Mr. SIGLER. That is correct, and processing arrangements.
Mr. DINGELL. What is the name of those?

Mr. SIGLER. Exchange agreements.

Mr. DINGELL. This is not a bad thing. I don't want the record to indicate that I am indicating it is. What it does is allow a refiner to enter markets in an area where he might not have a refinery and to move his gasoline by agreement with others in the industry, as opposed to necessarily having to move it by tank car, freighter, tank truck, or pipeline or other mechanism to points where he happens to have his outlets.

Mr. SIGLER. That is correct. It is very beneficial to the consumer. Mr. DINGELL. I think, and properly so, it is useful and helpful to the industry.

Mr. SIGLER. Yes, sir.

Mr. DINGELL. The Chair will yield back to Mr. Demarest.

Mr. DEMAREST. To follow up on the question raised by the chairman, what if the gasoline supplied by refiner A to a franchisee of refiner A does not meet the specifications? That is, refiner A makes some unrealistically stringent specifications which he has no intention of satisfying but does so for the purpose of precluding his franchisees from obtaining gasoline elsewhere.

Mr. SIGLER. I don't believe under our proposal a refiner would be precluded from establishing any specific requirements that he chose to establish, presumably those that he would meet. So, I am not certain I understand your question.

Mr. DINGELL. To elaborate on Mr. Demarest's question, would it be fair in saying that the refiner could establish specifications that his dealers, lessees, would have to meet but he would in turn have to meet those same specifications in regard to his own product, before he could impose that kind of standard? Isn't that an inherent part of the arrangement that we are discussing?

Mr. SIGLER. Yes.

Mr. DINGELL. Mr. Demarest.

Mr. DEMAREST. On page 3 of your statement, you list three general areas of problems.

Area No. 1 appears to have a recognition that the supply question problem on a lessee-dealer basis is really two-sided, that he has the problem of a disparity of bargaining power with his lessor-supplier under which he could be terminated or not renewed arbitrarily. He also has a problem of obtaining supplies at equitable and competitive prices.

As a result of that recognition, would your position be that franchise protection of the type accorded in title I would not be sufficient in and of itself, that it needs to be accompanied by something to address the equitable and competitive price problem which you outlined on page 3?

Mr. SIGLER. I will answer your question, but first I want to clarify that problem Number 1 is not acknowledgement on my part that they would have problems.

I merely stated there are segments of the industry who believe they have problems.

In that clarification, the answer to your question is yes; I acknowledge that title I does not speak to that problem and that correcting the fear or the real problem, whichever it is, will require some other action.

Mr. DEMAREST. You outlined two different areas, I believe, of pricing concern on page 3. You have indicated the problem of supply at an equitable and competitive price for distributors and retailers. In your sub-heading No. 3, you indicate the concern of industry segments that a vetrically integrated company could subsidize refining or retailing with upstream production profits. Are those somewhat different concerns or are they identical?

Mr. SIGLER. NO; I think they are different concerns, as I intended them here.

Mr. DEMAREST. Could you expand on the differences between those two concerns and how specific your rack pricing proposal addresses those two different pricing concerns?

Mr. SIGLER. Speaking of the first area, the concerns which I envision, there are certain segments, predominantly private brand marketers, concerned that they will be denied access to adequate supply at a competitive price, however they find it.

Other segments, like branded dealers, are concerned that, while they have access to adequate supply, that their buying price will not be competitive because they buy on a different pricing system, normally a tank wagon system, versus a rack system wherein the tank wagon price contains other renumeration for other considerations. So, they are concerned that they are not buying competitively.

The open access rack requirement would speak, I believe, to all of those concerns. Each competitor would be buying at a clean price for gasoline and Robinson-Patman would require they be the same, if they were competing in the same location. The open access provision would give each retailer access to anybody's product. That should solve those problems.

The open access, as I explained earlier, would also solve part of the second area. There are those who have been concerned that vertically integrated refiners can subsidize with crude profits at the refining sales levels.

The open access provision would remove all economic incentive to subsidize your refining outputs since obviously you could be required to sell to a competitor.

Mr. DEMAREST. You have indicated the removal of an economic incentive to subsidize refining with crude production profits is the result of this rack pricing proposal. Could you explain in a little more detail how that works as opposed to the removal of any incentive to subsidize marketing with refining and crude oil profits?

Mr. SIGLER. If all gasoline must be sold at a clean rack price and you must sell all competitors or all prospective purchasers, then there is nothing to gain by selling below cost because your competitors would simply close down their refiners and buy from you; you would not be gaining market share because it is unidentified product, and the incentive then for any subsidization at that level should disappear.

Subsidization at retail by one who has retail investment and acquires gasoline or diesel fuel from his own refinery or someone else's refiner is a slightly different matter.

Mr. DEMAREST. Thank you very, very much.

Mr. DINGELL. The Chair recognizes Mr. Vlcek.

Mr. VLCEK. Mr. Sigler, I would like to get back to your statement on page 6 where you talk about differential pricing.

In the second full sentence, you say, "The specific proposal as outlined would appear to require cost-justified differential pricing between all classes of trade throughout the entire United States. You go on to criticize that.

If the committee set up a pricing mechanism which was based on a regional or a market region concept where you wouldn't have to require cost differential prices between all classes of trade throughout the United States but, rather, for all classes of trade within a particular market region, would this still have the same sort of problem that you are talking about here?

Mr. SIGLER. Yes; it would. Even with that alteration, this proposal would interfere very significantly with the market mechanism. It would rigidly restrict differentials in pricing. It would virtually require cost justified pricing. It would raise an almost impossible task of determining what unit costs were at each level.

I do not believe it would solve the problem I assume it is intended to solve and that being subsidization of the retailer.

Mr. VLCEK. You seem to be focusing on this problem of cost differential and determination of cost. You mentioned unit cost several times.

Let me describe to you another possible alternative, and that is, in addition to the horizontal type of approach that appears in alternative 2, a vertical approach whereby refiner could not price below a differential when pricing with respect to a wholesaler and pricing with respect to a directly supplied retailer.

The prices charged both of those could not be less than the differential based on the average cost of marketing and distribution services provided to the retailer.

In this case, the cost factor is the average cost of marketing and distribution.

Again, from what you have said previously, this would have the same type of problem in the cost determination that you talked about?

Mr. SIGLER. Yes; I think it would still have problems of cost determination.

Unit cost, which is what you have to be dealing with, is a function of absolute cost and volume and, as your volume changed either in the system or in a unit, depending on how the law requires you to calculate it, your cost would change.

Mr. VLCEK. Almost on a daily basis?

Mr. SIGLER. Virtually on a daily basis. I think the rigidities that would be forced upon petroleum marketing would be perhaps unenforcible and certainly highly destructive to the best interests of the consumer.

Mr. VLCEK. In what sense would this sort of vertical pricing or cost differential pricing mechanism be destructive of the interest of the consumer?

Mr. SIGLER. It would simply put rigidities in the system; it would decrease the efficiencies of competition. I think it would potentially make free entry much more difficult for a new competitor.

Mr. VLCEK. Why is that?

Mr. SIGLER. As an example, depending on which of your proposals become law, when a new service station is open it has very high fixed cost and very low volume. So, on that day its costs would be rather high on a unit basis.

Presumably, the owner would be prohibited from decreasing his margin in trying to build up a business, which is something that benefits the consumer.

Mr. VLCEK. It is possible that there are situations in which you may want to price below cost in order to either increase market share or protect market share; is that true?

Mr. SIGLER. I think it is true in the latter; to protect market share it may be necessary to price below cost, patricularly since cost is a function of volume and absolute cost.

Mr. VLCEK. I would suggest that the Supreme Court has agreed with that. In Standard Oil Co. v. E.T.C., 340 U.S. 231, at 249, the Court said:

For example, if a large customer requests his seller to meet a temptingly low price offered to him by one of his seller's competitors, the seller may well find it essential, as a matter of business survival, to meet that price rather than lose the customer. It might be that this customer is the seller's only available market for a major portion of the seller's product, and that the loss of this customer would result in forcing a much higher unit cost and higher sales price upon the seller's other customers.

I gather that is the kind of thing you are talking about.
Mr. SIGLER. That is correct.

Mr. VLCEK. On another point, you appropriately pointed out the semantic problem you are having in dealing with rack pricing and functional pricing, so I won't come back to that.

One of the criticisms we have heard of rack pricing is that it would destroy the present marketing of branded product system that exists, patricularly among some of the very large integrated refiners. Will you comment on that criticism.

Mr. SIGLER. Mr. Vlcek, I don't share that view. On the other hand, Continental is a relatively small force in the market, particularly in major marketing styles, and I can only tell you that we don't see it that way, but perhaps some of our competitors do.

Mr. VLCEK. Perhaps it would be more appropriate that I ask them when they appear.

Mr. SIGLER. I would suggest that you do that.

Mr. VLCEK. Thank you, Mr. Chairman.

Mr. DINGELL. Mr. Sigler, the Chair thanks you for a very thoughtful and excellent statement.

You have made certain suggestions with regard to the period of lease terms that I think merit careful consideration by the committee, also.

We thank you for your help.

Mr. SIGLER. Thank you, sir.

Mr. DINGELL. The subcommittee will stand adjourned until the hour of two o'clock.

[Whereupon, at 12:35 p.m., the subcommittee recessed, to reconvene at 2 p.m. the same day.]

AFTER RECESS

[The subcommittee reconvened at 2:15 p.m., Hon. John D. Dingell, chairman, presiding.]

Mr. DINGELL. The subcommittee will come to order.

This afternoon, we have a panel before us to continue testimony with regard to H.R. 13000 (Dingell, et al.), the Petroleum Marketing Practices Act; S. 323, the Fair Marketing of Petroleum Products Act; H.R. 12712 (Devine, et al.), Gasoline Dealers' Protection Act of 1976; H.R. 612 (Litton), a bill to provide for protection of franchised dealers in petroleum products, and similar and related bills. Gentlemen, we are very pleased that you are all with us. The Chair expresses the thanks of the committee.

If you will, please, for purposes of assisting our reporter, identify yourselves, we will be pleased to receive your statement.

STATEMENT OF A PANEL CONSISTING OF ROBERT G. GRIFFIN, VICE PRESIDENT, MARKETING, STANDARD OIL CO. (OHIO); JOHN H. DEWELL, VICE PRESIDENT, CITGO RETAIL MARKETING, A DIVISION OF CITIES SERVICE CO.; AND CHARLES J. LUELLEN, GROUP VICE PRESIDENT, ASHLAND PETROLEUM CO., A DIVISION OF ASHLAND OIL, INC., ACCOMPANIED BY FRED DROGULA, COUNSEL Mr. GRIFFIN. Thank you, Mr. Chairman.

My name is Robert G. Griffin and I am marketing vice president of the Standard Oil Company (Ohio). I am pleased to have the opportunity to appear before you to provide my comments on H.R. 13000.

I plan to keep my presentation brief by covering only the major issues involved in this bill. I am, however, submitting a detailed written statement which covers all the points I wish to make and I ask that it be made a part of the official record of this subcommittee.

Mr. DINGELL. Without objection, the full statement will appear in the record.

We will recognize you for such summary as you choose.
Mr. GRIFFIN. Thank you, Mr. Chairman.

Let me begin by citing my belief that we are living in a strange phase of history in the evolution of the petroleum marketing system in the United States. The oil industry has, in spite of its mistakes, provided energy to our citizens in abundance and at reasonable cost.

Now, however, profound changes are occurring in the marketplace more rapidly than has ever before been the case. They are motivated by economic pressures to reduce costs and in reaction to the changing attitudes and preferences of our customers.