My name is William F. Madison, Senior Vice President of Worldwide Production for Marathon Oil Company.

I am pleased to testify today in connection with this committee's review of the experience of U.S. companies that seek the assistance of competition authorities abroad. I welcome the opportunity to discuss with you the responsiveness of the European Commission to the complaint Marathon filed with that body in 1996. The complaint concerns the anticompetitive practices we have encountered in connection with our investment in a natural gas field in the North Sea. I am also happy to discuss with you the efforts the FTC has made to assist us in obtaining relief from the European Commission. Marathon very much appreciates these efforts of the FTC.
Factual Background

Marathon's involvement in the North Sea goes back to 1976, when it purchased a major interest in the Heimdal field in the Norwegian sector of the North Sea. In early 1981 Marathon Oil Company's Executive Committee, meeting in Findlay, Ohio, approved the financing and development of the company's reserves. Subsequently, Marathon invested $300 million through its Norwegian affiliate to develop its portion of the field, which began producing gas in 1986.

Unfortunately, the investment has resulted in major losses to Marathon totaling nearly $500 million. We have suffered these losses because of the abusive practices of a joint purchasing cartel on the European Continent that contracted for most of Marathon's gas. This cartel, known as the Consortium, consists currently of five of the major importers and distributors of natural gas in France, the Netherlands, and Germany, each of which is a monopoly. The agreement establishing the Consortium states that the member companies will act only jointly in buying Norwegian gas, denying Marathon the opportunity to bargain separately with them. In addition, the members of the Consortium dominate the natural gas markets in the three European countries, as each member company controls well over a majority of the sales in its market at the national or regional level. Members of the Consortium also control the only pipeline systems that connect with the terminal in Emden, Germany at which the North Sea gas is landed. Anyone wishing to sell Norwegian gas to end-users on the Continent must transmit the gas through these pipelines.

Thus, the Consortium members do not just dominate the markets for natural gas in their own territories. They also control the essential pipeline facilities needed for transporting and distributing the gas on the Continent, while on the supply side they have eliminated all competition among themselves for the purchase of the Norwegian gas.

Marathon has suffered substantial losses because the Consortium members have used their monopoly powers to suppress competition and to force Marathon to sell its gas to the Consortium at excessively low prices. The Consortium agreed in 1981 to pay a premium price for the natural gas in order to compensate Marathon for the high cost of transporting the gas to the Continent, and in order to convince Marathon to sell the gas to the Consortium rather than to alternative buyers. However, when the field became operational in 1986 the Consortium resisted paying Marathon the contract price. Instead, it unilaterally reduced the purchase price by some 45%. When an arbitration panel found the Consortium had acted illegally, the Consortium still sought to avoid paying the price stipulated in its agreement with Marathon. The Consortium coerced Marathon in 1990 into accepting its lower price by refusing to allow negotiations with individual members, and by denying Marathon access to the pipeline distribution systems in order that we might sell the gas to other purchasers. Subsequently, the Consortium members agreed to increase the price paid to the other Heimdal producers, effective April 1, 1992, but they refused all requests by Marathon to pay it the same price. As a result, since that time Marathon has received on the average 30% less--and at times as much as 60% less-- for its gas than all other Heimdal producers have received for identical gas.

Currently, Marathon's affiliate is receiving a price for its gas that is well below the average price on the Continent, well below the price the Consortium pays all other Heimdal producers for the same gas, and well below the price set in the original agreement between the Consortium and Marathon. At the same time, Marathon is still charged the same high fees for transporting the gas to the Continent that necessitated the premium sales price for the gas in the first place.

As a result, Marathon has suffered major losses from its investment. The company calculates that its losses in the investment will equal $495,062,000 by the time the field is exhausted next year. This calculation, which reflects actual losses from inception of the project through May 1998, and projections for the remainder of 1998 and 1999, does not include the loss of anticipated profits. It does include interest at the rate charged our Norwegian affiliate, and depreciation.
Legal Basis of Marathon's Complaint

Marathon's Norwegian affiliate filed its complaint on October 25, 1996 with the Directorate General IV of the Commission of European Communities (DG-IV). This is the Directorate charged with enforcing the competition provisions of the Treaty of Rome. The complaint alleges that the members of the Consortium abused their dominant position and violated Articles 85 and/or 86 of the Treaty of Rome. Specifically, the complaint alleges that the members of the Consortium, acting unilaterally or in concert, restrained competition in the sale of natural gas in Europe by (i) denying Marathon access to essential pipeline facilities, thereby preventing Marathon from selling its gas to any other purchaser except the Consortium members; (ii) illegally fixing the prices paid to Marathon for its gas; (iii) unlawfully discriminating against Marathon by paying it prices significantly lower than those paid to other Heimdal suppliers for the identical product; and (iv) abusing its dominant position to force Marathon to accept artificially low prices for its gas. These practices have enabled Consortium members to charge end-users supra-competitive prices for their gas.
Status of European Commission's Investigation

As a result of Marathon's complaint, the European Commission opened a preliminary investigation in 1996, and in February 1997 conducted on-the-spot inspections at the premises of most of the companies named in the complaint. We do not know if the Commission has taken any additional steps to collect evidence from the members of the Consortium. We do understand from our conversations with both DG-IV staff and the FTC, however, that the European Commission considers its on-going investigation a priority matter. DG-IV forwarded to us just last week a letter dated September 24, 1998 which it sent to the two members of the Consortium that are involved in a related arbitration proceeding. In that letter Deputy Director-General Rocca affirmed that DG-IV considered "this case to be of great interest in view of its dimension as well as its importance for the development of the gas market within the Community."

In his September 24 letter Mr. Rocca indicated that DG-IV intended to take a decision "shortly" on whether to open a formal procedure. If the Commission decides to open a formal procedure, we would expect it to do so by issuing a Statement of Objections. (It is our understanding that, like a civil indictment, a Statement of Objections would identify the facts and legal arguments supporting DG-IV's contentions that Articles 85 and/or 86 of the Treaty of Rome have been violated.). We are very encouraged by the statement in DG-IV's letter. Nevertheless, in three weeks it will be exactly two years since Marathon filed its complaint with the European Commission. As of this time, the Commission's investigation is still in the preliminary fact-finding stage. Some of the members of the Consortium contend that it can be "many years with no fixed time limits applying to any of the different stages" of the proceeding before the Commission reaches a final decision.

We therefore hope that the Commission will not only shortly decide to open a formal procedure, but that it will actually carry through and issue in the near future a Statement of Objections. In this way it can proceed expeditiously to complete the final stages of the investigation and issue a decision with respect to the allegations in Marathon's complaint.
Related Arbitration Proceeding

At the same time as DG-IV's investigation continues, another panel in Europe has been requested by two of the Consortium's members to take up the same issues under investigation by the European Commission. This was done by Ruhrgas and Gaz de France in October 1997 when they initiated an arbitration proceeding against Marathon's Norwegian affiliate. They seek a declaratory ruling that the 1990 reduction in the purchase price that the Consortium forced on Marathon is binding. All the issues that the arbitration panel will be considering are issues that are also addressed in the complaint that Marathon's Norwegian affiliate filed with the European Commission.

We are very concerned that a decision by the arbitration panel could reduce the willingness of the European Commission to devote adequate resources to its investigation. It could seriously undermine the ability of Marathon's Norwegian affiliate to bring its own arbitration proceeding to collect damages from the Consortium members should the European Commission issue a final decision favorable to Marathon. It could also create a conflict between the panel and the European Commission in their respective interpretations of Article 85 and 86 of the Treaty of Rome. In Marathon's view, the only reason that the two members of the Consortium brought the arbitration was to undermine the investigation of the European Commission. In DG-IV's September 24 letter to the parties to the arbitration proceeding, which was forwarded as well to the arbitration panel, Mr. Rocca stated that the "the mere fact of initiating" these proceedings may constitute an aggravating factor of any infringement the Commission later finds to exist.

On October 15, the arbitration panel will hold a hearing to consider whether to stay its proceeding, pending a final decision by the European Commission on Marathon's complaint. As we discuss below, it is particularly important that the FTC act before October 15 to emphasize to the arbitration panel that its proceeding should not proceed because it could undermine the enforcement authority of the European Commission.
Role of the FTC and Positive Comity

Chairman Pitofsky has been very helpful in trying through informal means to emphasize to the European Commission the importance the FTC attaches to the issues raised by Marathon's complaint, and the desirability of timely action on the complaint by the Commission. We believe that, on at least two occasions in the past year, Chairman Pitofsky has raised the matter informally with the top personnel of DG-IV.

In addition, the FTC international antitrust staff has been very helpful. We understand that in the summer of 1996, even before Marathon had filed a complaint with the European Commission, the FTC staff expressed an active interest to the European Commission in its opening an investigation into the matter. We have been told that, since the initiation of the complaint, FTC staff has stayed in touch with the staff of DG-IV on a regular basis.

Marathon appreciates very much the efforts that the FTC has made to expedite the European Commission's investigation. Undoubtedly its involvement has been beneficial. The fact remains, however, that after two years of conducting its preliminary investigation, the European Commission has still not issued a Statement of Objections.

We therefore have urged the FTC to formally invoke the mechanism of positive comity, pursuant to the new U.S.-EU Positive Comity Agreement signed in June. We believe that this course of action represents the best way for the FTC to express its concern that the competition laws of the EU will be fully and vigorously enforced by the European Commission. For the following reasons, Marathon believes that the current investigation falls squarely within the circumstances envisioned for the invocation of positive comity when the 1998 Agreement was drafted:

1) Important U.S. economic interests are involved. In the words of the 1998 Positive Comity Agreement, the practices of the Consortium seriously and adversely affect the ability of Marathon and other U.S. energy companies "to export to, invest in, or otherwise compete" in EU countries. One leading U.S. company has predicted that the size of the European natural gas market will grow by the end of the next decade to around $250 billion. Continuation of the existing anticompetitive practices will significantly interfere with the ability of U.S. energy companies to capture a portion of this expanding market. We have other reserves in the North Sea which could be developed, and an interest in participating in other ways in the sale of Norwegian gas on the Continent. Marathon may be unable to do so, however, until competitive conditions in Europe change, and Marathon is free to decide to whom it will sell gas, and on what terms.

2) Important consumer interests are involved. The abusive practices of the Consortium have artificially inflated the price of natural gas paid by end-users in Europe. If the Consortium permitted third party access to its pipelines, for example, producers or importers would no longer have to sell gas to the Consortium, but instead could sell gas directly to end-users. This would create price competition between the Consortium and other sellers of gas, and help reduce the supra-competitive prices currently charged end-users by the Consortium. There is some evidence that German purchasers pay three times as much to Ruhrgas for gas as Ruhrgas pays to Marathon for the same gas.

3) The FTC staff has noted in discussions with us that, in its view, the allegations in Marathon's complaint filed with the European Commission appear, on their face, to have substantial merit under Articles 85 and 86 of the Treaty of Rome, and deserve a thorough investigation by the European Commission. As the new Positive Comity Agreement indicates, it is not necessary for the FTC or the Justice Department to determine first whether the anticompetitive practices violate the competition laws of the U.S. before invoking the positive comity mechanism.

4) There is a special and urgent need to demonstrate the importance the U.S. competition authorities attach to the European Commission's investigation in light of the pending arbitration proceeding, which was begun to subvert the Commission's jurisdiction over competition issues. As previously noted, the arbitration panel will hold a hearing October 15 on whether to stay its proceeding, pending a decision by the European Commission. Ruhrgas and Gaz de France are arguing that the arbitration proceeding should not be suspended because, in their words, "there is a lack of urgency" on the matter at the European Commission, and a "potential for significant further delay before there are any material developments." In fact, these two members of the Consortium told the arbitration panel that they were "recently informed that the Commission was still a long way from deciding whether or not to issue a Statement of Objections." This is inconsistent with the stated intent of the European Commission, and the Commission has so informed the arbitration panel. Nevertheless, until the European Commission takes formal action on the complaint, the opportunity exists for these sorts of statements to be made, creating a basis for the normal European Commission procedures to be thwarted by arbitration proceedings.

We believe that formally invoking the positive comity mechanism would help signal to all concerned the importance of the European Commission's proceeding to the U.S. government, and increase the likelihood that the European Commission will more expeditiously reach a final decision on Marathon's complaint. It would also indicate that the U.S. government has a strong interest in seeing that the responsibility for investigating alleged anticompetitive practices that adversely affect U.S. companies remains with the European Commission. The European Commission is the body that has the authority and expertise to fully investigate violations of the competition laws, and it is the body that negotiated the recent Positive Comity Agreement with the U.S. government.

In its September 24, 1998 letter to Ruhrgas and Gaz de France, DG-IV emphasized the authority of the European Commission to enforce the competition provisions of the Treaty of Rome. It suggested that private parties should not use the arbitration process to protect their actions from the jurisdiction of the European Commission. Marathon applauds DG-IV for taking the significant and unusual step of sending this letter. By invoking the positive comity mechanism, the FTC would provide very useful support to the position DG-IV took in its recent letter.

Assistant Attorney General Klein emphasized in a speech at Fordham University last October 16 that "our serious commitment to positive comity" is reflected in the fact that the U.S. and European Commission have agreed on a new positive comity agreement. In our view, Marathon's case is an ideal one to demonstrate a serious commitment both to the mechanism of positive comity, and to the new Positive Comity Agreement. In light of the seriousness that the European Commission also attaches to this matter, as most recently demonstrated by its September 24 letter, the FTC has a valuable opportunity to demonstrate to skeptics that invoking positive comity can be beneficial, both to the EU and the U.S., in promoting full and vigorous enforcement of the competition laws. Although it is true that the European Commission has already launched a preliminary investigation, the new Positive Comity Agreement will have little meaning if either party to the agreement can preclude any invocation of positive comity simply by initiating an investigation. * * * * *

In conclusion, I would like to commend the members of this Committee for the interest they are taking in the new Positive Comity Agreement, and in ways to better coordinate competition enforcement issues generally with foreign countries. In our view, the new Positive Comity Agreement represents the best way to improve coordination with the European Commission. It is essential, however, that the agreement not be allowed to become a dead letter through disuse. The U.S. government must demonstrate a willingness to invoke positive comity on behalf of U.S. companies that have been denied a fair opportunity to compete for business in foreign countries.

In light of the size of Marathon's losses and its additional natural gas holdings in Europe, it is very important to Marathon that the European Commission acts fairly and promptly on its complaint. The unprecedented effort of some members of the buyer's cartel to undermine the authority of the European Commission in this case flies in the face of well-established principles of "public order" in Europe. It strikes directly at the goals of the new Positive Comity Agreement. We therefore believe that Marathon's experience presents unique and particularly compelling grounds for invoking positive comity.