ment of Justice, and there will be a soft antitrust policy. We should not have any man's policy, we ought not to have an Elman policy any more than we have a Katzenbach policy. But we have to have the law of the land up there, the Supreme Court law. And I still say, Mr. Chairman, we have enough laws on our books, let us enforce what we do have, and let us live.

Thank you, Mr. Chairman.

Chairman DIXON. Now, Mr. Waller, you have had your say. I hope you feel better.

Mr. WALLER. Thank you.

Chairman DIXON. I think everybody is entitled to their say in America. I don't think the lawyers are quite as bad as you might think they are, or that judges are or commissioners perhaps are motivated by principles that aren't of the highest. I assure you I have great respect for my colleagues. This is not an easy chair to sit inas you might well understand. We are trying to do our best. But I am always reminded of what Senator Langley told me one time: "The greatest thing about America is listening to people."

And we listened to you, sir. And I wish you well.

Mr. WALLER. Thank you.

(Waller exhibits Nos. 1 to 6 appear in the appendix at pp. 10001005.)

Chairman DIXON. We will stand adjourned until May 20 at 10 o'clock.

(Whereupon, at 5:30 p.m., May 12, 1965, the Commission recessed to reconvene at 10 a.m., Thursday, May 20, 1965.)

55-013-66—vol. 1—-42

FTC INDUSTRY CONFERENCE ON MARKETING OF

AUTOMOTIVE GASOLINE

THURSDAY, MAY 20, 1965

FEDERAL TRADE COMMISSION,

Washington, D.C.

The Commission met in public hearing, pursuant to recess, at 10 a.m., in room 532, Federal Trade Commission Building, Hon. Paul Rand Dixon (Chairman) presiding.

Present: Paul Rand Dixon, Chairman; Philip Elman, Commissioner; A. Everett MacIntyre, Commissioner; John R. Reilly, Commissioner; and Mary Gardiner Jones, Commissioner.

Chairman DIXON. We continue the hearing on the marketing of gasoline this morning.

The first appearance will be the representative of the Frontier Refining Co.

Would you identify yourself, please?

TESTIMONY OF NEAL R. OLSON, VICE PRESIDENT, THE FRONTIER REFINING CO., DENVER, COLO.

Mr. Olson. My name is Neal R. Olson. I am vice president in charge of marketing of the Frontier Refining Co. with headquarters at Denver, Colo. I have been engaged in petroleum marketing in the Rocky Mountain area for the past 15 years or so.

The Frontier Refining Co. is a small but prominent independent refiner. From its refinery in Cheyenne, Wyo., it markets products on the eastern slope of the Rockies, from Wyoming and Colorado eastward through Nebraska and Kansas to Iowa, South Dakota, and Minnesota. From its refinery in North Salt Lake, Utah, augmented by a small plant in Farmington, N. Mex., it markets on the western slope of the Rockies from Arizona and New Mexico north through Utah and Nevada on its Idaho, Oregon, and Washington (its Beeline Division).

Frontier markets through jobbers, through dealers, and through its company owned and operated stations. The relative importance of these methods of distribution will appear in the remarks I have to make here. Frontier markets under its own brand names-Frontier and Beeline and unbranded to independents.

While it owns a small amount of crude oil production, Frontier, typical of an independent refiner, buys the great bulk of its crude requirements. It receives the crude oil through major pipelines paying the posted tariffs, although it just recently has constructed a short crude line to reach oil otherwise not economically accessible. It operates a small products pipeline from Cheyenne into central Nebraska. Frontier is a nonintegrated, regional refiner marketing in

an area beset with the competition of many aggressive major oil companies, national and international in size, and other independent refiners.

It appears to us that we, as an independent refiner, can be of most service to the Commission in these proceedings if we describe marketing in the Rocky Mountain area and provide you with a series of examples of predatory marketing practices which are ruinous to independents if not stayed-and which call out for action by the Federal Trade Commission.

The Rocky Mountains is a crude exporting area with pipelines moving crude into the midcontinent. In the early days the backhaul of products into the area was costly and the products market was served by local refineries. A sound market structure developed with room for majors and independents alike.

With the spread of products pipelines, gasoline now moves into the area creating new competitive forces. But the market, too, has expanded. And there is still room for the efficient major and the efficient independent refiner and marketer.

However, in recent years the major companies have reached for an ever-increasing proportion of the market. But not by fair competitive means. The area has been racked by price wars brought on to raid the independent markets. We are involved in a war of attrition, financed for the majors by worldwide crude profits. The short-term losses they suffer in localized price wars are a small cost if they can crush their independent competitors. They are busy doing so with a series of practices which well earn the attention of this Commission.

The 2-cent differential: It is clear from the recent Sun Oil case involving the 2-cent differential in gasoline prices in the Southeast that this Commission is familiar with the traditional differential in price between major branded and independent gasolines. That traditional 2-cent differential is found in the Rocky Mountains.

The principal difference between various brands of gasoline is market acceptance. The majors and most independents sell first-quality gasoline. The gasolines are made in refineries of comparable technological proficiencies; they are made with competitive octane ratings; they are of like grade and quality. Various refiners use distinguishing additives but the majors using additives sell their gasoline at the same level as other majors, the additives being a sales tool and not the basis for pricing.

The majors, with nationwide, even worldwide distribution, incur marketing expenses which far exceed the market expense incurred by or sustainable by independents. Intensive advertising programs by television, radio, and the printed page, and the extensive use of credit cards, are effective but costly. Palatial service stations on expensive sites, while themselves uneconomic, are monuments to profits in foreign crude oil. Independents do not have the means to compete on this costly level.

Independents must confine themselves to stations which are selfsustaining. The independent, to meet the competitive advantage of the majors, traditionally has sold at a price below the majors, passing on to the motorist the savings in market expense as its method of effective solicitation. Time and experience has set the resulting differential at 2 cents; at that level the independent can find its niche in the market

without creating a constant drain upon the higher priced gallonage of its major competitor.

It is

However, the 2-cent differential has proved a convenient scapegoat and majors, intent upon raiding markets, have mounted attacks upon the 2-cent differential as an excuse for inducing price wars. significant to note that the price wars brought on by attacks on the differential are localized, generally confined to areas where independents have built well.

The technique is simple. The aggressor major company or companies will decide that in a given area only a 1-cent differential will be permitted. A reduction of 1 cent on major branded gasoline is followed by a defensive cut of 1 cent by the independent-and the market cascades down to a ruinous low level.

Meanwhile in surrounding and adjoining markets in which the majors also market the price levels are sustained at normal. While the major thus finances its localized price war, the local independent faces ruin. Some are ruined, other are crippled, and ultimate surrender and elimination is the foreseeable result. That is, unless the law against predatory pricing and practices is enforced.

The 1-cent plan: Our case in Denver is a prime example of the imposition of the so-called 1-cent plan in place of the traditional 2 cents differential. In Denver the imposition of the 1-cent plan and the resulting price was initiated and conducted primarily by Phillips, and by Continental, the traditional market leader.

Beginning in 1958 the major price was dropped to within 1 cent of the independent price. Independents, in self-defense to maintain the 2 cents differential essential to their survival, dropped 1 cent in price. Round after round of cuts brought on price war after price war through 1960.

The results were ruinous to independents in the price-war territoryFrontier among them. In 1958 Frontier was serving 87 retail stations in the Denver market. In 1959 it was serving 48, and in 1961 it was serving only 43 stations. By 1963 it had increased the number of stations slightly so that it was serving 50 stations in the Denver area-still less than two-thirds of the number being served when the market was at a 2 cents differential.

But this is only one measure of the losses caused by the 1-cent plan price wars and the resulting low prices. The majors gave price protection to their dealers and jobbers throughout the price-war maneuvers. Frontier with its limited resources was not able to protect its dealers and jobbers in similar fashion for the extended period of the price wars. As a result it and its jobbers suffered. In the year ended October 31, 1960, as compared to the previous year, Frontier lost distribution of over 7 million gallons of gasoline through its jobbers.

At this point, Frontier was forced to surrender. It and another sizable independent refiner accepted a 1-cent differential in an attempt to restore the market to a somewhat near normal basis. The majors have permitted from time to time other independents to post a 2-cent differential.

But the damage was done. Frontier had already lost its jobbers by reason of its inability to continue jobber and dealer margin supports, and the marketing prospects, with Frontier gas selling at only a 1-cent differential, were too dismal for us to recover or replace them. Some