FTC Staff Comment to the Hon. Elizabeth E. Randall Concerning New Jersey A.B. 08625 to Allow Self-Service Gasoline Stations

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FEDERAL TRADE COMMISSION
Washioitoo, DC 20580
BUREAU OF ECONOMICS
April 21, 1988
The Honorable Elizabeth E. Randall
Majority Whip
The Assembly
State of New Jersey
Trenton, New Jersey 	08625
Dear Ms. Randall:
COMMISSION AUTHDRiZED
The staff 	of 	the 	Federal Trade 	Commission 	is pleased 	to 	provide 	the
following comments l in response to your request of March 31, 1988, for our
views 	on 	four 	bills 2 	that 	would 	allow 	self-service 	gasoline 	marketing,
currently 	prohibited 	under 	New 	Jersey 	law. 	We 	believe 	that 	New 	Jersey
consumers stand to gain 	millions of dollars per year in 	lower prices if self-
service stations, the predominant method of gasoline retailing in all but one
other state, were legalized. 	The safety concerns that may have given rise to
the 	prohibition 	of self-service 	four 	decades 	ago 	appear 	to 	have 	long 	been
addressed 	through 	improvements 	in 	technology 	and 	government 	safety
standards. 	Further, fire safety insurance rates do not appear to reflect any
significantly increased risk from self-service outlets. 	Finally, there does not
1 	These 	comments 	represent 	the 	views 	of 	the 	Federal 	Trade
Commission's Bureaus of 	Economics, Competition, and 	Consumer 	Protection,
and 	not 	necessarily 	those 	of 	the 	Commission 	itself 	or 	any 	individual
Commissioner. 	The Commission has, however, with Commissioner Azcuenaga
dissenting, voted to authorize the staff to submit these comments to you.
1385.
2 	These bills are Sen:lte Bills 815 and 2321, and Assembly Bills 813 and

seem to be a good reason to limit the hours when self-service islands can be
open, as one of the proposed bills would do. 3
The Federal Trade Commission (Commission) is an independent agency
with 	the 	responsibility 	for 	enforcing 	the 	Federal 	Trade 	Commission 	Act,·
which 	prohibits, among other 	thir.gs, "unfair methods of competition." 	The
Commission seeks to promote competition in energy markets, as evidenced by
numerous 	law 	enforcement 	actions, 	and 	in 	statements 	filed 	with 	various
government 	and 	regulatory 	bodies. 	For 	example, Commission 	comments as
well 	as 	FTC 	staff 	comments 	and 	testimony 	have 	identified 	the 	costs 	of
divorcement 	and 	"below-cost 	selling" 	1:lws 	before 	legislatures 	10 	Nevada,
Georgia, 	Hawaii, 	South 	Carolina, 	North 	Carolina, 	Washington, 	and 	in 	the
United States Senate and House of Representatives. s
3 	Senate 	Biil 	815 	would 	not 	allow self-service 	between 	9:00 a.m. 	and
5:00 p.m. 	Senate Bill 2321 	would allow self-service at all 	hours, but would
require all retailers to offer a full-service option between 9:00 a.m. and 5:00
p.m. 	The other 	two bills (Assembly Bills 813 and 	1385) would 	not restrict
self-service hours in any way.
15 U.s.c. 41 tl~.
S 	See 	letter 	to 	Nevada 	Chairman 	Randolph 	Townsend, 	Assembly 	Bill
420, "A 	Bill 	to Establish 	Divorcement 	by Gasoline 	Refiners of their 	Retail
Gasoline 	Outlets," 	April 	22, 	1987; 	letter 	to 	Georgia 	Governor 	Harris 	on
"Retail 	Gasoline 	Divorcement 	Bill," 	March 	18, 	1987; 	letter 	to 	Peter 	Apo,
Hawaii House Bill 	1376, "A Bill For An Act Relating to 	the 	Retail Sale of
Gasoline," December 23, 1985; comments on South Carolina 	House Bill 2663,
"Motor Fuel Marketing Divorcement and Below-Cost Sales Bill, May 14, 1985;
comments on 	North 	Carolina 	"Motor 	Fuel 	Marketing 	Act," 	March 	27, 	1985;
comments on State of Washington, Senate Bill 3418 and House Bill 329, "An
Act Relating to Retail Practices in the Sale of Motor Vehicle Fuels," March
22, 	1985; Testimony before the Subcommittee on General 	Oversight and 	the
Economy of the United States House of Representatives on House Resolution
3824 	"Motor 	Fuel. Sales 	Competition 	Improvements 	Act 	of 	1985," 	April 	17,
1986; 	letter 	to 	Chairman 	Strom Thurmond, 	Committee 	on 	the 	Judiciary, S.
1140, "Motor Fuel Sales Competition Improvements Act of 1985," July 9, 1985.
2

The Honorable Elizabeth E. Randall
In the comments below, we review evidence on a possible safety-related
rationale 	for 	the existence of a self-service ban. 	We 	next discuss evidence
that 	the 	ban 	on 	self-service 	imposes 	significant 	costs 	on 	New 	Jersey
consumers, who annually pay millions of dollars more than necessary for the
purchase 	of 	gasoline. 	Finally, 	we 	discuss 	policy 	options 	and 	present 	our
conclusions.
Safety-Related Rationale
The 	current 	statutory 	prohibition 	on 	self-service 	gasoline 	stations 	in
New Jersey was adopted in 	1949, explicitly for fire safety reasons. 6 	At that
time 	only 	a 	few 	states 	permitted 	self-service gasoline 	sales 	and 	such 	sales
represented 	a 	very 	small 	fraction 	of 	all 	gasoline 	dispensed. 	Since 	then,
there 	have 	been significant 	technological 	and 	safety 	improvements 	in 	self-
service 	dispensing. 	The 	number 	of 	states 	allowing 	self-service 	increased
accordingly, 	and, 	at 	present, self-service 	retailing 	is 	permitted 	in 	48 states
and 	the 	District 	of 	Columbia. 	Consumer 	preference 	for 	self-service 	has
increased dramatically as well, especially during the 	1970's. 	It is estimated
that 	78 	percent 	of 	all 	gasoline 	sold 	nationally 	is 	now 	sold 	through 	self-
service. 7
A government ban on an activity for safety reasons is only appropriate
if the unregulated market fails to provide adequate safety protection, and if
a ban is one of the least-costly and most practical remedies for the problem.
6
7
N.J.S.A. 34:3a-1 et gg.
Na tional Petroleum News Factbook. 1987.
3

The Honorable Elizabeth E. Randall
There does not appear to be any safety-related "market failure"g that would
justify 	continuing 	the 	present 	ban 	on 	self-service 	in 	New 	Jersey. 	Any
potential 	under-provision of safety appears to have been 	remedied 	in other
states 	through 	technological 	improvements 9 	and 	through 	governmental
regulations that are less restrictive than a ban on self-service.
The risk of fire does not appear to justify a prohibition of self-service
rctailing. 	The 	National 	Fire 	Protection 	Association 	(NFPA), 	a 	private
standards setting organiza tion whose determinations are used as the basis of
most 	local codes, explicitly scts standards that allow self-service operations.
A 	1974 	NFPA 	report 	found 	self-service 	establishments 	to 	be 	safe 	when
certain basic procedures are followed. lO 	Additional evidence of the safety of
self-service 	stations 	is 	provided 	by 	the 	practices 	of 	liability 	insurers.
Phone 	surveysll show 	that 	self-service 	stations do 	purchase 	insurance 	and,
g 	A "market 	failure" 	would only exist 	if 	the 	free 	market, 	left 	to 	its
own devices, would disregard or give inadequate consideration to safety.
9 	These 	improvements 	include: 	1) 	dispensing 	pumps 	that 	cannot 	be
turned 	on 	by 	the 	customer 	unless 	the 	cashier 	authorizes; 	2) 	nozzles 	with
automatic safety fill shut-off and a shear-off spout that provides additional
spill 	protection; 	3) 	hose 	break-a way 	couplings, 	which 	protect 	against
accidental 	drive-off spills, and 4) an "emergency stop" safety feature 	which
provides for 	immediate gas shut-off in the event of an accidental spill that
the customer fails to handle.
10 	Discussions 	with 	NFPA 	officials 	verified 	that 	NFPA 	had, 	in 	the
early 	1970's, 	dropped 	its 	previous 	position 	against 	self-service 	gasoline
retailing 	in 	light 	of 	technological 	and 	safety-related 	improvements 	in
dispensing. 	These conclusions are discussed in the 1974 NFPA report, which
is currently unavailable.
11 	We 	received 	information 	about 	insurance 	rates 	for 	full-service 	vs.
self-service gasoline stations from 9 insurance companies in the Washington,
D.C. area. 	The companies contacted included Capitol Hill Insurance Agency,
Genson 	Donald 	K. 	Inc. 	Insurance 	Agency, Selective 	Insurance 	Company 	of
4

The Honorable Elizabeth E. Randall
further 	that 	insurance 	companies 	do 	not 	charge 	higher 	fire 	insurance
premiums 	to 	self-service 	retailers. 12 	Thus, 	it 	would 	appear 	that 	safety
concerns that underlay the initial ban on self-service in New Jersey are not
a signific3nt problem today.13
In sum, the experience in 48 states and the Distri,ct of Columbia offers
little reason to believe that consumers are subject to significantly increased
danger from self-service, provided proper rules and regulations are followed
America, 	St. 	Paul 	Fire 	and 	Marine 	Insurance 	Company, 	Safeco 	Insurance
Company of America, FSG Underwriters LTD, Cigna INA, Cartwright William
T. & Associates, and 	Crawley and Thomas Insurance Inc. 	Individuals were
contacted 	by 	phone 	on 	April 	8, 	11, 	and 	12, 	1988. 	Since 	firms 	in 	the
insurance industry base their rates on information provided by the Insurance
Service Office (ISO), Ann 	Lavy, an employee at the ISO, was contacted on
April 12, 1988, to corroborate our findings. 	The ISO provides information to
the industry on risk rates for different classes of customers.
12 	There 	is some 	indication 	from 	our survey 	that 	liabilitv 	insurance
rates do differ between full-service and self-service or combination stations.
Two 	insurance 	companies 	charge 	liability 	insurance 	rates 	that 	are
approximately 	30 	percent 	higher 	for 	self-service 	and 	combination 	stations
than 	for 	full-service 	(although 	several 	other 	companies 	had 	no 	such 	rate
differential). 	However, we were informed 	that 	these rate differentials are
not 	based 	primarily 	on 	fire-safety 	concerns, 	but 	rather 	on 	more 	general
risks. 	One 	such 	risk, 	for 	example, 	occurs 	because 	consumers 	might 	be
injured when they get out of their cars. 	To the extent that such 	insurance
rate 	differentials 	exist, 	they 	indicate 	that, 	although 	the 	market 	perceives
some additional risk (and, therefore, cost) associated with self-service, these
costs are low enough that self-service stations have been able to survive and
prosper, as evidenced by their rapid growth in other states.
13 	There 	are 	also 	potential 	health-related 	aspects 	of 	self-service
gasoline retailing. 	To the extent that breathing gasoline vapors represents a
health 	hazard, 	the 	existence 	of 	self-service 	presumably 	increases 	the
(occasion::d) 	exposure 	of 	consumers 	using 	self-service 	while 	decreasing 	the
number 	of 	gas 	station 	attendants 	subject 	to 	constant 	exposure. 	The 	net
health effect of such a redistribution of exposures is unclear.
5

·. The Honorable EtizatJeth E. Randall
\
by retailers. 	Therefore, a 	ban on 	this retailing option 	would 	appear to be
excessive.
Effect of Self-Service Ban
Because the New Jersey ban does not appear to be necessary to correct
any significant safety 	problem, 	the 	primary beneficiaries of 	the regulation
apparently are 	incumbent gasoline 	retailers 	who are able 	to keep a 	proven
efficient 	form 	of 	gasoline 	retailing 	out 	of 	the 	market. 	By 	contrast, 	New
Jersey consumers and visitors are clear losers. 	They are denied access to a
lower 	price 	service 	that 	is 	now 	preferred 	by 	most 	consumers 	across 	the
country.
It is 	possible to approximate 	the added 	expenditures incurred 	by New
Jersey consumers due 	to 	the self-service ban 	by examining the 	behavior of
consumers 	in 	nearby 	northeastern 	communities 	where 	self-service 	is 	an
option. 	The 	annual 	National 	Petroleum 	News 	Factbook(s) 	provides
information on the 	percentages of retail gasoline purchases made on a self-
service 	basis 	for 	the 	fOllowing 	five 	locations 	over 	the 	period 	1983-1986:
Baltimore, 	Boston, 	Long 	Island, 	Philadelphia, 	and 	Providence. 	Taking 	the
simple 	average 	percentage 	for 	these 	five 	areas 	as 	an 	indicator 	of 	likely
hypothetical 	New 	Jersey consumption 	patterns, 	we estimate 	that 	59 	percent
of the gasoline purchased 	in New Jersey would be bought on a self-service
basis if that were a permitted option. I.
H 	This 	may 	be 	a 	conservative 	estimate 	since 	it 	is 	well 	below 	the
national average of 78 percent.
6
...

The Honorable Elizabeth E. Randall
Using 	data 	from 	the 	same 	five 	areas, 	we 	can 	also 	estimate 	for 	New
Jersey 	the 	likely 	premium 	that 	would 	be 	paid 	for 	full-service 	over 	self·
service 	if self-service 	were 	not 	banned. 	A study 	of 	retail 	gasoline 	prices
using the Lundberg Letter data,IS adjusted for differences in gasoline taxes,
has produced a data series on the full-service premiums for the five areas. 16
The study indicates that the full-service premium for 	New Jersey would be
17.0 cents for a gallon of leaded gasoline and 16.8 cents for unleaded. 	This
implies 	that 	New 	Jersey 	consumers, 	as 	a 	result 	of 	the 	prohibition 	against
self-service, 	pay more 	than 	16 cents per gallon 	extra for 	59 percent of 	the
gasoline they purchase. 17
Finally, using this data, we can estimate the total additional consumer
costs 	attributable 	to 	the 	self-service 	ban. 	Taking 	59 	percent 	of 	the 	3.5
billion 	gallons 18 	of 	gasoline 	purchased 	in 	New 	Jersey 	in 	1986 	yields 	an
estimate of over 2 billion gallons of gasoline that would have been purchased
In 	New 	Jersey 	on 	a 	self-service 	basis 	but 	for 	the 	ban. 	The 	U. 	S.
Department 	of 	Energy 	estimates 	that 	69.1 	percent 	of 	the 	retail 	gasoline
15 	The 	Lundberg 	Letter 	is a 	privately 	published 	source of 	petroleum
pricing informa tion.
16 	Putnam, 	Hayes 	& 	Bartlett, Gasoline 	Prices 	in 	Marvland 	Following
Divorcement (1987).
17 	The 	estimated 	16 	cents/gallon 	price 	premium 	may 	overstate
somewhat 	the 	current 	price 	raising 	effect 	of 	the 	self-service 	ban 	in 	New
Jersey 	if 	New 	Jersey's 	full-service 	stations 	presently 	enjoy 	economies 	of
scale, 	due 	to 	specialization 	in 	full-service 	that 	are 	not 	possible 	in 	states
that allow self-service.
18 	See 1987 National Petroleum News Factbook, which lists New Jersey
as the ninth largest state in consumption of gasoline in 1986.
7

I ,
The Honorable Elizabeth E. Randall
consumed in the United States is unleaded. 1g 	Applying this number to the 2
billion 	gallons, and 	then 	multiplying by the estimated 	leaded 	and ilnleaded
full-service 	premiums yields an estimated increased 	payment by New Jersey
consumers 	of 	$108.5 	million 	for 	leaded 	gasoline 	and 	$239.7 	million 	for
unJeadcd. 	Taken together, we estimate that the self-se'rvice ban causes New
Jersey 	consumers 	to 	pay 	an 	additional 	$348 	million 	each 	year 	for 	the
purchase of gasoline.2o
Because 	full-service 	has 	some 	value 	even 	for 	potential 	self-service
consumers 	in 	New 	Jersey, 	this 	sum 	cannot 	be 	regarded 	as 	a 	pure 	loss 	to
these consumers. 	However, 	the 	fact 	that 	78 	percent of all 	gasoline is sold
in 	other 	states 	on 	a 	self-service 	basis 	suggests 	that 	most 	consumers 	value
the 	monetary 	savings 	of 	self-service 	more 	than 	the 	added 	convenience 	of
full-service. 	Thus, 	it 	is clear 	that 	the 	ban does 	have 	a substantial 	impact
on the gasoline retail market, and that it imposes a hea vy monetary burden
upon New Jersey consumers.
19 	See 1987 National Petroleum News Factbook.
20 	An alternative estimate 	may 	be calculated 	using 	very conservative
assumptions. 	Instead of using the five area averages, one may instead select
the 	lowest 	full-service 	premiums 	(those 	of 	Long 	Island) 	of 	8.35 	cents 	for
leaded 	gasoUne 	and 	8.62 cents for 	unleaded. 	One may also select 	Boston's
percentage of self -service customers, 	which, at 44 	percent, 	is 	the 	lowest of
the 	five 	areas. 	Under 	these 	assumptions 	New 	Jersey 	consumers 	can 	be
expected to pay an additional $131 	million each year because of the ban on
self-service. 	Thus, while 	the estimates are sensitive 	to 	the assumptions one
adopts, 	the 	ban 	against 	self-service 	has 	a 	substantial 	negative 	impact 	on
consumers even under extremely conservative assumptions.
8

· ,
The Honorable Elizabeth E. Randall
PQlicy Options and ConclusiQns
The 	current 	ban 	on 	self-service 	statiQns 	in 	New 	Jersey 	appears 	tQ
impose substantial costs on 	New Jersey CQnsumers that are not likely to be
offset 	by 	justifiable 	safety-related 	CQncerns. 	Thus, 	the 	net 	effect 	on
consumers of Assembly Bills 813 and 1385, which would completely repeal the
ban, should be positive.
AdditiQnally, limiting self-service hQurs to the period between 5:00 p.m.
and 9:00 a.m., as envisaged by Senate Bill 815, would reduce the advantages
offered by complete repeal. 	Such a plan would deny a self-service option to
all 	consumers 	during 	most 	of 	the 	daytime 	hours, 	imposing 	large 	consumer
cos ts.
A possibly 	less 	restrictive alternative tQ Senate 	Bill 	815 	is Senate 	Bill
2321, 	which 	would 	allQw self-service at all hQurs, but 	wQuld 	require every
dealer to offer a full-service Qption as well between 9:00 a.m. and 5:00 p.m.
However, this altern~tive, relative to a repeal of the self-service ban, might
raise 	the 	cost 	of 	a 	full-service 	station 	contemplating 	changeQver 	tQ 	self-
service, 	such 	that 	conversiQn 	WQuld 	not 	be 	econQmic. 	Further, 	this
alternative CQuid 	impQse an additiQnal (perhaps substantial) CQst on statiQns
whose 	economic 	advantage 	lies 	in 	being 	low 	cost-high 	volume 	self-service-
only outlets. 	The need 	to 	hire extra 	help and order additional supplies to
maintain 	a 	service 	option 	for 	a 	few 	hours 	a 	day 	could 	be 	extremely
burdensome 	and 	equId 	raise 	the 	CQst 	and 	price 	of 	gasoline (both 	fQr 	self-
service and full-service retailing options) at such statiQns. 	It might be more
economically 	efficient 	to 	permit 	stations 	to 	specialize 	according 	tQ 	their
9

The Honorable Elizabeth E. Randall
particular competitive strengths. 	This is particularly 	true since there is no
reason 	to believe that full-service stations will disappear as long as there is
a demand for them. n
Evidence 	indicates 	that 	safety 	problems 	associated 	with 	self-service
stations 	do 	not 	appear 	significant, 	and 	that 	self-service 	gasoline 	retailing
offers 	large 	potential 	savings 	to consumers. 	For 	these 	reasons, 	we 	believe
that consumers and visitors in New Jersey would benefit substantially if the
ban on self-service retailing were repealed.
Sincerely,
CLTr;J..{--
Da vid T. Scheffman
Director
Bureau of Economics
21 	On 	the 	other 	hand, 	there 	might 	be 	a 	benefit 	to 	having 	every
station 	preserve 	some 	service 	option 	to 	the 	extent 	that 	consumers 	cannot
easily "search" for stations with their preferred option. 	Elderly or disabled
persons, or tourists, may, for example, benefit from each station maintaining
a 	service 	option. 	However, 	it 	is 	not 	clear 	tha t 	this 	would 	require
maintenance of a full-service island reserved exclusively for that purpose.
10