[Federal Register Volume 65, Number 149 (Wednesday, August 2, 2000)]
[Proposed Rules]
[Pages 47358-47362]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19506]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 342

[Docket No. RM00-11-000]


Five-Year Review of Oil Pipeline Pricing Index; Notice of Inquiry

July 27, 2000.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of inquiry.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
issuing this Notice of Inquiry to seek comments on its five-year review 
of the oil pricing index, established in Order No. 561, Revisions to 
Oil Pipeline Regulations Pursuant to the Energy Policy Act of 1992, 
FERC Stats. & Regs. [Regs. Preambles, 1991-1996] para. 30,985 (1993). 
Specifically, the Commission is seeking comments on the adequacy of the 
Producer Price Index for Finished Goods minus one percent as an index 
to measure actual cost changes in the oil pipeline industry.

DATES: Written comments must be received by the Commission by September 
1, 2000. Reply comments must be received by the Commission 30 days 
after the filing date for initial comments.

ADDRESSES: Office of the Secretary, Federal Energy Regulatory 
Commission, 888 First Street, NE, Washington, D.C. 20426.

FOR FURTHER INFORMATION CONTACT: Harris S. Wood, Office of the General 
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE, 
Washington, DC 20426, (202) 208-0224.

SUPPLEMENTARY INFORMATION: In this notice of inquiry (NOI), the Federal 
Energy Regulatory Commission (Commission) presents an opportunity for 
comments regarding its five-year review of the oil pricing index, 
established in Order No. 561.\1\ Specifically, the Commission has 
undertaken a review of the effectiveness of the change in the Producer 
Price Index for Finished Goods, expressed as a percent, minus one 
percent (PPI-1) \2\ as an index to measure actual cost changes in the 
oil pipeline industry, and welcomes comments on the result of that 
review. The annual percentage change in the PPI-1 Index is applied to 
the prior year's ceiling level for oil pipeline rates to derive the 
current year's ceiling rate.
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    \1\ Revisions to Oil Pipeline Regulations Pursuant to the Energy 
Policy Energy Policy Act, FERC Stats. & Regs. [Regs. Preambles, 
1991-1996] para. 30,985 (1993), 58 F.R. 58753 (Nov. 4, 1993); order 
on reh'g, Order No. 561-A, FERC Stats. & Regs. [Regs Preambles, 
1991-1996] para. 31,000 (1994), 59 F.R. 40243 (Aug. 8, 1994), 
affirmed, Association of Oil Pipelines v. FERC, 83 F.3d 1424 (D.C. 
Cir. 1996).
    \2\ The PPI represents the Producer Price Index for Finished 
Goods, also written PPI-FG. The PPI-FG is determined and issued by 
the Bureau of Labor Statistics, U.S. Department of Labor. Pursuant 
to 18 CFR Section 342.3(d)(2), ``The index will be calculated by 
dividing the PPI-FG for the calendar year immediately preceding the 
index year by the previous calendar year's PPI-FG, and then 
subtracting 0.01.'' Multiplying the rate ceiling on June 30 of the 
index year by the resulting number gives the rate ceiling for the 
year beginning the next day, July 1.
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I. Background

    Oil pipelines have been subject to rate regulation under the 
Interstate Commerce Act (ICA) \3\ since the enactment of the Hepburn 
Act in 1906.\4\ From the enactment of the Hepburn Act until 
jurisdiction over oil pipeline rates was transferred from the 
Interstate Commerce Commission to the Commission in 1977,\5\ oil 
pipeline rates were fixed according to a cost-of-service methodology 
grounded upon use of a valuation rate base--a mixture of original and 
replacement costs, or a ``fair value'' methodology. The Commission was 
required to utilize for oil pipeline ratemaking the ICA as it existed 
on October 1, 1977. The first adjudicated case decided by the 
Commission under the ICA was the Williams Pipe Line case, which 
resulted in the issuance of Opinion No. 154-B in 1985.\6\ Opinion No. 
154-B established a fairly traditional cost-of-service methodology for 
determining oil pipeline rates. This methodology used a trended 
original cost rate base, and a rate of return based on the actual 
embedded debt cost and equity costs reflecting the pipeline's risks. 
This Opinion No. 154-B methodology became the standard methodology for 
setting oil pipeline rates under the ICA.
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    \3\ 49 U.S.C. app. 1 (1988).
    \4\ Pub. L. No. 59-337, 34 Stat.584.
    \5\ Jurisdiction over oil pipeline rates was transferred to the 
Commission pursuant to the Department of Energy Organization Act of 
1977, 42 U.S.C. 7101.
    \6\ Williams Pipe Line Co. 31 FERC para. 61,377 (1985).
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    Adjudicated proceedings for oil pipelines, though few in number, 
were long, complicated and costly, and required considerable 
expenditure of participants' time and resources, including those of the 
Commission.\7\ As a result, Congress, in the Energy Policy

[[Page 47359]]

Energy Policy Act (Energy Policy Act),\8\ required the Commission to 
establish a ``simplified and generally applicable'' ratemaking 
methodology for oil pipelines, consistent with the just and reasonable 
standard of the ICA. On October 22, 1993, the Commission issued Order 
No. 561 (final rule), promulgating regulations pertaining to the 
Commission's jurisdiction over oil pipelines under the ICA, and to 
fulfill the requirements of the Energy Policy Act. In so doing, the 
Commission found that using an indexing methodology to regulate oil 
pipeline rate changes, accompanied with certain alternative rate-
changing methodologies where either the pipeline or the shipper could 
justify departure from the indexing methodology, would satisfy both the 
mandate of Congress and comply with the requirements of the ICA.
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    \7\ The Williams case, which culminated in Opinion No. 154-B, 
took fourteen years to resolve, although some of the time was 
attributable to the transfer of jurisdiction of oil pipelines to the 
Commission from the Interstate Commerce Commission.
    \8\ 42 U.S.C.A. 7172 note (West Supp. 1993). The Energy Policy 
Act ``grandfathered'' certain oil pipeline rates then in effect.
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    The final rule reflects the Commission's compliance with the 
mandate of Congress.\9\ The final rule, in accordance with section 1801 
of the Energy Policy Act, provided a ``simplified and generally 
applicable'' approach to changing just and reasonable rates through use 
of an index system to establish ceiling levels for such rates. The 
indexing methodology adopted in the final rule was designed to fulfill 
both the simplification directive of the Energy Policy Act and the just 
and reasonable standard of the ICA. The Commission found that the 
indexing methodology adopted in the final rule would simplify, and 
thereby expedite, the process of changing rates by allowing, as a 
general rule, such changes to be made in accordance with a generally 
applicable index, and that it would ensure compliance with the just and 
reasonable standard of the ICA by subjecting the chosen index to 
periodic monitoring and, if necessary, adjustment.
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    \9\ In the final rule, the Commission recognized that Congress 
deemed certain rates to be just and reasonable, thereby forming a 
baseline for many future oil pipeline rate changes and obviating 
future debate over the appropriateness of existing rates, many of 
which are based on valuation or trended original cost methodologies.
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    In determining which index to use, the Commission obtained the 
views of interested parties on its proposal to change its ratemaking 
methodology for oil pipelines. After extensive analysis of various 
suggested indices, the Commission adopted the PPI-1 index for the 
purpose of allowing oil pipelines to change rates without making a 
cost-of-service filing. This index was chosen over others considered 
because it comes the closest to tracking the historical changes in 
actual costs as reported in FERC Form No. 6. The Commission publishes 
the final annual change in the PPI-FG expressed as a percent minus one 
percent after the final PPI-FG is available in May of each calendar 
year. Pipelines are required to calculate the new ceiling level 
applicable to their indexed rates, and if the rates being charged by a 
pipeline exceed the new ceiling level, the pipeline must file to reduce 
the rates to a level not exceeding the new ceiling level. If the new 
ceiling level is higher than the rates being charged, the pipeline may 
file to increase such rates at any time in the index year to which the 
new level is applicable.
    The Commission determined that the cost changes experienced by oil 
pipelines, which essentially do business at the wholesale level, had 
more closely resembled the cost changes experienced by producers of 
finished goods than by the economy as a whole, and that they would 
likely continue to do so in the future. Therefore, on a broad 
conceptual basis, the Commission determined that the PPI-FG is an 
appropriate choice for an oil pipeline industry-wide index.\10\ Based 
on the evidence of record, the Commission determined that a 
modification of that index to include the ``minus one percent'' factor, 
or PPI-1, was the index that most closely approximated the reported 
costs of oil pipelines.\11\
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    \10\ For a more detailed discussion, see Order No. 561-A, FERC 
Stats. and Regs. [Regs. Preambles] para. 31,000 (1994).
    \11\ Order No. 561, FERC Stats. & Regs. [Regs. Preambles] para. 
30,985 at p. 30,951.
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    Further, the Commission found that application of the index of the 
change in the PPI-1 to the whole rate, rather than applying the index 
to specific components of a rate, would, in addition to tracking 
economy-wide cost changes closely, obviate the need to incur the 
additional regulatory work and unintended consequences involved in 
breaking down rates to adjust some components and not adjust others.
    The Commission stated in the final rule that the selection of the 
PPI-1 was not necessarily a choice for all time. The Commission 
recognized that its responsibilities under the ICA, to both shippers 
and pipelines, required it to monitor the relationship between the 
change in the PPI-1 Index and the actual cost changes experienced by 
the industry. The Commission undertook to review the effectiveness of 
the index every five years. This is the first of such reviews. The 
Commission stated that it would use the Form No. 6 information for this 
purpose. Staff's review is reflected in this NOI.

II. Review of PPI-1 Index and Oil Pipeline Industry Costs

    The Commission requested that Staff review the change in the PPI-1 
index as an effective means of tracking the historical changes in 
industry costs.\12\ The PPI-1 index went into effect on January 1, 
1995.\13\ This section reviews industry cost experience with PPI-1 
index for the period indexing has been in effect and for which data are 
available--January 1, 1995 through December 31, 1999.
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    \12\ Order No. 561 at p. 30,952.
    \13\ Staff calculated the initial change in the PPI-1 using the 
PPI figures for 1992 and 1993. These are the most recent final 
figures for the PPI available prior to January 1, 1995, when the 
index was first applied. The index is updated each year when the 
final PPI figures become available (usually mid-May), to be applied 
to rates for the period from July to the following June. Thus, for 
example, the PPI-1 index calculated and published in May 2000 
applies to rates effective from July 1, 2000 to June 30, 2001.
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    According to Staff, this review compares the change in industry-
wide operating costs with the change in the PPI-1 index during 1995-
1999. Staff began by calculating the industry-wide annual operating 
costs per barrel mile from FERC Form No. 6 data and the year-to-year 
percentage changes in those costs. Next, Staff compared the percentage 
changes in the PPI-1 index \14\ with the percentage changes in industry 
costs. This step is necessary because the newly published index is 
applied to the period from July through the following June, whereas the 
FERC Form No. 6 data are reported on a calendar year basis. Finally, 
Staff compared the annual changes in the PPI-1 index with the annual 
changes in industry-wide operating costs per barrel mile.
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    \14\ The PPI-1 index is adjusted to a calendar year basis. See 
Table 2, column 5, infra.
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    In this review Staff used the industry-wide annual operating cost 
per barrel mile as the primary measure of industry costs. Staff used 
operating costs as reported by pipelines in FERC Form No. 6 \15\ as the 
most appropriate single measure because these costs include both 
operating expenses incurred during in the relevant year and charges for 
amortization and depreciation for that year. \16\ Staff divided these 
costs by

[[Page 47360]]

barrel miles shipped because the pipelines' rates, to which the PPI-1 
index is applied, are stated in dollars per barrel mile.
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    \15\ Operating expenses were taken from Form No. 6, page 304, 
line 22, column m.
    \16\ Form No. 6 data were obtained in electronic form from OPRI, 
a subsidiary of Research Data International (RDI), which in turn is 
owned by the Financial Times. OPRI receives FERC Form No. 6 data, 
puts them into a database and sells the database to the public. 
Staff compared these data with the data filed with the Commission. 
In preparation for this comparison, Staff conducted a comprehensive 
review of operating cost data for the period 1990 to 1997 and a 
selected review of cost per barrel mile data to identify apparently 
anomalous values in cost per barrel mile figures. See Appendix A for 
a listing of the corrections staff made to the OPRI data.
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    For purposes of this review, Staff excluded the Trans Alaska 
Pipeline System (TAPS) and those pipelines delivering oil directly or 
indirectly to TAPS.\17\ Staff used only companies whose reports 
included both barrel mile and total cost information in calculating the 
overall average (these companies' reports comprised 99% of total 
reported costs for the period 1994 through 1999). Table 1 summarizes 
the industry cost data.
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    \17\ 18 CFR Section 342.0 (b).

 Table 1.--Summary of Reported Costs from FERC Form No. 6, 1994 to 1999
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                                     Total Operating Costs    Operating
                                      Total Barrel Miles      Cost  ($/
               Year               --------------------------   Thousand
                                                                Barrel
                                   (Million $)   (Billions)     Miles)
1                                            2            3            4
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1994.............................       $3,182        3,111       $1.023
1995.............................        3,176        3,125        1.016
1996.............................        3,277        3,293        0.995
1997.............................        3,375        3,267        1.033
1998.............................        3,305        3,147        1.050
1999.............................        3,139        3,150        0.997
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    The PPI-1 index is calculated and published each May when the final 
PPI values become available and applied to the period from July of the 
same year to June of the following year. For any calendar year, rates 
from January 1 to June 30 are subject to the index published the 
previous year, and rates from July 1 to December 31 are subject to the 
index published in that calendar year.
    To compare how well the PPI-1 index tracks the costs, Staff 
constructed an index that applies to the specific period of the cost 
data, i.e., to the calendar year of the reported information. Since 
each calendar year is affected by two PPI-1 indexes of six months' 
duration, Staff calculated the calendar year PPI-1 index as the simple 
average of the two applicable PPI-1 indexes. Table 2 presents the 
results of this calculation PPI and the calculation of the calendar 
year changes in the PPI-1 index to be applied to changes in the FERC 
Form No. 6 cost information.

                 Table 2.--Calculation of PPI-1 Index for Comparison With FERC Form No. 6 Costs
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                                                                                                       Percent
                                                                             Percent      Percent     change in
                            Year                                PPI(FG)     change in    change in    PPI-1 for
                                                                             PPI(FG)       PPI-1       calendar
                                                                                                         year
1                                                                       2            3            4            5
1992........................................................        123.2  ...........  ...........  ...........
1993........................................................        124.7  ...........  ...........  ...........
1994........................................................        125.5         1.22         0.22  ...........
1995........................................................        127.9         0.64        -0.36        -0.07
1996........................................................        131.3         1.91         0.91         0.28
1997........................................................        131.8         2.66         1.66         1.29
1998........................................................        130.7         0.38        -0.62         0.52
1999........................................................        133.0        -0.83        -1.83        -1.23
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    Notes: Column 3 is computed by taking column 2 for the immediately 
prior year minus column 2 for the second prior year divided by the 
latter number. For example, (124.7--123.2)/123.2=.0122=1.22%. 
Subtracting 1 from column 3 gives column 4.
    Column 4 contains the number by which a pipeline's rate ceiling on 
June 30 of a particular year is changed to determine its rate ceiling 
for the year beginning July 1 of that year.
    Column 5 is calculated by taking one-half of column 4 for the prior 
year plus one-half of column 4 for the current year. For example, 
(0.22/2)+(-0.36/2)=0.11--0.18=-0.07. In summary, column 5 converts the 
July--June year corresponding to the index's application to the 
calendar year so it can be compared to Form No. 6 cost data.
    Table 3 compares the percentage changes in the PPI-1 index and 
industry operating costs for the period 1995 through 1999. Year-to-year 
differences in the index and costs are to be expected, since the period 
used for the index lags the reporting period by up to 18 months. Staff 
compared an average of percentage changes in the index to percentage 
changes in industry-wide costs over a five-year period, which reduces 
the influence of year-to-year fluctuations and enables us to better 
evaluate the five-year relationship between the index and industry-wide 
costs. Over the entire period, the PPI-1 index averaged small, positive 
changes (0.16%) while the industry costs averaged small, negative 
changes (-0.47%). Thus, for the five-year

[[Page 47361]]

period, the differences between the index and the costs are relatively 
small.

   Table 3.--Comparison of Year-to-Year Changes in Operating Costs per
                       Barrel Mile and PPI-1 Index
------------------------------------------------------------------------
                                                               Percent
                                                  Percent     change in
                     Year                        change in    operating
                                                PPI-1 index   costs per
                                                             barrel mile
1                                                         2            3
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1995..........................................        -0.07        -0.68
1996..........................................         0.28        -2.07
1997..........................................         1.29         3.82
1998..........................................         0.52         1.65
1999..........................................        -1.23        -5.05
Average, 1995-1999............................         0.16        -0.47
------------------------------------------------------------------------

    Notes: Column 2 is column 5 of Table 2.
    Column 3 is computed from data in Table 1, column 4, current year 
minus column 4, prior year divided by the latter number. For example, 
($1.016--$1.023)/$1.023=-0.0068=-0.68%.
    Based on the foregoing Staff review, it appears that the changes in 
the PPI-1 Index have closely approximated the changes in the reported 
cost data for the oil pipeline industry during the five-year period 
covered by this review.

III. Comment Procedures

    The Commission invites interested persons to submit written 
comments on the matters and issues in this notice to be adopted, 
including any related matters or alternative proposals that commenters 
may wish to discuss. Upon evaluation of those comments, the Commission 
will determine what further action, if any, will be appropriate. The 
Commission intends to conclude any such further action by May 2001.
    The original and 14 copies of such comments must be received by the 
Commission before 5 p.m. September 1, 2000. Comments should be 
submitted to the Office of the Secretary, Federal Energy Regulatory 
Commission, 888 First Street, N.E., Washington D.C. 20426 and should 
refer to Docket No. RM00-11-000.
    In addition to filing paper copies, the Commission encourages the 
filing of comments either on computer diskette or via Internet E-Mail. 
Comments may be filed in the following formats: WordPerfect 8.0 or 
below, MS Word Office 97 or lower version, or ASCII format.
    For diskette filing, include the following information on the 
diskette label: Docket No. RM00-11-000; the name of the filing entity; 
the software and version used to create the file; and the name and 
telephone number of a contact person.
    For Internet E-Mail submittal, comments should be submitted to 
``[email protected]'' in the following format. On the subject 
line, specify Docket No. RM00-11-000. In the body of the E-Mail 
message, include the name of the filing entity; the software and 
version used to create the file, and the name and telephone number of 
the contact person. Attach the comment to the E-Mail in one of the 
formats specified above. The Commission will send an automatic 
acknowledgment to the sender's E-Mail address upon receipt. Questions 
on electronic filing should be directed to Brooks Carter at 202-501-
8145, E-Mail address [email protected].
    Commenters should take note that, until the Commission amends its 
rules and regulations, the paper copy of the filing remains the 
official copy of the document submitted. Therefore, any discrepancies 
between the paper filing and the electronic filing or the diskette will 
be resolved by reference to the paper filing.
    All written comments will be placed in the Commission's public 
files and will be available for inspection in the Commission's Public 
Reference room at 888 First Street, N.E., Washington D.C. 20426, during 
regular business hours. Additionally, comments may be viewed, printed, 
or downloaded remotely via the Internet through FERC's Homepage using 
the RIMS or CIPS links. RIMS contains all comments but only those 
comments submitted in electronic format are available on CIPS. User 
assistance is available at 202-208-2222, or by E-Mail to 
[email protected].

IV. Document Availability

    In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's Home Page (http://www.ferc.fed.us) and in 
FERC's Public Reference Room during normal business hours (8:30 a.m. to 
5:00 p.m. Eastern time) at 888 First Street, N.E., Room 2A, Washington, 
DC 20426.
    From FERC's Home Page on the Internet, this information is 
available in both the Commission Issuance Posting System (CIPS) and the 
Records and Information Management System (RIMS).

--CIPS provides access to the texts of formal documents issued by the 
Commission since November 14, 1994.
--CIPS can be accessed using the CIPS link or the Energy Information 
Online icon. The full text of this document is available on CIPS in 
ASCII and WordPerfect 8.0 format for viewing, printing, and/or 
downloading.
--RIMS contains images of documents submitted to and issued by the 
Commission after November 16, 1981. Documents from November 1995 to the 
present can be viewed and printed from FERC's Home Page using the RIMS 
link or the Energy Information Online icon. Descriptions of documents 
back to November 16, 1981, are also available from RIMS-on-the-Web; 
requests for copies of these and other older documents should be 
submitted to the Public Reference Room.

    User assistance is available for RIMS, CIPS, and the Website during 
normal business hours from our Help line at (202) 208-2222 (E-Mail to 
[email protected]) or the Public Reference at (202) 208-1371 (E-
Mail to [email protected]).
    During normal business hours, documents can also be viewed and/or 
printed in FERC's Public Reference Room, where RIMS, CIPS, and the FERC 
Website are available. User assistance is also available.

    By direction of the Commission.
David P. Boergers,
Secretary.

Appendix A

    Below is a list of six instances in which the OPRI data were 
found to reflect barrel rather than barrel-mile information. In the 
first instance, Form No. 6 contained only barrel information, and as 
a result both the Total Cost and Barrel Mile information reported 
were removed from Staff's data set. In the five other instances, 
barrel-mile data were found in Form No. 6 and, as a result, the OPRI 
data were adjusted to reflect the barrel-mile rather than the barrel 
figures.

[[Page 47362]]



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                                                                                    Barrel miles reported
                           Company                                 Year    -------------------------------------
                                                                                   OPRI            Form No. 6
----------------------------------------------------------------------------------------------------------------
1. American Petrofina Pl. Co.................................         1995         27,877,793                N/A
2. Calnev Pipe Line Company..................................         1996         37,894,152  \18\ 8,367,187,00
                                                                                                               0
3. Calnev Pipe Line Company..................................         1997         39,018,728  \19\ 8,569,572,00
                                                                                                               0
4. West Gulf Coast P.L. Co...................................         1999         22,057,426  \20\ 22,057,425,3
                                                                                                              63
5. Sun Pipe Line Company.....................................         1998         96,155,360  \21\ 14,695,314,4
                                                                                                              96
6. Ashland Pipe Line LLC.....................................         1997        109,786,344  \22\ 91,327,743,7
                                                                                                             33
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\18\ See 1997 Form No. 6, page 700, col (c), line 4.
\19\ See 1997 Form No. 6, page 700, col (b), line 4.
\20\ See 1999 Form No. 6, page 700, col (b), line 4.
\21\ See 1998 Form No. 6, page 700, col (b), line 4.
\22\ See 1997 Form No. 6, page 700, col (b), line 4.

[FR Doc. 00-19506 Filed 8-1-00; 8:45 am]
BILLING CODE 6717-01-P