Mr. PHILLIPS. I am Robert Phillips, president, Vickers Petroleum, Wichita, Kans.

Mr. GRUESKIN. I am Harold Grueskin, vice president, Vickers Petroleum Corp.

Mr. CASEY. I am Bob Casey, Jr., of Bracefell & Patterson, on behalf of Vickers Petroleum Corp.

Mr. DINGELL. I guess we should start with Mr. Winkler.

Without objection, your full statement will be included in the record and we will recognize you for purposes of summarizing it.

STATEMENT OF ELMER L. WINKLER

Mr. WINKLER. I plan to just speak from my notes here very briefly. These remarks will be pertinent only to title II.

I would like to start out by saying Rock Island Refining Corp. owns and operates a small and independent refinery in Indianapolis, Ind., with a size of 32,600 barrels a day. We market through customers and through our own retail outlets in the State of Indiana, Michigan, and Ohio.

There is approximately 71 percent of our market of gasoline that goes through our own affiliated companies, the balance through outside customers. We own less than 1 percent of our own crude oil. A brief history of the company: It was started in 1941, with a 5,000 barrel a day plant and the function was strictly refining. It remained strictly as a refiner until the mid-1950s, when the company lost its largest customer, Hoosier Pete, to a large unbranded marketer.

At that time the company became very worried about losing additional accounts and possibly having to cut refinery runs to an unprofitable operation. As a result, the company entered into an aggressive program in which it acquired marketing companies, started marketing companies, and expanded them.

In 1972 and early 1973, the company was cut off from a large portiton of its crude supply and had to go from 27,500 barrels a day run to 18,000. At that time we made it a policy to allocate products to our outside customers in the same relationship that we sold to our own units.

Later in 1973, Mr. Simon proposed a voluntary allocation program which we followed. Actually, we had been following it before we announced it.

At the present time, we are involved in a program where we have been spending approximately $13 million to modernize and expand our refinery. It is essential in our opinion that we be able to also expand our direct marketing operation.

There is no reason for us to cut off our customers because we need their volume as well as expanding our own operation.

Getting back to one point, to this bill, supposing that we lost one of our major customers now. As we understand this bill, we could not only not expand our operation, but we would be forced to cut back the number of our own units operating. This would certainly be a very severe situation.

Let's look for a moment at pricing. As we understand the bill, if it applied only to wholesale, it would not affect our operation,

because we price at the same price. We charge our own outlets a little more than the outside customers because we provide them with some services.

If this is carried to retail, however, and we are forced to price. at a specific price, then this would put us in a noncompetitive operation with many of the geographically distributed private branders. Many of these companies are willing to take a loss in one operation and make profits in other areas of the country in order to build volume in the area where they are taking a loss.

In addition to that, when you say that you have to pass on your marketing costs on a per gallonage basis, in order to know what your marketing costs on a per gallonage basis per unit is, you have to know the volume going through the unit. Obviously, the more volume the unit does the less its operating cost per unit, so, therefore, we feel that the predatory pricing, if it goes down to the retail level, would be an extremely dangerous point for our company.

In conclusion, we feel that we need flexibility to meet competition and to expand our marketing to take care of our increased production.

Thank you for the opportunity to make these comments. [Mr. Winkler's prepared statement follows:]

PREPARED STATEMENT OF ELMER WINKLER ON BEHALF OF ROCK ISLAND

REFINING CORP.

Mr. Chairman and Members of the Subcommittee: My name is Elmer L. Winkler. I am President of Rock Island Refining Corporation, and I appreciate the opportunity of appearing before the subcommittee to present our views on this important legislation.

Rock Island Refining Corporation is a small, independent refiner located at Indianapolis, Indiana, with a newly certified refining capacity of 32,600 B/D. This is an increase of some 3,100 B/D from our previous capacity of 29,500 B/D. We are currently in an equipment modernization and refinery expansion program, costing $13,000,000, which will increase our throughput capability to approximately 40,000 B/D by October, 1976. We do not expect to run at that level immediately, but we do anticipate that by the early part of 1977 we will be running at 35,000 B/D.

Rock Island is completely independent from the control of any other company and is in the refining and marketing business. We own less than 1% of our crude oil supplies. Rock Island's primary emphasis is on production of middle distillates and gasoline. Currently, gasoline accounts for about 65% of our refinery production. We market gasoline to third party, uncontrolled cuttomers and through retailing subsidiaries which operate 224 service stations in Indiana, Southern Michigan and Northwestern Ohio. Rock Island is not a franchisor. It owns its retail outlets through its subsidiaries. Rock Island prices its gasoline in accordance with FEA's formulae on a "rack pricing" basis. That is, all customers who purchase gasoline F.O.B. refinery rack pay the same product price. We do not make price distinctions such as "dealer tank wagon" or other differentiations because we have no dealers. Far from favoring our own marketing subsidiaries, we charge them .35¢ per gallon more than our third-party customers for storage, marketing services and the like.

In 1972, Rock Island sold about 74.79% of its gasoline through companyowned units, but in 1975, that percentage had fallen to 71% or nearly a 4% reduction in sales, through company outlets. In 1973, before FEA controls, Rock Island's crude oil runs were cut from 26,000 B/D to approximately 20,000 B/D because of reduced crude oil available from our major oil company suppliers. At that time we did not favor our company outlets but allocated available gasoline to those outlets and third-party customers on the same reduced per

centage basis. And in May, 1973, when then energy chief William Simon issued a comprehensive voluntary allocation program for gasoline, Rock Island complied fully. Of course, Rock Island has complied with the mandatory allocation program since its inception.

We cite these facts because it is important to understand that many small refiners are not interested in gobbling up the business of their third-party customers. On the contrary, in the limited market served by us, continued equitable treatment of our gasoline purchasers is the only sensible course.

Because we are not in the franchise business, those provisions of the various bills which deal with cancellation, renewal and termination of franchises are beyond the scope of our operations and would not affect Rock Island directly. Title III of H.R. 13000, as we understand it, attempts to standardize procedures for testing, certifying and displaying octane ratings of the gasoline distributed by us. We are currently doing most of these things under FEA regulation and assume that it is the bill's intent to continue a similar octaine testing, rating and posting system. We do question the advisability of turning the FTC, an enforcement agency, into a regulatory agency which will be responsible for promulgating the octane regulations.

Our greatest concern lies with the provisions of Title II of H.R. 13000 as originally drafted and as proposed to be amended. We support competition in gasoline retailing. In fact, small and independent refiners often provide the lion's share of that competition. Today, there is a plethora of gasoline marketers everything from farm coops to food processors, from mass merchandisers to Mom and Pop retail outlets. The competition is, indeed, vigorous. And our past record amply demonstrates that we have fostered such competition, even at times when circumstances permitted us to take advantage of our customercompetitors.

To meet competition, and to assure that there is a market for the increased gallons of gasoline each month that we are investing millions of dollars to manufacture, Rock Island must retain the ability to grow and the flexibility necessary to respond to consumer demand for gasoline. As we read Title II, however, a percentage moratorium on increasing gasoline sales through owned ontlets would prevent the very retail growth we need to survive and would permit other segments of the market to grow at our expense. There is no moratorium on franchises and no moratorium on the large multi-state independent retailers, such as represented by IGMC, who are our competitors and who are not gasoline "distributors." In addition, the language of Title II is not clear. If we lost a customer, our sales percentage would nonetheless increase. Surely, it is not the intent of the legislation to penalize us in such a

case.

Our marketing area is limited-both from a geographic standpoint and in the number of customers we can easily serve. It is impractical for us to attempt to serve customers far beyond the geographic locale of the refinery. The costs of exchanges and transportation in most cases would be prohibitive. If a Title II moratorium were adopted and if Rock Island were unable to sell increased gasoline supplies to regular third-party customers, we would have two alternatives. We could sell in spot sales at distressed prices. This has happened to us in the past, and it is financially disastrous. Distress sales of surplus gasoline would, of course, give the large, independent multi-state retailers the pricing edge to engage in cutthroat competition. The only real solution would be to cut refinery runs. In either case, Rock Island would be unable to recoup its investment in new refining facilities an investment which we made in good faith and in response to the governments' plea for energy independence.

Competition might be enhanced-but only until those small and independent refiners unable to replace lost wholesale sales with increased retail sales were forced out of business. Needless to say, a restriction on the absolute number of gasoline station outlets as proposed in Amendment Number 1 to Title II is subject to the same objections as the language limiting the percentage of gasoline through company outlets to 1975 or to national average 1972. We strongly oppose proposed Amendment Number 3 which limits a company only to its 1975 percentage of gasoline through owned outlets. Rock Island's 1975 percentage is lower than its 1972 percentage but with increased runs that percentage could be expected to increase.

This brings us to the second proposed amendment to H.R. 13000 dealing with so-called "predatory" pricing. As this amendment has been explained to

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us, Title II would prohibit a distributor from selling gasoline for resale at different prices to the same level of purchasr unless the price diffrential were cost justified. On its face, that appears to be what we are doing now. Rock Island does not price differentiate among whosesale gasoline purchasers (except for the small charge to subsidiaries). However, we also understand that the bill is intended to go further and require that the retail price at a companyowned station could not be less than the uniform wholesale price plus marketing service costs. This provision is designed to prohibit the refiner from raising the wholesale price so high as to make it impossible for a third-party jobber to compete and to prevent the refiner from "subsidizing" low retail prices at company-owned stations with high wholesale prices and refinery profits. Of course, the language of Amendment Number 2 is not that inclusive or definitive, but that is our understanding of its ultimate purpose.

This proposal is unworkable, we believe, for several reasons. First, how would a refiner respond to competitive situations that arise almost daily if retail price were pegged? Nothing in Title II deals directly with this problem. We certainly do not think it desirable to have to prove to FTC that we are "meeting competition" every time we drop a price. In fact, the history of the Robinson-Patman Act indicates that this enforcement mechanism is not a good one and will effectively hamper our necessary competitive flexibility.

Secondly, this provision, far from enhancing competition, could result in a fixed, rigid price for gasoline for refiners with owned outlets while the multistate independent retailer who is not a refiner or distributor of gasoline within the bill's definition engages in the very predatory pricing the bill is supposed to preclude.

We recognize that Title II in its various forms contains provisions for FTC exception on a case by case basis. Although we have not dealt with FTC, our experience with FEA's exceptions process would lead us to oppose this mechanism in principle. It is time-consuming, expensive and subject to arbitrary rules and actions. Moreover, it forces a small refiner to drive its corporate bus through the rear view mirror-advance corporate planning is nearly im possible.

I want to make it clear that we do not subsidize our downstream marketing operations from crude profits because we have none. We do not subsidize such operations from refining profits because a company that has just spent millions of capital dollars on new plant and equipment cannot afford to use profits to keep losing marketing operations afloat-even for a short time. It would not make sense for us to do so anyway, because we could not expand retail operations fast enough to fill in the gap left by third-party customers who would go out of business.

It must be remembered that the segment of the market we deal in is smallabout 3.6% of the total gasoline in the United States is produced by refiners 50.000 B/D and under. The major oil company franchisees contractual diffi culties do not involve us, and Rock Island cannot be accused of using forward or backward integration for anti-competitive purposes. From Rock Island's perspective, the provisions of Title I will offer significant protection to franchisees, and we urge the Congress not to adopt a gasoline moratorium or pricing mechanism which is unnecessary and unenforceable and will have damaging, anti-competitive side effects for companies such as Rock Island. If there must be a pricing limitation or moratorium, we endorse the concept supported by Senator Moss and set forth in S. 323 whereby small refiners and independent refiners, as defined in the EPAA, are simply not subjected to marketing activities limitations-by whatever name they are called. As Senator Moss said in his testimony to this subcommittee: “I *** would regret to see this sound principle [viz, protection of the major oil company franchisee from so called predatory pricing] extended so broadly that a relatively minor refinery which did increase its capacity was precluded from company operated distribution, because of the provisions of Title II of this bill."

Although he did not have us in mind, that is exactly the situation in which Rock Island finds itself today.

Thank you for your courtesy and attention.

Mr. DINGELL. Mr. Winkler, you have given us a helpful and thoughtful statement. I certainly intend to keep your comment care

fully in mind as we proceed on legislation. I want to express my personal thanks.

Thank you.

Mr. DINGELL. Mr. Roper.

STATEMENT OF JOHN DEE ROPER

Mr. ROPER. Thank you, sir. My comments will be related just to title II.

Koch Refining Co. owns about 300 service stations. Koch has nothing but an employee operated service station operation. We do have a refinery in St. Paul, Minn., which has 127,300 barrels per day capacity.

I have developed the statistics that the bill contemplated relating to our percentage of total wholesale sales and they are, in 1972, 30 percent, and in 1975, 27.9 percent.

At the time of preparing this testimony, I did not know the actual national average. The Federal Energy Administration testified that the national average was 15.8 percent, so I will modify my statement by the FEA statement.

It is true, however, I believe, that the major oil companies as opposed to the independent refiners have virtually no employee operated stations. At least, nationally they have less than onehalf of the percentage that the independent refiners have.

It is our opinion that it is the small independent refiner that is the competitive muscle offering gasoline at a discount to the consuming public. So long as our crude oil prices are competitive with the majors, we can and do compete successfully with the major brands. Koch's crude oil prices during 1973, 1974, and the first months of 1975 were not competitive. Now they are and we want to grow.

As I understand it, the intent of H.R. 13000 is to stimulate competition. H.R. 13000's beginning paragraph states its purpose is "to prevent deterioration of competition in gasoline retailing

"By preventing the independent refiner from expanding its retail business, it helps the major brands.

Implicit in the thinking of the draftees of H.R. 13000 is a preliminary finding that there is a significant amount of predatory and discriminatory pricing practices. I don't believe this is true. In Koch's case, Koch is required presently by the FEA to treat all of its gasoline wholesale sales within a given class the same. With 300 stations spanning a 30-State area, we do not have the market power to use predatory practices if such practices were lawful under FEA regulations or the antitrust laws.

Independent refiner-operated stations compete successfully basically because of price. A competitive price is what you want, but H.R. 13000 and its three amendments will immobilize the primary cause for retail price competition if you freeze the independent refiner.

H.R. 13000 as originally drafted provides:

Sec. 202. (a) The Federal Trade Commission shall, by rule in accordance with section 553 of title 5, United States Code, prohibit