Phillips' dealers also reported that their supplier was engaged in predatory pricing and was subsidizing its direct operated stations. Mr. John Herren of the Ohio Gasoline Dealers Association testified before the Antitrust Subcommittee of the House Small Business Committee that one of his dealers was paying Phillips 91 cents a gallon for gasoline. Fourteen blocks away at a company operated station, Phillips was charging 93 cents a gallon and giving away a free car wash. There was no way that the dealer could compete on service and price with the company direct operation and cover his costs. This section of the report has reviewed the practice of refiners of "selling below cost" and destroying independent dealers and jobbers as they expand their direct marketing operations. Time and again the dealers and jobbers indicated that they wanted no special treatment, but just to have a fair opportunity to compete. There is no way that independents can compete when refiners subsidize direct marketing from profits earned at earlier levels of the petroleum industry. BUY-OUTS AND SHUTDOWNS OF DEALERS The petroleum product shortage starting in early 1979 has reduced, at least for the time being, the problem of economic eviction of dealers resulting from subsidization of direct marketing outlets. While dealers are subject to price and volume discrimination practiced by their suppliers, they are better able during times of shortage to price what product they have to recover their cost and make a profit. In addition, dealers are protected from arbitrary lease cancellations since the passage of Dealer Day In Court legislation in June, 1978. Thus, one might assume that the ability of petroleum companies to further extend their direct marketing would be stopped. These developments may have made it harder, but they have not stopped the plans of refiners to expand direct marketing. With the petroleum products shortages and the Dealer Day In Court legislation refiners have turned to “buy-outs" as a way of eliminating dealers and expanding direct market operations. When a major petroleum company such as Gulf wants a key location as part of its planned expansion of direct marketing operations, the company offers dealers previously unthought of dollar amounts for giving up their stations. For example, Gulf has recently paid dealers from $30,000 to $35,000 for several locations they wanted for direct operations in Atlanta. Good dealers with many years of experience are eliminated through the "buy-out" process. The Dealer Day In Court legislation has had the effect in many cases of merely delaying the termination of branded dealers. After a full 3 year contract following passage of the Dealer Day In Court, refiners wanting to close locations are permitted to do so. The petroleum companies have notified many of their dealers that they will close certain stations at the earliest possible time permitted under the act. This information has discouraged dealers from continuing to develop their businesses and encouraged them to seek employment elsewhere. Knowing that there is no future in these stations, some dealers are willing to take a small cash settlement for vacating the station or simply to abandon the station without any payment recognizing that they have no future with the petroleum company. In the manner described refiners are able over time to shift more volume from dealers to direct company operations, and continue with their program of enlarging their direct marketing activities. PRICE INCREASE TO OPEN DEALERS AND JOBBERS To gain market share and market coverage, the petroleum companies have sold gasoline to dealers who own their properties, as well as through leasee dealers. To compensate these open to buy dealers for the value of the property used in retailing gasoline, refiners have typically paid them an allowance of 11⁄2 to 21⁄2 cents per gallon of gasoline. In some of the large metropolitan markets like Detroit and Los Angeles, these independently owned branded service stations became high volume, price aggressive outlets. As a consequence, while the petroleum companies gained market representation. from open to buy dealers they also created a competitive problem for themselves since they were unable to control price at which this gasoline was sold. With the shortage, and the goal of controlling volume in direct operations, majors are cancelling the traditional discounts given to independent dealers who own their own stations. For example, Mobil has cancelled all discounts given to its open to buy dealers in California and Detroit, Michigan. Other majors including Shell and Texaco have followed suit and have reduced or eliminated station allowances. If dealers who own their own properties are not paid for the capital they have invested in stations, then they will be forced to withdraw from the industry leaving it controlled by a handful of suppliers. The branded jobber is another independent marketing agent, and where he competes with the major he too is marked for elimination. On the West Coast Texaco relies heavily on jobbers to market its gasoline. For example, in Los Angeles, Texaco markets more than half of its gasoline through four high volume jobbers. Most of this gasoline is sold by jobbers to dealers owning their own service stations. Studies made by Texaco in the early 1970s highlighted the efficiency of this method of marketing and stressed the importance to Texaco of the distributor business. Yet, in spite of the role and efficiency of the Texaco jobber operations, Texaco plans to eliminate several of its high volume jobbers when their contracts expire in May 1981. (See Transcript, Office of Competition, Hearings in Los Angeles, California on July 17, 1979, pages 15 19). Texaco will accomplish two things by eliminating its distributors. The company intends to redirect its distributor volume through direct properties in which Texaco has invested hundreds of millions of dollars. In addition, Texaco will eliminate the price competition within its brand that is originating from stations served by its distributors. To reduce the competitiveness of its distributor operations, prior to the final termination of their services, Texaco unilaterally increased the price to its distributors by le per gallon on January 17, 1977, decreasing their margin by 30 percent. Mobil has taken a similar action and has increased the price to its distributors which will impair their ability to compete. CHAPTER V ACTIONS AND INACTIONS OF THE DEPARTMENT OF ENERGY CONTRIBUTING TO THE DESTRUCTION OF COMPETITION IN THE GASOLINE INDUSTRY In 1972 the United States experienced its first domestic petroleum products shortage since the end of World War II in 1945. The United States was just commencing to work its way out of this energy shortage when the Arab Oil Embargo started on October 15, 1973. The petroleum shortage was converted into an energy crisis which was particularly severe during 1974. Since 1973 the United States has been on the ragged edge of having just enough, or being a little short, of the quantity of petroleum needed to meet the level of market demand. With the beginning of this extended period of petroleum shortage an environment was created which could materially alter the structure of competition in the gasoline industry to the public detriment. Shifts in the historical pattern of gasoline distribution started to appear with the beginning of the petroleum shortage and Congress recognized that legislation during the shortage was necessary to preserve the structure of competition in the gasoline industry or irreparable damage would be done to some of the less powerful, but highly important competitors. To insure that this would not happen Congress passed the Emergency Petroleum Allocation Act of 1973. The purpose of this Act is to grant to the President of the United The President originally established the Federal Energy Office which later became known as the Federal Energy Administration to carry out the authority delegated to him by Congress. The Department of Energy (D.O.E.) was charged with the: Preservation of an economically sound and competitive Equitable distribution of crude oil, residual fuel oil, and refined Congress speedily passed the Emergency Petroleum Allocation Act recognizing that the petroleum industry was dominated by several large vertically integrated petroleum companies. Without the self-regulatory process of competition at work, these large firms were in a position to pursue a strategy beneficial to themselves, but highly damaging to small businesses that had competed so vigorously in the marketing of gasoline. The unequal economic bargaining position of small businesses relative to the large integrated petroleum company made Congress fearful that as long as shortage conditions existed action could be taken with adverse impact to small business. We will show in this section that the pricing and allocation regulations established by the Department of Energy failed to protect the structure of competition as provided for by the Emergency Petroleum Allocation Act of 1973. The failure of the Department of Energy (D.O.E.) to carry out its charge of preserving an economically sound and competitive petroleum industry falls into three general areas as outlined below: (1). Failed to adopt and implement regulations needed to preserve (2). Developed regulations favorable to the large integrated (3). Failed to respond to substantial evidence that its actions and We will discuss seven specific areas in which the actions of the D.O.E. have been harmful to small business competition: (1). New base period; (2). Allocation of supply; (3). Handling of rent increases; (4). Unequal nonproduct cost banking provisions; (5). Subsidization of company operations through nonproduct passthrough provisions; (6). Subsidization through margin limitation on company direct units; and (7). Failure to equalize the wholesale price of gasoline. NEW BASE PERIOD The D.O.E. rolled forward the base period for the allocation program to the last two months of 1977 and the first ten months of 1978. The historic base period of 1972 covered a time before the marketplace distortions caused by the petroleum shortages. Rolling forward to the new base period favored the large integrated petroleum companies that were aggressively expanding their direct marketing operations in 1977 and 1978. During 1977 and 1978 the direct operated stations of the refiners were generally selling gasoline from 3 to 5 cents per gallon less than the branded dealer. As was discussed in the last chapter, the low prices at the major direct operated stations were often the result of marketing subsidization and below cost selling by refiners. It was also explained that the majors often favored their direct operated stations by selling to them at the rack price which was 4 cents less than the tankwagon price paid by dealers. In other words, the dealers faced both a higher cost of product and majors subsidized markets during this period when the direct operated stations of refiners were building large volume throughputs. Finally, refiners favored their direct operated stations with large product allocations. Facing both price and volume discrimination, many of the customers of branded dealers and private brand marketers were diverted to the major direct company operated stations. The hearings of the Office of Competition of the Department of Energy and the Antitrust Subcommittee presented a great deal of testimony about the volume that was drained away from independent marketers to company operated stations. For example, The Georgia Association of Petroleum Retailers surveyed more than 700 branded and private brand marketers and found that their volumes from 1973 through 1977 had decreased on average by 26 percent. In addition, many private branders found it difficult to cover their costs and started purchasing gasoline in the wholesale spot market to try to remain competitive. In this environment, the large refiners encouraged the Department Of Energy to roll forward the base period on the ground that much had changed since 1972, and that it was no longer appropriate to maintain the original base period. Yes, much had changed and one of the big developments was that the majors had established large numbers of high volume, direct operated stations through price subsidization and price and volume discrimination. Rolling the base period forward locked in the large volume allocations in refiner-direct operated units which was very advantageous to refiners when the shortage of 1979 hit. At the same time the new base period locked in branded dealers and private brand marketers with low allocations. In addition, those private branders who had turned to the spot market to remain competitive found that the price of this source of supply climbing rapidly above the retail price and they could not afford to purchase it. Thus, the predatory acts by which the majors built the volume at their direct operated stations paid off when the Department of Energy rolled forward the base period to late 1977-1978. Furthermore, as was previously noted in Chapter II, with this volume locked in at the direct company operated stations, the majors rolled forward their prices by 3 to 5 cents a gallon to the level of their branded dealers and no longer acted as aggressive price competitors and sold their large gallonage at a much higher profit margin since they now had no competition. UNFAIR ALLOCATION OF PRODUCT The allocation provisions of the Emergency Petroleum Allocation Act required that regulations be prepared that resulted in fair and equitable distribution of product, but this has not occurred. As all statistics on petroleum marketing show, there has been a major attrition of branded dealer stations. As a hundred thousand branded stations were closed because of the many questionable practices raised in this report, their volume reverted back to the major refiners. Instead of fairly reallocating that product across all stations, the majors took advantage of the fact that this volume was not tied 79-549 0-81-28 |