STATEMENT OF

LEONARD L. COBURN

Director, Division of Competition

Office of Communications

U. S. DEPARTMENT OF ENERGY

Leonard L. Coburn, Director, Division of Competition, submits this statement for the record on behalf of the Department of Energy. The Department of Energy is opposed to enactment of both H.R. 2406 and H.R. 3338 because we view the bills as anticompetitive, reducing the efficiency of the marketplace, and increasing prices to consumers.

On May 22, 1984, Mr. Jan W. Mares, Assistant Secretary for Policy, Safety, and Environment of the Department of Energy, testified on H.R. 5023, a bill in most respects identical to H.R. 2406. In that testimony, Mr. Mares elaborated at length on a study published in May 1984 by the Department of Energy's Office of Competition titled, Deregulated Gasoline Marketing: Consequences for Competition, Competitors, and Consumers. Since the publication of that study, the major trends discussed in that study continue in the same directions. The conclusions found in that study are as valid today as they were when the study was released in May 1984. Therefore, rather than repeating the testimony given by Mr. Mares, we incorporate by reference his testimony in this (The testimony is attached for ease of reference.) The Department of Energy also provided a detailed analysis of H.R. 5023 for the record at the close of the hearings on H.R. 5023. This statement for the record in large measure incorporates that detailed analysis; however, this statement is modified to take account of changes

statement.

made in H.R. 2406.

The proposed amendments to the Petroleum Marketing Practices Act (PMPA) cover a broad spectrum of issues. Some have direct application

(Editor's note: The study referred to was previously printed in a

subcommittee hearing (Serial No. 98-159) and will not be reprinted here.

A

copy of this study has been retained in subcommittee files.)

to alleged problems with the operation of the PMPA or court interpretations. Others have much broader implications for how the gasoline marketing industry operates. This statement will discuss both types of amendments, but will emphasize those with the broader implications.

I.

SUMMARY DESCRIPTION OF THE PROPOSED AMENDMENTS

A.

Changes Definition of Failure

Franchisor can terminate or nonrenew the franchise relationship only if it can show that the failure was for a cause within the reasonable control of the franchisee. This shifts the burden of proof from the franchisee to the franchisor.

Franchisor failure does not constitute constructive termination if the franchisor can show that the failure was beyond its reasonable

control.

o Franchisor can terminate or nonrenew for failure of franchisee to purchase minimum volumes only if franchisor can prove that the volumes were offered at a price and on terms that reasonably enabled the franchisee to compete with other comparable branded marketers.

B. Adds Section on Constructive Termination

Defines constructive termination as the failure of the franchisor to

do any of three things:

1.

Failure to supply the franchisee with at least the minimum quantity of motor fuel specified in the franchise

agreement.

O

2.

other

Failure to supply that quantity at a price and on terms that reasonably enabled the franchisee to compete with similar operations controlled or supplied by the franchisor. 3. Failure to apply any adjustment to volumes a franchisee or end-users are required or entitled to receive proportionately to all franchisees or other end-users, or, if a downward adjustment is based upon the franchisee's failure to purchase minimum contractual volumes, failure to show that the price and terms enabled the franchisee to compete with similar marketing operations of the franchisor.

Prohibits constructive termination.

C. Gives Franchisee Right of First Refusal when Franchisor

Withdraws from the Market

Gives franchisee the right of first refusal to purchase the outlet, unless the franchisor is a jobber withdrawing from all United States marketing areas.

D. Provides that any Change in the Franchise Agreement Must be

Fair and Reasonable

Change must be fair and reasonable if it is the basis for nonrenewal when the parties cannot agree to the change.

E. Gives

Franchisee Right of First Refusal under Station

Conversion

Major alterations cannot be implemented until the end of the franchise term. If franchise relationship is not renewed, franchisee has right

of first refusal to purchase the property, unless the franchisor is a

jobber.

F. Prohibits Nonrenewal with Intent of Avoiding Competition

Franchisor must prove that any nonrenewal based on the "uneconomical" argument does not have the intent of avoiding competition between the franchisor and the franchisee.

G. Provides for Notification of Expiration of Third Party Lease

Franchisor can nonrenew only if it provides specified lease information to the franchisee and the franchisee cannot make arrangements with the third party for continuation of the lease.

H. Adds Section Regulating Prices and Quantities

Franchisor must supply motor fuel to the franchisee at quantities, prices, and terms that will allow the franchisee to compete with the franchisor, unless the franchisor can prove that they are not competitors. I. Provides that Franchise Assignments Must be on a Full Basis, Not on a Trial Basis

Franchisee may maintain a civil action against a franchisor for constructive termination.

Grants attorneys' fees in cases where equitable relief has been granted.

K.

Provides for Plan of Succession and Transfer Rights

Franchisee and franchisor may adopt a plan of succession to take effect upon the death, disability, or retirement of the franchisee. Franchisor may not unreasonably withhold approval of the transfer of

the franchise.

II.

THE EXISTIng requirements under PMPA

PMPA is both a procedural law and a substantive law. Procedurally, it sets out how a franchisor can terminate or nonrenew, with set times for Substantively, it provides the bases upon which the franchisor

notice.

can terminate or nonrenew. Thus, it provides protection for the franchisee from the arbitrary action of the franchisor. The PMPA prohibits cancellation or nonrenewal of a franchise agreement except in four general circumstances:

Certain operational failures by the franchisee, e. g., dirty restrooms, failure to pay rent, failure to fulfill substantive terms of the franchise agreement such as volume requirements, and other failures which are important to the franchise relationship.

Failure of the parties after good-faith negotiations, to agree on the terms of a renewal franchise.

The location is uneconomical to the franchisor despite any reasonable changes in the franchise agreement or where the premises are to be substantially altered or converted to other uses.

The franchisor is withdrawing from the entire market area.

The statute specifically prohibits cancellation or nonrenewal for the sole purpose of substituting the franchisor's own employees for the fran

chisee.

The PMPA, as interpreted by the courts, permits broad discretion for the franchisor. In the various contracts with the franchisee, the franchisor may specify the hours of operation, the number of days the station will stay open, the percentage of time the franchisee devotes to operation of the franchise, the minimum gallonage the franchise must take