FTC Staff Comment to the Hon. Bill Morris Concerning Kansas H.B. 2628 to Prohibit Selling Motor Fuel Below Cost

Federal 	Trade 	Commission'
Denver Regional Offiec
Suite 2900
1405 Curtis St.r1:lct
Donvor. Colorado 80202
(303) 8-44·2271
V920006
COMMISSION AUTHORIZED 	(9
February 	26, 	1992
The Honorable 	Bill Morris
~n~a8 state Senate
state House, 	Room 143 	North
Topeka, 	KS 	66612
Dear Senator Morris:
The 	statts 	ot 	the 	Denver 	Regional 	Ofiic. 	and 	the 	Bureauo!
Competition of the 	Federal 	Trade Commission 	are pleased to submit
this 	letter 	in 	response 	to 	your 	request 	for 	comments 	on 	the
potential 	competitive 	effects 	of 	proposed 	legislation, 	House 	Bill
No. 	2628, 	for 	a 	Kansas 	Hotor 	Fuel 	Marketing Act. 	The 	bill would,
in general, 	prohibit selling motor fuel 	"below cost" 	(as 	"cost" 	is
defined) 	or selling it at a price below the price charged to others
at 	the same marketing 	level, 	in 	the 	same 	area, 	at 	the 	same time.
We believe 	such legislation 	is 	likely to be 	anticompetitive,
and 	that 	its 	likely 	result 	may 	be 	that 	Kansas 	consumers 	and
visitors 	could pay higher prices 	tor gasoline.
%. 	Intoerlft 	apd 	'G,rienc. 	of 	the 	,taff 	of 	the 	'e4eral 	7r.41
9o_i•• 108.
The 	Federal 	Trade 	Commission 	is 	charged 	by 	statute 	with
preventing 	unfair 	methods 	at 	competition 	apd 	untair 	or 	deceptive
acts or practices 	in or affecting commerce. 	Under thi& 	statutory
mandate, 	the Commi•• ion seeks to 	identify restrictions that impede
competition 	or 	increase 	costs 	without 	offering 	countel"'ailing
benefits to consumers. 	In particular, 	the Commission and ita staff
, 	These 	comments 	are 	the 	views 	ot 	the 	staffs 	of 	the 	Denver
Regional Office and the 	Bureau of Competition of the Federal Trade
Commission. 	They 	are 	not 	necessarily the 	views 	of 	the 	co~ission
or any 	individual 	Commissioner.
Z Federal 	Trade Commission Act, 	15 U.S.C. 	§45 	et 	seg.

Hon. 	Bill Morrie
PaCl8 	2
have had considerable experience 	assessing 	the 	competitive impact
of 	regulations 	and 	business 	practices 	in 	the 	oil 	industry.
II. 	Description 	of 	tho 	proposed 	legi81.~ioD.
House 	Bill 	No. 	2628 	rests 	on 	proposed 	findings 	that 	"unfair
competition" 	results when costs associated with marketing fuel 	are
recovered 	from 	other 	operations, 	so 	the 	fuel 	is 	sold 	at
"subsidized" 	prices. 4 	It 	describes 	three 	sources 	of 	these
"subsidies": 	first, 	a 	refiner's 	use 	of 	profits 	from 	refining 	to
compensate 	for 	below-normal 	Cor negative) 	profits 	from marketing;
second, 	a marketer's use of profits at one location to cover losses
from 	below-cost 	selling 	at 	another 	location: 	and 	third, 	any
business'. 	use 	of 	profits 	from 	sales 	of 	other 	products 	to 	cover
losses 	from 	below-cost 	sales 	of motor 	fuel. 	The 	bill 	would 	find
that independent marketers "are unable to survive" 	these practices,
which 	are 	said 	to 	be 	"inherently predatory."S 	Thus, 	to 	safeguard
against 	monopolies 	or 	unfair 	methods 	of 	competition, 	the 	bill
declares that "the advertising, 	offering 	for sale or sale of motor
fuel 	below 	cost 	or 	at 	a 	cost 	lower 	than 	charged 	other persons 	on
the 	same 	marketing 	level, 	Which 	has 	the 	effect 	of 	injuring
competitors 	or destroying 	or SUbstantially 	lessening 	competition,
is an unfair and deceptive trade practice, II whose prohibition would
be 	in the public 	interest.'
Any sale ot any grade of motor fuel 	below cost, 	or at 	a 	price
difterent from the price charged other customers in the same market
area, 	at 	the 	same 	distribution 	level, 	on 	the 	same 	day, 	would 	be
) The staff of the commission has gained 	extensive experience
with 	enerqy 	competition 	issues 	by 	conducting 	stUdies,
investigations, 	and 	law 	enforcement 	actions. 	FTC 	staff 	comments
and 	testimony 	to 	legislative 	bodies 	have 	identified 	the 	costs 	ot
proposed gasoline retailing divorcement, 	"below-cost selling," and
other 	petroleum 	marketing 	legislation 	for 	Alabama, 	Arkansas,
Georgia, 	Hawaii, 	Louisiana, 	Massachusetts, 	Montana, 	Nevada, 	North
Carolina, 	south 	Carolina, 	Tennessee, 	Virginia, 	Washington, 	Utah,
and 	the 	United 	States 	Senate 	and 	House 	of 	Representatives. 	The
Commission and 	its 	staff have also gained 	considerable 	experience
with 	gaso11ne 	refining 	and 	marketing 	issues 	affecting 	consumers
from premerqer antitrust 	reviews 	pursuant 	to Sections 	7 and 	7A of
the Clayton Act, 	15 U.S.C. 	§§18, 	18&.
4 H. 	B. 	No. 	2628 	("Bill 	2628"), 	§2{b).
5 Bill 	2628, 	§§2(c), 	Cd).
6 Bi112628, 	§§3{b), 	(0).

Hon. 	Bill Morris
Page 	3
prohibi ted, 	"where 	the 	effect 	is 	to 	injure 	competition. ,,7
Liability 	could 	be 	based 	on 	injury 	to 	particular 	firms 	or
individuals as well as injury to competition, because "competitionll
is 	defined 	to 	mean 	individual 	competitors. 	In 	the 	bill's 	basic
prohibitory 	section, 	"cost" 	is 	not 	defined: 	however, 	another
section of the 	bill 	describes 	the 	requirements 	for 	a 	plaintiff to
make 	out 	a 	prima 	facie 	case, 	which 	use 	several 	defined 	terms
related 	to 	costs.' 	In 	addition, 	section 	7 	of 	the 	bill 	prohibits
transferring motor 	fuel 	to an 	affiliate 	for 	resale 	on 	a 	different
marketing 	level 	at 	a 	transfer 	price 	lower 	than 	the 	price 	charged
purchasers 	for 	resa!e 	at 	the 	same 	level, 	where 	the 	effect 	is 	to
injure 	competition.'
The 	bill 	includes 	several 	separately 	defined 	offenses. 	It
would be 	unlawful 	to 	use 	motor 	fuel 	as 	a 	1I10ss 	leader," 	that 	is,
to 	sell 	it 	at 	less 	than 	"costll 	to 	encourage 	the 	purchase 	of
7 	Bill 	2628, 	§6. 	Exemptions 	are 	set 	out 	for 	isolated
transactions, 	discontinued 	products, 	imperfect 	or 	damaged 	fuel,
liquidation 	of 	a 	business, 	or 	sales 	pursuant 	to 	a 	court 	order.
S§ 12 (a) (1) - (5) •
8 compare 	Bill 	2628, 	53(c) 	and 	§4(d).
9 	A 	prima 	facie 	violation, 	shifting 	the 	burden 	to 	the
defendant, 	is made 	out 	by plaintiff's 	showing 	that:
ita 	purchase 	price 	(from 	a 	refiner 	or 	wholesaler) 	i.
greater than 	the 	refiner's 	transfer price, 	§18(a), 	or
the 	sum 	ot 	its 	purch-ase 	price
wholesaler 	supplier) 	and 	"cost
(overhead, 	§4(e» 	is greater than
posted 	price, 	§19(b), 	or
(from 	a 	refiner 	or
of 	doing 	business"
the 	supplier's 	retail
the sum of 	its "basic cost of motor fuel" 	(cost 	of goods
sold, 	§4(b» 	and IIcost of doing business" i8 greater than
the 	posted 	retail 	price 	of 	a 	competitor 	suspected 	of
sel11ng below cost. 	§18(c).
It 	is 	not 	clear 	Whether 	the 	"competitor" 	in 	§18(c) 	must 	be 	the
defendant 	in 	the particular action.
10 Bill 2628, 	§7. 	Refiners are 	required to establish transfer
prices 	for transactions with their affiliates and to disclose them
on 	request. 	S5.

Hon. 	Bill Korris
Paqe 	4
something 	else," 	or 	to 	offer 	a 	rebate 	or 	concession,'2 	where 	the
effect 1s to 	injure competition. 	In addition, 	a 	retailer would be
prohibited 	from 	jnducing 	a 	wholesaler 	to 	sell 	below 	the
wholesaler's cost;' 	this would be an offense regardless ot whether
there 	is 	any 	effect 	on 	competition. 	The 	combination 	of 	sales 	of
motor 	fuel 	with 	some 	other 	merchandise 	or 	with 	coupons 	or 	gifts
could 	not 	be 	made 	or 	advertised 	at 	prices 	below 	"cost," 	where
"cost" 	for all such items would be determined according to the same
definitions 	the 	law 	applies 	to 	motor 	fuel;" 	here 	too, 	these 	acts
would 	be offenses without 	regard 	to 	the 	effect 	on 	competition.
A difference 	in cost could 	justify charging a 	different price
to 	a 	purchaser 	for 	resale, 	but 	only 	if 	the 	cost 	difference 	is 	due
to 	a 	difference 	in 	shipping 	method. 15 	A 	price 	set 	to 	meet
competition would 	not violate 	the 	proposed 	act, 	but 	only 	if 	it 	is
set 	to meet, 	and 	not 	be 	lower than, 	a 	specific price."
The law would be 	enforced by 	injunctions 	and 	civil 	penalties
of 	up 	to 	$10,000 	for 	each 	offense. 	The 	bill 	would 	also 	permit
private actions 	for 	injunctive 	relief, 	civil penalties, 	and actual
and 	special 	damages.
" Bill 	2628, 	§9(a); 	JiU §4(j), 	defining 	"loss 	leader".
12 Bill 	2628, 	§9(b).
13 Bill 	2628, 	§9(c).
16 Bill 	2628, 	S10.
1S 	Bill 	2628, 	§8(a). 	Differences 	among 	its 	customers' 	ooats
can 	affect 	a 	supplier's 	potential 	liability. 	This 	is 	because,
under 	§S18 (b) 	and 	(c), 	prima 	facie 	liability 	is 	determined 	by
reference to a plaintiff's actual overhead costs, 	so customers with
different 	costs 	could have different claims.
'6 Bill 	2628, 	§S (b). 	Another section of the bill would permit
a 	wholesaler 	or 	retailer 	to 	meet 	the 	competition 	ot 	a 	specific
party 	selling 	to 	it 	(at 	the 	same 	level 	of 	distribution) 	at 	cost.
113(a). 	Whether 	the 	sales 	are 	at 	"coat" 	can 	be 	determined 	by 	a
market 	survey: 	the 	lowest 	cost 	disclosed 	by 	such 	a 	survey may 	be
presumed 	to be the 	relevant 	"costtl • 	§13(b), 	§lS.

Hon. 	B1ll 	MorrIs
PICJe 	5
III. 	&DAly.is 	ot lou •• Bill 	No. 	262'.
A. 	No 	reliable 	.yideDoe 	.upports 	cl.i.. 	of 	pr.d.tory,
mODopolistio 	or 	collu.iy. 	aotiyiti.. 	by 	r'fin.r. 	or
m,rket.r. 	of glsoliD'.
Bill 	2628 's 	premise 	is 	that 	competition 	in 	the 	petroleum
industry is being reduced becayse 	independent motor fuel 	marketers
cannot survive predatory "subsidized" pricing by major refiners and
marketers. 	This 	view 	is 	shared 	by 	proponents 	of 	similar
legislation that would 	impose 	restraints 	on vertically 	integrated
petroleum refiners and marketers in other jurisdictions. 	They have
maintained 	that 	such 	laws 	are 	necessary 	to 	protect 	dealers 	from
unfair and anticompetitive practices by their suppliers. 	According
to this view, 	vertically 	integrated 	refiners can and do set retail
prices 	charged 	by 	their 	company-owned 	and 	operated 	outlets 	below
the Wholesale prices charged to 	franchised or independent dealers.
They 	allege 	that 	the 	reason 	for 	such 	"SUbsidization" 	is 	to 	drive
franchised 	and 	independent 	dealers 	out 	of 	business 	in 	order 	to
replace them with company-owned stations. 	It 	is similarly charged
that 	major 	gasoline 	marketers 	often 	have 	subsidized 	"below 	cost"
pricing 	at 	one 	location 	by 	high 	prices 	at 	another 	location, 	and
that 	such practices 	harm 	competitors 	and 	consumers.
Such 	claims 	do 	not 	appear 	to 	be 	well 	founded. 	Major 	oil
companies have historically been "integrated by contract," 	relying
heavily 	on 	franchised 	dealer 	networks 	to 	sell 	their 	refined
products. 	Several 	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 5umma.rize
the 	results 	of 	these 	studies 	below.
1. 	re«eral 	studi.s.
The 	Department 	of 	Energy 	(tiDOEtI) 	has 	studied 	whether
vertically 	integrated 	refiners 	were 	"subsidizinq" 	their 	retail
gasoline 	operat~ons 	in 	a 	way 	that 	might 	be 	predatory 	or
anticompetitive.' 	DOE's 	final 	report 	to 	congress, 	published 	in
January, 	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 	DOE 	investiqations.
'7 This 	study was 	undertaken 	following 	enactment 	of 	Title 	III
of the Petroleum Marketing Practices Act 	in 1978, 	15 U.S.C. 	§2841.

Hon. 	B11l 	Morris
Page 	6
The 	study 	concluded 	that 	there 	was 	no 	evidenoe 	of 	such
"subsidization. It 11
In 	1984, 	DOE 	published 	an 	updated 	study 	that 	further
substantiated 	and 	elaborated 	on 	its 	1981 	findings. 19 	The 	study
showed 	that 	company-operated 	stations 	were 	not 	increasin9 	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
continuing 	tre'1~ 	toward 	the 	use 	of 	more 	efficient, 	high-volume
retail 	outlets.
2. 	stat. 	studt•••
In 	1986, 	the 	Washinqton 	state 	Attorney 	General 	initiated 	8
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 	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 pricing structure between retail and
Wholesale prices that prevented dealers from covering their costs.
Information was gathered on the practices of all eight ot 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
Washington 	study 	found 	that 	less 	than 	one 	percent 	of 	all 	observed
pairs 	of 	prices 	of 	lessee 	dealers 	and 	company-operated 	stations
disclosed 	any 	significant 	price 	variations. 	The 	study 	concluded
that 	such 	instances 	were 	"clearly 	too 	infrequent" 	to 	show 	that
lessee 	dealers 	were 	being 	systematically 	driven 	from 	the 	market
,. 	DOE, 	Final 	Report: 	!be 	state 	of 	competition 	in 	GasolilUt
~arketing, p. 	xi 	(1981).
'9 	DOE, 	Deregulated 	Gasoline 	Marketing: 	Consequences 	for
competition, 	Competitors, 	and 	Consumers 	(March, 	1984) 	(111984 	DOE
Report.").
m 1984 	DOE Report 	at 125-32.

Bon. 	Bill Morris
Page 	7
because 	their 	gasoline 	purchase 	costs 	were 	the 	same 	as 	or 	hi9~er
than the 	retail prices 	ot 	competing 	refiner-operated 	stations.
More 	recently, 	in 	1987, 	the 	Arizona 	legislature 	created 	a
Joint 	Legislative 	study 	Committee 	on 	Petroleum 	Pricing 	and
Marketing 	Practices and 	Producer Retail 	Divorcement. 	In 	December
1988 the Committee recommended that no new legislation be enacted,
concluding that "(t)he m~fketp1ace for petroleum 	products 	is very
competitive 	in Arizona. 1t
The 	DOE 	studies, 	based 	on 	data 	from 	the 	1970' s 	and 	early
1980·8, 	and 	the state 	studies 	done more 	recently have 	revealed no
instances 	ot 	predatory 	behavior 	by 	major 	gasoline 	refiners. n
Rather, 	they 	show 	that 	the 	fortunes 	of 	refiners 	and 	their
franchised 	retailers are closely linked and that these 	firms 	"form
a 	mutually 	fupportinq 	system 	backed 	by 	company 	advertising 	and
promotion. tl 2 FranChised retailers have continued to be by far the
predominant 	form 	of 	outlet 	for 	the 	gasoline 	sales 	of 	major,
integrated 	refiners. 	Indeed, 	major refiners 	operate 	only 	a 	small
percentage 	of 	the 	gasoline 	stations 	in 	the United 	states.~
21 	Final 	Report 	to 	the 	Washington 	State 	Legislature 	on 	the
Attorney General's 	Investigation 	of 	Retail 	Gasoline Marketing, 	p.
14 	(August 	12, 	1987).
22 	Final 	Report 	to 	the 	Arizona 	Joint 	Legislative 	Study
Committee on Petroleum Pricing and Marketing Practices and Producer
Retail 	Divorcement, 	p. 	35 	(December, 	1988).
23 	Much 	of 	the 	information 	cited 	here 	in 	support 	ot 	these
propositions comes from the 1984 	DOE Report, 	and thus on data that
is now a decade old. 	But the 	results 	of continuing investigations
by 	the 	Commission's 	staff 	into 	competition 	in 	the 	petroleum
industry 	give 	us 	no 	reason 	to 	believe 	that 	the 	distribution
structure 	has 	significantly changed 	since that 	time.
~ 	1984 	DOE Report 	at 	ii. 	We do 	not mean to 	suggest that the
interests and incentives of refiners and their franchised retailers
are linked perfectly in every situation. 	Although the refiners and
their 	retailers 	generally 	share 	common 	goals, 	on 	occasion 	their
interests 	and fortunes 	may 	not 	coincide.
~ Lundberg Letter, 	Vol 	XI, 	No. 	36, 	July 6, 	1984, 	at 	3, 	where
it 	was 	reported 	that 	the 	major 	refiners 	operated 	only 	about 	3.3
percent 	of 	all 	retail 	stations. 	The 	1984 	DOE 	Report 	confirmed 	a
similarly 	low 	proportion. 	A 	recent 	study 	conducted 	for 	the
American 	Petroleum 	Institute 	noted 	that 	the 	fourteen 	largest
integrated 	refiners, 	representing approximately 	67 	percent 	of the
econtinued ••. )

Hon. 	Bill Morris
Page 8
3. 	Ga.olin ••,rkttipg 	in laDSAI-
The national pattern is reflected in the distribution systems
of 	the 	leading 	branded 	refiners 	in 	Kansas. 	The 	1984 	DOE 	study
indicates that vertically 	integrated gasoline marketers 	accounted
for 	13.3 percent of total 	sales 	in ~ansas in 1981; 	tgis was almost
exactly equal to the national average, 	13.1 percent. 6 	Only one of
the 	eight 	leading 	branded 	marketers 	in 	Kansas 	for 	which 	data 	are
available 	uses 	company-owned 	and 	operated 	outle~s 	as 	the
predominant 	form 	of 	retailing 	on 	a 	national 	basis. 2 However,
company operated outlets may be a predominant form of retailing for
smaller 	independent 	refiners. 	For 	example, 	the 	largest 	refiner
that 	operates 	most 	of 	its 	own 	outlets 	is 	Clark, 	w~ich ranks 	24th
nationwide 	in 	number 	of 	retail 	outlets 	(with 937). a
The 	major 	integrated 	refiners 	are 	not 	likely 	to 	engage 	in
predation 	against 	the 	mainstay 	of 	their 	own 	retail 	distribution
systems, 	their 	franchised 	retailers. 	Major 	refiners 	would 	have
little 	incentivQ to 	charge 	discriminatory prices 	that 	would cause
their franchised 	retailers to move to different suppliers or to go
out of business. 	A refiner that discriminated in ways that injured
its 	franchisees 	and dealers would probably 	lose 	sales, 	leading to
a lower market share, 	greater excess refining capacity, 	and higher
per unit 	costs.
25 	1	( .•• cont 	nued)
nation's 	refining 	capacity, 	had 	only 	about 	10 	percent 	of 	their
gross 	gasoline 	sales 	and 	4.5 	percent 	of 	their 	outlets 	devoted 	to
company-operated retail stations. 	Temple, 	Barker & Sloan, Gasoline
Marketing 	in 	the 	1980's: 	Structure, 	Practices, 	and 	Public 	Policy,
pp. 	2- 3 	(1988) .
26 1984 	DOE Report 	at 	82.
21 National 	Petroleum News 	1991 	Factbook 	34-51. 	The 	seventh
ranked 	firm in Kansas, 	Coastal Corporation, 	operates 70 percent of
its 	branded 	outlets 	itself 	(nationwide). 	Of 	the 	other 	top 	elqht
firms 	in ~ansas, only two operate more than 8 percent of their own
outlets 	(nationwide). 	Total 	Petroleum, 	Inc., 	with 	the 	largest
number 	of 	outlets 	in 	Kansas 	(19 	percent), 	operates 	23 	percent 	of
its branded outlets itself; 	the second largest 	in Kansas, 	Phillips
66 	Company, 	operate. 	none; 	the 	third 	largest, 	Conoco, 	Inc.,
operates 	11 percent.
zs National 	Petroleum News 	1991 	Factbook 34-51. 	Clark 	is 	the
16th-ranked marketer 	in Kansa., 	with ten 	outlets. 	~

Hon. 	Bill Morris
Page 	9
B. 	By'D 	if pr.4at9ry behavior or 	pri2' Oi,qriaipatioD w.r.
found, 	it 	i. 	alr.ady 	sUbject 	to 	pro ••cutioD 	unO.r
.xi.ting ,tit. 	and 	teOeral 	lavl.
Predatory conduct 	in the petroleum 	industry is subject to the
Sherman 	Act, 	the 	Clayton 	Act, 	and 	the 	Federal 	Trade 	Commission
Act. 	In addition, 	price discrimination Jhat 	injures 	competition
1s 	subject 	to 	eXi8~1ng 	Kansas 	law 	and 	to 	the 	federal
Robinson-Patman 	Act.] 	These 	statutes 	address 	possible
anticompetit1ve 	practices 	in 	the 	industry 	and 	deter 	firm. 	from
,ngag1ng 	in 	predatory 	behavior 	or 	illegal 	price 	discrimination.
In contrast, 	the proposed Kansas Hotor Fuel Marketing Act may make
it more 	difficult 	for 	firms 	to 	adjust 	their prices 	in 	response 	to
changing 	conditions 	ot 	demand 	and 	supply. 	Its 	prohibitions 	are
broader 	than 	those 	in 	the 	Robinson-Patman 	Act. 31 Bill 	2628 	may
inhibit vigorous 	competition and add 	costs 	to the 	distribution 	ot
gasoline 	in 	Kansas 	that 	do 	not 	exist 	in 	other 	states, 	costs 	that
would be borne by Kansas 	consumers 	and 	visitors.
~ 	~ 	Kansas 	Statutes 	Ann., 	Art. 	50-149 	(prohibiting
geographic price discrimination 	intended 	to destroy 	competition).
~ 15 U.S.C. 	§13 	(Section 	2 of 	the Clayton Act). 	~ Texago,
Inc. 	v. 	Hasbrouck, 	u.s. 	, 	110 	S. 	ct. 	2535 	(1990), 	in
which 	franchised 	gasolIne 	retailers 	successfully challenged ~rice
discrimination by a vertically 	integrated 	refiner.
31 For example, 	under Bill 	2628 liability could be based solely
on 	injury 	to 	a 	competitor. 	The 	Bill 	does 	not 	require 	that 	the
"injury" 	be 	related 	to 	etfects 	on 	competition 	generally; 	rather,
"competition" 	means 	an 	individual 	competitor. 	Bill 	2628, 	54(d).
By contrast, 	illegality under the Robinson-patman Act requires that
the effect of the pricing action be 8ither "SUbstantially to lessen
competition 	or tend to 	create 	a 	monopoly 	or to 	injure, 	destroy,
or prevent competition with any person" 	who grants or receives the
benetit 	of 	price 	discrimination 	(or 	with 	customers 	of 	either 	of
them). 	15 	U.S.C. 	S13(a). 	Under 	federal 	law, 	the 	effect 	of 	the
conduct on 	competition, 	as distinguished 	trom effects 	on 	a 	single
competitor, 	is the more relevant consideration. 	And, 	although Bill
2628 	would 	allow 	setting 	a 	price 	to 	meet 	competition, 	it 	limits
that to meeting a specific price of a competitor in the same market
area on the same day. 	By contrast, 	the Robinson-Patman Act permits
a 	seller 	to 	meet 	the 	prevailing 	competitive 	circumstances 	in 	a
market, 	falls 	City 	Indus. 	y. 	vanco 	Beverage, 	460 U.S. 	428 	(1982).

Hon. 	Bill Morris
Paqe 	10
C. 	The 	bill 	.ay le.d 	to 	higher 	gasoline 	price. 	b.olu•• 	i\
vill discourage price oompetition and faoilitate unifora
Rrlqins·
Bill 2628 may have adverse consequences 	for consumers. 	Short
term 	price 	discounts 	designed 	to 	attract 	new 	customers 	Dlay 	be
deterred. 	The 	legislation 	mtl 	also 	limit 	the 	availability 	of
certain 	functional 	discounts. 	Refiners 	may "be 	prevented 	from
realizing all 	the 	efficiencies 	of vertical 	integration, 	which can
often 	red~e 	transaction 	and 	search 	costs 	and 	lower 	prices 	to
consumers. 	As 	a 	broad 	generalization, 	economic 	theory 	suggests
that 	vertical 	integration 	is 	likely 	to 	harm 	consumers 	~ly when
market 	power 	exists 	in 	at 	least 	one 	stage 	of production.
An 	unintended 	effect 	may 	be 	to 	encourage 	vertically-
integrated 	refiners 	who 	distribute 	gasoline 	in 	Kansas 	to 	change
otherwise lawful pricing practices. 	In enforcing the federal price
discrimination 	law, 	the 	Robinson-Patman 	Act, 	the 	Commission 	is
careful 	to 	avoid discouraging 	firms 	from 	engaging 	in 	lawful 	price
competition and from setting price differences, 	which often operate
to destroy cartel pricing. 	However, 	such laWful price competition
may 	be 	discouraged 	by 	a 	number 	of 	provisions 	in 	the 	bill. 	Firms
n 	In Texaco. 	Inc. 	v. 	HAsbrouck, 	the 	Supreme 	Court 	said 	that
"a 	functional 	discount that constitutes a reasonable reimbursement
for the purchasers' 	actual marketinq functions will not violate the
Act." 	110 S. 	Ct. 	at 	2550.
33 	For 	example, 	a 	vertically 	integrated 	refiner 	may 	be 	able
to achieve greater efficiency in coordinating 	its different 	levels
of 	distribution 	than 	is 	possible 	in 	market 	transactions. 	In 	a
competitive 	industry, 	such 	as 	retail 	gasoline 	sales, 	it 	may 	be
expected that these cost savings would be at least partially passed
on to the consumer. 	However, 	Bill 2628 may inhibit such firms from
using 	these 	savings 	to 	lower 	prices 	to 	consumers. 	The 	exemption
for 	certain 	price 	differences 	based 	on 	cost 	differences 	does 	not
recognize the 	likely cost savings due to coordination efficienci ••
of 	vertical 	integration. 	Indeed, 	Bill 	2628 	recognize. 	only 	one
source 	of cost differences, 	Shipping methods.
~~, ~., 	Department of Justice Herger Guidelines, 	Section
4.21 	(1984).
3S 	~, 	~., 	Y.M. 	Scherer 	, 	D. 	Ross, 	Industrial 	Market
structUre and Economic 	Performance, 	p. 	515 	(3d 	ed. 	1990).

Hon. 	Bill Morris
Paqe 	11
may 	simply 	decide 	to 	set 	un~form prices 	across 	broad 	geographic
regions 	to 	avoid violations.
IV. 	conolusion.
For the reasons stated above, 	we believe that 	Bill 	2628 would
tend to insulate qasoline refiners and marketers from competition,
and thereby could cause gasoline 	prices 	in Kansas to increase. 	We
~ To the extent that 	individual 	firms would have an 	incentive
to 	set a 	a1ngl. 	price 	in a 	geographic 	area 	to avoid violating 	the
law, 	the bill 	would 	resemble 	"uniform price 	laws," whose possible
effects 	were discussed 	in 	the 	1984 	DOE Report, 	at 	122:
In a market where there are no restrictions on pric1nq, 	price
reductions 	tend 	to 	spread 	throughout 	the 	geographic 	area
providing 	lower 	prices 	tor 	consumers. 	It 	the 	geoqraphic
area 	within which 	the 	price 	cutting 	occurs 	1s limited, 	it 	ia
very 	likely 	that the 	refiners will 	respond 	in 	kind. 	Thus,
a 	price 	cut 	1n one area 	often will 	lead 	to price 	cuts 	across
broad market areas. 	In this situation, 	competition haa worked
effectively 	and 	consumers 	in 	all 	areas 	affected 	are 	better
off.
In aarkets 	where 	there are 	uniform 	price 	restriction., 	it 	is
more 	likely 	that 	the 	responses 	will 	be 	different. 	Again, 	a
refiner may decide to lower prices 	in a 	geographic area where
sales traditionally have been weak. 	Refiner.' 	responses must
now 	take 	into 	account 	the 	uniform 	price 	law. 	[R]etinera
muat 	lower prices throughout the area covered by the law. 	In
this situation, 	the refiners are more 	than likely to maintain
their 	prices, 	since 	they 	may 	decide 	it 	is 	less 	costly 	to
forego 	some 	sales 	in 	the 	initial 	market 	where 	price 	cutting
is 	occurring 	than 	lower 	prices 	throughout 	the 	rogion.
Competition has been adversely affected and most consumQrs are
no 	better 	off, 	since 	price 	reductions 	have 	not 	occurred 	in
areas 	where 	they would have 	without 	the uniform price 	law."

Hon. 	Bill Morris
Paqe 	12
appreciate the opportunity to comment on this matter. 	Please 	feel
free 	to contact us 	if we 	can be 	ot 	further 	assistance.
Sincerely,
J'''''''-_ '_I--_~~di>
laude 	c. 	Wild 	III
Director
Denver Regional 	Office