so that you can look at the parity and say, "well, that indicates no competition."

Mr. BETHELL. Well, I think that is awfully conjectural. You are talking about something that does not happen.

If you will excuse me, I think that Mr. Woodruff had a comment he wanted to make on your last point.

Mr. WOODRUFF. Yes. I think another part of our point about the lack of competition was that the time horizon of 1973 to now is not broad enough.

You have to look at what did not happen prior to 1973. You did not have scrubbers and other environmental technology developed which would have happened in a competitive situation. You also did not have a viable synthetic fuel industry developed which, we point out in our testimony, relates to dominance of the oil industry. And lacking those two developments, prior to 1973, you know, that that influenced what happened since then.

And I think that by just looking at since 1973, your time horizon is too small on that point.

Dr. VAUGHN. Well, even in the short run, I would expect a parity to exist between the two fuels if, in fact, they are competitive because the users, if not the coal producers, then the users of fuels will keep switching back and forth until the prices have been equalized, I do not see what is so mysterious about that.

But the synthetic fuels, they were brought up before. You claim that the synthetic fuel and coal conversion certainly was a possible business proposition that you would have. But the oil companies decided to retard the technology. But if it was such a promising prospect and since it would have been the coal companies that would have benefited in the new markets created by his products, why did not the coal companies pursue the technology and let the oil companies produce coal?

Mr. BETHELL. That is a fair question, and I think the answer to it probably goes back to the traditionally very, very low level of commitment in the coal industry, at that time particularly, to the kind of R. & D. that needed to be done.

The other point to bear in mind, of course this one is really inarguable, I think-is that you are talking about an industry which, even at that time-and particularly in the 1950's-was insignificant in size, compared to the influence of the oil industry.

Dr. VAUGHN. But, still, if it is a good business proposition, very attractive, would you not have expected some effort into this feeling, that the oil companies, themselves, refused to take the opportunity, we would expect someone somehow to investigate this opportunity?

Mr. BETHELL. Yes. As I said, I think that is a fair question. I think the answer to it is that the industry has never taken the coal industry has a long and very sad tradition, of neither investigating nor committing its resources either to safety research or to that kind of research.

Dr. VAUGHN. But I found it sort of mysterious that even if the coal industry did not take the ball and run with it, some third party might have.

Mr. BETHELL. Some what?

Dr. VAUGHN. Some third party might have because, you know, if it's a profitable business proposition, why not expect other people to enter it?

Just one last question. You said in your statement:

The oil companies tell us that oil money will be used for investment in the coal industry to increase production. Financial records of the oil companies that now have coal divisions indicate that this has not happened, and that, in fact, coal divisions of the oil companies are currently more profitable than the oil companies, themselves.

How have coal divisions of oil companies become more profitable than the oil companies, themselves, if they had not run out and sold coal? Remember that the oil-connected coal companies only account for a small fraction of the total coal production.

I mean, how are they profitable without oil producing coal?

Mr. BETHELL. Well, they have, of course, sold coal. I mean, that is what has been happening. It's that black stuff that you get more money for now than you did 3 years ago.

Dr. VAUGHN. Well, then, it seems to me, they would have to sell more coal in order to make more profit.

How do you account for that?

Mr. BETHELL. You account for it on the fact, obviously, that if oil. basically, governs the price of a theoretically competing fuel, and if oil prices skyrocket, as they have, if you can sell one ton of coal for four times as much as you did in 1973, unless all of your costs increase four times as much during that same period of time, you will make more money off of that one ton of coal. That is how you account for it.

Dr. VAUGHN. But if coal divisions, themselves, become a lot more profitable, they would have to go out and vigorously sell coal. So does not that contradict your previous claim that the oil companies are not pursuing the coal production?

Mr. BETHELL. No, it does not contradict anything. They can sell the same quantity of coal at four times the price; there is nothing vigorous about it.

Dr. VAUGHN. OK. Well, had the coal divisions of the oil companies been more or less profitable than other coal companies? I mean, let us suppose their profits rise by 100 percent but other coal companies, not oil companies, rise, their profits rise 200 percent.

That would indicate that perhaps the coal business and oil companies are holding back; that they are just taking advantage of the increase in the value of, what amounts to, their inventory; they just had a fortunate increase in their price; that is, unless they are holding out.

Do you have any evidence to that extent, that they are increasing their output less than

Mr. BETHELL. No. I do not think we could generalize on that. Senator ABOUREZK. There is a vote on now, so I am going to have to recess for 10 minutes while I go over and vote. We will come back, and the next witness will be Mr. Owen Johnson, Director of the Bureau of Competition of the Federal Trade Commission.

Before I go, I want to express my gratitude and thanks for the excellent presentation and the statistical data which you furnished with your testimony.

Mr. BETHELL. Thank you.

Senator ABOUREZK. Thank you very much. [Recess.]

Senator ABOUREZK. The subcommittee hearings will come to order. The next witness will be Mr. Owen Johnson, Director of the Bureau of Competition of the Federal Trade Commission.

I would like to welcome you to the subcommittee hearings and thank you for coming up and testifying.

If you are ready with your statement, we are.

Mr. JOHNSON. Thank you, Mr. Chairman. I have brought with me a prepared statement. It is not too long and, with your permission, I would like to read it for the record.

Senator ABOUREZK. Please do.

STATEMENT OF OWEN M. JOHNSON, JR., DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION; ACCOMPANIED BY JAMES OLSON, ASSISTANT TO THE DIRECTOR

Mr. JOHNSON. Mr. Chairman, I am here in response to the committee's request for the Federal Trade Commission's views on S. 489. As you know, this bill would amend the Clayton Act by prohibiting firms engaged in the production and marketing of petroleum or natural gas from acquiring an interest in, owning, or controlling any coal, oil shale, uranium, nuclear reactor, geothermal steam, or solar energy business.

At the outset, I should make it clear that I am appearing as a representative of the FTC's Bureau of Competition. My remarks do not constitute an official statement of the FTC or any Commissioner, nor have they been adopted or approved by the Commission, itself.

Before speaking on S. 489, I will address the first question raised by Senator Hart in his letter inviting this testimony today; that is, whether the energy market is a relevant market in terms of interfuel competition. As you are undoubtedly aware, a definition of the relevant market or markets is quite often the key to an antitrust prosecution. Before a monopoly can be charged, it must be determined what is monopolized and where. Similarly, before a merger can be challenged successfully, the Government must define the product and geographic markets and show the shares of the acquired and acquiring companies within the relevant markets.

It is important to note that in an antitrust case, several relevant markets and submarkets may be found, and a violation exists if there are anticompetitive effects in any market or submarket. The classic exposition of this theme appears in the Supreme Court's opinion in Brown Shoe v. United States.1

The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. However, within this broad market, well-defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes. The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors. Because Section 7 of the Clayton Act prohibits any merger which may substantially lessen competition "in any (Emphasis supplied) line of commerce," it is necessary to examine the effects of a merger in each such economically significant submarket to determine if there is a reasonable probability that the merger will substantially lessen competition. If such a probability is found to exist, the merger is proscribed.

1370 U.S. 294 (1962) at 325.

Applying these principles to the specific situation of the energy industry, I think it is clear that there is both an overall energy market and various submarkets within it. Both types of markets are economically significant for purposes of antitrust enforcement.

A 1972 study by an FTC economist demonstrated the existence of the interfuel competition necessary to show an overall energy market.1 The study concentrated on the electric utility sector, which, by 1985, is expected to account for over 35 percent of total U.S. energy consumption. It detailed the extensive competition within that sector between the four basic fuels; coal, crude oil, natural gas, and uranium. These fuels account for 96 percent of the energy consumed in the United States. All four fuels, in addition to hydropower, are used to generate electricity. The relative percentages of total electric utility production are as follows: coal, 44.4 percent; natural gas, 17.1 percent; hydro, 16.1 percent; petroleum, 12.2 percent; and nuclear, 6.0 percent.2

It is significant to note that nuclear, while relatively small today, is expected to account for 30 percent of utility fuel consumption by 1985.3 The 1972 report looked at competition in the electric utility market in nine geographic regions of the country. It found that, in nearly every region, the relative prices of the four basic fuels were close enough to place them in actual or potential competition with one another. The author concluded that:

4

. . The primary fuels are generally good substitutes for one another. While the market definition in each region may not include all four energy sources, in most areas at least three of the fuels trade in the same economic market.

Coal, crude oil and natural gas also compete extensively in the industrial sector. In 1970, natural gas accounted for 50.2 percent; crude oil, 25.4 percent; and coal, 24.4 percent, of the industrial energy supply.

These head-to-head competitions between the various fuels would seem to establish the relevance of an overall energy market. But at the same time, it is equally clear that submarkets exist within the overall energy market. For instance, in the transportation sector, accounting for nearly one-quarter of all energy consumption, petroleum is totally dominant, amounting to nearly 96 percent of the energy consumed. Whether one travels by car, truck, boat, plane or train, there is almost no way of moving without using petroleum.

Based on the terminology of the Brown Shoe case, the lack of interchangeability or cross-elasticity of demand in the transportation energy sector would qualify petroleum as a distinct submarket.

The coal industry is another example of a submarket within the overall energy market. The FTC found coal to be a distinct line of commerce in its decision finding Kennecott's acquisition of Peabody Coal Co. to be unlawful. The Commission found that:

Coal . . . is clearly a relevant product market for antitrust purposes, separate and distinct from other fuels, by virtue of the fact that coal has unique characteristics which are commercially significant and a technology obviously different from such power sources as gas or nuclear energy.5

1 Federal Trade Commission, "Interfuel Substitutability in the Electric Utility Sector of the U.S. Economy," Thomas D. Duchesneau (Washington: U.S. Government Printing Office, 1972).

2 Compiled from Federal Power Commission, "News Release on Preliminary 1974 Power Production, Capacity, Fuel Consumption Data", June 5, 1975.

3 Energy Research and Development Administration, "Nuclear Industry, 1974" (Washington Government Printing Office 1174–74), p. 14.

4 Thomas D. Duchesneau, "Interfuel Substitutability in the Electric Utility Sector of the U.S. Economy," p. 82.

578 F.T.C. Decisions 913, 915 (1972).

The Court of Appeals agreed that, "The coal industry is a distinct submarket which has characteristics which are not shared by the other fuel industries." 1

I would now like to address myself specifically to the proposed Interfuel Competition Act of 1975, S. 489. The committee's request for comments on this bill comes at a time when the Commission is in the midst of developing a tremendous volume of data on the energy industry. This data would be obviously relevant to the questions of multifuel ownership raised by the proposed legislation.

Specifically, the Energy Study Unit of the Commission has sent detailed subpenas or compulsory special report forms to the Nation's leading coal, uranium and natural gas companies. The companies are being asked to provide information on their corporate structure, reserves, production, profitability, research expenditures, and patents. This data, much of which has never been submitted to any Government agency, will provide the staff with an accurate statistical basis to identify competitive problems in these areas.

Senator ABOUREZK. Excuse me. Will that be made public, the data that you are speaking of?

Mr. JOHNSON. It will be.

Senator ABOUREZK. At what point?

Mr. JOHNSON. Well, we are releasing these energy studies as they become available, and, as I will indicate later in my testimony, one study is already public; several more are anticipated shortly.

Senator ABOUREZK. Will it be the underlying figures as well and not just the aggregated ones developed by you after you have received the underlying information?

Mr. JOHNSON. At this point, it is my understanding that we will only be releasing the aggregated figures.

Senator ABOUREZK. And when will you release the underlying data? Mr. JOHNSON. I am not certain that that release will be made. For one thing, these reports are going to address themselves to the competitive conditions.

Senator ABOUREZK. Are you saying you will or you will not release the underlying data?

Mr. JOHNSON. I am not prepared to state that at this time, Mr. Chairman.

Senator ABOUREZK. Either way?

Mr. JOHNSON. Either way. It might be necessary to be kept confidential for enforcement purposes.

I am informed that we do have confidentiality agreements, which are quite common in an antitrust investigation, with some of the companies that are responding to the subpenas and the special reports. Senator ABOUREZK. Will you make it available to this committee on a confidential basis?

Mr. JOHNSON. I am not prepared to respond at this time. I believe it is general Commission practice to honor requests of congressional committees. And usually our confidentiality commitments include that as an express exception.

I just cannot speak for the Commission at this time.

Senator ABOUREZK. I will direct a letter to you then requesting that material.

1 Kennecott Copper Corp. v. FTC, 467 F.2d 67 (10th Cir., 1972) cert. denied 416 U.S. 909 (1974).