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Ronald Reagan Presidential Library
Digital Library Collections
This is a PDF of a folder from our textual collections.
Collection: Reagan, Ronald: Gubernatorial Papers,
1966-74: Press Unit
Folder Title: [Energy] - Report of the Attorney General's
Task Force on Energy, May 1974
Box: P35
To see more digitized collections visit:
https://reaganlibrary.gov/archives/digital-library
To see all Ronald Reagan Presidential Library inventories visit:
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PRESS
REPORT OF THE
ATTORNEY GENERAL'S TASK FORCE
ON ENERGY
of
REPARTMENT CALIFORNIA lege of munita SECURITY 3
Evelle J. Younger
Attorney General
May 1974
INTRODUCTION
The California Attorney General's Task Force on Energy was
established by Attorney General Evelle J. Younger on January 22,
1974, with Senior Assistant Attorney General Robert O'Brien as
head. Members of the Attorney General's anti-trust unit, land
section, resources section, business law section, environmental
unit and consumer protection unit have served as members of the
Task Force.
The Task Force was given the following mandate:
1. An intensified anti-trust investigation of the
petroleum industry, with particular attention
to the questions:
a. Should there be divestiture of any part of
the oil company structure?
b. Should any part of the oil industry be placed
under Public Utilities Commission regulatory
control?
2. Examination of state and Federal taxation policies as
they affect the petroleum industry.
3. Evaluation of whether price controls on natural gas
should be lifted in order to encourage more exploration.
4. Formal support for lawsuits challenging orders of the
Federal Power Commission which cut back allocations
of natural gas in California.
5. Assisting the Federal Trade Commission in its investiga-
tion of the petroleum industry in the western states.
6. An anti-trust investigation into transmission and
development of geothermal power in California.
7. A statistical survey of the oil industry in Calif-
ornia in order to make a public report of fuel
production, storage, refining capacity, reserves,
and other aspects of the petroleum industry. The
report will cover a five-year period.
8. Assisting state law enforcement agencies to prepare
for emergency shortages, with particular emphasis
on dealing with crime during these shortages.
9. Take necessary steps to ensure that Federal fuel
allocation programs are adequately operated for
California's benefit.
10. Intensified support for legislation which will
assist in implementing the Attorney General's
positions on energy and the environment.
The purpose of this report is to outline the progress made by
the Task Force to the present time, and to make recommendations
for action in those areas where studies are completed.
2
I. QUESTIONS RELATING TO ANTI-TRUST MATTERS
A. SHOULD THERE BE DIVESTITURE OF ANY PART OF THE OIL
COMPANY STRUCTURE
Recommendation: Retail service stations should be
divested from petroleum producers,
refiners, or product transporters.
Discussion:
The primary concern of the Attorney General's
Task Force in regard to the anti-trust aspects of the
petroleum industry is to assure that the industry is
competitive. An examination of the industry on a
nationwide basis indicates that it is dominated by
eight major oil firms: Exxon, Texaco, Gulf, Mobil,
Standard of California, Standard of Indiana, Shell,
Arco). However, domination is not so great as to
constitute a monopolistic situation on its face. The
petroleum industry does not fit the generally accepted
definition of a concentrated industry. For example,
crude production in the United States in 1970 by the
big four oil companies (Exxon, Texaco, Gulf, Mobil)
constituted approximately 30% of the total -- by the
big eight approximately 50%. The critical point in
determining over-concentration for the big four is
50% control and the critical point for the big eight
is 70% control.
Since 1955, however, the oil companies have
increased their control of crude production. The big
four in 1955 showed approximately 19% control and the
big eight 31% control. However, this can be explained
by two factors: (1) pro-rationing restraints were
lifted between 1955 and 1970. Pro-rationing is the
device employed by some states to limit production
within state boundaries. Pro-rationing primarily
affects the big companies and when pro-rationing
restraints were lifted the big companies produced
more; (2) the development of the outer continental
shelf which by its very nature only attracts large
companies. In refining throughout the United
States, in 1972 the big four had approximately
33% control of petroleum refining - the big eight 59%.
(The trend since 1955 was constant -- in 1955 the
big four share was 33% and the big eight was 57%.)
3
Figures for California and the West Coast,
which are not completely available at this time, may
show a greater concentration than the national figures.
Also, the widespread use of joint ventures throughout
the industry adds another factor to questions of
petroleum industry concentration and control over
oil markets.
The question then remains: is there any
aspect of the petroleum industry where the concentra-
tion is of such a nature that anti-trust action is
warranted. The answer is that potential anti-competitive
practices exist at the retail level, in the sale of
gasoline, and there is reason to believe that the recent
gasoline scarcity acerbated the anti-competitive
situation. The April 1974 Consumers Reports notes:
In the near but fast-fading past when
gasoline was plentiful, the gas stations
controlled by major oil companies were
losing a large measure of their hegemony
over the American driving public. Between
1960 and 1972, independent and nonmajor
brand discount gas stations increased their
share of the market from 10 per cent to 25
per cent
Their success formula was simple and
unadorned-a straightforward pitch to cost-
conscious consumers. By cutting auto-
motive service to a minimum and by operating
high-volume, around-the-clock type stations,
the independents were able to sell gas for
from 2¢ to 6¢ per gallon less than the going
prices at stations controlled by major oil
companies.
The energy crunch closed with bear-trap
suddenness. And the major oil companies
were quick to capitalize on the chief
weakness of the independents-their place
at the bottom of the gasoline distribution
chain
The squeeze on the independents coincides
with another trend in the retail gasoline
business: The major oil companies are
4
canceling leases on many of their margin-
ally profitable dealer-operated stations,
replacing them with large-scale company-
owned and operated stations
But it's unrealistic to expect the major
oil companies not to use the present short-
ages to their own ends. They are not in
business as a public service; they are
in business to maximize the return on their
shareholders' investment. Still, it's the
public's prerogative to establish, through
the instrument of government, a framework
within which corporations are permitted to
operate. In the case of the petroleum
industry, it's clearly in the public
interest to maintain competition in the
retail gasoline business.
Our study of the industry has concluded that
there are four different operations in the petroleum
industry -- crude production, transportation, refining,
and marketing and sales. The major petroleum companies
are all vertically integrated as though they were a
single company. Integrated control of the entire industry
by a small group of companies plus the size of the largest
of the majors raises the anti-competitive spectre. The
FTC has a suit against several oil companies now regard-
ing the East Coast and is investigating the West Coast,
to determine if there is basis for federal anti-trust
action.
Setting aside for the moment any comprehensive
anti-trust actions that might lead to overall divestiture,
it is the task force recommendation that divestiture be
required at the retail level. This is the area where the
situation is most critical; this is the area where
immediate action is most needed. While a fully com-
petitive structure at the retail level does not guarantee
a lowering of gasoline prices, nor a greater supply of
gasoline, it does guarantee that the free market will be
allowed to work to the benefit of the consumer, and that
free market pressures will be exerted to hold down
gasoline prices.
5
Divestiture at the retail level can be ac-
complished in two ways: (1) by anti-trust action seeking
to divest major corporations of their retail outlets.
This would require proving violations of law, such as a
conspiracy to drive out independent retailers; (2) through
legislation requiring all companies which own or control
refining, producing or transporting of petroleum to
divest retail stations, or, if they choose, to divest all
operations other than retail. At the present time, a
legislative approach is clearly preferable. An anti-trust
lawsuit on this matter could take eight years to complete,
with no guarantee of success.
Evidence presented to us by economists we
consulted, as well as empirical data on the oil industry,
indicates that before the current energy crisis and
resulting gasoline shortage, there was more competition
at the retail level because independents were able to
get enough gasoline to compete. Much of this gas was
obtained from majors who had more gas than their own
retailers and franchisees could sell. Now it appears that
with the majors having to serve their own stations first
they have been cutting out the independents. The independent
affiliated stations (i.e., major franchisees) are also
affected by the majors' absolute control over supplies.
We suspect that the majors may be supplying their own
company-owned gas stations before they supply the af-
filiated independent stations (franchisees). Such a
practice would be an apparent violation of Federal Energy
Office guidelines. relating to allocation.
Divestiture at the retail level would create
competition. If all refineries were competing for the
sale to retailers, presumably the price to retailers
should be lowered. Further, without the price support
previously provided by the majors to their own retailers,
the lowest priced retailer should be able to capture his
fair share of the market.
The Task Force legislation on oil company
divestiture is included in Section 10.
B. SHOULD ANY PART OF THE OIL INDUSTRY BE PLACED UNDER
PUBLIC UTILITIES COMMISSION REGULATORY CONTROL
Recommendation: The oil pipeline structure should be
placed under Public Utilities Commission
control.
6
Discussion:
Regulatory control of an industry involves
assigning to a governmental agency (such as the Federal
Power Commission or Interstate Commerce Commission, on
the Federal level, or the Public Utilities Commission
on the California state level) the function of regulating
the industry or major aspects of it. This involves
setting prices (rates) for the commodity provided,
guaranteeing a fair rate of return to the industry, and
a host of side activities such as regulating supplies,
locations, and service. It is the antithesis of a free
competitive market.
Such regulation, or the ultimate of such
controls - nationalization or public ownership - is
appropriate where a monopoly situation exists, such as
in electrical, water, and telephone services; and is
undoubtedly called for in the transportation field where
predatory practices have prevailed historically.
With certain exceptions, the oil and gas
industry does not show a monopolistic concentration.
Although the oil industry is huge, and of vital importance
in national and international economics, no effective
case for blanket control or nationalization of the industry
has yet been made. However, at the present time, certain
aspects of the industry are under PUC-type control, some
desirable and some not:
(a) Interstate gas pipelines and production
are regulated by the Federal Power Commission.
(b) Interstate petroleum pipelines are under
ICC regulation.
(c) Gas distribution is controlled virtually
everywhere by state public utility commissions. Such
systems are frequently municipally owned.
(d) Intrastate petroleum pipelines are,
except in California, usually common carriers and subject
to state control.
(e) Except in California, oil production
has been subject to certain controls. Due to shortages,
control is now effectively abandoned.
7
The Task Force concludes that, at the present
time, the public interest can be adequately protected
without placing the entire California oil and gas
industry under such controls. We do not believe segments
of the California industry, such as gasoline sales,
refining, or crude production should be placed under
PUC control. Any anti-competitive or predatory practices
can be adequately dealt with by anti-trust and trade
practice laws as they now exist.
Oil pipelines, however, are a special considera-
tion. Unlike mid-continent oil fields, only five Calif-
ornia petroleum pipelines are common carriers and
thereby subject to Public Utility Commission control and
available to all producers and refiners. The largest
such common carrier is owned by Southern Pacific Railroad,
which uses its right of way for pipelines for petroleum
products. Although the California Constitution and the
Public Utility Code declare all such pipeline to be public
utilities, and subject to regulation, California courts
have imposed an additional prerequisite; that the owner
dedicate the pipeline to common carrier status.
In 1960, Justice Traynor, speaking for the
California Supreme Court, strongly indicated that the
old rationale for requiring dedication no longer exist-
ed. Current statutes were, however, enacted on an
interpretation of the older court cases. Therefore,
the Court concluded, PUC regulation of petroleum pipelines
without dedication would require affirmative legislative
action. Richfield Oil Company VS. Public Utilities
Commission, 54 Cal.2 419 (1960).
The usual method of moving crude oil from the
fields to shipping ports and refineries is large pipelines.
Pipelines are expensive to build. An independent producer
can rarely build pipelines to market his production, and
an independent refiner can rarely build pipelines to
many or all of his sources of supplies. This leaves
both producers and refiners at the mercy of those who
own the existing pipelines, usually the major integrated
oil companies. Exchange agreements are frequently
entered into in California, but the owner of the pipeline
can bargain from an unfair bargaining position.
The Task Force notes that complaints have been
made relative to denial of pipeline access, indicating
8
that abuses may be taking place. Such abuses could
result in suppression of independent oil production,
refining or sales. And we note that apparently, no
state agency has a record of the location and owner-
ship of all the pipelines in California.
Thus it would appear that pipeline operations
in California have become a "natural monopoly." We
recommend therefore that PUC control be imposed. This
will allow a company denied access to pipelines to file
a petition with the PUC, which would have the power to
guarantee access to transportation of crude and finished
products through all pipelines. This can be implemented
by legislative action.
The Task Force legislation on oil company
pipelines is included in Section 10.
9
II. AN EXAMINATION OF STATE AND FEDERAL TAXATION
POLICIES WHICH AFFECT THE PETROLEUM INDUSTRY
Recommendations:
1. Limit the foreign tax credit, so that American oil
companies cannot write off royalties on foreign
petroleum operations against their United States
taxes.
2. Remove expensing of intangible drilling costs.
3. Abolish the percentage depletion allowance for oil.
Discussion:
There are currently three areas of income tax policy
whereby the oil and gas industry is given tax benefits not
available either in part or whole to other industries or
businesses:
(a) The Depletion Allowance - A producer of oil or
gas is allowed to deduct from income from the producing
property 22% of the gross income of the property (not to
exceed 50% of net). There is no limit to the deduction -
it continues as long as the property is producing gross
income and irrespective of the capital investment on the
cost of acquisition. All other mining and depletable re-
sources industries have a depletion allowance benefit at
lesser percentages.
(b) Expensing of Intangible Drilling Costs - Oil and
gas producers may either (1) capitalize all dry-hole costs
and the intangible (wages, fuel, repairs, etc.) costs of
drilling production wells or (2) deduct them as current
operating expenses. Since virtually all producers forego
cost depletion (ordinary depreciation) and use percentage
depletion on the oil, they obviously choose to expense
intangible drilling costs. While a strong case can be made
for allowing dry-hole costs to be expensed as any other
business loss, expensing of intangible costs is another
matter. These costs may be deducted in the year they are
incurred or by capitalizing them and deducting them over
each year of useful life (depreciation). They may be cur-
rently deducted (i.e., immediate expensing as opposed to
depreciation) in addition to taking the percentage deple-
tion allowance. We feel this amounts to, in effect, a
double tax subsidy for the industry.
Our recommendation is to do away with this subsidy.
In order to avoid short-run interruptions generating adverse
long-run effects on investments, such recommended tax re-
vision probably should be done gradually.
10
(c) Foreign Tax Credit - All businesses may offset
income taxes paid to a foreign government against United
States income tax due on their income. This is to preclude
double taxation. Since the early 1950's however, by an
Internal Revenue Service ruling, and allegedly as part of
United States foreign policy, international oil companies
have been allowed to offset as a tax credit, royalty pay-
ments to oil producing nations. These are Middle East
countries primarily. These payments are couched in tax
terms but are in fact royalty payments which would ordi-
narily be deductible from income, not as a tax, but as a
business expense. Moreover, the companies are allowed to
apply this credit against all foreign income, particularly
the lucrative tanker shipping operations, irrespective of in
what country the income was earned.
The result of these policies is substantial tax savings
for the oil and gas industry, and the statistics show that
most major oil companies pay only from 2 to 15% of net in-
come in United States income taxes, when the tax rate for
ordinary corporations is 48%. The difference obviously con-
stitutes a major tax subsidy by the American taxpayer to
the oil and gas industry. The subsidy, of itself, is not
the problem; but the subsidy has resulted in the American
petroleum industry becoming excessively dependent upon
foreign oil. Oil produced in foreign countries is eligible
for depletion allowance and intangible expensing tax sub-
sidies, as well as the foreign tax credit. The ability to
fully offset foreign royalties against American taxes, in
addition to the other tax breaks, makes it extremely attrac-
tive for American oil companies to invest and drill in for-
eign countries. As the Arab embargo has shown, this can be
to the detriment of the American consumer, as well as to
our own independent oil producers.
The oil industry puts forth several arguments in favor
of maintaining these tax subsidies. The depletion allowance
is defended on grounds that the oil and gas in the ground
is depleting as produced and can not be replaced. Empirical
data, however, suggests that depreciation allowance which
permits recovery of the cost of acquisition, as any other
business would have, would handle the problem. The vice of
the depletion allowance is that it continues beyond recovery
of cost as long as there is gross income from production.
(See page 12 for a detailed discussion of the drawbacks of the
oil depletion allowance.)
Various arguments have been put forth that tax bene-
fits, and more importantly import quotas, are necessary to
protect America's energy industry and to foster domestic
exploration and production. However, the foreign tax credit
has just the opposite effect. Assuming the foreign tax
credit ruling of the 1950's was a proper foreign policy
11
consideration then, that rationale no longer holds in the
1970's. And allowing depletion and expensing of intan-
gibles on foreign oil fields, of course, hardly fosters
domestic exploration and production. The Arab embargo has
shown that the United States may lack an adequate crude oil
and petroleum stocks reserve. The oil and gas industry in-
sists that only through retention of the present tax bene-
fits will adequate exploration take place. However, this
incentive is not working as it should. There are, more-
over, two more fundamental objections to these tax subsidies:
(1) If a subsidy for exploration is needed, then it
should be in the form of appropriation by the Congress or
the legislatures of the various states, thereby allowing
control by the representatives of the people who are paying
the subsidy. The amount of subsidy, recipients, location
of drilling, etc. could then be blended with overall national
priorities. The current tax subsidy method precludes any
taxpayer control, and it is unknown whether the subsidies
are actually being used for exploration, or as suspected
by some for acquisition of competing energy sources, such
as coal companies and geothermal energy.
(2) A market free of price restraints should supply
adequate exploration funds. A price of $7 to $10 per barrel
for crude oil should attract many investors without the
need for government support.
Arguments for repeal of the oil depletion allowance.
Because the oil depletion allowance is of particular
emotional concern both to the oil industry and the public,
the Task Force feels it is beneficial to detail reasons
for the recommendation that the allowance be eliminated.
Fiscally, this tax subsidy has limited impact on the
California treasury, only about $25 million a year. Its
impact on the Federal treasury is much greater.
We based a number of our conclusions in the field of
oil taxation on the report "An Analysis of the Federal Tax
Treatment of Oil and Gas and Some Policy Alternatives, pre-
pared by the Congressional Research Service of the Library of
Congress for the U. S. Senate Committee on the Interior.
This report quotes from several other studies of petroleum
industry taxes, including Federal Trade Commission studies
and Treasury Department studies.
With regard to the oil depletion allowance, and its
effect on the structure of the oil industry, the report notes:
12
"It has been charged that the tax provisions,
primarily percentage depletion, have definite effects
on the structure of the petroleum industry. On July
12, 1973, a preliminary Federal Trade Commission Report
investigating the petroleum industry was published by
the Senate Government Operations Committee. The report
was directed generally toward concentration and com-
petition in the petroleum industry, but charged that the
percentage depletion allowance contributed to vertical
integration, concentration and barriers to entry in the
petroleum industry. The report suggested that because
of the tax advantages in production, firms seek to
integrate backward to take advantage of these provisions.
Integrated firms (those engaged in production, refining,
transportation, and marketing) then have an incentive
to set high crude prices which result in a larger per-
centage-depletion allowance, which they are able to do
because they sell crude oil to themselves. The result
is concentration of profits in production and a very low
rate of profit in refining operations. This low level
of refining profits creates a barrier to entry for
independent refiners who cannot supply themselves with
crude. The general conclusion, is that the industry is
characterized by concentration, lack of competition,
cooperative behavior and administered prices."
Thus we feel it can be argued that repeal of the
depletion allowance can have a beneficial effect on the overall
industry, leading to more competition at production and refining
levels, and generally more efficient operation. We realize
there will be a need for a short term price increase, but,
as the report notes, the long term effects on the consumer
will not be harmful. The depletion allowance is economically
inefficient, and leads to higher rents for oil producing
lands, according to the report:
"[An] aspect of percentage depletion which might
lead to inefficiency is that to the extent that per-
centage depletion acts to bid up the price of oil lands,
it acts merely to redistribute income from taxpayers
to landowners. Reductions in the percentage depletion
rate would tend to stretch out the recovery time rather
than affect ultimate recovery. In addition lowering
the rate itself would have a primary effect on low
cost wells, since high cost wells often have percentage
depletion limited through the net income limitation.
The primary effect of percentage depletion is to en-
courage the drilling of development wells in known
fields. These expenditures in known fields do not add
substantially to the reserves.
13
The original intent of these tax subsidies was to
establish a quid pro quo whereby the consumer got gasoline at
a low price, and the oil companies received generous tax ad-
vantages in return for keeping the price low. The glut of
low cost foreign oil which began flowing into this country in
the late 1950's was largely due to the provisions of the
foreign tax credit, which encouraged exploration in foreign
lands where costs were lower than in the United States. Indeed,
in real dollars the price of gasoline to the consumer remained
virtually static between 1948 and 1972.
However, this is no longer the case. The consumer
no longer buys gasoline at bargain prices. Inflation in fuel
prices is running far ahead of cost of living inflation at the
current time. Therefore, we take the stand that the tax sub-
sidies no longer operate to keep down prices for the consumer,
and the quid pro quo no longer exists. If a tax subsidy
neither holds down prices nor increases exploration, it is not
in the public's best interest to maintain it. We find with
the oil depletion allowance that it operates only marginally
to hold down prices, and does not lead to increased explora-
tion, arguments of the oil industry notwithstanding. Again
the Senate report notes:
"The review of literature, and both qualitative and
quantitative analysis previously presented in this
paper, tends to suggest that percentage depletion
and intangible drilling costs are inefficient in
stimulating exploration and development. The reason-
ing for this argument may be summarized as follows:
"(1) These tax provisions tend to lower the
price of scarce commodities and to increase rents to
the landowner and retard the development of substitute
energy sources, since they depress the prices of oil
and gas. Their repeal would increase oil and gas
prices and reduce land rents.
"(2) Rising prices for oil and gas, in turn,
would permit oil companies to protect themselves
from losses due to repeal of percentage depletion.
'(3) The percentage depletion allowance is
determined by the level of current production and
is the outcome of past investments to achieve that
production. It does not influence current output
of minerals. Tax relief based upon investments already
taken can only indirectly influence future investment
through generating corporate liquidity via internal
cash flows. But this is an inefficient means of
attempting to encourage investment as it grants tax
14
relief based on existing capital stock and not future
capital requirements. If percentage depletion were
repealed, the owners might raise prices in the short
run, but, if they were profit maximizing monopolists,
they would have already obtained what the market would
bear. So they will suffer a capital loss. For the
same reason, percentage depletion reduction appropri-
ately would strike rents and would not contribute to
an increase in oil and gas prices.
"(4) The present value of percentage depletion
with development drilling is higher than with explora-
tory drilling as the output comes on stream almost
immediately. The expensing of intangible drilling
costs when viewed in concert with the expensing of
dry holes only provides an incentive for producing
wells. However, the removal of the option to expense
these costs would make development drilling less
attractive.
"(5) Investment in oil and gas exploration is
more likely to be stimulated by the immediate write-
off of dry holes. By contrast, the elimination of
percentage depletion would add only nominal profit-
ability to investment in exploration and development
activities because it accounts for such a small frac-
tion of the future income stream. Further, any wells
already in production, if their operating costs are
less than the value of their output will continue to
produce, so long as taxable income exceeds net cash
flow before income tax.
"It would appear that tax policy would be more
efficient if it served to redirect tax incentives
toward exploration and development and away from
rewarding drilling in known fields."
15
III. AN EVALUATION OF WHETHER PRICE CONTROLS ON OIL AND NATURAL
GAS SHOULD BE LIFTED IN ORDER TO ENCOURAGE MORE EXPLORATION
Recommendation: All government-imposed price restrictions
on natural gas and petroleum products
which constitute an artificial restraint
on the free market, should be removed.
Discussion:
1. Deregulation of Natural Gas. In 1938 Congress
enacted the Natural Gas Act designed to regulate, under the
jurisdiction of the Federal Power Commission, the interstate
shipment of natural gas by pipeline companies. These companies
were accused of taking unfair advantage of producers. In
1954 in Phillips Petroleum Company VS. State of Wisconsin,
347 U.S. 672, the Supreme Court extended the jurisdiction
of the FPC to prices paid to producers of gas produced for
interstate shipment. That amounted to control over wellhead
gas prices. The FPC has wrestled with this problem for years
and now has a series of area rates for gas destined for inter-
state shipment. The rates are subject to upward, downward and
even retroactive adjustment by the FPC. The prices currently
allowed at the wellhead are generally in the area of 25-30
cents per thousand cubic feet (mcf), with less allowed for
older contracts. Prices charged for intrastate gas, not under
FPC regulations, have been reported to be as high as 95c
per mcf.
The basic pricing policy of FPC has been a tradi-
tional public utility approach; that is, cost of service.
Little regard has been paid to the inherent or market value
of the product. More recently, the FPC has been integrating
into the cost of service some consideration for market value.
There is a fear, however, that the Courts will not allow this.
Most experts agree that there is a long range gas
supply shortage, and many, including the FPC, believe it is
short range as well. Thus the FPC has issued curtailment
orders on interstate shipment of natural gas, to the severe
detriment of California where, as a result, fuel oil must
be burned for the generation of electricity instead of gas.
(The curtailment orders are the subject of a separate
memorandum by the Task Force.)
Interstate shippers know there is currently a
shortage, and the stark difference between FPC regulated
prices (25-30c per mcf) and unregulated prices (up to
95c per mcf) clearly shows why no newly discovered gas is
16
being placed in the interstate market. We feel that
artificial price restrictions are suppressing exploration
for and development of new reserves, although new oil
discoveries, particularly offshore, will undoubtedly bring
with them additional gas supplies.
The Task Force concludes that the FPC wellhead
price regulations, should be removed. Whether this should
be immediately done for all new gas placed in interstate
shipment, or whether phased in under FPC supervision,
would appear to make no great difference. The important
objective is to restore a free market for natural gas.
This conclusion, however, does not suggest removal of FPC
regulation over interstate gas pipelines, an area of inherent
monopolistic control.
2. Lifting Price Controls on Petroleum Products.
As anyone who has waited in line for gasoline knows, some-
thing is wrong. Some facts appear indisputable: The United
States, although still the largest single producing country
of crude oil at nine million plus barrels per day, never-
theless must import prodigious quantities of crude and
refined products to meet an increasing demand for oil
products. Current imports total from five to seven million
barrels per day. The statistics, most of which come from
the oil industry, show a constant excess of demand over
supply for at least the last two years. These same statistics,
however, also show a relatively steady stock, particularly
of motor gasoline, which is hardly comforting for those
forced to wait in line.
The Task Force concurs with the judgment of many
economists that the current shortage in the United States
is in large part caused by artificial suppressants and dis-
locations forced on the market by federal allocation and
pricing regulations. We believe these should be removed
immediately to allow the free market to prevail. If a
future Arab oil embargo in fact severely restricted the
total supply available to the United States, then immediate
heating oil and motor gasoline rationing would be justified.
Otherwise, the normal supply-demand functions should be
allowed to work.
3. Impact of Deregulation. Most economists agree
there would be an immediate effect, if pricing restrictions
on petroleum products and natural gas were lifted. Generally
it is to be believed that crude oil prices would rise to
$10 per barrel ($9 for California crude) immediately; but
over a two to three year period prices would settle back to
the $6 to $8 range. Gasoline might go as high as 80 cents
17
per gallon, and later retreat to the 60-70 cents range.
Interstate gas wellhead prices would be expected to rise to
60-65 cents per mcf, resulting in roughly a one-third
increase in home heating bills.
In addition, other prices would rise, for instance
food costs, because of increased fertilizer, fuel and trans-
portation costs. And there would be increased costs in
transportation; plastics and other materials made from
petroleum feedstocks; electricity would rise, due to fuel
costs. All these price rises reflect, however, a basic fact
of economic life: the days of cheap energy in the United
States and elsewhere in the world have come to an end.
We believe that it is extremely important to stress
that although prices would rise, the overall cost to the
consumer would be much less than the price increases. We
consider our proposals a total package, and would not favor
a free market economy in oil and gas as long as the unjusti-
fied and inefficient oil tax subsidies are still in effect.
Repeal of the oil depletion allowance and ending expensing
of intangible drilling costs, and revising the foreign tax
credit will save taxpayers millions of dollars. So, while
the consumer as purchaser may pay more for the product at
the retail level; the consumer as taxpayer will save due to
ending the tax subsidies. And, a free market approach will
tend to curb the excessively high profit margins, without
the necessity of imposing excess profits taxes.
There are also some non-fiscal but nevertheless
very important corollary benefits to de-regulation of prices.
An increase in natural gas supplies will help alleviate
California's smog problems. Higher petroleum product prices
should spur efforts to develop alternate and additional sources
of energy, such as geothermal, nuclear and solar. It is
estimated that oil shale, of which the United States has an
enormous supply, can be profitably produced and the petroleum
extracted at $6 plus per barrel, witness recent successful
bid-lease sales by the Federal Government. Higher natural
gas and petroleum prices should spur coal gasification, coal
desulphurization, and coal liquification projects, and gas
liquification efforts.
The one obvious beneficial effect of the current
petroleum shortage is that the United States now must and
will search for new and more efficient energy sources. A
free market will help in those efforts.
18
4. An Excess Profits Tax. The high profit margins
enjoyed by international oil companies since the commence-
ment of the gasoline shortage has led to increased calls
for an excess profits tax. We note that increased crude
oil and gasoline prices, increased demand with no real
decrease in supply, and the end to gas wars, have resulted
in an enormous increase in industry profits. However, we
do not feel that these profits can be adjusted by an excess
profits tax, but rather that they warrant an end to the tax
benefits particular to the oil industry. We object to an
excess profits tax and an inefficient and improper response
to the profit margins on three grounds.
(a) As Congress is finding out, the definition
of "excess" is almost impossible to spell out.
(b) Such a tax encourages inefficiency and cost
increases to avoid the tax, resulting in economic waste.
(c) Such a tax would be a form of punishment for
the oil and gas industry. If the questioned profits of the
industry are the result of monopolistic or predatory practices,
or unfair trade operations, then laws prohibiting such
practices should be strengthened and enforced. To impose
a tax on an industry because it has made money would be to
impose another artificial restraint on free market.
While we oppose such a tax, we emphasize that
the fact profits are so large, is testimony in itself that
the oil industry no longer needs the special depletion
allowance, the current foreign tax credit, and special tax
benefits for intangible drilling costs. If these tax
subsidies were repealed, and a truly free market situation
allowed to develop, the pressures of the marketplace would
of themselves reduce the profit margins. This is to be
preferred to a questionably effective excess profits tax.
19
IV. FORMAL SUPPORT FOR LAWSUITS WHICH CHALLENGE ORDERS OF THE
FEDERAL POWER COMMISSION WHICH HAVE CUT BACK ALLOCATIONS
OF NATURAL GAS TO CALIFORNIA.
The Federal Power Commission's curtailment of the
natural gas supply to California has resulted in three
principal lawsuits.
We received from the U.S. Court of Appeals for the
District of Columbia permission to file an amicus curiae
brief in the case involving the Federal Power Commission's
statement of policy of January 1973. This order established
an 8-tier system of priorities in the distribution of natural
gas (since amended to a 9-tier priority system). The basic
problem of the policy is that curtailments were made with
regard to end use, rather than contractual relationships
between the utilities and their customers. Pacific Gas and
Electric and the Mississippi Power and Light companies have
both appealed the Federal Power Commission's order. Our
petition is on the side of Pacific Gas and Electric.
Our brief was sent to the Court on April 5. If
the order is allowed to stand, there will be a serious
curtailment in the supply of natural gas to California,
which will require switching to more expensive and less
clean fuels by California industries and consumers. If
our intervention is successful, it will have the long term
effect of lowering fuel prices in California.
20
V. ASSISTANCE TO THE FEDERAL TRADE COMMISSION IN ITS INVESTIGATION
OF THE PETROLEUM INDUSTRY IN THE WESTERN STATES.
In 1973, the Federal Trade Commission filed a detailed
anti-trust lawsuit against several major oil companies, charging
that the vertical integration of the oil industry amounted to a
violation of the Federal anti-trust laws. The suit involved
petroleum operations in the East and Midwest. At the time this
suit was filed, the California Attorney General's Office began
a study to determine what role California should play in this
and similar lawsuits. The FTC has concluded that the vertical
integration and concentration evident in the industry amounts
to a shared monopoly although there was no evidence of con-
spiracy to control prices. Our study has stressed the anti
competitive structure of the industry.
The Federal Trade Commission has now undertaken an
examination of the oil industry in the Western States, and
we have committed one man-year of support from the Attorney
General's Office to this effort. We also requested the FTC
to make public the transcripts of these present actions
against the major oil companies in the East and Midwest.
The FTC has granted our request.
This undertaking is, of course, a supplement to our
own independent anti-trust investigations. Whether or not
the FTC files an action in California, will not necessarily
determine what will be recommended upon conclusion of our
independent anti-trust investigation.
21
VI. ANTI TRUST INVESTIGATION OF GEOTHERMAL RESOURCES IN CALIFORNIA
The Attorney General's Office has commenced a long
term investigation of allegations of anti-trust violations
in the development and transmission of geothermal power in
California. The allegations of violations involve the Pacific
Gas and Electric Company, and possibly the Union Oil Company.
It will require a considerable amount of time to gather the
information necessary to make a decision on the advisability
of anti-trust actions by our office. At present, the U.S.
Department of Justice is conducting an investigation of its
own, and we have requested access to the information they have
acquired thus far. We have been in contact with the Division
of Oil and Gas, and the Northern California Power Agency in
our effort to obtain information.
22
VII. SURVEY OF THE OIL INDUSTRY IN CALIFORNIA
The following letter has been sent to 760 oil and
gas companies in California:
23
J
01 LILORNIA
CONTRAL
OFFICE OF THE ATTORNEY GENERAL
Department of Justice
STATE BUILDING. LOS ANGELES 90012
March 4, 1974
TO: THE OIL OR GAS PRODUCER
ADDRESSED
RE: REQUEST FOR INFORMATION
Dear Sir:
The Office of the Attorney General is vested with numerous
responsibilities in the environmental field. Not only must
he enforce California's new environmental laws, but he must
act, in effect, as legal guardian for California's air, land,
and water. He is not unmindful of the need to maintain a
sound economy, and recognizes that these concerns are often
in conflict.
Among California's major environmental concerns at the present
time is the orderly development of sources of energy. It
appears that California faces an energy crisis of substantial
proportions. In order that the Office of the Attorney General,
and the citizens of California may be better informed as to
the extent and seriousness of that crisis, and to permit the
formulation of sound policies in response to it, the Attorney
General is hereby requesting you, as a California oil or gas
producer, to provide certain information. The Division of Oil
and Gas estimates that well in excess of 90% of California's
energy consumption is currently met by oil and gas supplies.
Consequently, the requested information involves the production,
storage, importation, estimated proven reserves, and distribu-
tion of those supplies within California. Attached is a
questionnaire that you are hereby requested to complete and
return.
Your cooperation in this effort is sincerely solicited, with
the hope that a voluntary effort to inform the public will
prove the most effective method of achieving our goals. Please
address any correspondence, and your replies to Senior Assistant
Attorney General Robert H. O'Brien, 217 West First Street, Los
Angeles, California 90012, Telephone (213) 620-2494. Thank you.
Very truly yours,
EVELLE J. YOUNGER, Attorney General
Robert ROBERT H. O'BRIEN
Encl.
Senior Assistant Attorney General
OFFICE OF THE ATTORNEY GENERAL
STATE 01 CALIFORNIA
REQUEST FOR INFORMATION CONCERNING
OIL & GAS SUPPLIES IN CALIFORNIA
DEFINITIONS
As used in this request for information, the following
terms have the meanings indicated:
1. "California" includes the land areas of the State
of California, the California State tidelands, and the United
States Outer Continental Shelf off the shores of the State of
California.
2. "Company" includes the company to which this
correspondence is directed and all of its domestic and foreign
parents, subsidiaries, divisions, and affiliates.
3. "Crude oil" means all liquid hydrocarbons produced
from oil wells.
4. "Production" means gross production of crude oil or
natural gas, including royalty interests.
5. "Gas" means all hydrocarbons which at atmospheric
conditions of temperature and pressure are in a gaseous state.
6. "Proved Reserves" means the estimated quantities of
all liquids statistically defined as crude oil, and of all natural
gases, which geological and engineering data demonstrate with
reasonable certainty to be recoverable in the future from known
reservoirs under existing economic and operating conditions.
7. "Units" mean areas operating under unit agreements,
or plans of development and operation for the recovery of oil and
gas made subject thereto as a single consolidated unit without
regard to separate ownerships and for the allocation of costs
and benefits on a basis as defined in the agreement or plan.
1.
8. "Joint Operations" means areas operating under a
joint operating agreement between or among concurrent owners for
the operation of a concurrently owned tract or leasehold for oil,
gas and other minerals.
9. "Stock" means the inventory of a company in the
company's storage facilities, or in storage facilities of others
which are owned, leased, rented or otherwise under the control of
your company.
Please answer the following questions and produce any
documents under your control or custody which were used to arrive
at your answers:
PRODUCTION
1. The average number of producing walls, on a monthly
basis, wholly or partially owned or operated by your company or
your company and others in California between January 1, 1969 and
the present. Set forth the number of wells wholly owned separately
from the number jointly owned.
2. The amounts, in barrels, of your company's production
of crude oil in California, on a monthly basis, between January 1,
1969 and the present.
3. The amount, in barrels, of your company's share of
production of crude oil from units in California, on a monthly
basis, between January 1, 1969 and the present.
4. The amounts, in barrels of your company's share of
production of crude oil from jointly owned wells in California, on
a monthly basis, between January 1, 1969 and the present.
2.
5. The amount, in thousand cubic feet (M.C.F.), of
your company's production of natural gas in California, on a
monthly basis, between January 1, 1969 and the present
6. The amount, in M.C.F., of your company's production
of natural gas from units in California, on a monthly basis,
between January 1, 1969 and the present.
7. The amount in M.C.F., of your company's share of
natural gas production from joint operations in California, on
a monthly basis, between January 1, 1969 and the present.
STOCKS
8. The amount of your company's stock, in California,
in barrels (average number of), of the following, on a monthly
basis, between January 1, 1969 and the present:
a. Crude oil
b. Gasoline
C. Diesel fuel
d. Jet fuel
e. Residual fuel oils
f. All other petroleum products.
9. The amount of your company's stock, in average number
of M.C.F., of natural gas, on a monthly basis, between January 1,
1969 and the present.
10. The total storage capacity (in M.C.F. and barrels,
respectively), of natural gas and oil (crude and products) of
your company's bulk storage facilities in California on a monthly
basis, between January 1, 1969 and the present. Include in total
capacity for each month all bulk storage facilities (including
tankers) which the company either owned, operated, rented, leased,
or had any other right to use during that month.
3.
IMPORTS
11. The amount, in barrels, of your company's total crude
oil imports (from any sources outside of California) on a monthly
basis, between January 1, 1969 and the present. As to any imports
from outside the United States please indicate the source nation
and the amount obtained from each such source nation.
12. The amount, in M.C.F. of natural gas imported by
your company (from any sources outside of California) on a monthly
basis between January 1, 1969 and the present. As to any imports
from outside the United States please indicate the source nation
and the amounts obtained from each such source nation.
13. The amount, in barrels, of your company's total
imports of oil products, other than crude oil (from any source
outside of California) on a monthly basis, between January 1, 1969
and the present, for each of the following:
a. Crude oil
b. Gasoline
c. Diesel fuel
d. Jet fuel
e. Residual fuel oils
f. All other petroleum products
As to any imports from outside the United States please indicate
the source nation and the amounts of each oil product obtained from
each such source nation.
EXPORTS
14. With respect to your company's exports of natural
gas, crude oil, and oil products, outside of California, please
provide the same figures as requested in numbers 11 - 13 above and
indicate the state or country to which exports were delivered and
the amount sent to each such state or country.
RESERVES
15. The amount of your company's estimate of total
proven reserves, in M.C.F. of natural gas and barrels of crude oil
respectively, as of December 31st of each calendar year from 1969
to 1973, and at the present time on both a California and a worldwide
basis.
16. Describe the method by which the figures provided in
response to No. 15 above were estimated.
REFINERIES
17. The capacity, in barrels per day, of refineries
owned or operated by your company in California, on a monthly
basis, between January 1, 1969 and the present.
18. The actual monthly production, in barrels, on a
monthly basis from the refineries owned or operated by your company
between January 1, 1969 and the present of the following products:
a. Gasoline
b. Diesel fuel
C. Jet fuel
d. Residual fuel oils
e. All other products
19. The percentage of refinery capacity utilized by
your company, on a monthly basis, between January 1, 1969 and the
present.
20. The percentage of refinery capacity of refineries
owned or operated by your company utilized by persons other than
your company, on a monthly basis, between January 1, 1969 and the
present.
5.
SALES
21. The amount, in barrels, of each refined product sold
in California, in the United States, and throughout the world by
your company, on a monthly basis, between January 1, 1969 and the
present.
MISCELLANEOUS
22. Please set forth the names and titles of each
person involved in the preparation of responses to the above
questions. As to each such person please indicate the number of
each question on which the person participated.
6.
VIII. ASSISTANCE TO STATE LAW ENFORCEMENT AGENCIES TO PREPARE FOR
EMERGENCY ENERGY SHORTAGES
We have conducted a preliminary review of law
enforcement contingency plans for dealing with crime in the
event of major blackouts or other energy shortages. On
January 28, we sent to all agencies a copy of the results
of our preliminary review, with a guide to help them prepare
for the energy shortage and suggestions of how to cope with
blackout and brownouts.
The Office of Emergency Services has responsibility
for long range planning in this area, and our office is in
contact with them. The OES is conducting an evaluation of
law enforcement problems with regard to the energy crisis.
31
IX. OPERATION OF THE FEDERAL FUEL ALLOCATION PROGRAMS IN
CALIFORNIA
We feel there are problems with the methods and
amounts of fuel allotted to California under the Federal
fuel allocation system. To assure that California receives
its proper allocation of gas and oil, we have offered our
services to the State Energy Planning Council, and we
requested that the Attorney General be made a member of
the Council. This has been done.
We are prepared to file suit in any month in which
the Energy Council and our office feel California is receiv-
ing insufficient fuel for our particular needs. In
determining state allocations, we feel the Federal Energy
Office should take into consideration the unique features
of each state. Geographically, California is a long state
with several diverse population centers. As a result, we
must rely on the automobile more than other states. We
also have significant agricultural and tourism industries.
We belive all these factors must be taken into account in
allocating fuel to the state.
An attorney has been assigned by this office to
work with the State Energy Planning Council, and to monitor
Federal fuel allocation policies as they relate to California.
32
X. LEGISLATION IN SUPPORT OF ATTORNEY GENERAL'S ENERGY POSITION
PAPER AND RECOMMENDATIONS OF THE ENERGY TASK FORCE
1. Letter to members of California Congressional
delegation in support of Federal energy bills.
2. Legislation on divestiture of retail outlets
by the oil companies.
3. Legislation placing pipelines under Public
Utilities Commission regulation.
33
The Attached letter was sent to the following members of Congress:
CALIFORNIA SENATORS
Alan Cranston
John V. Tunney
CALIFORNIA CONGRESSMEN
Don H. Clausen
Harold T. Johnson
John E. Moss
Robert L. Leggett
Phillip Burton
William S. Maillard
Ronald V. Dellums
Fortney H. Stark
Don Edwards
Charles S. Gubser
Leo J. Ryan
Burt L. Talcott
Jerome R. Waldie
John J. McFall
B.F. Sisk
Paul N. McCloskey, Jr.
Robert B. Mathias
Chet Holifield
Carlos J. Moorhead
Augustus F. Hawkins
James C. Corman
Del Clawson
John H. Rousselot
Charles E. Wiggins
Thomas M. Rees
Barry Goldwater, Jr.
Alphonzo Bell
George E. Danielson
Edward R. Roybal
Charles H. Wilson
Craig Hosmer
Jerry L. Pettis
Richard T. Hanna
Glenn M. Anderson
William Ketchum
Yvonne Brathwaite Burke
George E. Brown, Jr.
Andrew J. Hinshaw
Bob Wilson
Lionel Van Deerlin
Clair W. Burgener
Victor V. Veysey
EVILLE J. YOUNGER
STATE OF CALIFORNIA
ATTORNEY *THERAL
OFFICE OF THE ATTORNEY GENERAL
Department of Justice
STATE BUILDING, LOS ANGELES 90012
Nonorable
United States House of Representatives
Capitol Building
Washington, D.C. 20515
Dear Congressman:
The current shortages in oil supplies have served to highlight
the substantial proportions of the energy crisis we face.
While emergency measures are in order, the Congress of the
United States has also been called upon to give careful con-
sideration to long-term solutions as well. The result has
been a dramatic increase in the volume of proposed energy
legislation. Our staff has studied the following bills, and
we particularly recommend them for your support.
S. 2176, the National Fuels and Energy Conservation Act, was
introduced by Senator Jackson and passed the Senate on
December 10, 1973. It is now before the House Interstate and
Foreign Commerce Committee. This bill incorporates a wide
variety of energy conservation measures that can materially
aid in solving the energy crisis. It establishes new structures
for identifying and responding to energy problems, and
appropriates needed funds for research and development in the
area. We regard the following measures as among the outstanding
features of the Act:
1. The Automobile Fuel Economy Act is enacted by
the addition of Title V to the Motor Vehicle
Information and Cost Savings Act (15 U.S.C. $ 1901
et seq.). This provides that the Department of
Transportation establish minimum fuel economy
standards for 1978 model cars, and requires dealers
to prominently place a sticker indicating expected
miles per gallon and estimated annual costs on each
automobile. We have endorsed similar legislation
for California, but effective controls must come at
the national level.
2. The Automotive Transport Research and
Development Act would be added as Title VI of the
Motor Vehicle and Cost Savings Act. This provision
appropriates $200 million in the form of grants
and loan guarantees to insure the development of
production prototypes for advanced automobiles.
These vehicles are to be energy-efficient, safe,
damage-resistant and environmentally sound. The
prototypes are to be ready for production within
four years.
3. The bill also requires that a complete life-
cycle cost analysis be prepared for each major
federal facility to be constructed, a measure that
we are also supporting in the form of H.R. 1565.
4. Finally, S. 2176 contains a directive to the
Federal Trade Commission to establish methods for
determining the cost of major energy-consuming
products over an average use cycle. The FTC is then
to require that such information be displayed in
selling and advertising such products. This "Truth-
in-Energy" requirement provides the consumer with
information needed to conserve energy in the home,
and therefore creates an indirect incentive to manu-
facturers to improve the efficiency of their products.
H.R. 11565 is an act for the development of design criteria for
new construction and for the exploration of the possibility of
improvement of existing buildings. It also requires federal
agencies to prepare a complete life-cycle cost analysis for new
major federal facilities. Because the important provisions of
this act are included in S. 2176, it should be superseded
should this act be passed. However, it is an important
measure in its own right and fully merits independent support.
Careful attention to long-range efficiencies can result in
savings both in energy consumed and dollars spent.
H.R. 10965 was introduced by Representative Anderson of
California. We believe it would set an important example for
the nation by increasing the proportion of fuel-economy cars
purchased by the federal government. Encouraging the use of
small cars is one way to alleviate the pressures of the current
energy crisis. No would like to see the bill amended, however,
to add the words "and thereafter" at the end of line 1 on page
2 in order to correct what was probably a technical oversight
in drafting. This would insure that the legislation remains
effective after 1976.
H.R. 8628, introduced by Representative Brown of California,
is a bill to encourage development of geothermal resources for
the production of electrical energy. The bill creates the
Geothermal Energy Development Corporation whose initial
responsibilities include the construction of two demonstration
facilities. It is governed by a board of nine directors
nominated by the President. We have suggested an amendment to
the author to provide that all directors be confirmed by the
Senate. We believe that geothermal resources hold special
promise for the State of California and we urge your support in
this matter.
H.R. 10392, the NASA car bill also introduced by Representative
Brown, with its objectives of energy conservation, economy,
clean emission characteristics, performance and safety, and
its utilization of the unique engineering systems competence to
be found in NASA, offers a real prospect of significant develop-
ment in ground propulsion systems.
As a member of the California congressional delegation, we
urge your support of these bills.
Very truly yours,
EVELLE J. YOUNGER
Attorney General
SENATE BILL
No. 2121
Introduced by Senators Mills, Behr, and Robbins
ASSEMBLY BILL
No. 3928
Introduced by Assemblymen Nimmo, Berman, Carter,
Craven, Ingalls, and Papan
April 18, 1974
An act to add Article 2.5 (commencing with Section 16730) to
Chapter 2 of Part 2 of Division 7 of the Business and
Professions Code, relating to restraint of trade.
LEGISLATIVE COUNSEL'S DIGEST
SB 2121, as introduced, Mills. Restraint of trade.
Makes it unlawful, after one year from the date of enact-
ment of this act, for any person to own or control any gasoline
marketing outlet who is also engaged in the business of pro-
ducing or transporting petroleum.
Provides that neither appropriation is made nor obligation
created for the reimbursement of any local agency or school
district for any costs incurred by it pursuant to the act.
Vote: majority. Appropriation: no. Fiscal committee: no.
State-mandated local program: no state funding.
The people of the State of California do enact as follows:
1
SECTION 1. Article 2.5 (commencing with Section
2 16730) is added to Chapter 2 of Part 2 of Division 7 of the
3 Business and Professions Code, to read:
4
5
Article 2.5. Petroleum Industry Divestiture
6
7
16730. This article may be cited as the "Petroleum
8 Industry Divestiture Act of 1974."
9
16731. (a) The Legislature finds and declares that in
10 order to promote the public health, safety and welfare of
11 the people of the State of California that:
12
(1) It is necessary to insure adequate supplies of
13 petroleum products at competitive prices;
SB 2121
- 2 -
1
(2) It is necessary to remove currently existing
2 competitive restraints in the structure of the petroleum
3 industry; and
4
(3) Ownership or control of gasoline retail marketing
5 outlets by any person engaged in the business of
6 production, refining, or transportation of petroleum
7 precludes competition, increases the cost of gasoline and
8 diesel fuels and is often detrimental to the interest of
9 individual gasoline marketing retailers and consumers.
10
(b) The Legislature declares that the purpose of this
11 act is to insure adequate supplies of petroleum products
12 at competitive prices by requiring the divestiture of
13 gasoline marketing outlets by any person engaged in the
14 business of production, refining or transportation of
15 petroleum.
16
16732. As used in this act the term:
17
(1) "Affiliate" means a person controlled by or
18 controlling, or under or subject to common control with
19 any other person.
20
(2) "Interest" means any financial interest whatsoever
21 and includes, but is not limited to, loans of money or
22 equipment and extensions of credit provided however
23 that "interest" does not mean extensions of credit for the
24 purpose of supplying inventory of gasoline marketing
25 outlets for a period of no longer than 30 days.
26
(3) "Gasoline marketing outlet" means a place of
27 business used for the sale and distribution of gasoline and
28 diesel fuels to the consuming public.
29
(4) "Own or control" means actual or legal power or
30 influence over another person, directly or indirectly,
31 arising through direct, indirect, or interlocking
32 ownership of capital stock, interlocking directorates or
33 officers, contractual relations, including but not limited
34 to, agency agreements, leasing arrangements,
35 instruments of indebtedness, or security agreements
36 where the exercise or potential exercise of such power or
37 influence may be used to affect or influence persons
38 engaged in the marketing of petroleum products.
39
(5) "Person" means an individual, corporation,
40 partnership, joint-stock company, business trust, trustee
2 2121 35 32
- 3 -
SB 2121
1 in bankruptcy, receiver in reorganization, association
2 whether or not incorporated, or any affiliate of any of
3 these.
4
(6) "Petroleum" means crude oil, oil shale, or products
5 refined therefrom.
6
(7) "Production" means the development of oil lands
7 or oil shale lands wherever situated, the extraction of
8 crude oil or oil shale therefrom, and the storage of crude
9 oil thereon.
10
(8) "Refining" means the refining, processing, or
11 converting of crude oil, or oil shale, into finished or
12 semifinished products. "Refining" includes the initial sale
13 or transfer of such finished or semifinished products to
14 customers from the refiner.
15 (9) "Transportation" means the movement of
16 petroleum products by means of pipelines or ships.
17 16733. It shall be unlawful, after one year from the
18 date of enactment of this act, for any person to own or
19 control, or have any interest in, any gasoline marketing
20 outlet within the State of California who is also engaged
21 in the business of producing, refining, or transporting
22 petroleum.
23 16734. Each day in which a person owns or controls
24 petroleum product marketing outlets in violation of
25 Section 16733 shall constitute a separate violation of this
26 act. A violation by a corporation shall be deemed to be
27 also a violation by the individual directors, officers,
28 receivers, trustees, or agents of such corporation who
29 shall have authorized, ordered, or done any of the acts
30 constituting the violation in whole or in part.
31 SEC. 2. No appropriation is made by this act, nor is
32 any obligation created thereby under Section 2231 of the
33 Revenue and Taxation Code, for the reimbursement of
34 any local agency or school district for any costs that may
35 be incurred by it in carrying on any program or
36 performing any service required to be carried on or
37 performed by it by this act.
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2 2121 45 34
SENATE BILL
No. 2179
Introduced by Senators Behr and Mills
April 23, 1974
An act to add Chapter 10 (commencing with Section 5601) to
Division 2 of the Public Utilities Code, relating to oil and
gas, making an appropriation therefor, and declaring the
urgency thereof, to take effect immediately.
LEGISLATIVE COUNSEL'S DIGEST
SB 2179, as introduced, Behr. Pipeline regulation.
States legislative intent. Enacts the Pipeline Regulation Act
of 1974. Specifies the conditions and circumstances under
which transporters of petroleum or natural gas may use the
pipeline facilities of operators for reasonable charges. Directs
the Public Utilities Commission to permit such use, upon peti-
tion therefor, and to fix the charges. Prohibits discrimination
in the terms and conditions of such use of pipelines. Defines
terms used.
Requires certain information regarding quantities of petro-
leum and natural gas to be filed with the commission monthly.
Specifically authorizes the commission to seek enforcement
of these provisions or its rules, regulations, or orders in the
superior court. Permits interested persons affected by these
provisions or any rule, regulation, or order of the commission
to bring an action in the Supreme Court to test the validity
thereof.
Provides penalties for any violation.
Appropriates an unspecified amount to the State Controller
for allocation and disbursement to local agencies for costs
incurred by them pursuant to this act.
To take effect immediately, urgency statute.
Vote: 2/3. Appropriation: yes. Fiscal committee: yes. State-
mandated local program: yes.
2 2179 25 111
SB 2179
- 2 -
The people of the State of California do enact as follows:
1
SECTION 1. Chapter 10 (commencing with Section
2 5601) is added to Division 2 of the Public Utilities Code,
3 to read:
4
5
CHAPTER 10. PIPELINE REGULATION
6
7
Article 1. General Provisions
8
9
5601. This chapter shall be known and may be cited
10 as the Pipeline Regulation Act of 1974.
11
5602. The Legislature hereby finds and declares that
12 the people of the State of California have a direct and
13 primary interest in the continued operation and
14 development of petroleum and natural gas, and that the
15 state should insure the continued development of
16 petroleum and natural gas resources in such a manner as
17 to safeguard life, health, property, natural resources, and
18 the public welfare.
19 5603. The Legislature further finds and declares that
20 pipelines afford a fast, economical, and necessary means
21 of transporting natural gas and petroleum to the public
22 for ultimate use.
23 5604. The Legislature further finds and declares that
24 to speed the development of new or existing natural gas
25 or petroleum resources it is necessary that existing
26 pipelines be available for use in such development.
27 5605. It is, therefore, the purpose and policy of the
28 Legislature in enacting this chapter to confer on the
29 Public Utilities Commission the power and authority to
30 insure that access to existing pipelines where appropriate
31 under the circumstances, is provided for the
32 transportation of natural gas or petroleum, SO as to
33 protect the safety and general and economic welfare of
34 the public.
35 5606. The provisions of this chapter shall apply to
36 transportation of petroleum and natural gas in intrastate
37 commerce for ultimate public consumption for
38 commercial, industrial, or any other use.
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3 I I
SB 2179
1
Article 2. Definitions
2
3
5611. Unless the context otherwise requires, the
4 definitions in this article shall govern the construction of
5 this chapter.
6 5612. "Person" includes a natural person or a
7 corporation.
8 5613. "Corporation" includes any corporation, joint
9 stock company, partnership, association, business trust,
10 organized group of persons, whether incorporated or not,
11 or a receiver of trustee of any of the foregoing.
12 5614. "Local governmental entity" means a city,
13 county, city and county, or other political subdivision of
14 the state.
15 5615. "Natural gas" means natural gas, either
16 unmixed or any mixture of natural and artificial gas.
17 5616. "Petroleum" means crude oil or any liquid or
18 gaseous product thereof.
19 5617. "Intrastate commerce" means commerce
20 between any points within this state, but not through this
21 state.
22 5618. "Commission" means the Public Utilities
23 Commission.
24 5619. "Pipeline" includes any pipe or pipeline used
25 for the transportation or transmission of any liquid or
26 gaseous substance, except water, within or through any
27 part of this state, including tide or submerged lands.
28 5620. "Transporter" includes every person producing
29 or purchasing and transporting, conveying, distributing,
30 or delivering natural gas or petroleum under any of the
31 following conditions:
32
(a) For public use or service for compensation.
33
(b) For compensation to a local governmental entity
34 for further sale and distribution to the public or any
35 portion thereof.
36
(c) For compensation to any person for further sale
37 and distribution to or for the public or any portion thereof
38 pursuant to franchise or contract issued by a local
39 governmental entity to such person.
40
(d) To or for the public or any portion thereof for
2 2179 45 115
SB 2179
4
1 compensation.
2
5621. "Operator" includes every person owning,
3 operating or managing a pipeline for the transportation
4 or carriage of natural gas or petroleum, whether for
5 public hire or not, if any part of the right-of-way for such
6 pipeline has been acquired by eminent domain; or if such
7 pipeline or any part thereof is constructed upon, over, or
8 under any public street, highway, right-of-way, beach, or
9 easement of the state, any local governmental entity, or
10 the right-of-way of any railroad or other public utility, or
11 any other such location in which the public has a property
12 right.
13
14
Article 3. Regulation of Pipeline Operators and
15
Transporters
16
17
5631. Every operator and every transporter shall, on
18 or before the 20th day of each month, file with the
19 commission a verified statement containing the following
20 information concerning its activity during the preceding
21 month:
22
(a) The quantity of petroleum or natural gas used in
23 connection with pipelines within this state which are in
24 the actual and immediate control of such person at the
25 beginning and close of such month, where such
26 petroleum or natural gas is located or held, the location
27 and designation of each tank or place of deposit, and the
28 name of its owner.
29
(b) The quantity of petroleum or natural gas received
30 by such person through such pipelines during such
31 month.
32
(c) The quantity of petroleum or natural gas delivered
33 by such person during such month.
34
(d) The available empty storage owned or controlled
35 by such person, and its location.
36
5632. (a) Any transporter may request any operator
37 to permit the use of a pipeline under the control of the
38 operator for a reasonable charge.
39
(b) In the event the operator denies such request, or
40 in the event the parties cannot agree on a reasonable
2 2179 55 117
SB 2179
- 6 -
1 against the commission to test the validity of such law,
2 rule, regulation, or order. Such action shall be advanced
3 for trial and be determined as expeditiously as possible
4 and no postponement thereof or continuance shall be
5 granted except for reasons deemed imperative by the
6 Supreme Court. In all such trials, the burden of proof
7 shall be upon the party complaining of such law, rule,
8 regulation, or order, and such law, rule, regulation, or
9 order so complained of shall be deemed prima facie valid.
10 5637. Any person who willfully or knowingly violates
11 any provision of this chapter, or any rule, regulation, or
12 order of the commission pursuant to this chapter, shall be
13 punished by a fine of not more than five hundred dollars
14 ($500) or by imprisonment for not more than six months,
15 or both such fine and imprisonment.
16 SEC. 2. The sum of
dollars ($
) is
17 hereby appropriated from the General Fund to the State
18 Controller for allocation and disbursement to local
19 agencies pursuant to Section 2231 of the Revenue and
20 Taxation Code to reimburse such agencies for costs
21 incurred by them pursuant to this act.
22 SEC. 3. This act is an urgency statute necessary for
23 the immediate preservation of the public peace, health,
24 or safety within the meaning of Article IV of the
25 Constitution and shall go into immediate effect. The facts
26 constituting such necessity are:
27 The immediate regulation of pipeline construction,
28 operation, maintenance, and abandonment is necessary
29 in order to safeguard life, health, property, natural
30 resources, and the public welfare. It is, thus, essential that
31 this act take immediate effect.
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