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INTERFUEL COMPETITION ACT OF 1975

WEDNESDAY, OCTOBER 22, 1975

U.S. SENATE,

SUBCOMMITTEE ON ANTITRUST AND MONOPOLY
OF THE COMMITTEE ON THE JUDICIARY,

Washington, D.C.

The subcommittee met at 9 a.m., in room 6202, Dirksen Senate Office Building, Hon. James Abourezk, presiding.

Present: Senator Abourezk.

Staff present: Charles E. Bangert, general counsel; Henry A. Banta, assistant counsel; Walter S. Measday, chief economist; Patricia Y. Bario, professional staff member; Catherine M. McCarthy, chief clerk: Peter N. Chumbris, minority chief counsel; Richard Jones, minority counsel; and Garrett Vaughn, minority economist.

Senator ABOUREZK. The hearing will come to order. Our first witness is Mr. Thomas E. Kauper, Assistant Attorney General in charge of the Antitrust Division, Department of Justice and, apparently, one staff member.

I would like, before you start, Mr. Kauper, to welcome you to the subcommittee hearings, and also just announce that the debate on vertical and horizontal divestiture on the floor begins at 11:30 this morning. So if we are not finished with all of the witnesses by 11:30, we will have to recess until sometime this afternoon. So I hope, in fairness to other witnesses, that you will be able to summarize your statement and your testimony into a very compact period of time, and then we will do some questioning.

We do not want to cut anybody short is what I am trying to say. We will come back this afternoon if necessary.

We are ready to proceed now.

STATEMENT OF THOMAS E. KAUPER, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, ACCOMPANIED BY WILLIAM E. SWOPE, DEPUTY DIRECTOR OF OPERATIONS

Mr. KAUPER. Thank you, Mr. Chairman. I think the record should indicate that I am accompanied by Mr. William E. Swope, who is the Deputy Director of Operations for the Antitrust Division.

I appreciate the opportunity to appear before this subcommittee this morning. Unfortunately, time has permitted me to do little more than to prepare some rather generalized observations regarding S. 489 and the problem at which it is apparently aimed.

The letter of invitation requested me to address several issues, one of which is "*** whether the energy market is a revelant market in terms of interfuel competition." The facile answer, of course, is, "It depends." While that may sound a bit flippant, let me try to explain why I believe that is, in fact, the only responsible answer.

As you know, the process of defining what is a relevant market for antitrust analysis is frequently more difficult than it might seem at first blush. There are two basic elements to relevant market analysis; the products which should be included and the geographic areas which must be considered.

The general formula we have usually employed is that found in the Brown Shoe case, and I think you heard that yesterday from the FTC,1 so I will not quote it again. The application of this standard to the energy area requires considerable care and depends in the first instance on the existence of a sufficient body of factual information.

Some persons contend that all forms of primary energy-oil, natural gas, coal, oil shale, uranium, geothermal steam, solar energy, and tar sands are sufficiently interchangeable so that it is appropriate to lump everything into one large so-called energy market. Others argue that a more refined analysis indicates that the degree of interchangeability among the forms of primary energy fluctuates depending upon the types of energy being considered and the context of the analysis. For example, it seems reasonably clear that fuel oil, natural gas, coal, and uranium are, to a considerable extent, reasonably interchangeable insofar as the electric power industry is concerned.

Of course, there is a wide variety of factors such as transportation costs, environmental restrictions, mine safety costs, nuclear safety, and waste disposal problems, to mention a few-which importantly affect the degree of interchangeability which actually does exist in a given situation in the electric power industry.

Undertaking the kind of analysis required is further complicated by the fact that many of the energy forms mentioned in S. 489-tar sands. solar energy, geothermal energy, oil shale, and coal-are usable only if commercially feasible technology can be developed. Whether "reasonable interchangeability of use" or "cross-elasticity of demand" in the antitrust sense will develop with regard to those forms of energy is a question which can only be dealt with today by speculation.

The other dimension of market definition in the antitrust context, the geographic market, must also be considered in evaluating what the proper market or submarkets are in the energy field. For example, the marketing of geothermal steam is necessarily limited, geographically. Also, the extent to which solar energy may provide an effective alternative to other forms of energy is, of course, affected by location. Its potential is obviously greatest in those portions of the country which have the greatest exposure to the Sun.

In sum, it is virtually impossible to make any general statements about what is and what is not the proper market in the energy area outside of a specific factual context.

In the abstract, then, the only responsible answer to your first question is, I think, "It depends."

You also asked us to comment on “*** whether ownership in various sources of energy by the same firm creates a potentially anticompetitive situation.”

1 See testimony of Owen M. Johnson, p. 302.

In a literal sense, the answer must be yes, the potential for adverse competitive effects exists. Whether this potential will be realized or whether there is any realistic possibility of that happening simply cannot be answered in the abstract. For example, there would appear to be no inherently pernicious antitrust consequences flowing from the acquisition of a solar heating firm in Massachusetts by a Wyoming oil producer. On the other hand, serious issues would be raised if a major petroleum company which is also a major natural gas producer achieves prominence in coal, uranium, and oil shale and also embarks upon an active program of acquiring the important patents in solar energy and others of the yet undeveloped fuel processes.

The Antitrust Division has examined a variety of energy crossownership situations in the past and will, of course, evaluate any others which arise. The FTC has done a considerable amount of work in this area. Some transactions of this type have taken place in the past without challenge from the antitrust enforcement authorities. Those decisions were based on analysis of particular factual circumstances.

One of the major problems in the energy area, which has handicapped both the antitrust enforcement agencies and the Congress, is the paucity of hard data. For example, recent court decisions indicate that analysis of mergers in the extractive minerals area requires detailed data regarding the ownership and dedication of reserves. Such information is generally almost impossible to obtain in a form which is suitable for analysis. We understand that the FTC is in the midst of a major effort to obtain much of this hitherto unavailable material, and the successful completion of the effort may well permit us to reach more informed conclusions regarding cross-ownership of energy

sources.

Finally, you asked for our overall views of the proposed legislation. We understand and appreciate the subcommittee's concern that fewer and fewer large corporations may achieve an unhealthy degree of domination of most of the important sources of energy. None of us wants such a situation to occur. The question then becomes: How real is the threat? And if it is serious, how best to combat it. At this juncture, we do not feel that it is possible to state, categorically, that the Nation will move rapidly toward a highly concentrated energy industry absent the passage of S. 489 or similar legislation.

While there has been some movement of companies in one portion of the energy field into other sectors of that industry, there is, as yet, no clear indication that these transactions constitute an important phenomenon with adverse competitive effects. Accordingly, we cannot conclude that there is a demonstrable need for S. 489 or similar legislation.

Given this conclusion, it is important to realize that the proposed legislation might be harmful to the public in certain situations. For example, we all know that the Nation has virtually limitless amounts of coal. Given the development of various complex and expensive technologies, it is conceivable that much more of this coal can be exploited than is currently the case. Coal liquifaction and coal gasification are two of the potential means by which greater coal utilization can be accomplished.

Senator ABOUREZK. Mr. Kauper, can I interrupt you for a second. Isn't most or nearly all coal gasification research funded by the Federal Government?

Mr. KAUPER. I don't know if I can answer in terms of total dollars. Certainly, a substantial amount of it is, yes.

Senator ABOUREZK. I think that nearly all of it-I think there is very little private funds going into that. I just thought that was pertinent here.

Mr. KAUPER. Well, I think, clearly there is a substantial amount of Government funding going on. There is also a question, I suppose, of who is doing it. There is some private funding, as well. I don't know the precise percentages, Senator; maybe you do. I do not have them. The research and development costs required to achieve commercially viable processes are, however, enormous and generally beyond the reach of all but the largest firms. In fact, many of the major oil companies are currently engaged in this research. Should this bill become law, an oil company might well conclude that further expenditure of capital on coal gasification, for example, was unwarranted and the company might abandon a promising effort. Such a result may well be contrary to the public interest.

The situation with respect to oil shale and tar sands is much the same. At present, neither of these energy sources is being exploited to any commercially significant extent. The expense of developing a technology to utilize the Canadian tar sands is such that a consortium of energy companies banded together to make a joint effort. S. 489 appears to categorically prohibit any such effort, and it is highly questionable whether such a blanket prohibition advances the public interest.

It is, of course, always possible that a joint venture will produce anticompetitive consequences, either actual or potential. I believe that existing antitrust enforcement authority is quite sufficient to allow careful analysis of such situations and, where appropriate, to enjoin their creation or continuation.

In sum, the factual justification for legislation to categorically prohibit cross-ownership of energy sources has yet to be demonstrated. Absent such an analytical base, and considering the potential adverse effects of such legislation, we cannot recommend its passage. If a basis for action is established by careful anaylsis, we would, of course, reconsider this position.

Senator ABOUREZK. Thank you, Mr. Kauper. We have been hearing, all during this set of hearings, from oil and coal company representatives and their spokesmen, that if they are not allowed to continue in the manner in which they have-in other words, continuing to violate antitrust laws-they are not going to produce oil, gasified coal, or they are not going to produce coal, they are not going to research and develop coal.

We hear that on television and the advertising bought and paid for by the oil companies constantly. And I am surprised to hear the Antitrust Division say the same thing and take the same line.

Mr. KAUPER. Well, I do not think I would put it quite the same way that you have said they put it. I am not sure they would have put it that way either. I do not think that they would have said that they needed to violate the antitrust laws.

I think the point that I am trying to make, put in somewhat different terms, is the possibility of harmful effects on the incentives side

of the analysis. That is a rather difficult thing to measure, obviously, particularly in terms of technology which is not yet developed. Obviously, one cannot state categorically who would develop the sources, whether we have a statute of this kind or not. Surely, I don't want to be in the position of saying they would not be developed. I do not have the factual base for saying that either.

It is quite possible they would be developed by somebody else, so that I do not want to be in a position of seeming to say that these resources will not be developed unless we have involvement by the petroleum companies. I do not necessarily believe that to be the case. But I think, particularly in these areas of new technology-and a number of the provisions of the bill in the energy areas we are dealing with are areas of new technology-it is very hard to speculate on where that development is going to come from and by whom. I think that is the crucial point.

Senator ABOUREZK. I think that probably the central question to this legislation is probably in its title, "The Interfuels Competition Act." And the primary competition between oil and coal lies in the area of public utilites.

Mr. KAUPER. That is correct.

Senator ABOUREZK. Electric power production can come and quite easily, in fact-come from either coal or oil.

Mr. KAUPER. That is true.

Senator ABOUREZK. And in fact, the U.S. Government has been encouraging the conversion of utility power production from oil to coal, because of the greater amount of coal reserves, wherever that is environmentally possible.

Now, say that you have a utility company that is shopping around right now for the cheapest source of energy for the production of electric power, and let us assume that the oil industry holds a dominant position now in the coal industry, which they do in fact.

They now own and control 44 percent of over captive coal reservesthese are oil companies that do that, and that centers around, Mr. Kauper, the statement by the first vice president of Continental Oil Co., when I asked him at these hearings earlier, "Would you allow your coal subsidiary to undersell your oil subsidiary on a BTU-equivalent basis?"

His answer essentially was, "Of course, not." And that makes sense. I mean, why would they do that? In spite of the fact that a coal company president from Old Ben Coal, connected with Sohio, tried to say yesterday, "Well, of course, we can undersell the oil subsidiary, and avidly answer a strong yes," I think he said.

I guess we all have to travel in terms of common sense once in a while, and it doesn't make sense that they would try to undersell each other.

However, it does make sense to prevent the oil industry from dominating the coal industry. And given that set of facts. I honestly can't see any basis for your position that there is no real danger or there is no real need for this kind of legislation.

Mr. KAUPER. Well, let me take the first part of your observation. I think the FTC studies, and our own conclusions, would tend to suggest that it certainly is true in the electric power industry that there is a high degree of interchangeability of fuel; that conclusion, I think,

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