14. Discussion

The pipeline transportation services that applicant proposes may afford the airline shippers at Sacramento International Airport a competitive alternative to their existing truck transportation option. Moreover, the CEQA review conducted by the County demonstrates that the jet fuel pipeline transportation will provide an environmentally preferable alternative to other forms of jet fuel supply at the airport.

The ownership, financing and tariff arrangements sought by applicant are reasonable arrangements consistent with applicant's proposed undertaking as a public utility pipeline corporation. Expedited authorization by the Commission will allow applicant to proceed with timely development of the proposed pipeline, which we find will serve the public interest. However, the question of whether or not it is reasonable to allow the use of market-based rates for this operation is a more complicated matter.

The Commission has established criteria for determining whether or not market-based rates are appropriate. See, for instance, D.96-04-061, in a complaint involving the Unocal California Pipeline Company. In that decision, the Commission determined that it was appropriate for Unocal to operate under market-based rates after reviewing the criteria the Commission had applied in approving such rates in an earlier decision (D.94-05-022).

The Commission said that the factors supporting market-based rates for Unocal were as follows:

Considering these factors in light of Wickland's request, we find the record in this proceeding in some respects superficial, in other respects non-existent. Wickland has argued that its potential customers are sophisticated and that it faces ongoing competition from tank truck companies, but has provided no evidence to support either assertion. Wickland has provided no basis for the Commission to determine how its rates would compare with those of other pipelines or to assess the reasonableness of its likely rate of return.

It is easy to want to believe that airlines, as savvy businesses, are sophisticated purchasers. However, the record does not help us understand their experience and sophistication in negotiating for pipeline services in the San Jose area, or whether the nature of the market will place them in a strong position to apply their sophistication to advantage in ensuring fair rates. Much of the answer lies in an understanding of whether, after the construction of this pipeline, there will be any meaningful competitive alternative, in the form of another pipeline, tank trucks, or both. We cannot know that at this point, because Wickland has not made the case.

Suppose, for instance, that Wickland could provide transportation at half the cost of a tank-trucker. It would, then, be able to negotiate initial rates at a level that could far exceed its costs while still charging less than truck carriers. Arguably, it could win a contract at rates that might even exceed those of a tank-trucker, if its service would be considered superior in others ways. In either event, Wickland could, then, make exorbitant profits while driving away all competitors.

Its ability to maintain exorbitant profits or drive prices even higher might depend on the ease of re-entry for tank truck carriers. This may depend on many factors, such as whether the tank trucks involved are specialized and whether the loss of existing fuel transportation drives tank truck operators out of business, or out of the area. If, for instance, conveying this particular commodity required any specialized equipment, would truckers be willing to make such an investment if Wickland could respond by temporarily reducing its rates?

And what about competitive pipelines? Are there any in existence or on the drawing boards? Is there reason to believe that other new lines could be sited easily? What would be the lead time? Once again, is it likely that a competitor would make such a commitment, if Wickland could respond by reducing its prices?

It is possible that none of these hypothetical problems apply to the situation in San Jose, or that there are other potential concerns we cannot even imagine. What is clear, however, is that we do not have a record before us that provides support for the assertion that Wickland will face competitive forces sufficient to induce reasonable prices. An applicant bears the burden of proving that market-based rates will be reasonable and an assertion of "no market power" must be supported with a credible study of the applicable market.

Finally, since we do not know what rates Wickland will offer, and because Wickland has not provided evidence of rates charged by comparable pipelines, we do not know if Wickland's rates will compare favorably with those of other pipelines or if their rates will reflect a reasonable rate of return. This further undermines our ability to approve Wickland's request for market-based rates now.

For all of these reasons, we deny Wickland's request for market-based rates without prejudice. While it is pursuing completion of its pipeline, Wickland may submit a more comprehensive showing in this docket to support its request for market-based rates, or prepare a cost-based rate application for the Commission's consideration.

Notice of the application was published in the Commission's Daily Calendar on September 3, 1999. Notice of the amended application appeared in the Daily Calendar on June 4, 2002. No protests have been received. In Resolution ALJ 176-3023 dated September 16, 1999, the Commission preliminarily categorized this application as ratesetting, and preliminarily determined that hearings would be necessary. Because Wickland will retain the option of improving its showing on market-based rates, it is still too soon to conclude that hearings will not be necessary.

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