You asked for (1) a description of zone pricing, (2) a history of the issue in Connecticut, (3) if the issue has been considered in other states or by the federal government, and (4) for a summary of LCO 4304.

SUMMARY

Gasoline industry suppliers sometimes sell the same brands and grades of gasoline to retailers at different prices depending on the “price zone” in which the retailer is located. Each supplier determines the number and boundaries of a price zone that best suits his needs.

The issue has been debated in Connecticut since 1997. There have been proposals to ban them or to allow them but set a cap on the maximum allowable price difference between zones.

We did not identify any other state that has banned price zones, but we did discover that the issue has also been debated in other states. For example, a task force in Maryland studied the issue in 2001. The Federal Trade Commission studied price zones and found that their impact on consumer welfare is “ambiguous. ”

LCO 4304 bans gasoline producers and refiners from establishing price zones for two years, beginning on July 1, 2006. It also imposes certain other gasoline marketing practice restrictions. It prohibits these suppliers from using pricing system that would prevent retail sellers from paying lower prices on an equal basis with other in-state retail sellers. It requires producers and refiners to disclose and offer discounts or rebates to all of their retail sellers on equal terms and conditions. It requires retail sellers to set prices based on the actual price paid for gasoline and prohibits them from raising prices in anticipation of price increases. It requires the Department of Consumer Protection to adopt emergency regulations to monitor and enforce compliance.

The Energy and Technology Committee amended a bill by adding a similar amendment. The bill is in the House of Representatives.

ZONE PRICING

Zone pricing is a gasoline industry practice of selling the same brands and grades of fuel to retail sellers at different prices depending on the “price zone” in which the retail seller is located. Price zones are not established by law. Instead, gasoline suppliers determine their own price zones. They may establish as many or as few as they determine best suits their needs.

In a 1997 General Law public hearing, Tom Hinchman of Mobil Oil (now ExxonMobil) described the practice of creating price zones. He said that Mobil has 46 different price zones in Connecticut. He stated,

We carefully analyze the competitive conditions in order to determine the boundaries of a given market so that purchases supplied by Mobil in different zones do not compete significantly with each other. The analysis often takes into consideration such factors as competition, gasoline taxes, type of product, traffic patterns, distance, natural barriers such as rivers and parks, and man-made barriers such as highways.

His description of the process did not identify the specific information used or the criteria applied. Mobil, like the other gasoline suppliers, has not identified its price zones.

In addition to not disclosing where the boundaries are, gasoline suppliers do not disclose the price differentials between zones. Hinchman in 1997 said that the differential ranged between 2¢ and 5¢. That year, the retail price of gasoline in Connecticut ranged between $ 1. 25 and $ 1. 40 per gallon.

HISTORY OF PRICE ZONE LEGISLATION IN CONNECTICUT

The General Law Committee raised a bill in 1997 that would have prohibited all gasoline suppliers from establishing price zones. It reported a bill that would have allowed suppliers to establish price zones but limited the price differences between zones to five cents. The apparent rationale behind the five cent differential was to allow sellers to recoup higher transportation costs.

The issue has been discussed each year since then, and there have been bills to ban, modify, or investigate zone pricing in 1998, 1999, 2001, 2002, 2005, and 2006. Zone pricing was one of the issues considered by the 1997 Task Force on Gasoline Pricing in Connecticut; the task force, among other things, recommended banning zone pricing (OLR Report 98-R-0215). The bills to ban or modify zone pricing were substantially like either the raised or reported 1997 bills.

OTHER STATE ACTIONS

The issue has been debated in other states as well, but we could not identify any state that has prohibited gasoline industry zone pricing. We found, for example, Maryland's 2001 “Task Force Report on Gasoline Zone Pricing. ” The report was similar to Connecticut's 1997 task force report in several aspects. It discussed the number of price zones (each refiner in Maryland has at least 10 but fewer than 200 price zones), the price difference between zones (from one to 10 cents), and the reason zones are established (to account for the number of competing stations, number of vehicles or traffic flow, population density, geographic characteristics). Maryland's task force considered two types of proposals to address zone pricing, open supply and uniform wholesale pricing. It stated that the “essence of [open supply] is the elimination of exclusive purchasing agreements between refiners/wholesalers and retail dealers. ” Uniform wholesale pricing requires refiners to equalize their rack prices at each terminal. The task force rejected both proposals because, it concluded, they would do nothing to increase supply. Unlike Connecticut's task force, the Maryland task force did not recommend banning price zones.

Currently, there are proposals concerned with gasoline prices in New Jersey and New York. New Jersey's legislation would create a Wholesale Gasoline Pricing Board. The bill requires the board to determine and set the initial maximum pre-tax wholesale gasoline price for regular unleaded, mid-grade, and premium gasoline and use the following factors: a baseline price for regular unleaded gasoline, location adjustment, marketing margin, zone price adjustment, mid-grade adjustment, and premium adjustment.

New York has two bills. One prohibits zone pricing and states that gasoline prices set using zone pricing are unconscionably excessive (AB 472). The other prohibits zone pricing and defines it as arbitrary price differences within the same market area based on what consumers are likely to pay or where the effect is to injure competition (AB 3856 and S 973 (identical bills)).

FEDERAL TRADE COMMISSION

A Federal Trade Commission (FTC) working paper reviewed two vertical restraints commonly used in gasoline marketing, price zones and redlining (“The Economics of Price Zones and Territorial Restrictions in Gasoline Marketing,” Meyer and Fischer (March, 2004)). The authors wrote that price zone critics argue that the existence of price zones implies that gasoline markets are not competitive. They found that even if zone pricing reflects price discrimination and the existence of price discrimination reflects market power, it does not follow that the practice reduces consumer welfare. They stated that, “the impact of zone pricing on consumer welfare is ambiguous” (p. 13).

SUMMARY OF LCO 4304

Wholesale Prices in Different Zones

The amendment makes several changes, including a temporary ban on price zones established by producers and refiners. It prohibits, for two years beginning on July 1, 2006, petroleum product producers and refiners from using a pricing system under which their wholesale prices are based on a retail seller's location in a price zone established by the supplier. Prior bills applied to all suppliers, which included distributors (typically called “jobbers”).

The amendment would change the prices charged retail sellers by these suppliers. Proponents of the ban argue that zone pricing is used to increase prices in high-cost, low-competitive parts of the state. The ban would, they argue, lower prices to retail sellers in these zones. Opponents of the ban argue that zone pricing is used to lower prices in parts of the state to meet competition or to enable retail sellers to compete with retail sellers in adjoining states that have a lower gas tax. The ban would, they argue, compel them to raise prices in these zones. In either event, retail sellers set the prices charged consumers; the amendment's effect on consumer prices would be indirect.

Retail sellers

Unlike the bills in prior years, the amendment also addresses other pricing practices. It prohibits producers or refiners from using any pricing system that would prevent retail sellers from paying lower prices on an equal basis with other in-state retail sellers.

Gasoline industry marketing levels are not strictly delineated. Jobbers (distributors) buy gasoline from suppliers, typically refiners, and deliver it to dealers. The gasoline may be branded (sold under a trade name like Shell or Gulf) or unbranded. Jobbers may also own and operate their own retail outlets. If a jobber sells gasoline at retail, the amendment presumably prohibits a producer or refiner from discriminating in the prices charged to the jobber.

Discounts or Rebates

The amendment prohibits producers and refiners from discriminating in the price charged to retail sellers, except to offer discounts or rebates. Discounts and rebates must be disclosed and offered to all of a producer's or refiner's retail sellers on equal terms and conditions. The bill requires producers and refiners to state the discounts or rebates, and the period during which they are being offered, on a separate line on each invoice.

The bill makes a violation of its provisions on zone pricing and gasoline marketing an unfair trade practice.

Retail seller Mark-up Restrictions

The amendment requires retail sellers to set prices based on the actual price paid for gasoline and prohibits them from raising prices in anticipation of price increases.

Regulations

The amendment requires the commissioner of the Department of Consumer Protection (DCP) to adopt emergency regulations to monitor and enforce compliance with its provisions and the existing law on gasoline allocation, which requires gasoline refiners to supply independent gasoline retail distributors with gasoline at wholesale prices and in reasonable quantities as long as they supply gasoline to their franchisees.

The regulations must also require producers, refiners and retail sellers to keep records to verify compliance and provide them for inspection by the DCP commissioner or the attorney general to verify compliance. The required regulations must at least require gasoline suppliers to keep records of the volume, price, date, and purchaser of gasoline sold and gasoline retail sellers to keep records of the volume, price, date, and seller of gasoline purchased.

RELATED BILL

The House referred An Act Concerning Energy Resource Market Disruption Emergencies and Price Gouging (sHB 5670) to the Energy and Technology Committee on April 12. It reported a substitute bill the following day. It added an amendment that has many similar provisions to LCO 4304. It (1) establishes a two-year ban on gasoline producers and refiners from establishing price zones when selling to “retail distributors,” (2) requires producers and refiners to sell gasoline at the “posted rack price” as of the day and time when the gasoline is picked up for delivery, and (3) prohibits producers and refiners from discriminating in the posted rack price charged to retail distributors, except to offer discounts or rebates.

DD: dw