FTC Staff Comment to the Hon. Daniel E. Bosley Concerning Massachusetts H.B. 2225 and 2226 on Gasoline Divestiture and Divorcement

BUREAU OF COMPETITION
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
V900029
COMMISSION AUTHORIZED
April 	9, 	1990
The 	Honorable 	Daniel 	E. 	Bosley
Representative
House 	of 	Representatives
Commonwealth 	of 	Massachusetts
State House
Boston, 	Massach~setts 02133
Dear Mr. 	Bosley:
The 	staff 	of 	the 	Federal 	Trade 	Commission! 	is 	pleased 	to
submit 	this 	letter 	in 	response 	to 	your 	request 	for 	comments 	on
the 	potential 	competitive 	effects 	of 	House 	Bills 	2225 	and 	2226,
proposed 	"divestiture" 	and 	"divorcement" 	laws. 	H. 	2225 	would
prohibit 	petroleum 	refiners 	from 	owning 	retail 	gasoline 	service
stations 	and 	would 	mandate 	open 	supply 	and 	regulate 	gasoline
pricing. 	H. 	2226 	would 	prohibit 	refiners 	and 	other wholesale
distributors 	from 	operating 	such 	stations. 	We 	believe 	that
enactment 	of 	either 	of 	these 	bills 	may 	tend 	to 	lessen 	competition
among motor 	fuel 	dealers 	and 	raise 	gasoline 	and 	diesel 	prices 	to
Massachusetts 	consumers 	and 	visitors.
Interest 	and 	experience 	of 	the 	Staff 	of 	the 	Commission
The 	Federal 	Trade 	Commission 	is 	charged 	by 	statute 	with
preventing 	unfair 	methods 	of 	competition 	and 	unfair 	or 	deceptive
acts 	or 	practices 	in 	or 	affecting 	commerce. 	15 	U.S.C. 	§ 	45.
Under 	this 	statutory mandate, 	the 	Commission 	seeks 	to 	identify
restrictions 	that 	impede 	competition without 	offering
countervailing benefits 	to 	consumers. 	In 	particular, 	the
Commission 	and 	its 	staff 	have 	had 	considerable 	experience
assessing 	the 	competitive 	impact 	of 	regulations 	and 	business
practices 	in 	the 	oil 	industry.2
These 	Comments 	are 	the 	views 	of 	the 	staff 	of 	the 	Bureau
of 	Competition 	of 	the 	Federal 	Trade 	Commission. 	They 	are 	not
necessarily 	the 	views 	of 	the 	Commission or 	any 	individual
Commissioner. 	Questions 	about 	these 	comments 	may be 	addressed 	to
Ronald 	B. 	Rowe, 	Director 	for 	Litigation, 	Bureau 	of 	Competition,
600 	Pennsylvania 	Avenue, 	N.W., 	Washington, 	D.C. 	20580. 	Mr.
Rowe's 	telephone 	number 	is 	(202) 	326-2610.
2 	The 	staff 	of 	the 	Commission has 	gained 	extensive
experience 	with 	energy 	competition 	issues 	by 	conducting 	studies,
investigations, 	and 	law enforcement 	actions. 	Staff comments 	and
testimony 	to 	legislative 	bodies 	have 	identified 	the 	costs 	of
proposed 	gasoline 	retailing divorcement, 	"below-cost 	selling,"
and 	other 	petroleum market 	legislation 	in 	North 	Carolina, 	South
Carolina, 	Georgia, 	Alabama, 	Tennessee, 	Washington, 	Hawaii,
(continued ... )

Honorable 	Daniel 	E. 	Bosley
Description 	of H. 	~
H. 	2225 	would, 	among 	other 	things, 	prohibit 	refiners 	with
more 	than 	175,000 	barrels 	per 	day 	of 	aggregate 	refinery 	capacity
who 	obtain 	less 	than 	forty 	percent 	of 	their 	crude 	oil 	for
refinery 	input 	from 	third parties, 	from 	owning 	or 	operating 	any
motor 	fuel 	servi~e stations 	in 	the 	Commonwealth 	of 	Massachusetts
[Section 	4(a)(1)]. 	Divested 	service 	stations 	would 	have 	to 	be
offered 	first 	to 	the 	current 	dealer 	with 	a 	prescribed 	right 	of
first 	refusal 	[Section 	4(a)(2)(A) 	and 	(C)]. 	The 	value 	of 	such 	a
divested 	motor 	fuel 	station would 	be 	"determined by 	the
Assessor's 	records 	in 	each 	individual 	city 	or 	town 	...
established 	by. the 	assessed value 	of 	the 	property based 	on 	the
previous 	year's 	tax 	bill 	[Section 	4(a)(2)(B)].
The 	bill 	would 	require 	"open 	supply" 	by 	prohibiting 	refiners
from 	objecting 	to 	dealers 	storing 	or 	distributing 	motor 	fuel
purchased 	from 	other 	suppliers 	at 	the 	refiner's 	trademarked
station 	as 	long 	as 	"reasonable 	notice" 	of 	that 	fact 	is 	posted 	at
the 	point 	of 	sale 	to 	advise motorists 	[Section 	4(d)).
Refiners 	would 	be 	required 	to 	have 	uniform 	resale 	prices 	for
motor 	fuel 	sold 	at 	the 	same 	point 	of 	transfer, 	provided 	that
differences 	in 	transfer 	prices 	could 	reflect 	different 	costs 	of
manufacture, 	sale, 	or 	delivery 	for 	motor 	fuel 	[Section 	4(c)).
The 	bill 	also 	would 	impose 	certain 	information 	reporting
requirements 	on 	refiners 	and 	create 	a 	three 	person 	commission 	to
promulgate 	rules 	and 	regulations 	to 	implement 	and 	enforce 	the
Act. 	The 	commission would 	be 	empowered 	to 	initiate 	proceedings
in 	state 	and 	federal 	courts 	to 	enforce 	the 	provisions 	of 	the 	act,
to 	levy 	fines, 	to 	sue 	for 	civil 	penalties, 	and 	to 	seek 	temporary
and permanent 	injunctive 	relief 	[Sections 	3(a)(14) 	and 	4].
Description 	of 	H. 	2226
H. 	2226 	provides 	that 	after 	July 	1, 	1989, 	"no 	producer,
refiner, 	or wholesale 	distributor 	of 	petroleum 	products 	shall
open 	a 	major 	brand, 	secondary brand 	or 	unbranded 	retail 	service
station" 	in 	Massachusetts 	and 	"operate 	it 	with 	company 	personnel,
2( ••• continued)
Nevada, 	Virginia, 	and 	the 	United 	States 	Senate 	and House 	of
Representatives. 	The 	Commission 	and 	its 	staff. have 	also 	gained
considerable 	experience 	with 	gasoline 	refining 	and marketing
issues 	affecting 	consumers 	from 	premerger 	antitrust 	review
pursuant 	to 	Sections 	7 	and 	7A 	of 	the 	Clayton Act, 	15 	U.S.C. 	§§
18, 	lea.
2

Honorable 	Daniel 	E. 	Bosley
a 	subsidiary company, 	co~~issioned agent, 	or under 	contract 	with
any person, 	firm 	or corporation managing 	a 	service 	station on 	a
fee 	arrangement" 	with 	such 	a 	defined person. 	It 	also 	provides
that 	no 	such 	producer, 	refiner, 	or wholesale 	distributor 	shall
continue 	to 	operate 	a 	service 	station 	in 	the 	specified manner
even 	if 	the 	station was 	opened 	before 	the 	referenced date.
In 	addition, 	after 	July 	1, 	1989, 	any 	supplier 	of 	gasoline 	or
special 	fuels 	to 	a 	retail 	service 	station 	dealer would 	be
required 	to: 	"apportion uniformly 	all 	gasoline 	and 	special 	fuels
on 	an 	equitable 	basis 	during periods 	of 	Shortages;" 	"not
discriminate 	among 	the 	dealers 	in 	their 	allotments;" 	"extend 	all
voluntary 	allowances 	uniformly 	to 	dealers;" 	and 	"apply 	all
equipment 	rentals 	uniformly 	to 	dealers." 	A penalty 	of 	$10,000
per 	day 	shall 	be 	assessed 	for 	each 	violation 	of 	the 	Act, 	and 	the
Attorney General 	of 	Massachusetts 	is 	"authorized 	and 	directed 	to
enforce 	compliance 	with 	the 	provisions 	of 	this 	Act."
No 	reliable 	evidence 	supports 	claims 	of 	a 	need
for 	laws 	to 	alter motor 	fuel 	franchise 	contracts
Proponents 	of 	"divorcement,,3 	and 	"open 	supply" 	legislation
have 	maintained 	that 	such 	laws 	are 	necessary 	to 	protect 	the
franchised 	dealers 	of 	major, 	integrated 	refiners 	from 	unfair 	and
anticompetitive 	practices 	by 	their 	suppliers. 	They 	argue 	that
permitting 	refiners 	to 	own 	and 	operate 	retail 	gas 	stations 	in
competition with 	independent 	dealers 	and 	franchised 	dealerships
of major 	branded 	suppliers 	is 	unfair. 	According 	to 	this 	view,
the 	refiners 	can 	and 	do 	"subsidize" 	their 	own 	retail 	operations
by 	providing 	gasoline 	to 	those 	outlets 	at 	prices 	that 	are 	both
below 	cost 	and 	below 	the 	wholesale 	prices 	charged 	to 	lessee
dealers. 	Refiners' 	alleged 	reason 	for 	such 	"subsidization" 	is 	to
drive 	their 	own 	lessee-dealers 	out 	of 	business 	in 	order 	to
replace 	them with 	company-owned and 	operated 	stations.
The 	claims 	that 	vertical 	integration by 	refiners 	into
gasoline 	retailing 	is 	anticompetitive 	in 	and 	of 	itself 	or 	because
of 	refiner 	subsidization do 	not 	appear 	to 	be 	well 	founded. 	In
fact, 	although most 	refiners 	in 	the 	United 	States 	are 	vertically
integrated 	into 	gasoline 	retailing 	because 	such 	integration 	is
3 	"Divorcement" 	laws, 	existing or 	proposed 	laws 	that 	call
for 	refiner 	divestiture 	of 	retail 	gasoline 	stations, 	refer 	to
legislation 	to 	eliminate 	or 	lessen vertical 	integration between
petroleum 	refining 	and 	retail 	marketing 	sectors 	of 	the petroleum
industry.
3

DOE, 	Final 	Report:
Gasoline 	Marketing, 	1981.
Honorable 	Daniel 	E. 	Bosley
efficient, 	the 	"major"4 	oil 	companies 	targeted 	by 	this 	bill 	are
the 	least 	integrated 	into 	retailing. 	Major 	oil 	companies 	have
historically been 	"integrated by 	contract," 	relying 	heavj.ly 	on
franchised 	dealer 	networks 	to 	sell 	their 	refined 	products. 	The
following 	studies 	of 	competition 	in 	gasoline marketing 	in 	the
United 	States 	since 	1981 	have 	concluded that 	gasoline 	dealers
have 	not 	been 	and 	are 	not 	likely 	to 	become 	targets 	of
anticompetitive 	practices 	by 	their 	suppliers. 	We 	briefly
summarize 	the 	results 	of 	these 	studies 	below.
Federal 	Studies 	- 	Following 	enactment 	of 	Title 	III 	of 	the
Petroleum Marketing 	Practices 	Act 	("PMPA") 	in 	1978, 	15 	U.S.C.
S 	2841, 	the 	Department 	of 	Energy 	("DOE") 	studied whether 	the
alleged 	"subsidization" 	of 	retail 	gasoline 	operations 	by 	the
major 	refiners. actually 	existed, 	and, 	if 	it 	did, 	whether 	the
practice 	was 	predatory 	or 	anticompetitive. 	The 	final 	report 	to
Congress, 	published 	in 	January' of 	1981, 	was 	based 	on 	an 	extensive
study 	of 	1978 	pricing 	data 	in 	several 	Standard Metropolitan
Statistical 	Areas 	("SMSAs"), 	as 	well 	as 	on 	internal 	oil 	company
documents 	subpoenaed 	by DOE 	investigators. 	The 	study 	concluded
that 	there 	was 	no 	evidence 	of 	such 	"subsidization."s
In 	1984, 	DOE 	published 	an 	updated 	study 	that 	further
substantiated and 	elaborated on 	its 	1981 	findings. 6 The 	study
showed 	that 	company-operated 	stations 	were 	not 	increasing 	as 	a
percentage 	of 	all 	retail 	outlets, 	except 	among 	the 	smaller
refiners. 	In 	the 	1984 	report, 	DOE 	concluded 	that 	the 	increased
pressures 	on 	gasoline 	retailers 	since 	1981 	were 	not 	caused 	by
anticompetitive 	behavior 	on 	the 	part 	of 	the 	major 	oil 	companies.
Rather, 	the 	decline 	in 	the 	overall 	number 	of 	retail 	outlets 	and
the 	intensification of 	competition 	among 	gasoline 	marketers 	were
attributable 	to 	decreased 	consumer 	demand 	for 	gasoline 	and 	a
4 	"Major" 	oil 	companies 	describe 	a 	group 	consisting
generally 	of 	the 	largest 	fully 	integrated petroleum 	firms 	that,
in 	the 	aggregate, 	have 	the 	largest 	shares 	of 	most 	levels 	of
petroleum production, 	refining, 	distribution, 	and marketing.
These 	companies 	include 	Exxon, 	Chevron, 	Mobil, 	Texaco, 	Amoco,
Sohio, 	Shell, 	and 	other well-known 	firms.
The 	State 	of 	Competition 	in
6 	DOE, 	Deregulated Gasoline 	Marketing: 	Consequences 	for
Competition, 	Competitors, 	and 	Consumers, 	March, 	1984 	(hereinafter
cited 	as 	1984 	DOE 	Report).
4

Honorable 	Daniel 	E. 	Bosley
continuing 	trend 	toward 	the 	use 	of 	more 	efficient, 	high-volume
retail 	outlets.]
State 	Studies 	- 	In 	1986, 	the 	Washington 	state 	attorney
general 	initiated 	a 	study of 	motor 	fuel 	pricing 	in 	that 	state 	to
determine 	whether 	claims 	of 	refiner-subsidization were 	justified.
The 	study 	focused 	on whether major 	oil 	companies 	injured
competition 	by 	c~arging lessee-dealers 	higher prices 	for 	gasoline
than 	the 	companies 	were 	charging 	their own 	company-operated
retail 	stations. 	The 	study 	also 	sought 	to 	examine 	whether 	the
major 	oil 	companies 	injured 	competition 	by 	establishing 	a 	pricing
structure 	between 	retail 	and 	wholesale 	prices 	that 	foreclosed 	the
ability 	of 	dealers 	to 	cover 	their 	costs. 	Information 	was
gathered 	on 	the 	practices 	of 	all 	eight 	of 	the 	major 	companies 	in
Washington 	for 	a 	three-year 	sample 	period. 	The 	study 	covered
regions 	throughout 	the 	state 	where 	the 	companies 	maintained 	both
retail 	operations 	and 	lessee-dealer 	operations. 	The 	Final 	Report
found 	that 	less 	than 	one 	percent 	of 	all 	observed 	pairs 	of 	prices
of 	lessee 	dealers 	and 	company-operated 	stations 	disclosed 	any
significant 	price 	variations, 	and concluded 	that 	such 	instances
were 	"clearly too 	infrequent" 	to 	show 	that 	lessee 	dealers 	were
being 	systematically driven 	from 	the 	market 	because 	their
gasoline 	purchase 	costs 	were 	the 	same 	as 	or 	higher 	than 	the
retail 	prices 	of 	competing 	refiner-operated 	stations. s
More 	recently, 	an 	Arizona 	legislature 	special 	committee
conducted 	an 	extensive 	inquiry 	and 	concluded 	that 	special
legislation 	similar 	to 	that 	proposed 	in 	Massachusetts 	was 	not
justified. 	In 	December of 	1988, 	that 	investigative 	body
recommended 	that 	no 	new 	legislation be 	enacted, 	concluding 	that
"[t]he 	marketplace 	for 	petroleum 	products 	is 	very 	competitive 	in
Arizona. ,,9
The 	state 	and 	DOE 	studies 	have 	revealed 	no 	instances 	of
predatory 	behavior 	on 	the 	part 	of 	major 	gasoline 	refiners;
rather, 	they 	show 	that 	the 	fortunes 	of 	refiners 	and 	their
franchised 	retailers 	are 	closely 	linked, 	and 	that 	they 	"form 	a
mutually 	supporting 	system backed by 	company 	advertising 	and
] Id. 	at 	125-32.
8 	Final 	Report 	to 	the 	Washington 	State 	Legislature 	on 	the
Attorney General's 	Investigation 	of 	Retail 	Gasoline Marketing,
August 	12, 	1987, 	at 	14.
9 	Final 	Report 	to 	the 	Arizona 	Joint 	Legislative 	Study
Committee 	on 	Petroleum 	Pricing 	and 	Marketing 	Practices 	and
Producer 	Retail 	Divorcement, 	December, 	1988, 	at 	35.
5

Honorable 	Daniel 	E. 	Bosley
promotion. "10 	Independent 	franchised 	retailers 	have 	continued 	to
be 	by 	far 	the 	predominant 	form 	of 	outlet 	for 	the 	direct 	gasoline
sales 	of 	major, 	integrated 	refiners, 	who 	operate 	only 	a 	small
percentage 	of 	the 	gasoline 	stations 	in 	the 	United 	States. ll
Given 	their 	continuing massive 	investment 	in 	branded,
lessee-dealer marketing 	distribution 	systems, 	major 	refiners 	are
unlikely 	to 	charge 	their 	lessee-dealers 	prices 	that 	would 	cause
them 	either 	to 	seek new 	sources 	of 	supply 	or 	to 	go 	out 	of
business. 	A refiner 	that 	undertook 	such 	a 	course 	of 	action would
probably 	face 	a 	decrease 	in market 	share, 	an 	increase 	in 	unused
refining 	capacity,- and 	higher 	per 	unit 	costs. 	Put 	another 	way,
the 	~ajor integrated 	refiners 	are 	not 	likely 	to 	engage 	in
predation 	against 	themselves.
The 	impact 	of 	H. 	2225 	and 	H. 	2226 	on 	refiners
Furthermore, 	although 	the 	proposed 	laws 	are 	intended 	to
remedy 	the 	alleged 	unfair 	activities 	of 	major, 	integrated
refiners, 	the 	legislation 	may 	affect 	them 	less 	severely 	than 	it
would 	smaller 	refiners 	who 	may want 	to 	retain 	existing 	retail
stations, 	or 	compete 	for 	new 	station 	locations. 	Although 	H. 	2225
would 	appear 	to 	affect 	a 	smaller 	number 	of 	refiners 	in 	comparison
10 1984 	DOE 	Report, 	supra, 	at 	ii. 	(Although 	the
information 	for 	this 	proposition comes 	from 	1984 	and 	earlier
materials, 	we 	have 	no 	reason 	to 	believe 	that 	the 	distribution
structure 	has 	significantly changed 	since 	that 	time; 	gasoline
diesel 	fuel 	production 	and 	distribution methods 	have 	remained
same.)
and
the
11 	In 	1981, 	the 	eight 	largest 	refiners, 	who 	in 	the
aggregate, 	accounted 	for 	about 	half 	of 	all 	gasoline 	sales, 	sold
approximately eight 	times 	more 	gasoline 	through 	lessee 	dealers
than 	through 	company-operated 	outlets. 	Id. 	at 	146 	(Table A-I0).
The 	1984 	DOE 	Report 	confirmed 	a 	similarly 	low proportion. 	So 	did
the 	Lundberg 	Letter, 	Vol. 	XI, 	No. 	36, 	July 	6, 	1984, 	at 	3. 	A
recent 	study 	contracted 	for 	by 	the 	American 	Petroleum 	Institute
("API") 	noted 	that 	the 	14 	largest 	integrated 	refiners,
representing 	approximately 	67% 	of 	the 	nation's 	refining 	capacity,
had only 	about 	10% 	of 	their 	gross 	gasoline 	sales 	and 	4.5% 	of
their 	outlets 	devoted 	to 	salary-operated 	retail 	stations.
Temple, 	Barker 	& Sloan, 	Gasoline 	Marketing 	in 	the 	1980s:
Structure, 	Practices, 	and 	Public 	Policy 	at 	2-3 	(1988).
6

12
13
Honorable 	Daniel 	E. 	Bosley
with 	the 	broader 	coverage 	of 	H. 	2226,12 either proposed 	law 	could
harm 	competition 	and 	consumers.
Only 	a 	minor 	percentage 	of 	the major 	refiners' 	branded
outlets 	in 	Massachusetts 	are 	owned 	and operated by 	the 	major
refiners 	themselves. 1J In 	contrast, 	although 	there 	do 	not 	appear
to 	be very many 	smaller, 	independent 	refiner-owned 	stations 	in
Massachusetts{ 	such 	outlets 	as 	are 	present may 	be 	company owned
and 	operated. 4 	Smaller, 	independent 	refiners 	may 	find 	that
company 	operated 	outlets 	are 	more 	efficient 	than 	lessee-dealer
outlets. 	Consequently, 	refiner-marketing divorcement 	or
divestiture 	in Massachusetts, 	which 	would 	adversely 	affect 	many
refiners, 	may 	be 	most 	harmful 	to 	smaller, 	independent 	ones, 	who
may 	want 	to 	capture 	market 	share 	in Massachusetts. 15
H. 	2225 	would 	exempt 	from 	its 	requirements 	all 	refiners
who 	have 	aggregate 	refining 	capacity 	of 	less 	than 	175,000 	barrels
per 	day 	or 	who 	purchase more 	than 	sixty 	percent 	of 	their 	crude
oil 	from 	others. 	H. 	2226 	does 	not 	exempt 	such 	refiners 	from 	its
coverage.
According 	to 	the 	National 	Petroleum News 	("NPN") 	1989
Factbook, 	at 	34-51, 	providing comparative 	national 	data 	on
refiners' 	company 	operated 	and 	lessee 	operated 	retail 	outlets,
the 	leading 	branded 	refiners 	in Massachusetts 	appear 	to 	have 	a
relatively 	small 	number 	of 	company-owned 	or 	operated 	stations.
For example, 	the 	NPN 	figures 	show 	that 	Mobil's 	company-operated
stations 	constitute 	only 	about 	6.5% 	of 	its 	overall 	retail
distribution volume. 	Texaco 	stands 	at 	about 	5.7%, 	and 	Exxon 	has
only 	5.2%.
14 	In 	1988, 	the 	Lundberg 	Letter 	reported 	that 	"Majors 	lost
share 	to 	the 	independents." 	Vol. 	XV, 	No. 	11, 	at 	14. 	One 	such
independent 	is 	Southland, 	who 	owns 	Citgo's 	refinery 	and 	gasoline
distribution 	system. 	Southland 	has 	been 	aggressive 	in combining
its 	7-11 	convenience 	stores 	with 	gasoline 	retailing. 	Another
independent 	is 	Cumberland 	Farms, 	who 	also 	has 	combined
convenience 	stores 	with 	gasoline 	retailing. 	Cumberland
reportedly 	has 	a 	presence 	that 	is 	growing 	in Massachusetts. 	Id.
U 	As 	noted 	in 	footnote 	11, 	supra, 	the 	"major" 	oil
companies 	constitute 	the 	refining 	segment 	with 	the 	lowest
proportion 	of 	gasoline 	volume 	in 	company-operated 	retail
stations. 	Smaller refiners 	comprise 	the 	refining 	segment with
the 	highest 	incidence 	of 	company-owned 	and 	operated 	retail
stations.
7

Honorable 	Daniel 	E. 	Bosley
Monopolistic 	and 	predatory 	behavior 	is 	presently
covered 	by 	state 	and 	federal 	antitrust 	laws; 	new
legislation 	to 	regulate 	gasoline 	markets 	is 	unnecessary
Predatory or monopolistic 	behavior, 	including 	"predatory
subsidization" 	in 	the 	petroleum 	industry, 	is 	subject 	to 	the
Sherman Act, 	the.Clayton 	Act, 	and 	the 	Federal 	Trade 	Commission
Act. 	The 	Massachusetts 	state 	law 	similarly prohibits
monopolistic 	behavior 	[Chapter 	93, 	General 	Laws 	of 	Massachusetts,
Sections 	1-14A].16 	These 	statutes 	address 	possible
anticompetitive 	practices 	in 	the 	industry more 	effectively 	than
would 	legislation 	restricting 	new entry by potential 	competitors
and 	regulating 	contractual 	relationships 	between 	suppliers 	and
purchasers 	of 	gasoline.
Existing 	law 	deters 	firms 	from 	engaging 	in 	monopolistic
behavior, 	but, 	at 	the 	same 	time, 	allows 	them 	to 	lower 	their 	costs
of 	operation 	through 	their 	gasoline 	distribution 	systems.
Manufacturers 	selling 	in multi-regional, 	national, 	or 	broader
markets 	typically 	impose 	standardized 	distribution 	requirements
across 	markets 	to 	insure 	that 	customers 	will 	be 	able 	to 	receive
the 	same 	product 	no 	matter where 	they 	shop. 	Lessee-dealer
contract 	requirements 	imposed by 	refiners 	similarly 	reflect
branded 	refiners' 	competitive 	strategies. 	Traditionally, 	such
strategies 	have 	emphasized 	service 	and 	other 	non-price 	forms 	of
competition. 	Unbranded 	marketers, 	by way 	of 	contrast, 	have
competed 	solely on 	a 	price 	basis, 	and 	they 	are 	usually 	refiner-
owned 	and 	operated. 	H. 	2225 	and 	2226 	would 	therefore 	restrict
the 	ability 	of 	firms 	to 	realize 	increased market 	efficiencies 	and
to 	adjust 	to 	changing market 	conditions. 	Because 	both 	types 	of
marketing 	provide 	price 	and 	service 	options 	for 	consumers,
competition 	and 	consumers 	would 	be 	harmed 	by 	legislation
restricting 	entry 	and 	expansion. 17
The 	proposed 	laws 	are 	likely 	to 	result 	in 	higher 	fuel 	prices
Massachusetts 	is 	presently 	among 	the 	majority 	of 	states 	that
does 	not 	limit 	competition between 	refiner 	operated 	stations 	and
lessee-dealers 	of 	the 	same 	brand. 	The 	proposed 	laws 	would 	place
Massachusetts 	among 	only 	a 	few 	states 	that 	limit 	refiner 	retail
motor 	fuel 	operations. 	In 	competitive markets, 	savings 	from
vertical 	integration 	between 	refining 	and 	marketing 	levels 	of 	the
petroleum 	industry 	are 	usually 	passed 	on 	to 	consumers 	in 	the 	form
16
(1988).
17
See 	CCH Trade 	Reg. 	Rep., 	Vol. 	6, 	! 	32,401 !! seq.
See 	Temple, 	Barker 	& Sloan, 	supra 	at 	23-54.
8

18
19
20
Honorable 	Daniel 	E. 	Bosley
of 	price 	competition. 	The 	proposed Massachusetts 	divorcement 	and
divestiture 	provisions 	would deny 	consumers 	such opportunities
for 	lower 	prices 	attributable 	to 	affiliated 	refining/marketing
operations.
Because 	"low" 	prices 	typically 	benefit 	consumers, 	calls 	for
their 	abolition 	should 	be viewed with 	skepticism, 	especially 	in
the 	absence 	of 	reliable 	evidence 	of 	illegal 	behavior.
Legislation 	such 	as 	H. 	2225 	and 	2226 	is 	likely 	to 	add 	costs 	to
the 	distribution 	of 	gasoline 	in Massachusetts 	that 	do 	not 	exist
in 	other 	states, 	costs 	that 	would 	be 	passed 	on 	to 	Massachusetts
consumers 	and visitors. 	The 	potential 	harm 	of 	divorcement 	and
other 	regulatory 	legislation may 	be 	illustrated 	by 	the 	experience
of 	the 	State 	of 	Maryland, 	which 	in 	the 	early 	1970s 	enacted
divorcement 	legislation 	similar 	to 	that 	now 	proposed 	by H. 	2225
and H. 	2226. 	One 	economic 	study, 	described 	by DOE 	as 	perhaps
"the 	best 	empirical 	analysis 	of 	the 	effects 	of 	Maryland's
divorcement 	law,,,18 	estimates 	that 	Maryland 	consumers 	may 	be
paying millions 	of 	dollars 	more 	per year 	for 	gasoline 	primarily
because 	of 	that 	law. 19
A study 	commissioned by the Maryland 	State 	Comptroller's
Office 	and 	the 	state 	attorney 	general 	to 	defend 	the 	divorcement
law 	against 	a 	legislative 	proposal 	for 	its 	repeal 	concluded 	that
the 	law 	benefitted 	consumers, 	saving 	them 	nearly 	$117 	million. 20
The 	study, 	however, 	contained 	serious 	flaws 	that 	undermined 	its
conclusion. 	It 	compared 	average 	prices 	for 	full 	and 	self 	service
gasoline 	in 	Baltimore 	to 	average 	prices 	in 	six 	cities 	outside
1984 	DOE 	Report, 	supra, 	at 	105, 	describing 	a 	study 	by
Barron 	and Umbeck.
See 	Barron 	and 	Umbeck, 	A Dubious 	Bill 	of 	Divorcement,
Requlation;-Jan.-Feb., 	1983, 	at 	29. 	See 	also 	Hearings 	on 	S. 	326,
Before 	the 	Senate 	Comm. 	on the 	Judiciary, 	97th 	Cong., 	1st Sess.
(Oct. 	21, 	1981) (Testimony of 	Pester 	Corp. 	and Crown 	Central
Petroleum 	Corp.); 	Barron 	and Umbeck, 	The 	Effects 	of 	Different
Contractual 	Arrangements: 	The 	Case 	of 	Retail 	Gasoline 	Markets,
27 	J. 	Law 	& Econ. 	313 	(1984). 	See 	also, 	S. 	1140 	Hearing 	at 	305-
306, 	where 	Crown 	stated 	that 	"retail 	divorcement 	in Maryland 	has
been 	a 	disaster 	for 	both 	small 	and 	independent 	refiners 	and
others 	who 	do 	not 	have 	the 	brand recognition 	or 	the 	benefit 	of
millions 	of 	credit 	card 	holders 	that 	the 	major 	refiners 	have."
Crown 	complained 	that, 	because 	of 	divorcement, 	it 	lost 	over 	25%
of 	its 	market 	share 	between 	1979 	(when 	divorcement 	became
effective) 	and 	1984. 	Id.
See 	Putnam, 	Hayes 	& Bartlett, 	Gasoline 	Prices 	in
Maryland 	FOIIowing 	Divorcement 	(1987).
9

Honorable 	Daniel 	E. 	Bosley
Maryland 	during 	a 	four 	year 	period. 	Such 	comparisons 	of 	average
prices 	in 	different 	areas, 	however, 	fail 	to 	take 	adequate 	account
of 	any 	differences 	in 	the 	proportions 	of 	full 	and 	self 	service
gasoline 	purchased 	in 	those 	areas. 	Thus, 	if 	the 	purchase 	of 	high
price, 	full 	service 	gasoline 	in 	Baltimore 	constituted 	a 	smaller
percentage 	of 	total 	gasoline 	than 	in other 	areas, 	the 	average
price 	of 	gasoline 	might 	well 	appear 	to 	be 	less 	in 	Baltimore.
However, 	more 	co~sumers in 	Baltimore would 	be 	choosing 	a 	lower
quality 	product 	and 	service 	mix, 	with 	an 	attendant 	lower 	price,
than 	that 	chosen by 	consumers 	in other 	areas.
In 	fact, 	the 	data 	indicate 	that 	an 	unusually 	small
proportion 	of 	purchases 	in 	Baltimore 	is 	full 	service 	gasoline
sales, 	perhaps 	because 	the 	price 	differential 	in 	Baltimore
between 	full 	and 	self 	service 	gasoline 	is 	unusually 	large. 21 	For
this 	reason, 	the 	$117 	million 	figure 	calculated 	in 	the 	study 	does
not 	represent 	consumer 	savings 	associated 	with 	the 	purchase 	of 	a
comparable 	product 	and 	service 	combination. 	If 	and 	to 	the 	extent
that 	divorcement 	is 	responsible 	for 	the 	unusually 	high 	full
service 	price 	in 	Baltimore, 	divorcement 	may 	have 	diminished 	the
variety 	of 	product, 	service, 	and price combinations 	and 	choices
available 	for 	Maryland consumers 	and 	visitors.
The 	study 	also 	included 	southern cities 	in 	its 	comparison,
but 	"full 	service" 	in 	southern 	cities 	typically 	is 	more 	extensive
than 	full 	service 	in 	northern 	cities. 22 	Therefore, 	even 	if 	the
proportions 	of 	full 	and 	self 	serve 	gasoline 	purchases 	were 	the
sarne 	in 	the 	two 	areas, 	a 	higher 	average 	price 	in 	a 	southern 	city
may 	be 	associated 	with 	a 	higher 	quality 	product 	and 	service 	mix
than 	that 	sold 	in Baltimore.
The 	Maryland 	study was 	also 	flawed 	in 	that 	it 	did 	not
compare 	prices 	in Maryland 	before 	and 	after 	divorcement. 	One
scholar made 	such 	a 	comparison 	and, 	using 	data 	that 	was 	otherwise
21 	During 	the 	period examined 	in 	the 	study, 	the 	full
service 	consumption 	rate 	in 	Baltimore 	ranged 	from 	14 	to 	17
percent, 	the 	lowest 	rate 	of 	any 	northern 	city. 	Baltimore 	also
had 	the 	highest 	premiums 	for 	full 	service 	over 	self 	service,
approximately 	33 	cents 	per 	gallon 	for 	unleaded 	regular, 	of 	any
northern 	city. 	See 	Lundberg 	Letter, 	Vols. 	XII, 	XIII, 	and 	XIV,
"Price/Margin Report," 	1985-1987.
22 	See 	Sorenson, 	"The 	Cost 	To Consumers 	in Maryland 	of 	the
Divorcement 	of 	Refiners 	from 	Retail 	Gasoline Marketing 	1979-
1986," 	Florida 	State 	University, 	January, 	1988, 	at 	11. 	In
southern cities, 	full 	service 	typically 	includes 	checking 	tire
pressure, 	washing 	windows 	and 	an 	under-the-hood 	inspection.
10

Honorable 	Daniel 	E. 	Bosley
the 	same, 	concluded 	that 	divorcement 	significantly 	increased
Maryland 	gasoline 	prices. 23
The 	pr~posed laws 	may weaken 	branded marketing 	systems
The 	provisions 	of 	H. 	2225 	and 	2226 	that 	would 	require 	"open
supply" 	would 	alter contractual 	relationships 	between 	refiners
and 	their 	franch+sed 	retailers 	in -a 	manner 	that 	is 	likely 	to
weaken 	the 	branded marketing 	system 	of 	petroleum 	distribution.
In 	response 	to 	such 	legislation, 	major 	refiners 	may 	abandon
relatively 	efficient 	franchised 	retailer operations 	in 	favor 	of
commodity 	sales 	of 	gasoline 	at 	the 	refinery 	gate 	or 	at 	wholesale
terminals. 	Refiners 	may 	have 	less 	incentive 	to 	continue 	sizable
investments 	in 	their 	lessee-dealer 	networks 	if 	they 	are 	unable 	to
guarantee 	by 	contract 	that 	they will 	be 	able 	to 	sell 	their
products 	and 	services 	through 	an 	efficient 	distribution 	system. 24
To 	the 	extent 	that 	the 	proposals 	are 	intended 	to 	redress
perceived 	gasoline 	retailer 	grievances 	against 	their 	refiner-
suppliers, 	we 	suggest 	that 	you 	consider 	the 	extent 	to 	which 	these
concerns 	have 	been 	addressed 	in 	existing 	federal 	legislation, 	the
Petroleum Marketing 	Practices 	Act 	of 	1978 	("PMPA"), 	15 	U.S.C.
S 2841. 	The 	legislative 	history 	of 	the 	PMPA 	shows 	that 	Congress
was 	concerned 	over 	similar 	allegations 	of 	abuses 	of 	the 	franchise
relationship, 	and 	that 	the 	PMPA was 	intended 	to 	balance 	the
rights 	of 	the 	respective 	parties 	to 	retail 	gasoline 	franchise
agreements.~
Conclusion: 	The 	passage 	of 	H. 	2225 	and 	2226 	is 	not
necessary 	in 	Massachusetts 	motor 	fuel 	distribution
For 	the 	reasons 	stated 	above, 	we 	believe 	that 	H. 	2225 	and
2226, ,if 	enacted, 	could 	injure 	competition 	and 	consumers 	in
Massachusetts. 	We 	believe 	that 	the 	bill 	would 	tend 	to 	insulate
lessee-dealers 	from 	competition by 	potential 	entrants 	and 	by
expansion 	of 	the 	existing 	refiner-operated 	networks. 	This 	could
therefore 	cause 	higher 	motor 	fuel 	prices 	and 	fewer 	choices 	for
Massachusetts 	consumers 	and 	visitors.
23 	Sorenson 	estimated 	that 	divorcement 	imposed 	an 	annual
cost 	on Maryland 	consumers 	of 	between 	$32 	million 	and 	$75
million. 	Id. 	at 	20-21.
24 	See 	attached 	copy 	of 	DOE 	testimony on 	similar
legislation 	in 	the 	United 	States 	Senate 	(5. 	1140) 	in 	1985.
~ 	See 	Senate 	Report 	No. 	95-731, 	95th Cong., 	2d 	Sess., 	15-
19, 	29-43,-r€printed 	in 	1978 	U.S. 	Code 	Congo 	& Ad. 	News 	873.
11

Honorable 	Daniel 	E. 	Bosley
We 	appreciate 	the 	opportunity to 	comment 	on H. 	2225 	and
2226. 	Please 	feel 	free 	to 	call 	on us 	if 	we 	can 	be 	of 	further
assistance.
Ronald 	B. 	Rowe
Director 	for 	Litigation
12