Senator ABOUREZK. And, also you indicate that, heretofore, there had been relatively vigorous interfuel competition in what we will term, for the sake of this discussion, the energy industry. Is that valid?

Mr. MAX. Sure. Heretofore and currently, as well.

Senator ABOUREZK. Yes, sir. You state that with respect to these oil company acquisitions, they can be viewed as horizontal integration on a scale comparable to the formation of trusts in the latter decades of the 19th century. Is that accurate?

Mr. MAX. That's correct.

Senator ABOUREZK. But your conclusion is that we should not have a separation by legislative fiat, but that it should be handled on a case-by-case basis under section 7 of the Clayton Act.

And it is here that I question the validity of that conclusion; while you question the relative wisdom of the antitrust agency's enforcement policies so far. For instance, you note in footnote 33 of your prepared statement: "The failure of those agencies to challenge Continental Oil Co. acquisition of Consolidated Coal."

And at a time shortly after this acquisition, a Deputy Assistant Attorney General, Walker Comegys, who was in the Antitrust Division, testified before this subcommittee, and with regard to that acquisition, he said:

In the light of hindsight, we have seen growing concentration in the energy field, and perhaps if this had been a recognized fact at the time, I do not know what the result might have been.

At the same time, in 1970, your colleague, Dr. Netschert, of your organization, expressed great concern over oil companies taking over the coal industry at a time when 11 major companies had coal interests, according to his statistics.

Today, 16 of the 25 largest oil companies have coal interests. What has happened to antitrust enforcement over that period of time? Mr. MAX. It has been lousy.

Senator ABOUREZK. Is it possible, Mr. Max, that on a case-by-case basis, each of these oil company's acquisitions of alternate fuels may not, in and of themselves, have been a violation of section 7 of the Clayton Act, but that the cumulative effect of a series of such acquisitions may have been anticompetitive, wherein a single one might

not have been?

Mr. MAX. It is possible, Senator, but since I am speculating, since these cases were not brought and they were not tried, if I had to take a guess, I think that under the applicable section 7 standards, many of these acquisitions could have been successfully challenged.

And I certainly feel rather strongly, although I do not pretend to have studied it in complete depth, that that would have been true in the case-today would be true, as well-of the Continental acquisition of Consolidated Coal.

For a standard of comparison, look what the courts did with the Kennecott Copper acquisition of Peabody Coal; that was struck down. Now, if that gives us a clue, I submit that vigorous enforcement, directed at some of the petroleum company acquisitions, would be successful.

Senator ABOUREZK. Well, you are stating the ideal, with which I agree. However, it has not happened and my question is how long are we going to have to wait to find out whether section 7 of the Clayton

Act is going to do the job, until all of the alternative fuel sources are gobbled up, or

Mr. Max. I think that is a question appropriately addressed to the Assistant Attorney General of the Antitrust Division. I would like to hear his answer to that question, as well.

Senator ABOUREZK. Well, I would, too, and when he comes up here, we are going to ask him that, of course.

Mr. MAX. While you have him here, find out why he does not want his budget expanded, also. I understand, from the press, he is against that.

Senator ABOUREZK. I am reminded by the staff that it might cause a management problem, if they expand their budget.

The problem is that if we are going to be involved in all these vagaries of what is enforceable under the Clayton Act and what is not enforceable and, in fact, as you and I both concede, that hardly anything has been enforceable-would it not, in fact, be better to have a specific legislative stricture on what is anticompetitive and what is not so that you are not involved in legal interpretations and judicial interpretations of what is and what is not anticompetitive?

And, in fact, would that not save the economy much better than the way the economy is being saved now?

Mr. MAX. I really do not think so because I think it goes too far. There are, doubtless, situations where there are potentially procompetitive effects and, certainly, in terms of the Nation's economy, desirable effects, from acquisitions.

Senator Bartlett touched, and Mr. Perry, in his testimony touches further, on the capital question. I would hope it is not a fact that the only place the coal industry can get capital is from the petroleum producers. I question whether that is true, although I realize that argument is made.

But there is no doubt in my mind, at least that the inflow of capital, to the extent that it has occurred from the petroleum companies, has been a positive factor. And the costs of future development, as I understand it, in the fuels area, are immense. It may be that some incentive, some participation from the petroleum companies, is a desirable thing. The thing that disturbs me is an absolute standard, such as suggested by this bill, which constitutes an absolute prohibition. I think we would be better off dealing with it, as I have said, on a case-by-case basis, so as to not preclude that set of circumstances where there may be desirable effects from acquisitions. That is, I think, about as far as I can go.

I am sort of a traditionalist in what section 7 stands for, in this regard. I recognize it and I certainly cannot strongly endorse the quality and success of use of that statute over, particularly, the last few years.

Senator ABOUREZK. That is what I do not understand about your testimony. You admit-you even shout it from the rooftops-that what we are doing now is not working; yet you are afraid to try a new approach.

Mr. MAX. I am not afraid to try a new approach. One new approach might be application of section 7, since

Senator ABOUREZK. But that is what I am saying is not working. We have that, that law is there, and it is not working. So you would have

us just sit and bemoan the fact that the Antitrust Division is not doing anything.

Mr. MAX. No, I would not; no, I would not.

Senator ABOUREZK. Well, what would you have us to do?

Mr. Max. I would exert such pressure, I believe, if I were sitting on the other side of the table, as one might, to try and get

Senator ABOUREZK. On behalf of the administration?

Mr. MAX [continuing]. Effective enforcement in the Antitrust Division, and I have suggested another alternative, a legislative alternative, which, I think, might help to improve the situation, and that is my reference to something akin to section 105C of the Atomic Energy Act.

Now that section, in words or effect, requires, as part of the licensing procedure for a nuclear utility plant, a review by the Department of Justice, in terms of the principles of the Sherman Act, as I recall the language of the statute.

Now, what has resulted from that process? Several hearings and proceedings have been brought before the Atomic Energy Commission challenging certain alleged antitrust-related practices of the utilities as a result of the mandated review by Justice.

In that instance, they must review it and must take a position, one way or the other. Something similar in the case of other energy acquisitions might very well lead to a salutary effect.

I think it is worth trying before going the whole way with an absolute prohibition.

Senator ABOUREZK. You question an antitrust policy that prohibits a de novo entrance into another industry; and, of course, a conventional antitrust thinking is on your side in that respect. But I wonder if you are confused, with respect to de novo entrances. If, for instance, an oil company went out and discovered a previously unknown coal field, this would be de novo. But, as I understand it, the present trend is toward purchasing known, but undeveloped, reserves or going companies. Is this de novo in the sense that it brings new production onto the market that would not otherwise have appeared?

Mr. MAX. No, I do not think that I would so categorize it. The first illustration clearly is de novo entry.

Senator ABOUREZK. Now, if I can switch to another area: You indicate that the entrance of the petroleum producers might benefit competition through the injection of new sources of capital, new sources of know-how and some kind of management vitality. With respect to the new sources of capital, if alternative fuels have the potential of taking their place in the energy market, should not new sources of capital be forthcoming from areas outside of the petroleum industry? Mr. MAX. The answer is yes, provided there are not barriers which tend to keep out those sources of capital, which barriers do not apply or are not perceived as barriers on the part of the petroleum companies. Senator ABOUREZK. But I cannot conceive of the kind of barrier you are talking about.

Mr. MAX. There may be a differential perception of risk. A petroleum company may view the uncertainties of future air pollution policies and things of that sort as a lower level of risk than the stock market, let us say, or public sources of funds; and, therefore, capital may flow, under present circumstances, from the petroleum sector, and not from other

sectors.

If that is the case-and I really do not know whether that is the case or not, I have a notion it may be if that is the case, then we should be addressing ourselves to the question of what should be done to encourage nonpetroleum sources of capital.

Senator ABOUREZK. I think, in fact, and I would like you to respond to this, if you turn sources of alternative energy over to the oil industry as we are now doing by our inaction, are we not foreclosing opportuníties for investment to the rest of the capital market?

Mr. MAX. By definition, if the resources are limited, as soon as they are acquired and kept by one, they are not available to another. Senator ABOUREZK. So the answer is yes.

Mr. MAX. The answer is yes, so long as nothing happens.

Senator ABOUREZK. On another trend, let me just state a hypothetical situation. Let us imagine a market where every citizen of the U.S. must buy and own, on a continuing basis, a widget.

Now, the widget industry is characterized by a concentrated oligopoly structure. And someone has derived, in addition to that, a substitute for a widget. It would have the substitute we would call a gidget and it has a much lower cost of production.

Now, on a competitive market, if you would trace for me the price relationship between the gidget, which is a substitute at a lower cost, and the widget; and assume, for this purpose, that there are a number of firms in the gidget industry, would the gidget stabilize the price of the widget or would the gidget come in at some place below the price of the widget and, in turn, force the widget's price down?

Mr. MAX. More likely, the latter.

Senator ABOUREZK. So the competition would force the price down? Mr. MAX. I would hope so.

Senator ABOUREZK. Now, there have been several indications that, recently, the price of coal has spiraled upward at an astronomical rate to the point where it has reached, roughly, the price of oil.

In a competitive marketplace, assuming that coal has lower production costs, should it also have a lower selling cost?

Mr. MAX. Not necessarily.

Senator ABOUREZK. In a competitive marketplace?
Mr. MAX. Not necessarily.

Senator ABOUREZK. And why not?

Mr. MAX. Because if it were possible to offer the lower priced product at a lower price, the price of the higher priced product-in your example, petroleum-to the extent there is direct competition between the two fuels, would fall to the level of coal. So it would not be lower; coal would not be lower than petroleum in your example, but what would occur, presumably

Senator ABOUREZK. But, in this example, has petroleum dropped? Mr. MAX. Not to my knowledge.

Senator ABOUREZK. But coal has come up, has it not?

Mr. MAX. That is correct.

Senator ABOUREZK. And there is direct competition between those two fuels, is there not?

Mr. MAX. Sure, in many uses.

Senator ABOUREZK. All right. So, another question: What specific arts do petroleum companies have that are uniquely essential to alternative sources?

Mr. MAX. That one I cannot answer. I would be delighted to submit, subsequently, an answer from one of my colleagues who is much more knowledgeable in the technological area.

Senator ABOUREZK. We would appreciate that.

Mr. MAX. Fine.

Senator ABOUREZK. Another question: Are petroleum geologists any better qualified to locate uranium or coal deposits than are geologists who look for metals, gypsum, or plain water?

Mr. MAX. Let me duck that one equally as well, and let Dr. Netschert answer it for you.

Senator ABOUREZK. What petroleum production techniques are applicable to coal, uranium, or solar energy?

Mr. MAX. He is going to enjoy answering that, as well.

Senator ABOUREZK. Are the major oil companies the only people who can hire drilling contractors to sink geothermal wells?

Mr. MAX. I will try that one and say no.

Senator ABOUREZK. Now, Mr. Max, with respect to coal as a synthetic fuel source, is there any fundamental economic reason why we could not envision the development of a completely new, synthetic fuel industry, separate from conventional fuel industries?

Mr. MAX. I really do not know, one way or the other. I will let Dr. Netschert try an answer on that one, as well, or perhaps Mr. Perry.1 Senator ABOUREZK. Now, in your prepared testimony in footnote 26 on page 38, you mention that geothermal development may be owed partly to the fact that oil companies have available risk capital.

Could you account for the relatively better position of the oil companies in risk capital by the fact that they have enjoyed oligopoly positions in prices for many years already?

Mr. MAX. Yes.

Senator ABOUREZK. Would you, in this context, comment on the relationship between the oil companies and the commercial banks, and describe the effects that relationship has on competition?

Mr. MAX. I really have not studied that question, Senator, to any sufficient extent to give you a useful answer.

Senator ABOUREZK. With regard to your approach of a case-by-case look at anticompetitive effects of acquisition of opportunity fuel sources, would you say that at a certain stage in economic growth-for example, in a highly concentrated industry that is dominated by large corporations-would you say that incremental increases or decreases in competition-say, a change in the ratio from 83 percent to 81 percent, for example would you say that kind of a change means very little to the consuming public or to the economy in general?

Mr. Max. This is a concentration ratio of the top how many firms? Senator ABOUREZK. Well, of all the firms in that particular industry. Let us take the oil industry; it is concentrated.

Mr. MAX. Well, if it were a concentration figure for the top 20 firms, I would be less concerned than if it were for the top four. But I would be very concerned about a concentration ratio of 81 percent for the top four to begin with. So the incremental caution or concern that I would have from a change of that magnitude, I think, would be very little because I would be so concerned to begin with.

Senator ABOUREZK. So if you were to operate on a case-by-case basis, it really would not have very much impact on the person looking at

1 See p. 704.