providing such protection to dealers and which was also the subject of the Department of Energy's title III study.

There are at least two different types of phenomena often labeled "subsidization." It is important to distinguish these because evidence exists for one type but little exists for the other.

What we call "downstream subsidization" is the hypothesis that in their attempt to maintain high prices for crude oil, major companies used their downstream distribution system as a mere adjunct to the generation of crude profits. Consequently, marketing investments were unable to earn competitive returns.

However, we have not seen support for the other type of subsidization investigated and now rejected in the DOE report. This type of "predatory" subsidization is argued to result from major selling gasoline at retail prices that does not cover retail costs in order to drive their own dealers out of business.

Because this second type of subsidization has not been demonstrated, the Bureau cannot support prohibition on refiners' operation of retail outlets proposed in the present legislation. As DOE's title III study discussed, the demise of a large number of service stations in the 1970's was partly due, at least, to natural market forces and also to some features of DOE regulations. We would also add that the major oil companies seemingly over-built stations in the past as a result of their decision to engage in downstream subsidization. When the majors lost their access to additional barrels of low cost crude oil, it could be argued that they no longer had any reason for perpetuating their former inefficient form of marketing.

Although the trend to high-volume and self-service stations is therefore not surprising, the fact that this trend results, in part, from an increase in the number of employee-operated, rather than franchised, stations is less understandable. There is simply no convincing evidence that franchisees cannot run high-volume operations as efficiently as refiners, who have additionally not extensively operated retail stations. Some of the most successful nonbranded high-volume operations are run by independent businesses with no refineries.

Because we cannot support the divorcement provisions of the bill, our support for the open-supply provisions must remain, at best, lukewarm. As I have already mentioned, open-supply legislation might create new incentives for vertical integration into employee-operated stations.

There would be no method of distinguishing integration to avoid the effect of this bill from integration undertaken from procompetitive reasons, such as penetrating a new market. Thus, open supply, without more, might unduly increase company retail operations. And, open supply with some type of cap on direct operations to limit evasion of the provision, would require new and burdensome regulations on an industry recently deregulated.

Another provision of the bill would require suppliers to maintain a single wholesale transfer price for each type of motor fuel at each of its transfer allocations. Variations in this transfer price would only be allowed based on variations in cost, in order to meet competition, or for remuneration for the use of the supplier's trade

mark. Any sale or transfer at prices not comporting with this provision would be unlawful.

While the Robinson-Patman Act covers much of the same territory as the proposed legislation there are at least two major differences. Robinson-Patman requires an injury to competition, and does not appear to cover intracompany transfers. We believe these differences are significant. Evidence of competitive harm should exist before enforcement is mandated.

Moreover, simply applying a Robinson-Patman type provision to intracompany transfers might only encourage the companies to change their accounting procedures rather than change any practices in the marketplace.

The transfer price provision in combination with the prohibition against subsidization would, it is true, have a more substantial effect. In essence, a supplier could not refuse to sell at wholesale at the transfer price and then sell the same supplies at retail at a lower profit than could have been realized at wholesale. In perhaps the simplest interpretation of this prohibition, a supplier would have to sell wholesale if the additional revenue obtained from the retail sale would be less than the additional cost of making the retail sale.

Compliance with such a provision, however, would be extremely difficult, if not impossible. Consider the decisions a single supplier would have to make before determining whether to sell a cargo wholesale or retail. The supplier would first have to know all costs from the point of transfer to the point of sale, for each individual cargo subject to sale, and from every transfer point where a purchase offer might be made.

In order to calculate such costs, the supplier would not only have to determine constant costs but also those costs which vary with conditions. For instance, if the retail volume sold at a given station should unexpectedly drop, the supplier's unit cost might increase significantly, thereby violating the subsidization standard. If the supplier attempted to lower retail price to increase volume, per unit revenue would decline, again threatening compliance with the subsidization rule.

In contrast to a supplier's need under the proposed legislation to predict immediate future profit on each sale, accounting techniques could only provide a historical perspective over a broad range of sales for a significant period of time.

Consequently, we neither believe it would be possible for a refiner to comply with the retail subsidization provision set out in this bill, nor do we believe the FTC could develop guidelines which would insure refiner adherence to the subsidization standard.

Finally, now that decontrol has been mandated and regulatory distortions have been somewhat limited, or abated, we will be scrutinizing gasoline markets for signs of traditional antitrust violations such as sales below cost, price discrimination, boycotts, and conspiracies. While we recognize that these traditional remedies are somewhat limited and may not adequately address the competitive problems that this bill attempts to correct, they appear preferable to the legislation as presently worded. This concludes my prepared statement.

Mr. Schildkraut, who is an expert on my staff in petroleum competition matters, and I would both be pleased to answer any questions, Mr. Chairman, you and the subcommittee members might have.

Mr. BEDELL. Thank you very much. Mr. Mavroules?

Mr. MAVROULES. Thank you, Mr. Chairman. I do have a couple of questions of Mr. Rowe.

First off, let me get your position very clear on the record. Are you speaking in opposition of this bill?

Mr. RowE. Yes.

Mr. MAVROULES. You are. Just so that we can have it on the record. I think that it was quite ambiguous. You were all over the place in your testimony and I didn't quite understand where you were coming from.

Mr. Rowe. I am very sorry if it is ambiguous to you.

Mr. MAVROULES. No, it is all right. Maybe it was I and not you. I do have a couple of questions here. You know we have the classic case of the integrated refiner that is in direct competition with its own dealer and all afternoon my colleague, Mr. Tauke, has been talking about this. They are able to control that dealer's rent, supply, price of product, credit advertising, et cetera, et cetera, do any of the antitrust laws now on the books supply-let me go further with this second question. If so, is the witness familiar with any of them being used successfully?

Mr. SCHILDKRAUT. The only provisions under the antitrust law that might apply are on retail price maintenance. In general, when you talk about conditions of service at the station, the use of the pumps, the use of the tanks, the number of hours the station would have to stay open, the antitrust laws would not apply at all.

Mr. MAVROULES. Could you comment on the relevance and effectiveness of the following laws, the Petroleum Marketing Practice Act, the Robinson-Patman Act, the Sherman Act, and the Clayton Act?

Mr. SCHILDKRAUT. The effectiveness?

Mr. MAVROULES. The effectiveness.

Mr. Rowe. The Robinson-Patman Act, as we pointed out in the testimony, first of all, deals with discrimination among companies, among competing classes of customers-prohibiting illegal primary, secondary line discrimination and the like. There have been Robinson-Patman cases in the past that covered such discriminations but they would not cover, as I understand it, intracompany discriminations, if you will, which apparently are the purpose of some of the provisions of this bill.

Mr. MAVROULES. Petroleum Marketing Practices Act?

Mr. Rowe. As I understand it, the Petroleum Marketing Practices Act essentially dealt with competition-not necessarily just antitrust perspectives-by mandating the study which we had seen as the DOE title III study. It does provide certain protections which do not concern antitrust prescriptions.

Mr. MAVROULES. Let me be very fair and very candid if, perhaps, you want to articulate your position more fully we could get that for the record also.

Mr. Rowe. Certainly.

Mr. MAVROULES. Also the Sherman Act and the Clayton Act, please.

Mr. Rowe. Yes, with respect to conspiracies and acquisitions. Again, subjects of the proposed bill, which I have indicated in the testimony, to some degree, are not covered by present law.

Mr. MAVROULES. OK. In view of your answer to me and to the committee, let us get back to my original question and that is the control that the dealers rent, supply and price of product, credit and advertising, how come we have those discrepancies if indeed they are protected by these acts?

Mr. SCHILDKRAUT. By and large they are not protected by those acts.

Mr. MAVROULES. Let me just ask one final question. There are those who contend that today there is no bargaining between refiners and marketers and of course we hear that all the time, that the contract negotiating process is one-sided. The subcommittee, earlier this year, sent the FTC information concerning the new Texaco wholesaler contract-let me just cite you one example. And this is one request that the subcommittee received. It is one of many hundreds of requests, and I will not go into the name but it is here for the record. It says here the dealer really has no opportunity to negotiate the price but was given the price on a take it or leave it basis. Naturally, we are accustomed to these negotiations with the major oil companies, since most of their leases and dealer supply agreements are presented on a take it or leave it basis, and the independent dealer really has little, if any, bargaining power. Could you comment on that kind of request that comes before the subcommittee, counsel?

Mr. Rowe. Well, as we indicated in our testimony it is true that there is unequal bargaining power between suppliers and dealers, and as we understand it the legislation would attempt to redress some of these. However, we are concerned with the antitrust significance and the competitive significance of this bill. As we see it the legislation would create new difficulties in terms of divorcement and in terms of trying to maintain competition in the market, which would contravene, perhaps the helpful purposes of the bill.

Mr. MAVROULES. Finally-Mr. Chairman, perhaps I can just ask one final question. Is there something that you could recommend to the subcommittee as part of your thoughts in making this a more effective piece of legislation? Or, perhaps you could consider that and give that to the committee, on the record.

Mr. Rowe. I most certainly wish we could. However, as we pointed out in our testimony-and I would like to be very clear about this-we do applaud and endorse the open supply concept. We have wrestled with this concept for some time in the context of determining where the competitive problems can be dealt with, in the petroleum industry.

However, we have found no way, at present, of undoing the competitive problems, and the difficulties that exist at the petroleum marketing level in retail gasoline sales, without running into the difficulties that the specific provisions of this bill would entail. Mr. MAVROULES. You are not willing to make any suggestions to the committee?

Mr. RowE. We have no answers at present.
Mr. MAVROULES. Thank you, Mr. Chairman.

Mr. BEDELL. Mr. Bereuter?

Mr. BEREUTER. Thank you Mr. Chairman. I guess I would begin by saying that I regret that we do not have testimony of this complexity provided to us in advance. I do not find that it communicates well with me what your intentions, recommendations, or thoughts are on the subject.

Mr. Rowe. I am very sorry for that.

Mr. BEREUTER. I would like to suggest that it might be appropriate for the Federal Trade Commission, the Bureau of Competition to come back to us with additional testimony which attempts to communicate to our legislative body what your views are.

Beyond that, I heard you make a statement that some of the aspects of the proposed legislation violates the existing antitrust statutes. What is the implication of that violation?

Mr. Rowe. Well, there is an exemption from the provision which would free up the dealers' rights to buy product from alternative sources of supply, which, as we understand it, would permit a supplier to continue to maintain the sole supply relationship with the dealer, if that product were offered on reasonably comparable terms to that dealer.

Now the situation that exists and, I think it has been pointed out in previous testimony to this subcommittee, is that presently there is a fairly unequal bargaining relationship between the supplier and the dealer, if the dealer has tanks and facilities placed on the premises which are placed there by the supplier, and it is not easy to acquire alternative sources of supply given these various and certain types of constraints.

Now if you permitted a refiner to continue the relationship under the provision in this bill, it might look to some as if the dealer were being forced to continue the relationship with that supplier. As a matter of fact, that is an issue presently being litigated in the-

Mr. BEDELL. Would the gentleman yield?

Mr. BEREUTER. I will give up.

Mr. Rowe. I will be glad to provide a letter-

Mr. BEREUTER. I would like to know what is the implication-we pass legislation here which is in conflict with existing antitrust statutes-

Mr. Rowe. What is the purpose?

Mr. BEREUTER. What is the impact? Do we set aside provisions of the antitrust statute? Do we obviate it? Do we replace it? Do we substitute this?

Mr. SCHILDKRAUT. It is not clear from the language of the bill. Let me just go back one step and see if I can explain what the problem is. The problem is that right now there is no exception to the exclusive dealing statutes, so that if a supplier came in with equivalent supplies, the purchaser can still say, I don't want your supplies.

Mr. BEREUTER. Don't address a specific issue. I am asking in a general sense. We can't do this because it violates existing statutes of the antitrust act, did I hear that said?