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Lakehead Pipeline Co. v. Illinois Commerce Commission

April 14, 1998

LAKEHEAD PIPELINE COMPANY LIMITED PARTNERSHIP, PETITIONER-APPELLANT,
v.
ILLINOIS COMMERCE COMMISSION, ET AL. RESPONDENTS-APPELLEE.



Petition for Review of an Order of the Illinois Commerce Commission No. 96--0145

The opinion of the court was delivered by: Breslin, J.

Justice BRESLIN delivered the opinion of the court:

This controversy concerns a challenge to the Illinois Commerce Commission's (Commission) authority to regulate a proposed interstate pipeline under the Common Carrier by Pipeline Law (Pipeline Law), (220 ILCS 5/15-100 et seq. (West 1996)). Petitioner Lakehead Pipe Line Company (Lakehead) and amici curiae assert that the Commission exceeded its lawful authority when reviewing Lakehead's application for a certificate in good standing under section 401 of the Pipeline Law, (220 ILCS 5/15-401(b) (West 1996)). Lakehead also claims that the Commission erroneously interpreted the "public need" requirement of 401(b), resulting in an unlawful interference with interstate commerce and an arbitrary denial of Lakehead's application. We hold that the Commission did not exceed its lawful authority and that its interpretation and application of the Pipeline Law is reasonable and does not conflict with the Commerce Clause of the United State Constitution, (U.S. Const., art I, § 8 clause 3). Thus, we affirm.

I. FACTS

Lakehead is a limited partnership which owns the United States portion of the world's longest liquid petroleum pipeline. With its Canadian affiliate, Interprovincial Pipe Line, Inc. (IPL), Lakehead transports crude petroleum and other liquid hydrocarbons along approximately 3,200 miles of pipeline across North America from the Northwest Territories and the Province of Alberta to refineries in the midwest as well as the Provinces of Ontario and Quebec. Within Illinois, Lakehead operates a 116.64 mile stretch of pipe referred to as Line 6A. Line 6A went into service in 1969. It enters Illinois from Wisconsin near Harvard and follows a route through McHenry, Kane, Cook, DuPage and Will counties. It then proceeds to Indiana and enters that state near Griffith, Indiana. Line 6A was generally constructed upon rights-of-way acquired from public utilities, as well as easements and fee interests purchased from private landowners. It did not require the use of eminent domain.

As part of a system expansion program, Lakehead began adding new pumping stations to Line 6A to meet a greater demand for crude petroleum along its system. When Lakehead determined that 6A's practical capacity was reached, which it said resulted in rationing during peak periods, it decided to construct a new 24-inch pipeline that it refers to as Line 14. Proposed Line 14 will track through several Illinois counties, including DeKalb, Kane, and Kendall counties, and is to interconnect with Line 6A in Mokena, Illinois. The new line is part of a large expansion program named System Expansion Program II, which calls for greater transportation of crude oil by Lakehead and IPL to and through Illinois. A new route was determined to be desirable due to the significant development in the counties along Line 6A since 1969, and the fact that proposed Line 14 would traverse predominantly rural and agricultural land. Its total cost is estimated to be $300 Million.

Before beginning construction, Lakehead sought the issuance of a certificate in good standing under section 401 of the Pipeline Law, which is a first step toward acquiring eminent domain authority. During the application process, Lakehead made clear that it sought to negotiate with landowners and municipalities along the proposed route, but it noted that it may eventually need condemnation authority in order to achieve its goal. Several counties, municipalities, and state agencies intervened, as did numerous landowners. Landowners formed an organization titled Communities Against the Pipeline (CAP) in order to form an organized group of landowners in opposition to Line 14.

An extended hearing with numerous witnesses and exhibits was held before a Commission hearing examiner. At the hearing, Lakehead presented evidence regarding the fact that it properly filed its application, and that it was fit, willing and able to construct the line and maintain it safely and effectively. It also argued that there was a public need for the line and the route chosen was consistent with the public's need and convenience. With respect to need, Lakehead's witnesses testified that there would be substantial growth in the demand for crude oil during the next decade. There was testimony that the demand flowed from the increased demand for refined petroleum products. Representatives from midwest refineries that purchase crude oil from Lakehead stated that they needed increased supplies of Canadian crude oil in order to maintain competitive rates in the markets for refined petroleum products and that the capacity restraints had a negative economic impact on refiners. However, representatives acknowledged that their future demands for crude oil could be met with the current pipeline system established in the midwest of which Lakehead controls 40% of the market. Lakehead also offered testimony that the purchase of crude oil from its system could result in savings to refiners which could be passed on to consumers. Mark Turri, an employee of Mobil Oil Corporation, said that Canadian crude oil would be cheaper and that an adequate supply of Canadian crude would ultimately benefit consumers. Canadian oil consultant Timothy Partridge pointed out, however, that Canadian crude oil production capabilities would decline after 2002.

William Gould, a senior economic analyst for the Commission, testified that the interest of refiners, shippers, and producers should be viewed as business interests rather than public interests. In his opinion, as long as the public had an adequate supply of refined petroleum products at reasonable prices, public convenience and necessity were being served. Since there was no evidence that an adequate supply of refined products were not available at reasonable prices, Mr. Gould stated that there was no public need for Line 14. He testified that Lakehead merely demonstrated a private interest in wanting to deliver more Canadian crude oil to refineries in the midwest.

Along the same line, there was the testimony of James McDonald, who was ruled not to be an expert but whose testimony could be accepted for its factual content, and Merton Miller, a Nobel Laureate in Economics. Both stated that any barrel of oil that would be shipped via the proposed line would simply displace crude oil which arrives from other points on other lines. This is the case because all of the midwest refineries were operating at or near capacity and the supply of crude oil already significantly exceeded the capacity of the refineries. According to Miller, a new line would only assist in giving Lakehead a greater market share. It would not result in any benefit to the public because the aggregate supply would not change and thus the price of crude oil would not be affected. Any benefit from the new line would flow entirely to Lakehead and Canadian oil producers.

At the close of the hearing, the examiner concluded that the need and demand for more capacity on Lakehead's system were the relevant considerations for certification under section 401 and that such need and demand were clearly established. Thus, having determined that the statutory prerequisites of section 401 had been met, the examiner recommended that the application be granted.

The Commission rejected the examiner's recommendation. It determined that Lakehead failed to demonstrate a public need for the new line. In doing so, the Commission stated that it agreed with the analysis proposed by its staff that public need must be assessed by looking to the demand for refined petroleum products and not only crude oil per se. Public need, according to the Commission, must be determined not by looking to the needs of any individual or number of individuals, but by looking to the public at large since "[t]he public *** is greater than a limited number of market players." The Commission concluded that Lakehead failed to support its claim that Line 14 would have a positive price effect on the market for refined products and that since the consuming public did not lack an adequate supply of refined petroleum products at adequate rates, and there was no shortage or crisis, no public need for Line 14 existed. Lakehead's application was therefore denied and it appeals. On appeal, Lakehead is supported by amicus briefs from numerous oil and pipeline companies and associations.

II. DISCUSSION

A. Scope of Commission Authority

On appeal from the Commission, this court's review is limited to considering whether: (1) the Commission acted within its authority; (2) state or federal constitutional rights have been infringed; (3) the decision is supported by substantial evidence; (4) adequate findings were made to support the decision . Citizens United For Responsible Energy Development, Inc. v. Illinois Commerce Comm'n, 285 Ill. App. 3d 82, 673 N.E.2d 1159 (1996). The burden of proof on all issues raised on appeal rests with the appellant. 220 ILCS 5/10-201(d) (West 1996); United Cities Gas Co. v. Illinois Commerce Comm'n, 163 Ill. 2d 1, 643 N.E.2d 719 (1994).

The first issue we will address is whether the Commission exceeded its lawful authority. More specifically, the first issue is whether the Commission exceeded its authority by interpreting section 401(b) of the Pipeline Law as requiring it to determine whether Lakehead, a pipeline carrier operating in interstate commerce, met the statute's requirements including the requirement that there be a public need for Line 14.

Lakehead contends that the Commission's review is limited in interstate pipeline cases because it may not regulate the interstate markets involving transportation by common carriers. Lakehead argues that the Commission only has "prudential control" over certification applications, which does not include the right to determine whether there is a need for Line 14.

Section 401(b) lists the necessary requirements for a pipeline to be issued a license to operate as a common carrier by pipeline in ...


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