Topic:
SERVICE STATIONS; RETAIL TRADE; WHOLESALERS; LEGISLATION; GASOLINE; PRICE CONTROL; CONSUMER PROTECTION;
Location:
GASOLINE; GASOLINE DEALERS;

OLR Research Report


May 1, 2006

 

2006-R-0319

ZONE PRICING

 

By: Daniel Duffy, Principal Analyst

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 SB 502 as amended by Senate “A.”

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.”

SB 502, as amended by Senate “A” (1) temporarily bans gasoline producers and refiners from establishing price zones when selling to anyone who sells gasoline at retail in Connecticut; (2) requires producers and refiners to sell gasoline at the “posted rack price;” and (3) prohibits producers and refiners from discriminating in the posted rack price charged to retail sellers, except for actual delivery charges and discounts or rebates.

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).

SB 502, AS AMENDED BY SENATE “A”

This bill (1) temporarily bans gasoline producers and refiners from establishing price zones when selling to anyone who sells gasoline at retail in Connecticut; (2) requires producers and refiners to sell gasoline at the “posted rack price;” and (3) prohibits producers and refiners from discriminating in the posted rack price charged to retail sellers, except for actual delivery charges and discounts or rebates.

It requires gasoline retailers to set their prices based on the cost of gasoline in their possession and prohibits them from basing prices in anticipation of price increases.

In addition, the bill bars gasoline suppliers from prohibiting their retailers from offering discounts to cash customers. Sellers may offer discounts for cash, check, or similar means other than a credit card.

The bill makes a violation of its provisions concerning gasoline producers and refiners and cash discounts an unfair trade practice.

Senate Amendment “A” adds the provisions (1) temporarily banning gasoline price zones, (2) requiring producers and refiners to sell at the posted rack price and prohibiting them from price discrimination, and (3) concerning retailer price setting.

EFFECTIVE DATE: July 1, 2006, except for the provisions on cash discounts, which are effective on October 1, 2006.

Temporary Ban on Price Zones and Gasoline Marketing Practices

The bill 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. In addition, 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.

The bill requires producers and refiners to sell gasoline at the “posted rack price” and defines it as the price of each brand and grade of gasoline offered for sale. It requires producers and sellers to promulgate their posted rack prices at 6:00 p.m. each day. The price is the controlling price for the 24-hour period beginning the following 12:00 a.m. They must promulgate the price by (1) posting a sign conspicuously listing the price at the point of sale and (2) sending notices to all franchisees and, on request, to other retail sellers by facsimile, e-mail, or other means.

The bill prohibits producers and refiners from discriminating in the posted rack price charged to retail sellers, except to (1) charge the actual cost of transportation of delivered gasoline or (2) offer discounts or rebates. Discounts and rebates must be disclosed and offered to all of a producer's or refiner's retailers 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.

Retailer Mark-up Restrictions

The amendment requires retailers to set prices based on the actual price paid for gasoline located in their underground storage tanks and prohibits them from raising prices in anticipation of price increases.

Regulations

It requires the commissioner of the Department of Consumer Protection (DCP) to adopt emergency regulations, effective on July 1, 2006, 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 retailers to keep records to verify compliance and provide them for inspection by the DCP commissioner and the attorney general to verify compliance. The required regulations must at least require gasoline producers and refiners to keep records of the volume, price, date, and purchaser of gasoline sold and gasoline retailers to keep records of the volume, price, date, and seller of gasoline purchased.

BACKGROUND

Connecticut Unfair Trade Practices Act (CUTPA)

The law prohibits businesses from engaging in unfair and deceptive acts or practices. CUTPA allows the DCP commissioner to issue regulations defining what constitutes an unfair trade practice, investigate complaints, issue cease and desist orders, order restitution in cases involving less than $5,000, enter into consent agreements, ask the attorney general to seek injunctive relief, and accept voluntary statements of compliance. The act also allows individuals to sue. Courts may issue restraining orders; award actual and punitive damages, costs, and reasonable attorneys fees; and impose civil penalties of up to $5,000 for willful violations and $25,000 for violation of a restraining order.

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:ts