need for certainty mandates a different
decision. The parties still must offer evidence sufficient for
the Commission to assess market power in each market, and our
unwillingness to establish a firm HHI threshold in a particular
case does not add significantly to that obligation.
The testimony cited by Williams is not as definitive as
Williams suggests. The passages cited explore the preferences of
each witness for a particular HHI value (1800 vs. 2500), as being
indicative of a lack of market power. However, the witnesses do
not espouse a particular number as the basis for an irrebuttable
presumption of competition. Rather, each witness addresses the
need to consider a number of factors in making a market power
determination.
Further, we do not read the Oil Pipeline Study to require
that a particular HHI can establish an irrebuttable presumption
of competitiveness. Although the study does state that, with a
BEA of less than 2500, competitive concerns are presumed to be
small relative to the costs of pipeline regulation, 32/ we
find no language that would bar additional analysis, particularly
if other factors present in a case suggest that further
examination may be of value.
We also disagree that Buckeye supports the notion that a
particular HHI can serve as an irrebuttable presumption of lack
of market power. In that proceeding, the parties argued for an
31/(...continued)
(E.D. Pa. 1990); United States v. LTV Corp., 1984-2 Trade
Cases 66,133 at 66,336 n.5 (D.D.C. 1984).
32/ Oil Pipeline Study at 30.
Docket No. IS90-21-003, et al. - 14 -
HHI threshold, but the Commission concluded that, while the use
of HHIs is the appropriate first step in evaluating the
likelihood of market power, knowing the degree of concentration
in a market merely "provides useful information about where on
the competitive spectrum that market likely lies and what other
factors will have to be weighed to enable a finding as to the
existence or absence of significant market power." 33/
Although the Commission stated that, where a market had a
"particularly low" HHI, it did not undertake further review, the
Commission did not recognize any specific number as raising an
irrebuttable presumption of competitiveness. 34/
Neither do we agree that the ALJ's decision supports the
notion of a particular HHI number raising an irrebuttable
presumption of lack of market power. While the ALJ chose to use
2500 as an initial screen for his analysis, he acknowledged that
in Buckeye, the Commission did not adopt a particular
number, 35/ and he recognized that caution suggested a look at
BEAs with HHIs below 2500 where Williams has a high market
share. 36/ His choice of 1800 as a lower limit appears to be
based in large part on the fact that several parties had urged
adoption of that number as the screen. Accordingly, based on all
of these considerations, we deny rehearing on this issue. 37/
E. Weight Accorded Exchanges
The Commission, in Opinion No. 391, affirmed the ALJ's
conclusion that exchanges should be entitled to little weight in
the post-screening review of the markets in this case. Further,
the Commission recognized that the potential for double counting
33/ 53 FERC 61,473 at 62,667.
34/ Id. See also 55 FERC 61,084 at 61,254.
35/ 58 FERC 63,004 at 65,013.
36/ Id. at 65,023.
37/ In both the Buckeye proceeding and this proceeding we have
used an initial screen of 2500. The Commission did so to
follow the recommendations and the precedent of the Justice
Department in its work on oil pipelines. More recently, the
Commission has requested comments on a Staff Paper on
Market-Based Rates for Natural Gas Companies. In that
Paper, Staff proposed an initial screen of 1800 for
analyzing natural gas pipeline transportation markets,
proposing a relatively strict standard when the Commission
considers market-based rates for natural gas pipelines.
Request for Comments on Alternative Pricing Methods, Docket
No. RM95-6-000, 70 FERC 61,139 at 61,403, 61,408.
Docket No. IS90-21-003, et al. - 15 -
exists where capacity is included in the HHI and the exchange
utilizing the capacity is added into the HHI as well or
considered a mitigating factor. The Commission pointed out that
exchanges do not create new barrels of product and do not always
involve the owner's taking physical possession of the barrels.
Finally, the Commission concluded that exchanges tend to be
negotiated with reference to Williams' rates rather than
disciplining the rates. 38/
Williams disputes the conclusion that assigning significant
weight to exchanges would result in possible double counting.
According to Williams, it never asked the Commission to take
exchanges into account as some sort of adjustment to HHIs, but
merely asked the Commission to consider the extensive volume and
pricing information contained in the record on exchanges.
Williams claims that this record shows a consistent pattern of
intense price rivalry among alternative sources, even in the BEAs
found not workably competitive.
The Commission's use of supply capacity as a measure of
market concentration already takes exchanges into account, as
explained in Opinion No. 391. 39/ While exchanges may obviate
the use of specific pipeline corridors between two markets, they
do not obviate the need for ultimate delivery into the BEA. This
must be accomplished with existing delivery capacity, including
trucks, pipelines, barges, and direct refinery sales. All of
these alternatives, where viable, have been included in our HHI
calculations for individual markets.
We do acknowledge the considerable traffic in exchanges
documented by Williams and the fact that this permits shippers to
bypass all or part of the Williams system. However, this does
not change the fact that delivery of exchanged product into a BEA
must take place through the facilities of some existing supplier.
The ability of suppliers to deliver exchanges into the BEA is
already accounted for in our HHI analysis.
Williams has offered specific examples of what it claims to
be the effects of exchanges in the Omaha, Duluth, Grand Island,
and Sioux City BEAs. Although Williams alleges that product is
received on exchange in the Omaha BEA, thereby eliminating the
need for transportation on its system, as we have stated above,
our use of supply capacity as a measure of market concentration
already considers exchanges. Although Williams has not sought
rehearing of our market power determinations relating to the
Duluth, Grand Island, and Sioux City BEAs, the same principle
applies in those markets.
38/ 68 FERC 61,136 at 61,673.
39/ Id. at 61,672-73.
Docket No. IS90-21-003, et al. - 16 -
F. Ability to Sustain a 15 Percent Price Increase
The Commission accepted the ALJ's definition of market power
as "a firm's ability to sustain a price increase over a
significant period of time, or to exclude competition." 40/
The Commission also affirmed the ALJ's rejection of any specific
rate increase as a litmus test for market power. 41/
Williams and AOPL challenge the Commission's failure to
establish a specific price increase threshold for determining the
existence of market power. First, they contend, use of such a
threshold flows from the definition of market power adopted by
the ALJ. Williams and AOPL also object to the Commission's
reliance on the Merger Guidelines 42/ for the proposition that
a small but significant nontransitory price increase is only a
methodological tool and does not establish a tolerance level for
inferences concerning market power. According to Williams and
AOPL, the point of the statement in the Merger Guidelines is that
an small but significant nontransitory price increase is not
intended to license a particular quantum of future price, and in
any event, that is not what Williams seeks to do. Rather, state
Williams and AOPL, the evidence of Williams' inability to sustain
a 15 percent price increase demonstrates that it lacks the
ability to increase its rates by that amount today.
Williams contends that the Commission ignored a great deal
of evidence when it accepted the ALJ's finding that Williams
studied the impact of a hypothetical rate increase in only three
of its markets where market concentration suggested further
scrutiny. According to Williams, the record demonstrates that
its rates have not increased significantly in real terms over its
pre-existing rates and actually have decreased in real terms,
particularly its average rates to each of the BEAs where it was
found not to have shown that it lacks market power. Further,
emphasizes Williams, its average systemwide rates also decreased
6.6 percent in real terms, although its systemwide average
nominal rates increased 13 percent.
Williams maintains that the record contains evidence that
would have allowed the ALJ and the Commission to test the effect
of a 15 percent increase in all of the markets that were
subjected to further analysis. Williams states that it presented
BEA-by-BEA evidence of the number of additional truckloads of
product per day from non-Williams sources that would make a 15
40/ Id. at 61,657.
41/ Id. at 61,658.
42/ Dep't of Justice and Federal Trade Commission Horizontal
Merger Guidelines (April 2, 1992).
Docket No. IS90-21-003, et al. - 17 -
percent real price increase by Williams unprofitable. 43/
Williams claims that this evidence is extremely conservative
because it relies on the delivery-based market share data
presented by the staff, which includes 100 percent of Williams'
deliveries to non-Williams terminals even if they were trucked
outside of the destination BEA. Despite that flaw, Williams
seeks to demonstrate that, in most of the BEAs where the ALJ
found that Williams had failed to demonstrate that it lacks
market power, fewer than ten additional truckloads per day would
be sufficient to make a 15 percent increase unprofitable.
Finally, Williams states that the trucking cost table presented
by Kerr-McGee and relied on by the ALJ also showed the extent to
which external sources could cost-effectively serve each BEA as a
result of a 15 percent real price increase by Williams. Williams
concludes that the analysis, which it depicted in the maps
contained in the individual BEA discussions in its Brief on
Exceptions 44/ and the Appendix to its Brief Opposing
Exceptions, 45/ confirmed that Williams would lose sufficient
business to render such a price increase unprofitable.
The Commission denies rehearing on this issue. Opinion No.
391 thoroughly explains the Commission's reasons for rejecting
the use of a specific level of rate increase as a litmus test for
market power. Williams and AOPL raise no new arguments that were
not addressed by the Commission in its previous order. For
example, the Commission rejected Williams' argument that rate
decreases in certain of its markets requires the Commission to
establish a specific rate increase threshold for determining the
presence or absence of market power. The Commission also pointed
out that the Merger Guidelines reject mechanical application of
the concept of a small but significant nontransitory price
increase.
We also find a lack of agreement on the use and definition
of a small but significant nontransitory price increase in this
proceeding. When Williams alludes to the importance of such a
price increase in measuring its competition, it looks at the
43/ Williams explains that it calculated its daily deliveries to
each BEA by multiplying its net percentage share of
deliveries by total daily consumption in the BEA. Citing
Ex. 306 at 2; Ex. 354 at 3; Ex. 217 at 8. Then Williams
determined the number of tank truckloads that would be
required to displace 15 percent of those deliveries and
presented the results in the individual BEA discussions in
its Post-Hearing BEA Appendix.
44/ Brief on Exceptions of Williams Pipe Line Co. at 72-113.
45/ Brief Opposing Exceptions of Williams Pipe Line Co., BEA
Addendum.
Docket No. IS90-21-003, et al. - 18 -
effect of a 15 percent price increase on competition in its
markets, citing the reference to 15 percent in Buckeye, but
adding 15 percent to its 1990 proposed rate increase. 46/ By
contrast, Witness Alger, in his assessment of transit pipelines
that could build terminals profitably in particular BEAs, used as
his small but significant nontransitory price increase a $0.10
increase over pre-1990 rates. 47/ There is no need for the
Commission to resolve this conflict.
G. Use of Corridors
Opinion No. 391 affirmed the ALJ's use of destination
markets, rejecting Texaco's contention that corridors should be
used in determining the relevant geographic markets in this
proceeding. The Commission found that the real economic concern
of shippers is the delivered product and its price rather than
whether the product travels between specific locations via
pipeline. Additionally, the Commission recognized that, if
geographic markets were limited to specific origin/destination
pairs, this would fail to recognize the economic concern of the
shippers as well as eliminating from consideration competitive
suppliers who bring product into the markets without utilizing
the specific corridors. The Commission also explained that the
availability of exchange options mitigates situations in which a
shipper might otherwise be captive and that the use of
destinations as the relevant market allows for those exchanges to
be recognized and considered as the viable options that they are
for shippers. Finally the Commission found that the use of
destinations as the relevant markets is consistent with
Buckeye. 48/
Texaco argues that, just as Williams may have captive and
non-captive destination markets, with relief tailored
accordingly, there should be recognition that both captive and
non-captive corridors can exist. 49/ Texaco's request for
rehearing on this issue is denied. In Opinion No. 391, the
Commission thoroughly explained its reasons for rejecting the use
of corridors, principally that defining geographic markets by
specific corridors would eliminate from consideration those
suppliers who bring product into a market without using the
corridors.
46/ See, e.g., Ex. 208 at 38.
47/ Tr. 41/6997, 7006; Ex. 627.
48/ 68 FERC 61,136 at 61,660-61.
49/ Texaco states that the Commission recognized this in the
NOPR for market-based ratemaking for oil pipelines. Citing
68 FERC 61,137, slip op. at 10, n.18 (July 28, 1994).
Docket No. IS90-21-003, et al. - 19 -
Texaco argues in the alternative that, if the only
consideration is for destination markets, and corridors are
immaterial, then there should be only a single competitive rate
to each market where Williams lacks significant market power.
Texaco maintains that, if Williams posts more than one rate to
the market destination, it demonstrates either that (1) there is
a segmented market in the destination, with one segment insulated
from another, or (2) only some customers are receiving the
benefit of any competition, contradicting the finding that
competition will hold the rates within just and reasonable
levels. Texaco asserts that the single rate it advocates should
be set at the lowest of the rates posted, subject to verification
that the lowest rate is no higher than the rate of the principal
competitors.
Texaco has cited the Dubuque BEA as an illustration,
claiming that, while Williams claims to face competition in this
market, the range of rates in this BEA makes it appear that only
some customers benefit from this competition. However, Texaco is
incorrect when it assumes that competition requires that there be
only one pipeline rate into a BEA. Competition will tend to
effect a single market price of delivered product, but that does
not require all suppliers to have identical costs at every level
of the delivery chain. Competition, in fact, may require
differential pricing, as will be discussed in greater detail
later in this order. We also emphasize that competition does not
preclude price increases. In any of its markets, if Williams'
cost for product transportation is above market levels, it will
lose customers. In the case of Dubuque, shippers not only have
pipeline alternatives to use instead of Williams, but may receive
barge deliveries as well. 50/
Texaco mistakenly assumes here that Phase I of this
proceeding is for the purpose of establishing just and reasonable
rates in individual markets, rather than for the purpose of
performing a market analysis to determine market power. Market
power that controls access to a destination is relevant to that
market, and market power that controls egress from an origin
market is relevant to that market; however, the options open to
shippers in an origin market do not prove or disprove competition
in the destination market. The fact that a pipeline may be able
to post more than one rate to a market could also reflect
differences in distances, costs, product prices, density of
traffic, and trucking or delivery costs for competitors in
various sectors of a market.
Texaco appears to be seeking an inappropriate result -- that
Williams should post a single rate from all destinations into
50/ See Ex. 321.
Docket No. IS90-21-003, et al. - 20 -
each of its competitive markets. The Commission rejects that
argument as well. To require a single transportation rate, which
would be set at the lowest of the rates posted, subject to the
verification sought by Texaco, would be to impose by regulation
the desired outcome of a single party without regard to market
realities. It would also be inconsistent with the Commission's
philosophy of light-handed regulation where market forces are
effective.
II. Challenged BEA Findings
With respect to the nine BEA markets where it challenges the
Commission's findings, Williams argues that Opinion No. 391 (1)
failed to take into account the recent entry of the Heartland and
Cenex pipelines into Williams' markets; (2) ignored the surveys
and interviews demonstrating that external sources are serving
Williams' markets on a regular and ongoing basis; (3) failed to
consider the impact of barge competition; (4) failed to consider
the competition created by the Department of Defense (DOD) annual
bidding process; and (5) misconstrued staff analyses concerning
the potential for profitable construction of terminals on
pipelines traversing several of Williams' markets. Texaco asks
the Commission to grant rehearing and find the Columbia BEA to be
noncompetitive, claiming that Williams has been able to raise its
rates significantly in that market.
A. Springfield, MO
Despite the ALJ's 1317 HHI for this market and Williams' 38
percent delivery-based market share, the Commission found that
Williams had failed to demonstrate that it lacks market power in
this BEA. The Commission explained that this is a large BEA and
that five of the external sources utilized in the ALJ's
calculation are at too great a distance from the BEA border to
provide economic competition. The Commission's recalculated HHI
was over 3000. 51/
On rehearing, Williams states that the Commission excluded
all external sources as well as three pipelines that do not have
operating terminals within the BEA. As a result, contends
Williams, the recalculated HHI is high because only three
suppliers with capacity sufficient to supply the entire BEA were
considered. 52/ Williams argues that the Commission is
incorrect about the potential for terminals on the three excluded
pipelines because the staff found that two terminals could be
51/ 68 FERC 61,136 at 61,679.
52/ The three pipelines are Williams, CRA-Farmland, and
Cherokee.
Docket No. IS90-21-003, et al. - 21 -
constructed profitably within this BEA and should be included in
the HHI calculation.
Further, maintains Williams, the exclusion of external
supply sources was based on inaccurate information, which cited
distances from external sources to the City of Springfield,
rather than distances to the border of this large BEA.
According to Williams, Phillips supplies this BEA market from
both Jefferson City and Kansas City. Williams contends that the
Commission eliminated both sources, although Kansas City is twice
as far as Jefferson City from the market. Williams argues that
inclusion or exclusion of external sources should be based on
observed trucking activity, such as the survey and interview
evidence in the record.
Williams explains that the HHI used by staff discounts the
external sources by recognizing that these sources are capable of
serving only part of a BEA market. However, Williams argues that
even these external supply sources are capable of competing with
an internal source. Williams notes that Phillips at Kansas City
is capable of competing in slightly more than one-half of the
market, while Shell at Wood River, Illinois, competes in less
than four percent of the market.
Williams also argues that the staff's recalculated HHI is
conservative because it excludes sources that logically would
supply the BEA but were not documented by the trucker interviews
or the gas station manager surveys. Williams lists six external
sources that logically could serve the Springfield BEA but were
excluded because there was no documentation on the record. 53/
Williams concludes that these additional supply sources require
an HHI even lower than the staff's calculation.
We will grant rehearing with respect to the Springfield BEA.
Our further examination of the record indicates that the
Springfield BEA could support the profitable construction of
terminals for the ARCO and Explorer transit pipelines, although
not for the KCPS line. 54/ We will, therefore, include these
two internal sources in our recalculation of the HHI for this
market.
We reach a different conclusion regarding the viability of
external sources. We have examined carefully the documentation
of delivery costs provided by Williams for this BEA, which
53/ Williams lists Chase at Valley Center, Kansas; Texaco at El
Dorado, Kansas; Derby at Wichita, Kansas; Total at Arkansas
City, Kansas; ARCO at Kansas City, Kansas; and Sinclair at
Tulsa, Oklahoma.
54/ See Ex. 627.
Docket No. IS90-21-003, et al. - 22 -
demonstrates that delivery costs for Phillips and Shell far
exceed those of Williams. 55/ Phillips' delivery costs into
this BEA through Jefferson City are nearly double those of
Williams. Shell's terminal which, according to Williams, is 50
miles further from the BEA, would necessarily be even more
costly, although Williams provides no costs for this source.
Therefore, on the basis of this evidence, we are unable to
conclude that deliveries by Phillips and Shell are economically
viable competitive sources for this BEA.
Truck deliveries from the Sun refinery in Tulsa are
questionable; it is not clear that such deliveries would occur
because both Conoco and Williams offer pipeline service from
Tulsa to a number of terminals in the Springfield BEA, at
delivered costs well below the cost of trucking. 56/ If
Williams were to raise its rates, the Sun alternative could
become more attractive. However, because Williams assigns only a
five percent market share to Sun, including or excluding it
barely changes the market concentration.
We will not include the other six potential suppliers cited
by Williams. As Williams itself admits, these sources are not
documented in the record and are included by Williams for the
first time on rehearing.
With the inclusion of the ARCO and Explorer pipelines as
internal sources, we can find that Williams lacks significant
market power in this market. Even with the continued exclusion
of Phillips and Shell as external sources, customers in this BEA
now have a choice of taking deliveries from five alternative
suppliers in addition to Williams. This is reflected in the
recalculated HHI of 1800 for the Springfield BEA. Therefore, we
grant rehearing for this market.
B. Kansas City
For the Kansas City BEA, the Commission recalculated the HHI
to eliminate sources more than 100 miles from the BEA, finding
that the record did not show them to be competitive with
Williams. The recalculated HHI of more than 2500, in addition to
Williams' delivery-based market share of 63 percent and the lack
of offsetting circumstances, caused the Commission to find that
Williams had failed to establish that it lacks market power in
the Kansas City BEA. 57/
55/ See Ex. 311.
56/ Id.
57/ 68 FERC 61,136 at 61,680.
Docket No. IS90-21-003, et al. - 23 -
Williams asserts that the Commission erred by relying on an
inaccurate high delivery-based market share and by improperly
excluding external supply sources. According to Williams, the
market share cited by the Commission actually represents the
combination of Williams' and Phillips' pipeline deliveries to
this market because the two companies share breakout facilities.
Williams also states that the shippers have exaggerated the
distances from the external supply sources to the BEA border.
Williams urges the Commission to adopt the original staff HHI of
2340 because this calculation appropriately recognizes the effect
on this market, albeit small, of the external sources located
more than 100 miles from the BEA border.
Williams maintains that it included in the HHI calculations
only external sources that had been identified and documented as
serving the BEA by the gas station manager surveys or trucker
interviews. However, in the case of the Kansas City BEA,
Williams contends on rehearing that there are four other external
supply sources that could be included in the HHI calculation,
thereby lowering the HHI. 58/
On review of the record, we find that some of these external
sources may indeed deliver into this BEA at competitive prices.
Truck deliveries from two external sources -- the Farmland
refinery in Coffeyville, Kansas, and the Conoco terminal at Mt.
Vernon, Missouri -- were improperly excluded from our calculation
for this market. Although both sources face some competition
from pipeline deliveries, they are still economically feasible.
Product from both Coffeyville and Mt. Vernon can serve the border
counties of the BEA in viable competition with product delivered
at Kansas City and trucked back to the border counties. On this
basis, we will include trucking from the Farmland refinery and
the Mt. Vernon terminal as separate and competitive alternatives
to Williams' pipeline in this BEA. 59/
However, the record does not contain capacity figures for
the alleged external supply sources at Salina, Phillipsburg, El
Dorado, and Council Bluffs that would allow us to examine their
potential as competitors.
For this BEA, we also agree that the delivery data are
somewhat misleading. Because Williams shares breakout facilities
with Phillips in this BEA, the data on market share include
deliveries for both companies. With this correction, Williams'
58/ These sources are Kaneb at Salina, Kansas; NCRA at
Phillipsburg, Kansas; Texaco at El Dorado, Kansas; and NCRA
at Council Bluffs, Iowa.
59/ See Ex. 315.
Docket No. IS90-21-003, et al. - 24 -
market share falls almost by half, causing us considerably less
concern about Williams' market power.
On review, we find that six other suppliers in addition to
Williams can serve this BEA competitively. Therefore, our HHI
calculation, which now includes Amoco, ARCO, KCPS/Texaco,
Phillips, Williams, Farmland, and Conoco (at Mt. Vernon only), is
2400. This figure, along with a corrected market share for
Williams of 36 percent, causes us to find that Williams has
successfully demonstrated that it lacks market power in this BEA.
Accordingly, rehearing is granted.
C. Lincoln
The Commission concluded that Williams had failed to prove
that it lacks market power in the Lincoln BEA. In this market,
the Commission found Williams' delivery-based market share to be
65 percent. Eliminating the NCRA pipeline, which does not have a
terminal in the BEA, produced a recalculated HHI of over 3000.
The Commission also found no evidence of any factors offsetting
the high market share and HHI numbers. 60/
Williams argues that the Commission erred in excluding the
NCRA and Heartland pipelines in its HHI recalculation and in
relying too heavily on Williams' pre-Heartland delivery-based
market share. Williams cites the evidence presented by staff's
Witness Alger that NCRA would find it profitable to build a
terminal because the net present value of the incremental profits
that would be generated would exceed the cost of constructing the
terminal. Williams further states that the Heartland pipeline,
with a rated capacity of 50,000 barrels per day, began operation
in September 1990 and was fully operational throughout 1992.
On review, we find that the evidence demonstrates that, even
though NCRA presently has no terminal in the Lincoln BEA, it does
have a terminal at Council Bluffs, some 60 miles from the City of
Lincoln, that can deliver product competitively into the Lincoln
area. 61/ Given this fact, the question of a potential
internal NCRA terminal is moot. We will include the Council
Bluffs terminal in the HHI calculation. However, our reading of
Witness Alger's testimony concerning the Heartland terminal at
Lincoln differs from that of Williams. Witness Alger merely
agreed that if Williams' assumptions about the economics of the
potential NCRA terminal were accepted, then an NCRA terminal
would be profitable; however, he did not accept Williams'
60/ 68 FERC 61,136 at 61,680.
61/ See Ex. 327.
Docket No. IS90-21-003, et al. - 25 -
assumptions. 62/ We believe that his assumed price increase
of $0.10 over pre-1990 rates is more realistic than Williams'
assumed price increase of 15 percent over pre-1990 rates.
Although Williams presented evidence that Heartland was
under construction, we excluded it from our analysis of the
market as an uncertainty. However, the Heartland terminal at
Lincoln became fully operational in 1992, in which year Williams'
deliveries fell by a significant percentage. While the record
does not contain any evidence of costs for this new pipeline, it
is in fact an internal source in this BEA, with an effective
capacity equal to that of Williams or Kaneb. With the inclusion
of Heartland and the NCRA Council Bluffs terminal, our
recalculated HHI is 1542. Therefore, based on our determination
that Williams lacks significant market power in this market, we
grant rehearing.
D. Quincy
The Commission examined the Quincy BEA and reversed the
ALJ's decision, based on Williams' 74 percent delivery-based
market share and the recalculated HHI of 6559. 63/ The
Commission found that Williams has the only pipeline terminal in
the BEA and that evidence demonstrated that it would not be
profitable for Amoco, which has a proprietary pipeline traversing
the BEA, to build a terminal there. 64/
Williams argues that, contrary to the Commission's
conclusion, staff Witness Alger determined that it would be
profitable for Amoco to build a terminal in the Quincy BEA.
Williams also states that, in evaluating external supply sources
in this BEA, it included only external sources that had been
identified and documented as serving the BEA by the gas station
manager surveys or trucker interviews. However, Williams
contends that there are three other external supply sources that
could have been included. 65/
Next, Williams contends that, contrary to its findings in
Buckeye, the Commission erred in not recognizing the strong
competitive effects of the barge facilities that are located
virtually in the center of the Quincy BEA market at Canton and
62/ Tr. 42/7185.
63/ The ALJ found the HHI to be 2026. 58 FERC 63,004 at
65,023.
64/ 68 FERC 61,136 at 61,685.
65/ Williams lists Conoco at St. Charles, Missouri; ARCO at Ft.
Madison, Iowa; and Shell at St. Louis, Missouri.
Docket No. IS90-21-003, et al. - 26 -
LaGrange, Missouri. 66/ Williams also maintains that its
effective capacity-based market share in Quincy is 25 percent,
demonstrating that it cannot exercise market power in this
market.
On rehearing, we find that Williams is correct in its
contention regarding the possible construction of an Amoco
terminal. Using his own conservative assumptions, staff Witness
Alger found that it would be profitable to construct this
terminal, and that its inclusion in the HHI calculation might
alter his finding on competition in this BEA. 67/ We have
accepted Witness Alger's assessment of the potential
profitability of such terminals in other markets and will do so
here as well by including the potential Amoco terminal in the
market and the HHI calculation.
With respect to external sources that might serve as
alternatives in this BEA, the trucking and delivery costs
presented in the record lead us to reaffirm our exclusion of
Phillips as an economically viable alternative in the BEA. The
trucking costs alone from Phillips' terminals are almost equal to
Williams' total delivered costs in the Quincy market. By
contrast, these cost data indicate that ARCO, while not a least-
cost supplier, could serve this BEA in competition with
Williams. 68/
The external barge sources cited by Williams, which are St.
Louis and Gulf Coast suppliers, also must be eliminated. If they
serve the BEA through the internal barge terminals at Canton and
LaGrange, they should not be counted twice as sources. If
supplies are offloaded from barges at St. Louis and trucked to
Quincy, the 79 mile trip to the border of the BEA would be
uncompetitive with more direct barge deliveries because barge
transport costs are approximately one to two mils per mile as
opposed to approximately one cent per mile for trucks.
We also recognize that there are year-round barge facilities
within this BEA at LaGrange and Canton, Missouri, which together
are capable of providing more than 10 times the BEA's consumption
of product. 69/ If these barge facilities were included at an
effective capacity to serve the entire BEA, the HHI would be
66/ Citing 50 FERC 63,011 at 65,055-56; 53 FERC 61,473 at
62,669 (199O).
67/ See Ex. 627.
68/ See Ex. 318.
69/ BEA Appendix to the Opening Post-Hearing Brief of Williams
(BEA Appendix), n.30.
Docket No. IS90-21-003, et al. - 27 -
2700. According to the evidence provided by Williams, barge
deliveries into this BEA account for some 28 percent of total
deliveries. 70/ However, the HHI calculation relied on by the
ALJ in making his findings credits these facilities with a very
low capacity. Like the ALJ, we merely relied on Williams'
numbers in reaching our conclusion in Opinion No. 391.
We will recalculate the HHI to include Amoco on the basis
that a terminal could be constructed profitably in this BEA. We
will exclude Phillips because we find that it is not economically
viable, and we will exclude the external barge sources to avoid
double counting, as explained above. The recalculated HHI is
3100, almost half of our previous HHI, but not enough by itself
to change our finding about the concentration of this market.
However, it is commonly viewed that the existence of waterborne
traffic, coupled with expandable capacity for waterborne
deliveries, makes an oil market competitive. 71/ The staff in
the past has suggested a more conservative approach, holding that
expandable waterborne capacity, coupled with waterborne
deliveries that account for at least 10 percent of total
deliveries into a market, create a presumption of competition in
that market. 72/ We will adopt this more conservative
approach. Accordingly, because the conditions in the Quincy
market satisfy this presumption, we find that Williams does not
have significant market power in this market. Despite the
seemingly high HHI for this BEA, we will grant rehearing.
E. Des Moines
The Commission found that Williams has a 78 percent
delivery-based market share in the Des Moines BEA. Eliminating
two external sources, barge terminals at Dubuque and Bettendorf,
Iowa, the Commission's recalculated HHI was over 2500. In
concluding that Williams had failed to establish that it lacks
market power in this BEA, the Commission explained that Williams
had not offered other considerations to offset the two high
numbers. 73/
70/ See Ex. 211 at 3.
71/ See, e.g., John A. Hansen, U.S. Oil Markets 40, 49, 64
(1983); Department of Justice, Oil Pipeline Study at 36, 64
n.75.
72/ Commission Staff Proposal for Revisions to Oil Pipeline
Regulations Pursuant to the Energy Policy Act of 1992 at 46-
47, 54 (March 1993). See also Oil Pipeline Study at xii,
17, 36 (indicating the importance of port facilities in
determining the competitiveness of a market).
73/ 68 FERC 61,136 at 61,680.
Docket No. IS90-21-003, et al. - 28 -
Williams emphasizes that Heartland began operating in this
BEA in September of 1990, causing Williams to cut its rates from
Central Oklahoma origins to Des Moines in November. Despite this
action, Williams states that it lost substantial volumes to
Heartland. 74/ Williams argues that these losses verify the
strong pro-competitive effect of Heartland and also Williams'
lack of market power.
Williams maintains that the Bettendorf and Dubuque barge
facilities were documented to be serving the Des Moines BEA
through interviews with truckers and surveys of gas station
managers, as validated statistically by Witnesses Bollen and
Schink. Although the Commission found that the barge facilities
at Bettendorf and Dubuque to be approximately 160 miles distant,
Williams states that these are the approximate distances to the
central city of the BEA, not to the BEA border. Williams also
points out that neither of these external barge sources serves
the entire BEA market.
Williams claims that it did not include external sources
unless they were specifically identified by the truck driver
interviews or through the telephone surveys. Thus, Williams
urges consideration of two other documented sources for this BEA:
NCRA's pipeline terminal in Council Bluffs and the Mississippi
River barge terminals in Canton, Missouri. Williams points out
that trucks from Amoco's terminal in Council Bluffs and from
Williams' terminal in Omaha serve a large part of the Des Moines
BEA; therefore, reasons Williams, it is logical that trucks from
NCRA's terminal in Council Bluffs should have the same reach
within the Des Moines BEA as do trucks from Amoco's Council
Bluffs and Williams' Omaha terminals. Williams calculates that
NCRA competes in 41 percent of this market. Noting that trucks
from the barge terminal in LaGrange, Missouri, serve the Des
Moines BEA, Williams assumes that the effective supply capacity
for the barge docks at Canton is at least as great as the
effective supply capacity of the barge docks at LaGrange, given
the fact that the Canton docks are approximately seven miles
closer to the Des Moines BEA border than the LaGrange docks.
We reject Williams' argument that we failed to give adequate
consideration to the effects of Heartland's entry into the
market. Our calculations did take full account of Heartland,
viewing it as equal to Williams in its ability to serve the
market. Because our HHI in this case is a simple capacity-based
measure, the price and volume changes experienced by Williams are
irrelevant to, but implied by our calculations.
74/ Williams claims that Heartland's FERC Form No. 6 submitted
December 31, 1992, confirms that these barrels, along with
volumes lost by Williams at Lincoln, were diverted to
Heartland.
Docket No. IS90-21-003, et al. - 29 -
As to external sources, Williams correctly notes that NCRA
can serve this BEA competitively for a small share of the
market. 75/ By contrast, Williams' cost evidence shows that
ARCO deliveries from Ft. Madison exceed Williams' own delivery
costs by almost $1.00 per barrel. 76/ We will, therefore,,
include NCRA but not ARCO in our recalculated HHI for this
market. We will also include the barges at LaGrange and Canton
as minor sources.
We disagree with Williams' contention that the barge
terminals at Dubuque and Bettendorf can serve 72 percent and 81
percent of the BEA market respectively in competition with
Williams. We conclude that we properly excluded trucked
deliveries from these barge terminals as regularly viable
sources. The trucking and delivery costs presented in the record
for this BEA show a disparity of $1.00 to $2.00 per barrel
between Williams' pipeline rates and the parallel trucking
costs, 77/ making it unlikely that anyone would choose
trucking from these terminals.
In contrast, the record shows that pipeline deliveries from
these barge terminals into the BEA are cost-effective. However,
our reexamination of the record reveals that three of the four
terminals at Bettendorf and one of the two at Dubuque are
connected to Williams. 78/ Access to the BEA from these
terminals is thus primarily through Williams unless product is
trucked. If we include deliveries made into the Des Moines BEA
by pipeline, then we must recalculate the HHI to consolidate some
of this capacity into Williams' share of the market. We can
ascribe 3/4 of the capacity at Bettendorf and one-half the
capacity at Dubuque to Williams.
With this addition to Williams' share of capacity in the Des
Moines market, and reflecting the other changes discussed in this
section we have a recalculated HHI of 2897. Shippers in this
market have a choice of only two other pipelines in the BEA, with
limited service alternatives from external sources. Accordingly,
because Williams exercises significant market power in this
market, rehearing is denied with respect to the Des Moines BEA.
75/ See Ex. 326.
76/ Id.
77/ Id.
78/ Tr. 23/3017-19, 41/6971-72.
Docket No. IS90-21-003, et al. - 30 -
F. Omaha
On review of the ALJ's determination, the Commission
affirmed that Williams exercised significant market power in the
Omaha BEA. The Commission based its decision on Williams'
delivery-based market share of 46 percent and an HHI of 2786.
The Commission rejected Williams' arguments concerning
competition from the Heartland pipeline. Finally, the Commission
rejected Williams' contention that the reduction in its rates to
Omaha was conclusive evidence of competition, emphasizing that a
rate increase or decrease per se does not prove or disprove
market power. 79/
Williams states that both the ALJ and the Commission failed
to recognize the presence of a Heartland terminal in Lincoln,
Nebraska, which also serves this BEA. Williams points out that
the Heartland Lincoln terminal is located just 25 miles from the
Omaha BEA border and less than 50 miles from the City of Omaha.
Based on documented truck movements from Williams' terminals in
Lincoln, Williams argues that trucks from the Heartland terminal
at Lincoln logically could serve a large portion of the Omaha
BEA.
Williams also points out that this terminal, owned and
operated by Conoco, was served exclusively by Williams prior to
the construction of the Heartland pipeline. Subsequently,
asserts Williams, shipments to Conoco's Lincoln terminal were
largely rerouted through the new pipeline, which sharply reduced
Williams' shipments to the Lincoln BEA.
Williams also argues that the Omaha market can be served
from the Heartland terminal at Des Moines, and that a strong
potential exists for construction of a new terminal or
modification of an existing facility served by the Heartland
pipeline within the Omaha BEA. 80/ Finally, Williams states
that it delivers substantial volumes of product in Omaha for
ultimate use at Offutt Air Force Base. Williams argues that this
business is constantly at risk because the DOD puts the fuel
contract out for competitive bid every year.
On rehearing, the Commission finds that Williams is partly
correct. The trucking cost information provided by Williams for
this BEA confirms that the Heartland terminal in Lincoln, located
25 miles from the BEA border and 58 miles from Omaha, could be
79/ 68 FERC 61,136 at 61,684.
80/ Williams points out that the Heartland Pipeline, which is
jointly owned by Conoco and Enron, runs through the southern
portion of the BEA and currently makes LPG deliveries to an
Enron terminal in Plattsmouth, Nebraska.
Docket No. IS90-21-003, et al. - 31 -
considered a viable supply source for this BEA. 81/ Although
the record contains no evidence of costs for this terminal,
Williams notes that its share of deliveries in this BEA has
dropped substantially since Heartland began operations, which
reduces Williams' delivery-based market share.
By contrast, we do not find that Heartland's terminal in Des
Moines, some 130 miles from Omaha and 68 miles from the BEA
border, should be included as an economically viable source for
this BEA. According to evidence presented by Williams, the
additional trucking charges from Des Moines would make deliveries
from this terminal uncompetitive in this BEA. Trucking costs to
the border would be approximately 70 cents and approximately
$1.20 to Omaha, exclusive of pipeline and terminal fees. 82/
There is insufficient evidence to permit us to rule on the
inclusion of the potential Heartland terminal near Omaha; in
fact, Williams does not include any capacity figure for it. We
can acknowledge the possibility of its construction, but will not
include it in our HHI calculation.
Although Williams argues that its market share in this BEA
is subject to serious competition because a large volume is
subject to annual bids for DOD contracts, we conclude that
Williams' ability to compete for DOD sales is no different than
its ability to compete for other business. Such decisions are
made on the basis of Williams' transportation costs, as those
affect the delivered price.
Under our revised market analysis, we find that shippers in
this BEA have a choice of five internal sources, including
barges, as well as the Heartland terminal at Lincoln. The
recalculated HHI is 2300. Accordingly, we find that Williams
lacks significant market power in this market, and grant
rehearing.
G. Eau Claire
In finding that Williams failed to prove that it lacks
market power in the Eau Claire BEA, the Commission relied on
Williams' 59 percent delivery-based market share and recalculated
the HHI, eliminating the Koch pipeline, which lacks a terminal,
and the Badger terminal, which is at too great a distance to
serve as effective competition for Williams. The recalculated
81/ See Ex. 316.
82/ Id.
Docket No. IS90-21-003, et al. - 32 -
HHI was over 3000, which the Commission found was not offset by
other factors. 83/
Williams claims that the Commission improperly excluded Koch
as a supplier for this market because Koch does not have an
operating terminal on its transit pipeline. However, contends
Williams, Koch serves the entire Eau Claire BEA from its
Minneapolis-area refinery. Williams also contends that the
Commission erroneously excluded the Badger pipeline terminal in
McFarland, Wisconsin, believing the truck haul to be too lengthy.
However, according to Williams, the uncontroverted gas station
manager surveys and trucker interviews substantiated that this
was a regular and ongoing movement.
Further, Williams states that only external sources from
which product movements could be documented were included in the
HHI. However, in the case of the Eau Claire BEA, Williams states
that there is one external source that logically would be capable
of serving the entire market, namely Amoco's pipeline terminal
located at Minneapolis, only 67 miles from the border of the Eau
Claire BEA. According to Williams, it has been documented that
trucks serve the entire Eau Claire BEA from truck racks at
Ashland's and Koch's refineries and Williams' terminal, all of
which are located in Minneapolis.
In this market, Williams argues that delivery-based data
overstate Williams' market share and are unreliable.
Specifically, Williams points out that it does not operate a
terminal within the Eau Claire BEA, but instead delivers to three
third-party terminals operated by shippers. Given this fact,
Williams states that it has no information as to where the
product from these terminals is delivered; therefore, all of the
product shipped to these terminals is counted as being delivered
to the county where the terminals are located. However, Williams
reasons, trucks from these terminals clearly deliver product to
locations throughout the Eau Claire BEA and into adjacent BEAs.
On rehearing, the Commission acknowledges the weakness of
the delivery-based data in this market. The Commission also
agrees that its HHI calculation was in error in this BEA. The
record demonstrates that Koch could serve the BEA competitively
from its St. Paul refinery, 74 miles from Eau Claire itself and
57 miles from the edge of the BEA. In the initial calculation,
following the method established by staff's Witness Alger, this
external capacity was combined with Koch's internal
capacity. 84/ When Koch was excluded as an internal source,
we inadvertently also dropped the external refinery capacity
83/ 68 FERC 61,136 at 61,679.
84/ See Ex. 619 at 60-61.
Docket No. IS90-21-003, et al. - 33 -
properly attributable to Koch. Therefore, the total exclusion of
Koch from the HHI calculation was an error.
Williams also urges the inclusion of several Koch pipeline
terminals as sources for this BEA. A review of the trucking and
delivery costs in the record shows that, with delivery costs
nearly twice that of Williams, none of these is a viable
alternative source. We only include the refinery. Further, on
the basis of these trucking and delivery costs, we continue to
find that Badger would not be a competitive alternative to
Williams in this BEA. 85/
Adding Koch's St. Paul refinery to our previous analysis,
but not the Badger terminal, reduces Williams' market share and
results in an HHI of 2500. Williams is the only internal
pipeline source for this BEA, but the market is served by at
least three refineries at prices that undercut Williams. 86/
Given the significant potential for price discipline from these
sources, we find that Williams lacks significant market power in
this market, and we grant rehearing.
H. Fargo
The Commission recognized that the Fargo BEA covers a large
area and found that the external sources cited by Williams are
too distant to serve as viable alternative sources. In this BEA,
Williams has a delivery-based market share of 51 percent, and the
Commission's recalculated HHI is in excess of 3000. Given these
facts, the Commission found that Williams had failed to prove the
market to be workably competitive. 87/
Williams states that Cenex was constructing a pipeline into
Fargo during the evidentiary hearing. According to Williams,
this eight-inch pipeline, which transports product to Fargo from
the Cenex refinery in Montana, has a design capacity exceeding
the consumption of petroleum products in the entire Fargo BEA.
Williams points out that the Cenex pipeline is connected to
Williams' terminal at Fargo in the same way that Phillips
pipeline is connected to Williams' terminal in Kansas City,
allowing Cenex to deliver product to the Fargo BEA through
Williams' tank truck loading racks. Further, states Williams,
Cenex has chosen to use Williams' truck racks instead of
constructing its own only because Williams offered Cenex an
attractive rate for providing these racking services.
85/ See Ex. 333.
86/ The refineries are owned by Ashland, Koch, and Murphy. See
BEA Appendix at 4-5.
87/ 68 FERC 61,136 at 61,681.
Docket No. IS90-21-003, et al. - 34 -
Williams argues that the Commission improperly excluded all
external supply sources, which, Williams maintains, have been
documented as occurring on a regular and ongoing basis by the
gasoline station manager surveys and the truck driver interviews
and statistically validated by Witnesses Bollen and Schink.
According to Williams, the shipper-intervenors' own trucking
distribution data are consistent with the trucking distances
determined in the driver interviews. Further, states Williams,
trucking distances can be expected to be longer in remote rural
areas such as Fargo. Finally, Williams argues that its delivery
data do not provide a reliable indication of the location of its
deliveries in this market.
We find the evidence demonstrates that Cenex can deliver
product directly into Fargo; therefore, it should be included in
the HHI calculation as an internal source. 88/ Adding Cenex
to this market will reduce Williams' delivery-based market share.
We also have reviewed the evidence relating to the three
additional external sources that Williams claims should be
included in the HHI calculation for this market. These sources
include the Interprovincial facility at Winnipeg (168 miles from
the BEA), and the Koch and Ashland refineries at Minneapolis (175
miles from the BEA). According to evidence on trucking and
delivery costs submitted by Williams for this BEA, we find that
the cost of deliveries to Fargo from these sources exceed the
cost of deliveries on Williams' system by 40 to 112 percent, and
thus, would not offer serious price discipline for Williams' rate
increases. By contrast, product from Amoco's refinery in Mandan
can be delivered to Fargo by pipeline or by truck (a distance of
more than 100 miles) at a cost that far undercuts
Williams. 89/
The HHI recalculated to include Cenex, but not
Interprovincial, Koch, or Ashland, is 2500. The following
factors suggest that this market is competitive: (1) shippers in
this BEA have a choice of service from four pipelines, even
without external sources; 90/ (2) Williams offers proportional
discounts in the western half of the Fargo BEA in order to meet
the competition it faces from Kaneb and Amoco; 91/ and (3)
88/ Tr. 26/ 3519-21.
89/ See Ex. 330.
90/ The Fargo BEA is served by Amoco and Kaneb, in addition to
Williams and Cenex. Request of Williams for Rehearing and
Clarification of Opinion No. 391 at 73. Citing Staff BEA
Appendix at 31; Ex. 217 at 31.
91/ See Ex. 15.
Docket No. IS90-21-003, et al. - 35 -
according to the cost evidence supplied by Williams, its rates
into this BEA are considerably undercut by Amoco and by trucking
deliveries from Amoco's refinery in Mandan. 92/ Accordingly,
we find that Williams lacks significant market power in this
market, and grant rehearing with respect to this BEA.
I. Grand Forks
The Grand Forks BEA is also large, and Williams' delivery-
based market share is 56 percent. Because external sources were
not shown to offer effective competition, the Commission's
recalculated HHI was greater than 3000, and the Commission found
that the Grand Forks BEA is not a workably competitive
market. 93/
According to Williams, the Cenex pipeline into Fargo is
located only 64 miles from the BEA's southern border and 77 miles
south of the City of Grand Forks. Williams argues that the
record contains ample evidence of truck deliveries from Amoco's
Fargo terminal and the Cenex terminal at Minot into the Grand
Forks BEA. Further, Williams claims that truck driver interviews
and gas station manager telephone surveys confirmed specific
towns within the BEA being served and the extent of the service.
Williams lists seven other external sources, located at
distances ranging from 68 to 189 miles to the BEA border. 94/
Williams claims that these sources can serve varying percentages
of the market -- from four percent to 22 percent. 95/
According to Williams, this demonstrates that external sources
need not reach the center city of a BEA to be competitive with
Williams.
Williams also claims that it is under constant pressure to
charge competitive rates to Grand Forks, largely because of the
highly competitive nature of the DOD business in the BEA.
Williams states that, in Grand Forks, off-line deliveries to the
DOD represented nearly one-quarter of total shipments to the BEA
92/ See Ex. 330.
93/ 68 FERC 61,136 at 61,681.
94/ Request of Williams for Rehearing and Clarification of
Opinion No. 391 at 77. They are Winnipeg at Winnipeg,
Manitoba; Kaneb at Jamestown, North Dakota; Amoco at Fargo,
North Dakota; Mandan, North Dakota; and Sauk Center,
Minnesota; Ashland and Koch at Minneapolis, Minnesota;
Murphy at Superior, Wisconsin; and Cenex at Minot, North
Dakota.
95/ Id. at 78.
Docket No. IS90-21-003, et al. - 36 -
during 1990, but that it has lost a substantial portion of this
business.
We agree with Williams that the now-completed Cenex terminal
in Fargo should be included in our HHI calculation. However, as
for external sources, the trucking and delivery costs in the
record for this BEA indicate that only Amoco, in addition to
Cenex, can make competitively viable deliveries into this BEA.
According to the delivery cost data provided by Williams, all
other options are 60 to 120 percent more costly than Williams and
so cannot be expected to offer sufficient pricing
discipline. 96/
Again Williams has argued that it faces serious competition
because a large portion of its sales is subject to annual
contract awards by the DOD. As stated above in the discussion of
the Omaha BEA, we consider Williams' ability to compete for the
DOD business to be no different than its ability to compete for
other business in its markets. Therefore, as with the Omaha BEA,
we will not consider the DOD business as a separate factor in our
market power analysis of the Grand Forks BEA.
Our recalculated HHI for this BEA is 3500, reflecting market
shares for Williams, Amoco, and Cenex. This figure remains too
high to permit a finding that Williams lacks significant market
power in this market. Accordingly, rehearing is denied with
respect to the Grand Forks BEA.
J. Columbia
The Commission determined the HHI for this BEA to be 1738
and acknowledged that Williams' market share is 49 percent. The
Commission accepted the testimony of Witness Alger that it would
be economical for Amoco to construct a terminal in the Columbia
BEA, and the Commission also recognized that external sources
might economically serve particular areas of the BEA. Therefore,
the Commission affirmed the ALJ's finding that the Columbia BEA
is a workably competitive market. 97/
Emphasizing Williams' 49 percent market share, Texaco states
that Williams has demonstrated its ability to raise rates by 44
percent. Further, argues Texaco, if the Commission continues to
hold that BEAs such as Columbia are competitive, then Williams
should be estopped from charging rates above the 15 percent
standard for which Williams argued. In the Columbia BEA, Texaco
states that the rate first went from 87 cents to 110.40 cents, an
increase of 26 percent. Texaco also claims that subsequent
96/ See Ex. 335.
97/ 68 FERC 61,136 at 61,678.
Docket No. IS90-21-003, et al. - 37 -
increases to 119.10 cents and then to 124.90 cents are near the
15 percent mark.
On review of the record, we find that the Columbia BEA is
served by three pipelines having terminals within the BEA. 98/
According to Witness Alger, a fourth pipeline, Amoco, could build
a terminal profitably on its transit pipeline in this BEA. 99/
Moreover, the BEA is served competitively by the Conoco terminal
just outside the BEA boundary and by two barge terminals within
30 miles of the BEA. 100/ We continue to find that Williams
lacks significant market power in the Columbia BEA, with an HHI
of 1800.
Texaco errs in suggesting that the Williams' 49 percent
share of deliveries in this market should be dispositive of a
market power finding. As discussed at the outset, market
delivery data in this proceeding are incomplete and inconsistent,
and cannot be used as a primary indicator of market power. We
have used delivery data primarily as a matter for further
scrutiny when the more reliable capacity-based HHI was
sufficiently high to warrant further examination of the market.
That is not the case with Columbia.
Texaco also errs in its argument that an increase in
Williams' rates -- even a significant one -- is indicative of
market power. The existence of competition does not
automatically imply an inability to raise rates or even that low
rates should prevail. The existence of competition means that
price increases above efficient, market-driven equilibrium prices
will not be sustainable for any length of time. 101/
Texaco has cited evidence of price increases in this BEA,
but has offered no evidence that these price increases are undue,
incongruent with efficient competitive pricing, or indicative of
the exercise of market power. Texaco has not discussed the
effect of Williams' 1985 price freeze on real rates, has not
compared Williams' rates with those of competing sources in this
market, nor has it compared the rates paid by Texaco with those
paid by other shippers on Williams to this BEA. Absent any such
showings, and given the wide range of alternatives to Williams in
this BEA, we find no basis for granting rehearing with respect to
the Columbia BEA.
98/ See Ex. 619 at 19.
99/ See Ex. 627.
100/ See Ex. 314.
101/ Merger Guidelines at 4.
Docket No. IS90-21-003, et al. - 38 -
III. Discrimination Claims
The intervenors raised a variety of discrimination
claims. 102/ The ALJ found that each alleged form of
discrimination was intended to meet market conditions and was not
an abuse of Williams' market power; however, he reserved for
evaluation in Phase II the questions of whether one service
cross-subsidizes another and whether, in certain instances,
differences in costs also could be used to justify the alleged
discrimination. 103/ On review, the Commission affirmed all
of the ALJ's determinations, but stated that the ALJ's findings
did not establish that the rate differentials are lawful. The
Commission determined that it would review Williams' rate
differentials in Phase II using the cost information required in
that phase to determine whether the proposed rates are just and
reasonable or unjustly discriminatory. 104/
On rehearing, Williams and AOPL argue that all of the
discrimination claims have been resolved in Phase I and should
not be relitigated in Phase II. Williams emphasizes that rate
disparities can be sustained solely on the ground that they are
reasonably related to differing competitive conditions, 105/
a defense that the ALJ accepted. However, Williams concedes that
the issue of whether one service cross-subsidizes another is a
legitimate question for Phase II.
102/ The discrimination issues addressed by the ALJ are as
follows: (1) the disequalization of certain "Group 3" rates,
resulting in relatively higher rates to certain northern
destinations from relatively more distant origins in
Oklahoma than from Kansas; (2) the approximate equalization
on a per-mile basis of rates from northern and southern
origins on Williams' system; (3) alleged discrimination
against rural destinations in relation to urban
destinations; (4) discounts for relatively higher volume
shippers (or shipper groups); (5) "proportional rate"
discounts -- i.e., discounts for movements to certain
destinations on Williams' system which then move by truck
into certain designated counties; and (6) Williams'
operation on an "open stock" (or "fungible") basis whereby
Williams is able to meet shipper demand at a particular
destination without moving that barrel from a particular
origin.
103/ 58 FERC 63,004 at 65,025-28.
104/ 68 FERC 61,136 at 61,688.
105/ Citing Associated Gas Distributors v. FERC, 825 F.2d 981,
1011 (D.C. Cir. 1987) (AGD), cert. denied, 485 U.S. 1006
(1988).
Docket No. IS90-21-003, et al. - 39 -
The ALJ's decision is replete with citations to evidence
indicating that Williams relied on its extensive calculations of
competitors' and shippers' delivered prices into various Williams
markets to justify its newly-instituted rate differentials.
According to the ALJ, Williams then based its competitive
discounts on these determinations of what the market could bear.
Williams did not rely primarily on its own cost-of-service/cost
allocation data, and only briefly mentioned cost differentials
between routes where rate differentials were established or where
discounts are provided. 106/
The ALJ noted that, absent full cost evidence, any reliance
on costs to support these discounts and rate differentials would
have to await Phase II. 107/ However, he also concluded that
this would not be necessary because Williams had justified its
rate differentials on the basis of competitive exigencies. He
correctly pointed out that any talk of cost justification is no
longer of significance once the competitive need for rate
differentials has been established. 108/ The Commission
agrees.
Opinion No. 391 responded to claims that these discounts
constitute undue discrimination by requiring the allegations to
be examined in Phase II. The Commission is concerned that
discounts to some shippers not entail cross-subsidies by others.
Simply put, customers in noncompetitive markets should not be
required to pay excessive rates in order to make up for any
losses suffered in competitive markets. We recognize, however,
that rate differentials -- even if not based on corresponding
cost differences -- are not necessarily tantamount to cross-
subsidies.
In fact, discounts to customers with other shipping
alternatives are recognized as benefitting captive customers, so
long as the non-captive customers contribute something to common
costs. 109/ Therefore, competitive discounts do not
constitute or require subsidies from captives, and can be found
to be not unduly discriminatory in this Phase I rehearing. On
the basis of the competitive justifications provided by Williams,
the Commission finds that for Williams to charge such rate
differentials is not unduly discriminatory. Accordingly, the
106/ See 58 FERC 63,004 at 65,024-28.
107/ Id. at 65,025, 65026, and 65,027.
108/ Id. at 65,025 and 65,026.
109/ Policy Statement Providing Guidance with Respect to the
Designing of Rates, 47 FERC 61,295 at 62,053 (1989),
citing AGD, 824 F.2d 981, 1011-11.
Docket No. IS90-21-003, et al. - 40 -
Commission clarifies its previous order on this point, and will
not require re-examination of the issues of alleged
discrimination on a cost basis in Phase II of this proceeding.
Nevertheless, questions of rate design, that is, how rates
and rate differentials should be set in noncompetitive markets is
properly the subject of Phase II. We also fully expect Phase II
to explore the role of efficient and not-undue price
discrimination in both competitive and captive markets. However,
to insist that the issue of cross subsidies can only be fully
explored in the context of cost-of-service or point-to-point
cost allocations would be to misread our intent. These issues
can also be considered, for example, by examining the cost and
revenue contributions of relevant services or markets. The
rights of the participants in Phase II to examine these important
questions of cross subsidies, cost contributions, and discounts
do not depend on the use of a single sanctioned method for
determining justness and reasonableness.
IV. Whether the Commission Has Ruled on the Merits of
Williams' Proposed Rate Standards
Following issuance of the ALJ's decision, Williams filed a
motion with the Commission proposing a standard for adjudicating
in Phase II the maximum reasonable level of rates in any market
not found workably competitive in Phase I. Williams proposed
that it make two showings in any rate filing: (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, 110/ and (2) that the total of its proposed rates do
not exceed the stand-alone costs of its services in
total. 111/ Williams also proposed a standard for
adjudicating in Phase II the minimum reasonable level of rates in
any market not found workably competitive in Phase I. Under
Williams' proposal, the minimum rate standard for any given
service would be short-run marginal 112/ or incremental
costs. In proposing a one-year time horizon to measure short-
term marginal costs, Williams asserted that such short-term costs
110/ Williams Pipe Line Co., 31 FERC 61,377 (Opinion No. 154-
B), modified, 33 FERC 61,327 (Opinion No. 154-C) (1985);
ARCO Pipe Line Co., 52 FERC 61,055 (Opinion No. 351),
reh'g denied, 53 FERC 61,398 (Opinion No. 351-A) (1990).
111/ Williams claimed that the total stand-alone costs would
equal a rate of return ceiling based on a current cost rate
base for a hypothetical, optimally efficient pipeline
designed to supplant the present Williams pipeline as a
whole.
112/ Marginal cost is the cost of producing one more unit.
Docket No. IS90-21-003, et al. - 41 -
consisted only of variable fuel and power costs. The rate
maximum for each service would be the stand-alone costs.
In Opinion No. 391, the Commission pointed out that the rate
standards proposed by Williams would govern not only the
establishment of base rates in this case, but also would
establish how Williams' rates would be judged in future cases.
The Commission explained that it had adopted a final rule
instituting a simplified and generally applicable ratemaking
methodology for oil pipelines. The Commission noted that, in the
rulemaking, it had considered requests by Williams and AOPL to
establish a stand-alone maximum rate standard for changing rates.
However, the final rule rejected the stand-alone methodology as a
primary vehicle for rate changes in favor of an indexing
methodology. Therefore, because the indexing methodology adopted
by the Commission is inconsistent with Williams' proposed stand-
alone methodology, the Commission rejected Williams' proposed use
of the stand-alone methodology to justify future rate changes.
The Commission stated that the only question remaining is what
base rates will be allowed for Williams in this case and will
serve as the basis for future indexing. The Commission set for
hearing in Phase II the method to be used for establishing base
rates, but directed the ALJ and the parties, in developing such a
method, to 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 those in
the competitive markets. 113/
Williams and AOPL seek clarification of Opinion No. 391
insofar as its denial of Williams' motion could be read to have
ruled on the merits of any cost standards proposed by Williams in
Phase I or to preclude Williams from continuing to advocate such
standards in Phase II. Williams and AOPL ask the Commission to
clarify that, in Phase II, Williams may continue to advocate the
cost-based standards that it advocated in Phase I.
Both Williams and AOPL rely on Order No. 561, et
al. 114/ They emphasize that Williams did not intend for the
rate standards proposed in its motion or the similar standards
proposed in the rulemaking by AOPL to apply in lieu of the
indexed rate cap. Rather, states Williams, these standards were
proposed in the present case to enable Williams to establish base
rates to the extent necessary in Phase II. Indeed, states
Williams, in Order No. 561-A, the Commission expressly (1)
113/ 68 FERC 61,136 at 61,695.
114/ Citing Revisions to Oil Pipeline Regulations Pursuant to the
Energy Policy Act of 1992, order on reh'g, Order No. 561-A,
59 Fed. Reg. 40,243, (Aug. 8, 1994), III FERC Stats. & Regs.
Preambles 31,000 (July 28, 1994).
Docket No. IS90-21-003, et al. - 42 -
recognized that cost-based standards are necessary as a
supplement to the index in certain circumstances; (2) declined to
decide the issue of whether fully-allocated costs should be
employed for that purpose; and (3) promised that proponents of
the stand-alone cost methodology or other costing methodologies
will not be precluded from advocating such methodologies in
individual cases. 115/
Despite this promise, continues Williams, Opinion No. 391 is
confusing. While the Commission set for hearing in Phase II the
method to be used for establishing base rates, the opinion
admonishes the participants and the ALJ to give particular
attention to the allocation of costs between competitive and
noncompetitive markets to ensure that customers in the
noncompetitive markets do not subsidize customers in the
competitive markets. This admonition, asserts Williams, could be
read to suggest that the cost standards proposed by Williams,
which do not rely on cost allocations in order to prevent cross-
subsidies, have been prejudged.
Thus, concludes Williams, rehearing should be granted for
the purpose of clarifying that Williams may advocate any cost-
based standards of its choosing in Phase II and that the
Commission has made no rulings on the merits of any cost issue
for Phase II. Further, Williams states that the evidence
regarding cost standards submitted in Phase I is massive and was
prepared at considerable cost. Although Williams believes that
all participants should have the right to supplement that
evidence in Phase II, Williams maintains that it would be
wasteful if the participants were required to construct a Phase
II record from scratch. Accordingly, Williams also asks the
Commission to clarify that the participants may rely on any
portion of the Phase I record in Phase II, subject to
supplementation by any participant.
The Commission clarifies that its ruling in Opinion No. 391
was not intended to pre-judge the validity of Williams' proposed
rate standards as a means of establishing base rates in Phase II
of this proceeding. As both Williams and AOPL acknowledge,
future rate increases will be subject primarily to the indexing
process established in Order No. 561, et al. However, in Phase
II of this proceeding, Williams is free to present any method it
chooses for arriving at just and reasonable rates for the markets
we have determined to be noncompetitive. As we stated above, the
rights of the parties to address important questions relating to
cross subsidies do not depend on the use of a single sanctioned
method for determining justness and reasonableness of rates.
Finally, we agree with Williams that it is efficient in terms of
both time and costs to permit the parties to rely on data already
115/ Citing Order No. 561-A, slip op. at 47.
Docket No. IS90-21-003, et al. - 43 -
submitted in Phase I, supplemented as determined to be necessary
by the ALJ and the parties.
V. Motion to Sever Limited Issue
for Investigation and Decision
On October 31 and November 10, 1994, Williams filed proposed
tariffs in Docket Nos. IS92-26-000, IS95-2-000, and IS95-7-000.
In orders issued November 30 and December 9, 1994, the
Commission's Oil Pipeline Board accepted and suspended the
proposed rates, subject to refund, but stayed these consolidated
proceedings pending rehearing of Opinion No. 391 and completion
of the Phase II investigation in that earlier
proceeding. 116/
Murphy Oil USA, Inc. (Murphy) owns and operates an oil
refinery in Superior, Wisconsin. Murphy states that it is
captive to Williams for shorthaul shipments from its refinery
across the state line to the Duluth and Wrenshall, Minnesota
terminals. Murphy asks the Commission to sever from the
proceedings in Docket No. IS92-26-000, et al., the limited issue
of whether Williams' shorthaul rates from Superior to Duluth and
Wrenshall create unlawful discrimination against shorthaul
intrastate shipments from Minnesota refineries to Williams' own
Minneapolis terminal. Murphy states that, because the Phase II
investigation in Docket No. IS90-21-000, et al., is now only in
its preliminary stages, there is likely to be a lengthy delay in
the resolution of this issue.
Williams filed an answer opposing Murphy's motion to sever.
Williams states that Murphy has failed to make even a prima facie
case that the rates identified are discriminatory or that it has
in any way been injured as a result of the alleged
discrimination. Williams also contends that the revenues
involved do not warrant a separate investigation into the
challenged rates. Finally, Williams states that Murphy failed
timely and properly to protest the rate increases it now
challenges.
The Commission denies Murphy's motion to sever. Since the
Commission commenced the investigation in Docket No. IS90-21-000,
it has routinely suspended subsequent Williams rate filings and
consolidated them with Docket No. IS90-21-000, as occurred in
this instance. As discussed in greater detail above, differences
in rates do not necessarily establish discrimination. Williams
correctly points out that a variety of non-mileage factors can
influence a particular rate and justify a differential. The
issue of just and reasonable rates for the Duluth BEA remains to
116/ Williams Pipe Line Co., 69 FERC 62,175; 69 FERC 62,206
(1994).
Docket No. IS90-21-003, et al. - 44 -
be resolved in Phase II of the proceedings in Docket No. IS90-21-
000, et al.
The Commission is satisfied that staying the proceedings in
Docket No. IS92-26-000, et al., pending resolution of the earlier
proceeding will promote administrative efficiency and that Murphy
will suffer no injury. It appears that the volumes and revenues
associated with Murphy's shipments to Duluth and Wrenshall are
rather minimal and do not outweigh the potential cost to the
parties and to the Commission that would result from separately
investigating the rates Murphy challenges. In any event, both of
the Oil Pipeline Board orders clearly require Williams to
maintain accurate records of the revenues it receives under these
tariff sheets so that refunds with interest can be made in the
event the proposed rates are found to be unjustified.
The Commission orders:
(A) Rehearing and clarification are granted and denied as
discussed in the body of this order.
(B) No further rate review is required for the following
markets where Williams has established that it lacks market
power: Springfield (MO), Kansas City, Lincoln, Quincy, Omaha, Eau
Claire, Fargo, and Columbia.
(C) The ALJ is directed to continue with Phase II of this
proceeding for the purpose of establishing base rates for the
following markets where Williams has failed to establish that it
lacks market power: Des Moines and Grand Forks. These markets
are in addition to those listed in ordering paragraph (C) of
Opinion No. 391 that were unchallenged on rehearing.
(D) Murphy's motion to sever is denied.
By the Commission.
( S E A L )
Lois D. Cashell,
Secretary.