FTC Staff Comment Before the Utah Department of Commerce Concerning the Utah Motor Fuel Marketing Act

V920004
_F_ed_e_ral	__	Tr_a_d_e_Co_mnllSS	__' _l_'O_n________ 	~
Denver Regional Office
Suite 2900
1405 Curtis Street
Denver, Colorado 80202
(303) 844·2271
January 	29, 	1992
David 	Buhler
Executive 	Director
Department 	of 	Commerce
P.O. 	Box 	45802
Salt 	Lake 	City, 	UT 	84145-0802
Dear Mr. 	Buhler:
The 	staffs 	of 	the 	Denver 	Regional 	Office 	and 	the 	Bureau 	of
Competition of 	the 	Federal 	Trade 	Commission' 	are pleased to 	submit
this 	letter 	in 	response 	to 	your 	request 	for 	comments 	on 	the
potential 	effects 	on small business 	and 	on competition of the Utah
Motor 	Fuel 	Marketing 	Act 	and 	proposed 	amendments 	to 	it. 	The
amendments 	would 	broaden the 	Act's 	prohibitions.
We 	believe 	such 	legislation 	is 	likely 	to 	be 	anticompetitive,
and that 	its 	likely 	result may be that Utah consumers and visitors
could pay 	higher 	prices 	for 	gasoline.
I. 	Interest 	and 	elq)erience 	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
acts or 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
These comments are the views 	of 	the staffs 	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.
"

David 	Buhler
Page 	2
the competitive impact of regulations and business practices in the
oil 	industry. Z
II. 	Description 	of the 	proposed 	legislation
utah adopted the Motor Fuel Marketing Act 	("Act")3 	in 	1981 and
amended 	it 	in 	1987. 	The Act 	prohibits 	selling 	or offering 	to sell
motor 	fuel 	either 	below "cost," 	as 	that 	is 	defined,' 	or 	at 	a 	price
lower 	than 	the 	price 	the 	seller 	charges 	at 	the 	same 	time 	to 	other
customers 	at 	the 	same 	level 	of 	distribution, 	with 	the 	intent 	or
effect 	to 	injure 	competition. 5 In 	addition, 	the 	Act 	prohibits
refiners 	from selling or transferring to themselves 	or affiliates,
for 	resale 	on 	a 	different 	marketing 	level, 	at 	a 	transfer 	price
lower 	than 	the 	refiner 	charges 	purchasers 	for 	resale 	at 	the 	same
level, 	if the 	intent or effect 	is 	to 	injure 	competition. 6 The Act
permits 	a 	degree 	of 	cost-justification: 	the 	sales 	price 	(or
transfer price 	for an affiliate) 	need not be identical to the price
2 	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, 	Louisiana, 	Massachusetts, 	Montana, 	Nevada, 	North
carolina, 	South Carolina, 	Tennessee, 	Virginia, 	and Washington, 	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. 	§§ 	18, 	18a.
utah 	Code Ann. 	Title 	13, 	Ch. 	16.3
, "Cost" 	is defined by reference to the lowest invoice cost
(or, 	for an 	"affiliate," 	the 	lowest transfer price) 	charged within
the 	five 	days 	before 	an 	alleged 	violation. 	utah 	Code 	Ann. 	§ 	13-
16-2(2). 	Trade 	discounts, 	allowances 	or 	rebates 	are 	subtracted
from 	the 	invoice 	cost 	or 	transfer 	price, 	and 	freight 	charges 	and
taxes are added. 	In 	addition, 	the 	"cost" 	includes 	"the 	reasonable
cost 	of 	doing 	business 	as 	determined 	by 	generally 	accepted
accounting 	principles," 	which 	is 	presumed 	to 	be 	six 	percent 	of
posted 	retail 	price. 	utah 	Code 	Ann. 	§ 	13-16-2(2).
5 utah 	Code Ann. 	§ 	13-16-4.
6 utah 	Code 	Ann. 	§ 	13-16-5. 	Refiners
establish 	transfer 	prices 	for 	transactions 	with
and 	to 	disclose 	them 	to 	the 	pUblic 	on 	request.
§ 	13-16-3.
are 	required 	to
their 	affiliates
utah 	Code 	Ann.

David 	Buhler
Page 	3
charged 	at 	the 	same 	level 	of 	distribution 	to 	a 	third-party
purchaser for 	resale, 	if the difference 	is 	due 	to 	"a difference 	in
shipping method, 	transportation, 	marketing, 	sale 	[sic], 	or quantity
. 	. 	• 	sold."7 	The law 	includes exemptions 	for good 	faith 	efforts
to 	meet 	competition and 	for 	liquidation 	and 	close-out 	sales. 8
The 	proposed 	amendments 	would 	add 	another 	element 	to 	support
a 	violation. 	Now, 	a 	violation 	depends 	on 	an 	intent 	or 	effect 	to
injure 	competition. 	The 	amendments 	would 	add, 	as 	an 	alternative,
"the 	intent 	and 	purpose 	. 	to 	induce 	the 	purchase 	of 	other
merchandise, 	to 	divert, 	unfairly, 	trade 	from 	a 	competitor, 	or
otherwise to 	injure a 	competitor." 	This 	new criterion would 	apply
to 	sales 	below 	cost 	and 	sales 	at 	different 	prices,9 	but 	would 	not
apply 	to 	the 	section 	addressed 	specifically 	to 	refiners. 10 	In
addition, 	the 	proposed 	amendments 	would 	require 	that 	the
determination 	of 	whether 	a 	person was 	meeting 	competition 	be 	made
without 	regard 	to 	anything, 	such 	as 	other 	kinds 	of 	merchandise,
offered 	for 	sale 	in 	conjunction 	with 	motor 	fuel. 	Finally, 	the
recordkeeping 	requirements 	would 	be 	changed; 	rather 	than 	require
a 	record 	of 	all 	sales 	at 	different 	prices 	and 	all 	efforts 	to 	meet
competition, 	rules would be adopted 	requiring 	records 	of all 	price
changes.
III. 	Analysis 	of 	Act 	and 	Proposed Amendments
A. 	Claims of predatory, monopolistic or collusive activities
by 	refiners 	against 	gasoline 	dealers 	may 	not 	be 	well-
founded.
The premise of 	the Act and the proposed 	amendments appears 	to
be 	that 	franchised 	and 	independent 	retail 	dealers 	are 	being
victimized 	by 	subsidized 	pricing 	by 	the 	major gasoline 	marketers.
Proponents 	of 	legislation 	that 	would 	impose 	restraints 	on
vertically 	integrated petroleum refiners 	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
7
8
9
10
utah 	Code 	Ann. 	§ 	13-16-6.
See Utah 	Code Ann. 	§§ 	13-16-6(2), 	13-16-6(3), 	§13-5-12.
Utah 	Code Ann. 	§ 	13-16-4.
Utah 	Code 	Ann. 	§ 	13-16-5.

11
David 	Buhler
Page 	4
franchised 	and 	independent 	dealers 	out 	of 	business 	in 	order 	to
replace 	them with 	company-owned 	stations.
The claims that vertical integration by refiners 	into gasoline
retailing 	is 	anticompetitive 	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. 	We 	briefly
summarize 	the 	results 	of 	these 	studies 	below.
1. 	Federal 	studies.
Following 	enactment 	of 	Title 	III 	of 	the 	Petroleum 	Marketing
Practices 	Act 	("PMPA") 	in 	1978, 	15 	U.S.C. 	§ 	2841, 	the 	Department
of 	Energy 	("DOE") 	studied 	whether 	vertically 	integrated 	refiners
were 	"subsidizing" 	their 	retail 	gasoline 	operations 	in 	a 	way 	that
might 	be 	predatory 	or 	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 	("SMSAS"), 	as 	well 	as 	on 	internal 	oil 	company
documents 	subpoenaed 	by 	DOE 	investigations. 	The 	study 	concluded
that 	there was 	no 	evidence 	of 	such 	"subsidization.,,11
In 	1984, 	DOE 	pUblished 	an 	updated 	study 	that 	further
substantiated 	and 	elaborated 	on 	its 	1981 	findings. 12 	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
continuing 	trend 	toward 	the 	use 	of 	more 	efficient, 	high-volume
retail 	outlets. 13
DOE, 	Final 	Report: 	The 	State 	of 	Competition 	in 	Gasoline
Marketing, 	1981.
12 	Department 	of 	Energy I 	Deregulated 	Gasoline 	Marketing:
Consequences 	for 	Competition. 	Competitors. 	and 	Consumers, 	March,
1984 	("1984 	DOE 	Report").
13 	1984 	DOE 	Report 	at 	125-32.

14
16
David 	Buhler
Page 	5
2. 	state 	Studies.
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 	foreclosed 	the 	ability 	of 	dealers 	to 	cover
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, 	and
concluded that such instances 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 	than 	the 	retail 	prices 	of 	competing 	refiner-operated
stations. 14
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 	"Ct)he 	marketplace 	for 	petroleum 	products 	is 	very
competitive 	in 	Arizona. ,,15
The 	state 	and 	DOE 	studies 	have 	revealed 	no 	instances 	of
predatory behavior by major gasoline 	refiners. 	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 	and 	promotion. ,,16 	Franchised
Final 	Report 	to 	the 	Washington 	state 	Legislature 	on 	the
Attorney 	GeneralIs 	Investigation 	of 	Retail 	Gasoline 	Marketing,
August 	12, 	1987, 	at 	14.
15 	Final 	Report 	to 	the 	Arizona 	Joint 	Legislative 	study
Committee on Petroleum Pricing and Marketing Practices and Producer
Retail 	Divorcement, 	December, 	1988, 	at 	35.
1984 	DOE 	Report 	at 	ii. 	We 	do 	not 	mean 	to 	suggest 	that
the 	fortunes 	of refiners and their 	franchised 	retailers are 	linked
perfectly 	in 	every 	situation; 	rather, 	although 	the 	refiners 	and
Ccontinued ... )

17
David 	Buhler
Page 	6
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. 1r
3. 	Gasoline 	marketing 	in 	utah.
The national 	pattern 	is 	reflected 	in the distribution 	systems
of 	the 	leading 	branded 	refiners 	in 	utah. 	The 	1984 	DOE 	study
indicates 	that 	vertically 	integrated gasoline 	marketers 	accounted
for 	just 	under 	seven 	percent 	of 	total 	sales 	in utah 	in 	1981; 	this
was 	only half of the 	national 	average, 	13.1 percent. 18 None of 	the
twel ve 	leading 	branded 	marketers 	in 	utah 	for 	which 	data 	are
available use company-owned and operated outlets as the predominant
form of retailing on a 	national 	basis. 19 However, 	company operated
outlets 	may 	be 	a 	predominant 	form 	of 	retailing 	for 	smaller
independent 	refiners. 	For 	example, 	the 	largest 	refiner 	that
16 ( ••• continued)
their 	retailers 	generally 	share 	common 	goals, 	on 	occasion 	their
interests and 	fortunes 	may not coincide. 	Although our 	information
for 	these 	propositions 	comes 	from 	1984 	reports 	and 	articles, 	we
have 	no 	reason 	to 	believe 	that 	the 	distribution 	structure 	has
significantly 	changed 	since 	that 	time.
Lundberg 	Letter, 	Vol 	XI, 	No. 	36, 	July 	6, 	1984, 	at 	3,
where 	it was 	reported 	that 	the 	major 	refiners 	operated 	only 	about
3.3% 	of 	all 	retail 	stations. 	The 	1984 	DOE 	Report 	confirmed 	a
similarly 	low 	proportion. 	A 	recent 	study 	conducted 	for 	the
American 	Petroleum 	Institute 	noted 	that 	the 	fourteen 	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 	company-operated 	retail
stations. 	Temple, 	Barker 	& 	Sloan, 	Gasoline 	Marketing 	in 	the
1980's: 	Structure, 	Practices, 	and 	Public 	Policy. 	2-3 	(1988).
18 1984 	DOE 	Report 	at 	82.
19 National 	Petroleum 	News 	1991 	Factbook 	34-51. 	The 	firm
with the largest number of outlets 	in Utah, 	SinClair, 	operates only
10 	percent 	of 	its 	branded 	outlets 	itself 	(nationwide); 	the 	second
largest 	in Utah, 	Texaco, 	operates 	7.5 	percent; 	the 	third 	largest,
Phillips, 	operates 	none. 	The 	only 	firm 	selling 	at 	retail 	in 	utah
that 	operates 	more 	than 	11 	percent 	of 	its 	branded 	outlets
(nationwide) 	itself 	is 	V-I 	oil 	Co., 	which 	has 	six 	outlets 	in 	utah
and 	a 	total 	of 	36 	in 	the 	entire 	country.

David 	Buhler
Page 	7
operates 	most 	of 	its 	own 	outlets 	is 	Clark, 	which 	ranks 	24th
nationwide 	in 	number 	of 	retail 	outlets 	(with 	937).20
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.
B. 	Even 	it 	predatory behavior 	or 	price 	discrimination were
found, 	it 	is 	already 	subiect 	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 	the 	Robinson-Patman 	Act. 21 These 	statutes 	address
possible anticompetitive practices 	in the 	industry and deter 	firms
from 	engaging 	in 	predatory 	behavior 	or 	illegal 	price
discrimination. 	In contrast, 	the utah Motor Fuel Marketing Act and
the 	proposed 	amendments 	may 	make 	it 	more 	difficult 	for 	firms 	to
adjust 	their 	prices 	in 	response 	to 	changing 	conditions 	of 	demand
and 	supply. 	Their 	~rohibitions 	are 	broader 	than 	those 	in 	the
Robinson-Patman 	Act. 2 	The 	legislation 	may 	inhibit 	vigorous
20 National 	Petroleum News 	1991 	Factbook 	34-51.
21 15 	u. S. C. 	§ 	13 	(Section 	2 	of 	the 	Clayton 	Act). 	See
Texaco. 	Inc. 	v. 	Hasbrouck, 	U.S. 	,110 	S. 	ct. 	2535
(1990), 	in 	which 	franchised 	gasoline 	retailers 	successfully
challenged price discrimination by a vertically integrated refiner.
22 	To 	the 	extent 	that 	the 	Utah 	Act, 	as 	amended, 	would
proscribe 	offering 	lower 	prices 	with 	the 	intent 	or 	effect 	of
winning 	sales 	from 	a 	competitor, 	without 	reference 	to 	injury 	to
competition, 	see 	proposed 	sections 	13-16-4(1)(b) 	and 	(2)(b), 	we
believe that 	the Act could harm competition. 	Under these proposed
sections, 	establishing 	a 	prima 	facie 	violation 	would 	require
showing 	only 	an 	offer 	to 	sell 	below 	"cost," 	as 	defined, 	with 	the
intent 	of 	winning 	business. 	No 	showing 	of 	actual 	or 	threatened
competitive 	effect 	would 	be 	required. 	Because 	"cutting 	price 	in
order 	to 	increase 	business 	often 	is 	the 	very 	essence 	of
competition," 	the 	Act 	may 	"chill 	the 	very 	conduct 	the 	antitrust
laws 	are 	designed 	to 	protect." 	Matsushita 	Elec. 	Indus. 	Co. 	v.
(continued .•. )

24
David 	Buhler
Page 	8
competition 	and 	add 	costs 	to 	the 	distribution 	of 	gasoline 	in Utah
that 	do 	not 	exist 	in 	other 	states, 	costs 	that 	would 	be 	borne 	by
Utah 	consumers 	and visitors.
c. 	The price and allocation 	regulatory 	features 	of the bill
may 	lead 	to 	higher 	gasoline 	prices.
The 	Act 	and 	the 	proposed 	amendments 	may 	have 	adverse
consequences 	for 	consumers. 	Short 	term 	price 	discounts 	designed
to attract new customers may be deterred. 	The legislation may also
limit the availability of certain 	functional 	discounts. n Refiners
may 	be 	prevented 	from 	realizing 	all 	the 	efficiencies 	of 	vertical
integration, 	which 	can 	often 	reduce 	transaction 	and 	search 	costs
and 	lower 	prices 	to 	consumers. 24 	As 	a 	broad 	generalization,
22 ( ••• continued)
Zenith, 	475 	U.S. 	574, 	594 	(1986). 	If 	the 	Act 	is 	amended 	as
proposed, 	gasoline 	retailers 	in Utah may 	try to avoid 	liability by
refraining 	from 	competition, 	to 	the 	detriment 	of 	Utah 	consumers.
Under 	federal 	law, 	although purpose 	is 	important, 	in particular to
illuminate 	ambiguous 	conduct, 	the 	effect 	of 	the 	conduct 	on
competition 	(as distinguished 	from 	effects on a 	single competitor)
is 	the 	more 	relevant 	consideration. 	Thus 	illegality 	under 	the
Robinson-Patman Act 	requires 	that 	the effect 	of 	the pricing action
be 	either 	"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. 	§13(a).
Illegality 	under 	the 	Robinson-Patman 	Act 	may 	also 	require
establishing many 	factors 	in addition to effect or 	intent, 	such as
those 	relating 	to meeting 	competition 	and 	cost 	justification.
n 	In Texaco, 	Inc. 	v. 	Hasbrouck, 	the Supreme Court said that
"a 	functional 	discount that constitutes a 	reasonable 	reimbursement
for the purchasers' 	actual marketing functions will not violate the
Act." 	110 	S. 	ct. 	at 	2550.
For example, 	a 	vertically 	integrated refiner may be 	able
to achieve greater efficiency 	in coordinating its different 	levels
of 	distribution 	than 	is 	possible 	in 	market 	transactions. 	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 	Act 	and 	the 	proposed 	amendments
may discourage such 	firms 	from 	using these 	savings 	to 	lower prices
to 	consumers. 	The 	exemption 	for 	certain 	price 	differences 	based
on 	cost 	differences, 	§13-16-6(1), 	does 	not 	recognize 	the 	likely
cost 	savings 	due 	to 	coordination 	efficiencies 	of 	vertical
integration. 	The 	Act 	contains 	several 	provisions 	that 	would
(continued ••• )

David 	Buhler
Page 	9
economic 	theory 	suggests 	that 	vertical 	integration 	is 	likely 	to
harm consumers only when market power exists 	in at 	least one 	stage
of 	production. 25
An unintended effect may be to encourage vertically-integrated
refiners who distribute gasoline in utah to change otherwise lawful
pricing 	practices. 	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
price differences, 	which often operate to destroy cartel pricing. 26
However, 	such 	lawful 	price 	competition 	may 	be 	discouraged 	by 	a
number 	of 	provisions 	in 	the 	Act, 	including 	the 	recordkeeping 	and
disclosure 	obligations. 	Firms 	may 	simply 	decide 	to 	set 	uniform
prices 	across 	broad 	geographic 	regions 	to 	avoid 	violations. 27
24 ( ••• continued)
discourage 	firms 	from 	lowering 	prices. 	For 	example, 	§13-16-
4 	( 	1 	)
prohibits 	retail 	prices 	below 	the 	transfer 	cost 	to 	the 	outlet;
under §13-16-2 (2), 	"cost" 	includes a mandatory markup over adjusted
invoice 	or transfer price, 	so a 	firm 	risks violating 	the 	law 	if 	it
wants 	to 	set a 	lower 	margin.
25 See, 	~.,
Section 	4.21 	(1984). Department 	of 	Justice 	Merger 	Guidelines,
26
27
See, 	e.g., 	F.M. 	Scherer 	& D. 	Ross, 	Industrial 	Market
structure 	and 	Economic 	Performance 	515 	(3d 	ed. 	1990).
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 	law 	would 	resemble 	"uniform 	price 	laws,"
whose 	possible 	effects 	were 	discussed 	as 	follows 	in 	the 	1984 	DOE
Report, 	at 	122:
In a 	market where 	there 	are no 	restrictions 	on pr1c1ng, 	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.
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
( cont inued ••. )

,-,
i
David 	Buhler
Page 	10
IV. 	Conclusion.
For the 	reasons 	stated above, 	we 	believe that 	the Act 	and 	the
proposed 	amendments 	would 	tend 	to 	insulate 	gasoline 	refiners 	and
marketers from competition, 	and thereby could cause gasoline prices
in 	utah 	to 	increase. 	We 	appreciate 	the 	opportunity 	to 	comment 	on
this 	matter. 	Please 	feel 	free 	to 	contact 	us 	if 	we 	can 	be 	of
further 	assistance.
Sincerely,
~aJ~
Claude 	C. 	Wild 	III
Director
Denver 	Regional 	Office
27 ( ••• continued)
[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.