FTC Staff Comment to the Hon. David Knowles Concerning California A.B. 2371 Concerning Refiners Sale and Resale of Gasoline

BUREAU OF COMPETITION
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20S80
May 	5, 	1992
V920012
COMMISSION AUTHORIZED
The Honorable 	David Knowles
Assemblyman, 	District 	7
California Legislature
State 	Capitol
Sacramento, 	California 	95814
Dear Assemblyman Knowles:
The 	staff 	of 	the 	Bureau 	of 	Competition 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
Assembly 	Bill 	No. 	2371 	(the 	"Bill"), 	pending before 	the
California 	Legislature. 	This 	Bill 	would 	threaten 	refiners 	that
operate 	retail 	gasoline 	stations 	with 	liability 	if 	they 	set
prices 	for 	their 	sales 	to 	branded wholesalers 	("jobbers") 	and
dealers 	higher 	than 	specified margins 	below 	the 	refiners' 	own
retail 	prices. 	We 	believe 	this 	legislation 	is 	likely 	to 	be
anticompetitive, 	and 	that 	its 	likely 	result 	may be 	that
California 	consumers 	and visitors 	could pay 	higher 	prices 	for
gasoline.
I. 	Interest 	and exPerience of 	the 	staff of 	the Federal 	Trade
Commission.
The 	Federal 	Trade 	Commission 	is 	charged by 	statute with
preventing 	unfair methods 	of 	competition an? 	unfair 	or 	deceptive
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
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.
2 Federal 	Trade 	Commission Act, 	15 	U.S.C. 	S45 	et 	seq.

The 	Honorable 	David Knowles
Page 	2 May 	5, 	1992
assessing the 	competitive 	impact 	of 	regulations 	and 	business
practices 	in 	the 	petroleum 	industry.
II. 	Description of 	the 	Bill
The 	Bill 	deals 	with 	refiners' 	prices 	for 	sales 	for 	resale,
that 	is, 	sales 	to wholesale 	jobbers 	and 	independent 	franchised
retail 	outlets. 	The 	Bill would authorize 	a 	purchaser 	for 	resale
to 	sue 	its 	refiner 	supplier 	if 	the 	price 	it 	paid was 	higher 	than
the 	refiner's 	"adjusted retail 	price," 	which 	is 	determined by
reference 	to 	the 	"consumer retail 	price" 	at 	tpe 	refiner's 	"direct
operated 	outlet 	in 	the 	same 	geographic 	area." 	In general, 	the
"adjusted 	retail 	price" 	would be 	calculated by 	subtracting 	from
the 	"consumer 	retail 	price" 	an 	amount 	representing 	the 	refiner's
retail 	operating expenses. 5 If 	the 	sale 	complained of were 	to 	a
branded wholesaler, 	an 	additional 	amount would be 	subtracted
representfng the 	refiner's 	average wholesale 	operating
expenses. 	If 	the 	sale were 	to 	an unbranded wholesaler, 	though,
this 	additional 	wholesale expense 	factor 	apparently would 	not 	be
considered.
Under 	the 	Bill, 	the 	plaintiff 	would 	not 	be 	required 	to 	show
injury 	to 	competition, 	and the 	defendant 	could not 	avoid
3 	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,
Colorado, 	Georgia, 	Hawaii, 	Kansas, 	Louisiana, 	Massachusetts,
Montana, 	Nevada, 	North Carolina, 	South Carolina, 	Tennessee, 	Utah,
Virginia, 	Washington, 	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.
4 Assembly 	Bill 	2371, 	proposed Ch. 	8.5 	of 	Title 	4 of 	the
California 	Business 	and Professions 	Code S21301. 	All 	citations
are 	to 	the 	proposed 	sections 	of 	this 	new Chapter 	8.5.
5 These 	amounts 	would be 	adjusted 	for 	costs 	of 	consumer
credit 	and 	for 	differences 	in 	freight, 	taxes, 	and 	fees.
S21304(a), 	(e).
6 	S21304(a).

May 	5, 	1992	The Honorable 	David Knowles
Page 	3
liability by 	showing 	that 	there 	was 	no 	injury 	to 	competition. 7
Liability 	could be 	established 	prima 	facie 	by 	showing 	that 	the
refiner made 	sales 	at 	prices 	that 	departed 	from 	specified
percentage margins. 	For 	a 	sale 	to 	a 	branded 	retail 	dealer, 	the
specified price 	is 	no 	higher 	than 	94 	percent 	of 	the 	refiner's
consumer 	retail 	price, 	rnd 	for 	sale 	to 	a 	branded wholesaler, 	no
higher 	than 	90 	percent. 	The 	Bill 	provides 	only one way 	for 	a
refiner 	to 	rebut 	the 	prima 	facie 	case, 	which 	is 	by demonstrating,
by 	a 	"preponderance 	of 	evidence," 	that 	its 	actual 	retail 	(or
wholesale) 	operating 	expenses 	were 	less 	th~n six percent 	(or 	ten
percent) 	of 	its 	own consumer 	retail 	price. 	The 	expenses 	to 	be
considered 	are 	not 	well 	defined. 10 Anyone who 	purchased 	at 	a
price 	that 	violated 	the 	Bill would be 	presumed to 	be 	injured 11
and 	could 	sue 	for 	injunctive 	relief 	and 	the 	greater 0t: 	treble
damages 	or 	$5000 	per violation, 	plus 	attorneys' 	fees. 2 The
Bill 	does 	not 	permit 	a 	refiner 	to 	defend 	against 	liability by
showing 	that 	its 	prices 	were 	set 	to meet 	competition.
III. 	Analysis 	of 	the competitive effects 	of the 	Bill
Overview. 	The 	Bill 	rests 	on 	findings 	that 	the 	major
petroleum 	refineries 	are 	using 	their company-operated 	outlets 	to
impose 	financial 	hardship on 	"independent marketers." 	The 	Bill's
provisions 	demonstrate 	special 	concern 	about 	the 	situation of
branded wholesale 	and branded retail 	customers, 	rather 	than
unbranded 	distributors, 	and 	the 	Bill 	finds 	that 	additional
7 	§21302(f).
8 	§21303(a). 	A prima 	facie 	case 	could also 	be made 	out 	by
showing 	that 	the 	price 	exceeded the 	consumer 	retail 	price 	less
"the 	most 	recently 	available 	average 	retail 	operating 	expenses,"
and, 	for 	wholesale 	sales, 	average wholesale 	operating expenses
for 	the 	state. 	These 	average 	expenses 	are 	not 	defined, 	but
presumably 	could be 	industry-wide 	average 	figures.
9 	§21303(b). 	If 	the 	prima 	facie 	case were made with 	average
expense 	data, 	the 	refiner could 	also 	rebut 	by 	showing 	its 	actual
expenses 	were 	less 	than 	those 	averages.
10 	"Wholesale operating expenses" 	are 	defined 	simply 	to
include 	direct 	and 	indirect 	expenses 	and 	the 	cost 	of wholesale
credit, 	but 	the 	definition 	is 	limited to 	sales 	to 	branded
dealers. 	S21304(p). 	There 	is 	no 	similar 	definition 	for 	retail
operating expenses.
11 S21302(a).
12 §21302(c), 	(d).

The 	Honorable 	David Knowles
Page 	4 May 	5, 	1992
remedies 	are 	necessary 	to 	end 	their 	hardship 	and 	"restore 	an
equitable marketing relationship" 	between refiners 	and their
customers. 13 Under existing California 	law, 	sale 	of 	motor 	fuels
at 	discriminatory prices 	is 	illegal 	where 	"the effect 	is 	to
lessen competbtion or 	to 	injure, 	destroy, 	or 	prevent
competition." 4 	By contrast, 	the 	Bill would make 	refiners
liable 	for 	charging prices 	that violate 	its 	prRvisions 	regardless
of 	whether 	there 	is 	any 	injury 	to 	competition, 5 	and would 	not
permit 	refiners 	to 	avoid 	liability by 	showing 	that 	their· prices
were 	set 	to 	meet 	the 	equally 	low prices 	of. a 	competitor. 16 This
Section explains 	why 	the 	Bill's 	proposed new 	remedies, 	which
would 	inhibit 	normal 	competition and 	disregard 	actual 	competitive
effects, 	are 	likely 	to 	discourage 	price 	discounts 	and be 	harmful
to 	consumers.
A. 	Claims 	of predation or monopolization through refiners'
sales 	"below cost" 	at company-operated 	retail 	stations
are unfounded.
The 	Bill's 	premise, 	that 	wholesalers 	and 	retailers 	are
suffering 	"financial 	hardship" 	and 	a 	"high 	rate 	of 	attrition"
because 	of 	"onerous 	and 	regrettable 	marketing conditions 	imposed
upon 	them, ,,17 	resembles 	arguments 	made 	by proponents 	of 	similar
legislation that 	would 	impose 	restraints 	on vertically 	integrated
petroleum refiners 	and marketers 	in other 	jurisdictions. 	These
arguments 	maintain 	that 	new 	laws 	are 	necessary 	to 	protect
customers 	purchasing 	for 	resale 	from 	unfair practices 	by 	their
suppliers. 	According 	to 	this 	view, 	vertically 	integrated
refiners 	can 	and do 	set 	retail 	prices 	at 	their company-owned 	and
operated 	outlets 	either below the wholesale prices 	charged 	to
jobbers 	and 	dealers, 	or 	at 	levels 	so 	low 	that 	the 	jobbers 	and
dealers 	cannot 	compete with 	them. 	The 	alleged 	intent 	and effect
of 	such pricing 	is 	to 	drive 	jobbers 	and 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 by 	high prices 	at
another 	location, 	and 	that 	such practices 	harm competitors 	and
consumers.
13 	S 21300 ( d) .
14 Legislative 	Counsel's 	Digest 	of 	A.B. 	2371; 	California
Business 	and 	Professions 	Code, 	S§21200-2l203.
15 § 21302 ( f) .
16 § 21302 ( f) .
17 §21300(b).

May 	5, 	1992	The 	Honorable 	David Knowles
Page 	5
Such 	claims 	do 	not 	appear 	to 	be well 	founded. 	The 	history
of 	pricing practices 	and 	levels 	in the 	industry does 	not 	disclose
widespread competitive 	problems, 	and 	the 	pattern of 	change 	in
dist~ibution methods 	is 	not 	consistent with claims 	of
monopolization. 	Major oil 	companies 	have 	historically been
"integrated by contract," 	relying 	heavily on 	franchised 	dealer
networks 	to 	sell 	their 	refined products. 	We 	review below 	recent
pricing behavior 	in 	the 	industry 	and 	the 	numerous 	studies 	of
competition 	in 	gasoline marketing 	in 	the 	United 	States 	since 	1981
that 	have 	concluded that 	gasoline 	dealers .have 	not 	been 	and 	are
not 	likely 	to become 	targets 	of 	anticompetitive 	practices 	by
their 	suppliers.
B. 	Claims 	that major refiners 	set 	prices 	at different
distribution 	levels 	in order to 	"squeeze" 	branded
customers 	and to drive 	them 	from 	the market 	are 	also
unfounded.
Claims 	that 	major 	refiners 	intentionally set 	prices 	at
different 	distribution 	levels 	to 	"squeeze" 	disfavored customers
are 	often 	advanced 	in 	support 	of 	legislation 	like 	the 	proposed
Bill. 	It 	is 	alleged 	that 	refiners 	have 	discriminated 	among
competing wholesale 	customers 	and even 	that 	refiners 	have 	charged
less 	for 	direct-delivery 	sales 	to 	some 	retail 	dealers 	than they
charged 	for 	wholesale 	sales 	at 	their 	terminals. 	These
allegations 	were 	particulary 	intense 	after 	Iraq's 	August 	1990
invasion of 	Kuwait, 	which 	created uncertainty 	about 	future
petroleum 	supplies 	and was 	followed 	by rapid 	swings 	in petroleum
prices. 	Occasional 	price 	shifts 	or changes 	in 	"spreads" 	between
prices 	charged 	at 	different 	levels 	of 	distribution do 	occur, 	but
they 	are 	readily explained 	as 	the 	result 	of 	normal 	competitive
behavior 	in 	response 	to 	changes 	in world petroleum markets.
Understanding 	these 	allegations 	requires 	first 	an understanding
of 	how 	gasoline 	is 	distributed.
Major 	refiners 	sell 	gasoline 	at wholesale 	to 	three 	classes
of 	customers. 	At 	the 	terminal 	"rack," 	refiners 	sell 	to 	jobbers,
either branded or unbranded. 	Branded 	jobbers 	own, 	or 	resell 	to,
branded 	retail 	stations, 	while 	unbranded 	jobbers 	own, 	or 	resell
to, 	unbranded 	retail 	stations. 	Refiners 	may 	also 	sell 	through
direct 	delivery 	to 	branded 	lessee-dealers 	(who may also 	buy 	from
branded 	jobbers).18 	In 	the vast majority of 	cases, 	a 	refiner
does 	not 	sell 	to 	branded and unbranded 	jobbers 	in 	the 	same
18 The major branded 	gasoline 	refiners 	make 	relatively 	few
sales 	through company-owned and 	operated 	retail 	stations.
Smaller refiners 	are 	more 	likely to 	sell 	predominantly through
company-owned 	and 	operated 	retail 	stations. 	See 	Section D,
below.

The 	Honorable 	David Knowles
Page 	6 May 	5, 	1992
geographic 	area, 	or 	to 	jobbers who 	compete 	in 	the 	same 	geographic
area 	as 	its 	direct-buying branded 	lessee-dealers.
~The different 	distribution methods 	involve 	different 	costs
and 	risks 	and thus 	different 	pricing 	structures. 	For 	example, 	a
refiner's 	wholesale price 	for 	branded 	gasoline 	delivered 	directly
to 	a 	retail 	station 	(the 	"dealer tankwagon" 	or 	"DTW" 	price) 	is 	on
average 	higher 	than 	the 	"rack" 	price 	it 	charges 	a 	jobber. 	The
jobber purchasing 	at 	the 	rack 	then 	provides 	transportation 	to
retail 	stations, 	either 	its 	own or 	its 	customers', 	and may 	also
have 	its 	own 	storage 	facilities. 	The 	rack price 	for 	sale 	to
branded 	jobbers 	is 	typically higher 	than 	the 	price 	to 	unbranded
jobbers. 	The 	average 	spread between the 	DTW price 	and 	the
branded 	jobber rack price may be 	7-8 	cents 	(per 	gallon), 	and
betweefi the 	DTW price 	and 	the 	unbranded 	jobber rack 	price, 	9-10
cents.
Both 	spreads 	vary widely 	and change 	continually. 	How 	some
of 	these 	spreads 	changed 	in 	the 	last 	two 	years 	is 	shown on
Attachment A to 	this 	letter. 	The 	difference 	between 	DTW prices
and 	branded 	jobber prices 	(on 	average) 	has 	often exceeded 	10
cents, 	and 	even 	reached 	20 	cents 	in 	late 	1990. 	For 	a 	short 	time
in 	the 	summer 	of 	1990 	the 	branded 	jobbers' 	"advantage" 	was
actually 	negative, 	that 	is, 	the 	average 	dealer 	tankwagon 	price
was 	lower 	than 	the 	average 	branded 	jobber price. 	Similarly, 	the
difference 	between branded 	jobber prices 	and 	unbranded 	jobber
prices 	has 	occasionally reached 	5 cents, 	but 	during 	that 	same
period 	in 	the 	summer of 	1990 	the 	unbranded 	jobbers' 	usual
"advantage" 	also 	turned negative. 	Such changes, 	leading to
occasions 	when price 	levels 	for 	unbranded 	jobbers were 	higher
than 	for 	branded 	jobbers, 	or 	jobber price 	levels 	were 	higher 	than
DTW 	price 	levels, 	have 	led to 	allegations 	that 	prices 	have 	been
set 	to 	squeeze 	disfavored 	customers.
But 	these 	spreads 	change because 	different 	kinds 	of 	sales
respond 	differently 	to 	changing market 	conditions, 	as 	indicated
by 	swings 	in 	the 	"spot market" 	prices 	for 	bulk 	gasoline. 	For
reasons 	explained below, 	jobber prices 	generally tend 	to 	adjust
rapidly 	to 	changes 	in 	spot market 	prices, 	while DTW 	prices 	tend
to 	adjust 	more 	slowly. 	Thus, 	when 	spot 	prices 	rise 	rapidly 	and
unexpectedly, 	as 	they did 	after 	the 	Iraqi 	invasion of 	Kuwait 	in
August 	1990, 	jobber prices 	should 	increase more 	quickly 	than DTW
prices 	and might even briefly exceed them. 	These 	"inversions"
tend 	to 	be 	temporary, 	however, 	and the 	relationships 	between DTW
19 These 	spreads 	are 	based on 	the 	prices 	reported 	by Oil
Weekly 	from 	March, 	1989 	through 	July, 	1991.

The 	Honorable 	David Knowles
Page 	7 May 	5, 	1992
prices 	and branded an?c 	unbranded 	jobber prices 	quickly 	return 	to
their 	normal 	pattern. 0
~Jobber prices 	tend 	to 	change 	rapidly because 	a 	refiner 	that
responded 	too 	slowly would 	risk 	disruptions 	in 	its 	bulk
distribution 	network. 	Jobbers, 	especially unbranded 	jobbers, 	who
may purchase 	from 	several 	suppliers 	and 	serve many retail
outlets, 	could 	shift 	their purchases 	to 	low-priced 	suppliers.
Because many 	jobbers 	have 	storage 	facilities, 	they might 	purchase
and 	store 	larger volumes 	in anticipation of 	price 	increases.
Unless 	its 	rack prices 	respond quickly 	to 	expectations 	about
price movements, 	a 	refiner's 	terminal 	might 	be 	drained 	and 	its
distribution 	system disrupted, 	making 	it 	difficult 	for 	the
refiner 	to 	supply 	its 	own outlets 	or 	to meet 	the 	contract
commitments 	it may 	have 	with 	some 	customers, 	such as 	lessee
dealers.
DTW prices 	would 	tend 	to change more 	slowly because 	branded
lessee 	retail 	dealers 	are 	in 	a 	different 	situation 	from 	jobbers.
Their 	ability 	to 	shift 	purchases 	based on 	speculations 	about
future 	price movements 	is 	limited because 	their 	storage
capability 	is 	relatively 	limited. 	Moreover, 	refiners 	that 	sell
directly 	to 	retail 	dealers 	can monitor 	purchases 	and detect
speculative 	purchasing. 	Finally, 	refiners 	have 	an ongoing
relationship with 	their 	lessee 	and 	franchisee 	dealers, 	which may
involve 	both contractual 	supply commitments 	and 	an 	implicit
agreement 	that 	the 	refiner 	will 	share 	some 	of 	the 	risk when
prices 	change 	unexpectedly. 	The 	refiner bears 	a 	portion of 	this
risk 	by moderating dealer 	tankwagon price 	incfJeases 	(decreases)
when 	spot 	prices 	are 	increasing 	(decreasing). 1
20 Moreover, 	although 	these 	inversions 	may 	appear 	between
average 	price 	levels, 	they 	rarely 	appear 	in 	the 	prices 	of 	a
single 	refiner 	supplier, 	because 	a 	refiner that 	charged 	such
inverted 	prices 	to 	competing customers 	would 	run 	the 	risk 	of
violating existing 	law, 	such as 	the 	federal 	Robinson-Patman Act,
15 	U.S.C.§13.
21 	The 	refiner's 	continuing relationship with 	branded
customers 	would also 	imply 	that 	prices 	to 	branded 	jobbers 	should
be 	less 	volatile 	than 	those 	to 	unbranded 	jobbers, 	and thus 	may
help explain the 	occasional, 	temporary 	"inversions" 	of 	these
price 	levels. 	However, 	substantial 	differences 	between branded
wholesale 	prices 	and unbranded wholesale 	prices 	could not 	be
sustained even 	in 	the 	short 	term because wholesalers 	with 	storage
capabilities 	can 	increase 	(or decrease) 	their purchases 	of
unbranded product when 	its 	price 	is 	unusually 	low 	(or 	high)
relative 	to 	branded product. 	By contrast, 	substantial
differences 	between DTW 	and wholesale 	prices 	could 	persist 	for 	a
longer, 	but 	still 	limited, 	period.

The 	Honorable 	David Knowles
Page 	8 May 	5, 	1992
These 	relationships 	between 	prices 	in different 	distribution
chains 	and 	the 	recent 	changes 	in 	those 	relative 	prices 	are what
would be 	expected 	in a 	normally 	functioning 	competitive market.
Becapse 	the 	competitive explanation 	is 	so 	straightforward, 	there
is 	little 	reason 	to 	suspect 	that 	these 	price movements 	are
evidence 	of 	some 	anticompetitive purpose 	or effect. 	Rather, 	the
Bill's 	encouragement 	of 	mininum margins 	between wholesale 	and
retail 	prices 	would 	likely 	interfere with natural 	market
processess 	and, 	as 	a 	result, 	may 	lead 	to 	shortages 	at 	the 	rack,
higher 	prices 	to 	consumers, 	or 	both.
In 	any event, 	because 	these 	allegations 	about 	price
inversions 	at 	the 	time 	of 	the 	Persian G~lf war 	raised 	questions
about 	violations 	of 	the 	antitrust 	laws, 	they 	have 	been
investigated by 	the 	staff 	of 	the 	Commission. 	That 	investigation·
did 	not 	find 	that 	these 	price 	actions 	showed 	illegal 	price
discrimination, 	intentional 	"squeezing" 	of 	customers' 	margins, 	or
injury 	to 	competition.
c. 	Studies 	of 	"subsidization" 	and 	"predation" 	in the
petroleum 	indust~ have 	not 	supported allegations 	of
predation.
The 	Department 	of 	Energy 	("DOE") 	has 	studied whether
vertically 	integrated refiners 	were 	"subsidizing" 	their 	retail
gasoline 	operations 	in 	a 	way 	that might 	be 	predatory or
anticompetitive. 23 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 	stU?7 concluded that 	there was 	no 	evidence
of 	such 	"subsidization."
In 	1984, 	DOE 	published 	an updated 	study 	that 	~urther
substantiated and elaborated on 	its 	1981 	findings. 	The 	study
showed 	that 	company-operated stations 	were 	not 	increasing 	as 	a
22 Robinson-Patman Act, 	Section 	2(a) 	of 	the 	Clayton Act, 	15
u.s.c. 	§13(a).
23 	This 	study was 	undertaken 	following 	enactment 	of 	Title
III 	of 	the 	Petroleum Marketing Practices 	Act 	in 	1978, 	15 	U.S.C.
§2841.
24 	DOE, 	Final 	Report: 	The 	State 	of 	Competition 	in Gasoline
Marketinq, 	p. 	xi 	(1981).
~ 	DOE, 	Deregulated Gasoline Marketing: 	Consegyences 	for
Competition, 	Competitors, 	and Consumers 	(March, 	1984) 	("1984 	DOE
Report").

The 	Honorable 	David Knowles
Page 	9 May 	5, 	1992
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
continuing trend 	toward 	the 	use 	of more 	efficient, 	high-volume
retail 	outlets. u
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 observed
pairs 	of 	DTW prices 	to 	lessee 	dealers 	and retail 	prices 	at
company-operated 	stations; 	the 	study 	found 	that 	less 	than one
percent 	of 	these 	pairs 	disclosed 	any 	significant 	instances 	where
the 	DTW 	price was 	above 	or 	at 	the 	retail 	price. 	Rather, 	the 	bulk
of 	the 	price 	pairs 	were 	consistent with the 	thin margins 	observed
elsewhere 	in gasoline 	distribution. 	The 	study concluded 	that 	the
few 	price 	pairs 	at 	variance were 	"clearly too 	infrequent" 	to 	show
that 	lessee 	dealers 	were 	being 	systematically driven 	from 	the
market 	because 	their 	gasoline 	purchase 	costs 	were 	the 	same 	as 	or
higher 	th~n the 	retail 	prices 	of 	competing refiner-operated
stations.
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
26 	1984 	DOE 	Report 	at 	125-32.
27 	Final 	Report 	to 	the Washington State Legislature 	on 	the
Attorney General's 	Investigation of 	Retail 	Gasoline Marketing, 	p.
14 	(August 	12, 	1987).

The 	Honorable 	David Knowles
Page 	10 May 	5, 	1992
enacted, 	concluding that 	"[t]he marketplar.e 	for 	petroleum
products 	is 	very competitive 	in Arizona." 8
~The DOE 	studies, 	based on data 	from 	the 	1970's 	and 	early
1980's, 	and 	the 	state 	studies, 	conducted more 	recently, 	rev~al no
instances 	of 	predatory behavior by major 	gasoline 	refiners. 9
Rather, 	they show that 	the 	fortunes 	of 	refiners 	and 	their
franchised 	retailers 	are 	closely 	linked 	and 	that 	these 	firms
"form 	a 	mutuallrc 	supporting 	system backed by company 	advertising
and 	promotion." 0 	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 	smal13fercentage of 	the 	gasoline 	stations 	in 	the 	United
States.
28 	Final 	Report 	to 	the 	Arizona 	Joint 	Legislative 	Study
Committee on 	Petroleum Pricing 	and Marketing Practices 	and
Producer Retail 	Divorcement, 	p. 	35 	(December, 	1988).
29 	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.
30 	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.
31 Lundberg Letter, 	Vol 	XI, 	No. 	36, 	July 	6, 	1984, 	at 	3,
reported 	that 	the major 	refiners 	operated only 	about 	3.3 	percent
of 	all 	retail 	stations. 	The 	1984 	DOE Report 	showed a 	similarly
low 	proportion. 	A study conducted 	for 	the American Petroleum
Institute 	found 	that 	the 	for 	the 	fourteen 	largest 	integrated
refiners, 	representing 	approximately 	67 	percent 	of 	the 	nation's
refining capacity, 	company-operated 	retail 	stations 	accounted 	for
about 	10 	percent 	of 	their 	gross 	gasoline 	sales 	and 	4.5 	percent 	of
their 	outlets. 	Temple, 	Barker 	& Sloan, 	Gasoline Marketing 	in 	the
1980's; 	Structure, 	Practices, 	and 	Public 	Policy, 	pp. 	2-3 	(1988).

May 	5, 	1992	The 	Honorable 	David Knowles
Page 	11
D. 	Gasoline marketing 	in California appears 	to be as
diversified and competitive as 	in the rest 	of 	the
country.
The 	national 	pattern 	is 	reflected 	in 	the 	distribution
systems 	of 	the 	leading branded refiners 	in California. 	The 	1984
DOE 	study 	indicates 	that 	vertically 	integrated gasoline marketers
accounted 	for 	7.3 	percent 	of 	total 	sales 	in California 	in 	1981:
this 	was 	substantially below the 	national 	average, 	13.1
percent. 32 	None 	of 	the 	leading branded marketers 	in 	California
for 	which 	data 	are 	available 	use 	company-owned and 	operated
outlets 	as 	the 	predominant 	form 	of 	retailing on 	a 	national
basis. 33 However, 	company operated outlets 	may be 	a ~redominant
form 	of 	retailing 	for 	smaller, 	independent 	refiners.
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 	in
California 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.
32 	1984 	DOE Report 	at 	82.
33 National 	Petroleum News 	1991 	Factbook 	34-51. 	The 	firm
with 	the 	largest 	number of 	outlets 	in California, 	Unocal,
operates 	only one 	percent 	of 	its 	branded outlets 	itself
(nationwide): 	the 	second 	largest 	in California, 	Chevron, 	operates
seven percent: 	the 	third 	largest, 	Shell, 	operates 	three 	percent.
NPN 	does 	not 	offer data 	on 	salary operated outlets 	for 	fourth-
ranked ARCO 	or 	eleventh-ranked Thrifty Oil. 	The 	only 	leading
firm 	in 	California 	for 	which data 	is 	available 	that 	operates 	more
of 	its 	own branded 	outlets 	than 	the 	national 	average 	rate 	of 	13.1
percent 	is 	Ultramar 	(eighth 	largest 	in 	California, 	with 	all 	of
its 	operations 	in 	the 	state), 	operating 	44 	percent; 	BP America
(ninth 	largest 	in California), 	operates 	13 	percent 	(nationwide),
equal 	to 	the 	national 	average 	rate. 	The vast majority 	(95
percent) 	of 	retail 	outlets 	in California 	are 	operated by 	firms
that 	operate 	fewer 	of 	their own outlets 	than the 	national 	average
rate.
34 The 	Bill 	only applies 	if 	a 	refiner 	has 	company-operated
outlets 	in 	an 	area. 	S21301. 	Thus, 	because 	smaller 	refiners 	are
more 	likely 	to 	use 	company-operated 	outlets, 	the 	Bill 	is 	likely
to 	have 	a 	greater 	impact 	on 	smaller refiners 	than on major ones.

May 	5, 	1992	The 	Honorable 	David Knowles
Page 	12
E. 	Even 	if 	predato6Y 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 	ex~sting California 	law and 	to 	the
federal 	Robinson-Patman Act. 	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. 36 The 	Bill's 	apparent 	purpose, 	to
protect 	competitors 	without 	regard 	to 	effects 	on competition 	and
cons~ers, could extend beyond the 	reach 	of 	existing 	federal
law. 3 The 	Bill would 	permit 	a 	competitor or customer to 	claim
"ihjury" 	based on a 	refiner's 	sale 	at 	an unlawful 	price, 38
35 	California 	Business 	and 	Professions 	Code, 	§§21200-21203,
adopted 	in 	1975, 	prohibits 	price 	discrimination 	in 	the 	petroleum
industry 	in terms 	that 	are 	taken virtually verbatim 	from 	the
Robinson-Patman Act, 	15 	U.S.C. 	S13 	(Section 	2 of 	the 	Clayton
Act). 	~ Texaco. 	Inc. 	v. 	Hasbrouck, 	U.S. 	, 	110 	S.
Ct. 	2535 	(1990), 	a 	case 	arising under 	the 	Robinson-Patman Act 	in
which 	franchised 	gasoline 	retailers 	successfully challenged price
discrimination by a 	vertically 	integrated refiner.
36 	For 	example, 	the 	Bill 	permits 	no 	defense 	based on meeting
competition. 	By contrast, 	the 	Robinson-Patman Act 	permits 	a
seller 	to meet 	the 	prevailing competitive 	circumstances 	in 	a
market, 	Falls 	City 	Indus. 	v. 	yanco 	Beverage, 	460 	U.S. 	428 	(1982).
37 	Under 	the 	Bill, 	liability could be 	based 	solely on 	injury
to 	a 	competitor, 	and 	the 	Bill 	explicitly does 	not 	permit 	as 	a
defense 	the 	absence 	of 	any 	injury 	to 	competition. 	S21302(f).
Illegality under 	the 	Robinson-Patman Act 	requires 	that 	the 	effect
of 	the 	discriminatory 	price be 	"substantially to 	lessen
competition or 	tend 	to 	create 	a 	monopoly 	_ 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. 	S13(a).
38 Liability under 	the 	Bill 	could be 	triggered by 	too 	small
a 	margin 	between 	jobber prices 	and the 	refiner's 	retail 	price.
§21303. 	That margin could be made 	smaller either by a 	higher
wholesale 	price 	or 	a 	lower 	retail 	price. 	Thus, 	a 	claim of
liability could be 	based on a 	refiner's 	retail 	price 	that 	was, 	by

May 	5, 	1992	,.
• 	The Honorable 	David Knowles
Page 	13
without 	any showing that 	the 	pricing practices 	lessen or 	injure
competition. 	Because 	"cutting price 	in order 	to 	increase
business 	often is 	the very essence of 	competition," 	the 	Bill may
"chill 	the very conduct 	the 	antitrust 	laws 	are 	designed to
protect. ,,39
F. 	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 California that 	do 	not 	exist 	in
other 	states, 	costs 	that would be borne by California consumers
and visitors. 	The 	Bill may make 	firms 	less 	inclined to reduce
their 	retail prices 	in response 	to 	changing conditions 	of 	demand
and 	supply and may deter 	short term price 	discounts 	designed 	to
attract new customers, 	because these 	actions 	risk 	allegations
that prices 	to wholesale customers 	are 	too 	high 	in relation 	to
the 	corresponding 	"adjusted retail 	price."
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 	onl~ when market 	power
exists 	in at 	least one 	stage 	of 	production. 0 	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
operating costs 	justifying narrower margins 	than the 	Bill 	sets
for 	a 	prima 	facie 	violation.
An unintended effect may be 	to encourage vertically-
integrated refiners 	that 	distribute gasoline 	in California to
the 	Bill's 	standards, 	too 	low.
39 Matsushita 	Blec. 	Indus. 	Co. 	v. 	Zenith, 	475 	u.s. 	574, 	594
(1986).
40 ~, 	~., 	U. 	S. 	Department of 	Justice, 	Herger
Guidelines, 	Section 4.21-4.213 	(1984). 	In announcing 	joint
Merger Guidelines 	earlier this month, 	the Department of 	Justice
and the 	Federal Trade Commission 	stated that 	these 	sections 	of
the previous 	Guidelines, 	describing policies 	about vertical
relationships, 	would still be applied.

The 	Honorable 	David Knowles
Page 	14 May 	5, 	1992
change 	otherwise 	lawful 	pricing 	practices. 	For example, 	th~ Bill
may 	limit 	the 	availability of 	certain 	functional 	discounts. 1
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 	inbure
competition, 	may operate 	to 	destroy 	cartel 	pricing. 	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 	orices 	across 	broad 	geographic. regions 	to 	avoid
. 	I 	t' 	4~	v~o a 	~ons.
41 In Texaco, 	Inc. 	y. 	Hasbrouck, 	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.
42 ~, 	~., 	F.M. 	Scherer 	& D. 	Ross, 	Industrial 	Market
Structure 	and 	Economic 	Performance, 	p. 	515 	(3d ed. 	1990).
43 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 	red~ctions 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. 	N' 	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.
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. 	_ 	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.

The 	Honorable 	David Knowles
Page 	15
IV. 	Conclusion.
May 	5, 	1992
#For 	the 	reasons 	stated above, 	we 	believe 	that Assembly 	Bill
2371 	might 	cause 	gasoline 	prices 	in California 	to 	increase. 	We
appreciate 	the 	opportunity to 	comment 	on 	this 	matter. 	If 	you
have 	additional 	questions, 	please 	feel 	free 	to 	contact me 	or
Assistant 	Director Marc 	G. 	Schildkraut, 	whose 	Division within 	the
Commission's 	Bureau 	of 	Competition 	has 	considerable 	experience 	in
analyzing 	competition 	in 	the 	petroleum 	industry. 	You may write
or 	call 	Mr. 	Schildkraut, 	at:
Energy 	and 	Food Division
Bureau 	of 	Competition,
Room 	3301
601 	Pennsylvania Avenue, 	N.W.
Washington, 	D.C. 	20580
(202) 	326-2622
Thank you 	again 	for 	the 	opportunity 	to 	comment 	on Assembly
Bill 	2371. 	I 	hope you 	find 	these 	comments 	to be 	helpful.
Ronald 	B. 	Rowe
Director 	for 	Litigation

Attachment A
Distributor 	Spreads
30 UL 	Reg. 	Gasol ine) 	East 	Coast
25
---- JoOber-UB RaCk
20 I
--- Dea ler-Jobber A
/I
.t 	/I
15 	,.... 	I ,
\ 	I I
\ 	I 	I 	I
10 , 	1\ I 	I
, 	I 	/II 	I
I I
'" I _.
.. 	, I P'	
5 	I 	1/ 	I 	(
L.JV'
cpg 	0
-5
-10 Invasion
-15 J91	J90
(Nlyaata)
Source: 	Oil 	Weekly, 	Oil 	& Gas 	Journal. 	Spreads 	shown 	here 	are
between 	DTW 	and 	branded 	jobber 	prices 	and 	between 	branded 	jobber
and 	unbranded 	rack 	prices 	for 	unleaded 	regular 	gasoline 	in 	the
eastern United 	States 	from 	early 	1989 	through mid 	1991.