FTC Staff Comment to the Hon. Gene Thayer Concerning Montana H.B. 464 to Regulate Gas Prices

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
The Honorable Gene Thayer
Chairman
Business 	and 	Industry Committee
Montana 	State 	Senate
Capitol 	Station
Helena, 	Montana 	59620
COMMISSION AUTHORIZED
Dear Chairman Thayer:
The 	staff 	of 	the 	Federal 	Trade 	Commission 1 	is 	pleased 	to
submit 	this 	letter 	in response 	to 	your 	request 	for 	comments 	on
the 	potential 	competitive 	effects 	of 	House 	Bill 	464, 	a 	bill 	that
would 	in 	general 	regulate 	gasoline 	prices 	by 	prescribing minimum
price 	levels 	and prohibiting 	price 	discrimination. 	Your 	letter
notes 	that H.B. 	464 	has 	already 	been 	passed by 	the 	Montana 	House
of 	Representatives 	and will 	be 	taken up 	shortly 	by your
Committee. 	We 	believe 	that 	H.B. 	464 	is 	anticompetitive 	and 	that,
if 	the 	bill 	is 	enacted, 	Montana 	consumers 	and visitors 	could pay
higher 	prices 	for 	gasoline. 	.
Interest 	and e~rience of 	the 	Federal 	Trade Commission
The 	Federal 	Trade 	Commission 	is 	charged 	by 	statute 	with
preventing unfair methods 	of 	competition 	and 	unfair 	or deceptive
practices 	in or 	affecting 	commerce. 	15 	U.S.C. 	S 	45. 	Under 	this
statutory mandate, 	the 	Commission seeks 	to 	identify 	restrictions
that 	impede 	competition or 	increase 	costs 	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
I 	These 	Comments 	are 	the 	views 	of 	the 	staff 	of 	the
Bureau 	of 	Competition of 	the 	Federal 	Trade 	Commission, 	and 	do 	not
necessarily 	represent 	the 	views 	of 	the 	Commission 	itself 	or 	any
individual 	Commissioner.
2 	The 	Commission's 	staff 	has 	gained 	~xtensive experience
with energy competition 	issues 	by conducting 	studies,
investigations, 	and 	law 	enforcement 	actions. 	FTC 	staff 	comments
and 	testimony 	to 	legislative 	bodies 	have 	identified the costs 	of
proposed 	gasoline 	retailing 	divorcement 	and 	"below-cost 	selling"
legislation 	for 	North 	Carolina, 	South Carolina, 	Georgia, 	Alabama,
Tennessee, 	Washington, 	Hawaii, 	Nevada, 	and 	for 	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 	reviews 	pursuant 	to 	Sections 	7 and 	7A of 	the 	Clayton

3
Description of H.B. 	464
Section 4 of 	H.B. 	464 	would, 	inter Alia, 	prohibit 	retailers
from 	selling 	gasoline 	in Montana 	at 	prices 	below costs, 	as
defined 	in Section 3, 	"if 	the 	effect 	is 	to 	injure 	or desjro y
competition or 	substantially lessen competition 	•••• " 	"Cost
to 	retailer" 	is 	defined as 	"the current 	invoice 	cost of motor
fuel 	to 	the 	retailer within 	30 	days 	prior to 	the 	date 	of 	sale 	or
the 	replacement cost 	••. 	, 	whichever 	is 	lower," 	less 	most 	trade
discounts, 	plus 	other 	specified costs 	of 	doing 	business, 	such 	as
taxes, 	transportation costs, 	and 	a 	share 	of 	overhead costs.
Section 	4 would 	also 	prohibita vertically 	integrated producer 	or
wholesaler 	from 	selling a 	petroleum distillate 	to 	its 	own 	retail
outlet 	at 	a 	price 	lower 	than 	the 	price 	charged any 	other,
competing retailer. 	Further, 	gasoline 	purchased 	from 	others 	for
sale 	in 	supplier-owned 	gasoline 	stations 	would 	have 	to 	be 	sold 	at
retail 	prices 	that 	are 	at 	least eight 	percent 	above 	the 	wholesale
prices 	that 	those 	retailers' 	suppliers 	charge 	other customers.
Section 	5 	of 	the 	bill 	would prohibit 	suppliers 	or
wholesalers 	of 	gasoline 	from 	discriminating 	in price, 	"if 	the
discrimination 	substantially 	lessens 	competition or 	tends 	to
create 	a 	monopoly or 	to 	injure, 	destroy~ or 	prevent 	competition
with 	a 	person 	in 	the 	marketing .of 	motor 	fuel 	in 	the 	community
where 	the 	supplier or wholesaler 	is 	selling 	at 	a 	lower 	price."
Sections 	7 and 	8 provide 	for 	civil 	penalties, 	cease 	and 	desist
orders, 	and 	injunctions 	to 	remedy violations 	of 	Section 	4; 	the
bill 	appears 	to 	contain 	no 	remedy 	for 	violations 	of 	Section 	5,
the 	price discrimination 	provision.
Claims 	of 	predato~, monopolistic or collusive
activities 	by refiners 	against 	gasoline dealers
may not 	be veIl-founded
The 	premise of 	H.B. 	464, 	as 	stated 	in 	Section 	2, 	is 	that
independent 	and 	small 	retailers 	and 	wholesalers 	are 	being
victimized by 	"subsidized pricing, 	which 	is 	inherently 	unfair 	and
destructive." 	Several 	studies 	of 	competition 	in 	gasoline
marketing 	in 	the 	United 	States 	since 	1981 	have 	concluded 	that
gasoline 	dealers 	and 	distributors 	have 	not 	been 	and 	are 	not
likely to 	become 	targets 	of 	anticompetitive 	practices 	by 	their
suppliers, 	although 	these 	studies 	do 	not 	contain 	information
about 	Montana. 	In 	light 	of 	these 	studies, 	discussed 	below, 	you
may wish 	to 	examine 	any claims 	by Montana 	gasoline 	dealers 	to 	be
sure 	that 	the 	claims 	are well-founded.
Act, 	15 	U.S.C. 	SS 	18, 	18a.
Section 	4(1)(a)-(b) 	specifies 	further 	exceptions 	for
unusual 	circumstances, 	such 	as 	isolated 	sales, 	clearance 	sales,
or 	sales 	to 	aid 	charitable 	causes.
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Federal 	studies
- Following enactment 	of 	Title 	III 	of 	the 	Petroleum Marketing
Practices 	Act 	("PHPA") 	in 	1978, 	15 	U.S.C. 	Sec. 	2841, 	the
Department of 	Energy 	("DOE") 	studied whether 	the 	alleged 	"sub-
sidization" 	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, 	as 	well 	as 	on 	internal 	oil 	company documents 	subpoenaed by
the 	DOE 	investigating 	staff. 	DOE 	found 	no 	evidence 	of 	such
"subsidization".4
In 	1984, 	DOE 	published 	an updated 	study 	that 	further
substantiated 	and elaborated on 	its 	1981 	findings. 5 	The 	study
showed 	that 	company-operated 	stations 	were 	not 	increasing 	as 	a
percentage of 	all 	retail 	outlets, 	except 	among 	the 	smaller
refiners. 	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 	due 	to 	decreased
consumer demand 	for 	gasoline 	and a 	continuing trend 	toward 	the
use 	of more 	efficient, 	high-volume 	retail 	outlets. 6
State 	studies
In 	1986, 	the 	Washington 	state 	attorney general 	initiated 	a
study of motor 	fuel 	pricing 	in 	that 	state 	to 	determine 	whether
subsidization had occurred or "was 	occurring. 	The 	study 	focused
on whether major oil 	companies 	injured competition by charging
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 	structure 	of 	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 	had 	retail 	operations 	and 	sold 	to 	lessee-dealers. 	The
Final 	Report 	concluded 	that 	instances 	of 	significant 	price
variation among 	lessee-dealers 	and company-operated 	retailers
were 	"clearly too 	infrequent" 	to 	support 	any 	claim 	that 	lessee-
4 	DOE, 	Final 	Report:
Gasoline 	Marketing, 	1981. The 	State 	of 	Competition 	in
5 	DOE, 	Deregulated Gasoline 	Marketing: 	Consequences 	for
Competition, 	Competitors, 	and 	Consumers 	(March, 	1984)
[hereinafter cited as 	1984 	DOE 	Report].
6 	j,g. 	at 	125-32 •
• • • _. • -. ~. ._ .......__ ." •••"v. _ _. _r __ - .....

7
dealers' 	gasoline 	purchase 	costs 	were 	higher than 	the 	retail
prices 	of 	competing company-operated stations, 	and 	that 	these
dealers 	were being 	systematically driven 	from 	the 	market. 7
Hore 	recently, 	in 	1987, 	the Arizona 	legislature 	created a
Joint Legislative Study Committee on Petroleum Priclng 	and
Harketing Practices 	and Producer Retail 	Divorcement. 	In December
1988, 	after more 	than a 	year of 	extensive 	inquiry and 	analysis,
the 	Final 	Report 	recommended 	that 	no 	new 	legislation be 	enacted,
concluding that 	"[t]he m~rketplace for 	petroleum products 	is 	very
competitive 	in Arizona."
The 	state and DOE 	studies 	have 	revealed 	no 	instances 	of
predatory behavior by major 	gasoline 	refiners. 	Rather, 	they 	show
that 	the 	fortunes 	of 	refiners 	and 	their 	franchised 	retailers 	are
closely 	linked, 	and 	that 	these 	firms 	"form a 	mutuall g supporting
system backed by company 	advertising and promotion."
Independent 	franchised 	retailers 	have 	continued to 	be 	by 	far 	the
predominant 	form 	of 	outlet 	fgr 	the 	direct 	gasoline 	sales 	of
major, 	integrated refiners. 1 	Indeed, 	major refiners 	operate
only a 	small 	percentage 	of 	the 	gasoline 	stations 	in 	the 	United
States. l1 	Given 	the 	importance 	of 	the 	branded, 	franchised
marketing distribution 	system, 	major 	refiners 	are 	unlikely 	to
charge discriminatory prices 	that 	would cause 	their 	franchised
retailers 	to, seek 	new 	sources 	of 	supply or 	to 	go 	out 	of 	business.
A refiner that 	undertook 	such a 	course 	of 	action would probably
Final 	Report 	to 	the 	Washington 	State 	Legislature 	on 	the
Attorney General's 	Investigation of 	Retail 	Gasoline 	Marketing,
August 	12, 	1987, 	at 	14.
8 	Final 	Report 	to 	the 	Arizona 	Joint 	Legislative 	Study
Committee on 	Petroleum Pricing and Marketing 	Practices 	and
Producer Retail 	Divorcement, 	December, 	1988, 	at 	35.
9 	1984 	DOE 	report, 	supra, 	at 	ii. 	We 	do 	not 	mean 	to
suggest 	that 	the 	fortunes 	of 	refiners 	and 	their 	franchised
retailers 	are 	perfectly 	linked, 	only 	that 	the 	studies 	have 	found
a 	preponderance 	of 	evidence 	that 	in 	general 	the 	refiners 	and
their 	retailers 	share 	common 	goals. 	Although our 	information 	for
these 	propositions 	comes 	from 	1984 	reports 	and 	articles, 	we 	have
no 	reason 	to 	believe 	that 	the 	distribution 	structure 	has
significantly changed 	since 	that 	time.
10 	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. 	14. 	at 	146 	(Table A-10).
11 	Lundberg Letter, 	Vol. 	XI, 	No. 	36, 	July 	6, 	1984, 	at 	3,
where 	it was 	reported 	that 	the major 	refiners 	operated only 	about
3.3% 	of 	all 	retail 	stations.
.'....-: "	
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- .• " :-.-.' .;.....-:-r-.. ~..~ ...«.:' ~;~ _..<:' ~ .... ':'.• !.~..:.~: ;/-:r: .. ;::P':"-'~'r-'.~~I:-'::-_:i'~~:~I-~~

face 	a 	decrease 	in market 	share, 	an 	increase 	in excess 	refining
capacity, 	and 	higher per unit 	costs. 	Thus, 	the major 	integrated
refiners 	are 	not 	likely 	to engage 	in predation against 	the
mainstay of 	their own retail 	distribution 	systems, 	their
franchised 	retailers.
Even 	if 	predatory behavior were 	found. 	it 	is 	already
subject to prosecution under existing state and
federal 	laws
Predatory conduct 	in the 	petroleum 	industry 	is 	subject 	to
the 	Sherman Act, 	the 	Clayton Act, 	and 	the 	Federal 	Trade
Commission Act 	and 	at 	the 	state 	level, 	the Montana 	Unfair 	Trade
Practices 	Law. 12 	These 	statutes 	address 	possible 	anticompetitive
practices 	in the 	industry more 	effectively than would 	legislation
regulating 	gasoline markets. 	The 	existing 	antitrust 	laws 	deter
firms 	from 	engaging 	in predatory behavior, 	but, 	at 	the 	same 	time,
allow 	them 	to 	lower 	their 	costs 	of 	operation through vertical
integration. 	In contrast, 	the 	price 	regulation 	envisioned by
H.B. 	464 	would deny 	firms 	the 	flexibility 	to 	adjust 	their 	prices
in 	response 	to 	changing conditions 	of 	demand 	and 	supply. 	Such
legislation 	is 	likely 	to 	add 	costs 	to 	the 	distribution of
gasoline 	in Montana 	that 	do 	not 	exist 	in other 	states, 	costs 	that
would 	be 	borne 	by Montana consumers 	and visitors.
In 	addition, 	many of 	the 	apparent 	concerns 	of 	the 	sponsors
of 	H.B. 	464 	in 	redressing 	alleged anticompetitive 	abuses
associated with 	refiner-owned 	and operated gasoline 	stations 	are
addressed by 	the 	exieting 	federal 	Petroleum Marketing Practices
Act 	of 	1978, 	supra. 13 	The 	legislative 	history of 	the 	PMPA 	shows
that 	Congress 	was 	concerned 	about 	these 	same 	alleged 	abuses 	of
the 	franchise 	relationship, 	and 	that 	the 	PMPA was 	intended 	to
balance 	the 	rights 	of 	the 	respective 	parties 	to 	retail 	gasoline
franchise 	agreements. 14
The price 	and 	allocation 	regulatory 	features
of H.B. 	464 	will 	lead 	to 	higher gasoline 	prices
Enactment 	of 	H.B. 	464 	is 	likely to 	have 	several 	adverse
consequences 	for 	consumers. 	Because of 	the 	uniform mark-up
provisiqn of 	the 	bill, 	retailers 	might 	be 	unable 	to 	operate
12 	Mont. 	Code Ann. 	SS 	30-14-201-224 	(1985).
13 	The 	PMPA establishes 	certain notice 	requirements 	with
respect 	to 	cancellation and 	nonrenewal 	of 	contracts 	between
franchisors 	and 	franchisees, 	and creates 	a 	private 	claim 	for
violation 	by 	franchisors, 	enforceable 	in 	federal 	courts.
14 	See 	S. 	Rep. 	No. 	731, 	95th Cong., 	2d Sess., 	15-19, 	29-
43, 	reprinted 	in 	1978 	U.S. 	Code Congo 	& Ad. 	New$ 	873.

discount 	outlets, 	which 	trade 	a 	smaller profit margin 	for 	larger
volume. 	In 	addition, 	short 	term price 	discounts 	designed 	to
attract 	new customers 	would be deterred. 	The 	result 	is 	likely to
be 	rigid, 	uniformly higher, 	retail 	gasoline 	prices 	within
Montana. 	H.B. 	464 	may also 	prevent 	refiners 	from 	capturing 	the
efficiencies 	of vertical 	integration, 	which can often 	reduce
transaction and search costs 	and 	lower 	prices 	to 	consumers. lS
In enforcing the 	federal 	price discrimination 	law, 	the
Robinson-Patman Act, 	15 	U.S.C. 	S 	13, 	the 	Commission 	is 	careful 	to
avoid discouraging 	firms 	from 	engaging 	in 	lawful 	price
discrimination, 	which 	often operates 	to 	destroy 	cartel 	pricing. l6
Moreover, 	changing market 	conditions 	frequently 	are 	manifested 	in
temporary discriminatory pricing 	patterns. 	Especially because 	it
prohibits 	price discrimination 	that 	injures 	competitors, 	but 	not
necessarily competition 	in 	the market, 	H.B. 	464 	may 	have 	the
effect 	of 	inhibiting 	efficient, 	pro-competitive pricing
practices. 	Firms 	may become 	insulated 	from 	competition, 	and
pricing may become 	rigid. 	The 	bill, 	therefore, 	if 	enacted, 	may
well 	result 	in 	higher 	profits 	for 	all 	gasoline 	refiners 	and
marketers 	through 	higher 	prices 	for 	Montana consumers.
Conclusion
For the 	reasons 	stated above, 	we 	believe 	that H.B. 	464, 	if
enacted, 	would 	tend 	to 	insulate 	gasoline 	refiners 	and marketers
from 	competition, 	and 	thereb~ could cause 	gasoline 	prices 	in
Montana 	to 	increase.
We 	appreciate 	the 	opportunity to 	comment 	on H.B. 	464.
Please 	feel 	free 	to 	contact 	us 	if 	we 	can be 	of 	further
assistance.
Sincerely,
·~jL~~~..-. 	{rei I. 	Zu 	rman
~rector
... ~
15 	For example, 	vertical 	integretion 	reduces 	the 	costs 	of
contracting with various 	retailers 	and 	reduces 	coordination
problems 	between different 	distribution 	levels.
16 	See 	generally Schwartz, 	The 	Perverse 	Effects 	of 	the
Robinson-Patman 	Act, 	United States 	Dept. 	of 	Justice, 	Antitrust
Division, 	Economic 	Analysis 	Group 	Discussion Paper 	86-12, 	July
30, 	1986, 	at 	8-10.