* * * 41

turing For example, a Western Electric study of the charges for technical information based on its total engineering costs found that 14 percent of those costs were attributable to technical information required by the decree, while 28 percent were attributable to nondecree type information. Yet, top officials of Western decided that "as little as possible of nondecree type information is to be provided, in part because its provision entails some obligations on (Western's) part to make it work." 43

42

In accordance with this decision, for some time after the decree, the defendants were unwilling to sell nondecree type information to a licensee unless the licensee produced the article involved solely for sale to Western. As an illustration, in February and March 1956, three companies sought to obtain nondecree type information relating to a high-speed strander. Western was unwilling to make the information available except to the one company which had indicated it would use the strander solely in production for Western." A similar situation occurred with respect to furnishing drawings and specifications on machines and processes for manufacturing Alpeth and Stalpeth cable sheaths under Bell System patents. For the first year after entry of the decree, only two companies were able to obtain this information and then only on payment of $150,000 by each. But, significantly, both concerns contemplated manufacturing the sheaths in question solely for sale to Western Electric.45

46

For decree-type information, it will be recalled that the defendants are permitted to make a reasonable charge designed to reimburse them for gathering and reproduction, together with that proportion, if any, of the development expense allocable to the class of equipment involved. One difficulty with this is that Western's accounting system does not show what the past development expense has been for specific equipment, except in a few cases. Therefore, the defendants use as a basis the development expenses for Western's seven extremely broad telephone product classes. For example, the transmission equipment class includes thermocouples, transistors, electronic tubes, repeaters, carrier systems, transmission test sets, microwave systems, mobile systems, and others. Though no development occurred for years on thermocouples, the defendants nevertheless consider that charges for technical information could be made, based on development undertaken for other systems in the class. "The trouble with this," the defendants admit, "is that it deprives the words 'if any' in section XIV (D) of any meaning." These words, the defendants pointed out, were

49

introduced at the specific request of the Government *** and the Government negotiators explained that the Government regarded that it was free to argue that the defendants were not entitled to recover any of their development cost.

50

The Justice Department should not allow this question to remain in abeyance any longer. As soon as possible, it should determine whether or not the decree permits the defendants to collect development expenses for a particular item even though, in fact, there has been no development with respect to that item for many years.

The defendants have made also it a practice to include in the charge for technical information development expense which has already been recovered from Western's telephone customers. As a Bell System committee pointed out: 51

f

Where a development has been carried on for a number of years in the past it may well be that each year's activity contributed something to the production of the technical information in question but the end of the year in which it was produced would seem to mark the logical point to sum up the cost of the underlying development. The fact that by that time the total development has been recovered from Western's telephone products customers is no reason why a fair share should not be recovered from users of such technical information. [Emphasis supplied.]

Under this practice, the Bell System collects the development expenses for a particular item of equipment not only from the telephone user, but also from the recipient of technical information. However, to prevent the defendants from collecting twice for the same development expense, the decree requires the defendants to credit to the development expense account of Western any charge for technical information exceeding the gathering and reproduction cost.

Here again the Justice Department should seek to determine whether the decree permits the assessment of a development charge for technical information in these circumstances, and, if so, whether the charge actually has been carried as a credit on Western's books. In summary, the patent licensing and technical information provisions of the decree neither materially aid independent manufacturers of telephone equipment to compete with Western, nor materially hamper Western in the enjoyment of its predecree patent monopoly. Despite his ability to demand a license-a right which the Bell System had for years accorded applicants without the compulsion of a decree-the independent manufacturer of telephone equipment is still under the necessity of finding a market for the product of which the patent is the basis. But Western remains the Bell System's exclusive supplier, and nothing in the decree prohibits this or affords the independent manufacturer access to the market.

With respect to the decree's impact upon A. T. & T.'s patent position, it has been shown that the company correctly estimated that the decree's requirements would not seriously interfere with its continued ability to obtain rights under the patents of other enterprise. Thus it appears that, as before the decree, the predominance of postdecree grantbacks exacted by A. T. & T. in consideration for licenses under its patents remain royalty-free. What is more, the company anticipates that by 1960 its predecree royalty income from patent licenses will have been largely restored.

51 Hearings, p. 2787.

Beyond this, it has been noted that the defendants have resorted to a number of devices to evade the decree's provisions. Thus they have apparently asked for and succeeded in exacting grantbacks beyond the permissive scope of the decree and options to take grantbacks, while freely conceding that the decree does not permit them to "insist" on such conditions. Further, as a means of persuading postdecree license applicants to forego rights accorded them by the decree, such as reasonable royalties on patent license grantbacks, the defendants have withdrawn or restricted privileges of laboratory visitation and technical information which they had freely accorded predecree licensees. These and other manifest evasions of the intent of the decree to relax Western's grip on the industry must be investigated to ascertain whether they violate the decree's letter as well.

The foregoing are only a few instances in which A. T. & T. appears to have exercised its considerable ingenuity in adapting the patent and technical information provisions of the decree to its purposes. Time available for the investigation of this decree did not permit a more exhaustive inquiry into these matters. The committee deems it essential, however, that the Department of Justice conduct a thorough investigation into all aspects of the defendants' compliance with the patent and technical information provisions of the decree and take prompt action against all violations.

CHAPTER III

OIL PIPELINE CONSENT DECREE

1. THE OIL PIPELINE INDUSTRY

Access to pipeline transportation is a competitive necessity in the petroleum industry. The superior efficiency and economy of the oil pipeline became apparent early in the industry's history and, over the years, has made the pipeline by far the outstanding form of land transportation.

Pipelines are almost as old as the petroleum industry itself. In 1865, within 6 years after the discovery of the Drake well in 1859, pipelines were operated to transport crude oil. By 1937, pipelines were carrying more crude oil than the railroads. At the present time, more than 98 percent of overland crude-oil shipments to United States refineries arrive by pipeline.1 Although products pipelines were not constructed until after 1931, at the present time nearly 40 percent of the domestic demand for refined products is delivered to the markets by pipeline transportation.2

As of December 31, 1956, there were 152,120 miles of crude-oil pipelines (trunk and gathering) and 36,420 miles of refined-products lines, giving a total of 188,540 miles of pipelines throughout the United States. During 1957, these oil pipelines transported 2,898,985,000 barrels of crude oil to United States refineries and 898,832,000 barrels of refined products from United States refineries. By way of contrast, 348,761,000 barrels of domestically produced crude oil were delivered in 1957 to refiners by boats, and 39,677,000 barrels by tank cars and trucks.

Cost advantages of pipelines over other forms of land transportation are such that no other method of carriage can be competitive.

1 Petroleum Facts and Figures, 12th edition, 1956, p. 231.

NPN Factbook, 1957, p. 219.

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The following chart shows that railroad rates are approximately five times the pipeline rates over comparable distances:

Freight rates for crude petroleum oil-A comparison of the present freight rates for crude petroleum from and to representative points

1 Per barrel of 42 United States gallons. A barrel is also equivalent to 310.8 pounds, based on 7.4 pounds per gallon.

The pipeline rates are subject to minimum of 10,000 barrels. The carload rail rates are subject to the minimum prescribed in rule 35 of the classification for tank-car load traffic.

Source: ICC.

The crude-oil pipeline system includes two types of operation: gathering lines and trunklines. Gathering lines collect crude oil produced in a particular field by connecting the lease tanks of the producers and transporting the production through a system of feeder lines to the trunkline system. For the most part, gathering lines are owned or controlled by the pipeline companies that operate the trunklines, although in some instances a producer may operate his own gathering system and transport crude oil from his own and other wells to a trunkline. A few of the trunklines operate no gathering systems, but, instead, receive crude oil from other pipeline companies at their receiving stations.

The trunklines are the main channels of the pipeline system. They connect refineries with the producing fields, and permit refineries to be located near the industry's major consuming markets, at great distances from the producing fields. For many years, the trunklines were of relatively small diameter, and each was designed essentially to supply the needs of a single refinery. During World War II, and increasingly since the war, improvements in the pipeline construction and operating techniques have permitted the size and capacity of the trunk pipelines to be increased. This has allowed the trunklines the advantages of the economies in large-scale operations, and has encour aged interconnections with other lines, so that each pipeline is enabled to serve additional refineries.

Seventy-five percent of the pipeline facilities in the United States are operated by 89 pipeline companies. These 89 companies are owned or controlled by the 20 major oil enterprises and service the vast bulk of petroleum pipeline movements. Unless they resort to the prohibitively expensive truck and rail transport, the 6,654 crude oil producing enterprises in the petroleum industry must depend upon the few

3

Petroleum Facts and Figures, 12th edition, p. 365.