FTC Staff Comment Before the Virginia Joint Subcommittee Studying Divorcement Concerning Gasoline Distribution

PREPARED STATEMENT
OF
RONALD 	B. 	ROWE
DIRECTOR FOR 	LITIGATION
BUREAU OF 	COMPETITION
FEDERAL TRADE 	COMMISSION
BEFORE 	THE
V900046
COMMISSION AUTHORllED
JOINT SUBCOMMITTEE 	STUDYING DIVORCEMENT
OF 	THE
VIRGINIA 	SENATE AND HOUSE 	OF 	DELEGATES
OCTOBER 	23, 	1990
Mr. 	Chairman 	and Members 	of 	the 	Joint 	Subcommittee: 	I 	am
pleased 	to 	appear 	before 	you 	today 	to 	discuss 	the 	analysis 	by 	the
staff 	of 	the 	Federal 	Trade 	Commission 	of 	S. 	235 	and 	related
legislation 	affecting 	gasoline 	distribution 	markets 	in 	Virgili~~.
Although 	the 	earlier 	submission 	of 	the 	staff's 	analysis 	and my
appearance 	today 	were 	authorized 	by 	the 	Commission, 	my 	remarks
reflect 	my 	own views 	and 	do 	not 	necessarily 	reflect 	the 	views 	of
the 	Commission 	or 	of 	any 	individual 	commissioner.
I 	will 	give 	a 	brief 	summary 	of 	our earlier written 	comment
on 	S. 	235. 	I 	will 	also 	discuss 	briefly a 	recent 	study 	of 	a
Maryland 	state 	agency 	that 	confirms 	our comment's 	conclusion 	that
the 	existing Maryland 	divorcement 	law 	has 	harmed 	competition 	and
consumers. 	I 	will 	then 	be 	glad 	to 	answer 	any 	questions.
The 	staff 	of 	the 	Commission 	opposed S. 	235 	as
anticompetitive 	and 	harmful 	to 	consumers. 	The 	argument 	that
refiner-owned 	and 	operated 	retail 	service 	stations 	are 	part .. of 	a
collusive 	scheme 	to 	harm 	franchised 	dealers 	has 	no 	factual

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support 	in 	the 	record 	before 	this 	subcommittee. 	However, 	even 	if
it did, 	existing 	antitrust 	laws 	such 	as 	the 	Sherman Act, 	the 	FTC
Act, 	and 	Section 	59 	of 	the 	Virginia 	Code 	address 	possible
anticompetitive 	practices 	more 	effectively 	than would 	legislation
restricting 	new 	entry by 	potential 	competitors 	and 	regulating
contractual 	relationships 	between 	suppliers 	and 	purchasers 	of
gasoline.
The 	Bureau 	of 	Competition 	devotes 	substantial 	resources 	to
monitoring 	the 	petroleum 	industry 	for 	antitrust 	violations 	and
anticompetitive 	behavior. 	The 	staff 	in 	the 	Commission's 	Bureaus
of 	Competition 	and 	Economics 	have 	considerable 	experience 	over
the 	years 	in 	analyzing mergers} 	and 	c:.lims 	of 	anticompetitive
practices 	in 	the 	petroleum 	industry. 	They 	are 	presently
monitoring 	petroleum 	price 	increases 	since 	Iraq's 	invasion 	of
Kuwait 	under 	the 	Commission's 	antitrust 	enforcement 	authority.
The 	Antitrust 	Division 	of 	the 	Department 	of 	Justice 	also 	has
announced 	that 	it 	is 	investigating 	claims 	of 	gasoline 	price
fixing 	following 	Iraq's 	invasion 	of 	Kuwait, 	under 	its 	exclusive
authority 	to 	seek 	criminal 	sanctions, 	including 	fines 	and
The 	Commission 	has 	authorized 	antitrust 	challenges 	to
several 	horizontal 	oil 	refinery mergers 	since 	1981 	that 	might
have 	substantially 	lessened 	competition 	and 	harmed 	consumers.
These 	included Mobil-Marathon, 	Gulf-Cities 	Service, 	Chevron-Gulf,
Texaco-Getty, 	and Conoco-Asamera 	(Denver, 	Colorado 	refining
market). 	In most 	of 	these 	cases, 	and 	in 	two 	others, 	Pacific
Resources-Shell, 	and 	in 	Sun-Atlantic, 	the 	Commission 	also 	acted
to prevent 	concentration 	increases 	at 	the 	more 	local 	distribution
level 	for 	gasoline 	and 	other 	light 	petroleum 	products 	such 	as
heating 	oil, 	downstream 	from 	the 	refinery 	level.
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imprisonment 	for 	price 	fixing, 	under 	Section 	1 of 	the 	Sherman
Act.
I 	would 	add 	that 	present 	~overnment scrutiny 	of 	the
petroleum 	industry 	focuses 	on 	the 	possibility 	of 	a 	collusive
scheme 	or 	conspiracy, 	because 	the 	industry's 	structure 	is 	less
conducive 	to 	single 	firm 	monopoly 	power. 	Even 	Exxon, 	the 	largest
refiner 	selling 	gasoline 	in Virginia, 	does 	not 	have 	its 	brand 	of
gasoline 	in more 	than 	15% 	of 	Virginia's 	gasoline 	stations. 	The
other 	leading 	refiners 	selling 	gasoline 	in 	Virginia 	of 	course
have 	even 	smaller market 	positions.
In 	this 	context, 	existing vertical 	integration 	between
retail 	gasoline 	distribution 	and 	refining 	is 	unlikely 	to 	be
harmful 	to 	competition 	and 	consumers, 	because 	the 	relevant 	stages
of 	production 	(e.g., 	refining 	and 	distribution) 	are
unconcentrated. 	As 	a 	broad 	generalization, 	economic 	theory 	says
that 	vertical 	integration 	is 	likely 	to 	harm 	consumers 	only 	when
market 	power 	exists 	in 	at 	least 	one 	stage 	of 	production. 2
Moreover, 	I 	would 	conclude my 	st~ary 	of 	the 	earlier FTC
staff 	statement 	by 	noting 	that, 	as 	a 	group, 	the 	largest 	refiners
have 	the 	lowest 	incidence 	of 	company-owned 	and 	operated 	retail
stations, 	in 	Virginia 	and 	in 	other 	states.] 	In 	contrast, 	the
See 	Section 	4.21 	of 	the 	1984 	Department 	of 	Justice
Merger 	Guidelines.
See 	our 	letter comment 	of 	March 	3, 	1990, 	noting 	that
DOE.reports 	in 	1981 	and 	1984 	found 	that 	the 	eight 	largest
refiners, 	who 	in 	the 	aggregate 	accounted 	for 	about 	half 	of 	all
gasoline 	sales, 	sold most 	of 	their 	refined 	gasoline 	through
lessee 	dealers 	and 	sold only 	a 	very 	small 	amount 	through company-
(continued.~.)
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majority of 	smaller, 	independent 	refiners' 	outlets 	are 	company-
owned and 	operated. 4 Virginia's 	earlier 	divorcement 	law 	(passed
in 1979) 	exempted 	all 	refiners' 	existing 	retail 	stations 	from
divorcement 	requirements 	but 	prohibited 	new 	stations 	from 	being
constructed 	within 	one 	and 	a 	half 	miles 	from 	existing 	franchisee-
operated 	stations. 	Under 	the 	requirements 	of 	S. 	235, 	all
existing 	retail 	stations 	are 	again 	exempted 	from 	divorcement
requirements, 	but 	no 	refiner may 	construct 	any 	new 	stations,
regardless 	of 	their 	locations. 	Therefore, 	refiner-marketing
divorcement 	in Virginia, 	which 	would 	adversely 	affect 	all
refiners 	by 	limiting 	their 	ability 	to 	expand, .would 	be 	most
harmful 	to 	smaller, 	independent 	ones, 	because 	their 	inability 	to
3( ••• continued)
operated 	outlets. 	The 	Lundberg 	Letter 	confirmed 	similarly 	low
proportions. 	Vol. 	XI, 	No. 	36, 	July 	6, 	1984, 	at 	3. 	A recent
study 	contracted 	for 	by 	the 	American 	Petroleum 	Institute 	("API")
noted 	that 	the 	14 	largest 	integrated 	refiners, 	representing
approximately 	67% 	of 	the 	nation's 	refining 	capacity, 	had 	only
about 	10% 	of 	their 	gross 	gasoline 	sales 	and 	4.5% 	of 	their 	outlets
devoted 	to 	salary-operated 	retail 	stations. 	Temple, 	Barker 	&
Sloan, 	Gasoline 	Marketing 	in 	the 	1980s: 	Structure, 	Practices,
and 	Public 	Policy 	at 	2-3 	(1988).
According 	to 	the 	National 	Petroleum 	News 	("NPN") 	1989
Factbook, 	at 	34-51, 	the 	leading 	branded 	refiners 	in Virginia 	have
the 	following 	percentages 	of 	their 	overall 	branded 	outlets
nationally 	in 	company 	operations: 	Exxon 	(5.2%); 	Texaco 	(5.7%);
Chevron 	(5.5%); 	Amoco 	(2.4%); 	Unocal 	(1.3%); 	Shell 	(2.6%); 	BP
(14%); 	Mobil 	(6.5%).
4 	See 	the 	National 	Petroleum News 	("NPN") 	1989 	Factbook,
at 	34-51, 	disclosing 	that 	86% 	of 	Crown Central 	Petroleum 	Corp.'s
outlets 	appear 	to 	be 	company operated. 	In 	1985, 	Crown opposed
federal 	divorcement 	legislation 	(S. 	1140), 	noting 	that 	it 	would
~threaten the 	survival 	of 	our 	limited 	presence 	in 	..• 	Virginia,
the 	Carolinas, 	Georgia, 	Florida 	and Alabama ..•"[Motor 	Fuel
Sales 	Competition 	Improvement 	Act 	of 	1985: 	Hearings 	on 	S. 	1140
Before 	the 	Senate 	Committee 	on 	the 	Judiciary, 	99th 	Cong., 	1st
Sess. 	306 	(1985)("5. 	1140 	Hearing"); 	emphasis 	added].
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expand would 	prevent 	them 	from 	taking market 	share 	away 	from 	the
major refiners.
In 	addition 	to 	this 	brief 	recap 	of 	the 	FTC 	staff 	statement
last 	Spring, 	I 	would 	like 	to 	note 	one 	comment 	in particular 	among
the 	broadly based 	comments 	already 	in your 	record 	from 	other
representative 	persons 	and 	groups 	that 	have 	opposed 	either
divorcement, 	open 	supply, 	or 	the 	asserted 	premises 	for 	such
proposals.
Virginia's 	neighbor, 	Maryland, 	has 	had 	a 	divorcement 	law
since 	1973. 	The 	earlier FTC 	staff 	comment 	discussed 	the 	harmful
effect 	of 	this 	law. 	In 	Lnis 	regard, 	you 	are 	no 	doubt 	aware 	that
a 	recent 	report 	by 	the 	Maryland 	State 	Department 	of 	Fiscal
Services 	("DFS") 	for 	the 	General 	Assembly 	of 	Maryland, 	concludes
from 	its 	analysis 	of 	all 	existing 	studies, 	including 	those
discussed 	in 	the 	FTC 	comment, 	that 	the 	Maryland 	divorcement 	law
has 	resulted 	in 	higher 	gasoline 	prices 	for 	consumers. 	That
report 	has 	already 	been 	submitted 	to 	the 	Joint 	Subcommittee 	by
William 	s. 	Ratchford 	II, 	the 	DFS 	Director.
In 	conclusion, 	there 	appears 	to 	be 	no 	factual 	support 	for
divorcement 	legislation, 	but 	there 	are 	compelling 	reasons 	to
.
believe 	that 	such 	legislation would 	be 	harmful 	to 	competition 	and
to 	Virginia 	consumers 	and visitors.
I 	thank 	you 	for 	your 	attention, 	and 	would 	be 	pleased 	to
answer 	any 	questions.
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