ful legal analysis of that existing situation under the RobinsonPatman Act, and understand just how dreadfully complicated it all is. We are so afraid that there will be innocent victims because of the pricing prohibitions that that act will lay on people and you should be very careful before doing anything. Thank you.

Mr. BEDELL. Thank you very much.

Without objection your statement will be inserted into the record at this point.

[Mr. Blum's prepared statement follows:]

PREPARED STATEMENT OF JACK A. BLUM, GENERAL COUNSEL, INDEPENDENT GASOLINE MARKETERS COUNCIL

My name is Jack Blum. I am the General Counsel of the Independent Gasoline Marketers Council, a trade association of nonbranded independent marketers of motor gasoline. Council members operate groups of retail stations under their own brand name. Most members operate in more than one state and all of the member companies are independent, many of them family owned. We, too, are part of the small business constituency of this subcommittee.

It is essential to consider the pending bill and the pleas for assistance from branded lessee dealers in the context of today's gasoline market. Gasoline stocks in primary storage are at an absolute all-time high level of 285 million barrels.' This number does not include inventory held by wholesalers, retailers and end-users. Gasoline demand has been declining steadily for the last two years. In March of 1981, the nation is using 15.1 percent less gasoline than we used in the crisis period of March 1979. In fact, present gasoline demand is at a level which three years age would have been considered a national emergency requiring rationing. Refinery runs are at the 70 percent level and a number of refineries have been mothballed. Inasmuch as consumers are using less gasoline, it stands to reason that these are difficult times for everyone in the business of refining, marketing and distributing the product. The volume declines mean that marginal businesses will go under and larger firms will be forced to restructure and redirect their resources in order to survive. No one I talk to expects these trends to change in the foreseeable future. In fact, the decline in consumer demand will continue.

Members of the Council have been systematically closing marginal retail units over the last two years in response to these fundamental market changes. They have also been cutting costs to the bone to remain competitive. A shakeout is inevitable and no legislation can or should attempt to salvage marginal, inefficient refiners, marketers or distributors.

We believe that many branded dealers are seeking protection from these economic fundamentals by talking about competitive problems, many of which ended when price and allocation controls were removed. The price and allocation regulations promulgated in 1973, had a "class of purchaser" rule which cast differentials among "classes of trade" in regulatory cement for most of the seven-year period of DOE regulation. As a result, jobbers as a class were given the May 15, 1973 discount until this Fall by regulation. The jobbers took advantage of this regulatory protection to expand their businesses but the regulations also protected the supplies of branded dealers and in some cases required refiners to sell them gasoline at prices far below market clearing levels.

When price and allocation controls were lifted most refiners eliminated the jobber differential and have been selling gasoline at a "rack price" to all comers. Six weeks of experience with a competitive pricing system is not enough to tell us whether the problems which the dealers have raised have been solved. We feel that much more experience with a free market is necessary before Congress tries to legislate another pricing system and before we will be able to separate competitive problems from overall economic conditions.

The legislative solution proposed in H.R. 1362 would assist troubled branded dealers by curtailing their competitors and raising consumer prices. It would sacrifice the competitive edge of our sector of the small business community without substantially changing the underlying economic reality of declining sales and declining demand, the real cause of the branded dealer's problem.

The competitive issue the branded dealers pressing for this bill use as their major argument, is that they compete with their suppliers who sell them product at a price higher than they transfer it to their own stations. We face the same problem

1

By comparison in 1973, when consumption was higher, stock levels were significantly lower.

competing with refiner direct stations and it can be solved with simple vertical divestiture legislation.

Instead, the bill purports to control the transfer price of gasoline to supplier owned stations by making it unlawful to sell to a directly owned unit at prices lower than the daily wholesale price.

As written, the transfer pricing provisions will not work. There is no legal prohibition on downstream operations losing money. Thus, if a high wholesale price is posted, all that will occur is that profits will be taken at the wholesale or refinery level. In fact this is how some wholesalers and refiners avoided the "class of purchaser" rules imposed by DOE. It is why legislation which seeks to solve the problem of vertical integration short of requiring divestiture cannot work. Ironically, we believe the provisions of H.R. 1362 imposing price rigidity will work and competition among the various suppliers will be substantially reduced.

H.R. 1362 would impose drastic changes on the entire wholesale market. It would limit competition among refiners and limit the ability of other types of other independent marketers and distributors to compete effectively by bargaining with their suppliers.

As you know, gasoline is a fungible commodity. The price of gasoline changes on a continuing basis as does the price of other commodities such as corn, wheat and soybeans. At any given time, the price depends on the suply and demand situation in the marketplace.

Our members play refiner suppliers off against each other to buy product at the lowest possible price. They are able to do this because they own their own stations and use their own brand names. They adopted this style of business operation to get just this advantage. The branded dealers have chosen to tie themselves to a single supplier and have as the result of their free choice surrendered their ability to bargain. They should not be protected from the consequences of their business decision.

The proposed legislation will end the present fast moving marketplace and create a system of daily pricing. Deviations from the daily pricing by suppliers will have to be defended and justified and an inappropriate price reduction will subject the offending firm to penalties.

Historically, price discrimination against small retailers has been covered by the Robinson-Patman Act. The Robinson-Patman Act applies to the gasoline business as it does to all other businesses. The retail dealers who are pressing for this legislation claim the Robinson-Patman Act is inadequate because it does not cover direct competition by a supplier. But as I have indicated, the proposed bill won't solve that problem either because it cannot prevent a refiner or wholesaler from losing money at the retail level.

The leading case on the applicability of the Robinson-Patman Act to gasoline marketing is Standard Oil Co. v. FT.C., 340 U.S. 231, 71 S.C. 240 (1951). In that case, the Federal Trade Commission alleged that giving a jobber a discount not available to a dealer was a violation of the act. The case turned on the "good faith meeting of the competition" defense. The court said that the refiner's discount to the jobber was to keep his business and was therefore justified.

The purpose of the defense is clear. It permits a supplier to keep his customer by meeting a competitor's lower prices. The court opinion in Standard Oil reviews the legislative history of the Act and in the review footnotes the testimony of the then Assistant Attorney General in charge of antitrust who said in testimony, “While we recognize the competitive problem which arises when one purchaser obtains advantages denied to other purchasers we do not believe that the solution to this problem lies in denying the sellers the opportunity to make sales in good faith competition with other sellers".

His position and the position taken by the court supports this underlying economic premise of the antitrust laws.

The Standard Oil opinion then seeks to reconcile the Robinson-Patman Act with underlying antitrust philosophy and concludes, at p. 250: "There is nothing to show a congressional purpose in such a situation, to compel the seller to choose only between ruinously cutting its prices to all customers to meet the price offered to one or refusing to meet the competition and then ruinously raising its prices to its remaining customers to cover increased unit costs."

Finally the court says that even if the discount made to meet competition at one level causes competitive injury at other levels the defense is absolute.

The Standard Oil case was recently reinforced and broadened by the holding in Great Atlantic and Pacific Co. Inc. v. FT.C., 440 U.S. 75, 99 S. Ct. 925 (1979). In that case A & P told its supplier Borden that it had another bid for private label milk and that Borden's bid was "so far out of line it is not even funny."

Borden rebid at a far lower price and the FTC went after A & P for misleading Borden and inducing an illegal discount. In dismissing the complaint the court said at p. 933: "Imposition of § 2(f) liability on petitioner in this case would lead to price uniformity and rigidity.

In a competitive market, uncertainty among sellers will cause them to compete for business by offering buyers lower prices. Because of the evils of collusive action the court has held that an exchange of price information among competitors violates the Sherman Act. U.S. v. Container Corp., 393 U.S. 333, 89 S.Ct. 510. Under the view advanced by the respondent, however, a buyer, to avoid liability must either refuse a sellers bid or at least inform him that his bid has beaten competition. Such a duty of affirmative disclosure would almost inevitably frustrate competitive bidding and by reducing uncertainty lead to price matching and anticompetitive cooperation among sellers."

As the meeting of the competition defense is framed in H.R. 1362 it adds language not found in the existing meeting of the competition defense. The added words are "but not to exceed" (p. 6 line 19). Inasmuch as existing law prohibits using the defense to exceed the discount offered by a competitor we must conclude this is an attempt to require collusive behavior by suppliers and disclosure of competitive price information if the defense is to be invoked. The addition of these words would signal a major departure from existing antiturst policy.

I urge every member of this committee to read these cases to gain an appreciation of the competitive and legal problems which will be created by attempting to narrow the meeting of the competition defense. I am sure that no member of this committee would want to be responsible for legislation which encouraged gasoline price fixing and in my judgment that is what this bill would do.

We believe, further, that the legislation as written would lead to frivolous lawsuits based on branded dealers misunderstanding of exchange transactions. Many of our members pick up product at refinery racks and pay less than the going rate at that refinery rack at that time for the product because they have in fact purchased the product through an exchange with another supplier at another location. We can easily foresee a situation in which lower-priced product received through an exchange is perceived by a dealer as a violation of the rack pricing provision and becomes the basis for suit. In these inflationary times, Congress should not encourage litigation against companies which cut prices.

Ironically the bill will also prevent jobber and terminal operator suppliers from helping their own dealers meet lower street prices charged by refiner competitors. That is because the good faith meeting of the competition defense in this bill is limited to "price reductions offered to independent wholesale purchasers in good faith, to meet but not to exceed, competing price reductions offered by others to those independent wholesale purchasers." It does not cover reductions by a jobber to enable an individual dealer to lower his price so that he can compete with a refiner run retail unit across the street. Indeed the good faith meeting of the competition defense in existing law was held to apply only to wholesalers and to prevent discounts from wholesalers to retailers which would enable a retailer to meet a competitor's lower street price. See F.T.C. v. Sun Oil Co., 317 U.S. 505, 80 S.Ct. 358 (1963).

To expand this holding to jobbers and terminal operators would create serious problems for jobber supplied dealers and for ultimate consumers who would not enjoy the benefits of price competition.

There is a deep seated suspicion throughout our organization that the real complaint of the branded dealer is not against his major competitive supplier but against his nonbranded competitor across the street who sells at a lower price. The branded dealer has made his business decision to operate as the distributor of a single major brand product. His decision deprived him of bargaining power. Other independent businessman including our members have chosen a different business strategy and are making it work. Their mode of operation gives them greater market flexibility and bargaining power. This committee should not solve the business problems of the branded dealer by depriving other independent businessmen of their flexibility.

The Petroleum Marketing Practices Act and this legislation contain "right of first refusal" provisions which give the dealers the option to buy retail units which their suppliers decide to sell. This bill would add Small Business Administration financing to assist the dealer in exercising the legally granted purchase option as divorcement is accomplished.

As we understand the original intent of the legislation, it was to allow dealers who wish to remain in business to buy the stations they operate from their suppli

ers.

In practice the Petroleum Marketing Practices Act "right of first refusal" has become a source of mischief and should, we believe, be repealed. Further, the "first refusal" provisions of this bill should be studied carefully.

Several of our members have negotiated for the acquisition of groups of stations from major companies and from branded jobbers. In at least three cases, competing independent marketers and real estate speculators have gone to a single dealer and offered him a small sum of money to exercise his option. In each of these cases, the dealer had no intention whatsoever of remaining on the premises and, indeed, arranged "back to back" sales of the property to the third party. The third party's sole purpose was to break up the original deal. This use of the PMPA is contrary to the intention of Congress and should be stopped by an appropriate amendment. We also believe that a provision must be added to this bill to require a dealer who exercises his option and gets SBA financing to remain in business on the premises for at least one year and to impose penalties on third parties who attempt to buy the dealer's option or use the dealer as a "straw man" to destory another transactions.

This committee should be aware that the same dealer organizations which are seeking this legislation are concurrently seeking a variety of protective bills in various state legislatures. These bills run the gammut from the continuation of Federal allocation and price controls on the state level to a prohibition against chain operations of retail units. If each of the fifty states adopts a different bill the operations of companies in our organization will be very difficult. A number of them operate several stations in each of as many as forty states. They cannot deal with forty different state regulatory schemes. If this committee decides to report a bill, we ask that it include a provision preempting state action in this area.

Finally, we are hard pressed to understand how this committee, which is watching the present Administration propose taking away the divestiture power of the Federal Trade Commission and watching O.M.B. cutting its budget to the bone can in good faith give the Federal Trade Commission the task of enforcing these complex proposals. The proposed budget levels will curtail all existing antitrust enforcement which we and the branded dealers need for our survival. The public interest would be far better served by fighting to increase the F.T.C.'s budget and by protecting existing antitrust legislation from the assault of the industries it is policing so that the entire small business sector can survive the coming hard times. TESTIMONY OF R. TIMOTHY COLUMBUS, COUNSEL, SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA Mr. COLUMBUS. Mr. Chairman, I will try to summarize this. My last name is Columbus and I am here on behalf of the Society of Independent Gasoline Marketers of America. SIGMA is a trade association comprised of approximately 265 independent private brand marketers and chain retailers of motor fuels. SIGMA members operate in 49 of the 50 States and their sales constitute between 10 and 15 percent of the retail market for motor fuels. In the context of the petroleum industry SIGMA's members are small businessmen and as such they certainly recognize and appreciate the chairman and the subcommittee's concern regarding the competitive viability of independent small businesses in that industry. However, SIGMA is compelled to oppose the enactment of H.R. 1362. SIGMA views this legislation as protective of the special interests of a limited number of competitors in the motor fuel market. Moreover, the protection which would be afforded these competitors by the bill is anticompetitive and anticonsumer.

Mr. Chairman, SIGMA's opposition is based on a fundamental problem with the Government intervening in the petroleum marketplace at any time in which adequate supplies exist.

Current conditions certainly indicate that adequate supplies are adequate. Inventories are at all time highs with about 285 million gallons of motor gasoline in inventory and it doesn't take into account secondary storage. Our demand is down dramatically. I believe API's demand figures for the month of February 1981,

showed about a 6-percent decrease from February 1980, which again was down significantly from 1979. And of course the refinery runs at about 69.1 percent of capacity which is a 30-year low. I am informed by the members of the association that competition in the retail market has never been fiercer than it is today. SIGMA is forced to accept as an economic reality, in light of declining demand and very fierce competition that in the retail market there will be a number of business failures. Not only of retail dealers but of chain retailers, jobbers, and refiners. It is SIGMA's deep concern that action such as that proposed in this legislation essentially is a legislative proportion of market shares, would be detrimental in a number of ways.

First of all, SIGMA has a big problem with any legislation setting a precedent to limit participation in the marketplace.

Quite candidly, Mr. Chairman, the members of the association view themselves as the ultimate target of this legislation or at least the proponents of this legislation. Simply stated, Mr. Mulit earlier today stated to this committee that the dealers problem really wasn't the majors, it was us. Apparently other people think that is true. Last Wednesday the Connecticut General Assembly, General Laws Committee reported a bill that, if enacted, will prohibit the operation of a retail outlet by any entity which sells motor fuel at more than one level of distribution.

Simply stated, it is a tough market. It is going to get tougher and only the most efficient people will survive.

I certainly ask that my whole statement be put in here. Mr. Chairman I wasn't quite ready and Mr. Sostek had to leave.

With respect to divorcement, SIGMA simply believes the case of predatory subsidization has not been made. I would view that the making of that case would be a condition precedent to taking the kind of radical action proposed in this legislation.

I understand that the Federal Trade Commission's presentation yesterday was less than satisfying. Nevertheless, I think it is important to note that every agency of the Federal Government todate that has been charged with responsibility for maintaining competitive structure of the industry has come out strongly opposed to divorcement provisions of this legislation and the Department of Energy title III study, I know again that you all are less than happy with that-still represents to the best of our knowledge, the only serious undertaking of the study of subsidization in the petroleum industry in recent years and they came up with a negative answer.

Therefore, my client is required to urge you not to enact those provisions of the bill.

With respect to rack pricing provision, I would like to be a little more specific. Specifically, I am talking about section 3(c) of the bill. As it has been mentioned in the last 8 years, the petroleum industry has reflected a massive experiment in price controls undertaken by the industry and the Federal Government. I think that it is important to note that right up until the time of President Reagan's deregulation order DOE was still fine tuning this pricing system. SIGMA urges you not to legislatively undertake the imposi tion of a new pricing system. There are lots of good reasons for that. I think the first is that we have never seen anybody come up