1 Gasoline lines.

REPORT TO AMERICAN PETROLEUM INSTITUTE'S CENTRAL COMMITTEE ON PIPELINE TRANSPORTATION OF THE COMMITTEE ON THE VALUATION OF PIPELINES, INCLUDING ITS ENGINEERS-ACCOUNTANTS SUBCOMMITTEE, IN CONNECTION WITH THE VALUATION OF THE PROPERTIES OF INTERSTATE CARRIERS BY PIPELINE BY THE INTERSTATE COMMERCE COMMISSION IN ACCORDANCE WITH SECTION 19-A OF THE INTERSTATE COMMERCE ACT

At the annual meeting of the American Petroleum Institute's Central Committee on Pipe Line Transportation held during the years of 1933 to 1939, inclusive, reports were submitted covering the activities and the accomplishments of the Committee on the Valuation of Pipe Lines and its Engineers-Accountants Subcommittee. Said reports covered the activities and the accomplishments of the committee from October 1934 to and including November 1, 1939.

As stated in our report for the year of 1939, as of December 31, 1934, the Interstate Commerce Commission determined there were 52 carriers by pipeline engaged in interstate commerce and included under section I of the Interstate Commerce Act, and therefore subject to the jurisdiction of the Interstate Commerce Commission. The Commission served on the said 52 carriers, under section 19a of the Interstate Commerce Act, valuation orders No. 26 and No. 27, requiring original cost data and physical inventory of the carriers' properties as of December 31, 1934, for the purpose of determining the value of the properties used and useful and dedicated to public use.

The Commission has found, and certified same to the respective carriers and other interested parties as required under section 19a of the Interstate Commerce Act, final value for ratemaking purposes on the original 52 companies, representing 93,531 miles of gathering and trunklines, as of December 31, 1934. Since the basic valuation date of December 31, 1934, certain carriers have merged and additional carriers have been determined to be engaged in interstate business, so that as of December 31, 1939, there were 80 carriers under the jurisdiction of the Commission, and the Commission had served valuation orders No. 26 and No. 27 on the additional 28 companies, as of different basic valuation dates, and had certified either tentative or final valuation on all the additional companies added with valuation date of 1936 or prior thereto, with the exception of three carriers, namely, Southern Pipe Line Corp., Rocky Mountain Pipe Line Co., and Kaw Pipe Line Co.

We attach hereto and make a part hereof, marked for identification "Exhibit A," statement showing the pipeline mileage as of December 31, 1939, of pipeline companies on which valuation orders have been served.

From a study of the aforesaid tabulation we find that the final value found by the Commission on the properties of 56 carriers, and the tentative valuation as found by the Commission on 6 carriers, for the 62 carriers combined the value as found by the Commission, is 66.9 percent of the original cost and 153 percent of the depreciated cost. Pursuant to section 19a of the Interstate Commerce Act, the Commission is required in determining the final value applicable to property owned and used for common-carrier purposes to consider the original cost, the cost of reproduction new, and cost of reproduction new less depreciation, including appreciation, depreciation, going-concern value, and all other matters which appear to have a bearing upon the value for ratemaking purposes of the property owned and used by the carrier for common-carrier purposes.

As to the element of going-concern value, the Commission's views, as stated in docket No. 1210, are as follows:

"We have long adhered to the view that going-concern value, although an element to be considered in final value, is not one to which a definite sum in money can be ascribed (San Pedro, L. A. & S. L. R. Co., 75 I. C. C. 463, 510; Illinois Central R. Co., 46 Val. Rep. 1, 123). We have also repeatedly held that under our method of valuing the properties of common carriers the single-sum value reported reflects the intangible elements inhering in a fully organized and operating property. (New York, N. H. & H. R. Co., 30 Val. Rep. 1, 39). As we said in Western Maryland R. Co. (32 Val. Rep. 1, 22):

"Without the advantages which make of the carrier's property a going concern, the property would have a mere scrap value. It follows that consideration

of the data on original cost and cost of reproduction as indexes of final value is in itself a recognition that the property is a going concern.'

"This conclusion finds full support in the recent decision of the Supreme Court of the United States in Denver Union Stock Yards Co. v. United States (304 U. S. 470, 87 L. ed. 1022, 1026).”

Paragraph (f) of section 19a of the Interstate Commerce Act reads as follows: "(f) Valuation of extensions and improvements; revisions; reports: Upon the completion of the valuation herein provided for the Commission shall thereafter in like manner keep itself informed of all extensions and improvements or other changes in the condition and value of the property of all common carriers, and shall ascertain the value thereof, and shall from time to time, revise and correct its valuations, showing such revision and correction classified and as a whole and separately in each of the several States and Territories and the District of Columbia, which valuations, both original and corrected, shall be tentative valuations and shall be reported to Congress at the beginning of each regular session."

Carriers whose basic valuation date has been established by valuation orders No. 26 and No. 27 are required to prepare and file with the Commission annually, in compliance with paragraph (f) of section 19a quoted above, and in accordance with the requirements as set forth in supplement No. 8 to Valuation Order No. 3, Report of Property Changes (Form 588-A), which reports contain the basic information from which the Commission perpetuates the basic inventory. As to the procedure followed by the Commission in bringing the valuation reports to a date later than the original date of the basic inventory, this is set forth in exhibits attached hereto, marked for identification "Exhibits C to G," inclusive, to which there are attached explanatory statements as applicable to each exhibit. While these exhibits cover only account 103, for one valuation section, the theory and procedure on any other account would be similar. The manner by which the developed data would be assembled for a State or system is, of course, self-evident, consisting only of a consolidated statement of the individual accounts for all of the valuation sections included in the group. Particular conditions may warrant the Commission in deviating to some extent from the detail shown in these exhibits, but the general procedure underlying the work remains substantially the same as outlined.

It appears appropriate at this time to direct your attention to the fact that the methods of transportation used in the petroleum industry are a natural development of the industry itself. They are owned within the industry and have grown out of the necessity on its part to move its raw material from the source of production to the refinery for manufacturing into refined products.

Since the discovery of the Brake well in western Pennsylvania in 1859, unique and improved transportation methods have been one of the important factors in the development and growth of the petroleum industry. The need for pipelines to supplement other modes of transportation of crude was recognized in the early period with the construction of small lines extending from the wells where the crude was produced to the railroads. Such small lines are now known as gathering line systems.

In 1879 the first interstate pipeline, that of the Tide Water Pipe Co., was constructed from the Pennsylvania fields to the Atlantic seaboard. Its success initiated the construction of other pipelines from the eastern refining center to the Appalachian fields. As new producing areas were developed, pipelines were extended into the producing areas to transport the crude from the producing wells to the refineries. The facts show that the pipeline mileage for the transportation of crude oil in interstate commerce in the year 1879 was 694 miles, whereas, 60 years later, in 1939, it had increased to 97,090 miles. As to the development by years, this is shown in graph attached hereto, marked for identification "Exhibit E."

In our report for the year of 1939, we directed your attention to the fact that we were unable to reach an agreement with the Engineering Section of the Bureau of Valuation of the Interstate Commerce Commission as to the amount of allowances which should be made for damage payments incident to the construction of pipelines which should be included in determining the reproduction cost new of pipeline construction, and that the Engineering Section of the Bureau of Valuation had recommended the following basis of allowance:

Damage allowance to be included under pipeline construction accounts

[Guide allowance in cents per lineal foot of trunkline right-of-way and gathering lines of comparable construction, irrespective of size of pipe]

In absence of an agreement, the Commission proposes to use the basis of allowance as set forth in the foregoing schedule, with the understanding that if any carrier is in position to produce facts that will show that the basis of the allowance is not adequate, consideration will be given to the facts produced and adjustment made in the allowance.

There has been no occasion for a meeting of the Committee on the Valuation of Pipelines during the current year, but a subcommittee of its EngineersAccountants Subcommittee is scheduled to meet with the Engineering Section of the Bureau of Valuation of the Interstate Commerce Commission in Washington on December 2, 1940, for the purpose of developing guide prices for the years of 1938 and 1939, and schedule of guide prices as developed at said meeting will be transmitted to all carriers subject to the jurisdiction of the Interstate Commerce Commission.

Continual cooperation and cordial relations between the carriers and the Commission have been maintained. Respectfully submitted.

NEW YORK, N. Y., October 24, 1940.

D. S. BUSHNELL, Chairman.