MINUTES OF THE ASSEMBLY COMMITTEE ON COMMERCE Sixty-eighth Session April 19, 1995 The Committee on Commerce was called to order at 3:37 p.m., on Wednesday, April 19, 1995, by the presiding Chairman, Larry Spitler, in Room 119 of the Legislative Building, Carson City, Nevada, and teleconferenced to Room 4401, Grant Sawyer Building, Las Vegas, Nevada. Exhibit A is the Agenda, Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Mr. Larry L. Spitler, Chairman Ms. Sandra Tiffany, Chairman Mrs. Maureen E. Brower, Vice Chairman Mr. Dennis L. Allard Mr. Morse Arberry, Jr. Ms. Barbara E. Buckley Mr. Thomas A. Fettic Ms. Chris Giunchigliani Mr. Lynn Hettrick Mr. David E. Humke Mr. Michael A. (Mike) Schneider COMMITTEE MEMBERS EXCUSED: Mr. Richard Perkins, Vice Chairman STAFF MEMBERS PRESENT: Paul Mouritsen, Research Analyst OTHERS PRESENT: John Sande, Western States Retail Association Harvey Whittemore, Lionel, Sawyer & Collins, Attorneys for ARCO Jack Greco, Nevada Gasoline Retailers Peter Krueger, Nevada Petroleum Marketers Association Jack Jeffrey, Western Petroleum Marketing Association Debbie Sheltra, Independent Dealer, Short Stop Market, Reno Steve Yarborough, Nevada Gasoline Retailer Wendy Black, Independent Texaco Dealer Nick Fakhimi, Independent Dealer Following roll call and opening remarks, Chairman Spitler announced the hearing would begin with testimony from the opponents of A.B. 441. ASSEMBLY BILL 441 - Removes prohibition against operation of service station by refiner of petroleum. Leading testimony in opposition was offered by Jack Jeffrey, representing the Western Petroleum Marketing Association. Mr. Jeffrey outlined the history leading to the present situation in regard to independent gasoline dealers and major petroleum refiners. He explained he was the Chairman of the Assembly Committee on Commerce in 1987 when divorcement was enacted. When the issue came up, Mr. Jeffrey stated, he took advantage of the business background possessed by then Assemblyman, Matthew Callister. Initially, Mr. Callister had opposed the legislation, however, as both Mr. Callister and Mr. Jeffrey became more involved in the issue and learned the experiences of small dealers, it was clear there was a need. Mr. Jeffrey said this was not a matter of economics, but a matter of what was fair, and it did not appear fair for a company to treat their dealers and lessees in a way that forced them out of business. Divorcement, when it was enacted, served as a disincentive for the major oil companies to do this. Thus, through the legislative process the committee had become absolutely convinced there was predatory pricing and unfair business practices going on. Following this testimony, Jack Greco, Chairman of the Nevada Gasoline Retailers and Garage Owners' Association, and also an ARCO lessee dealer, acknowledged this was an emotional issue for dealers who felt their livelihood was on the line. Mr. Greco entered for the record, some six or seven thousand signatures which had been gathered during a four-day period in the Las Vegas area. (See Exhibit C. This exhibit may be viewed in the Legislative Counsel Bureau Research Library, but is not included with the body of these minutes.) Much of the information, Mr. Greco pointed out, especially a study by John Barron and John Umbeck quoted by the proponents of the bill, was based on unreliable data. In an effort to respond to committee questions raised during the first meeting to hear A.B. 441 on April 10, 1995, Mr. Greco referred to what had been entered by the proponents of the bill as Exhibit I (see Minutes of April 10, 1995), entitled "Share of Market Report for the State of Nevada." The question raised concerned the condition, or health, of the unbranded independent marketers in the five western states in comparison to "divorced" Nevada. While the proponents had compared only California and Nevada, Mr. Greco stated they had spent $825 for reports showing five states. He then went on to explain and discuss the data shown in these reports. He stated they would be able to show that in 1982 when the ARCO Strategic Planning Unit (SPU) was published, the independents had some 56 to over 60 percent of the marketplace in Clark County. It was also clear by the time divorcement was enacted in 1987, the unbranded independents in Clark County had been reduced to 16 percent of the marketplace. Mr. Greco pointed out the most significant part of the data showed the major oil companies in Clark County had all gained market share from 1981 to 1987. He opined this volume had come from the independent marketer. Mr. Greco then discussed the Strategic Planning Unit published by ARCO (Exhibit Q, April 10, 1995. Mr. Greco continued with a series of overhead charts and data. He asserted there were figures showing an increase of 29 franchisees in Nevada. Additionally, ARCO testimony had confirmed these 29 stores were built by Nevada investors at a cost of $50 million with no cost to ARCO. He contrasted this with Oregon, with no divorcement, where there was only a gain of six franchisees. Evidence showed, Mr. Greco stated, that oil companies had decided to curtail their building. Blaming this on divorcement, he suggested, was simply a "red herring." Additionally, ARCO's gallonage since 1987 showed an improvement of approximately one million gallons a week. Mr. Greco continued with a discussion on the contrasts between Nevada and her sister states. He discussed the similarities between ARCO's Strategic Planning Unit (SPU) and Chevron's Strategic Network Plan (SNP). Mr. Greco then discussed the consumer prices from January 1990, to present (Exhibit D), comparing the cost of gasoline in Las Vegas, Los Angeles, Reno, San Francisco, San Diego and Phoenix. Unlike a similar graph presented by the proponents during the April 10, 1995, hearing, Mr. Greco pointed out Exhibit D not only compared five cities, instead of just Las Vegas and Los Angeles, but also presented gasoline prices without taxes and tariffs. Presenting the prices with taxes included, he maintained, showed a very distorted picture. Mr. Greco discussed oil sources, mentioning especially the oil supplied from Valdez, Alaska, where the major oil spill had affected the cost of oil. Virtually no crude oil came from the middle east, he stated. At the time of the Kuwait military action, ARCO was over 100 percent self-sufficient because its oil came from Alaska. Much of the other oil came from California fields, he stated, and thus, there was no reason for the drastic price increase as shown from July 1990 to March 1991 on the west coast. All those figures and graphs simply went to show that both Reno and Las Vegas consumers had benefitted from divorcement in lower gas prices. Ms. Giunchigliani asked Mr. Greco to again define just what an "independent" dealer was. Mr. Greco said a person who bought from a refiner or supplier and sold from his own location and/or sold to other individuals. He used, as an example, Rebel. Because a Rebel dealer was unbranded, he could buy from any of the oil refiners such as Shell, Texaco or another small refiner. Historically, the independent marketer could offer the least price because he could buy from the cheapest supplier. Tim Hamilton, Executive Director of the Automotive United Trade Organization of the State of Washington, came forward.. He said he was also representing Statewide Trade Association of Gasoline Dealers, and as a Franchise Dealers Director of the Automotive Trade Organization of California, the largest trade association of service station dealers in the state of California. Mr. Hamilton said he had been asked to share some of the actions of other states in the Northwest in regard to this problem. Mr. Hamilton submitted the following exhibits: - Exhibit E - Outline of Testimony of Tim Hamilton before the Nevada Legislature on April 19, 1995. - Exhibit F - Pollution Liability Insurance Agency (PLIA). - Exhibit G1 - 18-Minute Video which included testimony of Dr. Keith Leffler. (This exhibit has not been included with these minutes, but may be viewed in the Legislative Counsel Bureau Research Library. - Exhibit G2 - Testimony of Dr. Keith Leffler. - Exhibit G3 - Summary of the Attorney General's 1987 Retail Gasoline Marketing Investigation. - Exhibit H - January 9, 1991 News Release: Attorney General Files Suit to Stop Texaco. - Exhibit I - February 20, 1992 News Release: Attorney General May Challenge BP's Acquisition of Exxon Stations. Numerous measures had been passed in Washington state, Mr. Hamilton commented, which gave advantages to independent dealers in handling environmental needs. Also, unique in Washington state, was the passage of the Washington Pollution Liability Insurance Act. (See Exhibit F) This agency, funded with a $30 million public subsidy, actually provided underground storage tank insurance which allowed the independent dealers to comply with government regulations, and also allowed them to borrow money from the bank. Mr. Hamilton, as well as Mr. Greco, mentioned there was an ongoing problem with receiving data. Most oil companies, in particular, believed this information was proprietary and unless under subpoena, objected to providing certain information. Discussing market share reports, Mr. Hamilton said he had gone to a company which ordinarily prepared such reports. However, this company had come back to him with the opinion that it was not in their best interests to supply information their clients would find embarrassing. When this problem was encountered, the Washington Legislature undertook funding for a division in the Washington Energy Office to track unbiased prices. After frustrating and expensive efforts to obtain the needed information, this office had finally dropped the project. Washington state, Mr. Hamilton said, had also gone through the mergers and acquisitions encountered in Nevada. These moves had seen the oil companies selling stations to themselves in large blocks, leaving a small number of oil companies in control of the marketplace. When Texaco attempted to buy Shell stations, the Washington Attorney General had used the power of the anti-trust law to block that acquisition. A later consent agreement/order was reached with Texaco requiring them to divest themselves of 215 company-operated stations. Mr. Hamilton continued with a review of Exhibit E, and then discussed the 18- minute video tape (Exhibit G1) which included testimony from Dr. Keith Leffler, a premier expert on gasoline company mergers and acquisitions (see also Exhibit G2). Mr. Hamilton explained in this video, Mr. Leffler discussed petroleum redlining, or zone pricing. Mr. Spitler asked Mr. Hamilton if the Washington Gasoline Dealers' Bill of Rights was still in effect. When Mr. Hamilton answered affirmatively, Mr. Spitler asked if there was a copy of this in the document he was providing. Mr. Hamilton admitted this was the only document he did not have, and Mr. Spitler asked him to provide this for the committee. Mr. Hamilton said he would provide the Washington document, and he had the Oregon document with him. Mr. Humke recalled testimony had been offered by Mr. Greco regarding three states which had passed legislation based on the practices of ARCO. He asked which states were referred to and what specific legislation had been passed. Mr. Hamilton admitted it was fair to say the statutes did not specifically name ARCO. ARCO's relationship and volatility had brought them to the forefront of legislative attention. Mr. Hamilton said the Unocal company president had announced plans to "company out" 30 percent of their franchises, and had told dealers to get ready for an exit strategy. Three of the five states in which ARCO did business had passed major legislation -- either divorcement or a Dealers' Bill of Rights -- since the Strategic Planning Unit was launched. Again, Mr. Humke asked if there was some kind of legislative history which would show the committee ARCO was a primary factor. Mr. Hamilton said he would provide this information. Brent Crosby, representing himself as a consumer, a former Executive Director of the Arizona Service Station Dealers and currently employed by the city of St. George, Utah as the Public Information Officer, then came forward to testify in opposition to A.B. 441. He gave a brief outline of his extensive background in the gasoline business in Arizona. In 1973, he said, during the first energy crisis he had been hired by Dana Bros. Petroleum, an independent marketer headquartered in Phoenix and with approximately 30 stations across Arizona. In 1974-75, Mr. Dana asked Mr. Crosby to track divorcement legislation passed in the state of Maryland (and upheld by the Supreme Court as being a valid piece of legislation). Mr. Crosby went on to trace the history of efforts to enact divorcement in Arizona. Eventually, Mr. Crosby said, he ended up representing the dealers in Arizona. Following the second energy crisis in 1979-80, they had the votes in the Senate to pass divorcement legislation, but the legislation was lost in the Assembly. It was later learned this was due to the Commerce Committee Chairman's status as a consultant for ARCO mining, receiving thousands of dollars in compensation. Mr. Crosby traced other legislation dealing with the issue of prohibiting oil companies from requiring stations to be open 24 hours if it was not safe, if they did not provide the security to make it safe, or if it was not economically feasible. This bill, also, was held and it was impossible to move it through the legislative process. During the time Mr. Crosby was with Mr. Dana, he said the independents controlled over 70 percent of the gasoline sold in Arizona. They had pioneered self-service and had helped consumers enjoy competitively priced gasoline. Ultimately, Mr. Crosby said, after decontrol there was a concentrated effort on ARCO's part to eliminate the independent marketers, and this had led to the independent marketers being left with less than 5 percent of the market share in Arizona. The companies not forced out of business had to, in effect, become dealers of the major oil companies. Mr. Crosby submitted the following documents: 1. Exhibit J - "Report to the Governor, President of the Senate and Speaker of the House of Representatives on Motor Fuel Price Differentials. 2. Exhibit K - Chart entitled "Market share in Tucson." 3. Exhibit L - Graph showing the market share in Tucson. This exhibit, he said, was incomplete because they were unable to get the information for the Phoenix market. Mr. Crosby called attention to page 19 (Exhibit J), paragraph 3, referring to the situation in Nevada in 1987. Information dealing with the Strategic Planning Unit (SPU) document on page 20 was also discussed. Concluding, Mr. Crosby said, "... if you want competition here in Nevada and if you want consumers to be benefitted, you need to go a step further, and not only keep the bill that you're considering repealing, but further, divorce ARCO totally and give us open supplies so that as a dealer I can make a phone call and say `I think your price is too high and I can go shopping and buy gasoline where I can buy it competitively and take this great 20 or 30 cent slash out of the middle, that the oil companies are keeping for themselves and not being fair to the American consumers.' ... .". Mr. Allard wondered what would keep ARCO from dropping the wholesale price of gasoline and driving the independent dealer out of business. In response, Mr. Crosby said approximately two months ago he had learned ARCO had dropped the price of gasoline 10 cents a gallon, a move motivated by their desire to seek repeal of divorcement in Nevada. Indeed, ARCO had the capability to do what Mr. Allard suggested. This was further discussed. Clarifying, Mr. Allard said, "If they wanted a greater market share, couldn't they -- if they wanted to practice predatory pricing -- couldn't they now, first of all drop the price to their corp stores, drastically, and also drop the price to their dealers drastically, thereby running all of the others out of business, capture that share -- sure they don't have as many corp stores, but they could open up more dealerships. There's no moratorium on the dealerships -- and they could control the market in that fashion if they wanted to be predatory. ... Could they do that?" Responding, Mr. Hamilton said, "... Hypothetically, is it possible for them to sell gas for 5 cents a gallon plus tax, and lose money hand over fist and force everybody out of business? Yeah." Mr. Allard said there had been testimony that would happen if divorcement was repealed. Mr. Hamilton replied, "... The one protection you have from them going in and dumping the whole marketplace, is that when ARCO dumps the whole marketplace you're gonna force a response. As the SPU said, `There's a danger of a blood-bath price war with the majors.' ... .". Mr. Allard said he recalled a comment that the majors would not come into Nevada if divorcement was repealed, that it would stifle them from coming in. Mr. Greco acknowledged this was his comment, but this related to it being unlikely the oil companies would come in and build a whole new marketplace. Rather, they would attempt to sign up people who had built their own facilities. The President of the Nevada Gasoline Retailers and Garage Owners Association, Steve Yarborough, submitted a copy of his testimony (Exhibit M), and read his comments into the record. Peter Krueger, State Executive for the Nevada Petroleum Marketers Association, submitted a copy of his testimony (Exhibit N), and read his remarks into the record. Mr. Humke asked Mr. Krueger if the Rebel and Terrible Herbst service stations were members of his organization. He replied, "yes." Mr. Humke pointed out there had been some claim that Herbst had conspired with ARCO to control pricing and competition in Las Vegas. Mr. Krueger said he had not heard those claims before, and when asked whether he would put any stock in these rumors, Mr. Krueger said he could not comment. Mr. Humke observed that Rebel appeared to have a different view from that posed by Mr. Krueger. Rebel's view appeared to be there were barriers to entry into the Nevada market currently, under divorcement. He asked if Mr. Krueger agreed with this. In reply, Mr. Krueger said, "no." As he had earlier testified, there was disagreement with the stands taken in their court case, and this was Rebel's view only. Testimony was then taken from proponents of the bill. Leading this was testimony from John Sande, representing the Western States Petroleum Association, who said he wanted to correct for the record some statements made by Steve Yarborough. Mr. Sande said, "... He was talking about the fact that he had some invoices where was charged -- the price he was charged by his company was actually higher than the retail price of some company-operated stations, three company-operated stations -- and that would have been in Reno, Nevada, I believe. First of all, just to clarify, that could not have been company operated stations of his service station which is Unocal in Reno, because Unocal in 1987 did not have any company operated stations in the state of Nevada when divorcement passed, and obviously, they have none since, so I think he just misspoke himself. ...". Mr. Sande also wished to point out prices in Nevada were primarily set by the refiner, whether the individuals were independents or majors. Mr. Sande then submitted certain documents which had been requested during the April 10, 1995 hearing. They are as follows: 1. Exhibit O - "Total Shares of Market," a Lundberg survey showing total shares for Arizona, California, Nevada, Oregon, Washington and five west coast states. 2. Exhibit P - Graph entitled "1986-1993 Downstream Earnings Estimated to Exclude Transportation Earnings." 3. Exhibit Q - Court appeal of Rebel Oil Company, Inc. v. Atlantic Richfield Company, 1995 WL 150864 (9th Cir. (Nev.)). Referring to Exhibit O, Mr. Sande pointed out the three opponents had indicated in Arizona the independent market share had been 5 percent, and had also indicated because of predatory pricing in other places, the independents had been driven out of business. Mr. Sande stated this was false -- rather than the independents having 5 percent of market share, they had 29.47 percent, leaving the majors with 70.53 percent. He then discussed Exhibit O to substantiate his point. In explaining the chart, Mr. Sande told Mrs. Brower the 70.53 percent figure reflected Texaco, ARCO, Mobile, Shell, Exxon, Unocal, Phillips, Conoco and BP Oil, all refiners. The rest came from non-major oil refiners, however, Circle K and Tosco received their gasoline from non-major oil companies. Mr. Sande then introduced Charlie Stevens, Legislative Counsel to the Western States Petroleum Association, consisting of the major oil companies marketing in Arizona. Mr. Stevens indicated there was harmony in the legislative process in Arizona. He said, in fact, the service station dealers' representative, the marketers, the jobbers and wholesalers, and the major oil companies were together on all the bills which had been filed in Arizona. In 1988, Mr. Stevens said, there were two bills submitted (HB 2406 and SB 1419, both "session laws"). Mr. Stevens went on to explain a session law in Arizona had a limited life span of usually a year or two. HB 2406 was a marketing bill submitted by the service station dealers of Arizona which prohibited the unreasonable withholding of consent on an assignment, transfer or sale by a dealer. It also restricted the assignment (or transfer) to 15 percent of the differential from their purchase price plus inventory and equipment, to the present selling price. The bill also dealt with the question of mandatory operating hours and the wish to be limited to 18 hours, and it prohibited the elimination of service bays. SB 1419 created a joint legislative study committee on petroleum pricing, marketing practices and producer retail divorcement. Mr. Stevens described events leading up to a report entitled "Joint Legislative Study Committee on Petroleum Pricing and Marketing Practices and Petroleum Producer Retail Divorcement (Exhibit R), compiled by the Senate and House chairmen of the Arizona Transportation Committee, along with four representatives and four senators. He said the group had been charged to: 1) Investigate the issues of petroleum pricing and marketing practices, and producer retail divorcement; 2) to study other state systems where restrictions on petroleum producer retail operations had been enacted; 3) to study, determine and weigh the impact of petroleum producer retail divorcement and petroleum marketing and pricing practices in Arizona; and 4) to submit a report by December 31, 1988. Since completion of the study in 1988, Mr. Stevens pointed out the Arizona Legislature had received no bills on divorcement or pricing legislation. They had no service station franchising attempts in the last four or five years, and as previously indicated, the working relationship had improved tremendously. In referring to testimony from Mr. Crosby, Mr. Stevens said he had heard arguments saying this was a massive conspiracy to drive out the independents, but this had not happened in the last eight years in Arizona, nor did he believe it would happen. Actually, he said, the second largest share of the market was with the independent Circle K who had 16.51 percent in 1994. Discussion continued comparing Arizona and Nevada gasoline prices, pipeline access and the value of non-divorcement. Vernon Lindskog, an attorney from Olympia, Washington, told the committee he represented the Washington state Western States Petroleum Association. He said although he had opposed divorcement in the state of Washington for over 30 years, he was not in attendance to either oppose or propose A.B. 441. Indeed, he was there only to rebut remarks made by the opponents in the April 10, 1995 hearing. In 1986, he said, pertinent questions were asked and addressed relative to predatory pricing driving dealers out of business. A comprehensive study had been conducted, and the findings were contrary to what the dealers and the jobbers expected. In each instance the finding came out negative, and none of the allegations were substantiated by over 10,000 invoices, of which only 66 invoices were questionable. Mr. Lindskog submitted a packet of documents which contained information relative to the study he had referred to (Exhibit S). A later study, he alleged, had revealed the same thing. Mr. Lindskog also submitted "Background Notes - PLIA" (Exhibit T). This subject, he noted, had been earlier referred to by Mr. Greco, however, with a different interpretation. Mr. Greco's testimony indicated the state had provided $150,000 of free money to dealers for service stations in the context that there was a relationship between that money and divorcement. This was a misconception and untrue, Mr. Lindskog maintained. His document (Exhibit T) explained why $150,000 was made available to certain dealers in rural areas. Mr. Lindskog continued in a rebuttal discussion of certain statements made by the opponents of the bill. Directing a question to Mr. Sande, Mr. Allard stated he had some questions regarding the Strategic Planning Unit (SPU) document submitted during the April 10, 1995 hearing. In previous testimony, Mr. Whittemore, he noted, had indicated ARCO was a market follower. However, in the SPU document submitted by Mr. Callister (April 10, 1995) and entitled "SPU Discussion Outline," there was a reference to "market control." This concerned him. Mr. Sande said this document was only the outline, however, he had read the SPU and he believed it was a document containing great insight into the oil industry, and the process needed to take a company like ARCO and make it a very successful company in the future. Mr. Sande stated the ARCO franchisees were the most valuable in the industry. While Mr. Sande could not say what was meant by "market control," if the document itself was read, it would be clear this was a company concerned about the future planning to act less like a major oil company due to pending decontrol, and more as an independent responding to the public's concern about price. Mr. Sande concluded by saying he had read the entire document and, "... I could find nothing in it that I wouldn't say is anything other than genius." Mr. Allard asked if the words "market control" were in the actual document. Mr. Sande replied, "no." Mrs. Brower asked how many new stations were built by ARCO in the four states surrounding Nevada since divorcement in 1987; and how many of those were then taken over by lessees. Mr. Sande said he would provide her this data. Representing Lionel, Sawyer and Collins (attorneys) and appearing on behalf of ARCO, Harvey Whittemore attempted to address some committee concerns expressed. First, he said there was a question raised by the committee whether ARCO was subsidizing the downstream refining marketing transportation profitability of its division, i.e., the allegation there was subsidization and low price gasoline at the expense of the company. Mr. Whittemore produced a document and said, "... Lehman Brothers, a recognized stock analyst, in the March 17, 1995 report regarding major petroleum companies, has indicated that Atlantic Richfield -- ARCO -- my client -- is the most profitable downstream operator in the industry among the majors. Therefore, the allegations which have been made continuously, without substantiation at all, that somehow there's subsidization that allows ARCO to have lower prices is not met by anybody looking at this industry. It says that ARCO makes $2.43 per barrel. Now, the next question is, well, does that mean that they're doing it at the expense of the upstream division, i.e., with respect to worldwide profitability. The answer is, again, no, Atlantic Richfield is in the middle with respect to upstream profitability at $1.85 per barrel. This points out that Atlantic Richfield is, indeed, a market leader in terms of innovation with respect to the market itself, but my statement that it is a market follower with respect to pricing is still accurate. "Let's go to the hypothetical given to you today with respect to pricing with respect to the independent and the ARCO dealers in Carson City. Think of where the independent would be today in Carson City if they're charging $1.10 or $1.11, a penny higher than the ARCO dealer, but if ARCO wasn't around, who would -- where their prices would be if the next lowest gas company was at $1.16. They could bump their price as the independent from $1.11 to $1.15, still be below the market, make more money, reduce competition, still be very, very competitive, but hurt the consumer. "So the most important aspect of the allegations with respect to down -- again, this subsidization argument is belied by the information which we'll be happy to provide in a report. "The representatives of the dealers that came from Oregon suggested that there is a hue and cry with respect to the dealers opportunities within Oregon, that the consumers didn't want this legislation. I can tell you why. The consumers are now purchasing through a card-lot system and the dealers now want that very legislation that they didn't want, because the marketplace responds by innovation ... . Again, I would ask you to ask one question today. Demand proof that in Arizona there was 5 percent market share. How you can come in, in front of this committee and say that independents had 5 percent market share is beyond me. Now everybody heard that testimony ... and yet the Lundberg studies and all the information suggests to you that the independent market share is going up. That's the information which we've provided to you today." Mr. Whittemore urged committee members to read the Rebel Oil v. Atlantic Richfield Company decision (Exhibit Q). He believed this decision proved there was no justification for the allegations of predatory pricing. Continuing, he said, "As I told you a week ago, as a matter of law the Ninth Circuit said, no, there was no predatory pricing. Now much has been made about the following facts. Mr. Krueger was unaware of it -- the individual company that they said that ARCO was conspiring with was Terrible Herbst, a contract dealer, someone who ARCO provided their gasoline to. And I would ask that the committee focus its attention on page 10, and again, this is very important, page 10 of that decision, the second paragraph, 'Rebel introduced affidavits from experts ...'. The very expert which was cited today as having a position adverse to this legislation in this case said, '... potential new competitors in the Las Vegas market face high barriers to entry, the most significant being a legal license. Since July 1, 1987, Nevada law has barred major oil refiners from entering the market and directly operating gasoline stations. ...'. The very argument which this association is making to you, that Rebel is a member of, that it is not a significant barrier to the market, by introduction of its own affidavits were suggesting that it is. And that's why ARCO could control the market. It's absurd to let this charade continue in one forum that it's okay to say that it's a significant barrier to entry and another, say that it's not. "I would ask that this committee focus on what Rebel's own experts said about this law. They said it was a barrier to competition. We agree it is. And the only person who's going to get hurt by that is the consumer -- the only person -- to full competition. "So again, with respect to this argument, remember, they said there was predatory pricing. The court found, as a matter of law, that it couldn't find that, even given under the rules under which this decision was rendered ... this is a summary judgment motion ... and therefore, the allegations made against ARCO and Terrible Herbst had to be treated as true for purposes of reviewing the claim. And therefore, when you find on summary judgment that the claims even saying that the information is treated as true, is insufficient to find that this matter should go to trial, is a matter of significant weight, because the very period that they were talking about was the very period which Mr. Greco and his supporters have alleged were the basis for predatory pricing and the need for divorcement. ... And therefore, all the allegations weighed against our client's participation in this market were found in favor of us, except for one very important claim. Now, that claim was, did ARCO engage in a price conspiracy? Rebel claimed that there was a price conspiracy. On that issue, the court said, treating it as true the allegations of that complaint, we're gonna let Mr. Cason, i.e., Rebel, proceed to trial. There's been no verdict. It just simply said you can't get summary judgment now. ..." Referring to Mr. Allard's question regarding market control, Mr. Whittemore brought attention to the four-page summary submitted into testimony in the April 10, 1995 hearing (included with these minutes as Exhibit U), a document which was believed to be a "smoking gun" document and one which was prepared for a Board of Directors or people within the company. The market control being talked about in that document was the implementation of a series of marketing methods which would ensure that to the extent new growth came into the state, ARCO would have a substantial percentage of it. Mr. Whittemore did not believe this was an indictment on ARCO, but rather a sign of a market competitor who understood market forces, who had positioned itself to attract new customers, captured and maintained them both for the benefit of its franchisees as well as the company. Mr. Whittemore continued with a justification of the content of the four-page, confidential document (Exhibit U), and a reiteration of previously submitted statements. Rhetorically, Mr. Whittemore said, "Are we better off seven years into divorcement? No." Why was the Nevada citizenry concerned, he asked. This was because the majors had done a poor job of informing the public. Mr. Whittemore assured Mrs. Brower he would provide her with the information regarding the numbers of new stations built by ARCO in Nevada's surrounding four states. To Ms. Giunchigliani and her request for statewide figures versus Clark County figures, made during the April 10, 1995 meeting, Mr. Whittemore said this information was not available anywhere -- the State Agricultural Department had only the Clark County information. He could only suggest that the Clark County figures were representative. Mr. Whittemore remarked ARCO had gone from 55,000 employees in 1982, to 21,000 employees in 1995, and this was the impact of competition within this industry. Mr. Allard asked if it was Mr. Whittemore's position that, "... if divorcement is repealed, it will bring in more competition, it will lower prices --" Mr. Whittemore said he thought so. Continuing, Mr. Allard asked, "-- if it lowers prices, wouldn't it logically follow that ARCO would make less money?" Mr. Whittemore said, "no," because ARCO was very competitive with respect to the profitability of delivering the barrels of oil. Therefore, there were economies associated with the fact that the pipe line costs or refining costs were fixed. He said an arbitrary amount of gasoline could be produced and if more was delivered the economies went into effect. Mr. Whittemore acknowledged this was not increasing demand, it was increasing market share. Discussion followed. Ms. Giunchigliani asked for one of the proponents of the bill to summarize what the benefits would be to ARCO if divorcement was repealed, and what the downside would be if they did not repeal the law. Responding, Mr. Sande said the major dealers he represented could not show they were necessarily being hurt by divorcement in Nevada. Market share was satisfactory. He went on to say, "What we can tell you is that somebody's being hurt and that's the consumer, and somebody's being benefitted. You can look at those charts that show the contract dealers and who's building stations in Nevada. Those are the people that are being benefitted, and I wouldn't blame 'em for being here. "Long term, though, what you would say is, are we better off in this society having totally free enterprise? If you believe in the free enterprise system, and you believe we should have competition, then I think that you would have to go and support that. And ultimately, that benefits not only the consumer but it also benefits the companies because if they see ability to move into a market where they think the prices are too high, they can do so and they can go in with an ease of entry with no barriers to entry. The Ninth Circuit case that he referred to indicated that Rebel Oil had experts saying that the divorcement law created an anti-competitive effect in Nevada. ... and that's right in the decision. So what it's created, it's a barrier entry right now. Since 1987 no major oil company has invested to build stations in Nevada." Responding to Ms. Giunchigliani's insistence on hearing what the benefits would be to ARCO if divorcement was repealed, Mr. Whittemore said ARCO would likely increase its investment in the state of Nevada if they believed market conditions warranted additional company operated stores; or they might bring in contract dealers knowing divorcement was gone because if they had a bad dealer, they could take the station back. Alternatively, if divorcement was not repealed, Mr. Whittemore said ARCO still had its ability to sell gas to its existing franchisees and contract dealers. It could not compete for additional market share. Summarizing it, Ms. Giunchigliani asked Mr. Whittemore if it was true then, that if divorcement was retained, ARCO would continue to stay competitive and sell, they just would not be able to expand as they would have been able to if divorcement was not repealed. Mr. Whittemore said this was correct. Directing her statement to Mr. Sande, Ms. Giunchigliani said although she believed in competition she did not believe there was any such thing in government as free, private enterprise. She believed the legislature was inconsistent, based on reaction to each one's constituents. Although Mr. Sande said he agreed with Ms. Giunchigliani, he maintained it was the consumer who was being harmed by divorcement, and the person benefitted was the large retail operator. He pointed out the major oil companies had lessee dealers, but the big chain dealers such as Jerry Herbst (Terrible Herbst) and Jack Cason (Rebel) did not have lessee dealers. Ms. Giunchigliani indicated she did not believe either side had presented "smoking gun" testimony or documentation. What she did believe was there were a number of small business people who were fearful, and as a committee they needed to take this into consideration. Mr. Whittemore took issue with Ms. Giunchigliani's statement there was no "smoking gun" presented by either side. He believed allegations and statements made by the opponents dealing with market share in Arizona were clearly "smoking gun." Chairman Spitler then opened the hearing to public testimony. The following independent dealers testified to the detrimental effect of legislation which would repeal divorcement. - Nick Fakhimi, ARCO AM/PM franchisee, submitted a copy of a letter he had written to Mr. Humke after the April 10, 1995 hearing (Exhibit V). Chairman Spitler commended Mr. Fakhimi for documenting his situation and invited those in attendance to also write and express their opinions. These would be included in the record, Chairman Spitler stated. Mr. Fakhimi continued and reiterated much of his testimony taken in the April 10, 1995 hearing. He also submitted a document entitled "Notice of Settlement of Class Action" (Exhibit W) which, he stated, clearly showed there had been a conspiracy, as indicated by ARCO's agreement to settle the case. - Leslie Valpiani, Turtle Stop No. 7 (supplied by Chevron) then submitted her testimony (Exhibit X) and read her remarks into the record. - Steve Kalb, CEO of Kalb Construction Company in Las Vegas and on the Board of Directors for Sun State Bank, said for the past two years he had worked with people like Ms. Valpiani, independent people who were able to obtain Small Business Authority loans and start their own business. These people were terrified that divorcement would be repealed, because this would leave their businesses in jeopardy. In the past two years there had been approximately $20 to $25 million in construction spent in southern Nevada for convenience market gas stations. If divorcement was repealed, it would eventually affect not only the contracting business, but it would also affect the bank in that independent operators would be less likely to obtain a loan. As matters currently stood with divorcement, there was knowledge and confidence in the market. - Wendy Black, Mike Black Texaco, again testified, reiterating much of her testimony from April 10, 1995, answering some questions presented by committee members and rebutting statements made by the proponents. - Corrine Blair, AM/PM franchisee in Sparks, Nevada, told the committee in 1988 she and her family had become an ARCO contract dealer. After building a store in northwest Reno, they had run into problems. ARCO, she stated, was immediately willing to buy the store, and had no problem finding a franchisee to take over. She believed there were no problems associated with ARCO investing in Nevada. - Greg Simpson, buyer of Ms. Blair's station, stated in 1990 ARCO purchased her store back from her and immediately leased it to Mr. Simpson's family. The point of his and Ms. Blair's testimony was that ARCO did, in fact, have no problem buying back stations. Mr. Simpson cited personal experiences with his family's three-station business, one of which was in California. These businesses had been started in California, he said, but because there was no divorcement in that state, his business suffered, leading his family to come to Nevada and start two more stations in an area where there was the protection of divorcement. - Raymond May, AM/PM convenience store owner from Minden, Nevada, submitted his testimony (Exhibit Y), and read his statements into the record. - Debbie Sheltra, Short Stop Market, was again testifying in opposition to A.B. 441. Referring to statements by the proponents made in the April 10, 1995 hearing, that tank information was not available, Ms. Sheltra said all underground tanks were listed with the State Environmental Protection Agency, and she would provide this information. She continued by saying statistically Nevada had less population than surrounding states, and comparisons with those states were therefore distorted. Ms. Sheltra again stated ARCO somehow subsidized Pepsi, Coke, Miller Beer, Budweiser Beer and Coors Beer. This statement, she pointed out, had not been refuted. When she demanded the same price as went to ARCO from distributors, with retail 12-pack beer prices running $5.99 from ARCO when her cost was $5.93, she was told she was charged the same as ARCO was charged, and ARCO was able to undersell her because ARCO was subsidizing the operation in some other way. - Orval Larrew, Fernley AM/PM/Convenience Corner Texaco, gave a brief historical background of his business enterprises. Mr. Larrew stated he did not feel he had an adversarial relationship with ARCO, however, he believed the committee should question why, when he and his partners wanted to open another ARCO AM/PM store, he was told there was not enough gas available. Now, from testimony offered by the proponents, it appeared there was plenty [of gas] available. - Sherman York, 7-Eleven Franchisee since 1977, said during the last year he had opened an independent convenience store which had been branded and contracted through Texaco. In his conversations with other dealers across the United States, he was told how fortunate he was to live in a state with divorcement. The other dealers said they did not have the privileges enjoyed by the small independent dealers in the state of Nevada. Youssef Hyjazi, an ARCO franchisee in Las Vegas, spoke from the Grant Sawyer building in Las Vegas, in favor of ARCO. Mr. Hyjazi saw no problem with the company and did, in fact, believe if there was a threat, it was from some of the Rebel and Terrible Herbst dealers. He stated ARCO was working with their franchisees, they offered rebates whenever possible, and he did not mind if ARCO built additional stations in the area. This concluded public testimony, but before adjourning the meeting, Chairman Spitler asked committee members to study the quantity of material submitted by both the proponents and the opponents during the next five days. At a future meeting, the committee would discuss how many more hearings would be needed, and what other information was needed before taking action on A.B. 441. He invited anyone to submit written testimony for inclusion in the record. With no further business to come before the committee, the meeting was adjourned at 7:21 p.m. RESPECTFULLY SUBMITTED: _ ______________________________ Iris Bellinger Committee Secretary APPROVED: ________________________________ Chairman, Larry L. Spitler ________________________________ Chairman, Sandra Tiffany AFTER MEETING EXHIBITS SUBMITTED: Opponents' Exhibits Exhibit Z - United States Government Memorandum Dated January 12, 1983. Exhibit AA - Undated Memorandum to Evaluation Committee, from Eugene A. Higgins, Attorney, Bureau of Competition. Exhibit BB - Four-page set of graphs and charts dealing with Clark County Market share, April '82, November '87 and January '95, and related confidential information dealing with litigation entitled CADI et al. v. ARCO et al. Exhibit CC - Letter in opposition to A.B. 441 from Richard Pearlman and family. Exhibit DD - Washington State Gasoline Prices Study - 1990 (Not included in these minutes, but may be viewed in Legislative Counsel Bureau Research Library). Exhibit EE - Washington State Gasoline Prices Study - 1992 (Not included in these minutes, but may be viewed in Legislative Counsel Bureau Research Library). Exhibit FF - "Protecting Consumers From Unfair Gasoline Marketing Practices." Exhibit GG - "State of Washington Dealers Bill of Rights," attached to letter from Tim Hamilton, Executive Director of Automotive United Trades Organization, dated April 20, 1995, Exhibit HH - Voice Mail message to Tim Hamilton regarding sale of information from Elite Corporation. Exhibit II - Opponents graph entitled, "ARCO dealer retail sales showing loss in sales due to company operations." Exhibit JJ - Letter from Raymond E. May dated 24 April 1995. Assembly Committee on Commerce April 19, 1995 Page