Notwithstanding all of these substantial shortcomings, the pipeline consent decree as entered, if enforced vigorously as construed by the Department of Justice, could have resulted in a measurable reduction of the shipper-owners' advantage over the pipelines' outside users. Admittedly, the decree could not be effective to eliminate entirely the shipper-owners' advantage. That objective was foregone when the Department of Justice abandoned its position, taken at the start of the negotiations, that required the pipelines to be operated at cost.

At best the decree represents a "practical" solution to the problem of discriminatory rebates with which the Antitrust Division was confronted. Shipper-owners are permitted to continue to receive payments from pipeline transportation revenues which are derived in part from the tariffs they have paid to the pipelines. In short, the decree consents to the payment to shipper-owners of a rebate as limited in the amounts permissible under paragraphs III and IV.

While such payments may be a "practical" settlement of the Elkins Act litigation, there is no specific authority in that act for the Attorney General to make such a compromise. A literal reading of the terms of the Elkins Act would prohibit any device whatsoever for the payment of any sum of money as a rebate or offset against the common carriers' regular transportation charges, as fixed by its schedules of rates.

Although the Elkins Act, by its terms, prohibits the payments to shipper-owners that the consent decree allows, such payments may be justifiable, if reasonable, as allowances for compensable services rendered by the shipper for the common carrier. Under this theory, dividends paid under the decree to the shipper-owner would be analagous to the "just and reasonable" payments to shippers that are authorized in section 15 (13) of the Interstate Commerce Act." Under that section, the common carrier, after compliance with appropriate procedures, may compensate a shipper for needed transportation services. If a carrier, for example, contracts with a shipper for the use of terminal facilities, or if a consignee performs his own pickup or delivery services, or if a shipper makes his own provision for a portion of the transportation, a reasonable allowance to the shipper for furnishing such service is permitted. These services are inherent parts of the common carrier transportation and would either have to be performed by the carrier itself or payments would have to be made. to whomever provided them. The allowance is related to expenditures made by the shipper which are in addition to the shipper's payments for transportation.

This theory was adopted by both the Government and the defendants as the basis for the oil pipeline consent decree. Although the

71 49 U. S. C. 15 (13). This provision reads as follows: "(13) Allowance for service or facilities furnished by shipper.

"If the owner of property transported under this chapter directly or indirectly renders any service connected with such transportation, or furnishes any instrumentality used therein, the charge and allowance therefor shall be published in tariffs or schedules filed in the manner provided in this chapter and shall be no more than is just and reasonable, and the Commission may, after hearing on a complaint or on its own initiative, determine what is a reasonable charge as the maximum to be paid by the carrier or carriers for the services so rendered or for the use of the instrumentality so furnished, and fix the same by appropriate order, which order shall have the same force and effect and be enforced in like manner as the orders above provided for under this section."

Government in its complaint sought an adjudication that all of the dividend payments constituted rebates that were unlawful under the Elkins Act, in the final judgment the parties consented to permit the payment of reasonable dividends to shipper-owners.

During the initial negotiations for the consent decree the defendants related dividend payments to the shipper-owner to compensable allowances for services rendered. The capital invested by the shipperowner in the pipeline was considered to be in the nature of compensable services. At the conference on January 29, 1941, with the industry executives, Mr. Arnold advised the industry that it was his view that the Elkins Act "*** does not permit the shipper to receive any dividends from the carrier." From this statement, the industry inferred that the Department of Justice would commence the negotiations from the standpoint that the pipelines could not pay any dividends. The industry negotiators were hopeful, however, that, as the negotiations continued, the pipeline owners might be permitted to receive, under the Elkins Act, a reasonable interest on the capital they had invested in the pipelines. In its memorandum of this meeting, the negotiating committee commented on pipeline payments, as interest and in lieu of dividends, as follows:

The rather clear inference to be drawn from Mr. Arnold's observations with respect to the pipelines is that he will start negotiations from the premise that pipeline owners who are shippers over those lines are not entitled to receive any dividends from the lines. It is possible that as negotiations proceed Mr. Arnold will admit that the pipeline owners, be they shippers or nonshippers, are entitled to receive reasonable interest on the capital invested in the pipeline. It may be he will insist that the return be in the nature of interest rather than dividends.72 [Emphasis supplied.]

On March 6, 1941, Mr. Asbill, the chief negotiator for the Government, stated to Mr. Thompson that he regarded pipeline payments to be permissible only as just compensation on the investments of the shipper-owner in the pipeline. Mr. Thompson, in his notes of this conference, said:

Asbill states that he knows of no legal method of differentiating between treatment of the Elkins Act problem as between crude and product lines. Obvious to A [Asbill] that a reasonable rate may nevertheless cause a rebate. For purposes of settlement, just compensation for the investment, would not be considered a rebate. Anything more than just compensation is a device for a rebate." [Emphasis supplied.]

In connection with the entry of the pipeline consent decree, the Department of Justice indicated that it was of the view that the payment by the pipeline of a sum of money to the shipper-owner as compensation for shipper-owners' investment would not be deemed to constitute a rebate or device in violation of the Elkins Act. The

72 Hearings, p. 1327. 78 Hearings, p. 1395.

Department's press release on December 23, 1941, stated that its complaint, filed that day, contends that the dividend payments involved were refunds and rebates that "*** have often amounted to exorbitant returns upon the capital stock in the common carrier pipelines ***" 74 In the context of the description of the complaint and the final judgment, it seems clear that the purpose of the Department of Justice in the settlement was to insure that the oil companies that were owners of common carrier pipelines, and who, at the same time, were shippers on those pipelines, did not receive dividend payments which amounted to more than a 7-percent return per year on their capital stock investment in pipeline companies.

Although the parties to the consent decree throughout the negotiations apparently contemplated that dividends permitted to be made by the pipeline to the shipper-owner were to be in the nature of compensation for the shipper-owners' investment in the pipelines, the language of the consent decree on this point is not clear. Instead of expressly permitting payments which would amount to a 7 percent return on the shipper-owners' "investment," the decree in paragraph III prohibits any payments in excess of 7 percent of the shipperowners' share of the "valuation" of the common carriers' property.75 There is some evidence that the term "valuation" was used by the negotiators as a measure of the shipper-owners' investment. During negotiations of the consent decree, representatives of the staff of the Antitrust Division sought to have attached to the consent decree an exhibit that would set forth, for each of the companies, their investments in the pipelines. At the suggestion of the industry negotiators, this exhibit was not attached and the term "valuation" was substituted for investment.

During the hearings, representatives of the Antitrust Division were interrogated as to whether there existed a memorandum on this matter in the files of the Department of Justice. The Department of Justice acknowledged the existence of such a memorandum but refused to discuss in detail its contents.76

There is an additional reason that the term "valuation" as used in the decree was used as a substitute for the shipper-owners' "investment” in the pipeline. When the decree was negotiated in 1941, oil pipelines were financed almost entirely from funds provided by their shipper-owners. Investments in oil pipelines from outside sources were rare. Accordingly, the use of valuation to measure the shipperowners' investment in the pipeline was reasonable. In addition, since the ICC in determining valuation considered replacement cost as well as original cost, use of valuation would permit the shipper

74 Hearings, p. 171.

75 Hearings, p. 193.

78 Hearings, pp. 118-121. Reference to this aspect of the negotiations was contained in a letter dated March 29, 1950, from Hammond E. Chaffetz, counsel for Standard Oil Co. (Indiana) to Mr. J. Lee Burke, president of Stanolind Oil & Gas Co. With respect to the Government's exhibit to be attached to the decree, this letter states:

*** Snyder takes the view that the latest final valuation referred to in the decree means the latest valuation prior to the date of the decree. *** He said that when the decree was negotiated the Department sought to limit permissible return to 7 percent on the shipper-owner's investment, and he said that there was discussion even of an exhibit to be attached to the decree setting forth the investment of each of the companies concerned. According to him, although at the industry's suggestion valuation was substituted for investment, the intention was that the valuation as of that time would be employed, subject to be modified in the event of subsequent betterments, additions, or abandonments. He said that the only reason for the provision with respect to the latter was the assumption that the basic valuation would remain fixed."

owners to take advantage of any increase in the value of their investment due to inflationary growth of the economy.

In 1941 investments in pipelines generally was evidenced by the capital stock that was held by the shipper-owners. The reports of the Interstate Commerce Commission show that in 1940, the latest year for which statistics had been published at the time the decree was signed, oil pipelines had capital stock outstanding in a total value of $264,222,798. The total funded debt of the pipeline companies that reported to the ICC in 1940, however, amounted to only $20,521,018. Further, only eight companies accounted for this funded debt." In 1940 only 2 of the 52 pipeline defendants had funded debt that was owing to outsiders, and such debts were relatively small."

Since entry of the decree in 1941 there has been a substantial change in the method by which pipelines are financed. At the present time investment funds for pipelines are obtained from outside lending sources rather than from their shipper-owners. During the period 1940-58 the proportion of oil company investments in pipelines, as reflected by their capital stockholdings, have steadily decreased in comparison to investments made by outside lending agencies. As a consequence of this change in financing methods in the postwar era, the pipeline valuations determined by the ICC no longer are useful as a direct reflection of the shipper-owners' investment.

In 1956, 83 pipeline companies reported capital stock outstanding as $339,353,788. The total funded debt for these pipeline companies in 1956, however, amounted to $965,128,073.79 Exclusive of the pipelines that operate as departments of their shipper-owners, only 28 of the 74 pipeline companies reporting had no funded debt. Of the total funded debt owed by the remaining 46 companies, the great majority was owed to outside lending institutions.

GREAT LAKES PIPE LINE AMENDMENT

During the final stages of the pipeline consent decree negotiations, on December 5, 1941, James J. Cosgrove, general counsel, Continental Oil Co., discussed with the other members of the industry negotiating committee, substantial new revisions of the pipeline decree. These new revisions were designed to permit the 8 oil companies that jointly owned Great Lakes 82 to withdraw $11,252,286, or 82 percent of their $13,722,300 investment in the pipeline. This was to be accomplished by the pipeline company distributing cash to its shipper-owners that it obtained through the sale of 15-year, 314-percent debentures in the amount of $12 million. The debentures were to be repaid from money set aside in the pipeline company's depreciation fund.

For a number of reasons, the industry negotiating committee decided not to include the Great Lakes situation on the agenda for dis

Aloco Pipe Line Co., American Liberty Pipe Line Co., Great Lakes Pipe Line Co., Pure Transportation Co., Rocky Mountain Pipe Line Co., Texas-Empire Pipe Line Co. (Delaware), United Oil Pipe Line Co., Utah Oil Refining Co. 78 Great Lakes Pipe Line Co., $600,000; Texas-Empire Pipe Line Co. (Delaware), $1 million. ICC, Statistics of Railways in the United States, 1940; Tables 175 and 176, Oil Pipe Lines, Selected Statistics, pp. 225-227.

79 ICC, Transport Statistics in the United States for the year ending December 31, 1956, pt. 6, Oil Pipe-Lines, table 1, p. 2.

80 Ibid., table 9, p. 18.

81 Hearings, p. 1621, letter, Colonel Klein to C. I. Thompson, December 6, 1941.

82 Continental Oil Co., Mid-Continent Petroleum Corp., Skelly Oil Co., the Texas Co., the Pure Oil Co., Sinclair Refining Co., Cities Service Oil Co., and Phillips Petroleum Co.

83

cussion with the Antitrust Division. Instead, counsel for Great Lakes was authorized to present his proposals to the Justice Department separately. The Great Lakes' proposal would have required substantial revisions in the decree as it was then formulated.8 Additionally, the Antitrust Division staff looked upon the proposal as a "divorcement," and therefore desired to assist the negotiations between Great Lakes stockholding companies and Morgan, Stanley & Co.84 Finally, revisions for Great Lakes would refer only to the then rather isolated situation of a pipeline operated by a number of major companies jointly. The negotiating committee reported on this aspect of the negotiations to Mr. Colley, in a letter dated December 8, 1941, as follows:

As the proposed additions to the decree do not affect companies which (like the Atlantic) operate pipelines as wholly owned subsidiaries, the committee has authorized Mr. Cosgrove separately to negotiate with the Department of Justice for the inclusion of the provisions desired. If these provisions are acceptable to the Department, they will be added to the decree as it is now written.84

In the few remaining days until the entry of the consent decree on December 23, 1941, the Great Lakes' proposal could not be disposed of satisfactorily. Consequently, a special order of the court, under paragraph X of the decree, was required to refinance the Great Lakes Pipe Line. This was accomplished on August 3, 1942. On that day, counsel for Great Lakes submitted a petition that described the plan to refinance the pipeline, and defined the resulting obligations of the shipper-owners under the decree.85 On the same day, the court dispensed with service of notice on all defendants other than Great Lakes' shipper-owners, because the relief prayed for "*** will not affect any of the defendants other than those above mentioned." The court then decreed that the "*** plan set forth in the petition is not in violation of the terms of the final judgment, entered on the 23d day of December 1941 * * *" 86

The plan proposed by Great Lakes called for the creation of a sinking fund into which the pipeline was to make semiannual payments on the principal of the debentures in the amount of $400,000. At that time, Great Lakes had annual depreciation charges of approximately $1,150,000.

Four changes from the requirements of the pipeline consent decree are spelled out in the Great Lakes' petition. These changes are contained in paragraph 4 as follows:

(a) Permissible payments to the shipper-owners under paragraph III of the pipeline decree shall be reduced by "* *** an amount equal to the shipper-owners' proportion of any amounts accrued for interest **** on the debentures.

(b) If the payments niade on account of principal of the debentures exceeds the amount accumulated in the depreciation fund since December 31, 1941, the amount of the excess would

83 Hearings, p. 1621. Hearings, p. 1648. 85 Hearings, p. 197. Hearings, p. 201.