Appendix — Exxon Corp. v. Governor of Maryland

SUPREME COURT OF THE

OCTOBER TERM, 1977 ~.

Nos. 77-10, 77-11, 77-12,

77-47, and 77-64

EXXON CORPORATION and PHILLIPS

PETROLEUM COMPANY,

Sueii, Om COMPANY,

CONTINENTAL Oi, COMPANY and

Kayo O11 COMPANY,

Guir O11 CORPORATION,

ASHLAND OIL, INC., COMMONWEALTH Olt

REFINING ComPANY, INC. and PETROLEUM

MARKETING CORPORATION,

Appellants,

vu

GOVERNOR OF THE STATE OF MARYLAND, et ai.,

Appellees.

APPEAL FROM THE

i COURT OF APPEALS OF MARYLAND

APPENDIX

Volume II — Pages 425 - 826

APPEALS DOCKETED JULY 1,8 AND 11, 1977

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TABLE OF CONTENTS Page

VOLUME Il

TRANSCRIPT OF PROCEEDINGS (continuing)

Charles Horace Berry —

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EXHIBITS:

Plaintiffs’ No. 3 — Kayo Oil Company Maryland Stations . .

Plaintiffs’ No. 4 — Affidavit of George W. Ruppersberger .. .

Plaintiffs’ No. 8 — Affidavit of Robert G. Kelvey ...-.---

Plaintiffs’ No. 10(a) — Letter of Counsel re Affidavit

of Walter D. Naughton) ...-- ee eee eee eee teres

Plaintiffs’ No. 10(c) — Affidavit of Walter D. Naughton

List of Other Exhibits of Plaintiffs .......-+-+++ee>

Defendants’ A — Letter of the Honorable Marvin Mandel,

Governor of Maryland, dated June 13, 1973, to the

Honorable Louis L. Goldstein, Comptroller of the

oe 2 @ @ @ 2 2 62 6:02 OO 2 6 8-4.4°4. 22.

Defendants’ B — Retail Service Station Dealer Question-

naire and Cover Letter of the Honorable Louis L.

Goldstein, dated June 29, 1973... 2.2 eee eee eeeees

Defendants’ c i Major Oil Company Questionnaire .....-.

Defendants’ D — Results and Analysis of Service

Station Dealers Questionnaire .....---+e+5eeeeee

Defendants’ E — Analysis of Major Oil Companies

Questionnaire .. 6... 6 eee ee eee eee eee eens

Defendants’ F — Draft of Proposed Legislation Submitted

to the Honorable Marvin Mandel, Governor of Maryland

by the Honorable Louis L. Goldstein, Comptroller of

the Treasury... c ccc cc ccc crereeescceseees

Defendants’ G - Letter of the Honorable Louis L. Gold-

stein, Comptroller of the Treasury, dated January 7,

1974 to the Honorable Marvin Mandel, Governor of

Blaryfamd nn ccc ccc cn scccccesesccsssesesess

Defendants’ | — House Bil] 918

Defendants’ K-1 — Statement of James E. Grady, Public

Affairs Manager, Exxon Company, U.S.A., Eastern

Region, Before Senate Economic Affairs Committee

Defendants’ K-2 — Statement of James E. Grady, Public

Affairs Manager, Exxon Company, U.S.A., Eastern

Region, Before House Economics Matters Committec

Defendants’ K-3 — Statement of Shell Oil Company on

Maryland House Bil] 918

Defendants’ K-4 — Statement of Vic Rasheed before the

Economic Matters Committee

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Depositions of Charles H. King and J. D. Campbell,

B.P. Oil Corporation, Filed October 20, 1975

OPINIONS:

Memorandum of the Circuit Court for Anne Arundel!

County dated Octover 14, 1975 appears in the

Joint Appendix to Jurisdictional Statements at

pages 49a to 5la

Memorandum of Opinion of the Circuit Court for

Anne Arundel County dated January 27, 1976

appears in the Joint Appendix to Jursidictional

Statements at pages 53a to 134a.

Opinion of the Court of Appeals of Maryland dated

February 18, 1977 is printed at 279 Md. 410

(advance reports) and at 370 A.2d 1102 and

appears in the Joint Appendix to Jurisdictional

Statements at pages la to 44a.

Supplemental Opinion of the Court of Appeals of

Maryland dated April 13, 1977 is printed at

279 Md. 456 (advance reports) and at 372 A.2d

237 and appears in the Joint Appendix to Juris-

dictional Statements at pages 45a to 48a.

425

(Witness) My name is Charles Horace Berry, I live at 47

Maclean Circle in Princeton, New Jersey.

DIRECT EXAMINATION

By Mr. Greenwald:

Q. Dr. Berry, you hold a Ph. D. in economics from the

University of Chicago, is that correct? A. That’s correct.

Q. And do you currently hold a teaching position? A.

Yes, I do.

Q. Where is that teaching position? A. At Princeton

University.

Q. At any particular school at Princeton? A. My

appointment is in the University as professor of

economics and public affairs. That’s a joint appointment.

I’m a professor of economics for the Economics

Department and a professor of public affairs within the

Woodrow Wilson School of Public and International

Affairs; and the title reflects the fact that it’s an

appointment in each of the two departments as it were.

* * *

(T. 261) (Dr. Berry’s resume (Curriculum citae) filed

herewith as Plaintiffs’ Exhibit No. 5).

Q. Dr. Berry, have you ever testified from the

professional economist’s point of view as to the validity

of diverstiture legislation related to the petroleum

industry? A. To the validity of it?

Q. Yes, as to whether from an economist’s point of

view this is anti-consumer legislation or pro-consumer

legislation? A. I’ve testified as to the desirability of

legislation of that sort on one occasion, yes.

(T. 262) Q. Would you share with us the circum-

stances under which you've so testified? A. About a year

ago, a little bit more than a year ago, I was asked by

Assemblyman Baer of the State of New Jersey to appear

before his committee of the Assembly and give my

426

reaction as a disinterested outsider but as somebody

concerned with analyzing this type of policy proposal as

to the desirability for the consumers population in New

Jersey of adopting of a bill which restricted refiners and

distributors of petroleum products from operating retail

facilities within the state and I did so I believe in

September of last year.

Q. Were you sponsored or supported by any particular

interest group in offering this testimony? A. No, I was

asked specifically by Assemblyman Baer to come in as

somebody who was not directly involved in any way with

the—with those hearings or with the development of that

bill or with its advocates and to react independently and

give the committee my judgment with respect to whether

it was a good bill for the consumers and residents of the

state. I did so in exactly that spirit.

Q. Were you paid for your analysis of this proposed

New Jersey legislaticn or for your testimony? A. No, I

did it because I was asked to do it by Mr. Baer.

* * *

(T. 269) Q. Now, Dr. Berry, you’ve been retained by

Gulf Oil Corporation to act as an expert in this case, is

that correct? A. That’s correct.

Q. And you’re being paid for your efforts, is that

correct? A. Yes, Iam.

Q. Basically Gulf has requested that you review the

legislation at issue here particularly Paragraphs B and C of

Chapter 854 of the Laws of Maryland 1974 from the

point of view of the consuming public, is that correct? A.

That’s correct.

Q. Have you made such a review?

(Mr. Woodstock) Objection, Your Honor.

(Court) All right, sir.

(Mr. Woodstock) I don’t believe that the witness has

been qualified sufficiently to testify as to this legislation,

427

number one, with regards to petroleum marketing;

number two, what the effects of vertical integration in

the retail marketing of Maryland, number three, as a

consumer expert with regards to consumers within the

State of Maryland.

(Court) Overruled.

* * *

(T. 270) Q. Have you made such a review of

Paragraphs B and C of the Laws of Chapter 854 of the

Laws of Maryland 1974? A. Yes, I have.

Q. All right, and have you reached any conclusion

based upon your expertise as a professional economist

whether Paragraphs B and C will benefit or hurt the

Maryland consumer? A. Yes, I have.

Q. What is that conclusion? A. I think that the effect

of the implementation of this law will be adverse to the

interests of the consumers in the State of Maryland.

Q. Why do you say that, Dr. Berry? A. I think if—I

think that the statute if implemented would have three

quite separate and, of course, related effects which would

operate in the direction of lessening the intensity of

competition primarily within the retailing of petroleum

products within the state, possibly within the refining of

the product within the country and that as a consequence

of both of these effects each of them operates in the

same direction, each would tend to alleviate downward

pressure on the price of petroleum products which would

otherwise be present (T. 271) and, therefore, would

operate to the disadvantage of the consumers of

petroleum products within the state, quite possibly also

outside the state; and I can amplify that a little bit if you

would like.

Q. Yes, would you please explain exactly how in your

opinion the Paragraphs B and C of the statute— A. Well,

as I—

428

Q. —accomplish that. A. As I understand the content

of Paragraphs B and C, there would be basically three

things. It would require that a certain ciass competitor

currently active at the retail level within the State of

Maryland would have to either divest themselves of

refining interests outside the state, create them within the

state or have to cease activity as retailers within the state.

Secondly, no refiner or producer of crude petroleum

anywhere in the country would be permitted under these

statutes—under these paragraphs if effected to enter the

state at the retail—in terms of the retail distribution of

petroleum products and that would constitute a complete

barrier to entry. That’s prohibition with respect to entry.

For both those reasons whatever regulatory impact of

with respect to maintain margins low may be present

regarding non-integrated—I’m sorry integrated companies

operating at (IT. 272) the retail level within the state now

and the impact of any integrated refiner which might

integrate to the state would be lost. Therefore, the net

direction of those two effects would be to reduce the

vitality of competition at the retail level within the state.

In addition, no retailer active in the petroleum industry

within the state would under this statute be permitted to

integrate backwards to acquire position in either refining

or production while maintaining his position within the

state and that would exclude that class of competitors

from the potential entry at the refining—at the refining

level, and the direction of that effect is also clear. It

cannot improve vitality of competition at the refining

level. It might quite possibly lessen it and once again for

that reason the regulatory pressure, power of competition

to control prices at the wholesale level would also be lost.

I put these both together and the direction of any effect

in the aggregate, combining the impact would be towards

higher prices. In other words prohibiting, establishing

429

those two bars to entry and excluding a particular class of

competitors presently within the market would have the

net effect, I think, if any, of increasing the price of

petroleum products at retail.

Q. In your judgment is there any particular advantage

to the consuming public in permitting company operated

stations? A. Yes, I think there are, but that’s really just

the (T. 273) mere image of the undesirability of

excluding a particular class of competitor from the

industry at retail. It seems to me that one always—that

one ought to be very concerned whenever a particular

class of competitor is removed from a market and it

seems to me that in the retailing of petroleum products

of this sort and retailing of products of any sort, it’s

highly desirable to let every potential and actual

competitor compete within that market so that the full

array of possible methods of retailing a product may be

preserved. In the cases of the petroleum industry it’s a

rather peculiar industry in that the basic product, which I

take it is gasoline, is typically retailed in conjunction with

a range of the different types and associated services,

ranging from very liberal to a great deal, ranging from a

lower price, for example, at a perhaps net thoroughly

desirable location to a higher price at a very convenient

location. It’s important—it’s important if that market is

to operate satisfactorily that as much opportunity to

move in and offer whatever type of package particular

retailer feels is appropriate, particular seller feels is

appropriate so the consumers can register their choice

within that market; and it’s only by having that array of

options open to the consumer the consumer by reacting

will signal to the sellers of the product in question what it

is that he wants so that that marketer in fact can respond

to that.

* 430

(T. 274) If ome excludes a particular class of

competitor, that means that some type of outlet may be

lost, the potential for consumers to react to that may be

lost, the market may act less perfectly than it otherwise

would.

Q. Are you able to offer us an example of a situation

in which the consumer did lose for a period of time the

opportunity to make a choice? A. I’m not sure that I can

offer a precise—well, perhaps I can. Let me offer, if I

may, two quick illustrations. One that comes to mind is

the situation which existed in this country prior to the

introduction of small foreign-built motor cars, particu-

larly Volkswagens. There had been some debate prior to

that time about what it was consumers really wanted and

it was alleged that the manufacturers felt that consumers

wanted large, powerful automobiles. They did not—they

did not provide—domestic producers did not provide a

viable option in tenns of the small foreign car, but a

potential competitor, a German manufacturer, came in

with another sort package a small Volkswagen which also

was reliable and there was a response within the

American market; and the large domestic producers lost

sales to the new entrant, Volkswagen, and what we’ve

seen since that time for the past fifteen or twenty years is

a response of the American producers to that competi-

tion; and it’s become even more dramatic I think in (T.

275) recent years, that the presence of a new option

within that market resulted in a dramatic shift within—in

terms of the type of product that was made available. It’s

transportation in a different package. The same thing

could happen within the petroleum industry, different

packages presented in terms of that in fact people prefer

that to what existed previously. They respond by moving

in that direction. I would expect producers to respond by

providing more of that type facilities. Very important

431

that one not say you can’t move in and try and

experiment because if you do, it may never be apparent

what in fact it is the consumer in fact would respond to. I

heard earlier I think today in this court there was

mention of the discount house which is the same type of

thing. Here’s an innovation which somebody thought of

and it tured out that this was a particular package of

service plus product people preferred to the type of offer

which existed previously. There was a response not only

on the part of consumers but also subsequent response in

terms of the types of packages of retail goods which

became available.

That’s the type of fluidity which one wants to

maintain within these markets and that’s the type of

fluidity which may be impinged if one says you may not

enter this market arbitrarily; and it seems to me that

these two barriers, barrier to entry by the refiner,

producer at the retail level, (T. 276) barrier to entry at

the refiner, producer level in the case of the retailer only

and the exclusion of that particular sect, producers and

sellers from that market now would offer—would tend to

offer only in the direction of reducing that fluidity,

reducing that flexibility and making those markets work

less perfectly; and therefore, not in the interests of the

consumers without any question.

Q. In your judgment as a professional economist is the

retail gasoline market currently a competitive market? A.

Yes—

(Mr. Woodstock) Objection.

(Court) What’s the objection?

(Mr. Woodstock) The objection is based on I don’t

believe he’s testified that he’s done any studies of the

competitive market or retail sales of gasoline.

(Court) Have you, sir? A. I’m sorry, sir?

432

(Court) Have ycu conducted any study of the market

of gasoline so as to be able to determine whether or not it

is competitive? A. I’ve conducted no study but in the

type of work that we do, the structural characteristics

that are associated with the competitive industry are such

that I think that I can answer that question.

(T. 277) (Court) All right, sir, go ahead.

A. My answer would be yes that as a professional

economist, as somebody concerned with industrial

organization the retailing of petroleum products under

normal circumstances and I'd like to say here and now

that I’m by no means an expert with respect to the

existent controls that are imposed on this industry either

at that level or at any prior level. The structure of that

industry is such that it would be expected to be highly

competitive. I say that because the number of firms

competiting in it is by any measure very large. There are

very many different actors in that particular industry, in

varying degrees. It is not dominated by any single entity.

The establishments themselves create no barrier to entry

by virtue of the enormous financial cost which is

associated with creating one. One might argue, for

example, if you’re talking about refining, the modern

refinery is so expensive that the problem of accumulating

sufficient funds to build it would create a barrier to

entry. No such barrier exists with respect to the retailing

of petroleum products. There are many different types,

many different prices. I think that it’s possible to answer

that question simply by casual observation without

having a detailed study of whether it’s competitive or not

competitive. Another way to look at it is that it must be

obvious to everyone in this court room (T. 278) that his

option with respect to where he can get petroleum

products at retail even within Annapolis are relatively

large. There are lots of outlets. He can swop, the

433

information with respect to the pricing he will have to

pay at each of them is not hard to find, it’s posted. The

costs of getting additional information are not great.

That’s the type of situation in which industry is

necessarily going to be competitive and it will remain

competitive absent the type of regulation which begins to

exclude competitors and prevent the competitive process

from continuing.

Q. When you say that he is able to choose among the

variety— A. He or she.

Q. He or she, who do you mean? A. The consumer.

Q. All right. In your judgment as a professional

economist would the vertically integrated oil companies

be motivated to drive out competition at the retail level?

* * «©

(T. 279) A. Let me answer, Mr. Greenwald, first by

making clear what it is that we’re coming to in analyzing

a situation of -nis sort. Our assumption is typically that

the corporation wants either to maximize its income or

typically to maximize its sales subject to some income

restraint maintaining its income at some target of rate of

return; and under those circumstances it’s in the interest

of the producer of a product such as petroleum, it would

be under those circumstances in the interest of the

producer of a product such as petroleum to (T. 280)

maintain the highest degree of efficiency at the retailing

level as possible. In other words to have his—have the

costs that he bears for the retailing of his product

whether he does that by doing the job himself or whether

he does that by hiring somebody to do it for him by

selling him the product and letting him resell it at least

cost. It would not be in his interest under those

circumstances to drive out more—a more efficient retailer

of his product in terms of an independent sector solely to

434

be vertically integrated. He would have an incentive to

integrate forward if he could do the job more efficiently

at smaller margins which would imply other things being

equal lower prices for consumers and, therefore, higher

sales. He would not have an incentive to drive out

independents, for example, or to integrate forward

exclusively if he were not more efficient in so doing. If he

were less efficient, he would cost them money; and if he

would cost them money, I would assume that that would

not be in the interest of a vertically integrated

corporation.

I can give you a numeric illustration of that, if you

would like, if it would help or if it’s clear from what I’ve

said, I’d be happy to leave it at that.

Q. Why don’t you give us a brief illustration, if you

will? A. Well, let me suppose the formula, I'll make it—

(T. 281) I'll make it very unrealistic and very simple so

that the analytics will become clear.

Suppose that we have a—suppose we’re talking about

gasoline and we're talking about the sale of the gasoline

only, we’re not talking about a situation where there are

lots of different services combined with it just to keep it

simple. We have a producer who has some crude and who

has some refined gasoline which ultimately will be sold to

consumers over some area. We have the gasoline at some

central point. The gasoline at retail wherever he sells it,

another unrealistic assumption, let’s suppose will sell at a

dollar. Our refiner has the refined product, it will sell

throughout the country at a dollar. The question is, you

know, what's it worth to him. Now if his options are only

to hire somebody to take it to the consumer and to sell it

to them at a payment of twenty cents a gallon, that

petroleum is worth to him at his refinery eighty cents, a

dollar less the twenty cents. That’s the income. Now if in

fact he himself could make the investment in the

435

facilities, provide the transportation and get it to that

consumer at a cost of fifteen cents, would clearly be

worth more to him. It would be worth eighty-five cents

to him, a dollar less fifteen cents as opposed to eighty

cents a dollar less the twenty cents and under those

circumstances you would expect a profit making a

corporation go forward, (T. 282) do the job itself because

it’s more efficient. Okay?

Alternatively, suppose that he’s not more efficient at

it, suppose that the market, that those independent

dealers are much better at adjusting to the demands of

the consumers wherever they are and if he does the job

himself, it costs him twenty-five cents whereas he can

hire them to do the job for him at twenty cents. Under

those circumstances he would have absolutely no

incentive to integrate forward vertically. It would cost

him money and I would predict that he would not do it.

Now the real question is which of those two alternatives

exist within the particular market where vertical integra-

tion is at issue. The answer is frequently you don’t know.

Frequently the corporation may not know and so that

one frequently will observe both types of retailing

activity going on simultaneously. Now what that does is

give the seller of the refined product or the product at

wholesale, whatever it is, an indication with respect to

the efficiency of his own operation and is judged by the

efficiency of independents and the efficiency of inde-

pendents is judged by what he knows about his own

operation. It also gives him the flexibility to experiment,

to see whether with different techniques he can’t do

better, provide something which the independents would

emulate, subsequent would demonstrate to him—to them

that this would improve this very technique. If you deny

the option of integration, you (T. 283) deny that check,

436

you deny that element in terms of competition at the

retail level, the likelihood of the consumer will be the

ultimate loser.

I can—there are other I can expand on if you like.

Q. No, I think that’s sufficient, thank you.

Suppose that if the vertically integrated oil companies

embarked upon company operated retail outlets in a large

way, a number of independents would inevitably be hurt.

Wouldn’t this in your judgment adversely affect competi-

tion? A. I think my answer to that, Mr. Greenwald, is

that one must be very, very careful to differentiate

between an adverse effect upon competition and an

adverse effect on competitors. A competitor is in

competition and with intense competition and with an

increase in competition, it’s quite possible the competi-

tors can get hurt. It’s a very bad mistake though it’s a

frequent one, it’s a very bad mistake to infer that because

a particular competitor is losing ground that competition

has been lessened and that the consumer is being hurt.

Quite frequently it’s the other way around. Let me make

that clear by going back to an earlier illustration. I spoke

earlier about the introduction of Volkswagen as a new

competitor within the United States.

Competition I think all of us would agree was

heightened by the presence of that new competitor with

a (T. 284) different technique of providing travel services

to the American public. The domestic corporations got

hurt. They lost the market share, their earnings went

down, a couple went under; and subsequently the

American manufacturers have responded by revising their

notions about what type cf product it is that they can

sell efficiently within this market. The foreign market

gets hurt. Each of those tools increased the efficiency of

competition within those markets. In each case some-

body got hurt, but the consumer was the beneficiary and

437

by the very nature of the competitive process there are

always going to be winners and there are going to be

losers; but what one must be sure is that no class is

artifically protected from the competition of another

group of competitors if one wants to preserve that type

of competition; and in the case I just illustrated if one

had said we’re not going to let foreign cars be sold in the

United States, that would have protected the domestic

producers, that would have hurt the domestic consumer.

The discount stores which I also heard mentioned in

here earlier are another illustration. With the arrival of

the discount store, the department stores got hurt; and

the department stores started to respond by becoming in

part discount stores, the discount stores got hurt. The

consumer was the ultimate beneficiary. Competition was

increased but (T. 285) the process of the increased

competition frequently does hurt some competitors and

one ought to be very careful not to simply look to what

happens to the competitor and say competition has been

lessened. Look at the development of the super market.

The super market came in, it was an innovation in terms

of the retailing of food products. We have an enormous

impact on corner stores.

Q. Corner grocery? A. Corner groceries stores or if

we're talking about discount drug markets, they have an

impact on the corner drug store. One could have jumped

to the conclusion that because those competitors are

dropping out that there is a decrease in competition

within the industry, the competition has been—as it’s

been lessened, not true. Competition was heightened.

Margins came down, some competitors went by the

wayside. The consumer was the ultimate beneficiary and

the whole process of analyzing this type of problem

involved looking at the way in which resources—resources

that are used in providing the types of services are

438

organized and we use in this system the competitive

process to ensure that there is a gain to those who are

efficient and a cost to those who are inefficient in terms

of their place within the marketplace; and that process

has to be maintained if those signals are to mean anything

to corporations indicating to those how in (T. 286) fact

they should conduct their affairs in accordance with the

wishes, interests and demand of consumers.

Q. Dr. Berry, in your judgment as a professional

economist do Paragraphs B and C of the legislation at

issue have supporting them any rationale which could

justify them as promoting the public welfare?

(Mr. Woodstock) Objection, Your Honor. I believe that

what’s good for the public welfare and the consumer—

(Court) Well, yes, I think you’re right. If you rephrase

the question, perhaps you can—

Q. Dr. Berry, in your judgment do Paragraphs B and C

of the challenged legislation have any rationale to support

them as promoting the Maryland consuming public?

(Mr. Woodstock) Objection, Your Honor.

(Court) Overruled.

(Mr. Woodstock) I don’t understand—overruled.

A. Do you—if you mean looking at the provisions of

these two paragraphs in this statute, can I find—do I have

any form of explanation which would lead me to believe

that an enactment or making those provisions effective

could operate to the benefit of the consumers in the

State of Maryland? My answer is no. I think the effect

would be quite the opposite. I think it’s very difficult to

say that there would be an enormous and immediate

effect but the direction and the effect (T. 287) is clear. It

seems to me this is the type—this is the type of restriction

which can only operate in the direction of lessening

competition and that can only result in a lessening of the

439

regulatory impact of that device in terms of providing

what the consumer wants efficiently and that means at

low prices, I think.

* * *

(T. 287) CROSS EXAMINATION

By Mr. Woodstock:

Q. Dr. Berry? A. Yes, sir.

Q. My name is John Woodstock, Assistant Attorney

General representing the State in these proceedings.

Dr. Berry, you’ve given us a lot of testimony on the

effects of B and C. I'd like to ask you a few questions

about some of the broad concepts that you have

discussed. Can you think of any situations where vertical

integration would perhaps be anti-competitive? A. Well, I

can give you I think two situations have been (T. 288)

rather special situations where there are let’s say a very

large-single, let me make it extreme and then we’ll make a

case I think stronger where there is a firm which is a

monopolist, a single producer of a particular product,

selling that product to a monopolist, which is the sole

buyer of that product, if those two firms were to merge,

it would seem to me it would make it more difficult for

an outside firm to come in and compete within that

industry since the outside firm coming in would by its

very nature have to enter simultaneously at both levels;

and if the capital costs were high at both, we’re talking

about establishing, for example, a manufacturer of motor

car engines and a manufacturer of motor car exhausts, it

would be more difficult for an outside competitor to

come in because of the amount of capital required for

entrance would be greater as a consequence of the fact

that he would then have to come in at both levels or not

at all. So that might be an example of a barrier to entry

which would be a consequence of a vertical integration.

440

That’s one situation where one might say one would like

to keep those two firms separate because the likelihood

that the monopolist would integrate forward to avoid the

monopolist or the monopolist might prefer to integrate

backward to avoid the monopolist; and there are

situations of that sort in the- if you look at my writing,

you will see that (T. 289) I’ve considered that type of

situation.

The other situation where professional economists

would be concerned about vertical integration does not

relate to the vigor of competition. It relates to situations

where competition is absent because of the exclusive

right which is given to corporations who operate within

that particular area; and I can give you a concrete

illustration of the situation of that sort. Bell Telephone

Company is given exclusive rights to sell telephone service

in many parts of the country; and that—the price at

which it may sell this is regulated locally. If that

company were to integrate backward into the manufac-

ture of telephone equipment as in fact AT&T has done

through its ownership of Western Electric. That makes

the regulatory process more difficult because you then

have to inquire about the fairness of the price of the

manufactured equipment as well; and in that type

situation indeed one would have to raise the question of

whether one wanted integration in that context so it’s

not really related to the question of competition. So I

would say that the first illustration is really the most

applicable one to your question.

a oe

(T. 290) Q. Isn’t it true that when you speak of a

vertical acquisition, part of—as part of vertical integra-

tion, aren’t you in fact describing a system which does

not ultimately result in an increase in the number of

competitors? In fact doesn’t it, if anything, would either

441

keep the number stable or (T. 291) possibly if the vertical

acquisition was comprised of three small competitors that

way, it would reduce the number of competitors? A.

That’s correct.

Q. That’s somewhat—do you adhere to the theory that

the more the competitors the better the marketplace? A.

I adhere to the proposition that if a market is to behave

competitively, it must have many competitors.

Q. Well— A. So that if we're talking about an

acquisition of one of several hundred or several thousand,

the answer is that’s not apt to be significant. If on the

other hand, this illustration we’re talking about involved

a firm vertically integrating forward and acquiring let’s

say thirty, forty percent of the market, at the subsequent

stage, yes, one begins to worry about that. The concern is

not with the vertical integration in that context, the

concern is with the horizontal integration because in that

illustration you gave me it would be the firm which was

vertically integrated. We also had the horizontal integra-

tion at subsequent stages three independent competitors

were put together and I would be worried about the

horizontal tie, that that consolidation at a single level

began to get large relative to the market. If it’s not that

large relative to market, then the (T. 292) market is

basically competitive and then my earlier illustration

about, you know, what the effect of vertical integration

would still stand.

Q. May I ask you—do you want to say more? A. No.

Q. *** Have you ever undertaken any consumer

studies or investigations relating to specific consumer

preferences in the type of retailing in—of gasoline

products? A. None that amounted to anything.

Q. Then your testimony with regards to consumer

preferences today was based on general information from

other areas, is that correct? A. Based—based then

442

basically on my training as an economist without—I don’t

intend for one minute to tell you that I’m an expert with

respect to the —even this petroleum market or petroleum

market nationwide.

> 2 =

(T. 294) Q. In your economic—expert economic

opinion, would it be—is it necessary for the major oil

companies to have fully vert—to fully vertically integrate

into the direct operation at the retail level? A. Well, I

really feel with respect to that question as phrased that I

should say that I don’t know because I’m not an expert

in terms of what’s necessary within the industry. I don’t

know the industry from the inside out. My expectation is

that in general as Mr. Greenwald has mentioned what a

corporation of this sort will do is pursue alternative

strategy and my expectation would be that in something

like the use of the automobile one might find under those

circumstances that 1 company operating its own dealer-

ship, in other situations offering it through franchise

dealers simply because in some circumstances one form

of obtaining retail services is superior to the other. In

some cases it might be that the corporation might be able

to do the job more efficiently in selling, selling just

adjacent, for example, to its factory, it might be

convenient administratively in organi- (T. 295) zations

simply to operate it directly. You get—alternatively these

things are being retailed in some distant part of the

country where control is optive, I guess that under those

circumstances the balance would tend to go toward the

independent. Again it’s not in—It’s in the interest of the

seller of the product to find the most efficient way of

getting his product to the people who want it in the form

in which they want it and frequently that will be by using

independent dealers by selling the product to them,

letting them resell it or setting them up as independent,

443

you know, franchise dealers in some fashion. I don’t

mean to argue that under any circumstances any

prior—one can know that this or that system is the best.

(Mr. Woodstock) I have no further questions of this

witness. Your Honor.

(Court) All right, sir.

(Mr. Greenwald) No further questions, Your Honor.

(Court) All right, you can step down.

* * *

(T. 302) (Mr. Reid) We’d like to offer to the court a

photograph that was taken, we can top the one that

you've just referred to, these were taken in 1972. Price is

shown in the thirty cent range.

(Photograph Filed Herewith As Evidence As Plaintiffs’

Exhibit No. 7A through 7C)

(Mr. Reid) Secondly we’d like to offer the affidavit,

Mr. Kelvey, relates to the investment of Petroleum

Marketing Corporation in building and equipment in the

State of Maryland both as to the initial investment and as

to the current book value thereof.

(Affidavit Filed Herewith As Evidence As Plaintiffs’

Exhibit No. 8)

(Mr. Reid) We have in addition two witnesses to

testify, one briefly, Mr. Colin Carter, Commonwealth Oil

Refining Company, Inc., second, Mr. Theodore Ferguson,

Petroleum Marketing Corporation. First call Mr. Colin

Carter.

(T. 303) COLIN P. CARTER,

a witness of lawful age after being duly sworn, deposes

and says:

DIRECT EXAMINATION

By Mr. Reid:

Q. State your full name please. A. My name is Colin P.

Carter.

444

Q. What is your address? A. 51 Crawford Terrace,

Riverside, Connecticut.

Q. What is your relation to Commonwealth Oi

Refining Company, Inc.? A. I am distribution planning

manager in the head office in Park Avenue.

Q. What are your qualifications and background for

that position? A. I was educated in England. I’m a

professional chemist. I was employed in England by BP

and Esso in positions involving market research, market-

ing general economics and specifically in the last two

years in operations planning. I was hired by Common-

wealth Oil from England in 1970 to become operations

planning manager at their refinery in Penuelas, Puerto

Rico.

Q. Does Commonwealth Oil Refining Company, Inc.

have any other refineries other than the one in Puerto

Rico? A. No.

Q. Does it have any production capacity? (T. 304) A.

Production of crude oil, none.

Q. Are you familiar with the history of the relation-

ship between Commonwealth Oil Refining Co: pany, Inc.

and Petroleum Marketing Corporation? A. Reasonably,

yes.

Q. Would you explain that please? A. The negotiations

for a merger begun in 1969. They were completed in the

first quarter of 1970 and Petroleum Marketing Corpora-

tion became a subsidiary of Commonwealth Oil Refining

Company.

Q. And that is a wholly owned subsidiary? A. Became

a wholly owned subsidiary.

Q. Are you familiar with the operations of Petroleum

Marketing Corporation in the retail gasoline market? A. I

have some knowledge of their operations, yes.

Q. Where does Commonwealth obtain its crude oil? A.

Historically it’s obtained its crude oil almost entirely in

445

the Carribean. Beginning in 1971. we began to obtain our

crude oil from other parts of the world. We now obtain

approximately seventy, seventy to—about seventy per-

cent of our crude oil in the Carribean, the balance in the

rest of the world, largely Africa.

Q. What has happened to the foreign crude oil market

in recent years? (T. 305) A. From the onset of CFXC

what today seems a relatively small increase leading to

the dramatic increase that came about in the end of ’73

that—well, particularly the end of ’73 and right at the

beginning of 1974. In fact, I at your request I prepared a

chart showing crude costs and in fact showing how other

costs associated with getting gasoline through to the

public have changed since 1969.

Q. Is that the chart on the easel there? A. That is the

chart on the easel.

Q. Would you explain the chart to the court please?

* * *

(T. 305) A. This is a plot of costs. The blue is crude oil

costs in terms of dollars per barrel with this scale here.

This one is dollars per barrel. This one is the same scale

just expressed in terms of cents per gallon. Here we have

the years 1969 through °75. The orange above the blue

represents the plot of refinery operating costs. This is in

fact added to those. There’s crude costs added to this

then becoming the operating costs. The green is freight

costs from Puerto (T. 306) Rico to the east coast. The

pink represents a plot of PMC operating costs expressed

in terms of either dollars per barrel or cents per gallon.

The brown portion represents the taxes. I have shown

each of them sequentially. The implication would be that

this represents the cost of gasoline. That isn’t true. This

represents the addition of all the costs that can be

associated with it, but in fact gasoline has to bear more

than its share of the costs for the reason that if you like

446

residual fuel, which is one of the other products from

crude oil, tends not to. You cannot avoid making

basically three products from crude oil so this is in a

sense a simplification, but it does represent in sequence

the costs Commonwealth Oil has had over this period;

and I have also shown on the graph a plot of our PMC

pump price, weighted average pump price over the whole

system, this isn’t just the Maryland pump price, to

emphasize the problems specifically that Commonwealth

Oil has had because of this foreign crude.

Q. What effect has the increased in the cost of foreign

crude and other increases had with respect to the pump

price of Scot gasoline? A. The price of Scot gasoline in

competition with everybody else had to go up. However,

Scot gasoline has to be competitive and I think the graph

really makes the rest of (T. 307) that particular point.

Beginning with 1975 you can see the improvement with

the onset of the cnicie equalization program, but that gap

is still significantly less than this one.

Q. And this one being around 1971, °72? A. Yes,

going through—right througl:.

Q. Directing your attention to the block of 1974, does

the chart indicate that Scot gasoline was for a period of

time sold below cost? A. This certainly would since as I

said before, if anything, gasoline has to bear a high cost in

this one. Yes, this would show this.

Q. Some of the lines as they become vertical become

narrow which indicate—I draw your attention specifically

to taxes which get narrow in this area. Does that indicate

that the taxes were less there for instance? A. No, in fact

what you're plotting it, of course, the vertical height and

this apparent narrowness is a result of—really what you’re

plotting there if you like is a time difference, a relatively

small time difference, so it plots a rapid changeover of

small time distance. No, the thing that is significant

447

would be dropping a pump line, a vertical line right down

there where if you could imagine this push flatter, you’d

see in fact that taxes have tended to increase all along, as

virtually all those costs have. Sorry, I think I was (T. 308)

looking at operating costs, not taxes that time, but same

plot.

CROSS EXAMINATION

By Mr. Woodstock:

Q. Let me ask you with regards to that chart, what

does taxes indicate? All taxes, what taxes are—what taxes

are indicated— A. Those are all the taxes that are added

onto the pump price, the—both federal and state taxes.

Q. Does that reflect just Maryland’s or is that— A.

That is—no, those are all taxes for the whole system. That

is a plot of the whole Scot system. Obtaining the

historical data particularly just for the State of Maryland

would have been difficult, so we plotted the whole PMC

system, which is basically centered in this area.

Q. How many states is that? A. Seven states, seven

states J believe.

(Mr. Reid) We’d offer the chart as an exhibit, if the

court please.

(Court) All right, sir.

(Cost factor changes chart filed herewith as Plaintiffs’

(T. 309) Exhibit No. 9 as evidence)

THEODORE E. FERGUSON,

a witness of lawful age after being duly sworn, deposes

and says:

(Clerk) State your full name and address.

(Witness) Theodore E. Ferguson. 1703 Hicks Drive,

Vienna, Virginia.

448

DIRECT EXAMINATION

By Mr. Reid:

Q. Mr. Ferguson, what is your position with Petro-

leum Marketing Corporation? A. I’m executive vice

president.

Q. How long—in what areas of the operation are under

your supervision? A. I’m chief executive officer of the

company and that’s inclusive of retail and wholesale

marketing, going down through the organizational chart

covering real estate, operations, accounting groups report

to my office, the entire organization of Petroleum

Marketing.

Q. How long have you held that position? A. For

approximately—approximately four and a half (T. 310)

years.

Q. Incidentally, where is your office? A. It’s 7900

West Park Drive in McLean, Virginia.

Q. Is that the main office of Petroleum Marketing

Corporation? A. That’s our corporate headquarters, yes.

Q. What are your qualifications for the position you

hold with the Petroleum Marketing Corporation? A. Well,

I’ve attended school at the University of Florida, I was

two years with Tidewater Oil Company, which is

presently known as Getty Oil Company, even prior to

that I was a Cities Service dealer and, of course, I've been

with the company for fifteen years. I have come through

the ranks so to speak from a retail service station

supervisor, servicing anywhere from twelve to seven-

teen or to even seven stations in the beginning through

retail sales manager, vice president of retail sales and

holding within the company supply and distribution

functions, overall marketing functions and then executive

vice president.

449

Q. Have you been with the company since its

inception? A. No, I’ve not. I came with the company in

1960. That’s approximately four years after it was

formed. When I came with it, we were very small. We had

approximately six stations, primarily in Maryland and

about six under construction, (T. 311) some of those

being in Maryland and some in Virginia. In fact our

corporate headquarters were in Pasadena in the rear of a

service station prior to my coming to it, and then about

six months before I came, they were in the process of

moving and moved to the Investment Building in

Washington; and that was the beginning of the company.

Q. Who was he founder of the company? A. Norman

C. Keith. The company was, as I say, founded on a

Delaware corporation, but was founded here in Maryland

with the first two stations opening, one in Towson, one

in Pasadena and then growing from there from two

stations to when I came with the company, we'll call it

about thirteen and now we’re up to a hundred and forty

some stations and property.

Q. How many of those are in Maryland? A. Twenty-

one stations in Maryland.

Q. How does Petroleum Marketing Corporation parti-

cipate in the retail markets for the sale of gasoline? A.

We're a what we would call a high volume outlet. Some

people would call them cut rate, some would call them

highly competitive. We think of ourselves as an independ-

ent marketer. We are highly competitive in the market.

We operate on the basis of the public, what we think they

need to gain their patronage, which has been as large a

property as we could find; and as competitive prices as

we could find. We have (T. 312) what we think is a

somewhat of a different image and I think that the

gentleman prior to me emphasized that each company

has its own marketing method or motif, and I think he

450

called it market retail force o: something; and I think

that this is what we have developed. We have developed

our own. It might vary by degrees but I think it is the

entire package that makes for a successful high volume

stations which is what we have done.

Q. Specifically do you participate through dealership

operations or are your stations company operated? A.

We’re one hundred percent company operated. We have

in the past and from our conception experimented as we

have had the right to do and we have done this and found

that the company operation was the best method for us

to obtain objectives and to maximize the profits.

Q. What are the various factors which you sec that go

into the particular type of company operation as Scot

runs or the PMC runs through the Scot stations? A. Well,

I think being somewhat redundant, I think that one, I

think our competitive approach is the most important to

us in obtaining the volume that we need to justify our

investments and then following along we need control of

that operation which sometimes is constri ed to be nasty

but I’m using this in the sense of controlling that price to

be competitive (T. 313) and then it doesn’t miss one

thing in the operation, it goes on to your uniforms, it

goes on to your hours of operation, how your station is

maintained, how your people are trained, how you

approach, what sort of advertising you permit, what type

of advertising you don’t like, do you—what do you

permit on that station, what —it’s an overall image I think

is what I’m really trying to say; and we have developed

that with policies, with training and so forth to obtain

these volumes where we think it-—we think it’s us and we

think it’s successful and basically we’ve proven that not

just by making dollars because we’re losing a few on your

chart there, but throughout the years we have been

successful, and we have done it by taking our ups and

451

downs in the marketplace relative to profit making to

maintain this image.

Q. Incidentally could a dealer take these ups and

downs that you're talking about? A. In the last few years

he’d have pretty hard time of it. Even in my period of

time with the company, we have had and we felt it was

an advantage by being company operated in that we have

many periods of time and it might stretch for four and

five months at a time where we will break even with

slight losses. Call that—call it changing dollars. I think

that if you go back in the dealer operations in the period

of time that I’m talking about coming up with company

dealer (T. 314) turmmover was just one of the biggest jobs

that anybody in the oil company had to do was

replacement of dealers. I think even the federal govern-

ment has reflected in four and five years ago the most

vulnerable business in the country for bankruptcy was

the service station. I think all our ends of operation have

avoided that from our standpoint; and I really don’t

think that generally this—in our position relative to our

crude costs that a dealer could have sustained it. I don’t

feel I could have personally.

=

(T. 314) Q. All right, may I start again? I’m going to

ask you about each of the factors that you just testified

to with respect to the overall image necessary to be a high

volume, low cost operation and ask you how Petroleum

Marketing Corporation controls the price of the gasoline

that is offered to sale to the public and included in that

answer please tell us how your price relates to the price

of the major oil companies. A. Well, I'll start with the

latter. We're approximately two cents below major brand

competition. This varies, of course, (T. 315) from station

to station, but I think on an average we're probably two

cents to two two. It might be one seven for the moment

452

and I think that pricing in marketing is the thing of the

moment, but to be fair on the average I would say we’re

from one to two cents below major competition and I

mean to say those offering full service, bays, tire repairs,

batteries and so forth. Since we don’t off this type of

thing, we're gas, easy in, easy out type of operation.

Q. Why is that differential necessary in order to sell

Scot gasoline? A. Well, we need the volume because our

operation, our—I think what I’m trying to say is that

particularly with our manufacturing costs we've got to

maximize the profit. Since we became associated with the

refiner, I think this has even become more apparent and,

of course, the world situation hasn’t helped us; and I

think that particularly at this time we have to maximize

them, which I think the chart even bears out to just stay

alive.

Q. Do you think Scot gasoline would have appeal to

the motoring public if it was priced at the same price as

the major brands? A. Well, from my experience, I would

probably estimate, which is very presumptuous, but I'd

probably lose seventy percent of my volume if I tried to

market at major brand prices. (T. 316) We’ve had some

experience where we've tried it. Going back four or five

years ago, we tried this, we've experimented with it.

We—to show you we even trie experimenting with the

service. We probably were one of the pioneers in this area

with what these fellas call a—earlier car care center. I had

three of them. It didn’t work. Our image just didn’t lend

itself to this. We finally ended up closing these and going

back to our traditional company operated stations, high

volume, easy in, easy out, personnel type operation.

Q. The second thing I think you mentioned was hours

of operation. What is the policy of Petroleum Marketing

Corporation with respect to the hours the stations

operate? A. We generally like to after taking field surveys

453

of what competition has established per hour of

operation, we try to stay open, open an how earlier,

close an hour later. Also as a rule of thumb policy, after

evaluating the traffic, the market conditions and the

volume and our experience at that location, our basic aim

is to operate on a twenty-four hour basis. We found that

this lends itself to control, helps us establish the volumes

that we need and become a more efficient operation.

Q. How do you control the method of Operation at a

Scot station? A. We have a management team, consists of

vice president (T. 317) of retail, he in turn has district

managers and supervisors report to the district managers.

Generally our people will supervise on the basis of six to

cight stations. Because of the nature of our operations,

because we are a cash business primarily, it’s necessary

that we control the money, we control these things that

we think are necessary to keep our image, that being the

hours, checking that the station is open, training the

personnel, keeping good looking equipment, having—

making sure the stations are washed down and going

through what we think is general maintenance and

upkeep necessary for operation, therefore, we back it up

with personnel that might sound like a lot of people but

it’s actually minimum.

Q. Do you provide uniforms, for instance, for your

attendants? A. Yes, we do, we have a company color, red

pants and white shirts and red jackets and red caps; and

when possible black bowties and so forth; and this is one

of their jobs to try to maintain this image.

Q. How do you assure that these people will present a

good appearance at all times as far as having clean

clothes, things like that? A. We do their laundrySfor

them.

Q. You pay for the cost of cleaning the clothes? A.

454

Yes, we do; we pay the costgand we provide the men (T.

$18) with a change of uniform daily,

Q. Do you have any service facilities whatsoever at

any of your twenty-one stations in Maryland? A. No,

we're-where we have taken over stations with bays, we

have removed the lifts and I believe that there were only

about seven of those and blocked up the bays and have

used these bays for the storage of our oil and

merchandising signs and so forth; more in our mainte.

nance area than for anything else, We just don’t offer

facilities,

Q. Do you sell tires, batteries or other accessories at

your stations? A, No, we don’t.

Q. Why don't you provide maintenance services and

TBA sales? A. Well, we-we have-we have a philosophy

that we think and I believe it's beared itself out that this

may be an age of specialties. | think that if you're going

to wait on people aad we have found that about forty

percent of our customers are women, we feel that it takes

a clean type of personnel, clean appearing, we didn't feel

that we could it with mechanical work, There are some

other reasons which are basic and possibly important, To

develop the company to the size that we have, quite a

few of the zoning ordinances and at the hearings where

we presented our case, (T, $19) they prohibited us from

doing mechanical work, storing tow trucks and in a

couple instances, it is in our zoning that we will not do

any mechanical work, we will not wash cars, and many

attempts have even been to regulate our hours of

operation, But some thinking has changed since the

embargo, but I haven't been in for zoning since then,

Q. Couldn't you enter into an arrangement with a

dealer whereby he would agree to these same factors that

you've just mentioned a certain price, a certain hours of

operation, wearing the company uniform, things of that

455

nature? A. Well, under the present regulations as I've

been advised by several attorneys that it would be

impossible to put a man into the station and require

that—of this independent businessman that he maintain

hours or even wear a uniform and in many cases I think

it's not even—I'm not sure that whether he'd have .o buy

our product or not, So I don't feel along with some other

problems that we're faced with and that I don’t believe

that I could offer him a price for gasoline that he could

live with, I think it would be absolutely impossible for

Scot to go to a dealer operation and anywhere near get a

return on investment that would allow us to stay alive or

to grow,

Q. Does Petroleum Marketing Corporation require its

gasoline from Commonwealth Oil Refining Company,

Inc.? (T. $20) A. Yes, we do.

Q. How is that delivered in the State of Maryland? A.

It's delivered by ships in the Baltimore harbor and

unloaded and placed into our storage tanks and then

redistributed to the stations by either common carrier or

our own leased trucks directly to the stations, It's one of

our methods of operation, We've worked, | think, from

the beginning to cut costs so that we could stay

competitive in the market by acquiring this terminal |

think that it—we felt at the time that it was one of our

cost-cutting mechanisms; and again through our own

trucking arrangement, we felt we kept our costs at a

liveable level so that we could stay again competitive, and

in addition to that to couple that supply cycle in our

stations we have probably the largest storage tanks, the

most—at least average wise that I know of in the entire

country. We average throughout the entire country

forty-three gallons—forty-three thousand gallons a sta-

tion; and generally the new stations have eighty thousand

gailons. This way it is economical for us. We do not have

456

to have deliveries day to day into that station, We can live

for whatever our business cycle is. It's another method,

Again going back to the dealer, we're-we couldn't

require the dealer to buy under this franchising laws and

so forth in the quantities; and could say send us a

hundred gallons or whatever commercially rea- (). 321)

sonable | guess; but we deliver in full tanker loads. Again

maximizing our—

Q. Incidentally, how was PMC affected and how did it

react during the so-called gasoline shortages of the early

months of 1974? A. Obviously it’s the embargo period

you're talking about. We kept our stations open as long as

we could, We were very fortunate to have supply and we

only closed them down when it became unfashionable

and almost immoral to stay open because they were

saying turn down the lights and at first received criticism;

and at that time I went along with the atmosphere of the

country, and I did close some of the stations early, Also

we went along with the President's proposal to alternate,

for the closing of Sundays and then finally as the public

and as supervisors of different counties because aware of

what was really happening, we were one of the first to

cooperate with them and I had personally received calls

from Prince George's County, Montgomery County to

keep stations open specifically on Sunday, which we did.

We also gave preference to fire and police and I think we

reacted rather well,

Q. How did that compare to most dealerships that

were (T. 322) operating during that period of time? A.

During that particular time | think that the dealer by

being the individual in this, | think he was very conscious

of his economics. He found an opportunity to close early,

which he did, He also found that he could probably lay

off some of his part-time or full-time people; and he

worked through his allocation, | think as 4 company

457

| could be called and say yes, we'll do that even

though it’s not economical. | would have loved to operate

those reduced hours, I could have sold the same amount

of gasoline or more under reduced hours, but I think we

did have a conscience and I think there is some advantage

to be able to pick up a phone and say to the various parts

of your operations we should do this to cooperate with

the counties and so forth,

Q. You, of course, are familiar with the legislation

that’s the basis of this case. What would happen if to

Petroleum Marketing Corporation if the legislation were

enforced which would prohibit the operations by

Petroleum Marketing Corporation of the Scot retail

gasoline stations in the State of Maryland? A. Well, I

think other than—I guess the growth would be com-

pletely out of the picture; and I believe that we would

probably have to abandon our operations because I don't

see-I've spent a:lot of time pondering this and also

working (T. 323) with Colin trying to develop what we

had within our financial structure that would permit a

dealership and basically just starting with the economic

picture that we could not offer a tank wagon price that

would be competitive. I'd say that Petroleum Marketing

would end up out of the State of Maryland.

Q. And would you summarize then the reasons why

Petroleum Marketing Corporation could not be converted

to a dealership operation? A. In summary I would say the

economics of a high—of the gallon of gasoline related to

our high costs and our distribution system, remembering

that our gasoline comes from Puerto Rico, which

certainly adds close to two cents to it, another being the

volume that it takes to support the economics of our

entire operation, We require, I'd say, high volumes. In

order to retain the high volume, we certainly have to be

competitive and it could be construed to be super:

458

competitive, but competition is competition, Also the

image that we need to project to obtain this not that

always—price does not always do it alone; and I think

these gentlemen this morning pointed this out; but we've

tried to couple it; and I think we would lose that part of

our image that would help us or damage us in our volume

but at least towards our economic maximization of

profits. I think, too, we would probably and I think

without a doubt lose the economics of efficiency of (T.

$24) running that station; and our outside sources of

income are limited and majority of the properties are

probably limited to the conversion to other restaurants or

what have you. So there's no question we would be

damaged; but restricting it to why we couldn't, I think

that generally I have summarized it. 1 don't believe that

we could—most any other circumstances than company

operation maximize the profits in order to stay alive in

the state.

Q. Looking at it from the other side of the coin, from

the potential dealer, do you think that the—a dealer—a

potential dealer would find appealing the operation of a

Scot station as a dealership operation? A, Well, I think

the typical dealer as we know the dealer, I don’t know

why he'd want it. As I say, we don't have any facilities.

We have a small air compressor. We have no lifts, Just

being redundant I'm afraid.

Q. No, go ahead, that's all right. Go ahead, A. But I

don't believe the dealer could stay alive in there. He'd

have to be relying particularly, strictly on a hundred

percent gasoline and prohibited from doing any outside

work, TBA et cetera that would be extra profits; and

with a high dealer tank wagon, I think he would—he'd

have to surrender very quickly.

Q. Do you think that he could sell gasoline to the (T.

$25) motoring public at the differential that PMC has

| 459

been able to sell it, that is, two cents below the majors?

A. At a loss? I wouldn't hardly think so,

Q. What about the initial investment a dealer would

have in a station like Petroleum Marketing's Scot station?

A. Well, the-I think the highest investment and this is

somewhat conjecture, | guess, because I haven't found a

way to do it to offer him this on an economic basis just

from the purchase of the gasoline but to go behind that

and say what does he purchase from me, well, does he

purchase the gas. Fine. This would probably today | ask

him to fill the tank, might run up to thirty-eight to forty

ee dollars, depending on the tax, how we handle

that.

Q. Your taxes are larger than the average service

station, A. Well, we have quite a few with eighty

thousand gallons.

Q. And he'd have to make an investment in the

gasoline in the tank, A. In the tanks.

Q. To begin with, A. That's cer— | would assume this

because I haven't been able to develop this method that I

would put a dealer in on, So I'm dealing in hypothetical

structure here. If we (T. 326) adapted a few methods of

operation that other companies have, we might sell him

the pumps; and he would maintain them. That's why I

say I'm really dealing in a fog to try and tell the court

how I would structure this in that I've been unable to;

but some companies have—the dealers do own the pumps.

The pumps today are twelve hundred dollars a piece. We

have eight of them. Some of ours are dual pumps. Some

stations have twelve pumps so where do I stop with this

economics. I'm not just saying I'm making up what |

would want to sell him, but what method of operation I

would come up to put a dealer in I've been unable to

satisfactorily come up with it. So you're—my answer is

very difficult, but it would be a considerable investment

460

on his part and I'm not too sure that he could make a

return on it, He might do better in a savings and loan.

CROSS EXAMINATION

By Mr. Woodstock:

* * *

(T. 326) Q. I think I agree with almost all your

statements as it regards the period of time °74 and

perhaps early ‘75 when you obviously operating at a cost.

If | understand this (T, 327) chart right, the price of the

gasoline you would be supplying to a dealer, he would

already be behind. A. True.

Q. Let me ask you if the same would be true the

period of 1969, when your crude oil cost was signifi-

cantly lower. A, If the same—your question is would the

same thing—would he be losing-—-could he have done it in

1969?

Q. Yes. A. In general, | would say no. | might tell you

what has happened and maybe a reason why. There

were~back in "69, ‘70, even up into ‘71 if you made

twenty-five points, this is one twenty-fifths of a penny on

a gallon of gas when wage and hours were a dollar an

hour, everything was small, your profits were small and

you get it in volume; and I would say that that dealer

would not have had the volume back then unless he had

everything that we had, I don't believe he could have

done it because that's where the period of time when the

most dealers went out of business.

Q. Are you aware of any companies that made it

during that period of time? A. Independents.

Q. Yes. (T. 328) A. On a dealer basis?

Q. On a dealer basis. A. I'm not aware of any.

Q. How about today in Maryland? A. Companies

comparable to us? I don't know of any on a dealer basis.

Q. Are you familiar with the Crown operation? A. |

461

understand that Crown has—I thought that was a

commission arrangement so I can’t direct myself to

their—

Q. How about Hess? A. I think Hess as I know it is

a—defined by me as a commission agreement, defined by

you and the government as a dealer.

Q. Well, no it’s not. It’s not defined by me at all. It’s

defined by the law. A. By the law.

Q. To your knowledge are they operating at a profit

right now? A. I don’t know that.

Q. You don’t know that. Is Commonwealth Oil

Company operating at a profit on the total aspects of all

its refining operations? A. Not at present.

Q. It’s operating at a loss? (T. 329) A. That’s correct.

Q. If your crude costs were significantly lower and the

way I read that chart everything else has remained

relatively constant, the exception of your crude costs,

would PMC or—well, PMC turn the same profit or the

same rate of profit as it did in ’68, 69 and ’71? A. Very

difficult to answer. All I can say is that there is a

possibility.

Q. I’m basically asking you is if you did not incur

those increased crude costs, wouldn’t you—your profit

picture absolutely without question be better. A. I think

it would be down because—well, of course, the crude

costs today are affecting utility bills and everything, so if

you were—if you say that nothing in the economy went

up, inflation didn’t go, then everything remained the

same, then I could probably answer yes. The cost of

living, wages and so forth are eating into profits

constantly whether crude goes or not.

Q. To the best of your knowledge I don’t—to the best

of my knowledge I don’t believe you answered one

question on direct. I believe you answered the second

part of it but not the first part of it and I believe you

462

never did answer how does PMC control the price and set

the price at its retail service stations. I believe you

answered for the hours but you (T. 330) didn’t answer

for price. A. Okay, we survey the market; and I guess I

should define that. We'll take the competition up and

down the street, all of the gas stations in the area that

would affect the buying habits of the motoring public in

a particular area.

x * *

(T. 330) A. This is surveyed by our service station

supervisors and district managers; and the information Is

passed along to our home office, vice president of retail

discusses it with the either the field or the district passes

the information along to me and we establish for that

station that we feel to be a competitive price taking in all

of the factors. Those factors being a mix of whatever we

had surveyed from se'f service to full service to where we

feel our relative position is to maintain the volume

retaining our customers that are significant to our profit.

Q. Was Petroleum Marketing Corporation a profitable

corporation prior to the time it was absorbed by

Commonwealth? A. We were a—we were a viable entity,

es.

Q. Successful? (T. 331) A. I would say so, expanding.

Q. Growing? A. Yes.

Q. Growing. A. We found a need for crude. We were

getting big enough that we needed supply.

Q. To the best of your knowledge when you set the

price in the market, are you the lowest? A. No, I’m

matching competition. I don’t think that we would be

called the lowest in the area. When we spot that price, we

will match that price if it’s significant to that station.

Q. If you decided—Maryland law B and C were upheld

and you decided to convert to dealer leased operations, I

believe you said you might do certain things. One of

463

them was what I believe was to the exclusion of other

things, wouldn’t you possibly consider extending credit

to the gasoline in the ground as other major oil

companies do to certain dealers?

* * &*

(T. 332) A. I think this is certainly a factor that would

have to be considered, in order for a company to do this,

he would have to make cash arrangements to finance a

dealer.

Q. How about renting him the equipment instead of

selling it, including the pumps? A. These are all

possibilities. This is done in a variety of companies today.

Q. Has Scot or I’m sorry, has PMC adopted the official

corporate policy by a vote of their board of directors or

by whatever means that if this law is upheld they will

absolutely close up shop in the State of Maryland and not

do business in the State of Maryland at retail? A. We have

had no reason to this point to take it to our board.

Q. Does PMC also market petroleum at a wholesale

level? A. Yes, we do.

Q. If B and C were upheld, wouldn’t it be possible or

would it be possible that PMC would continue to do

business on that level? A. Well, we’d have to—we’d be

faced with a very (T. 333) serious decision in that

approximately sixty to seventy-five percent of our

product that goes through the Baltimore terminal is

destined for retail. I think that it would require an

economic study to find if we should even remain in the

harbor.

Q. Do you know— A. We have quite a few million

dollars invested there.

Q. Do you make a profit selling it wholesale? A. On

occasions.

Q. You actually do sell and not make a profit? A.

That’s correct. It’s as competitive as the retail.

464

Q. What is the average monthly volume for the

twenty-one Scot stations in Maryland? A. I would say

approximaicly a hundred and ninety thousand. I'll have

to use my company average. I haven’t worked it out for

the month. A hundred and ninety thousand gallons per

station.

Q. Do you recall what it was in about 1969, 1970 and

well, 1971? A. Without the record as to either one of the

years, it was somewhere between ‘69 and ‘71 we had

some averages that were ninety-eight to a hundred and

two.

Q. At that time do you have any idea and I don’t

know whether you know this or not what your cost

factors were as compared to other independent marketers

similar to your (T. 334) operation? Are they same? A.

What do you mean the same costs? Are you saying — :

Q. The costs identified on that board. A. Well, in

'71—’74, independents similar to us I would assume that

our costs were slightly greater in that we're bringing the

product from Puerto Rico. Others in similar situations

probably were domestic oriented and did not have the

freight included. |

(Mr. Woodstock) I don’t have any further questions,

Your Honor.

a a =x

(T. 336) OCTOBER 16, 1975

(Letter filed herewith as Plaintiffs’ Exhibit No. 10A as

evidence) (Affidavit and Exhibit filed herewith as

Plaintiffs’ Exhibit No. 10B as evidence). | “

(Original Affidavit filed herewith as Plaintiffs’ Exhibit

No. 10C as evidence).

(Court) All right, sir. :

(Mr. Abrams) Your Honor, my name Is Robert Abrams

465

—

and I’m an attorney for Shell Oil Company in this

litigation.

The thrust, we believe, Your Honor, as the court has

heard Plaintiffs’ contentions concerning Paragraphs B and

C of the Maryland Act, Shell’s position is similar to that

of other Plaintiffs in that it is Shell’s belief that

Paragraphs B and C are contrary to the interest of the

petroleum products consumer and that they constitute an

invalid exercise of the police power of this state. Insofar

as Shell’s legal contentions are concerned, Shell for the

sake of brevity and this court’s time will rely upon the

joint brief filed in this action and adopt Mr. Noonberg’s

legal arguments presented with the opening of this case.

In terms of Shell’s factual presentation, it is essentially

divided into two parts, Your Honor, one part dealing

with factual matters presented through the testimony (T.

337) of the company witness and I am happy in this

regard to tell the court that the State through Mr.

Woodstock and Shell have been able to reach an

agreement in terms of an affidavit. The second part of

Shell’s case will be the expert testimony of, economic

testimony of Dr. Matityahu Marcus. At this time, Your

Honor, I’m going to offer into evidence the affidavit that

I previously referred to and read to the court one

paragraph of the cover letter to that affidavit.

(Court) All right, sir.

(Mr. Abrams) And that provides—and the letter is

addressed to you, Your Honor.

“The affidavit and attached exhibits of Mr. Naughton,

area manager for the southeast area of Shell Oil Company

are being offered into evidence in Shell’s case in chief in

this action. The enclosed affidavit and exhibits were filed

in lieu of either direct or cross examination pursuant to

an agreement reached between counsel for Shelli, counsel

466

for defendants as result of Your Honor’s endorsement of

such a procedure on August 22, 1975.”

At this time, Your Honor, I would like to call Dr.

Marcus to the stand.

(T. 338) DR. MATITYAHU MARCUS,

a witness of lawful age after being duly sworn, deposes

and says:

DIRECT EXAMINATION

By Mr. Abrams:

Q. Dr. Marcus, please state your full name and

address. A. My name is Matityahu Marcus, spelled

MATITYAHU, Marcus, MARCUS. I live, at 771

Cranford Avenue, Westfield, New Jersey.

Q. Dr. Marcus, what is your present employment? A.l

am a professor of economics at Rutgers University.

Q. Have you held any other positions at Rutgers

University? A. Yes. Over the period 1970 to 19751 have

served as the chairman of the Department of Economics,

as the director of graduate studies in economics and as

the director of the Bureau of Economic Research at

Rutgers University. os

- Q. Have you held any other teaching positions? A.

Yes, I have been teaching before management groups at

Rutgers, Rutgers has a program known as the Rutgers

Advance Management Program and over the last several

years I’ve been a regular speaker on the economics of

business and regulation. .

Q. What courses have you taught at Rutgers? A. I’ve

taught quite a number of courses, but primarily in the

area of pricing, in the area of industrial organization,

financial theory and advanced seminars in the economics

of (T. 339) regulation. I might add that the courses in

467

industrial organization which I’ve offered for a good

number of years have been offered within our PhD

program for graduate students.

Q. What does industrial organization cover? A. Indus-

trial organization is that part of economics which ‘is

concerned with the relationship of the structure of

industry by structure I mean the size of firms, the market

share and its relation to the behavior of firms in terms of

pricing and similar characteristics and ultimately tracing

back through to its effect upon the performance of the

industry from the vantage point of the economic interests

of consumers.

Q. Dr. Marcus, would you state your educational

background please? A. I hold a BA degree in economics

which I obtained in 1959 and I hold a PhD degree in

economics from Brown University which I obtained in

1963.

Q. Have you been a recipient of any honors or

fellowships? A. I guess some. I graduated Phi Beta Kappa

and magna cum laude. I have held post doctoral National

Science Foundation fellowship and two years ago I was

made an honorary professor by the university—the major

university of Bolivia.

Q. What works, if any, have you published? A. Well,

let me try and mention some of the publications in which

my works have appeared, The Review of Economics and

(I. 340) Statistics, The Journal of Industrial Economics,

The Anti-Trust Bulletin, The Southern Economic Jour-

nal, The Canadian Economic Journal, Land Economics,

Journai - -*e American Institute Planners, Public

Utilities ughtiy The Oxford Bulletin of Statistics,

and probably a few o.: ers which I can’t—

Q. What kinds of subjects have you written about in

these publications? A. I have written on diverse subjects,

468

but many of my works have dealt with the areas in which

I have done the research over the years, in the area of

industrial organization; and the kind of topics with which

I've dealt include profitability and size of firm, market

concentration in advertising, issues relating to the exit of

firms, that is, mortality of firms, the determinants of

growth of firms and the like.

Q. Dr. Marcus, have you given testimony regarding the

economic effects of state legislation? A. Yes, I have.

Q. When did you give such testimony? A. I appeared

before an assembly committee of the New Jersey

Legislature about a year—over a year ago, September of

‘74 1 believe; and at that time I presented my views on

the desirability of a statute which sought to restructure

the retail part of the gasoline marketing industry.

Q. On whose behalf did you appear? (T. 341) A. Well,

I'd like to believe that I've appeared completely

independently, I've appeared at the invitation of the

chairman of the committee, Mr. Baer, the same person

who has requested Professor Berry to appear before him.

Q. What were the circumstances surrounding Mr,

Baer’s contact with you? A. Well, actually I was

contacted by a legislative aide of the committee. I believe

it was in June or May and was asked whether I would

come and give my views on that bill, At that time I was

told that the committee was going to hold hearings

within a period of two or three weeks; and I stated that I

just couldn't do any sufficient study to present my views

and I declined the invitation at that time.

Q. What happened subsequent to that? A. I was

subsequently approached and was told that the hearings

were delayed until September; and that gave me

somewhat more time and I felt that I could present my

opinions on the bill in September; and | agreed to appear.

469

Q. Were you compensated for that appearance in that

state? A. No, I received no payment for this—for my

time.

Q. Have you ever testified as to the economic effects

or consequences of other government industry related

actions? A. Yes, I have done so on several occasions.

(T. 342) Q. What were the areas of that testimony? A,

I have testified on areas relating to pricing and areas

relating to what is a fair and equitable rate of return on

investments and on the area of future market demands.

Q. Where did you give such testimony? A. Here again

I'm not sure I would be able to remember all of these

appearances but probably most of them. I've appeared in

the State of Virginia and at that time I was retained by

the Attorney General of the Commonwealth of Virginia.

| appeared in Alabama. At that time I was retained by the

government of Alabama on behalf of the State of

Alabama. I appeared in New York State on behalf of a

group of large corporations. I appeared in Massachusetts

on behalf of the Attorney General of Massachusetts. |

appeared in New Jersey on several occasions on behalf of

or that is I was retained by Rate Counsel which is division

of the Public Advocate in New Jersey, division of the

New Jersey State Government representing the public.

Q. Professor Marcus, have you ever engaged in private

consulting? A. Yes, I have.

Q. In what areas? A. Again in order not to take too

much time, let me just concentrate on what might be the

more representative areas (T. 343) of my work. Prior to

1969, no, about 1967 or so, I was retained as a

consultant by Mathematica, which is a Princeton-based

consulting firm, to do a study for the Department of

Agriculture. That study was concerned with market

acceptance of—a market competition of man-made fibers

470

and cotton; and my assignment was to looking to the

determinants which influence this acceptance and make

some projections.

Subsequently to that I was a special consultant to

National Economic Research Associates, which is a New

York based consulting firm, for a number of years. | have

worked on an assortment of problems, usually relating to

the question of structure of industry and its relationship

to behavior, performance in competition. In that connec:

tion I've dealt with marketing competition, marketing

penetrations. I've dealt with a question of structure of

the television supply indus: y, that was a study that was

done for the Office of Telecommunications Policy with a

view of exploring policy options for that office.

Q. Thank you. Dr. Marcus, could you describe the

circumstances surrounding your initial relationship with

Shell which has culminated in your appearance here

today? A. Yes. I believe I was contacted by you

sometime in the fall of 1974 and I was informed that I

would be subpoenaed to present the statement which |

had earlier presented to the (T. 344) New Jersey

Legislature. | was deposed subsequently to that; and after

the deposition I was asked whether I would undertake a

study to form a basis for an opinion concerning the

Maryland statute. | agreed to do so. . .

Q. Did you know the context within which that

deposition was taken? A. Yes, I understood that the

Florida Legislature had passed an act which sought again

to restructure the retailing segment of petroleum market

ing and in that context I understood that my statement

was going to be used. is

Q. Were you compensated for this deposition? A. I

think I got six dollars from somebody,

Q. Prior to your retention by Shell for purposes of

471

this litigation, had you ever been retained by a petroleum

company? A. No, sir.

Q. Dr. Marcus, are you familiar with Chapter 854 of

the Laws of Maryland? A. Yes, I am.

Q. Have you had sufficient time to study Chapter 854

of the Laws of Maryland in order to form a definite

opinion as to its economic effects? A. Yes, I have given it

quite a bit of time.

Q. Is your opinion based on a study? A. Yes, it is.

(T. 345) Q. What constituted the basis of your study?

A. Well, broadly speaking, of course, my study has begun

with days of graduate work and subsequent research on

industrial organization, These are precisely the issucs that

the study of industrial organization is concerned with.

Entry, pricing and the like, but I sought to gain some

more specific familiarity with gasoline marketing and

retailing in order to be absolutely certain about my

position on this matter and the rationale for it. So | have

over the good many months now and I would dare say

that actually my first study began in preparation for the

New Jersey statement, however, at that time I told the

committee that my study was ongoing, it was a kind of

preliminary and still somewhat hasty statement. I have

proceeded from that day on to study the industry. I've

done it through giving it more emphasis in my graduate

courses in industrial organization; and subsequent to

being retained by Shell Oil I have systematically reviewed

the literature including the academic literature as well as

Congressional committee reports that have dealt with

various facets of gasoline retailing. I'm not quite sure I've

been able to cover them all, but I had a pretty heavy

stack of books in front of me. I have followed the trade

literatures. I have received a continuous stream of

documents and manuscripts from your office which |

472

have endeavored to review, some of them with greater (T.

846) core and others more casually, | have also visited

with Shell people in Houston trying to understand in

greater detail the operations; and | was also very curious

to see some of the different operations that they told me

they had in Houston and just about one day I was driven

around to see various stations which have not yet been

introduced throughout the country,

Q. Now, Dr. Marcus, would you as an economist

describe the frame of reference within which you

approached your study? A. Well, the frame of reference

here I think the same frame of reference of Professor

Levitt and Professor Berry is the kind of reference that

economists do employ and that is is it in the interest of

the market as a whole, not is it in the interest of a

particular segment, particular participant, but will consu-

mers, will the public be better off next year, five years

from now or ten years from now. This was the frame of

reference on my study.

Q. Assuming Paragraph C, Chapter 854, becomes

effective how will it in your opinion as an economist

affect retail competition within the petroleum market:

place? A. It will tend to affect it adversely. It will tend to

lessen competition and competition is the means, the

only means I dare say, that we know through which in

the long run consumers will benefit. I, therefore,

conclude that it will tend to adversely affect consumer

interests in the area of (T. $47) pricing, in the area of

product development, in the area of innovation, in the

area of service variety. I'd like to emphasize that this is

not a statement of idealogy. Competition may appear to

be a simple term, but it is through competition that all

these elements are enhanced and this is why I've noted

that.

473

Q. Since it is your opinion that competition is a

fundamental consideration in terms of your analysis,

would you state whether you believe gasoline retailing to

be competitive generally? A. I'd like to relate it first to

retailing as a wh ie because gasoline retailing is a segment

of retailing. It's not a unique area; and retailing is

considered to be one of the more competitive segments in

American industry; and the reasons for it are fairly

simple, Retailing is characterized by a large number of

competing firms. Second, entry into retailing is relatively

easy, relatively compared with manufacturing, public

utilities and the like, that makes it more competitive.

These factors characterize gasoline retailing as well, but it

so happens that there are additional factors which make

gasoline retailing even more competitive than retailing as

a whole,

Q. What are these factors? A. Well, competition will

tend to become more intense, (T. 348) the more

substitutable are the products. Now gasoline brands while

they are not perfect substitutes in the mind of the public

are fairly close substitutes and that renders competition

more viable. Second, in order to—for consumers to take

advantage of competition, in order for them to behave

competitively they must have price information, they

must know which seller is selling less and in the gasoline

industry it is almost a unique industry where price

information is distributed in the most efficient way. All

you have to do is down drive—drive down, excuse me,

and you don't even have to do it on purpose, on the way

to work you get a very quick assessment of what are the

prices which the market quotes for you. This is a second

very important consideration. Third, in order for consu-

mers to take advantage of the different prices, they have

to be able to act quickly without much restraint, without

I

474

a great deal of burden, Here again it's almost a unique

industry because the consumer in his car he can do the

purchase while in his car, he doesn't have to park his car,

go up to the fourth floor, find out what's the price and

then act on it. For all these reasons gasoline retailing is

indeed highly competitive. Yr

Q. What are the benefits, if any, of this competition to

gasoline consumers? A, Well, I think I've mentioned that

before already. (T. 349) With competition there comes

the benefits of lower prices, greater product variety,

better service quality, service innovations, product inno-

vations because all these things become tools in the

competitive contest.

Q. Now I'd like you to take each one of those tools

and state in your opinion as an economist how each

would be affected by Paragraph C of the Maryland Act.

First what will be the effect, if any, of Paragraph C on

the price of gasoline? A. Well, the effect will tend to

duce the price because you will be affecting, you will

be impinging upon the number of stations and more

importantly upon or as importantly upon ;,

(The Court) You say reduce? A. I'm sorry, I'm sorry,

Your Honor, | misspoke. It would tend to reduce

price—competition and increase overall the level of prices.

This is a predictable result any time we preclude

competitors from the marketplace.

Q. What type of competitor would be precluded from

the marketplace? A. Well, according to the statute

producer-refiners would be precluded from the marke

“— Who are these producers-refiners comprised of? A.

Well, there's been evidence presented before this court

that this group encompasses very large producer-refiners

(T. 350) and some very small price competitors, price

f

475

marketers. This group of producer-refiners would have to

terminate operations under this statute.

Q. What is the importance of having this type of

competitor in the marketplace? A. Well, here again I

think we have to think about the meaning of competi-

tion. Competition again depends on the participants,

depends upon what they bring to bear. If you’re going to

have more types of participants in it, you’re going to

bring to bear more variety in managerial points of view,

in attitude to product development, in strategy and as

you bring these to bear, you allow consumers to choose

more and this process of choice is really competition.

Q. Dr. Marcus, do you have an opinion as to whether

Paragraphs B and C will affect market entry? A. Well,

there’s been extensive testimony before this court and I

will be very, very brief. It is going to influence—to bar

rather the entry of producer-refiners, it would bar the

entry of producer-refiners who might ultimately choose

to operate through dealers if they feel that in order to

establish themselves they must first operate through

company operated stations; and it will bar the forward

integration of companies who are currently in refining

from moving into marketing and I am sure there are

marketing firms which may (T. 351) at some point or

another be in danger or which may feel that economically

they should move into refining and under this statute as I

understand it, they would be prohibited from doing so.

The net effect of these influences is to reduce potential

entry into retailing—of the retailing industry.

Q. Returning now to the factors you previously

mentioned, how would type or the quality of service be

affected by Paragraph C? A. Again to have variety, you've

got to have variety in the types of participants. You have

to have as many diverse participants. If you're going to

476

limit, you're going to cut off some types. You're going to

influence it adversely.

Q. You’ve also previously mentioned innovations.

What is the importance of innovations to the consumer in

your opinion? A. Here again I think innovations

sometimes may be thought of as a kind of gadget, new

packaging and sometimes it is that; but economists have

established in numerous studics that over the history of

the United States innovations have been the so—I think

the most important source of productivity gains and

productivity improvements; and productivity is the

vehicle through which cost cutting gets effectuated and

cost cutting is the foundation for lower prices. So

innovations are of extreme importance.

Q. Now then would the prohibition against company

operated (T. 352) stations affect innovations? A. Well,

innovations do not just spring by somebody sitting on a

chair. Sometimes it happens but I guess companies just

can’t be—assume that this is a safe strategy. The—it has

been established that companies which seek innovations

have to engage in research and development activity,

known as R and D. Some of this research and

development activity becomes fruitful and gets translated

into usable and useful innovations. I believe that both the

R and D activity, research and development activity and

the ultimate adduction of innovations will be adversely

affected if one were to preclude a major participant from

operating in the market.

Q. Would you be more specific at how research and

development in your opinion would be adversely af-

fected? A. Research and development is a gamble just like

many other facets of business are. If it is a gamble, you

undertake it if you have profit incentives. If this segment

of the marketplace will no longer have the incentive in

477

the form of being able to use these innovations directly,

it’s only reasonable that they will curtail some of the R

and D activities. Second, some of the innovations—some

of the R and D work is inspired by realizing what the

needs of the consumers are and if you’re in direct contact

with consumers through company operated stations. I

think you get—you get the pulse of the (T. 353)

consumer and you may direct your R and D staff to try

and deal with these needs in the form of appropriate

innovations.

Q. You mentioned adoption of these innovations.

How will the adoption be affected by Paragraph C? A.

Well, here again I think an innovation by itself is not

sufficient because an innovation conceivably could sit on

the shelf someplace. We want the innovations to put

forth to be implemented, to be adopted and put to use;

and I believe that by excluding a segment from the

market the adoption of some innovations will be

adversely affected; and the reason for it is plain. The

frame of reference within which some innovations might

be viewed is completely different as viewed by an

established dealer who looks at it from the point of view

of his local, specific market and as viewed by a marketer,

and integrated producer-marketer who is concerned with

a large number of stations. That particular firm is maybe

more receptive to the risks that is involved in innovation

because when you adopt an innovation, by the way, it

doesn’t mean it’s going to be a success. It could be a

failure; and then in another words an Edse!. Now who is

going to make an experiment with something that could

prove an Edsel or a Mustang; and I’m suggesting to you

that if you are going to be preclude this segment of the

market, we may be paying for it very, very dearly.

(T. 354) Q. Dr. Marcus, based on your study and as an

economist do you believe that in the absence of this type

+78

of legislation dealer operated stations will be largely

replaced by company operated outlets? A. Not at all. I

believe that dealer operated stations and the so-called

conventional stations, neighborhoods, have very signifi-

cant managerial and operational advantages; and | think

the fact is that the bulk of service stations that are

operated under major brands are indeed operated by

independent dealers. These are the facts. The case of

Shell, the number ot company operated stations is well

under five percent. Now they were free to make these

conversions and as Professor Berry very, very clearly

demonstrated, they would have done it if it were in their

interest. Now it’s not in their interest to do it as long as

the dealer is performing efficiently and the economics of

retailing are such that dealers have a very significant

place; so I consequently do not foresee this happening in

totality in gasoline retailing. | |

Q. Are you suggesting that no company will switch

from dealer to company operated stations? A. No, I'm

not suggesting that either. The marketplace is a dynamic

arena. At any one time some firms are going to do well

and some firms are going to do poorly. Yesterday we

heard testimony from Commonwealth that they are

presently (T. 355) operating at a loss. Now this is really

competition. It’s not a race where everybody ends up in

the same place. Now if you start with understanding of

the marketplace in these terms, I think it becomes clear

that at some point some participant who is doing poorly

in this particular area and using this particular mode of

operations is going to try and do something else; and he

may very well try and move in one direction of another,

but this should not be construed to mean that this is

where we are all heading. I think it’s a kind of ongoing

jockeying, if you will, experimentation that a dynamic

market must have.

479

Q. Dr. Marcus, as an economist, do you believe it

desirable to protect or shield any segment of the market

from competiton? A. Again I think I’ve answered that

implicitly in what I’ve said. If you’re going to offer

protection, you are essentially working against the

concept of competition. You cannot have competition,

that is you don’t have economic competitive pressures of

participants if they know that they’re going to be

protected. So I think we’ve got to accept the notion that

under competition there cannot be protection to the

participants.

Q. Briefly concentrating on the use of company

operated outlets in the gasoline industry, do you know

whether or not company operated outlets are also used in

other industries (T. 356) that also utilize dealers?

(Mr. Woodstock) Objection, Your Honor. I believe the

witness has already testified that there are certain unique

qualities about the competition within the retail market-

ing of petroleum products so I fail to see the relevancy

between other areas of competition. He’s already

designated it as a special area with special qualities.

(Court) Well, he says a certain unique qualifications.

He doesn’t say it is unique. Unique as I understand it is

the pluperfect and permits it no other. He said certain

unique qualities. So I'll let him answer.

Q. You may answer the question. A. Actually when I

undertook the study, this is one of the things I wanted to

see because is this kind of provision going to render

gasoline retailing to be entirely unusual in American

industrial experience; and I found out a publication that

is issued annually by the Department of Commerce of the

United States. That publication reports on the major

franchising industries. In fact they say they cover all the

franchising industries of any consequences; and it then

480

reports the breakdown between company operated

outlets and dealer operated outlets; and it is significant

that in each and every one of the industries which are

included in this survey, there are company operated

stations (T. 357) alongside dealer operated stations.

Q. What is the significance in your opinion of your

testimony with respect to the utilization of company

operated outlets? A. I think the significance is that there

is something about the economics of retailing and it is

probably the diversity of conditions in the marketplace in

retailing which requires that there be both company

operated stations and dealer operated stations; and the

proof for that is that each of these industries has in fact

resorted to them. If gasoline retailing were to be

precluded from it, it would be the only exception among

this list of industries covered ty the Department of

Commerce.

Q. Would you please summarize briefly your opinion

with regard to the prohibition of company operated

stations set forth in Paragraph C? A. Well, in order not to

take time of the court, let me not really summarize but

just express my overriding concern here. My concern is

that this Act seeks to restructure an industry. I’ve already

pointed out as have the other expert witnesses, Professor

Berry and Professor Levitt, the immediate areas of

concern, the immediate costs that may be born by the

consumers, but I think more broadly a restructuring of an

industry has—can have very, very far-reaching conse-

quences (T. 358) because we do not have information

that used to be supplied to us by the marketplace; and let

me illustrate that that we had a couple decades ago in one

way or another frozen the retail structure say of tire

distribution, would we have known today the consumers

prefer to obtain their tires at department stores, variety

(

48i

stores, mail order houses, dealers, new car dealers, a

whole variety of areas which keep on expanding or

shrinking depending upon consumer preferences; and I

submit to you that we might not have known because

there would not have been any options for the consumer

to express his preferences. So my overriding concern is

that we might be just doing that. We might be phasing

out at enormous potential costs a segment of this

industry.

Q. Would you be less opposed to this type of

legislation if told that the Legislature can repeal the Act

if it doesn’t work out? A. Well, in theory that sounds all

right and if legislation and social and economic activity

could be carried out in a laboratory, I suppose this would

be nice to observe and we could then, you know, turn

back the experiment and bring the temperature down to

the level where we started. I’m afraid that in economic

and social organizations realities change and as they

change, you may never be able to come back exactly to

the point where you started. We've heard testimony (T.

359) here that some participants in the marketplace do

intend to discontinue operations if the bill becomes

effective. So this will be an economic fact which will have

all kinds of consequences on employment, on property.

Could we at some point in time restore them? They will

have made other plans. We've heard testimony that Gulf

has already modified its plans and is not at the moment

entering into the market. This is again a consequence so

what I'm suggesting here is that on the one side in my

view we have the bill which offers no benefits to the

public, very, very grave costs may be coming through that

bill and consequences that based on accepted economic

theory, accepted practices in American industry are

entirely undesirable. .

(Mr. Abrams) Thank you very much, sir.

482

CROSS EXAMINATION,

By Mr. Woodstock:

Q. Dr. Marcus, good morning, my name is John

Woodstock, representing the State of Maryland.

I believe you said on—you testified on direct that you

appeared for the State of Virginia, the Attorney General's

office. Was that Attorney General Miller, Andrew Miller?

A. 1-his assistant is Walter Marston, Jr. and I believe yes,

I met Mr. Miller, I was introduced to him.

Q. In what connection or what capacity did you assist

him? (T. 360) A. That was on the fair and reasonable rate

of return to the Chesapeake and Potomac Telephone

Company in the State of Virginia,

Q. Approximately when was that? A, That was |

believe in April of this year,

Q. I was sort of interested in your first connection

with testifying with regard to the oil industry, I think

you said in the fall of '74 you were first contacted by

Shell. Is that correct? A. I believe so.

Q. And I believe you said that or maybe you can

refresh my memory here. What was the nature of that

contact? A. It was sometime September, October,

November, December of '74 and I was told that I was

going to be subpoenaed to present the statement.

Q. Did they serve you with a summons? A. Yes, there

was.

Q. Where was that summons issued from? A. New

Brunswick, I believe.

Q. And your deposition was taken, is that correct? A,

Yes, sir.

Q. Who was present at that deposition? A. Mr.

Abrams, a court stenographer.

Q. Was anyone present from the State of Florida? (T.

$61) A, No, sir.

483

Q. And you were requested at that time to perform a

study, is that correct? A. No, sir.

Q. No? A. I said that I subsequently was requested to

perform a study,

Q. At what time frame if you can give me some idea?

A. Oh, I don't think it was until February that I was

really retained and maybe a couple weeks before that |

was approached on it.

Q. So your testimony has been a deposition was taken

either September, October, November or December and

that you were subsequently requested to do a study

which commenced perhaps February— A. That is—

Q. So it could have possibly been two months or six

weeks after the deposition, A. It could have been.

Q. Did you appear in the Florida case to testify? A,

No, sir.

Q. When did Shell retain you for this litigation? A. I

believe at about February of ‘75,

Q. February of '75. (T. 362) A. Yes, sir.

Q. Which was immediately following your deposition

in the Florida proceeding, is that correct?

(Mr. Abrams) Objection, Your Honor.

(Court) What's the objection?

(Mr. Abrams) The witness testified that it was not

immediately following. It was six weeks to two months

after that deposition.

(Mr. Woodstock) All right, I'll rephrase the question,

| Q. That was within two months after your deposition

in the Florida case? A. Approximately.

Q. And did they retain you as a private consultant for

them in this litigation? A. I believe that I was retained as

a consultant,

Q. And at a fee, sir? A. Yes, sir,

Q. What's the amount of that fee? A. It's four

hundred and fifty dollars a day for an eight hour day,

484

Q. How many days have you logged in preparation for

this case? A. My study to date approximately twenty-

five, thirty days. ;

(T. 3638) Q. And that was a study that wasn't

introduced, | believe. Is this the study you're speaking

about? May I hand you that? A, No, sir, this is not the

study that I've done for the-over the year. Is that your

question, Mr. Woodstock?

Q. I'm asking you about the study that you were

requested to do by Shell. Is that in printed form

anywhere? A. No, this is one of the work sheets that I'vc

had and I've had several of them; and this was prepared

with a possibility that it might be introduced.

Q Have you prepared any other reports for Shell on

the preparation of this trial? A. Mr. Woodstock, this is

not a report.

Q. Well, I'm asking if you have prepared any reports

for Shell. A. Oh, I'm sorry. I thought you said any other,

Any reports? No, I've prepared no reports.

Q. Did you provide them with any statements? A. No,

r,

: Q. I believe you testified that in seeking to get more

familiar with the gasoline industry for a good many

months that as part of your preparation for this case you

went down to Houston, is that correct? A. Yes, sir.

(T. 364) Q. Where did you go in Houston, just Shell

Oil Company Headquarters? A. We met at the Shell

headquarters, yes. |

Q. And I believe you said part of that was traveling

around Houston and viewing various types of stations? A.

Yes, sir.

Q. Was there anything unique about these stations or

any other reason why Shell might wanted to have shown

you them? A. Yes.

485

Q. Would you tell me what the unique quality or

characteristics of those stations were? A. The stations |

had seen I have never seen before anywhere in the

country. That doesn't mean that I have travelled

throughout the country, but I saw self repair stations and

1 saw them in operation. I was talking to the supervisor in

charge of this and it was quite a very interesting concept

where individuals will be coming, renting space in the

station and performing their own repairs. | saw equip-

ment designed to allow consumers to replace their oil in

the car without their constant attendance. I would have

loved to be able to use that in New Jersey. I understand

this may be one of the innovations that may or may not

work out, but I saw it working in an experimental

station. | saw various considerations of (T. 365) self

service stations. I saw some of them trying to sell some

groceries on the side, film. I really got the feeling of the

ongoing attempts on the part of Shell to make it true

offering a better product makes better service range to

consumers,

Q. Vis a vis, would you characterize that as research

and development? Is that a part of Shell? A. This is the

laboratory equivalent of research and development that

you find in manufacturing companies.

Q. Anything prohibit Shell Oil Company or any other

similarly situated major oil company from putting that

type of operation or these innovative concepts into

existing dealer operated service stations? A. Some of

these could undoubtedly be put in dealer operated

stations.

Q. Let me ask you about some. How about partial self

service? A. Now that I can't answer because the partial

self service I don’t know the economics of this.

Q. Are you familiar with the market in Maryland of

486

retail service stations? A. | have studied a great many of

the facts. 3 |

Q. Does Shell have any partial self service stations in

the State of Maryland? (T. 366) A. I'm not certain,

Q. They do. I believe it's also in the pretrial order. Are

you familiar with the contents of the pretrial order? A.

Your term familiar is—I'm afraid of it, I have reviewed

some parts of it. I don't know what familiarity means

here. |

Q. Do you know the particular facts of your client? A.

Facts of—were important but please remember, Mr.

Woodstock, that my assignment was not to study the

operations of Shell. My assignment was what is my view

of that particular Act. |

Q. Would it be possible for them to put into

conventional service station to make a bay available for a

consumer to come in and fix and repair his own car? A, It

may not be possible either. May or may not and some of

the reasons why it may not be possible is that some of

these operations may not be attractive to dealers. Some

other innovations that may be coming upstream which

are not yet known may not be manageable by dealers for

various reasons so my answer to this is some of them

could and some of them couldn't. | certainly don’t want

to see those that couldn't be shut out by these service

stations. |

Q. You say it may not be attractive to a particular

dealer, is that correct? Isn't that what you said? (T. 367)

A. May not be.

Q. Well, whose decision should it be whether or not it

goes into that particular location if that individual dealer

who finds it unattractive has been at that location and is

there under an existing lease agreement? A. I'm afraid the

question is not very clear to me.

487

Q. It's very simple. Should Shell have the final

decision to implement that innovation at that station or

should the independent businessman who is operating it?

A. Depending upon what innovation and what are the

terms. I think an innovation is a broad term. It goes all

the way from a new jet engine, a new aircraft to

something that the stores have described as the brakes.

Q. Sir, I have given you a very specific exxample and

I'm talking about opening an existing bay with equip-

ment and tools there for a consumer to fix or repair his

own car or to provide a area in there to unscrew his own

nut and change his own oil, A. And what is your

question?

Q. Who should have the final decision as to whether or

not that new innovation should be implemented in a

Shell leased dealer service station? A. Mr. Woodstock, to

the best of my knowledge dealers are free right now to

set aside a bay to tun—to cons mers and (T. 368) the

reason they probably don’t want to do it is that they can

make much more money by performing the services in

their own way.

Q. So the consideration as to whether or not it's

particularly attractive to any dealer doesn't really mean

anything? A. It's his decision then. Some of these

innovations could be adopted by dealers with no problem

at all. They're on the market.

Q. How about a gas only station? A. What about it?

Q. Could in your expert opinion— A. What is your

question? I’m sorry, I don't—

Q. In your opinion could that be operated by a dealer

lessee as opposed to direct company operation? A. If it is

economically desirable for him to operate, but a

dealer—but a gas only operation as I’ve heard here from

president of Kayo and as I've heard from yesterday from

488

PMC they maintain—these are the people who run these

operations. These are the people who sweat it out and

they maintain that they can't do it with dealers.

Q. Again I ask you your familiarity with the Maryland

market. Are you familiar with a company such as Crown

Central Petroleum in Maryland? (T. 369) A. I'm aware of

their existence in the Maryland market.

Q. Are you familiar with their percentage of sales over

the last five years in the State of Maryland? A. Yes.

Q. What does that reflect to you, sir? A. It reflects to

me that the marketplace is big enough, yet diverse

enough to allow some operators to do it one way and

some other operators to do it in another way. It’s the

only conclusion that I would draw from that.

Q. You're familiar with Hess Oil Company, too? A.

Yes.

Q. Are you familiar with their operations in Mary-

land? A. I believe so. I have an idea.

Q. Do they operate through dealers? A. Well, there

was a legal squabble the other day when this question was

raised and if I'm—one thing I’m not is a lawyer and

somebody said that the underlying terms they are very—I

heard all kinds of terms like commission agent, but let me

try to answer it as an economist. Here again what you're

doing here is you're selecting participants whem you say

hey, he’s operating this way. Can't everybody operate

this way? If everybody tried to operate this way, then he

couldn't and the only reason one person can do it this

way is the others are doing it in a different way. This is

the essence of the (T. 370) diversity in the marketplace.

* ° *

(T. 375) Q. Dr. Marcus, as an expert, what advantages

do you see to direct owned, company owned and

operated station by the major oil companies \apon price

489

competition in the State of Maryland? A. Here I

don’t—this is one area where I do not believe that there

are considerable advantages, that is, if you talk about

direct owned by the major brands; and the reasons for

this have been stated in my testimony in Jersey. I believe

that the major oil companies are not going to use (T.

376) their company operated stations in a cut-throat

competition with established dealers and consequently I

do not believe that the thrusts of price competition to

company operated stations will take piace from the major

owned, company operated stations, but I think the

producer-refiner category includes other participants,

very important participants which have been identified

for this court and they are a very important factor in

price competition.

Q. To what extent have you examined all the actors in

the universe, if you will, of mar—petroleum marketing to

distinguish various characteristics about their price

marketing activities? A. I have done my best to become

sufficiently familiar with the groups and categories of

participants to form the opinion which I’ve just

expressed.

Q. Do you find there are different sub-classes amongst

the producer-refiner category as to their competitive

behavior on price? A. I—even I was able to Ubserve that

Hess station traditionally sells under the major brands.

Crown sells under the major brand. They are producer-

refiners. There is no question that you're dealing here

with different types of retailers. The Crown, the Scots,

the Kayo have made it clear that they do not try and

compete over the (T. 377) entire range of services. It

would be suicidal for them to do so; so why would they

mention the competition that they choose to emphasize

or may be forced to emphasis under market conditions is

price.

+90

Q. Are you familiar with any non-producing refiners

independent retail service stations dealers in the State of

Maryland or in the State of New Jersey or in your travels

around the United States? A. They're all listed in the

pretrial order and I—

Q. Are you particularly familiar with them? A. I have

seen them, yes.

Q. How about are you familiar with their pricing

pattern? A. Again I think it is clear that they constitute

an important factor in pricing competition.

Q. Are you familiar with their pricing patterns, sir? A.

I am familiar with the fact that they are a competitive

force in the gasoline retailing. Pattern is a term which—do

you mean a historical product pattern, a regional pattern.

I’m a little bit uncomfortable with it.

Q. We'll start with an historical pricing pattern. A.

Well, again as an economist it is very, very clear that these

marketers had to continuously compete in the market-

place. They had to emphasize another dimension, perhaps

(T. 378) they had to emphasize price more because they

weren't giving other services. The point of the matter is

that in the marketplace there was a segment for them and

they had some bad years I understand and some good

years.

Q. You see a difference between the way they

marketed and emphasis on price as opposed to perhaps

other qualities of marketing demonstrated by the major

integrated oil companies? Historically? A. I’m afraid I've

not studied the broad question which groups all

marketers in one category and relates to the entire

history and ask me to summarize the entire history.

There have been various periods, various regions, various

marketers. I’m just unable to answer the question the

way it has been posed.

Q. You were here yesterday Dr. Levitt, I believe,

491

testified to a wheel of retailing concept. Are you familiar

with that concept? A. I’m familiar with the concept. I

have.:’t quite seen the wheel but—

Q. Are you familiar with it as it pertains to the

petroleum industry? A. I think the concept again is

universal as Professor Levitt pointed out. It is the motion

that the wheel turns. By the way I would have added to it

the wheel sometimes turns (T. 379) forward and then

may turn backwards. It’s not always a continuous motion

in one direction. I think what he was trying to say is that

there are great dynamic changes and look, the best

illustration for that is is that in the 1930’s the oil

companies were virtually, entirely operating through

company owned stations; and now we're talking about a

situation where the major brands are operating almost

entirely and predominantly through dealer operated

stations. There was no government statutes which lead

them to do it directly, which caused them to diverse

themselves, but there are plenty of opportunities to go

back to that. I think one has to approach the marketplace

with a great deal of respect for the uncertainty, for the

dynamic conditions and I’m frightened to have the law

just freeze a segment of it.

Q. Doctor, in your opinion does vertical integration

increase the number of competitors in the market? A.

Question—Mr. Woodstock, I don’t have enough informa-

tion to answer you.

Q. Generally speaking in the petroleum industry

where you have witnessed and examined veitical integra-

tion, has that resulted in increased numbers of competi-

tors in the marketplace?

* * ~

(T. 381) Q. Confining yourself to the State of

Maryland and as a result of your studies of the Maryland

market, has forward vertical integration resulted in an

A

492

increase in the number of competitors in the marketplace

selling gasoline to the consumer, public? A. Mr. Wood-

stock, if we have a situation, we have one oil company

selling to an independent dealer and you now tell me that

this particular consideration has changed, that the major

oil company has—is now directly operating a retail

firm—the retail end of it, under this configuration you

previously had two units, you now have one and I don’t

think this by itself has any bearing to competition in the

marketplace. |

Q. Sir, I think you've repeatedly testified this morning

one of the essential elements to healthy competition is

the diversity of that marketplace and an ingredient of

that is the number of competitors. A. That’s correct.

Q. Now I still don’t believe I have received an answer

to my previous question. A. I really—

Q. Unless you're saying that two into one means a

reduction.

= . a

(T. 382) A. Well, yes, if you had two before, this is the

universe, this is the reality, no other consideration into

account and the two merge into one, we have one.

Q. Does it help the general concept of competition to

(T. 383) have a large or a small number of price decision

makers in that marketplace? In the sense that that price

decision maker relates to making an offering to the

consumer? A. I think it’s very important to have a good

number of participants, but I think it would be erroneous

to assume that every time you add one you make a

market more competitive and any time you remove one

you necessarily make it more competitive. I think it’s not

a continuous kind of change. So my answer to your

question is yes, we need a good number of competitors

but it does not follow that any time you remove one you

have necessarily adversely affected competition. If you

493

had only two competitors and you removed one, you’ve

got an monapolist. If you had two hundred and you

removed one or two or three or five, may be entirely

different, but it also depends who you are removing,

you're removing a particular type and again you have

exerted influence on competition. So I’m afraid it’s a

most complex question.

Q. Doctor, I believe toward the end of your testimony

you said that something to the effect that your main

concern over this bill’s effect would be that we haven’t

had enough time and opportunity to find out or study

and find out what we would be doing and it’s a fear of

what might happen. I may be restating that wrong,

maybe you can restate for me. A. No, I’m sorry it’s not

correct.

(T. 384) Q. Okay, please restate what you said. A. It is

not a correct understanding of what I tried to say. I first

of all have emphasized very specifically the areas in which

I believe consumers would be adversely affected and I’ve

listed a good number of them. I then pointed out that in

addition to that, quite apart from that, the restructuring

of an industry has—is an extremely risky undesirable and

this is a conclusion that we draw from looking at the

history of retail activity and the court heard examples

about changes in super—from grocery stores to supermar-

kets, the evolution small apparel shops into department

stores and discount stores and the like. What I’m

suggesting to you that if somebody in the 1920’s had

tried to say to the little grocery people, hey, we’ve got a

beautiful, brand new supermarket, who needs it, what we

going to do for us. If we had adopted this particular

strategy, the costs would have been enormous; and I

thoroughly suggested, further suggested that we are not

doing it in other areas of the economy and I see no

reason for doing it in gasoline retailing.

494

Q. So the danger is that the bill attempts to

restructure an industry? A. This exclusion of a segment

of an industry amounts to restructuring its nature and

characteristics, yes, sir.

Q. To the best of your knowledge, has the—any of the

(T. 385) large segment of the petroleum industry ever

been restructured by governmental action? A. Restruc-

tured in terms of prohibiting entry of a particular

segment, prohibiting operations in a particular area,

prohibiting a mode of corporations, to the best of my

knowledge, I’m not familiar with any, no, sir.

Q. How about the divestment of various segments of

that industry? A. I think divestments—well, first would

you please tell me in what—

Q. Divestment of—are you familiar with any govern-

mental actions historically which required the divestment

of certain portions of the oil industry in this nation? A.

As I understand divestment, in cases where I’ve seen it

effectuated, it is a remedy that the law has, very

specific—under very specific circumstances where it is

called for, where there has been determination that the

particular firm and I’m talking here of the distinction

between a firm and restructuring an industry, so where a

particular firm has engaged in some form of violation of

anti-trust laws or FTC laws, I believe this is a remedy that

the law has.

Q. That’s the test of your knowledge as far as

regarding the concept of divestment. Are you aware of

any (T. 386) other legislation which calls for divestment

or called for a divestment of particular aspects of any

industry in this country without finding specifically they

were violating the antitrust law of the United States? A.

I’m aware of one. The New Jersey bill, which, of course,

was not acted upon after the hearings, but I would not

495

presume to be aware of any —all bills of legis—of any

legislature or Congress seeking particular remedy or

particular proposals, I couldn’t conceivably know of ail

of them.

Q. As an economist and I believe you testified as

to—you’re an economist and also you have a relationship

with industrial organization, would you give me a little

bit of background on that again. I have some notes here

but they’re not that good. A. Well, I would like to believe

that my expertise is in the area of industrial organization

which is the study of the relationship between the

structure of industry and its behavior in the marketplace

and its ultimate effect on consumers.

Q. Wouldn’t you consider part of your required

knowledge to make an economic evaluation and advise an

industrial organization an awareness of whether or not

certain economic conduct could even be undertaken? A.

I’m not an evangelist going around offering advice (T.

387) to any particular, unspecified action. I don’t

understand the thrust of it. What—where have I been

asked to do what which I have refused to do?

Q. As an economist, can you conceive of any situation

where legislatively imposed divestiture of an industry

would be appropriate? A. Mr. Woodstock, a legislature

may have all kind of reasons, may sometimes be right and

in my humble opinion sometimes it is not right—

Q. I’m asking you for your viewpoint as an economist,

not a legislature, I don’t believe you've been elected. A.

No, as an economist I also have an opinion about—now

the complexity of economic situations is so enormous

that to ask me is there any situation under the sun under

which this might be necessary is really a task that I can’t

handle. I mean it—if you care to specify a set of

circumstances, I would do my best to answer it.

496

(Mr. Woodstock) I have no further questions of this

witness, Your Honor.

(Mr. Abrams) I have no questions, Your Honor.

* * *

(T. 396) CHARLES J. LUELLEN

a witness of lawful age after being duly sworn, deposes

and says:

DIRECT EXAMINATION

By Mr. Drogula:

Q. Will you please state your full name, sir? A. My

name is Charles J. Luellen.

Q. What is your current position with Ashland Oil? A.

I am a group vice president of Ashland Petroleum

Company, division of Ashland Oil Inc.

(Court) Excuse me, sir, how do you spell your last

name? A. LUELLEN.

(Court) Thank you, sir.

Q. What are the duties of your present position, Mr.

Luellen? A. I have responsibility for all sales of gasoline

made by Ashland Petroleum Company, most of the

distillate fuel (T. 397) oil sales and all of the asphalt sales

for the company.

Q. And how long have you held that position? A. A

little over three years.

Q. Prior to that period of service, would you please

give us a brief outline of the other positions you have

held with Ashland? A. Yes, I began working with Ashland

in 1952 beginning in a training program which involved

work in the refinery, in terminals, in service stations, in

sales offices; and between 1953 and 1959 I served as a

sales representative in several sales territories. 1960 I was

transferred to a subsidiary company, Louisville Refining

497

Company, as a sales representative and I: left that

company in 1967 as vice president of sales and

distribution. 1967 I moved to company headquarters in

Ashland, Kentucky where I served for about three years

as an assistant to our board chairman. In 1970 I became

vice president of branded marketing where I served until I

assumed my present duties.

Q. Do you belong to any organizations within the

petroleum industry? A. Yes, sir, I’m a member of the

American Petroleum Institute and I’m currently serving

on two committees. I’m the director of the Asphalt

Institute and have been involved in several committee

assignments there.

(T. 398) Q. Will you please give to the court a brief

description of Ashland Oil as a company? A. Well, it’s a

diversified concern with operations in all phases of the

petroleum business. In addition we have a highway

construction division, a division that produces and sells

coal, and a division that manufactures and sells various

chemicals.

Q. Focusing your attention on the petroleum activi-

ties, is that handled by a specific subsidiary or division?

A. Yes, Ashland Petroleum Company.

Q. And would you please give us a little more specific

information as to the petroleum activities within that

company? A. Well, as you stated, we operate seven

refineries, two in Kentucky, two in Ohio, one in New

York, one in Pennsylvania and one in Minnesota. We nin

approximately three hundred eighty-five thousand barrels

per day of crude oil, that’s the capacity of those

refineries. On crude oil, that, as you've mentioned, is

purchased largely from other producers. We are involved

in all phases of transportation, both crude oil and

finished products; and we sell our products at wholesale,

at retail, the entire range.

498

Q. Focusing on your refinery operations, how many

barrels or throughput which you mentioned, three

hundred and (T. 399) eight-five thousand barrels a day,

was attributable to crude oil which Ashland owns or

controls? A. About fifty thousand barrels per day, which

is our worldwide production.

Q. Would you explain to the court how Ashland goes

about obtaining the additional crude oil it requires? A.

Well, we must buy it in the open market at the prevailing

prices; and we do so from a variety of sources including

major oil companies, independent domestic producers,

foreign national oil companies, so we cover ail phases.

Q. It it correct to characterize Ashland Oil as an

independent refiner? A. Yes, sir.

Q. Would you please indicate how that term is used in

the petroleum industry and what it refers to? A. Well, it’s

widely taken to mean a refiner who controls less than

thirty percent or who owns less than thirty percent of the

crude oil he runs through his refineries. In our case it’s

about fifteen percent or slightly less. It’s also taken to

mean or it has as varying form the method of gasoline

marketing. In that sense we also are independent oil

company and that we rely largely upon independent

private brand marketers, both our customers and our own

direct operated stations for the sale of our gasoline.

(T. 400) Q. Does Ashland’s crude deficiency cause in

any operational problems in the area of supply or the

area of price? A. Yes, sir, we have to operate, of course,

at a crude oil cost disadvantage compared to many of our

competitors; and so it’s always been a handicap, however,

it’s one that we are able to live with and prosper through

most of our history and became a very serious problem,

of course, during the shortage and subsequent rapid

increase in crude oil prices.

499

Q. I'd like to focus your attention on the period

which you referred to as a period of shortage. Approxi-

mately what period of time did that cover? A. Well, it

began in 1972 and continued on through early 1974.

Q. Did the absence of crude oil affect the runs at your

seven refineries? A. Yes, it did. They were sharply

reduced particularly during the embargo period which

was October 1973 until March ’74.

Q. Mr. Luellen, I'd like to nand you a document and

ask you if you can tell us briefly what it is.

(Mr. Drogula) Your Honor, may I hand a copy to the

court?

(Court) Yes, sir.

A. Yes, sir, this is a graph showing our refinery runs

beginning in October 1973 through July 1975.

(T. 401) (Mr. Woodstock) Your Honor, I’d like to

object to it and question the relevancy of his testimony

with regards to the statute being challenged in this

litigation.

(Mr. Drogula) I would be happy to respond to that,

Your Honor.

(Court) Go ahead and you can tie it in.

(Mr. Drogula) We have heard Mr. Woodstock examine

the expert witnesses and certain of the company

witnesses at length on the question of vertical integration;

and I believe that this document bears directly upon

showing that Ashland is not a fully integrated, major oil

company. Not only that the fact that it is crude deficient

costs is more in the role of an independent gasoline

marketer as I believe you will see when we get into the

State’s own case. I think the fact that Ashland itself was

injured during the crisis indicates that it was one of the

members of the class to be protected rather than among

the members of the class to be legislated against. This

500

chart dramatizes how vulnerable Ashland is to the world

crude oil supply.

(Mr. Woodstock) May I respond?

(Court) Yes.

(Mr. Woodstock) Doesn't appear to me that our statute

in any way affects the crude supply of any company.

Secondly the basic facts of Ashland’s operations have

already (T. 402) been stipulated to and a part of the

record as part of the pretrial order; and this extensive

affidavit from an FEA official which also discusses this

aspect of the petroleum industry.

(Court) Well, I think counsel is trying to indicate to

the court at least as we know that if it can be shown that

a particular class of citizens or organizations or any

particular class may be particularly segregated; and all

members of that class treated equally, then laws applying

to that class do not necessarily have to be deficient on

the question of due process. Now as I understand the

thrust of Ashland, it’s attempting to show that it does

not necessarily belong in the class of a major refinery and

it shouldn’t be included in this—in the prohibitions of

this Act; and I think they can do that.

(Mr. Woodstock) Your Honor, if I may make one last

point that the bill in question does not use a classification

of major or minor producers or refiners. The classifica-

tion is very broad in that sense and all encompassing; and

when they filed their Bill of Complaint for the purposes

of standing, they said we are a producer-refiner; and I

assume the facts I believe as to whether or not they are

affected by the bill within the classification is obvious on

the face of the pleadings.

(T. 403) (Mr. Drogula) | believe, Your Honor, an issue

in this case is the rationality of the classification. If a

state legislature in the exercise of its police power drags

501

its Rot too broadly and includes within the class

individuals or companies who do not reasonably belon

there upon any rational set of economic facts, then Pe

classification is arbitrary and must fall. As the court

anticipates, we do seek to indicate to the court that this

statute makes utterly no economic sense as to independ-

a a oe because without the crude production

yeni A ~ ae rod — to injure any other

(Court) Overrule the objection.

‘ Q. Mr. Luellen, directing your attention to the

document which I just handed you, would you please

interpret for us the apparent decline which appears in the

latter part of 1973? A. Yes, as a direct result of th

continuation of the effects of the shrinking availabilit 2

a and foreign crude which occurred prior ote

“ argo and then the very drastic reduction which

ollowed the embargo, which as I said began in Octobe

and ended the following March.

pes What was—what were the consequences of that

€ in crude oil supply upon the company? A. Well, it

was very drastic because our refining business is one

which relies very heavily upon incremental (T. 404)

barrels where there is one operating its plant at maximum

pectin so immediately we had to reduce refinery

pore Fi cae to the most profitable barrels

Q. What impact did reducing your refinery runs have

upon your retailing operations? A. Of i

effect of reducing them. Te ee

Q. Was that the case with respect to both branded

and unbranded marketing? A. Yes, sir, it was.

Q. Mr. Luellen, does Ashland engage in the sale of

branded gasoline? A. Yes, we do in a very small area

502

adjacent to our principal refinery at Catlettsburg near

Ashland, Kentucky. We market as a conventional branded

seller in a small portion of southern West Virginia, eastern

and central Kentucky and extreme southern Ohio. The

total sales of gasoline through those outlets account for

about only eight percent of our total gasoline sales.

Q. Are those stations in those areas which Ashland

markets through branded outlets dealer or company

owned outlets? A. They are dealer operated outlets

almost without exception. Fewer than six are company

operated.

Q. Why does Ashland confine its sales of branded

gasoline to the areas which you have just mentioned? (T.

405) A. Briefly because that kind of marketing is totally

dependent upon brand image or brand recognition.

Involved in brand recognition is great expense and years

of effort, much advertising must be done, a great market

penetration must occur, that is, there must be many

stations so that the consumer is frequently exposed, a

credit card system which is an extremely expensive to

operate and must be developed and administered; and we

simply have not had the resources over the years to

develop that kind of system and then operate it

profitably. .

Q. Has Ashland attempted to market branded gasoline

outside the geographical areas you have just mentioned?

A. Yes, we have. We planned to enter markets adjacent to

the three-state area that I just described and did so. For

example; after we had established some branded outlets,

business in Pennsylvania, in central and northem Ohio,

we next tried to develop that kind of business in

Michigan and we began that effort in about 1957. 1953,

excuse me; and for seventeen years we stayed with that

effort. We did not have very much money to spend on it,

but yet we spent well over a million dollars and in 1970

503

we concluded that we absolutely could not earn a return

on our investment and so we withdrew from that effort

entirely. During that entire time we never had as much as

one quarter of one percent of the total Michigan gasoline

market running through our branded (T. 406) service

stations so we not only and we lost money as it relates to

that, something over a half million dollars during that

period of time from operational losses. In addition to

that, of course, we were deprived the use of that over one

million dollars in capital which could have been applied

to a more efficient, economical mode of operation.

Q. As a result of that, Mr. Luellen, how does Ashland

market gasoline in parts of the country which are beyond

its home territory? A. We sell gasoline at retail to our

company owned, company operated stations which are

identified by the names other than Ashland and whose

style of operation is that that emphasizes low price,

limited services, no TBA operations, no service bays, no

dealers, we operate them direct.

Q. What is it about unbranded marketing that makes it

easier for companies such as Ashland to penetrate

distant markets? A. Well, it’s a type of marketing that

can be—a type of market that can be entered easily

because it isn’t necessary to have the credit cards, the

advertising and the brand acceptance. The appeal to the

consumer is obvious, its price and limited fast service and

so it’s easy to enter.

Q. You mentioned that Ashland operates in distant

markets through company operated stations, is that a

uniform policy (T. 407) A. Yes, it is.

Q. What are the reasons that Ashland chooses to

operate those unbranded marketing facilities as company

operated stations? A. We must have control of the basic

elements of the operation. The basic elements are quite

simple and they are price, appearance, housekeeping and

504

hours of operation. We cannot do that by operating on

any basis other than direct.

Q. Mr. Luellen, does the existence of company

operated stations have anything to do with the success or

failure of your refining operations? A. Yes, sir, it does.

We sell approximately sixty percent of our gasoline to

wholesale customers who typically are resellers who own

their own stations, resell the gasoline they purchase from

us through their own stations. These people are totally

independent of us. We have enjoyed their business for

many years, however, they have no obligation to us to

continue buying from us. We have no investment in their

business. We have no contracts with them and there’s no

written contracts with them; and so those people can

leave us at any time and frequently over the years they

have left us for various reasons but most frequently to

avail themselves of lower price and so in order to expand

our refineries we found it necessary to ensure ourselves of

a certain nucleus (T. 408) of controlled business such as

we achieved with our direct salary operated stations. So

in order to assure ourselves of continued high optimum

refinery runs, we must have that nucleus of direct

controlled business.

Q. Were those policies borne out during the recent

fuels crisis? A. Yes, sir, they were.

Q. Would you explain how the presence of company

owned stations assisted Ashland during that period of

time? A. Well, after the rapid escalation of crude oil costs

when our costs rose from roughly three and a half to

eleven and a half, twelve dollars per barrel, of course, our

gasoline prices had to be increased radically also; and so

our independent customers whom we have no tie on as |

mentioned were free to leave as for other suppliers and

frequently did.

Q. What would have been the consequence at that

505

time had not Ashland had these company operated

stations? A. The consequence certainly could have been,

undoubtedly would have been that we would have had to

make the decision to reduce refinery runs.

Q. What would that have done to the economics of

your refinery operations? A. Would have been very

damaging, of course.

Q. Mr. Luellen, in the presence of company operated

stations (T. 409) relevant to the fact that Ashland is an

independent, crude deficient refiner? In other words do

the operation of company stations assist you because of

your status in the industry? A. Yes, definitely.

Q. Would you explain to the court how that—

(Mr. Woodstock) Objection, Your Honor. I don’t think

the witness is qualified to speak for every other

independent refiner who may or may not have retail

service stations; and I have no idea what the universe is in

that category. I don’t believe there’s any testimony to

that effect on the record; and I-—-if counsel would

rephrase the question limiting it to just Ashland.

(Court) All right, rephrase the question.

Q. Mr. Luellen, in what way is the presence of the

company operated stations of value to Ashland given the

fact that it is a crude deficient, independent refiner? A. It

gives us protection against loss of uncontrolled business

and thereby enables us to maintain our refinery runs at

maximum levels.

Q. Directing your attention, Mr. Luellen, in the period

of time encompassed by the so-called fuels crisis, did

Ashland experience significantly higher crude acquisition

costs than major integrated refiners? (T. 410) A. Yes, sir,

we did.

Q. I'd like to hand you a document, Mr. wuellen, and

ask you if you can tell us what it is. A. This is another

graph showing the average crude oil costs of Ashland by

a a ey

506

the month beginning in March 1973 continuing through

December 1974 on one line and the other line shows the

crude oil costs of major integrated refiners. The source of

data of the other companies, incidentally, is the Federal

Energy Administration.

Q. Mr. Luellen, what is the significance of the fact

competitively to Ashland that during that period of time

it experienced a crude cost disadvantage in the area of

two to three dollars per barrel? A. Well, the penalty, of

course, resulted in the fact that we had to attempt to get

our prices up, our refined product prices up sufficiently

to pass through that—those cost increases.

Q. Now, Mr. Luellen, do company operated stations

permit Ashland to offset in part these disadvantages of

crude acquisition? A. Yes, sir, by protecting us from loss

of substantial volumes of uncontrolled business.

Q. Turning your—directing your attention, Mr.

Luellen, to Ashland’s operations in the State of Mary-

land, can you tell (T. 411) us when Ashland first entered

the unbranded market in Maryland? A. Yes, it was in

1961.

Q. Can you tell us whether Asiland has ever had a

lessee dealer operating in the State of Maryland? A. No,

we have not.

Q. At the present time how many stations does

Ashland operate in Maryland? A. There are seventeen.

Q. Would you again very briefly since you've already

touched on this tell us what these stations look like and

their marketing strategy and how they operate? A. Yes,

they're typical of other price marketers, I believe. They

typically are stations located on parcels of ground usually

not at intersections as is the case of branded operations.

The buildings are small, they include a shelter area for

attendants and a small storage area. There are no services

offered. No service bays are present or in the case of two

507

stations which were acquired from other companies

where there were bays, they are boarded up. Price is the

principal appeal to the consumers. The other appeals are

long operating hours, typically they operate eighteen

hours a day, none less than eighteen hours a day, three

hundred sixty-five days a year. Some of them are

twenty-four hours per day operations. Fast service, low

price, constant hours of oper—long hours of (T. 412)

operation.

Q. Will you tell us something about the pricing

policies of these stations in relation to major branded

marketers? A. Well, major branded marketers really we

feel are not our competition. Our competition is from

others who market similarly. Price is all important and

our price must be lewer as must prices of others who

market similarly than is the price of major brand dealers

who offer full service, credit cards, tour service, the entire

package associated with that kind of operation.

Q. Does Ashland have a policy as to how many

pennies below the major brands it attempts to price? A.

No, we have no policy.

Q. As a matter of practice in the State of Maryland,

approximately how much lower in price have these

Ashland stations been? A. Approximately three cents.

Q. Three cents a gallon. Mr. Luellen, I’d like to hand

you photographs of four of Ashland’s stations in the

State of Maryland bearing the brands that you have

described and ask you if these are typical of the stations

which Ashland operates in the State of Maryland? A. Yes

sir, they are.

Q. None of these stations, am I correct, offer service

(T. 413) or has service bays or other facilities? A. That’s

right, none of them does.

Q. Mr. Luellen, are you familiar with Chapter 854, the

legislation which we are concerned with— A. Yes.

508

Q. —in this litigation? A. Yes, I am.

Q. Are you familiar with what that Act would import

for Ashland and seventeen stations in Maryland? A. Yes.

Q. Has Ashland considered what alternatives it might

follow in the event that this statute should become

effective? A. Yes, we had to consider alternatives, of

course.

Q. What are the alternatives as you see them? A. Well,

the first thought is that we would attempt to place this

gasoline through retail outlets in some other state. The

second—that of course would involve disposition of the

stations which would be unfortunate at best and

undoubtedly difficult because their best use, we feel, is

their present use. Another alternative, of course, would

be to consider dealer operation, which we have done, and

we know that we would not choose that route if there

were any other alternative open to us.

Q. Let me stop you there for a moment. Why is it (T.

414) Ashland’s view that they would not operate the

seventeen stations through lessee dealer? A. Because we

simply could not control the vital elements, those being

price, hours of operation and appearance standards.

Q. Is this decision based upon any experience within

the company? A. Yes, sir, it is.

Q. Would you please explain that, please? A. Well, we

have had dealer operations both in our branded opera-

tions and in a few of our private brand operations; and

we simply—we have learned through very hard experience

that we simply cannot control these vital items.

(Court) Mr. Drogula, do you want to enter these

photographs into evidence?

(Mr. Drogula) Yes, sir. Would Your Honor prefer that I

offer them at this time?

(Court) All right.

(Mr. Drogula) I would do so.

509

(Photographs filed herewith as eviden intiffs’

Exhibit #12A through 12D) ebrens

Q. Mr. Luellen, does Ashland engage in the sale of

gasoline in the State of Maryland at wholesale? A. Yes

we do.

(T. 415) Q. Would you please describe those activities?

A. We sell to customers who typically operate their own

service stations under their own brand names and those

customers are also price marketers. Some of those

customers have both direct operated, salary operated

stations and dealer operated stations. The customers

cover a wide range of size, economic size, from small

individually operated businesses on through multi-station,

private brand chain operators and even includes such

giant companies as Sears Roebuck, Penneys, Food Fair

who by our gasoline, resell it directly through salary

operated stations located at their stores.

| Q. If Ashland were obliged as a result of the legislation

involved in this litigation to withdraw from retail activity

in Maryland, would that have an effect upon Ashland’s

wholesale activities? A. Yes, sir, it could. It would

jeopardize our position. We have found that we can

expand as we did into the Maryland market in 1961 only

if we can achieve a balance of uncontrolled and direct

retail business which is controlled; and so the losses at

retail business would obviously reduce our total through-

put in barrel, our total marketing in Maryland.

Q. Is any of the gasoline which Ashland sells in

Maryland Ashland’s own gasoline? A. No, sir, it is not.

(T. 416) Q. Would you please indicate how Ashland

acquires the gasoline which it sells in Maryland? A. We

acquire it by exchange.

Q. With whom do you exchange? A. Continental.

Q. Continental. Now would the inability to operate

510

retail stations as company owned facilities jeopardize

Ashland’s ability at wholesale to enter into such

exchange? A. Yes, it could where the exchanges must

be—the exchange volumes must be in balance, of course,

They are in balance now. They are in balance because we

have the total requirement that consists of both retail and

wholesale business. If we’re deprived of either segment of

our business, then the exchange will be out of balance

and it could be unbearable.

Q. Mr. Luellen, would you please indicate to the court

who you consider your competitors to be in the State of

Maryland? A. Our competitors at retail are other price

marketers and they include the many different kinds of

marketers that I touched on briefly in the description of

our wholesale business.

Q. If Ashland withdrew from the State of Maryland as

a result of this legislation, would it have the capacity to

reenter the state at a future time without undue expense

or burden to the company? A. Well, certainly it would be

very expensive and (T. 417) very inconvenient and

additionally very disruptive to our total operation; and |

really can’t say, of course, definitely but it would be very

difficult.

(Mr. Drogula) I have no further questions, Your

Honor.

* * .

(T. 417) (Mr. Drogula) Your Honor, before the cross

examination proceeds, may I offer into evidence docu-

ments previously marked as exhibit 13A and 13B?

(Court) All right, sir.

(Graphs filed herewith as evidence as Plaintiffs’ Exhibit

#13A (T. 418) and 13B).

511

CROSS EXAMINATION

By Mr. Woodstock:

a

(T. 420) Q. From your understanding of the Maryland

Act, does it in any way affect Ashland’s crude oil supply

situation? A. No, not directly, It does affect potentially

very severely our total refining operations, however. .

Q. 1 ask you about your crude oil supply situation. A.

Yes, sir and I answered.

(T. 421) Q. Availability— A. And I answered no.

Q. So the fact whether the Maryland law stands or falls

is not in any way going to change or alter your crude oil

situation? A. That’s right. .

Q. And until the crude oil situation changes, how can

your refining situation possibly change? Is there any way

it could possibly increase if you don’t get more crude oil?

* . ™

(T. 421) A. We can increase our refining runs and we

hope to do so. To do so, of course, we'll have to acquire

crude oil at very high cost. It will be impossible to do so

based on our previous experience unless we are free to

operate our sales in the manner we always have operated

which includes sales both (T. 422) at wholesale and at

retail.

Q. Have you ever tried to get rid of your entire refined

products to the wholesale market? A. Ah, no, we have

not.

Q. Have you ever investigated the possibilities of

potential buyers in that market to buy up your full

production of refined product? A. We've never wanted to

find a buyer for our total production. We find much

more appeal in selling to numerous wholesale customers

and then balancing those sales with retail.

> * *

512

(T. 422) Q. You testified as to Ashland’s expe

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