May 6, 2002

SENATE COMMITTEE TOLD PRIVATE BRANDERS IMPORTANT

A Senate Investigations Subcommittee held two days of hearings last week on volatile and rising motor fuel prices, which were widely reported in the general press, including the Wall Street Journal and The Washington Post. The first day, Tuesday, involved a "grilling" of representatives of major oil companies. The second day, Thursday, brought in eight other witnesses, including 3 state Attorneys General and 4 economists. At least three of those witnesses – two economists and one AG – made strong cases for the importance of a healthy independent sector to preserve competition. As used by the witnesses, the term "independent" generally meant merchant refiners (with no branded chain of retail) and private brand marketers ("able to buy from any supplier").

None of the witnesses were representing SIGMA, but what they had to say in many cases closely mirrored what we have been saying for years. They raised serious concerns about the market concentration resulting from major oil company mergers, and focused on the market power of individual remaining companies in specific markets. They looked at "choke points" in the distribution system, where suppliers also have significant control over pipelines and terminals serving an area. They looked at the overall loss of supply as refineries have been shut down (recognizing part of the problem is the high cost of upgrades to meet environmental regulations), and specifically pointed out the loss of unbranded supply as refiners have decided to limit their production to meeting their own branded needs. And they pointed to the proliferation of boutique fuels which has made it impossible to shift supplies from one area to another nearby area during spot shortages.

Not all of the testimony, particularly by the AGs, was "on target"; some of it was political grandstanding. For example, it is hardly "shocking" that oil companies operate in ways designed to maximize their profits. One Attorney General managed to find evidence of "collusion" when prices in an area were nearly uniform, and evidence of "price gouging" when they varied greatly! Nevertheless, despite some lapses, the overall tone of the hearing indicated that many are beginning to understand what is happening to cause price volatility in the market. Here are a few selected quotes from the prepared testimony:

Connecticut A.G. Richard Blumenthal: "Dangerous, damaging price spikes reflect unprecedented price volatility. In 1996, the difference between the highest monthly average gasoline price and the lowest was 23%. In 2001, the difference was 94%." Among his 5 recommendations: "stop and abate concentration of market power within the refining, distribution and retail markets ... require minimum levels of inventory ... prohibit zone pricing and other tactics that prevent gasoline retailers from obtaining gasoline at competitive prices ..."

Michigan A.G. Jennifer Granholm: "Differences in types of fuel marketed may prevent firms from freely interchanging inventories from one market to another in the face of a shortage ... Preserving competition in the supply of gasoline to independent marketers and retailers is essential to maintaining rigorous price competition on a fair and level playing field in the industry ... The consolidation in supply sources jeopardizes the ability of independents to compete ... The preservation of vigorous competition in the supply of unbranded gasoline is especially crucial ..."

California Sr. Asst. A.G. Tom Greene: "Inventory levels in the petroleum industry have declined dramatically over the last decade ... Because of minimal inventories and inelastic demand, virtually any single company has the power to increase prices – potentially dramatically – by withholding product from the market, or simply not investing in adequate capacity to make fuel ... The loss of independent discounters can have a direct effect on prices ... MTBE represents some 11% of the volume of gasoline in California. If simply removed, and not replaced, this could have dramatic effects on supply and prices ..."

Peter K. Ashton, Economist and Consultant: "At the retail level, concentration has been increasing, and more importantly, the most significant competitive influence, independent marketers, has dwindled in size and importance ... Over 65% of all retail sales now occur through branded stations, whereas only 5 years ago that number was less than 45% ... Considerable economic research over the years has demonstrated the competitive importance of maintaining a viable, strong independent, unbranded segment of the market, yet it is rapidly disappearing and may be one reason for increased price volatility ..."

Also testifying at that Senate hearing was Justine Hastings, Asst. Professor of Economics at Dartmouth, who said in part: "Independents compete heavily on price because they have no brand-loyal customer base. Independents are also the only retailers that can purchase gasoline from the lowest price wholesaler, and they are also the only stations that can completely determine their retail price independently of the upstream refiner ... Integrated refiners may have an incentive to raise the input cost of wholesale gasoline to rival independent retailers. Independent refiners do not have this incentive to raise rivals’ costs ... Large volume independent chains amplify the ability for outside entry into wholesale markets. They increase the ability for outside refiners to enter the market and supply their stations ... Boutique fuels further segment markets leading to fewer suppliers ... Divorcement will not lead to lower prices, and may increase inefficiency ... Minimum mark-up laws do not increase competition in the short run or the long run ... Independent retailers are important for competition. Independent refiners are important for competition ... In the long run, price volatility induced by boutique fuels may drive out independent retailers."

STAFF REPORT ON VOLATILITY AVAILABLE

This hearing did not take place in a vacuum. It was a follow-up to a majority staff report by the subcommittee. That 400-page report is available online, including a 16-page "executive summary". The study notes, among other things, that the gasoline wholesale market is "moderately concentrated" in 28 states and "highly concentrated" in 9. To download, go to www.senate.gov/%7egov_affairs/042902gasreport.htm.

GAO STUDY OF MARKETS UNDERWAY

The General Accounting Office (GAO), the investigative arm of Congress, is undertaking a major study of the structure of the petroleum downstream industry. As part of the study, they will be contacting many SIGMA marketers over the next few weeks – particularly marketers in California, Michigan, and Ohio. We have supplied GAO with names and phone numbers of contacts; we ask you to be as cooperative as possible with this study.

HAWAII HOOPLA

We leave this subject with a tidbit: Hawaii has pending legislation to impose retail price caps on gasoline!

SIGMA LOSES LAWSUIT

A unanimous 3-judge panel ruled against SIGMA and all other plaintiffs in NPRA v. EPA last Friday, a lawsuit challenging EPA’s new ultra-low-sulfur diesel rules. The judges didn’t buy any of our arguments: that the standard itself and the phase-in both were arbitrary and capricious; that it imposed a hardship on small businesses, and that it would have a negative effect on supply. We are looking for any grounds for possible appeal, but on first review it doesn’t look good.

TANK TESTIMONY THIS WEEK

SIGMA Legislative Committee Chairman Art DeBlois will testify on behalf of SIGMA and NACS this Wednesday before the Senate Superfund Subcommittee on S. 1850, Sen. Chafee’s (R-RI) bill on underground storage tanks. We will be supporting the bill, and asking for one amendment to widen the availability of LUST Trust Fund money to all cleanups, not just those where the "responsible party" faces financial hardship.

BELOW COST SELLING

Our "coverage" of SIGMA’s action on below-cost selling last weekend was in a separate mailing to all recipients of this Weekly Report on Thursday. Click here for the full report.

SENATE ENERGY CONFEREES

The Senate has named its members of the Conference Committee to work out differences with the House on energy legislation. The House is expected to name its members in the next few days. Senate conferees are:

Bingaman (D-NM) Murkowski (R-AK)

Hollings (D-SC) Domenici(R-NM)

Baucus (D-MT) Grassley (R-IA)

Kerry (D-MA) Nickles (R-OK)

Rockefeller (D-WV) Craig (R-ID)

Breaux (D-LA) Campbell (R-CO)

Lieberman (D-CT) Thomas (R-WY)

Reid (D-NV) Lott (R-MS)

Jeffords (I-VT)

It’s dangerous to predict the outcome, but there are some hints. Only 1 of these Senators is from the "corn belt", but only 2 of them voted against the ethanol mandate on ANY vote. Also interestingly, a slight majority (9 of 17) of the conferees supported drilling in ANWR, even though the overall Senate defeated that proposal.

TRUCKING SECURITY

A Senate Committee has approved legislation (S. 1750) that clarifies provisions of the anti-terrorism bill enacted in October 2001 requiring criminal background checks for certain drivers. A detailed memo from our attorneys is available by clicking here.