appear to lead to ever greater concentration in the energy industries. However, even the use of taxes could result in a less competitive situation. The larger, more R&D oriented companies could more easily develop the more efficient processes and equipment that would be taxed at a lower rate and thus capture a large share of the energy markets.

More important than either of the first two actions in its potential for reducing competition, is the need to increase domestic energy supplies. Although oil and gas resources are small compared to coal and to uranium resources (if the breeder reactor is developed), for the short term, increased exploration and development should lead to increased supplies of these relatively clean fuels. It is now believed that the major targets for new discoveries are in Alaska and on the new frontiers of the Outer Continental Shelf, the Gulf of Alaska, and offshore Atlantic. All of these areas will require much larger investments in order to be explored and developed than the traditional onshore deposits. The obvious implication is that the very large oil and gas companies will be in the best financial position to make the very significant "front-end” investments necessary to develop these resources and further increase their market share of the production of oil and gas.

These new oil and gas provinces, however, are largely federally owned. As a result it should be possible to increase competition by designing leasing terms and conditions that would permit a larger number of companies to participate in the development of these resources. Some changes have been suggested in the bidding methods for federal offshore leases that would reduce the large "frontend" bonus bids. However, no legislation has been enacted to change the limited number of bidding methods now permitted by the OCS law. Unless changes are made in bidding methods and in the lease terms and conditions, there will be an inevitable concentration of the new leases in the hands of a few large firms Another method of increasing domestic energy supplies is to develop the almost unlimited United States coal resources by finding ways to mine coal and use coal directly in an environmentally acceptable manner. Your subcommittee examined in depth the trends in coal company ownership in previous hearings and this is updated by Mr. Max in his testimony.

Capital requirements for development of new coal mines have increased sharply in the past five years. At the same time there has been a trend toward larger sized mines in order to capture the economies of scale. Both these developments raise significant capital barriers to entry and thus act to reduce competition. As will be discussed in more detail below, new safety and environmental regulations further enhance this trend toward reduced competition.

If the longer term energy requirements of the United States are to be met by domestic supplies, new technologies must be developed. These include using coal directly without violating pollution standards, converting coal to liquids and gases, developing the breeder reactor to extend uranium supplies and finding ways to use solar, geothermal and fusion energy.

The development of these new technologies will require vast R&D expenditures. For example, commercializing the breeder reactor will probably require in excess of $10 billion, while developing commercial fusion technology will probably be much more expensive and may require $30 billion or more and 20 additional years of research. At these costs even the largest companies will need financial assistance from the government to carry out the research and, because of the level of expenditures involved, only the largest companies will be able to participate fully. The result could be a concentration of the "know-how" of the newly developed technology by a few large companies.

Even if ways were found to diversify the federal expenditures so as to allow more companies to participate in the R&D effort, the vast financial requirements for the construction of most of the plants to utilize the new technology would make it impossible for all but the largest companies to become involved. In order to achieve scale economies only large plants will be constructed. A 50,000 barrel per day oil shale plant or a 250 million cubic foot per day coal to gas plant may each cost $500 million or more. Commercial application of breeder and fusion technology will also be very costly. Solar energy developments may allow much wider and diverse participation since the financial barriers to entry may be

smaller.

Actions that increase energy supplies can result in adverse environmental effects unless methods are taken to control the pollution that would otherwise result. Pollution control and improving the health and safety conditions in the energy industries both increase costs and, inevitably, the barriers to entry. Thus

achieving the goals of environmental enhancement can act to decrease competition, unless special efforts are made to prevent this from occurring.

An excellent example of these relationships is the effect that the Coal Mine Health and Safety Act of 1969 had on small underground coal mines and the expected effect that the new strip mine bill would have on small strip mines. In 1969, the year before the Act was passed, there were 2,539 underground mines which produced 100,000 tons per year of coal or less; by 1973, the number of these mines had declined to 1,208. It has been estimated that the provisions of the new strip mine bill, which twice passed the Congress but was vetoed each time, would force the closure of most of the small strip mines. The sharp reduction in the number of both small underground and strip mines can only lead to reduced competition in the coal industry.

This review of the impacts of probable future energy developments forces one to conclude that, unless special efforts are made to avoid it, there could be further concentration in the energy industries. While appropriate actions may ameliorate trends in this direction the need to meet national energy goals and the type and nature of new energy technologies may require compromises between meeting energy goals and preventing monopoly practices. Meeting the nation's energy requirements is a prerequisite for national survival. If energy demands cannot be met in a normal competitive setting, and there is evidence that they may not be, then special methods may have to be devised to see that the energy is provided while protecting the public from monopoly and anticompetitive developments. It is this aspect of the problem which is covered in detail by Mr. Max's testimony.

Senator ABOUREZK. We want to welcome you to the hearings, and express our gratitude for your appearance here today, Mr. Max. Mr. MAX. Thank you, Senator.

STATEMENT OF PETER MAX, VICE PRESIDENT, NATIONAL ECONOMIC RESEARCH ASSOCIATES, INC.

Mr. MAX. I want to say at the outset and particularly following Senator Bartlett, which is a position I find a trifle uncomfortable for several reasons which he can ascertain if he discusses my appearance with some of the oil companies in Oklahoma who, I think, will not consider me among their best friends-and, as my conclusions will indicate, I am not coming out with the same position Senator Bartlett espoused because I, too, disagree with most of what he said. My conclusion will be slightly different, but, I am afraid, closer to his, rather than further away from it.

I certainly want to express my gratitude for this opportunity to present my views on the economic and antitrust implications of this bill. Clearly, the bill is concerned with issues which are not only of substantial interest to the economist concerned with antitrust issues, but which may well have a profound impact upon the continued ability of the Nation's economy to provide resources sufficient to meet present and future energy requirements.

As an economist who has had a continuing interest and involvement in various phases of antitrust economic analysis, the resolution of the issues raised by S. 489 is of more than routine interest to me. In particular, as I understand it, what is proposed is a substantial hardening of the strictures of section 7 of the Clayton Act, as they pertain to petroleum and natural gas producers, so that mergers among these firms and others which operate within the energy sector would be deemed illegal per se. Put another way, whereas section 7, as ordinarily applied, requires a demonstration that the effect of a merger "*** may be substantially to lessen competition, or to tend to create a monopoly

*"this proviso, with respect to the energy sector, would be effectively eliminated. In addition, this bill would prohibit de novo entry of petroleum producers into other parts of the fuel/energy industry. At the outset, let me emphasize my serious concern with the increasing tendency among energy companies of various kinds to merge with one another. However, I am not at all sure that (a) such a dramatic alteration in section 7, as it would be applied to the energy sector, is, in fact, indicated at this time, and (b) that an alteration of this kind will advance realization of the economic objectives for which S. 489 presumably is intended. In fact, it could have the opposite effect since it may introduce certain undesirable rigidities into antitrust enforce

ment.

Without going into the details, an economist considering a merger first analyzes the nature of the participants as well as their prior relationship to one another in order to determine the general category into which a merger should be assigned: horizontal, vertical, conglomerate, whatever.

He next proceeds to determine the lines of commerce and sections of the country most relevant to an assessment of impact of the merger upon competition.

Finally, the structural, conduct and performance features characteristic of each such line of commerce and section of the country are assessed with a view toward determining the current level of competition, the relative importance of the participants, and the predictable impact of the merger.

That is the traditional approach.

The focus of economic inquiry in a merger situation is properly directed toward impact-not form-such that the aim is to determine whether on balance the probable effect of a given merger upon competition is beneficial, benign or adverse. Only in those cases where it can be shown that the effect is likely to be adverse should the economist recommend against the merger.

In order to reach a conclusion as to the desirability of the provisions of S. 489, it is useful, it seems to me, to consider the manner in which traditional economic analysis might be applied, within the framework of section 7 as it is now construed, to mergers of the type addressed in S. 489.

In delineating the appropriate relevant markets within which to assess the competitive impact of what, for convenience, I will refer to as energy mergers, the crucial determination obviously involves the extent to which there exists competition, either actual or potential, among the various energy sources.

As several recent studies have shown, for a number of end uses most of these energy sources are fully substitutable one for the other.

Uranium, coal, oil, gas, and geothermal energy all serve the identical function in an electrical utility powerplant-namely to produce heat which makes steam which turns the turbine-generator to produce electricity.

Considered as a whole, it appears to us that there is a high and increasing level of interfuel competition such that it would seem entirely appropriate, for the purpose of assessing the competitive impact of energy mergers, to consider the energy sector as a single relevant

market.

Gas and oil are complete substitutes in the production of both space and process heat; oil shale and coal can yield a refinery feedstock that supplies the full range of major refinery products now obtained from crude oil and a synthetic gas that is identical with natural gas; uranium and the fossil fuels are all complete substitutes for each other as fuel for power generation.

To be sure, depending upon the sections of the country involved, the relative unavailability of certain energy sources would suggest that they ought properly to be excluded.

Nevertheless, even here, it would be necessary to take into account the degree to which supplies of these energy sources might be made available at some point in the future.

Insofar as availability is a function of, say, imminent improvements in the technology of production and/or delivery, they may exert a considerable potential impact upon the vigor of competition simply by (* * * [remaining] at the edge of the market, continually threatening to enter."

Perhaps the single most important development within the energy market over the last 10 years has been the growth of the horizontally and vertically integrated company. Since 1965, a growing number of oil companies have taken positions of one sort or another in fuels.

I have included in my prepared statement a variety of tables setting forth various indicators and measures of the entry and expansion of petroleum companies into other fuels, be they coal or uranium.

In the last 10 years we have seen such a marked tendency among petroleum producers to acquire interests in other energy sectors that the petroleum sector accounts for at least 17 percent of total coal output, and more than a 38 percent of U2O, mill capacity.

8

One further point is relevant at this stage. The oil companies that have made these acquisitions are generally major or large independent firms. They tend to be dominant in their own submarkets, and bring substantial market power to each of the new fuel submarkets they are entering. The result is a tendency toward concentration and entrenched dominance.

To be sure, as my colleagues of NERA have noted, it is only natural for oil companies to diversify into certain areas. The move into oil shale and tar sands is a logical hedge against the time when the increasing shortfall of domestic crude oil production relative to demand, the sharply higher cost of imported crude, and the improvements in synthetic fuels production will make the latter a viable source of supply for their refineries.

Similarly, it is natural for them to regard coal as a future supplemental source for synthetic fuels.

It is also logical for the oil industry to be interested in uranium since the search for it is, in many ways, similar to the search for oil and gas, being founded on geology and geophysics, in which the industry already has high technical capability.

On the other hand, the move by an oil company into coal production and marketing for all of coal's conventional uses, whether by the acquisition of an existing company or by the acquisition of reserves and formation of a new coal company, bears no such logical relation to oil company activities.

Similarly, the move into the later stages of uranium production and marketing, such as fuel fabrication or fuel processing, takes the oil company into activities even more remote from oil technology and know-how.

Nevertheless, given the increasingly direct competition between fuels and electricity, the acquisitions by oil companies across the energy market spectrum take on special significance.

Indeed, they may be viewed as a classic horizontal integration on a scale comparable to the formation of the trusts in the latter decades of the 19th century.

In short, the oil companies, themselves, portraying their activities as efforts at diversification, are, in fact, systematically acquiring their competition. Now, what are the implications of this for antitrust policy?

As an economist, these developments are a matter of serious concern to me. How can the public be sure, for example, that the emergence of the synthetic fuels industries will occur at the pace which economic circumstances would, under free market forces, dictate?

It could well be that the self-interest of certain companies with dominant positions, if not of the industry as a whole, would call for delaying the inauguration of a synthetic fuels industry in order to protect existing investments in crude and natural gas.

Of even greater concern is the fact that the energy company-and it should be borne in mind that there are already at least eight major oil companies with across-the-board positions in all of the domestic fuel resources straddles a situation which heretofore has been characterized by relatively vigorous interfuel competition.

On the other hand, it is not clear that each and every such acquisition necessarily produces this effect.

For one thing, in certain circumstances, the entry of petroleum producers might, on balance, actually benefit competition through the injection of new sources of capital, know-how, and management vitality. For another, one may wish to distinguish between the acquisition of another going concern, and the acquisition of, say, fuel fabrication facilities and/or coal reserves.

This follows from the fact that, although the acquisition of a company in another energy field perforce eliminates an actual or potential competitor, coal liquefaction and the development of oil shale may well be advanced by petroleum company efforts, who, in turn, have the requisite downstream facilities.

Fortunately, it is precisely this kind of competitive situation that the present section 7 of the Clayton Act was designed to handle.

Mr. Perry, in his testimony, speaks to the problems of capital needs of the coal industry now and in the future. I, indeed, am concerned about this problem, and generally would not favor legislation which might have the effect of reducing the potential for flows of capital into coal.

To the extent there presently are factors which inhibit nonpetroleum capital from flowing into coal, and to the extent legislation could mitigate those factors, then the problems should be attacked directly. If the oil companies find investment in coal attractive, such investment should be attractive to others. The solution to this problem does not lie in a distortion of the competitive mechanism.