PROMOTIONAL PRACTICES BY PUBLIC UTILITIES AND

THEIR IMPACT UPON SMALL BUSINESS

THURSDAY, FEBRUARY 1, 1968

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ACTIVITIES OF REGULATORY AGENCIES OF THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C.

in room

The subcommittee met, pursuant to notice, at 10:15 a.m., 2359, Rayburn House Office Building, Hon. John D. Dingell (chairman of the subcommittee) presiding.

Present: Representatives Dingell and Conte.

Also present: Gregg Potvin, subcommittee counsel; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel.

Mr. DINGELL. The subcommittee will come to order.

The subcommittee is today initiating a series of hearings on Promotional Practices by Public Utilities and Their Impact Upon Small Business. Present today are the Honorable Silvio O. Conte, from Massachusetts. Mr. Gregg Potvin, the counsel of the subcommittee, Mr. John J. Williams, minority counsel, and Miss Myrtle Ruth Foutch, the clerk of the committee.

These hearings are being held in response to numerous complaints received by the House Small Business Committee concerning the adverse effect upon small businessmen caused by certain promotional practices of electric and natural gas public utility companies.

During the course of these hearings, testimony will be received by representatives of the various small business sectors affected by these practices.

Upon completion of the small business testimony, the committee shall then call upon industrywide spokesmen for each of the competing energy forms-electricity, fuel oil, bottled gas and natural gas. We shall likewise request testimony from the Edison Electric Institute, the American Gas Association, the Electric Heating Association, the National Electrical Manufacturers Association, the Gas Appliance Manufacturers Association, and similar trade associations. Testimony will then be received from manufacturers of appliances and other equipment. It is also anticipated that testimony will be received from economists desiring to present their analyses of the situation from the perspective of the several competing interests involved. Opportunity will also be presented for individual utilities to appear particularly for the purpose of replying to any complaints or allegations made concerning them.

It is further anticipated that testimony will be received at the closing session of the hearings from the Chairman and other members of the Federal Trade Commission. It is to be noted that an observer from the Federal Trade Commission was requested by the committee

(1)

to attend this and subsequent hearings. If he is present in the hearing room will he please identify himself for purposes of the record.

Mr. WILSON. Rufus E. Wilson, Chief of the Division of General Trade Restraints, FTC, and a member of my staff, Mr. James Wood. Mr. DINGELL. Mr. Wilson and Mr. Wood, we are happy to have you with us.

Mr. WILSON. Thank you.

Mr. DINGELL. The purpose of the hearings is to determine the nature of promotional practices being currently utilized by public utilities in their marketing of electricity and natural gas, together with those marketing other energy forms in competition with the public utility companies. Emphasis will be placed on determining whether present law is being violated, whether appropriate action by Federal enforcement agencies is required or whether there is a need for corrective legislation. The subcommittee is particularly concerned with the effect of these practices upon small businessmen, and it will be one of the primary purposes of the hearings to determine the nature and magnitude of these effects.

It is realized that a proportion of the problem falls within the jurisdiction of the regulatory bodies of the several States. The subcommittee has been most heartened to note that in recent months there has been an apparent trend toward more restrictive regulation of public utilities with relation to their promotional activities by a number of State regulatory bodies. It is not the intent of the subcommittee to impinge upon the jurisdiction of the States and their regulatory bodies. We will inspect the totality of the problem as it affects interstate commerce, and particularly activities of those not within the jurisdiction of State regulatory bodies and such actions as may be taken by them in concert with regulated utilities.

There will be included in the record of these hearings, as an appendix, a compendium of recent decisions by State regulatory bodies and the State and Federal courts and Federal regulatory agencies concerning the subject matter of these hearings.

Further, the subcommittee has received an extremely substantial amount of correspondence from small businessmen registering complaints concerning promotional activities by utilities. Letters have been received from appliance retailers, appliance wholesalers, heating and cooling equipment wholesalers, air conditioning wholesalers, sheet metal contractors, plumbing contractors, heating contractors, cooling contractors, mechanical engineers, consulting engineers, home builders, electrical supply wholesalers and retailers, oil jobbers, bottled gas distributors, and a number of other groups. Some of this correspondence too will be made a part of the record by way of appendix at an appropriate later date.

I believe counsel has advised those who were scheduled to be heard today of their relative position on our witness list. We are privileged to have for our first witness Mr. Wilfred H. Hall, executive vice president of the National Oil Jobbers Council. Mr. Hall is an old friend of the Chair and also of the counsel of the subcommittee.

Mr. Hall, it is a privilege to welcome you to the committee this morning. Do you have anyone with you that you would like to have, sir, with you at the committee table?

Mr. HALL. No, sir. I think not.

Mr. DINGELL. Mr. Hall, we are indeed happy to welcome you for whatever statement you want to present to the committee.

TESTIMONY OF WILFRED H. HALL, EXECUTIVE VICE PRESIDENT, NATIONAL OIL JOBBERS COUNCIL, WASHINGTON, D.C.

Mr. HALL. Thank you very much, Mr. Chairman.

Mr. Chairman and members of the committee, my name is Wilfred H. Hall. I am executive vice president of the National Oil Jobbers Council (NOJC). The NOJC is a nonprofit trade association headquartered in Washington, D.C. Our organization consists of 34 State and regional trade associations covering 40 States. Each of the States is identified in the attachment to this testimony. Some 8,600 independent jobbers, various classes of marketers both in gasoline and fuel oil, compose our membership. For 26 years the association has been active in representing the petroleum distributor in the Nation's Capital.

I address this committee, Mr. Chairman, not only as a paid trade association executive, but as one who operated a small fuel oil distributorship from 1946 to 1955. During this period, I personally experienced many of the situations which will be described today.

I should like to outline the problem in broad terms, describe the nature of competitors and discuss interfuel competition, all in terms of what is actually happening in the marketplace today.

Other witnesses who follow will concentrate on specific examples within the broad outlines which I shall try to draw.

In its broadest sense the problem is the foreclosure of the independent businessman's right from competing in the new housing market. As you stated, Mr. Chairman, plumbers, contractors and many others are affected by the practices of the utilities. However, my remarks will deal only with the foreclosure which is faced by fuel oil marketers.

This foreclosure is brought about by certain utilities through the device of buying new customers rather than competing for them in the usual sense. This is easily accomplished by them since they have a monopoly. This is granted under law so that they may exclusively serve a given market with their fuel.

Of course, once a customer is with a utility, he is locked in with no alternative but to buy fuel from that utility unless he wishes to go through a very expensive conversion. We believe it is unfair to permit a monopoly given to utilities under law to be utilized to drive competitors who do not have such monopoly from the marketplace.

Mr. Chairman, I would like to describe this practice by presenting a hypothetical case which is rather typical. It indicates how the utilities, through the use of payola, are picking up new accounts. The hypothetical payola electric utility serves the greater payola area. Its sales representatives go to a builder in this area where underground wiring is mandatory and they offer to bury his utility lines and give him an electric dryer, both free, if each house in the builder's development goes to electric heat.

Now, the Payola Electric Co. knows that once the system is in, it has a captive customer, as long as that house shall stand.

I would call the committee's attention to the tie-in aspects of this situation. Use our fuel exclusively and we will give you free underground services, and a dryer. Of course, if one of your customers wants some other form of heat, we will bury the lines for you at $500 a house; and, oh, incidentally, there will be no dryer, of course. ~

Well, the builder thinks about it. Perhaps he is not quite ready to start construction.

While doing so, one of the four fuel oil dealers in the town calls and attempts to sell the builder on oil heat. Now, this particular builder likes oil heat. His customers like it and he has had great success with it through the years. But, if he succumbs to his desires, then he has to bury his own electric and waterlines and buy a dryer for each house, all at his own expense, rather than at the expense of the rate payer of the Payola Electric Co.

"Sorry, Mr. Oil Dealer, give me the same deal or forget the business," he says.

Since the oil man has no guarantee that the customer will not ultimately take his business to one of his three other competitors, he cannot make such investments, and anyway, the return on investment would probably be inadequate by usual business standards.

Note that the ultimate sale of equipment is not based on the quality of heating apparatus, it is not based on the cost of operation, it is not based on availability of service, and certainly it is not based on individual preference for fuels. Indeed, these normal aspects of competition as we think of them are conspicuous by their absence.

Well, gentlemen, be cheered. The electric utility lost the business. The hypothetical Payola Gas Co. sewed up the development. They guaranteed the builder a $100,000 low-interest loan. In view of the tight money situation that exists today, this was more vital to the developer and the builder than the free trenching and the dryers involved.

Mr. Chairman, this hypothetical situation illustrates why the cost of product, service, fuel availability, customer preference and cost of operation never enter into fuel competition. As a direct result of this practice, competition is absent, almost dead, and it needs revival.

I would now like to turn, Mr. Chairman, to a description of the competing units. In the case of gas and electric utilities, the manufacture and sale of energy are tied to very few units. I would like to use an example, if I may. In the New England States we find the area serviced by two gas transmission companies whose product is sold to consumers by 63 gas distributing companies. In Massachusetts, New Hampshire, Maine, Vermont, Rhode Island, and Connecticut, there are but 38 investor-owned electric utilities and about 240 municipally owned or other types of electric utilities. It should be pointed out that perhaps half of the municipal companies buy power from the investor-owned electric utilities. And some may have emergency tie-in. In the case of fuel oil, we found about 3,800 individual privately owned firms who sell 85 percent of the heating oil sold in the six-State area. Now, less than 15 percent of the fuel oil is sold by the 13 major oil companies operating in the same geographic area. These 3,800 business units, independent small businessmen, each own their own. business, employ their own people, and, of course, compete vigorously not only with each other but with their suppliers and also with the utilities.

On the other hand, Mr. Chairman, the utilities in New England each have an exclusive franchise in an area, only one electric utility and one gas utility to a town. If you burn gas or electricity, you have only one source of supply.

Indeed, in parts of New England the gas and electric companies are owned by the same interests. In such cases, we are informed that competition between the utilities is negligible. This is also true of 723 other firms across the Nation which hold both gas and electric interests. As can be seen by this illustration, it is not the major integrated oil company pitted against the large New England electric system or the Algonquin Pipeline complex. It is, rather, the large utility pitted against the small businessman.

Looking at the United States as a whole, there are 1,667 gas utilities and 3,126 electric utilities. As indicated earlier, many are interrelated or jointly owned. By contrast, there are approximately 20,000 fuel oil dealers of all sizes, each of which is an individual business entity. Also, it should be pointed out that utilities are in all States while fuel oil consumption tends to be in the northern half of the United States. Thus, perhaps we are talking about 2,500 separate gas and electric utilities competing with perhaps 18,000 fuel oil dealers in these areas where fuel oil is sold.

The small oil man knows that his oil supplier also produces natural gas. It should be noted in passing that oil suppliers are rapidly integrating into all forms of energy. For example, the Continental Oil Co. has recently acquired the Consolidation Coal Co., which is the largest coal company in the world, I believe. In addition they have also recently acquired interests in atomic power generating equipment as well as atomic fuel itself. Thus, this company, like many others, will share in energy growth no matter which way the market swings.

Obviously, Mr. Chiarman, the oil supplier does not have the keen interest that an oil dealer does in these subsidy matters. Competition at the market place is clearly between the small fuel oil dealer and the giant utility.

We received complaints from many of our members about the practices being engaged in by utilities. Because of this, we decided to enter into a survey of oil marketers which I have in my hand. This is entitled, "A Survey of Utility Subsidy Practices and Their Effect on the Nation's Fuel Oil Dealers." This is in two volumes, and with the chairman's permission, I would appreciate having this survey reproduced in the record.

Mr. DINGELL. Without objection, so ordered.

(The document referred to appears in the appendix at p. A 11.) Mr. HALL. Thank you.

Table 2 in part 1 of the survey shows the dramatic change which is taking place in the new installation market. You will note that oil has dropped from getting 85 percent of the new installation market in 1947 down to about 24 percent in 1966. The Fuel Oil & Oil Heating magazine of January 1968 showed that electric heat jumped from about 372,000 operating domestic units in 1957 to about 21⁄2 million units in 1967, quite a jump certainly. Oil and gas back at that time, roughly 10 years ago, were around the 9- to 10-million unit level, but gas is now up to 18.8 million units while oil retains but 10.8 million units.

Based on these statistics and many other, we conclude that oil heat has not enjoyed very much growth. Indeed, it has been stopped in its

tracks.

So, we tried to find out why this happened. The answer is easy and clear. Payola.