FTC Staff Comment Before the Colorado Senate Concerning S.B. 92-203 to Amend the Colorado Unfair Practices Act

V920013
CGMMISSION AUTHORIZED
PREPARED 	STATEMENT
OF
CLAUDE 	C. 	WILD, 	III
DIRECTOR
DENVER REGIONAL 	OFFICE
FEDERAL TRADE 	COMMISSION
BEFORE 	THE
STATE, 	VETERANS, 	AND MILITARY AFFAIRS 	COMMITTEE
OF 	THE
COLORADO 	STATE 	SENATE
APRIL 	22, 	1992

Mr. 	Chairman 	and Members 	of 	the 	Committee: 	I 	am 	pleased 	to
appear 	before you 	today 	to 	discuss 	the 	potential 	effects 	on
competition 	of 	certain 	provisions 	of 	Senate 	Bill 	No. 	92-203.
This 	testimony 	represents 	the 	views 	of 	the 	staff 	of 	the 	Denver
Regional 	Office 	and 	the 	Bureau 	of 	Competition 	of 	the 	Federal
Trade 	Commission. 	They 	are 	not 	necessarily 	the 	views 	of 	the
Commission 	or 	any 	individual 	Commissioner. 1
This 	bill 	would 	amend 	the 	Colorado 	Unfair 	Practices 	Act 	by
adding 	a 	number 	of 	provisions 	addressed 	specifically 	to 	practices
in 	the 	petroleum 	industry.2 	We 	believe 	this 	legislation 	is
likely 	to 	be 	anticompetitive, 	and 	that 	its 	likely 	result 	may 	be
that 	Colorado 	consumers 	and visitors 	could pay 	higher 	prices 	for
gasoline.
If 	you 	have 	additional 	questions, 	please 	feel 	free 	to
contact 	the 	Commission's 	Bureau 	of 	Competition. 	Here 	are 	the
address 	and 	telephone 	number 	of 	the 	Assistant 	Director 	in 	charge
of 	the 	Division with 	the 	greatest 	experience 	at 	the 	Commission 	in
analyzing 	competition 	in 	the 	petroleum 	industry:
Marc 	G. 	Schildkraut
Energy 	and 	Food 	Division
Bureau 	of 	Competition
Room 	3301
601 	Pennsylvania Avenue, 	N.W.
Washington, 	D.C. 	20580
(202) 	326-2622
2 Our 	testimony 	does 	not 	address 	SS6-9 	of 	the 	bill, 	which
deal 	with 	certain 	provisions 	of 	general 	application 	and 	with 	the
means 	for 	investigating and 	enforcing 	the 	Act.
1

I. 	Interest 	and e~rience of 	the 	staff 	of 	the 	Federal 	Trade
Commission.
The 	Federal 	Trade 	Commission 	is 	charged by 	statute 	with
preventing 	unfair 	methods 	of 	competition 	and 	unfair 	or 	deceptive
3
acts 	or 	practices 	in 	or 	affecting 	commerce. 	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.4
3 Federal 	Trade 	Commission Act, 	15 	U.S.C. 	S45 	et 	seg.
4 The 	staff 	of 	the 	Commission 	has 	gained extensive
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, 	"below-cost 	selling,"
and 	other 	petroleum marketing 	legislation 	for 	Alabama, 	Arkansas,
Georgia, 	Hawaii, 	Kansas, 	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 	gasoline 	refining 	and marketing
issues 	affecting 	consumers 	from 	premerger 	antitrust 	reviews
pursuant 	to 	Sections 	7 	and 	7A 	of 	the 	Clayton Act, 	15 	U.S.C.
SS18, 	18a. 	The 	Commission 	has 	twice 	taken 	enforcement 	actions
with 	respect 	to 	acquisitions 	that 	might 	have 	adversely 	affected
competition 	in 	Colorado markets. 	A proposed 	1986 	acquisition 	of
Asamera's 	Denver 	refinery 	by 	Conoco, 	Inc., 	a 	competing 	Denver
refinery, 	was 	abandoned 	after 	the 	Commission 	announced 	that 	it
would 	sue 	in 	federal 	court 	to 	block 	the 	transfer. 	In 	Texaco's
1984 	acquisition 	of 	Getty Oil, 	the 	Commission 	required
divestiture 	of 	petroleum 	transportation 	facilities 	because
overlapping ownership 	of 	them might 	have 	lessened 	competition 	for
gasoline 	and 	fuel 	oil 	in eastern 	Colorado.
2

II. 	Description of 	the 	proposed 	legislation.
Provisions 	of 	Colorado's 	Unfai~ Practices 	Act 	("Act")5
already make 	it 	unlawful 	for 	a 	vendor 	to 	sell 	or 	offer 	to 	sell 	a
product 	at 	a 	price 	below 	the 	vendor's 	cost 	"for 	the 	purpose 	of
injuring 	competitors 	and 	destroying 	competition. ,,6 	Senate 	Bill
No. 	92-203 	(the 	"Bill") 	would 	add 	to 	the 	Act 	several 	detailed
definitions 	and 	provisions 	tailored 	to 	apply 	specifically 	to 	the
distribution 	and 	sale 	of 	motor 	fuel. 7 The 	Bill's 	declared
purpose 	is 	"to 	protect 	independent 	and 	small 	dealers 	and
distributors 	of 	petroleum and 	related 	products 	who 	are 	vital 	to 	a
healthy, 	competitive marketplace 	but 	are 	unable 	to 	survive
subsidized, 	below-cost 	pricing 	at 	the 	retail 	level."B 	The 	Bill
declares 	"subsidized pricing" 	to 	be 	"inherently unfair,"
"destructive 	to" 	competition, 	and 	"a 	form 	of 	predatory
pricing. ,,9
5 	Colo. 	Rev. 	Stat. 	SS6-2-101 	et 	seg. 	(1973).
6 Colo. 	Rev. 	Stat. 	S6-2-105.
7 The 	Bill 	would 	amend 	the 	Unfair 	Practices 	Act 	in 	other
respects 	as 	well. 	For 	the 	most 	part, 	those 	other 	changes, 	not
specifically designed 	for 	the 	petroleum 	industry, 	are 	not
discussed 	here, 	and 	we 	take 	no 	position 	about 	them. 	We 	discuss
below 	the 	implications 	of 	the 	proposal 	to 	change 	"and" 	to 	"or" 	in
the 	phrase 	quoted 	in 	the 	text 	at 	n. 	6, 	which would 	change
fundamentally 	how 	the 	Act's 	application 	could 	affect 	consumers.
B S1, 	to 	amend 	Colo. 	Rev. 	Stat. 	S6-2-102.
3

The 	Bill's 	regulation 	of 	petroleum 	pricing 	is 	accomplished
by 	a 	special 	definition 	of 	"cost" 	to 	be 	applied 	to 	motor 	fuel, 	so
that 	selling 	at 	a 	price 	below 	that 	flcost" 	could 	be 	illegal. 1o
Generally, 	"cost" 	is 	defined 	as 	the 	lowest 	recent 	price 	charged
to 	the 	purchaser 	that 	was 	allegedly 	reselling 	illegally. 	If 	that
reseller 	bought 	its 	supplies 	in 	an 	arm's 	length 	sale, 	"cost"
would 	be 	its 	invoice 	cost, 	while 	if 	the 	reseller 	was 	an 	affiliate
of 	another 	entity, 	such 	as 	a 	refiner, 	"cost" 	would 	be 	the 	lowest
recent 	transfer 	price 	charged 	to 	it, 	plus 	the 	reseller's 	cost 	of
doing 	business, 	which 	the 	Bill 	presumes 	to 	be 	six 	percent. 11
"Transfer price," 	defined 	as 	a 	refiner's 	price 	to 	its 	affiliate
12
or 	other 	operating 	unit 	for 	resale 	at 	another 	level, 	is 	deemed
to 	be 	the 	refiner's 	loading 	rack 	price 	plus 	wholesale 	costs,
which 	the 	Bill 	presumes 	to 	be 	four 	percent. 13
Under 	the 	Bill, 	one 	or more 	below-cost 	sales 	would 	establish
a 	prima 	facie 	case, 	shifting 	the 	burden 	to 	the 	defendant 	to 	show
I') 	S 3, 	to 	amend S6- 2 -105 ( 3 ) (b) .
11 	"Cost" 	so 	determined would be 	adjusted 	if 	necessary 	to
reflect 	freight 	and 	taxes. 	Generally, 	the 	reference 	"cost" 	under
the 	Act 	is 	invoice 	cost 	plus 	the 	cost 	of 	doing 	business. 	S6-2-
105(3)(a). 	The 	new 	definition 	that 	would 	apply 	to 	motor 	fuels
would 	include 	the 	cost 	of 	doing 	business 	in 	the 	reference 	"cost"
for 	transfers, 	but 	not 	for 	arm's-length 	sales. 	S.B. 	92-203, 	S3,
proposed 	new 	S6-2-105(3)(b)(II)(C).
12 	S3, 	to 	amend 	S6-2-105 (16) .
13 Where 	the 	refiner 	makes 	no 	loading 	rack 	sales, 	the
transfer 	price 	is 	deemed 	to 	be 	the 	weighted 	average 	of 	other
refiners' 	posted 	terminal 	prices, 	plus 	wholesale 	costs, 	again
presumed 	to 	be 	four 	percent.
4

lack 	of 	intent 	to 	injure 	or 	destroy 	competition. 	The 	defendant
could 	establish 	lack 	of 	intent 	by 	demonstrating 	its 	need 	to 	meet,
in 	good 	faith, 	the 	equally 	low 	or 	lOwer 	legal 	price 	of 	a
competitor. 14 	All 	efforts 	to 	meet 	competition must 	be
documented within 	24 	hours 	in 	a 	detailed 	notification 	to 	the
Colorado 	Attorney General. 	In 	determining 	whether 	a 	price 	is 	set
to 	meet 	competition, 	only competitors' 	motor 	fuel 	prices 	would 	be
considered 	(including 	credit 	terms), 	not 	the 	value 	of 	other
merchandise 	offered 	in conjunction with motor 	fuel. 	It 	is 	not
clear whether 	the 	defendant 	would 	be 	permitted 	to 	show 	that 	its
actual 	costs 	were 	lower 	than 	the 	six 	percent 	and 	four 	percent
rates 	that 	the 	law would 	presume.
III. 	Analysis 	of 	s. 	B. 	92-203
A. 	No 	reliable evidence 	sUnPOrts 	claims 	of 	predaton or
monopolistic 	activities 	by refiners 	of motor 	fuel.
The 	Bill's 	premise 	is 	that 	competition 	in 	the 	petroleum
industry 	is 	being 	reduced because 	independent 	motor 	fuel
marketers 	cannot 	survive 	predatory 	"subsidized" 	pricing 	by major
refiners 	and 	marketers. 	This 	view 	is 	shared 	by 	proponents 	of
14 S4, 	to 	amend 	S6-2-107. 	Here, 	the 	competition being met
would 	be 	presumed 	to 	be 	within 	a 	one-mile 'radius 	of 	the 	alleged
below-cost 	sale.
5

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 with 	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. 	I 	will
briefly 	summarize 	the 	results 	of 	these 	studies.
The 	Department 	of 	Energy 	("DOE") 	has 	studied whether
vertically 	integrated 	refiners 	were 	"subsidizing" 	their 	retail
6

gasoline 	operations 	in 	a 	way 	that 	might 	be 	predatory 	or
t · 	t·t· 	15	an 	~compe ~ 	~ve. 	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
investigations. 	The 	study 	concluded 	that 	there 	was 	no 	evidence
of 	such 	"subsidization." 16
In 	1984, 	DOE 	published 	an 	updated 	study 	that 	further
substantiated 	and 	elaborated on 	its 	1981 	findings. 17 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
15 This 	study was 	undertaken 	following 	enactment 	of 	Title
III 	of 	the 	Petroleum Marketing 	Practices 	Act 	in 	1978, 	15 	U.S.C.
§2841.
16 DOE, 	Final 	Report: 	The 	State 	of 	Competition 	in Gasoline
Marketing, 	p. 	xi 	(1981).
17 	DOE, 	Deregulated Gasoline Marketing: 	Consegyences 	for
Competition, 	Competitors, 	and 	Consumers 	(March, 	1984) 	("1984 	DOE
Report").
7

continuing 	trend 	toward 	the 	use 	of 	more 	efficient, 	high-volume
retail 	outlets. 18
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
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 	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 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 	because 	their 	gasoline
18 	1984 	DOE 	Report 	at 	125-32.
8

purchase 	costs 	were 	the 	same 	as 	or 	higher 	than 	the 	retail 	prices
of 	competing 	refiner-operated 	stations. 19
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 	marketplace 	for 	petroleum
products 	is 	very competitive 	in Arizona. ,,20
The 	DOE 	studies, 	based 	on 	data 	from 	the 	1970's 	and 	early
1980's, 	and 	the 	state 	studies 	done 	more 	recently 	have 	revealed 	no
instances 	of 	predatory behavior by major 	gasoline 	refiners. 21
Rather, 	they 	show 	that 	the 	fortunes 	of 	refiners 	and 	their
franchised 	retailers 	are 	closely 	linked 	and 	that 	these 	firms
"form 	a 	mutually 	supporting 	system backed by 	company 	advertising
19 	Final 	Report 	to 	the 	Washington 	State 	Legislature 	on 	the
Attorney General's 	Investigation 	of 	Retail 	Gasoline Marketing, 	p.
14 	(August 	12, 	1987).
20 	Final 	Report 	to 	the 	Arizona 	Joint 	Legislative 	Study
Committee 	on 	Petroleum 	Pricing 	and Marketing 	Practices 	and
Producer 	Retail 	Divorcement, 	p. 	35 	(December, 	1988).
21 	The 	1984 	DOE 	Report 	is 	based 	on 	data 	that 	is 	now 	a 	decade
old. 	But 	information 	gathered 	from 	industry 	publications, 	such
as 	the 	National 	Petroleum News 	Factbook 	(published 	annually), 	as
well 	as 	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.
9

.'
and 	promotion."u 	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. D
The 	national 	pattern 	is 	reflected 	in 	the 	distribution
systems 	of 	the 	leading 	branded 	refiners 	in 	Colorado. 	The 	1984
DOE 	study 	indicates 	that 	vertically 	integrated 	gasoline 	marketers
accounted 	for 	12.4 	percent 	of 	total 	sales 	in 	Colorado 	in 	1981;
this 	was 	slightly below 	the 	national 	average, 	13.1 	percent. 24
None 	of 	the 	twelve 	leading 	branded marketers 	in 	Colorado 	for
which 	data 	are 	available 	use 	company-owned 	and 	operated 	outlets
as 	the 	predominant 	form 	of 	retailing 	on 	a 	national 	basis.~
22 	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.
23 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 	found 	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
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).
24 	1984 	DOE 	Report 	at 	82.
~ 	National 	Petroleum News 	1991 	Factbook 	34-51. 	The 	firm
with 	the 	largest 	number 	of 	outlets 	in 	Colorado, 	Conoco, 	operates
(continued ... )
10

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,
which 	ranks 	24th 	nationwide 	in 	number 	of 	retail 	outlets 	(with
937) .26
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 	incentive 	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 ( ••• continued)
only 	eleven 	percent 	of 	its 	branded 	outlets 	itself 	(nationwide);
the 	second 	largest 	in 	Colorado, 	Texaco, 	operates 	eight 	percent;
the 	third 	largest, 	Sinclair, 	operates 	ten 	percent. 	Some 	of 	the
lower-ranking 	firms 	operate more 	of 	their 	own 	branded outlets
(nationwide) 	than 	the 	national 	average 	rate 	of 	13.1 	percent;
these 	include 	Diamond 	Shamrock 	(seventh 	largest 	in 	Colorado),
operating 	35 	percent, 	and 	Total 	Petroleum 	(eighth 	largest 	in
Colorado), 	operating 	23 	percent. 	The 	vast 	majority 	(84 	percent)
of 	retail 	outlets 	in Colorado 	are 	operated by 	firms 	that 	operate
fewer 	of 	their 	own 	outlets 	than 	the 	national 	average 	rate.
26 	National 	Petroleum News 	1991 	Factbook 	34-51. 	In
Colorado, 	the 	largest 	refiner 	that 	operates 	most 	of 	its 	own
branded 	outlets 	(nationwide, 	70 	percent) 	is 	Coastal 	Corp., 	which
ranks 	13th 	in 	Colorado 	(24 	outlets) 	and 	26th 	nationwide 	(807
outlets). 	.rg.
11

B. 	Even 	if 	predatokY behavior or price discrimination 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. 	In 	addition, 	price 	discrimination 	that 	injures
competition 	is 	subject 	to 	existing 	Colorado 	law 27 and 	to 	the
federal 	Robinson-Patman Act. 28 These 	statutes 	address 	possible
anticompetitive 	practices 	in 	the 	industry 	and 	deter 	firms 	from
engaging 	in 	predatory 	behavior 	or 	illegal 	price 	discrimination.
By 	contrast, 	even 	though 	there 	appears 	to 	be 	no 	competition
problem 	in 	the 	petroleum 	industry 	that 	is 	not 	subject 	to 	existing
laws, 	the 	Bill's 	prohibitions 	appear 	to 	be 	broader 	than 	those 	in
the 	Robinson-Patman Act. 	The 	Bill's 	apparent 	purpose, 	to 	protect
competitors 	without 	regard 	to 	effects 	on competition 	and
consumers, 	would extend beyond 	the 	reach 	of 	existing 	federal
29
law. 	The 	Bill 	would 	permit 	liability based 	solely on 	an
27 Unfair 	Practices 	Act, 	Colo. 	Rev. 	Stat. 	S6-2-103 	(1973).
28 15 	U.S.C. 	S13 	(Section 	2 	of 	the 	Clayton Act). 	~
Texaco, 	Inc. 	y. 	Hasbrouck, 	U.S. 	, 	110 	S. 	Ct. 	2535
(1990), 	in which 	franchised 	gasoline 	retailers 	successfully
challenged price 	discrimination 	by 	a 	vertically 	integrated
refiner.
29 	S3, 	to 	amend 	S6-2-105(1) 	to 	permit 	a 	finding 	of 	liability
for 	pricing below 	cost 	where 	the 	purpose 	is 	either 	to 	injure
competitors 	Qr to 	destroy 	competition. 	By 	contrast, 	illegality
under 	the 	Robinson-Patman 	Act 	requires 	that 	the 	effect 	of 	the
(continued ... )
12

intent 	to 	injure 	a 	competitor, 	but 	the 	Unfair 	Practices 	Act 	and
the 	Bill 	do 	not 	further 	define 	"injury." 	Thus 	a 	plaintiff 	might
claim 	"injury" 	based 	on 	an 	actual 	or 	threatened 	loss 	of 	sales 	to
a 	competitor 	that 	offered a 	lower 	price. 	Because 	"cutting 	price
in 	order 	to 	increase 	business 	often 	is 	the 	very 	essence 	of
competition," 	the 	Bill 	may 	"chill 	the 	very 	conduct 	the 	antitrust
30
laws 	are 	designed 	to 	protect."
C. 	The 	Bill may 	lead to 	higher 	gasoline prices because 	it
will 	discourage price competition and 	facilitate
uniform pricing.
The 	Bill may 	inhibit vigorous 	competition 	and 	add 	costs 	to
the 	distribution 	of 	gasoline 	in Colorado 	that 	do 	not 	exist 	in
other 	states, 	costs 	that 	would 	be 	borne 	by 	Colorado 	consumers 	and
visitors. 	The 	Bill 	may make 	firms 	less 	inclined 	to 	reduce 	their
prices 	in 	response 	to 	changing 	conditions 	of 	demand 	and 	supply
and 	may 	deter 	short 	term price 	discounts 	designed 	to 	attract 	new
29 ( ••• continued)
pricing 	action 	be 	either 	"substantially 	to 	lessen 	competition 	or
tend 	to 	create 	a 	monopoly 	h. or 	to 	injure, 	destroy, 	or prevent
competition with 	any 	person" 	who 	grants 	or 	receives 	the 	benefit
of 	price 	discrimination 	(or with 	customers 	of 	either 	of 	them).
15 	U.S.C. 	SI3(a). 	Under 	federal 	law, 	the 	effect 	of 	the 	conduct
on 	competition, 	as 	distinguished 	from 	effects 	on 	a 	single
competitor, 	is 	the 	more 	relevant 	consideration. 	But 	under 	the
Bill, 	no 	showing 	of 	actual 	or 	threatened 	competitive 	effect 	would
be 	required.
30 Matsushita 	Elec. 	Indus. 	Co. 	y. 	Zenith, 	475 	U.s. 	574, 	594
(1986).
13

customers, 	because 	these 	actions 	risk 	inciting 	allegations 	of
below-cost 	pricing.
The 	Bill 	may 	prevent 	refiners 	from 	realizing 	all 	the
efficiencies 	of 	vertical 	integration that 	can 	often 	reduce
transaction 	and 	search 	costs 	and 	lower 	prices 	to 	consumers. 	As 	a
broad 	generalization, 	economic 	theory 	suggests 	that 	vertical
integration 	is 	likely 	to 	harm 	consumers 	only when market 	power
. 	. 	I 	f 	d 	. 	31
	eX1sts 	1n at 	east 	one 	stage 0 	pro 	uct10n. 	A vertically
integrated 	refiner may 	be 	able 	to 	achieve 	greater 	efficiency 	in
coordinating 	its 	different 	levels 	of 	distribution. 	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, 	the 	Bill 	may 	inhibit 	such
firms 	from 	using 	these 	savings 	to 	lower 	prices 	to 	consumers 	if
the 	savings 	are 	difficult 	to 	demonstrate 	as 	reductions 	in 	the
"cost 	of 	doing 	business," 	which 	the 	Bill 	and 	the 	existing 	Unfair
Practices 	Act 	characterize 	in 	terms 	of 	normal 	overhead 	items. 32
31 ~, 	~., 	U. 	S. 	Department 	of 	Justice, 	Merger
Guidelines, 	Section 	4.21-4.213 	(1984), 	incorporated 	by 	reference
in 	the 	joint Merger Guidelines 	issued by 	the 	Department 	of
Justice 	and 	the 	Federal 	Trade 	Commission 	earlier 	this 	month.
32 Unfair 	Practices 	Act, 	S6-2-105(2); 	as 	proposed 	to 	be
amended, 	6-2-105(4). 	The 	Bill's 	section 	addressed 	to 	motor 	fuel
also 	uses 	the 	term 	"cost 	of 	doing 	business," 	refering 	to
"generally 	accepted 	accounting 	practices," 	in 	setting 	that 	cost
presumptively 	at 	six 	percent. 	Proposed 	S6-2-105(3)(b)(II)(c).
14

An 	unintended 	effect may 	be 	to 	encourage 	vertically-
integrated 	refiners 	who 	distribute 	gasoline 	in 	Colorado 	to 	change
otherwise 	lawful 	pricing 	practices.· 	For 	example, 	the 	Bill 	may
limit 	the 	availability 	of 	certain 	functional 	discounts. 33 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 	that, 	rather 	than 	injure
. 	. 	d 	1 	.. 	34
compet1t10n, 	may operate 	to 	estroy 	carte 	pr1c1ng. 	However,
such 	lawful 	price 	competition may 	be 	discouraged 	by 	the 	threat 	of
liability under 	the 	Bill's 	proposals. 	Firms 	may 	simply 	decide 	to
set 	uniform 	prices 	across 	broad 	geographic 	regions 	to 	avoid
. 	1 	t· 	35	V10 	a 	1ons.
33 In Texaco, 	Inc. 	v. 	Hasbrouck, 	a 	case 	ar1s1ng under 	the
federal 	Robinson-Patman Act, 	the 	Supreme 	Court 	said that 	"a
functional 	discount 	that 	constitutes 	a 	reasonable 	reimbursement
for 	the 	purchasers' 	actual 	marketing 	functions 	will 	not 	violate
the 	[Robinson-Patman] 	Act." 	110 	S. 	Ct. 	at 	2550.
34 ~, 	~., 	F.M. 	Scherer 	& D. 	Ross, 	Industrial 	Market
Structure 	and 	Economic 	Performance, 	p. 	515 	(3d ed. 	1990).
35 	To 	the 	extent 	that 	individual 	firms 	would 	have 	an
incentive 	to 	set 	a 	single 	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 	pricing,
price 	reductions 	tend 	to 	spread 	throughout 	the 	geographic
area 	providing 	lower 	prices 	for 	consumers. 	... 	If 	the
geographic 	area 	within which 	the 	price 	cutting 	occurs 	is
limited, 	it 	is 	very 	likely 	that 	the 	refiners 	will 	respond 	in
kind. 	... 	Thus, 	a 	price 	cut 	in 	one 	area· often 	will. lead 	to
price 	cuts 	across 	broad market 	areas. 	In 	this 	situation,
competition 	has 	worked 	effectively and 	consumers 	in 	all
areas 	affected 	are 	better 	off. ( continued ... )
15

IV. 	Conclusion.
For 	these 	reasons, 	we 	believe 	that 	the 	Bill's 	proposed
amendments 	dealing with motor 	fuel 	sales 	and 	distribution would
tend 	to 	discourage 	competition 	and 	thereby 	could 	cause 	gasoline
prices 	in Colorado 	to 	increase.
Thank you 	again 	for 	the 	opportunity 	to 	comment 	on 	S. 	B. 	92-
203. 	I 	hope 	you 	find 	these 	comments 	to 	be 	helpful.
35( ••• continued)
In markets 	where 	there 	are 	uniform 	price 	restrictions, 	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. 	Refiners'
responses 	must 	now 	take 	into 	account 	the 	uniform price 	law.
[R]efiners 	must 	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
region. 	u. 	Competition 	has 	been 	adversely 	affected 	and most
consumers 	are 	no 	better 	off, 	since 	price 	reductions 	have 	not
occurred 	in 	areas 	where 	they would 	have 	without 	the 	uniform
price 	law.
16