CHAPTER VIII

RECOMMENDATIONS FOR PERMANENTLY SOLVING THE PROBLEMS OF SMALL BUSINESS AND ENSURING A TRULY COMPETITIVE INDUSTRY

Congress is at a critical juncture regarding the structure of competition in the petroleum industry. We are either going to have a highly competitive gasoline industry or else one dominated by a few large integrated petroleum companies. If Congress desires to preserve for future generations a highly competitive gasoline industry, then it must act quickly for the structure of competition in this industry is on the brink of ruin. To do nothing at this time, or to enact inadequate legislation, will probably result in passing beyond the point of no return for preserving a viably competitive gasoline industry. The remedies to be suggested are not unduly harsh, nor will they have a detrimental public impact as some in the industry will allege. But, the proposed remedies are basic if Congress wants to ensure that the gasoline industry will remain highly competitive and capable of responding with the variety of product, service and price demanded in the marketplace.

RECOMMENDATION I.

INTEGRATED PETROLEUM COMPANIES WHO
PRODUCE CRUDE OIL AND OPERATE REFINERIES
WOULD HENCEFORTH BE PROHIBITED FROM BEING
INVOLVED IN ANY MANNER IN THE MARKETING OF
GASOLINE AND OTHER MOTOR FUELS THROUGH
RETAIL GASOLINE OUTLETS. THE INTEGRATED
REFINERS WOULD BE PERMITTED TO ONLY MAKE
FINAL SALES OF GASOLINE AT MARKET BASED
TERMINALS.

REASONING

Refiners processing less than 15,000 barrels per day or producing less than 10% of their average daily refinery input would not be affected by the legislation. The refineries processing less than 15,000 barrels a day are themselves small businesses and they are experiencing severe difficulty in competing with the large integrated petroleum companies. These refiners tend to be less efficient since they are small scale operations, and they normally produce a relatively lower percentage of gasoline and concentrate on manufacturing heavier petroleum products. In addition, small refiners are struggling to develop the capital required to modernize their plants and to meet environmental standards. The other class of refiners exempted are those that produce less than 10 percent of the oil they process, and who are not the beneficiaries of the tremendous profits that integrated refiners will earn from crude oil decontrol. True independent refiners, those with no crude oil, are entering a very uncertain period. With the beginning of phased crude oil decontrol, and with the unstable international crude oil situation, the outlook for independent refiners is quite uncertain. Thus, it is the larger refiners with substantial production, and who are receiving enormous benefits from crude

oil decontrol, who are primarily responsible for the anti-competitive practices described throughout this report, that would be required to divest themselves of marketing.

The type of structural reform advocated has also been recommended as an appropriate way of improving competition in the gasoline industry by the Justice Department, Federal Trade Commission, the Department of Commerce as well as the Senate Judiciary Committee. These agencies have argued that if a meaningful resolution of the problems existing in the gasoline industry is to come about, it will not be done through regulations, but instead be achieved through structural reform of the industry. The history of the judicial branch of government's effort to regulate the petroleum industry has, by their own admissions, been highly unsatisfactory. We only have to consider the recent failure of the Department of Energy to regulate the industry to protect competition to appreciate that regulatory remedies are not possible, and that divestiture of marketing is required.

The divestiture act would require that refiners, covered by the Act, sell their stations to the dealers of record as of a given time. The price would be determined by independent appraisers who would establish and justify the fair market value of the location. The dealer of record would be granted first right of refusal to purchase the station. The Small Business Administration would guarantee up to 90 percent of the loan made to dealers purchasing their stations. Only those stations which have economic viability would be financed and sold to dealers, and those that have no future as a gasoline outlet would be closed and sold.

An alternative to the Small Business Administration loan guarantee approach to dealers purchasing their stations would be to require the petroleum companies to establish an independent real estate arm that would finance and sell the properties to their dealers. The reason for this recommendation is that the integrated companies have, as a result of subsidization and other anti-competitive practices, built and financed over the years their gasoline station systems, and have engaged in practices that interfered with the normal workings of competition at the marketing end of the business. Since they already have under a special set of unfair circumstances financed their station programs, the petroleum companies could be required to finance the purchase of stations by their dealers. Refiners could earn a fair rate of return (e.g. 12 percent) while the dealer is paying off the station. Furthermore, given the enormous profits earned from crude oil decontrol, this plan imposes little burden on the petroleum companies.

For a variety of reasons such as age, health, desire for ownership, potential of present location, some dealers may not choose to purchase the station they operate. In this case the stations could be sold at their fair market value to independent real estate investors. These investors might purchase one, a few, or several hundred stations and would in turn lease the stations to the dealers at an economic rent. Under no circumstances would they be permitted to run the station directly, or through some subterfuge. If the dealer doesn't want to purchase the station, and if the investor is unable to receive a fair return on his investment, the stations could be sold for other purposes. It is, however, recognized that the intent of this law is to fairly price the facilities that are

already constructed to market gasoline, so that either a dealer, or an independent investor, can purchase them for the continued sale of petroleum product.

RECOMMENDATION II

THOSE REFINERS REQUIRED TO DIVEST MARKETING
WOULD SELL TO ALL PURCHASERS OF GASOLINE AT
THE RACK, IN TRACTOR-TRAILER LOAD QUANTITY,
AT THE SAME PRICE.

REASONING:

Testimony given by jobbers and dealers in endless hearings has been that all they are asking for is "fair and equitable" treatment and the right to buy at competitive prices. They conclude their statements by stressing they are not asking for any special privileges. In a competitive buying situation this is exactly what should occur. Greg Potvin, General Counsel of the National Oil Jobber's Council recently testified as follows: (See Transcript, Office of Competition, Hearings in Los Angeles on July 17, 1979, page 9)

Jobbers seek no special advantages, they are fearlessly independent and more than willing to meet the rigors of an unfettered and unrigged marketplace. They can not, however, hope to survive unless they are accorded a fair fight or a free field.” Similarly, Jack W. Houston, Executive Director of the Georgia Association of Petroleum Retailers testified at the same series of hearings that "all we (dealers) want and demand can be summed up in just two words-fair treatment". Also at those hearings Mr. Tom Patton, past President of the National Oil Jobbers Council, and a large gasoline marketer himself, testified as follows: (See Transcript, Office of Competition, Hearings in Atlanta, Georgia on August 28, 1979, page 11)

If you take a reasonable view of the petroleum marketer and read
what he has been saying for years, you can arrive at no conclusion
other than that he seeks nothing more than a fair share of supply
at a price which permits his competing from the same start, from
the same competitive start. I have fought legislative battles, and I
can recall no cases where he has sought some favored or some
protected role. He seeks nothing except a fair shot.

Mr. Patton went on to elaborate on his views that all marketers should start at the same gate and at the same price. He went on to testify in response to a question as follows: (See Transcript, Office of Competition, Hearings in Atlanta, Georgia on August 28, 1979, page 25 and 26)

Mr. Delaney: . . . Tom, you mentioned that several times you are
interested in starting out at the gate at the same point as everyone
else. I was wondering how you feel about the concept of instituting
a rack pricing system where everybody apparently could go to the
gate, even a dealer or broker, anybody, and pick up the product.

Mr. Patton: It has never been of any personal concern to me; and
I've argued that point a hundred times, I guess; and many guys just
get frightened to death of the idea, because they see that they are
now a jobber. They buy at a given price so here comes my
customer over here-let's call him a dealer for the moment. Then
under that scheme he comes in to buy at the same price. Well, I say
hogwash. My reason for that is this: Everything has a cost. There
is no free lunch. Now if a dealer provides every function that a
jobber performs then he is worthy to have the jobber's price...

The testimony of several leaders of the gasoline industry is quite significant and should be further considered. Mr. Potvin, Chief Counsel of the N.O.J.C. and Mr. Patton, past President of the N.O.J.C. both underscored, and reiterated, that they don't want any special advantage, but simply ask for fair and equitable treatment for all. Mr. Houston, Acting Executive Director of the Service Station Dealers of America, testified to the same goal. Obviously, there are those jobbers who want to maintain their special buying price and use it to compete at the retail level with dealers who are at a disadvantage. Congress should not be concerned about those jobbers who will argue for an unfair start "at the gate" (Tom Patton's words). We can either have fair and equitable competition in gasoline marketing, or we can continue to have those with special privileges, like the integrated petroleum companies who subsidize their marketing from crude oil, or some jobbers who use their special buying price to destroy branded and private brand marketers. Clearly, there are some jobbers who now have a preferential buying price, and that will join with the large integrated petroleum companies to fight any type of reform that will establish fair and equitable conditions of competition in the gasoline industry. Both refiners and some jobbers want to use their special buying price to destroy dealers, and to explain their demise by claiming they were inefficient.

What Mr. Potvin, and Mr. Houston all argue is that no one should start with an unfair advantage, and that is what would be expected in a truly competitive industry. The artificial distinction in buying price between jobbers and dealers does not exist in other industries. So why should this practice be continued which is so contrary to fair and equitable competition? Consider for a moment the pricing of products in other industries. No matter who the buyer is, if he purchases a trailer load, or a boxcar load, of the same product from P & G he pays the same price as the competition purchasing in the same quantity. The trailer and the boxcar is the maximum quantity of product for which there are cost justifiable differences in serving customers. The same is true in most other industry, as for example, in the appliance field. Competitors in a given market are normally charged exactly the same price for purchases made in tractortrailer load and in railroad car lots. So why should there be any difference in the petroleum industry when a dealer, or a jobber, both buy from the same loading rack and purchase the maximum quantity of approximately 8500 gallons which is a tractor-trailer load of gasoline? This is the largest quantity at which marketers typically purchase gasoline from the loading rack. Practically all stations today, except the small rural marketer, are capable of purchasing a full tractor-trailer load of gasoline.

Dealers and jobbers are not the only ones to have noted the inequity of the dealer tankwagon pricing system (i.e. D.T.W.) A major refiner also recognized the problem created by the dealer tankwagon system, and in a major document expressed an opinion in favor of rack pricing. The "SUMMARY" of Texaco's "Long Range Plan: 1977 1981" explains:

The growing trend whereby gasoline retailers are at a competitive
disadvantage in the marketplace with respect to Independents and
Branded wholesalers has threatened the Industry with possible
legislation to establish a single rack or functional price to all

customers.

Furthermore, sales trends of the traditional retailer are declining
and wholesalers are entering the retailing function utilizing their
margins effectively.

The Industry, including major oil companies recognizing the
problem, is seriously discussing the same price to all customers, or
of a rack pricing concept.

We recommend that Texaco oppose rack or functional price laws,
but consider the concept of rack pricing. (emphasis added)

If for some reason the jobbers argue and convince Congress that they deserve a special buying price, then we have no choice but to ensure that the jobber uses that special buying price for its intended purpose. Thus, we have the following recommendation which would only be implemented if our rack pricing provision is not adopted along with divestiture.

CONTINGENT RECOMMENDATION II

JOBBERS AND OTHER DISTRIBUTORS OF REFINERS
WHO ARE REQUIRED TO DIVEST MARKETING,
WOULD THEMSELVES, BE DIVORCED FROM THE
DIRECT MARKETING OF GASOLINE.

REASONING:

Since there is abundant evidence of the widespread practice of some jobbers using their special buying price to unfairly compete in direct marketing, this would no longer be permitted to happen. If jobbers of the large firms divesting marketing were permitted to continue to direct operate, having benefit of a special buying price, they would simply replace the refiner as large scale direct marketing operations. With the rack pricing provision, this would not happen and jobbers would not be competing with any special advantage.

RECOMMENDATION III

CONGRESS SHOULD DIRECT THE DEPARTMENT OF
ENERGY TO MAKE THE NECESSARY ADJUSTMENTS IN
THE CRUDE OIL ENTITLEMENT PROGRAM TO
ENSURE EQUITABLE PRICES OF GASOLINE TO
DEALERS OF DIFFERENT BRANDS.