competitive considerations point to selection of one of the three projects in preference of the other two. The problems we have identified in this Report and our Report to Congress may impact on any selected project and, therefore, do not make one project seem more desirable than the others.

We have proposed several conditions which ought to be appended to a license issued to any of the proposed transportation systems. These recommendations are in the Report to Congress appended to this Report and are summarized in the Conclusion of the appended Report. Respectfully submitted.

PETER F. FLAHERTY, Deputy Attorney General.

REPORT OF THE ATTORNEY GENERAL TO CONGRESS

(JULY 1977)

EXECUTIVE SUMMARY

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1

This report is submitted to Congress in compliance with Section 19 of the Alaska Natural Gas Transportation Act of 1976. That provision requires the Attorney General to conduct a thorough study of the antitrust issues and problems relating to the production and transportation of Alaskan natural gas.

Based on our analysis of all information currently available, we find that antitrust considerations do not militate against selection of any of the three proposed projects as the transportation system for moving Alaskan natural gas to the lower 48 states; nor do competitive considerations point to selection of one of the three projects in preference to the other two. Although we have identified several potential antitrust problem areas associated with the projects, these problems may impact on any project that is selected and thus do not make one project seem more desirable than the others.

This report has identified several potential competitive problem areas, which can be addressed through: (1) the imposition of conditions upon the license issued to whichever project is chosen; (2) the enactment of legislation; and (3) collateral action by the Federal Power Commission, or its successor agency. Since some of the identified problems are not directly associated with the transportation of natural gas but are associated with the sale of natural gas, these problems would have to be addressed in the context of the required examination of the gas purchase contracts.

The report first provides a general introduction to the three proposed projects, the methods of transportation and routes proposed and the participants in each proposed project, There are two overland pipeline projects proposed by Alcan and Arctic Gas, and a combinątion pipeline and liquified natural gas tanker system proposed by EI

Paso.

(1) The Alcan route follows the Alaska oil pipeline route to Fairbanks and then follows the Alcan Highway through Canada. Alcan has proposed two different sized pipelines. Originally Alcan proposed a 42-inch pipeline but more recently has proposed a 48-inch pipeline similar to that of Arctic Gas.

(2) The Arctic Gas route proceeds east from the North Slope to the Mackenzie Delta of Canada, where it is expected additional gas reserves will be developed. The route then proceeds south through Canada to the United States border.

(3) The El Paso project calls for a pipeline to follow the Alaska oil pipeline to Point Gravina on Prince William Sound. There the gas would be converted to liquid natural gas and shipped by tanker to the coast of California.

REPORT OF THE ATTORNEY GENERAL TO THE PRESIDENT

JULY 1977.

This Report is submitted to the President pursuant to Section 6 of the Alaska Natural Gas Transportation Act of 1976. Section 6 of the Act directs that any Federal officer or agency may submit written comments to the President with respect to the recommendation and report of the Federal Power Commission and alternative methods for transportation of Alaska natural gas for delivery to the contiguous states.1 This Report is principally concerned with item (6)—the impact upon competition of the respective proposed transportation systems.

The Department of Justice has done an extensive analysis of this subject in the Report of the Attorney General submitted to the Congress pursuant to Section 19 of the Act. Rather than repeat what already has been said therein, we are appending a copy of our Report to Congress. We believe that the contents of that Report fully set forth the antitrust implications of the various proposed projects.

The remainder of this Report will summarize briefly the areas of agreement or disagreement with the Federal Power Commission's competitive analysis in its Recommendation to the President. Also, in accordance with Section 6(c) we discuss the question of waiver of law. I. IMPACT ON COMPETITION: SUMMARY OF RECOMMENDATIONS OF THE FEDERAL POWER COMMISSION AND THE DEPARTMENT OF JUSTICE

The Federal Power Commission concludes generally that the certification of any one of the proposed systems will not have a significant impact upon competition among pipelines. The Department has reached the same overall conclusion.

The Commission has encouraged the participation of producers of substantial amounts of gas in the pipeline joint venture in order to contribute their significant financial resources to aid in the financing of the pipeline. The Department disagrees. We have recommended in the Report to Congress that an ownership interest, or participation in any form in the transportation system, by producers of significant amounts of natural gas, or their subsidiaries or affiliates, should be prohibited. The license to be issued to the selected system should contain a condition which prevents participation in any manner by such gas producers.

The Federal Power Commission has stated that it is strongly in favor of widespread distribution of Alaskan natural gas in order to limit reliance on Alaskan gas, to create incentives for participation in displacement arrangements and to provide easier private financing. The Department has stated that if, because of continued wellhead price

1 Attorney General Bell did not participate in the preparation of this Report due to conflict of interest considerations. Responsibility for this Report was delegated by Mr. Bell to Deputy Attorney General Flaherty.

regulation, market forces are not permitted to operate to allocate gas in the most efficient manner, then the possibility of a regulatory allocation mechanism should be examined if widespread distribution of Alaskan natural gas is believed to be in the national interest.

The Commission is of the view that Section 13 (a) imposes common carrier obligations upon the selected transportation system. The Commission indicates that this is a procompetitive result but may impact adversely upon the ability of the system to secure private financing. The Department disagrees. Section 13 (a) of the Act provides for equal access to the gas transportation system based upon ownership or lack thereof. But it is unclear whether this provision was intended to create common carrier status for the transportation system. It is our view that common carrier status for all facilities constructed or utilized as an integral part of the system carrying gas to the lower 48 states is desirable and Section 13 (a) should be clarified to unambiguously create such status. Additionally, we do not view Section 13 (a) to be an impediment to private financing. Moreover, to ensure the equal access provided for by Section 13 (a), Congress should consider legislation to grant the Commission, or its successor agency, the authority to order prorationing of pipeline capacity among shippers when gas is available in excess of pipeline capacity.

The Federal Power Commission approves of displacement arrangements as the most efficient mechanism for distribution of the Alaskan gas. The Commission, however, is fearful that such arrangements could create the potential for collusive market conduct. Thus the Commission would permit only those practices which are indispensable to the successful operation of the displacement procedure. The Department agrees that the efforts to work out displacement schemes may produce collusive behavior. We have recommended that if a system requiring displacement of gas is authorized, Government agencies should monitor any meetings of the transmission companies concerning reallocation. The plans for the meetings and the displacement programs resulting from the meetings should be subject to scrutiny and approval by Government agencies.

The Commission indicates that as a result of the implementation of an all-events, cost-of-service tariff, the producers may be able to exercise market power over the shippers if the producers know whatever price they charge will be passed on to the consumer. The Department, on the other hand, is concerned that the proposed pipeline capacities be evaluated carefully since the potential for adoption of an all-events cost-of-service tariff has diminished the incentives of the proponents to properly determine and propose the most efficient pipeline size.

The Commission indicates that the contracting process for the purchase of Alaskan gas has not been competitive. Among the elements the Commission points to as indicative of the noncompetitive nature of this process is the existence of side arrangements. The Commission has concluded that in the absence of full-fledged price competition, the producers have used side arrangements as a means of favoring companies which can provide other benefits. The use of a widespread distribution scheme may reduce the likelihood of such restrictive side arrangements. The Department's view is somewhat different. To minimize the distortion of Commission regulation from side arrangements for