ing complaints, and I wondered, would it be fair to say, based on the existence of numerous complaints, this may be a problem but you do not have the information to decide whether or not it is a problem ? Is it likely that predatory, discriminatory practices could become a more serious problem upon removal of price and allocation controls? Mr. SMITH. Mr. Demarest, if I could make sure we are understanding each other.

The predatory pricing practices that have been alleged do not have to do with the Robinson-Patman Act kind of predatory or discriminatory question where your allegation is that one seller is selling to two competitors at different prices. Rather, the allegations are that the sellers, usually the jobber, sometimes the refinery, is alleged to be selling to the dealer at a dealer tank wagon price and then selling at retail through his own company-owned operation to a different class of customers, that is, to retail consumers at a price that puts severe competitive pressures on the dealer.

One of the difficulties is that there is no provision in FEA regulations that speaks to that kind of a distinction. The FEA price regulations speak to sales to classes of customers established on May 15, 1973, and we have investigated a number of circumstances of this sort and we have found some places, frankly, where the supplier was selling on the street at-or in a couple of cases-a penny or two below what he was selling to his dealers for dealer tank wagon price.

Mr. DEMAREST. Could you provide that information for the record? Mr. SMITH. Yes, I can provide the number of times we found that, but in the overwhelming majority of the cases we found the opposite. We found where the supplier was selling through a company owned outlet at higher than the dealer tank wagon price, but not enough higher to give the dealer the kind of margin he, the dealer, thought he ought to have.

The hard question is when is that predatory? When is it discriminatory?

Mr. DEMAREST. In addition to the number, could you provide the details on those cases which you found? The members would find that helpful in considering these problems.

Mr. SMITH. There have been two, but I will get the details and provide those for the record.

I might add, they did not persist very long.

[The following information was received for the record:]

Question. Does FEA have any knowledge of any suppliers retailing gasoline at a price lower than the price they charge their lessee dealers?

Answer. FEA has received a number of complaints alleging unfair competi tion along such lines; however, on investigation, we have only found two instances where such activity was or is going on.

We investigated many such allegations in various areas of the country, Rumford, Maine, Grand Rapids, Michigan, Fort Walton Beach, Florida, Augusta, Georgia, Sioux Falls, South Dakota, Hagerstown, Maryland, Albequerque, New Mexico, to name a few, in response to inquiries from Congress and other sources. Specifically, we were looking for instances where refineries or jobbers were retailing gasoline directly to consumers at prices less than their Dealer Tank Wagon (DTW) price, the wholesale price they charged the service stations they supplied for gasoline.

The first instance of such activity we uncovered was in Sioux Falls, South Dakota. A Mobil jobber was selling gasoline through its own salaried station at the same price as the DTW price being charged to Mobil lessee dealers. However, in delving further into the situation we found that the jobber did not

supply any of the branded lessee dealers in question; they were all supplied directly by the refiners. Also, the jobber was retailing on a self-service basis while the branded lessee dealers were all full-service. Fortunately, this situation was shortlived and since has corrected itself. Shortly thereafter, Mobil lowered its DTW price 1 cent and the jobber raised his retail prices to profitable levels from the temporary "loss leader" levels he was posting.

The second situation we have uncovered is a situation in Augusta, Georgia where a Fina jobber is retailing gasoline directly through his own salaried self-service stations at a price less than the DTW price charged to a branded full-service lessee dealer he supplies. We are still looking into this particular situation, as it was only brought to our attention fairly recently.

Mr. DEMAREST. The question then is whether FEA as part of its existing regulatory responsibility should be charged with investigating this area or whether this is better a subject matter charged to the Federal Trade Commission as part of its antitrust and competition responsibilities. You don't have any objection to the Federal Trade Commission studying this problem, do you?

Mr. HILL. I have no objection. We have tried to investigate ourselves just under our own price rules those cases where that has been alleged, but if somebody else would like to take on that responsibility, we are not going to object.

Mr. DINGELL. Let me ask the question, how many folks do you have doing that kind of work at FEA? I have been somewhat apprehensive that you don't have enough.

Mr. SMITH. This is part of the job of the compliance staff, Mr. Chairman. You and I discussed the span of their responsibilities and resources before.

Specifically, those people involved in the retail aspect of the compliance program are the people who conduct these investigations.

Mr. DINGELL. Can you give us the number, please, the total number of that particular portion of the staff, and, then, the total number of those who are engaged in investigations of the kind of complaint we are discussing?

Mr. SMITH. The staff is a field staff at 955, sir, total. I will have to get for the record the number that are engaged in those things, because there is no specific segment of the staff set aside.

What I will provide for the record is the proportion of the total investigatory time that has gone to retail cases over the past few months.

Mr. HILL. The New Mexico case, for example-we handled that through a special project kind of arrangement of assigning a team to do a complete investigation, but that was in response to a specific complaint and not something that is part of the ongoing program. [The following information was received for the record:]

! Prior to April, audit time was reported under the category, "'Wholesale/Retail." These 2 categories have been separated and, consequently, a great disparity exists between April and previous months. There is no way to accurately break out retail audit time for the 1st quarter, but the 11 pct for April should be fairly representative of total time spent on retail Investigations.

Mr. DINGELL. The Chair is going to recognize Mr. Vlcek for questions.

Mr. VLCEK. When you are providing for the record detailed analysis of provisions of title I, I would ask you to focus particularly on section 108. Relationship to State law, especially with respect to the extent to which it would be advisable or unadvisable to preempt the 20 or more State laws that are now in existence.

The language now says that only those provisions of State law which are inconsistent with provisions of title I shall be preempted, and you should address the question of whether any State provisions dealing with similar types of issues should be totally preempted so we have solely Federal law operating in this area.

Mr. DINGELL. The committee thanks you for your helpful testimony. We thank you for being with us.

Mr. HILL. Thank you. We will be glad to answer any further questions you may have and provide any assistance.

Mr. DINGELL. It would be helpful if you work with our staff as we move forward on legislation.

Mr. SMITH. Mr. Chairman, I have one answer that I could put in the record now to a question Mr. Moorhead asked.

Mr. DINGELL. Without objection, that will be inserted in the record. Mr. SMITH. He asked what percentage of gasoline sales were accounted for by the major refiners who had 3.5 percent of the service stations, and the answer is, just another 9 percent of total gasoline sales.

Mr. DINGELL. Thank you very much, Mr. Smith.
Gentlemen, we thank you both.

[The following material was received for the record:]

RESPONSES TO QUESTIONS POSED DURING HEARINGS

Question. What areas of objection do you perceive in regard to Title I? Answer. FEA perceives two major problem areas in regard to Title I as currently drafted. The first of these is the "failure to renew" provision, Section 103, and the second is the insufficiently drawn savings clause that is included in section 106, the enforcement section of Title I. Section 103 would establish very strict requirements as prerequisites for a franchisor electing not to renew a franchise contract. A franchisor would be forced to renew such a franchise unless: (1) the franchisee has breached the terms of his franchise agreement and is so notified in writing; or, (2) notification is given and mutual agreement in writing is reached to terminate the franchise. This provision therefore unduly restrains basic freedoms of contract for both parties. It imposes overly strict requirements upon a franchisor which are designed to restrain his discretion not to renew a franchise. A franchisor's mere failure to renew a lease or franchise agreement should not be the basis for the imposition of severe legal remedies on behalf of the franchisee. The basic purpose of such legislation should be to restore and ensure more evenly balanced bargaining power between the franchisor and the franchisee and not to severely impede or eliminate basic freedom of contract. It is providing for evenly balanced bargaining power which was intended to be accomplished by the Administration's dealers' protection bill, H.R. 10840.

The second major area of objection in regard to Title I concerns the insufficiently drawn savings clause contained in Section 106, which is designed to create an exception from the Section 103 "failure to renew" provisions in those circumstances where a franchisor can demonstrate that his failure to renew was based upon "reasonable business judgment." This term as contained in H.R. 13000 is much too vague and indefinite, however, to create a meaningful exception to the requirements of Section 103. The term "reasonable business judgment" is completely undefined in the bill, and, as such, provides an inadequate

standard for defense by a franchisor. A definition is required which would delineate those occasions when "reasonable business judgment" would permit a franchisor the right to fail to renew a lease or franchise agreement. Examples of items to be included in such a definition are the following: declining profitability, ill will between the parties, changing market patterns and conditions, changing costs of operation, and credit failure. These and other factors should be taken into account in providing a definition of "good business judgment" which would include substantive criteria upon which to predicate a defense on the part of the franchisor.

Question. Does FEA object to the notification and cancellation provisions contained in Section 105 of Title I?

Answer. The Administration's own bill, H.R. 10840, would provide for a 90 day notification period as a predicate to termination or concellation of a franchise agreement. The notification requirements contained in H.R. 13000 are similar in concept therefore to those contained in the Administration measure. The 180 day time period provided for in Section 102 would have the effect of amending the otherwise applicable statute of limitations. A franchisor would have 180 days in which to decide whether he would terminate or cancel a franchise in response to a breach of that franchise by the franchisee. At any time during the 180 day period, the franchisor could elect to terminate or cancel, and at that point he would have to proffer the written 90 day notification to the franchisee required under Section 105. Even though Section 102 would serve to shorten the statute of limitations, these provisions constitute a reasonable balance of the respective interests of the franchisor and franchisee and would not severely impair the bargaining power of either party.

Question. In regard to the exceptions clause in Section 106, would your agency support an arbitration provision instead of the current "good business judgment" standard?

Answer. Some branded dealers have suggested that there should be an independent arbitration board created within FEA in order to provide a final source of administrative appeal and to substantively evaluate such considerations as costs and damages in the course of an arbitration hearing. FEA does not endorse this concept. This proposal would simply add another administrative layer to the current review procedures and mechanisms. As such, it would simply create frustration and delay for branded dealers who petition FEA for redress of grievances. Such a mechanism could not be expected to improve the speed, content, or quality of the grievance procedure.

Question. What are FEA's main objections to the moratorium which would be created under the provisions of Title II of H.R. 13000?

Answer. The moratorium provisions in the bill would empower the FTC to prohibit for two years any refiner from distributing an increased volume of gasoline through his wholly-owned retail outlets, based on the greater of: (1) the total of 1975 gasoline volume of the refiner; or (2) the national average percentage for 1972 of gasoline distributed for sale through refiner operated retail outlets as computed by the FTC. FEA opposes a marketing moratorium which would restrict either the gasoline volume or the total number of refiner operated retail outlets. The major problem with such a moratorium is that it would seriously interfere with competition in the market place and would encourage continuance of some inefficient operations. This provision would not help the branded dealers. In addition, it would restrict the ability of refiners, especially small independent refiners, to expand their businesses in response to changing market conditions.

Question. Three draft proposed alternatives to Title II have been prepared by Subcommittee staff. What is FEA's position in regard to each of these draft alternatives?

Answer. In regard to the three draft amendments which have been suggested by Subcommittee staff as potential alternatives to Title II, FEA has serious reservations about each of the alternatives as follows:

1. Alternative No. 1-This alternative would retain the marketing moratorium but would eliminate the volumetric percentage limitation. In its place, a refiner would be prohibited from increasing the number of his retail outlets. This proposal is therefore objectionable because it would serve to discourage competiton and would limit a refiner, especially a small refiner, in his ability to expand his refiner-owned business.

2. Alternative No. 2-This alternative would eliminate the moratorium mechanism. But, in its place, it would provide for immediate enactment of a prohi

bition on predatory pricing practices with a requirement that price differentials reflect costs of distribution and marketing services. This provision would have the effect of mandating certain prices and what goes into the computation of those prices. It can be construed as a form of minimum pricing provision and is therefore objectionable because of its negative impact upon competition.

3. Alternative No. 3-This alternative would retain the marketing moratorium mechanism. A refiner would be limited directly to that percentage of gasoline distributed by him through refiner-operated outlets during 1975. FTC would be empowered to exempt from this moratorium any refiner who maintains price differentials reflecting the cost of distribution and marketing services. This alternative would also, just as with Alternative No. 1, unduly restrict competition in the marketplace and the freedom of a refiner to expand his business. Also, the price differential mechanism which would be a predicate to receiving an exemption can be considered, just as in Alternative No. 2, to be a form of minimum pricing and is therefore objectionable as a restraint upon competition. Question. What is FEA's position in regard to "rack pricing" as a potential alternative mechanism to the moratorium provision contained in Title II? Answer: Rack pricing is a potential pricing mechanism that could be implemented by refiners under which all of the customers of a particular refiner would pay exactly the same price for gasoline at any particular period of time. Under such a system refiners would not be able to create price differentials between classes of customers. Such a system, however, would introduce a radical change in current market mechanisms severely disrupting the stability of wholesale and retail markets.

Mr. DINGELL. Our next witness is a panel of small refiners, Mr. Elmer L. Winkler, accompanied by Mr. W. J. Thomas, Mr. John Dee Roper and Mr. Robert Phillips.

Gentlemen, if you would come forward.

We are very pleased you are with us, and we thank you for your kindness to us, and if you will identify yourselves each for purposes of the record, we will be most pleased to receive your statement.

I think Mr. Thomas is on your left. Mr. Winkler, Mr. Roper and Mr. Phillips.

Mr. Phillips, I think you are accompanied also, by Mr. Grueskin and Mr. Casey, are you not?

Mr. CASEY. I am Bob Casey, Jr., on behalf of Vickers.
Mr. DINGELL. Were you scheduled to be on this panel?

Mr. CASEY. I am with Mr. Phillips.

Mr. PHILLIPS. I would like to ask Mr. Grueskin to sit here.

Mr. DINGELL. If you would each identify yourself for the record. STATEMENT OF A PANEL CONSISTING OF ELMER L. WINKLER, PRESIDENT, ROCK ISLAND REFINING CORP., INDIANAPOLIS, IND., ACCOMPANIED BY W. J. THOMAS, VICE PRESIDENT/MARKETING; JOHN DEE ROPER, VICE PRESIDENT, KOCH REFINING CO., WICHITA, KANS.; AND ROBERT PHILLIPS, PRESIDENT, VICKERS PETROLEUM CORP., WICHITA, KANS., ACCOMPANIED BY HAROLD GRUESKIN, VICE PRESIDENT; AND ROBERT CASEY, JR., COUNSEL Mr. WINKLER. I am Elmer L. Winkler, president of the Rock Island Refining Corporation, Indianapolis, Ind. Accompanying me is W. J. Thomas, vice president/marketing.

Mr. ROPER. I am John Dee Roper, vice president, Koch Refining Company, Wichita, Kans.