FTC Staff Comment to the Hon. Jennings G. McAbee Concerning South Carolina H.R. 3899 to Rollback Wholesale Gasoline Prices to April, 1989 Levels

l1NtTED STATES OF jRJCA
FEDERAL TRADE COMMISSION .
WASHINGTON, D.C. 20S80
May 	12, 	1989
V890072
COMMISSION AUTHORIZED
2
The Honorable 	Jennings 	G. 	McAbee
Chairman.
Other Taxes 	and Revenues 	Subcommittee
Ways 	and Means 	Committee
South Carolina House 	of 	Representatives
P.O. 	Box 	11867
Columbia, 	South 	Carolina 	29211
Dear Chairman McAbee:
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 	Resolution 3899, 	which
would 	require 	that 	wholesale 	gasoline 	prices 	be 	rolled 	back 	to
their 	levels 	as 	of April 	1, 	1989. 	Your 	letter 	notes 	that 	H.R.
3899 	has 	been 	referred 	to 	your 	Subcommittee 	and 	will 	be 	the
subject 	of 	a 	public 	hearing on May 	15, 	1989. 	We 	believe 	that, 	if
enacted, 	H.R. 	3899 	may 	have 	unintended 	adverse 	consequences 	for
South 	Carolina 	consumers.
Interest 	and 	experience 	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. 	§ 	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 	impa~t of 	regulations 	and 	business
practices 	in 	the 	oil 	industry.
1 	These 	Comments 	are 	the 	views 	of 	the 	staff 	of 	the 	Bureau
of 	Competition 	of 	the 	Federal 	Trade 	Commission. 	They 	are 	not
necessarily 	the 	views 	of 	the 	Commission 	or 	any 	individual
Commissioner. 	Questions 	about 	these 	comments 	may 	be 	addressed 	to
Ronald 	B. 	Rowe, 	Assistant 	Director, 	Bureau 	of 	Competition, 	room
3301, 	601 	Pennsylvania 	Avenue, 	N.W., 	Washington, 	D.C. 	20580. 	Mr.
Rowe's 	telephone 	number 	is 	(202) 	326-2610.
The 	Commission's 	staff 	has 	gained 	extensive 	experience
with 	energy 	competition 	issues 	by 	conducting 	studies,
investigations, 	and 	law 	enforcement 	actions. 	FTC 	staff 	comments
(continued ... )

The 	Honorable 	Jennings 	G. 	McAbee
Description of 	H.R. 	3899
2
Section 	1 	of 	H.R. 	3899 	would 	roll 	back 	the 	"wholesale 	prices
of 	gasoline 	in 	this 	State 	• 	. 	. 	to 	the 	base 	price 	of 	this 	_,
gasoline 	as 	of 	April 	1, 	1989, 	as 	it 	entered 	this 	State 	from 	the
refineries 	or 	suppliers 	located outside 	this 	State." 	Section 	2
would 	permit 	prices 	above 	the 	rollback 	prices 	"in order to 	comply
with 	contractual 	provisions 	that 	require 	the 	same 	pricing 	for
multistate 	outlets 	or 	in order 	to 	comply with 	any 	u~her
contractual 	provisions 	in 	existence 	on April 	1, 	1989." 	However,
such 	"excess 	wholesale 	prices 	. 	• 	. 	are 	declared 	to 	be 	a 	surtax
. 	. 	. 	for 	purposes 	of 	funding 	the 	South 	Carolina 	SHIMS 	highway
program." 	Section 	3 	provides 	that 	Sections 	1 	and 	2 	will 	expire
"six months 	after 	the 	effective 	date 	of 	this 	act 	.. 	"
The price 	control 	regulatohY 	features 	of 	H.R. 	3899
may 	lead 	to 	shortages 	and 	higher 	gasoline 	prices
Enactment 	of 	H.R. 	3899 	may 	have 	unintended 	adverse
consequences 	for 	South 	Carolina consumers. 	The 	proposed 	law
would 	mandate 	the 	lowering of wholesale 	gasoline 	prices.
However, 	nearly 	all 	of 	the 	gasoline 	sold 	by 	wholesalers 	in South
Carolina 	originates 	with 	refiners 	located 	elsewhere 	who
distribute 	such 	product 	in 	a 	large 	number 	of 	States. 	If 	mandated
wholesale 	price 	levels 	have 	an 	adverse 	impact 	on 	the
profitability 	of 	overall 	gasoline 	distribution 	for 	out 	of 	state
refiners 	or other wholesale 	distributors, 	South Carolina may
suffer 	a 	net 	loss 	of 	wholesale 	gasoline 	availability 	as 	products
are 	diverted 	to 	markets 	with 	no 	governmental 	constraints 	upon
individual 	commercial 	pricing 	decisions. 	It 	is 	possible,
moreover, 	that 	dislocations 	caused by enactment 	of 	H.R. 	3899 	may
arise 	and 	continue 	beyond 	the 	six-month 	duration 	of 	the 	proposed
legislation.
The 	concern 	over 	shortages 	is 	not 	merely 	a 	hypothetical
possibility. 	The 	price 	ceilings 	imposed 	in 	the 	federal 	price 	and
allocation 	rjgulations 	under 	the 	Emergency 	Petroleum Allocation
Act 	("EPAA") 	resulted 	in 	shortages. 	The 	regulatory 	response 	to	,
2( ... continued)
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
Act, 	15 	U.S.C. 	55 	18, 	18a.
3 	Pub. 	L. 	No. 	93-159, 	87 	Stat. 	619.
\-, --
•

The 	Honorable 	Jennings 	G. 	McAbee
these 	shortages 	was 	an 	enormously complex 	price 	and 	allocation
system that 	a~tempted to 	alleviate 	this 	problem but 	was
~nsuccessful. 	.
3
6
The 	dangers 	associated 	with 	holding wholesale 	energy prices
below market 	clearing 	levels 	are 	also 	aptly 	illustrated by 	the
Federal 	government's 	experience with 	regulating wholesale 	natural
gas 	prices. 	Beginning in 	1954, 	the 	Federal 	government 	began 	to
set 	the 	"wellhead" 	price 	of 	natural 	gas 	sold 	to 	interstate
natural 	gas 	pipelines. 	During the 	1970s, 	shortages 	of 	gas 	began
to 	appear 	in 	the 	interstate 	gas 	markets. 	One 	of 	the 	reasons 	for
this 	shortfall 	in 	interstate 	gas 	deliveries 	was 	that 	gas 	was
flowing 	to 	intrastate 	gas 	pipelines, 	which 	were 	not 	constrained
in 	the 	price 	they 	could pay 	for 	gas. 	Intrastate 	pipelines 	in 	the
gas 	producing 	states 	could outbid 	their 	interstate 	rivals 	for 	gas
because 	intrastate 	prices 	were 	not 	regulated. 	To 	alleviate 	these
shortages, 	Congress 	passed 	(in 	1978) 	the 	Natural 	Gas 	Policy Act
and 	the 	Power 	Plant 	and 	Industrial 	Fuels 	Use 	Act, 	which were
intended 	to 	remove 	the 	price 	differences 	between 	intra- 	and
interstate 	gas. 	As 	these 	price 	differences 	disappeared, 	so 	did
the 	accompanying 	shortages. 	The 	wholesale 	gasoline 	prices
mandated by 	H.R. 	3899 	could 	result 	in 	a 	similar diversion 	of
gasoline 	away 	from 	South 	Carolina 	consumers.
The 	Commission's 	Bureaus 	of 	Economics 	and 	Competition 	have
surveyed 	the 	adverse 	effects'of 	price 	controls 	in 	energy 	_
industries. 5 	These 	analyses 	suggest 	that 	you may wish 	to 	conduct
a 	legislative 	inquiry on 	both 	the 	geed 	for 	such 	legislation 	and
its 	likely 	effects 	on competition.
4 	~ 	C. 	Roush, 	Effects 	of 	Federal 	Price 	and 	AllocatiQn
Regulations 	on 	the 	Petroleum 	IndustkY, 	10-14 	(FTC 	Staff 	Report
1976); 	S. 	Harvey 	& C. 	Roush, 	Petroleum 	Product 	Price 	Regulations;
Output. 	Efficiency 	and 	Competitive 	Effects, 	169-180 	(FTC 	Staff
Report 	1981).
5 	I 	am enclosing copies 	of 	the 	following 	reports 	or
comments 	prepared 	by 	the 	Commission'S 	staff 	for 	your
subcommittee's 	consideration: 	Roush, 	supra 	note 	4; 	Harvey 	&
Roush, 	supra 	note 	4; 	Bureau 	of 	Economics, 	Comments 	ConcerninQ
Effects 	of 	Federal 	Price 	and 	Allocation 	Regulations 	on 	the
Petroleum 	IndustkY 	(1976); 	Bureau 	of 	Competition, 	Comment 	on 	the
Scope 	Qf 	the 	No.2 	Distillate 	ProceedinQs, 	(1979) 	(FTC 	staff
comment 	to 	ECQnQmic 	Regulatory Administration).
To 	the 	extent 	H.R. 	3899 	is 	premised 	on 	the 	belief 	that
gasQline 	prices 	are 	artificially 	high 	because 	Qf 	anticQrnpetitive
behaviQr 	by 	wholesalers 	Qf 	gasoline, 	the 	federal 	antitrust 	laws
are 	sufficient 	tQ 	address 	such 	behavior. 	While 	we 	are 	unaware 	Qf
(cQntinued ... )

The 	Honorable 	Jennings 	G. 	McAbee,
Conclusion
For 	the 	reasons 	stated above, 	we 	believe 	that 	H.R~ 	3899, 	if
enacted, 	could 	injure 	commerce, 	competition, 	and 	consumers 	in
South 	Carolina. 	If 	gasoline 	shortages 	were 	to 	result 	from 	its
passage, 	a 	return 	to 	gasoline 	lines 	could occur, 	and 	gasoline
prices 	could 	rise 	to 	an 	inflated 	level 	in 	South 	Carolina.
Because 	there may 	be 	costs 	associated with restoring 	supplies
diverted 	from 	South Carolina by H.R. 	3899, 	any rise 	in 	gasoline
prices 	might 	endure 	beyond 	the 	six month 	expiration 	date 	of 	the
proposed 	legislation.
We 	appreciate 	the 	opportunity to 	comment 	on H.R. 	3899.
Please 	feel 	free 	to 	calIon us 	if 	we 	can be 	of 	further
assistance.
. \
4 	-......
6( ... continued)
any 	evidence 	supporting 	that 	position, 	we would 	be 	interested 	in
hearing 	from 	anyone 	with 	such 	evidence.
". I,\
•• • _ ...... ~ - 0., _ •. __ .;-- ....