I recognize the need to ensure small businesses opportunity

to purchase their stations if major companies wish to sell their property. The provision providing the dealer with the right of first refusal to purchase the station is therefore a necessary requirement in the bill. Furthermore, I believe it is well within the overall goals of the Small Business Act to provide SBA assistance, where necessary and feasible, to service station operators purchasing their property. The amendments to the Small Business Act contained in this legislation are an effective and justified means of accomplishing this end. SBA has recently moved towards focusing our programs more on specific national problems, whether they be the problems of race or sex discrimination or energy, and this provision is a step in this

direction.

The so-called open supply and rack pricing provisions of the legislation are of major concern to small business. Open supply will forever change the nature of gasoline marketing by dramatically

increasing the flexibility

and competitiveness

of the retail

industry. For years we have seen the major oil companies switch

supplies among themselves.

We all know nearly all brands of gasoline

are identical. Opening up the supply system will have significant beneficial effects for both small businesses and consumers shopping for the best buy in gasoline.

Perhaps the most potentially controversial section of the bill is the provision establishing rack pricing, that is, similar prices for similar quantities of product. On face value, this measure is a basic step towards ensuring equity in the marketplace.

We believe it would have a generally beneficial effect and reduce the spread in retail prices. It would also clearly place a great deal of competitive pressure on some wholesalers and jobbers who in recent

years have been moving more and more, into retailing. Over the longer term, however, this measure may tend to eliminate arbitrary price distortions in the marketplace and induce greater competition between jobbers, retailers, and other marketers during periods of adequate gasoline supply. Obviously this increased competition will have significant consumer benefits, as well.

In the final analysis, this legislation provides badly needed measures to preserve and open up competition in the retail gasoline market. In such a heavily regulated industry sector one may wonder why further government intervention is necessary. There is no question in my mind about the answer. For although the current price and allocation regulations, burdensome as they are to small business, ensure at least some level of supply to existing stations, they simply do not and never were intended, to address the complex anticompetitive forces in the gasoline market place.

When price and gasoline controls expire, which is currently scheduled for Fall 1981, many retail dealers may find themselves without a source of supply. With no government allocation system, small business will have no other means of leverage with their major suppliers. Considering the voluminous complaints regarding major refiner marketing practices, I have great cause for concern regarding the impact of decontrol.

That is why decontrol of gasoline must be conditioned upon passage of this legislation which will protect small business from the dominant power of the integrated oil companies.

Though I could spend much more time on this critical small business issue, that concludes my comments for the time being. I

would be glad to answer any questions members of the Subcommittee may have.

Thank you for this opportunity to testify.

EXHIBIT 3

U.S. GOVERNMENT

SMALL BUSINESS ADMINISTRATION

WASHINGTON, D.C. 20416

Mr. Leonard Coburn, Acting Director

Office of Competition

U.S. Department of Energy

1000 Independence Avenue, S.W. Washington, D. C. 20585

Dear Mr. Coburn:

Thank you for forwarding to my office for review a copy of Part II of the study mandated by Title III of the Petroleum Marketing Practices Act (P.L. 95-297).

I appreciate the report's responsiveness to the suggestions in our letter of April 29, 1980, regarding the inadequacy of Part I of the study. Separation of the data for the eight refiners who are most aggressively involved in expanding their company-owned retail operations (Chapter IV) and inclusion of the discussion on predatory costing techniques (Chapter VI) provide in our opinion a more complete study. However, although the Office of Competition has obviously invested an extensive amount of time and effort in preparing Part II, it is our position that the study has inadequately addressed the central issue of refiner control cf the petroleum marketplace.

We believe that "predatory costing" is the predominant vehicle used to assert such control. With data that are scant by the authors' own admission, the report attempts to disprove that predatory costing occurs by stating that 1) the "mutuality" principle of contracts works to prevent predatory (excessive) rent increases by refiners; and that 2) the mandatory branding service charges usually contained in dealer tankwagon prices (DTW) are justifiable.1/ We disagree with this analysis, and contend that anti-competitive practices including predatory costing are indeed occuring and that refiners benefit from such practices.

Regarding predatory rent increases, we disagree that a lessee dealer exercises equal or even similar economic leverage with his supplier/landlord in the execution of a contract or contract renewal, as "mutuality" implies. The report contends that cost-of-living, property value, and construction and maintenance

1/ Report for Congress, mandated by Title III of P.L. 95-297, unpublished draft dated December 15, 1980. Office of Competition, U.S. Department of Energy. Chapter II. (Hereafter, "Report.")

cost increases have been fairly reflected in recent dealer rent increases. However, the record compiled by Rep. Berkley Bedell's Small Business Antitrust Subcommittee during its 1979 hearings on petroleum marketing practices provides substantial evidence to the contrary. Tables 6-11 and 6-12 of the Title III study indicate that the above factors have increased 85 to 100 percent annually for the past three to five years, while the Subcommittee record is replete with testimony from independent service station dealers whose rental costs increased from 200 to 300 percent from one year to the

next.

Mutuality simply does not exist in this situation. Many witnesses before the Subcommittee testified that the oil companies often ignored the terms of their leases and adopted a "take it or leave it" attitude toward such unilateral cost increases as conversion of rental from a per-gallon basis to flat fee and forced assumption by the dealer of maintenance costs which were formerly the responsibility of the landlord. Moreover, it has been the experience of this office that dealers who complain are often the subject of the most significant increases. Since there are often no alternate suppliers, the dealer has little choice. The refinersupplier has too much market power for the dealer to be truly independent or equal.

Al

Regarding predatory branding, the data used to conclude that it does not occur are, as stated, scarce and inconclusive. though an internal company document cited in the report3/ mentions that 2¢ to 2¢ per gallon might be an appropriate figure for the cost/value of branding, there are no hard data on this; the price is set arbitrarily by refiners. There are also no significant data on non-primary branded dealers' benefits from branding to compare with those of primary branded dealers, and only a conjectural explanation is given for that lack of data. In sum, average data from dealers in only one SMSA (Atlanta) were used to support the statement that "[i]t...appears that the "brand" is not a burden on [dealer] profitability."4/

2/ U.S. House of Reprsentatives. Hearings on Gasoline Marketing Practices, August 16, 26, 28, 1979. Committee on Small Business, Subcommittee on Anti-trust and Restraint of Trade Activities Affecting Small Business. 95th Congress, 2nd Session, Washington, D.C.

1978.

3/ Report, Chapter V, page 14.

4/ Report, Chapter VI, page 29.