FTC Staff Comment to the Hon. Randolph J. Townsend Concerning Nevada A.B. 420 to Divorce Gasoline Refiners of Their Retail Gasoline Outlets

IiUIYIMI~~IUIl iUJ I ilUiHLl:J
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
BUREAU OF COMPETIT1ON
April 	22, 	1987
The Honorable Randolph J. 	Townsend
Chairman
Senate 	Committee 	on 	Commerce 	and 	Labor
Nevada 	State 	Legislature
P.O. 	Box 	20923
Reno, 	Nevada 	89515
Dear Mr. 	Chairman:
The 	staff 	of 	the 	Federal 	Trade 	Commission* 	is 	pleased 	to
submit 	this 	letter 	in 	response 	to 	your 	request 	for 	comments 	on 	the
potential 	competitive 	effects 	of Assembly 	Bill 	420, 	a 	bill 	to
establish 	divorcement 	by 	gasoline 	refiners 	of 	their 	retail
gasoline 	outlets.** 	We 	believe 	that 	A.B. 	420 	is 	anticompetitive
and 	harmful 	to 	consumers 	and 	that, 	if 	it becomes 	law, 	Nevada
consumers 	and 	visitors 	will 	pay higher 	prices 	for 	gasoline.
Description 	of A.B. 	420
A.B. 	420 	would 	amend 	the 	part 	of 	the 	Nevada Revised 	Statutes
("NRS") 	relating 	to 	gasoline 	marketing 	practices, 	by 	adding 	new
provisions 	2 	through 	13. 	The 	bill 	would make 	it 	unlawful 	for 	a
gasoline 	refiner 	to 	open 	a 	new 	retail 	gas 	station 	or to 	sell
gasoline 	at 	retail 	after July 	1, 	1987 	[Sec. 	10.1.], 	or 	to 	continue
to 	operate 	any 	retail 	stations 	after July 	1, 	1988 	[Sec. 	10.2.].
A.B. 	420 	would 	also 	restrict 	the 	terms 	of 	franchise 	agreements
between 	refiners 	and 	dealers. 	For 	example, 	the 	bill 	would 	require
that 	dealers 	be 	given 	notice 	before 	they 	are 	terminated, 	would
guarantee 	them a 	grace 	period within which 	to 	bring themselves
into 	compliance with 	the 	agreement, 	and would 	prohibit 	refiners
!
* 	These 	comments 	represent 	the 	views 	of 	the 	Bureaus 	of
Competition, 	Consumer 	Protection, 	and 	Economics 	of the
Federal 	Tr~de Commission, 	and 	do 	not 	necessarily 	represent
the views 	of 	the 	Commission 	or 	any 	individual 	Commissioner.
The 	Commission, 	however, 	has 	authorized 	the 	staff to 	submit
these 	comments 	to 	you.
** 	The 	Commission's 	staff has 	extensive 	expertise 	in 	energy
competition 	issues 	based 	on 	studies, 	investigations, 	and
enforcement 	actions. 	FTC 	staff 	comments 	and 	testimony have
opposed 	passage 	of 	divorcement 	and 	"below-cost selling"
laws 	in 	North 	Carolina, 	south 	Carolina, 	Georgia, 	Alabama,
Tennessee, 	Washington, 	Hawaii, 	and 	in 	the 	United States
Senate 	and 	House 	of Representatives.

The Honorable Randolph J. 	Townsend 	-2-
from 	unreasonably 	restricting dealer 	activities 	that 	are not
related 	to 	the 	actual 	sale 	of gasoline 	or 	oil.
A.B. 	420's 	provisions 	would 	be 	enforceable 	in 	civil 	actions
for 	damages 	and 	injunctive 	relief 	by 	retailers, 	wholesalers, 	or
refiners 	[Sec. 	20].
No 	evidence 	supports 	claims 	of predatory or monopolistic
activities 	by 	refiners 	against 	independent dealers 	in
Nevada 	or 	in any 	other State 	in 	the 	United 	States
Legislation to 	regulate 	gasoline 	distribution 	is 	often
proposed 	in 	both 	Congress 	and 	in 	state 	legislatures. 	Proponents
of 	such 	legislation maintain 	that 	its 	passage 	is 	necessary 	to
protect 	gasoline 	retailers 	from 	unfair 	and 	anticompetitive
practices 	directed 	against 	them 	by their 	suppliers, 	who 	are major,
integrated 	refiners. 	They 	argue 	that 	it 	is 	inherently unfair 	for
refiners 	to 	operate 	retail 	gas 	stations 	in 	competition with
franchised, 	branded 	retailers 	who 	purchase 	gasoline 	from 	such
refiners. 	According 	to 	this 	view, 	the 	refiners 	"subsidize" 	their
own 	retail 	operations 	by 	providing gasoline 	to 	their own 	outlets
at 	internal 	transfer prices 	that 	are 	both below 	cost 	and below the
wholesale 	prices 	charged 	to 	franchised 	retailers.
We 	are 	not 	aware 	of 	any 	evidence 	that 	such 	subsidization has
occurred 	in Nevada 	or 	in 	any 	other 	state. 	In 	fact, 	an 	examination
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, 	indicated 	that 	gasoline 	dealers 	have 	not
peen 	and 	are 	not 	likely 	to 	become 	targets 	of 	anticompetitive
practices 	by 	their 	suppliers. 	Following 	enactment 	of Title 	III 	of
!the 	Petroleum Marketing 	Practices Act 	("PMPA") 	in 1978", 	15 	U.S.C.
Sec. 	2841, 	the 	Department 	of 	Energy 	("DOE") 	studied whether 	the
alleged 	"subsidization" 	of 	retail 	gasoline 	operations 	by 	the major
refiners 	actually 	existed, 	and, 	if 	it 	did, 	whether 	the 	practice
was 	predatory 	oi anticompetitive. 	The 	final 	report 	to 	Congress,
published 	in January 	of 	1981, 	was 	based 	on 	an 	extensive 	stUdy 	of
1978 	pricing 	data 	in 	several 	Standard Metropolitan 	statistical
Areas, 	as 	well 	as 	on 	internal 	oil 	company· &.ocuments.·.subpoenaed by
the 	DOE 	investigating 	staff. 	The 	study 	concluded that there was
no 	evidence 	of 	such 	subsidization.*
* 	DOE, 	Final 	Report: 	The 	State 	of 	Competition 	in 	Gasoline
Marketing, 	1981.

The 	Honorable Randolph J. 	Townsend 	-3-
In 	1984, 	DOE 	published 	an updated 	study that 	further
substantiated 	and 	elaborated on 	its 	1981 	findings.* 	The 	study
also 	showed 	that 	company-operated 	stations were 	not 	increasing 	as
a 	percentage 	of 	all 	retail 	outlets, 	except 	among 	the 	smaller
refiners. 	Nevada 	was 	actually 	among 	the 	states 	in which the
lowest 	growth 	in 	refiner-owned 	and 	operated 	stations was 	found.**
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 	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 	trend 	toward 	the 	use 	of more 	efficient, 	high-volume
retail 	outlets.*** 	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: 	rather, 	they 	show
that 	the 	fortunes 	of 	refiners 	and 	their 	franchised 	retailers 	are
inextricably 'merged, 	and 	that 	they 	"form a 	mutually 	supporting
system backed 	by 	company 	advertising 	and promotion. "****
Franchised 	retailers 	have 	continued 	to be by 	far 	the 	predominant
form 	of 	outlet 	for 	the 	direct 	gasoline 	sales 	of major, 	integrated
refiners.***** 	Indeed, 	major 	refiners 	operate 	only 	3.3 	percent 	of
the 	gasoline 	stations 	in 	the 	united 	states.****** 	Nevada
also 	has 	a 	small 	proportion 	of 	such 	refiner-operated 	stations.
r
1*
**
***
****
DOE, 	Dere~lated 	Gasoline Marketing: 	Consequences 	for
Competition. 	Competitors, 	and 	Consumers 	(March 	1984)
[hereinafter 	cited 	as 	1984 	DOE Report].
rd. 	at 	18.
M. 	at 	125-32.
,Ig. 	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. 	1£. 	at 	146 	(Table A-10).
****** 	Lundberg 	Letter, 	Vol. 	XI, 	No. 	38, 	July 	6, 	1984, 	at 	3.

The 	Honorable 	Randolph J. 	Townsend 	-4-
,
I
Given 	the 	importance 	of 	the 	branded, 	franchised marketing
distribution 	system to major 	refiners, 	such 	refiners 	are unlikely
to 	charge 	their 	franchised 	retailers 	prices 	that would cause them
either to 	seek new 	sources 	of 	supply 	or go 	out 	of 	business. 	A
refiner 	that 	undertook 	such 	a 	course 	of 	action 	would probably 	face
a 	decrease 	in market 	share, 	an 	increase 	in 	excess 	refining
capacity, 	and 	higher per 	unit 	costs. 	Thus, 	the major 	integrated
refiners 	are 	not 	likely to 	engage 	in predation 	against the
mainstay 	of 	their 	own 	retail 	distribution 	system, 	their 	fran-
chised 	retailers.
Even 	if monopolistic 	and predatory behavior were 	found
it 	is 	already 	subject to prosecution 	under existing
state and 	federal 	antitrust 	laws; 	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 	better way 	for
dealing with 	anticompetitive 	practices 	in 	the 	industry than
legislation 	requiring 	divorcement. 	The 	existing 	antitrust 	laws
deter 	refiners 	and 	other 	firms 	from 	engaging 	in predatory 	and
monopolistic 	behavior 	but, 	at 	the 	same time, 	allow them to 	seek
lower 	operating 	costs 	through vertical 	integration. 	In 	contrast,
the 	prohibition 	against 	refining/marketing 	integration 	found 	in
A.B. 	420 	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 	Nevada,
costs 	that 	would 	be 	borne 	by Nevada 	consumers 	and visitors.
Divorcement 	laws 	have 	resulted 	in
higher gasoline 	prices 	for 	consumers
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 A.B. 	420. 	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 	for 	gasoline 	primarily because 	of 	that 	law.** .. Georgia's
Governor 	recently vetoed 	a 	divorcement bill 	that 	is markedly
* 	1984 	DOE Report, 	supra, 	at 105, 	describing 	a 	study by
Barron 	and Umbeck.
** 	See 	Barron 	& Umbeck, 	A Dubious 	Bill 	of 	Divorcement,
Regulation, 	Jan.-Feb. 	1983, 	at 	29.

The 	Honorable 	Randolph J. 	Townsend
similar to A.B. 	420.*
-5-
A.B. 	420 would 	lead 	to higher gasoline prices
but would not protect gasoline 	dealers
We 	also 	believe 	that 	the 	provisions 	of A.B. 	420 	that 	regulate
the 	contractual 	relationships 	between 	refiners 	and 	their
franchised 	retailers 	are 	unnecessary, 	anticompetitive, 	and harmful
to 	consumers. 	Such 	restraints 	would 	not 	actually benefit
independent 	and 	franchised 	retailers; 	more 	likely they 	would
diminish 	the 	value 	of 	the 	franchised 	retailer 	distribution 	system
to 	refiner-suppliers. 	Major 	refiners 	would 	have 	incentives 	to
abandon 	relatively 	efficient 	franchised 	retailer 	operations 	in
favor 	of 	commodity 	sales 	of 	gasoline 	at 	the 	refinery 	gate 	or 	at
wholesale 	terminals. 	Because 	individual 	dealers 	may not have 	the
capability to 	transport 	gasoline, 	some 	individual 	retailers 	might
be 	unable 	to 	stay 	in 	business. 	Such 	retailers 	would 	not 	be 	helped
by A.B. 	420; 	they would 	be 	harmed. 	Franchised 	retailers 	who
provide 	a 	variety 	of 	services 	to 	consumers may decrease 	in 	number
because 	of 	government-imposed 	restrictions 	on 	the 	contracting
process, 	and 	consumers 	desiring 	this 	variety 	of 	service would 	have
fewer 	choices.
To 	the 	extent 	that A.B. 	420 	is 	intended 	to 	redress 	perceived
gasoline 	retailer 	grievances 	against 	their 	refiner-suppliers, 	we
suggest 	that 	you 	consider 	the 	extent 	to which 	these 	concerns 	have
been 	addressed 	in 	the 	Petroleum Marketing 	Practices Act 	of 	1978
(tlpMPA tl ), 	supra. 	The 	legislative 	history 	of 	the 	PMPA 	shows 	that
Congress 	was 	concerned 	over alleged 	abuses 	of 	the 	franchise
relationship, 	and 	the PMPA 	represents 	a 	balancing 	of 	the 	rights 	of
the 	respective 	parties 	to 	retail 	gasoline 	franchise 	agreements.***
! ------------------
* 	See veto 	message 	of 	Governor Harris 	(copy 	attached).
** 	1984 	DOE 	Report, 	supra, 	at 	97-98. 	Divorcement 	legislation
has 	been 	introduced 	in 	forty 	states 	as 	well 	as 	in 	the
United 	States 	Senate 	and 	House 	of Representatives 	since
1973. 	Five 	States 	and 	the "District 'Of 	Columbia 	have
passed 	divorcement 	bills. 	Georgia's 	law was 	invalidated.
*** 	See 	Senate 	Report 	No. 	95-731, 	95th 	Cong., 	2d Sess., 	15-19,
29-43.

The Honorable 	Randolph J. 	Townsend 	-6-
/
Conclusion: 	speciai 	interest 	legislation 	is
not 	necessary 	in Nevada 	gasoline 	distribution
For the 	reasons 	stated 	above, 	the 	staff 	of 	the 	Federal 	Trade
Commission 	believes 	that 	A.B. 	420's 	passage 	into 	law would 	likely
have 	harmful 	consequences 	for 	both 	competition 	and 	consumers. 	We
believe 	that A.B. 	420 	would 	serve 	only 	to 	insulate 	one 	segment 	of
business 	entrepreneurs 	from 	competition, 	at 	the 	cost 	of higher
gasoline 	prices 	for 	Nevada 	consumers 	and visitors.
For these 	reasons, 	the 	Federal 	Trade 	Commission's 	staff
respectfully 	urges 	that 	the 	Nevada 	state 	Legislature 	not 	approve
A.B. 	420.
Sincerely,
Jeffrey 	I. 	Zuckerman
Director
Bureau 	of 	Competition
,