FTC Staff Comment to Governor Joe Frank Harris Concerning Georgia S.B. 177 to Divorce Gasoline Refiners and Retail Outlets

~~ UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
March 	18, 	1987
The 	Honorable Joe 	Frank Harris
Governor 	of 	Georgia
203 	state 	Capitol 	Building
Atlanta, 	Ga. 	30334
Dear 	Governor Harris:
The 	staff 	of 	the 	Federal 	Trade 	Commission 	is 	pleased to
submit 	this 	letter 	in 	response 	to 	a 	request 	from 	Georgia House
Minority 	Leader Johnny 	Isakson 	for 	comments 	on Senate 	Bill 	177,
the 	gasoline 	divorcement 	bill 	recently passed by 	the 	Georgia 	state
Legislature 	and 	forwarded 	to 	you 	for 	your 	approval.* 	The 	Commis-
sion's 	staff** 	believes 	that 	s. 	177 	is 	anticompetitive 	and harmful
to 	consumers 	and that, 	if 	it becomes 	law, 	Georgia motorists 	will
pay 	higher prices 	for 	gasoline.
Description of 	s. 	177
s. 	177 	would 	amend 	the 	part 	of 	the 	Official 	Code 	of Georgia
relating 	to 	the 	regulation 	of 	gasoline marketing practices, 	by
adding 	at 	the 	end 	a 	new 	section, 	section 	10-1-242. 	In essence,
the 	bill 	would make 	it unlawful 	for 	a 	gasoline 	refiner to 	open 	a
new 	retail 	gas 	station 	after July 	1, 	1988, 	or 	to 	continue 	to
operate 	any 	retail 	stations 	after July 	1, 	1989. 	[Section 	10-1-
242(a)). 	Violation 	of 	this 	new 	law would 	be 	a 	misdemeanor.
[242(b)). 	s. 	177 	further 	provides 	that 	any 	dealer 	injured by 	a
violation 	of 	the 	statute may 	sue 	for 	damages 	or 	for 	an 	injunction.
[242(c)).
The 	need 	for 	s. 	177 	is 	not 	supported by the 	record
Aithough 	no 	statement 	exists 	in 	the 	preamble 	of 	s. 	177
concerning 	the 	purpose 	of 	the 	bill, 	representatives 	of 	the
gasoline 	dealer group 	supporting the 	bill 	testified 	in 	the 	hearing
that 	the 	bill 	was 	necessary 	to 	prevent 	"monopolistic" 	and 	"predat-
ory" 	activities 	by major 	oil 	companies. 	According 	to 	their
testimony, 	gasoline 	stations 	owned 	and 	operated 	by 	"big 	oil
companies" 	are making 	it 	increasingly difficult 	for 	independent
* 	These 	comments 	represent 	the views 	of 	the 	Bureaus 	of
Competition, 	Consumer 	Protection, 	and 	Economics 	of 	the
Federal 	Trade 	Commission, 	and do 	not 	necessarily 	represent
the 	views 	of 	the 	Commission or 	any 	individual 	commissioner.
The 	Commission, 	however, 	has 	authorized 	their 	submission.
** 	The 	Commission's 	staff has 	extensive 	expertise 	in 	energy
competition 	issues 	based 	on 	studies, 	investigations, 	and

enforcement 	actions.
The Honorable Joe 	Frank Harris 	-2-
gas 	stations 	to 	survive. 	However, 	during the 	hearing 	a 	factual
record was 	developed 	that 	contradicts 	the underlying premises 	of
S. 	177. 	According 	to 	those 	opposing 	the 	bill, 	including 	several
House members, 	and 	small 	refiner-marketers 	and 	convenience 	stores
with 	gasoline pumps, 	no major 	refiner 	such as 	Exxon, 	Shell,
Chevron, 	Standard 	or Texaco has 	any 	significant 	number 	of 	company
operated 	retail 	gasoline 	stations. 	Rather, 	two 	smaller 	refiners,
Marathon 	and 	Crown, 	are 	the 	principal 	operators 	of 	refiner-
operated 	retail 	gasoline 	outlets 	in 	Georgia. 	only about 	four
hundred 	stations 	out 	of 	a 	total 	of nine 	thousand 	stations 	in
Georgia 	are 	refiner-owned. 	In 	fact 	the 	largest 	number 	of 	such
stations 	is 	the 	seventy belonging to Marathon. 	Simple 	arithmetic
reveals 	therefore 	that 	only 	about 	four 	percent 	of 	all 	gasoline
stations 	in 	Georgia 	are 	refiner-operated, 	and 	only 	eight-tenths 	of
one 	percent 	are 	operated by Marathon. 	Moreover, 	there 	is 	no
evidence 	that 	this 	number has 	significantly 	increased 	in 	recent
years. 	It 	appears 	from 	the 	legislative 	record, 	rather, 	that
virtually 	all 	of 	the 	growth 	in new gasoline 	outlets 	in Georgia 	has
been 	in 	the 	area 	of 	new 	jobber 	stations 	and 	convenience 	stores,
such 	as 	Zippy Mart 	and 	Fast 	Fare.
No 	evidence 	supports 	claims 	of predatory or monopolistic
activities 	by 	refiners 	against 	independent dealers 	in
Georgia 	or 	in 	any 	other State 	in the united States
Proponents 	of S. 	177, 	like 	the 	supporters 	of 	similar
legislation 	in 	other 	states,. 	maintain 	that 	its 	passage 	is
• 	FTC 	staff 	comments have 	opposed passage 	of 	divorcement 	and
below 	cost 	selling 	bills 	in 	North 	Carolina, 	South 	Carolina,
Georgia 	(February 	18th, 	before House 	Industry 	Committee, 	on
S. 	177), 	Washington, 	Hawaii, 	Alabama, 	Tennessee, 	and 	in 	the
United 	States 	Senate and House 	of Representatives.

The Honorable Joe 	Frank Harris 	-3-
necessary 	to 	protect 	gasoline 	franchisees 	of major, 	integrated
refiners 	from 	unfair 	and 	anticompetitive 	practices 	directed
against 	them by 	their 	suppliers. 	They 	argue 	that 	it 	is 	inherently
unfair 	for 	refiners 	to 	operate 	retail 	gas 	stations 	in 	competition
with 	non-integrated 	independent dealers 	and 	franchised 	dealerships
of major 	branded 	suppliers. 	According 	to 	this 	view, 	the 	refiners
"subsidize" 	their 	own 	retail 	operations 	by providing gasoline 	to
their 	own 	outlets 	at 	internal 	transfer price$ 	that 	are 	both below
cost 	and 	below the wholesale 	prices 	charged 	to 	lessee dealers.
We 	are 	not 	aware 	of 	any evidence that 	such 	subsidization has
occurred 	in 	Georgia 	or 	in 	any 	other 	state. 	In 	fact, 	an examina-
tion 	of 	the 	state 	of 	competition 	in gasoline marketing 	in 	the
United 	states, 	both 	before 	and 	after 	the 	decontrol 	of 	petroleum
refining 	and marketing 	in 	1981, 	indicates 	that 	gasoline 	dealers
have 	not 	been and 	are 	not 	likely to 	become 	targets 	of 	anticompeti-
tive 	practices 	by their 	suppliers. 	Following 	enactment 	of Title
III 	of 	the 	Petroleum Marketing 	Practices 	Act 	in 	1978, 	15 U.S.C.
Sec. 	2841, 	the 	Department 	of Energy 	("DOE") 	was 	required 	to 	study
whether 	the 	alleged 	"subsidization" 	of 	retail 	gasoline 	operations
of 	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 Metropol-
itan 	statistical 	Areas, 	as 	well 	as 	on 	internal 	oil 	company
documents 	subpoenaed by the 	DOE 	investigating 	staff. 	The 	study
concluded 	that 	there was 	no evidence 	of 	such 	subsidization. 	In
1984, 	DOE 	published 	an updated 	study 	that 	further 	substantiated
and 	elaborated 	on 	its 	1981 	findings.**
* 	DOE, 	Final 	Report: 	The 	State 	of 	Competition 	in Gasoline
Marketing, 	January 	1981.
** 	DOE, 	Deregulated Gasoline Marketing: 	Consequences 	for
Competition, 	Competitors, 	and 	Consumers, 	March 	1984
report 	[hereinafter 	cited 	as 	1984 	DOE 	Report].

The Honorable Joe 	Frank Harris 	-4-
In 	its 	1984 	report, 	DOE 	concluded that 	the 	increased pres-
sures 	on gasoline 	retailers 	since 	1981 were 	not 	caused by 	anticom-
petitive 	behavior by oil 	companies. 	Rather, 	the 	decline 	in 	the
overall 	number 	of 	retail 	outlets 	and the 	intensification 	of
competition 	among 	gasoline marketers 	were 	attributable 	to 	decreas-
ed 	consumer demand 	for 	gasoline 	and 	a 	continuing trend 	toward 	the
use 	of more 	efficient, 	high-volume 	retail 	out1ets.* 	statistics
published by 	DOE 	and 	industry publications, 	such as 	the 	Lundberg
Letter, 	indicate 	that 	since 	federal 	controls were 	removed, 	the
public has 	been the 	beneficiary 	of vigorous 	price 	competition.
The 	DOE 	studies 	have 	revealed no 	instances 	of predatory
behavior 	on 	the 	part 	of major gasoline 	refiners. 	Instead, 	the
studies 	indicate 	that 	the 	fortunes 	of 	refiners 	and 	their 	franchis-
ed 	dealer 	outlets 	are 	inextricably merged, 	and 	that 	the 	two 	groups
"form a 	mutually 	supporting 	system backed by company 	advertising
and promotion."** 	Lessee-dealers 	have 	continued to 	be by 	far 	the
predominant 	form 	of 	retail 	outlet 	for 	the 	direct 	gasoline 	sales 	of
major, 	integrated 	refiners.*** 	Only 	3.3 	percent 	of 	the 	gasoline
stations 	in 	the United 	states 	are 	operated by major, 	integrated
refiners.**** 	As 	discussed 	above, 	Georgia 	has 	an 	even 	smaller
proportion 	of 	such major 	refiner-operated 	stations. 	Given 	the
importance 	of 	the branded, 	franchised 	marketing 	distribution
system to 	major 	refiners, 	traditional 	antitrust 	and 	economic
theory 	indicates 	that 	it would be 	irrational 	for 	an 	individual
major 	refiner 	to 	charge 	its 	lessee dealers 	prices 	that 	would 	cause
them 	either 	to 	secure 	new sources 	of 	supply 	or 	to go 	out 	of
business. 	The 	likely 	results 	of 	such 	a 	course 	of 	action 	in 	any
gasoline market would be 	that 	the 	refiner would 	face 	a 	decrease 	in
market 	share, 	an 	increase
* 	IQ. 	at 	125-32.
** 	Id. 	at 	ii.
\
\
***
****
In 	1981, 	the 	eight 	largest 	refiners, 	who, 	in 	the
aggregate, 	accounted 	for 	about 	half 	of 	all 	gas-
oline 	sales, 	sold approximately 	eight 	times more
gasoline 	through 	lessee 	dealers 	than 	through
company-operated 	outlets. 	Id. 	at 	146 	(Table A-10).
Lundberg 	Letter, 	Vol. 	XI, 	No. 	36, 	July 	6, 	1984, 	at 	3.

The Honorable Joe 	Frank Harris 	-5-
in 	excess 	refining 	capacity, 	and 	higher per 	unit 	costs. 	Thus,
individual 	gasoline 	franchisers 	are 	not 	likely 	to 	engage 	in
predation 	against 	the 	mainstay 	of 	their own 	retail 	distribution
system, 	their 	franchised 	dealers.
Even 	if monopolistic and predatory behavior were 	found
it 	is 	already 	subject to prosecution under 	existing
state and 	federal 	antitrust 	laWSi 	new 	laws 	are 	not needed
Predatory 	or monopolistic 	behavior 	in 	the 	petroleum 	industry
is 	subject 	to 	the 	Sherman Act, 	the 	Clayton Act, 	and the 	Federal
Trade 	Commission Act. 	These 	statutes 	provide 	a 	more 	rational
scheme 	for 	dealing with 	anticompetitive 	practices 	in 	the 	industry
than 	legislation 	requiring divorcement. 	The 	existing 	antitrust
laws 	deter 	firms 	from 	engaging 	in predatory 	and monopolistic
behavior, 	but, 	at 	the 	same 	time, 	allow them 	to 	lower 	their 	costs
of 	operation through vertical 	integration. 	In 	contrast, 	the
prohibition 	against 	refining/marketing 	integration 	found 	in S. 	177
would deny 	firms 	the 	possibility 	of 	increasing market 	efficiencies
through 	opening 	retail 	outlets. 	Such 	legislation 	is 	likely to 	add
costs 	to 	the 	distribution 	of 	gasoline 	in Georgia 	that do 	not 	exist
in 	other 	states, 	costs 	that would 	be 	borne by 	Georgia 	consumers
and visitors.
S. 	177 would 	lead to higher gasoline prices
The 	potential 	harm of 	divorcement 	bills 	is 	illustrated by 	the
experience 	of 	the 	State 	of Maryland, 	which has 	enacted divorcement
legislation 	similar to 	that 	now being proposed by S. 	177. 	One
economic 	study, 	described 	by DOE 	as 	perhaps 	"the best 	empirical
analysis 	of 	the 	effects 	of Maryland's 	divorcement 	law,"* 	estimates
that 	Maryland 	consumers 	may 	be 	paying millions 	of 	dollars 	more 	per
year 	than 	they would 	have 	been
* 	1984 	DOE 	Report, 	supra, 	at 	105, 	describing 	a 	study by
Barron 	and Umbeck.

The 	Honorable Joe 	Frank Harris 	-6-
paying had 	the 	divorcement 	law not 	been 	enacted.* 	The 	adverse
effects 	of divorcement 	resulted 	in the 	recent 	repeal 	of 	one 	of 	the
few 	existing 	state 	divorcement 	laws, 	in 	Florida, 	as 	noted 	in 	the
public 	record 	in 	the 	hearing 	on S. 	177.**
Conclusion: 	special 	interest 	legislation 	is
not 	necessary 	in Georgia gasoline distribution
As 	you 	recognized 	in vetoing 	a 	predecessor bill 	to 	S. 	177,
retail 	gasoline 	divorcement by 	refiners 	is 	anticompetitive 	and
harmful 	to 	consumers. 	No 	difference 	in 	the 	language 	of 	the
present 	bill 	would 	justify a 	different 	result 	here. 	The Supreme
Court 	of 	Georgia 	has 	stricken 	all 	special 	interest 	legislation 	for
the 	petroleum 	industry. 	Just 	last month 	it 	struck down 	the
Georgia 	State 	legislature's 	latest 	attempt 	to 	impose 	a 	so-called
"below-cost" 	gasoline 	pricing 	bill.***
* 	See 	Barron 	& Umbeck, 	A Dubious 	Bill 	of 	Divorcement,
Regulation, 	Jan.-Feb. 	1983, 	at 	29. 	See 	also 	Testimony
of 	Pester 	Corp. 	and 	Crown 	Central 	Petroleum Corp.,
Hearings 	on S. 	326 	before the 	Senate 	Committee 	on 	the
JUdiciary, 	97th 	Cong., 	1st Sess. 	(Oct. 	21, 	1981)
divorcement 	bill.
** 	Divorcement 	legislation was 	passed 	in 	five 	states 	and 	the
District 	of 	Columbia 	in 1974. 	1984 	DOE 	Report 	at 	98.
*** 	See 	companion 	cases 	of 	strickland v. 	Ports 	Petroleum
Company, 	Inc. 	and 	Georgia 	Association 	of 	Petroleum Retail-
ers, 	Inc. 	v. 	Texaco, 	Inc., 	et 	al., 	Nos. 	43435 	and 	43558.
(February 	16, 	1987) [Slip Ope 	attached]. 	The 	Supreme 	Court
cited 	its 	previous 	opinion 	in 	Batton-Jackson oil 	Company,
Inc. 	v. 	Reeves, 	255 	Ga. 	480, 	340 	S.E.2d 	16 	(1986), 	which
held 	such 	laws 	to be 	unconstitutional. 	The 	Court
stated 	that 	it had 	stricken 	such 	laws 	"unreluctantly"
because 	they 	"attempted to 	regulate 	and 	fix 	prices 	in
industries 	that 	are 	not 	affected with 	the 	public 	interest."

The 	Honorable Joe 	Frank Harris 	-7-
For the 	reasons 	stated above, 	the 	staff 	of 	the 	Federal 	Trade
Commission believes 	that 	S. 	177's 	passage 	into 	law would 	likely
have 	harmful 	consequences 	for 	both 	competition 	and 	consumers. 	We
believe 	that 	S. 	177 	would 	serve 	only 	to 	insulate 	one 	segment 	of
business 	entrepreneurs 	from 	competition, 	at 	the 	expense 	of 	causing
higher 	gasoline 	prices 	for 	Georgia 	consumers.
For 	these 	reasons, 	the 	Federal 	Trade 	Commission's 	staff
respectfully 	urges 	that 	you veto 	S. 	177.
Sincerely,
~b::cDirector
Bureau 	of 	Competition