energy sectors to divest themselves of these interests within three years of the bill's enactment, again without regard to competitive impact. In order to reach a conclusion as to the desirability of these provisions, it is useful to consider in some detail the manner in which the analysis described above might be applied, within the framework of Section 7 as it is now construed, to mergers of the type addressed in S. 849.

A. THE NATURE OF THE APPROPRIATE RELEVANT MARKETS

16

In delineating the appropriate relevant markets within which to assess the competitive impact of what, for convenience, I will hereinafter 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.1 As several recent studies have shown," for a number of end uses most of these energy sources are fully substitutable for one another. This should come as no great surprise; indeed, interfuel competition has been a characteristic of the energy sector since virtually the turn of the century. At the outset, this competition consisted largely of the progressive erosion of coal's position as the dominant energy source. Fuel oil in the 1920s and 1930s invaded coal's heating market. Diesel oil in the decade after World War II all but eliminated coal's railroad market and severely eroded its marine transportation market. Simultaneously, natural gas appeared on the scene, completing the rout of coal in the heating market and taking away oil's dominance of that market in the process.

This was competition with a vengeance; it was not nibbling at the edges, but was a struggle for dominance in or, indeed, complete takeover of entire markets. By the early 1950s it had resulted in the picture we see today: transportation is the all but exclusive province of oil; oil and gas share the bulk of the heating market, with gas dominant. Coal's remaining important market, aside from its special use for coke manufacture, is the utility boiler fuel market, in which it competes with the other fuels but in which it dominates.

Beginning in the 1950s, significant additional changes began to occur. One of the more recent has been the emergence of commercial nuclear power, which brought uranium into the boiler fuel market. As of the end of September 1974, 5.5 percent of total on-line generating capacity was nuclear powered; by 1985 this figure is expected to grow to nearly 30 percent.18

Another such change has been the development of geothermal energy as a source of electric power generation, particularly in the western United States. Although this energy source, which utilizes naturally heated water stored beneath the earth's surface, is only now beginning to undergo systematic exploitation, "[g]eothermal electric power generation, at favorable geologic sites, has been found to be feasible and competitive with other commercial sources of energy.' Uranium, coal, oil, gas and geothermal energy will serve the identical function in an electric utlity power plant-namely to produce heat which makes steam which turns the turbine-generator to produce electricity.

99 19

In the non-boiler fuel market there is also competition between coal, oil and gas, with coal at a basic disadvantage because of its greater difficulty of handling than the fluid fuels. In certain sections of the country, especially in the Northeast, there is significant competition between gas and oil; indeed, during the period prior to the emergence of serious supply problems with respect to both fuels, one of the complaints of the oil industry was that the regulation of natural gas field prices enabled gas to displace oil in the residential and commercial space heating markets, to the detriment of oil company oil revenues.

The various energy sources are in fact actual competitors with one another. In addition, it is also apparent that the pace of technological change has broadened the scope of potential competition, both in terms of additional uses for existing fuels and in terms of the development of a variety of new energy sources. Included among the former is the development of the fuel cell, which can be thought of as a continuous battery, in which fuel is continually fed in and electricity generated through flameless oxidation. Examples of the latter include the 16 The delineation of the appropriate section (s) of the country would appear to present no unique problems; consequently, I do not consider it separately.

U.S. Gov

17 See, for example, Federal Trade Commission, Interfuel Substitutability_in_the_Electric Utility Sector of the U.S. Economy, Thomas D. Duchesneau (Washington, D.C. ernment Printing Office, 1972); Richard Gonzalez, "Interfuel Competition for Future Energy Markets," Journal of the Institute of Petroleum (July 1968).

18 Data are derived from Atomic Energy Commission, The Nuclear Industry 1974 (Washington, D.C. U.S.Government Printing Office, 1974), p. 14.

10 National Petroleum Council, U.S. Energy Outlook: New Energy Forms (1973), p. 63.

commercial development of oil shale for the production of synthetic liquid and gaseous fuels and the various types of coal gasification projects currently underway.2

20

Considered as a whole, these factors suggest both 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 (say) of 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." 22

21

B. THE STRUCTURE, CONDUCT AND PERFORMANCE OF THE FUELS MARKET THE GROWTH OF THE ENERGY COMPANY

Perhaps the single most important development within the energy market over the last ten years has been the growth of the horizontally- and vertically-integrated energy company. Since 1965 a growing number of oil companies have taken positions of one sort or another in the other fuels. As shown by the data in Table 1,23 of the 25 largest oil companies (each of which, of course, is in natural gas), 19 have positions in oil shale, 15 have positions in coal, 22 are in uranium and nine are in tar sands (another resource capable of yielding synthetic crude oil, of minor potential in this country, but of enormous potential in Canada). These positions have been taken in several forms: the acquisition of existing companies in the other fuels industries; the acquisition of reserves holdings; the establishment of new ventures, either alone or jointly with other companies either within or outside the petroleum industry; and participation in research and development ventures, either alone or jointly with other companies. Since neither oil shale nor tar sands presently is commercial, the largest effects to date have been in the coal and uranium industries. The data shown in Table 2 illustrate the extent of coal interest acquisitions since 1965 by some 30 oil companies. As the data in Table 3 show, in 1973, the latest year for which sufficient data are available, four of the 15 leading coal producers were owned by petroleum producers; indeed, in that same year these four companies accounted for 17 percent of total coal output and eight oil companies produced over one million tons per year through coal operating subsidiaries (Table 4).

24

In uranium, oil interests already bulk large in the mining and milling stages and are expanding rapidly into the other stages of the uranium fuel cycle. As shown by the data in Table 5, in 1972 Kerr-McGee was the single largest producer, accounting for 22 percent of total uranium milling capacity directly and another 2 percent through half ownership. Exxon's 1972 startup capacity accounted for an additional 6 percent of total United States capacity, while in aggregate, 38.4 percent of total capacity was held by petroleum producers. An indication of the extent to which the oil industry is entering the uranium business and integrating throughout the various stages of the fuel cycle is given by the data in Table 6. These data, which were prepared from Federal Trade Commission data and a survey of the literature, list those of the 25 leading petroleum

25

20 For an interesting discussion of the current efforts to convert coal to synthetic fuels, see James G. Phillips, "Energy Report/Coal R&D Program to Lead Drive For SelfSufficiency," National Journal Reports (July 13, 1974), pp. 1,047-1,055.

21 An example would be the further development of the coal slurry pipeline.

22 U.S. v. Penn-Olin Chemical Co., 378 U.S. 158. See also U.S. v. El Paso Natural Gas Co., 376 U.S. 651.

23 These data are gleaned from a literature survey and may be incomplete.

24 Since 1970, most of the acquisitions have been made by the smaller petroleum producers; however, it should be noted that Standard Oil Co. of California recently acquired 20 percent of AMAX Coal Company's common stock (Wall Street Journal, June 2, 1975, 2).

p.

25 Federal Trade Commission, Concentration Levels and Trends in the Energy Sectorof the U.S. Economy, March 1974, p. 223.

producers which are either presently in stages other than exploration or reserves holdings, or which have indicated plans to enter other stages. These data doubtlessly understate the fuel extent of oil company activity in the nuclear industry in that they do not show the additional capabilities and plans of some of the companies for the production and processing of other nuclear materials such as thorium and plutonium.

To summarize, the last 10 years have witnessed a marked tendency among petroleum producers to acquire interests in other energy sectors. Thus, the most recent available data indicate that the petroleum sector accounts for at least 17 percent of total coal output and more than 38 percent of uranium oxide (U3O8) mill capacity.

One further point is relevant. 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.

C. THE PRESUMED IMPACT UPON COMPETITION

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 costs 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 described above, the acquisitions by oil companies across the energy market spectrum take on special significance. Indeed, they may be viewed as classical horizontal integration on a scale comparable to the formation of the trusts in the latter decades of the nineteenth century. In short, the oil companies, themselves portraying their activities as efforts at diversification, are in fact systematically acquiring their competition.

D. THE IMPLICATIONS FOR ANTITRUST POLICY

To the economist, these developments are of serious concern. 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 oil 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 57-567-764

26

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.

As presently constituted, Section 7 provides a useful tool for distinguishing between those acquisitions whose tendency is to lessen competition and those whose impact may well be, on balance, procompetitive. Moreover, for the most part this is the manner in which it has been utilized. (Indeed, if anything, criticism has centered largely upon the tendency of the courts to treat potentially procompetitive mergers rather too harshly.)" Thus, as noted above, in assessing competitive impact, the courts have been able to draw distinctions between mergers among leading actual or potential competitors and toehold acquisitions; the recent decision condemning Kennecott Copper's acquisition of Peabody Coal is a case in point. Similarly, they have recognized that in cases involving joint ventures, possible anticompetitive tendencies must be balanced against potential gains due to risk-sharing and the realization of economies of scale which, but for the joint venture, would have been largely unattainable. Furthermore, the courts have shown themselves adept at fashioning fresh distinctions and remedies in response to advances in the state of economic knowledge. In addition to the concept of the toehold acquisition, the doctrine of potential competition has been expanded and refined, as has reciprocity as an unfair trade practice."

30

29

To the economist, the primary importance of the foregoing lies in the fact that, under Section 7, consideration is given to economic impact. Applied to the energy sector, the usefulness of this approach should be apparent. Those mergers which, all things considered, are likely to be procompetitive can escape antitrust condemnation while those whose effects are likely to be anticompetitive can properly be proscribed. In contrast, the provisions of S. 489, if enacted, would preclude such inquiry; regardless of the effect of the proposed merger or ownership arrangement, the fact that it exists at all is sufficient for condemnation. In my judgment, this is to accord primacy to form over substance; to run the risk of impairing the operation of those competitive processes which the bill is designed to enhance; and, perhaps most importantly, to impede the efficient transfer of physical financial and managerial resources within a sector of the economy which is already facing relatively severe problems in this regard.

Let me be clear: I am in no sense advocating a blanket exemption for mergers and ownership arrangements of this kind. Those which possess the potential to lessen competition should not be accorded treatment at variance with current antimerger policy on the basis of so-called "crisis" arguments. Proposals to modify the thrust of antitrust policy during periods of economic difficulty are neither new nor novel. However, although the expressed purposes of these appeals have often been praiseworthy in principle, grants of exemptions, even for supposedly limited periods of time, have carried with them the potential for abuse. An example of particular relevance to the subject here under discussion is the "codes of fair competition" promulgated under the National Industrial Recovery Act of 1933; this led to the establishment of the "dancing partners" pricemaintenance scheme by members of the petroleum industry which was ultimately struck down by the Supreme Court.32

Instead, what I am proposing is that we do not let our concern for potential competitive abuses drive us to the other extreme-the adoption of a rigid per se position which sacrifices rigorous analysis for administrative convenience. Sec

26 Moreover, it is equally unclear that what little geothermal development that has already taken place in California would have occurred in the absence of petroleum company development, partly because the petroleum producers possess the drilling technology, but also because they have the risk capital available. To some extent, the Geysers may be an exception.

is

27 In his dissenting opinion in U.S. v. Von's Grocery Co., Mr. Justice Stewart expressed the view that, with respect to litigation under Section 7, "[t]he sole consistency that the Government always wins." See also Robert H. Bork and Ward S. Bowman, "The Crisis in Antitrust," Columbia Law Review (March 1965), pp. 393-376. 28 467 F. 2d 67; cert. denied, 94 S. Ct. 1617.

29 In this regard see U.S. v. Terminal Railroad Association of St. Louis, 244 U.S. 383 (1912) Associated Press v. U.S., 326 U.S. 1 (1945); U.S. v. Penn-Olin Chemical Co., supra. For an interesting discussion of the position of the courts toward joint ventures, see Robert Pitofsky, "Joint Ventures Under the Antitrust Laws: Some Reflections on Penn-Olin." Harvard Law Review (March 1969).

30 See F.T.C. v. Procter & Gamble Co., 386 U.S. 568; U.S. v. Falstaff Brewing Corp.,

supra.

31 See F.T.C. v. Consolidated Foods Corp., 380 U.S. 592; Allis-Chalmers Manufacturing Co. v. White Consolidated Industries, Inc., 414 F. 2d 506.

32 U.S. V. Socony Vacuum Oil Co., 310 U.S. 150 (1940).

tion 7 as presently constituted and interpreted is adequate to the task at hand; the enactment of S. 489 would introduce rigidities which are at best unnecessary and at worst antithetical to the economic objectives of antitrust policy.

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 non-petroleum capital from flowing into coal, and to the extent legislation could mitigate those factors, then the problems should be attacked directly. If 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.

IV. Conclusion

To summarize, it is my position that Section 7 of the Clayton Act presently can be an effective instrument for preventing anticompetitive mergers and ownership arrangements within the energy sector. The general economic issues presented thereby, i.e., the degree of end use, interproduct substitutability and the existence and effectiveness of both actual and potential competition, are clearly amenable to antitrust economic analysis; furthermore, they have been and continue to be the subject of ongoing judicial scrutiny. Consequently, I see no need for the enactment of the specifications contained in S. 489; indeed, in my judgment, the bill carries with it the potential for substantial economic harm. To be sure, I recognize the existence of many of the problems that doubtlessly led to the drafting of the bill in the first place. For one thing, with certain exceptions, activity in this area by both the Justice Department and Federal Trade Commission has been conspicuously absent. Whether this has been the result of an inappropriate application of the antitrust laws due to political considerations and/or the putative crisis atmosphere or budget limitations, or simple nonfeasance, I am not at this point prepared to say. Secondly, given the current pace of antitrust litigation, case-by-case resolution of questions of competitive impact can often take considerable time, with attendant risks to the competitive process in the interim.

33

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With respect to the latter, given adequate attention by the enforcement agencies, it should certainly prove feasible to mitigate the more pernicious anticompetitive effects by obtaining preliminary injunction and/or hold separate orders. With respect to the former, perhaps the enactment of a measure similar to Section 105C of the Atomic Energy Act" might be in order; this would stipulate (a) that the acquisition by any petroleum producer of any other property involving energy production or sale be submitted to the Justice Department and/or the Federal Trade Commission for an advisory letter, and (b) that either agency could call for a hearing to determine whether such an acquisition would tend to create or maintain a situation inconsistent with the antitrust laws.

In conclusion, I would urge this Subcommittee to consider very carefully the question of whether a bill as rigid as S. 489 is needed to cope with the problems to which it is addressed. It is a recognized tenet of antitrust policy that exemptions, both expressed and implied, are to be construed as narrowly as possible; and that an arrangement which, although designed to attain a presumably desirable economic objective, will nevertheless tend to affect competition adversely is to be permitted only if similar results could not be obtained via less retrictive alternatives. I would submit that such an approach be followed here; that is, only if it is determined that Section 7 of the Clayton Act-clearly a less restrictive alternative cannot obtain acceptably similar results, should the enactment of S. 489 be contemplated. If Section 7 can be shown to suffer from inherent deficiencies when applied to the energy sector or if, despite the opportunities provided by Section 7, Justice and/or the Federal Trade Commission are simply unable to provide an adequate explanation for their combined failure to exploit these opportunities, I would reluctantly conclude that the dynamics of the situation might well require that the existing laws be supplemented. However, I would urge that the Subcommittee not consider current antitrust policy and S. 489 as either/or alternatives. Rather, other alternatives, perhaps similar to that suggested above, should be explored with a view toward maintaining as much economic flexibility as would be consistent with an effective antimerger policy for the Nation's energy sector.

23 For example, note the failure of either agency to challenge Continental Oil Company's acquisition of Consolidated Coal Company. 34 68 Stat. 919 as amended by Public Law 91-560, 84 Stat. 1472, Section 105C.