Endnotes | 
Chapter 16 
Table of Contents |
Questions (15), (16), and (17) of the Resolution request the views
of survey participants on the following issues:
(15) The effects of the provision contained in section
486H-10(a), Hawaii Revised Statutes, that allows
manufacturers and jobbers to open one company operated
retail service station for each dealer operated service
station owned by that manufacturer or jobber, up to a
maximum of two company owned retail service stations;
(16) Whether laws in other states prohibit or limit the
number of retail service stations that may be opened or
operated by wholesalers, producers, or refiners of
petroleum products, or their subsidiaries; and
(17) Whether or not the existing moratorium has resulted in
lower gasoline prices for consumers.
These questions raise similar issues and are discussed together. The
survey participants were requested to respond only to questions (15)
and (17); the divorcement laws of other jurisdictions as requested by
question (16) are contained in the discussion section following the
survey comments.
State Government
AG: Regarding question (15), the Attorney General stated its belief
that section 486H-10, H.R.S., was "anti-consumer, anti-competitive, and
anti-dealer":
Such effects probably could not be measured in any
meaningful way. Theoretically, the provision
establishes an artificial and arbitrary entry barrier
to new competition. But the barrier is only partial.
Therefore, the provision compromises vigorous
competition and at the same time compromises protection
of dealers from competition. The measure is anti-
consumer, anti-competitive, and anti-dealer. Only
those with sufficient capital to explore any loopholes
will benefit. The small dealer certainly will not
benefit.577
With respect to question (17), the Attorney General noted that
consumer prices have increased, partly due to a lack of competition:
The Department of the Attorney General has no such
evidence. The only evidence the Department has is that
consumer prices have increased. The Department
believes that the lack of competition is an important
factor explaining the increase. The Department cannot
say at this point what other factors have
contributed.578
DBEDT: With respect to question (15), the department noted that while
there is no evidence illustrating the effects of section 486H-10,
restrictions on naturally occurring competitive forces are likely to be
detrimental to free-market efficiencies:
We know of no evidence that exists to illustrate the
effects of the existing restriction under Section 486H-
10(a), HRS. The direct results of this restriction
would probably be better identified by industry members
to whom it applies. However, we offer the observation
which we have stated throughout our responses to the
survey, that any restrictions on the naturally
occurring competitive forces in the market are likely
to be detrimental to the efficiencies of a free-market.
Nevertheless, the best evidence of the effects of this
restriction would be to determine what plans by
industry to add additional retail stations, if any,
were impacted by the restriction. This can be best
answered by industry itself.579
Regarding question (17), the department stated that it knew of no
evidence that the moratorium had resulted in lower gasoline prices for
consumers. The department further noted that "federal policy now
recognizes that free market forces are the best way to deal with
gasoline supply and demand, and that government intervention (i.e.,
allocation and price control) has only served to exacerbate past
shortages and market disruptions."580
Gasoline Dealers
HARGD: With respect to question (15), the Association believed that
section 486H-10 has allowed for controlled growth by suppliers seeking
to capture market share:
We believe the provision has allowed the opening of a
few new locations in new growth areas. It has also
provided [a specified entity] with the opportunity to
avoid franchising any locations, thus maintaining a
cloak of confidentiality around their pricing
structure, and questions of impropriety within their
pricing structure. We do not believe this has created
a negative impact to either the dealer organization or
the consumer. We believe it has allowed controlled
growth by suppliers wishing to capture market share
utilizing the vertically integrated method of
marketing.581
Regarding question (17), the Association stated that the moratorium
has helped to maintain the viability of independent dealers:
We do not believe lower prices would have occurred with
or without legislation. Petroleum prices are
controlled not by retail strategies, but by strategies
of refiners and suppliers. Likewise, we have seen no
evidence of a price increase to the consumer based on
the prohibition of suppliers from opening unlimited
locations at their discretion.
Price competition at the retail level is contingent
upon wholesale competition. With the franchisor being
the supplier, landlord, and franchisor, they in reality
control the limited means of competition available at
the retail level. With the
supplier/landlord/franchisor being allowed to compete
through vertically integrated retail locations, it
provides the supplier with total control of the retail
pricing structure of gasoline to the consumer.
It is our conclusion that the moratorium has
accomplished the following:
- Maintained an importance of independent dealers as a
means for suppliers to maintain marketshare.
- Provided a means for independent dealers to survive
the federal UST requirements.
- Provide[d] the consumer with the most possible
locations during a trend by suppliers to sell higher
volumes through fewer locations all on a self-serve
method of retailing.
- Provide[d] more job stability than would otherwise
exist by providing a need for a dealer organization.582
Jobbers
HPMA: With respect to question (15), the HPMA believed that "this
provision is totally restricted to jobbers":
Jobbers are customers of refiners and buy their product
at a functional discount which is a lower price than
dealer tankwagon. This functional discount, which is
standard in the petroleum industry, provides for the
cost of a jobber operating his own equipment, trucks,
terminal and various distribution activity. There is
not enough margin for a jobber to purchase product from
a manufacturer, operate his business, and make a return
on his investment in a new facility if he is forced to
put a dealer in between him and the consumer.
Traditionally, jobbers operate their own facilities
because they are low-cost operators. They need to
absorb the margin that would otherwise go to a dealer.
A refiner/manufacturer can provide for a dealer type
operation if he so chooses to because there is only one
layer of a dealer in between him and a consumer --
whereas a jobber is a second layer from a manufacturer
and then putting another layer of a dealer in between
him and the consumer make it economically unfeasible
for a jobber to build a facility under the restriction
of 486H-10(a). This statute totally inhibits the
jobber from retail expansion and therefore penalized
the consumer.583
The HPMA further noted that Act 238, Session Laws of Hawaii 1995 (in
part amending section 486H-10(a), H.R.S.), has decreased competition in
Hawaii's retail gasoline market:
Act 238 ... is government intervention in the
marketplace. The effect of this [Act] has been to
dampen competition in the retail gasoline market and to
facilitate the status quo, which has led to the growth
of the market share of the major oil companies because
their marketing is done through retail dealers. This
act has stopped the expansion of jobbers & independent
refiner/marketers who have chosen to market through
company-operated stations for various reasons. If the
purpose of this moratorium for the past four years has
been to create more competition in the marketplace, it
has failed miserably. The consumer benefits from
choices and competition; he loses when competition is
restricted by Act 238.584
Finally, with respect to question (17), the HPMA argued that the
moratorium has not benefited Hawaii's consumers:
HPMA can strongly state that there have not been lower
gasoline prices to the consumer and that competition
has been restricted by the existing moratorium.
Government moratoriums and intervention historically
cause prices to rise and are a disservice to consumers.
The consumer benefits if there are more new stations
built, increasing the level of competition and allowing
him to have choices. Any restriction of that process
by government is to the detriment of the consumer. In
the free-market system, the marketplace will punish a
manufacturer or jobber that over expands and creates
more supply than demand. This is the beauty of the
American free-enterprise system. Government should not
hamper this process.585
Aloha Petroleum: In response to question (15), Aloha Petroleum also
argued that the moratorium restricts competition and is therefore not
beneficial to consumers:
Regardless of whether manufacturers or jobbers are able
to open two new company-operated locations, any
moratorium is a restriction on business and thus
competition and is not beneficial to the consumer. The
moratorium was designed to protect a small group of
large branded dealers without adequate consideration of
the cost to the consumer. In addition, the moratorium
ignores the direction in which the gasoline consumer is
headed, which is for fast and convenient service. This
trend is not recognized or helped by the moratorium and
the consumer is inevitably harmed.586
With respect to question (17), Aloha Petroleum noted that the
moratorium protects a few large branded dealers at the expense of
consumers and may have prohibited other gasoline distributors from
entering Hawaii's markets:
It is evident that the moratorium has not resulted in
lower gasoline prices and may indeed have caused an
increase in gasoline prices. The moratorium has
prohibited the opening of any new company-operated
locations and unsuccessfully attempts to protect a few
large branded dealers at the expense of the consumer.
Consumers are looking for quick service with
convenience stores and fast food facilities. Due to
this preference of consumers and the advanced
automotive technology that virtually requires repairs
to be completed by car dealerships, the full-service
facilities offered by dealer-operated facilities with
repair shops are becoming obsolete. When existing
dealer-operated gasoline stations have closed for
reasons such as increased lease rent payments,
operating costs, EPA requirements, etc., the moratorium
has prohibited gasoline distributors or jobbers from
opening company-operated stations at those sites. This
has in some circumstances created a void and
neighborhood customers have been forced to either drive
further or purchase from the remaining stations who,
without the competition, may have increased prices.
The moratorium may also have prohibited other gasoline
distributors from entering Hawaii's market. For these
reasons, it is our belief that the moratorium has
actually increased gasoline prices. Competition is the
best way to encourage lower gasoline prices. Jobbers
play a crucial role in the petroleum industry and have
been instrumental in keeping gasoline prices down.
Jobbers have historically offered gasoline at prices a
few cents below the major brands. However, jobbers do
not manufacture petroleum products and must rely on
refiners for product. As such, any legislation
implemented to continue the moratorium should be
drafted to exclude jobbers.587
Oil Companies
Shell: With respect to question (15), Shell noted that this section
may reduce competition and, in the long run, could result in higher
prices:
Shell does not have company-operated service
stations in Hawaii, but we believe the retail market
should be available to suppliers as it is to dealer
operators. Assuming that all other factors affecting
competition remain the same, restricting the number and
type of competitors with access to the market, whether
dealer-operated or company-operated, may reduce
competition and in the long run could result in higher
prices than would have prevailed in the absence of the
restriction.588
In response to question (17), Shell stated that it had insufficient
data to determine what effect the moratorium has had on prices:
Shell does not have sufficient data to determine
whether the moratorium has had any effect on prices.
For example, we do not know how many additional
company-owned service stations would exist, or where
they would be located, in the absence of the
moratorium.
Gasoline prices are generally responsive to
competition in the market. Over time, a wide variety
of factors influences the degree of competition. It is
difficult to isolate any one factor, such as the
moratorium, to determine whether it has had any
relationship to prices, much less a cause-and-effect
relationship. This is particularly true in this case,
because the moratorium has been in effect for a
relatively short period of time.589
BHP: Regarding question (15), BHP stated that section 486H- 10(a)
favors dealers while limiting the ability of jobbers and manufacturers
to compete:
The provision arbitrarily limits a category of market
participants, namely jobbers and manufacturers, from
providing their competitive offering directly to
consumers. The jobbers and manufacturers are
disadvantaged in that the provision decreases their
ability to compete. The surest way consumers can
ensure that the things they value are offered to them
at a price they are willing to pay, is to have the
broadest constituency possible trying to satisfy their
wants. Dealers are the real winners in that the
provision effectively designates them as the favored
constituents to operate a profitable business
enterprise while arbitrarily excluding others. It also
shelters them from competitive offerings from the
excluded market participants.
While this provision was enacted by the 1995
legislature, we recognize it as a temporary compromise
put into place during the additional two year extension
of the current moratorium. BHP Hawaii continues to
believe that the consumer is best served by an open
competitive market driven by an economy that is not
controlled by legislation, but by a free enterprise
system.590
In response to question (17), BHP stated that "[t]here is no evidence
to suggest that the moratorium has resulted in lower gasoline prices
for consumers, rather it has resulted in a significant reduction in the
number of service stations and less serviced areas."591
Chevron: With respect to question (15), Chevron stated that "[t]he
Hawaii moratorium on new company-operated stations is anti-competitive
and anti-consumer":
If you eliminate one major group of players from the
retail marketplace, particularly the one group which
has an interest in minimizing the cost of distribution
between the refinery and the pump, then consumer prices
will inevitably go up.
In this context, the effect of the current
provision allowing a company to open two new company-
operated stations if it first opens two new dealer-
operated stations is negligible.592
With respect to question (17), Chevron stated that "it is inevitable
that the moratorium has resulted in higher gasoline prices for Hawaii
consumers. It could not possibly have any other effect. Every
impartial study conducted on this subject has reached the same
conclusion...."593
Discussion
In addition to divestiture, or vertical divorcement, as discussed
in chapter 12, retail divorcement, that is, prohibiting or restricting
the operation of retail service stations or the retail sale of gasoline
by refiners or producers, has been used to restructure the oil industry
through legislative initiative.594 This section reviews the retail
divorcement laws of other jurisdictions (as requested by question (16)
of the Resolution), studies conducted in other jurisdictions, arguments
for and against divorcement, predatory pricing, and concerns regarding
independent dealers.
A. Divorcement Laws of Other Jurisdictions
Divorcement laws are currently in effect in five states other than
Hawaii--Connecticut, Delaware, Maryland, Nevada, and Virginia--as well
as the District of Columbia. Florida has repealed its divorcement
statute,595 while Louisiana's statute became inapplicable by its own
terms after eight months.596 Since 1974, divorcement bills have come
before forty-one state legislatures.597
Connecticut
Connecticut's divorcement law reads as follows:
Sec. 14-344a. Retail service stations; opening
and operation by producers or refiners prohibited after
July 1, 1979. After July 1, 1979, no producer or
refiner of petroleum products shall open a major brand,
secondary brand or unbranded retail service station in
the state and operate such station with employees of
such producer or refiner, a subsidiary company,
commissioned agent or under a contract with any person,
firm or corporation managing such station on a fee
arrangement with such producer or refiner. Any such
station shall be operated only by a retail service
station dealer. As used in this chapter, "retail
service station" means a place of business where
gasoline or special fuel is sold and delivered into the
tanks of motor vehicles for use as fuel in the
operation of such motor vehicles.
Sec. 14-344b. Retail service stations; operation
by producers or refiners prohibited after July 1, 1980.
After July 1, 1980, no producer or refiner of petroleum
products shall operate a major brand, secondary brand
or unbranded retail service station in the state with
employees of such producer or refiner, a subsidiary
company, commissioned agent or under a contract with
any person, firm or corporation managing such station
on a fee arrangement with such producer or refiner.
Any such station shall be operated only by a retail
service station dealer.598
Delaware
Delaware's divorcement statute reads:
§2905. Independence of retail dealers.
(a) No manufacturer of petroleum products shall
open a major brand, secondary brand or unbranded retail
gasoline outlet or service station in the State, that
would be operated by company personnel, a subsidiary
company, or a commissioned agent.
(b) The Office of Retail Gasoline Sales shall
adopt rules or regulations defining the circumstances
in which a manufacturer may temporarily operate a
service station in times of emergency or similar
special circumstances.599
District of Columbia
The District of Columbia's divorcement law reads as follows:
§10-212. Restrictions on operation.
(a) After April 19, 1977, no producer, refiner,
or manufacturer of motor fuels as the terms are defined
in §10-201 (10) and (12) shall open a retail service
station in the District of Columbia, irrespective of
whether or not such retail service station will be
operated under a trademark owned, leased, or otherwise
controlled by such producer, refiner, or manufacturer,
unless such retail service station is to be operated by
a person or entity other than either an employee,
servant, commissioned agent or subsidiary of such
producer, refiner, or manufacturer or a person or
entity who operates or manages such retail service
station under a contract with such producer, refiner,
or manufacturer which provides for a fee arrangement.
(b) After January 1, 1981, no producer, refiner,
or manufacturer of motor fuels as the terms are defined
in §10-201 (10) and (12) shall operate a retail service
station in the District of Columbia, irrespective of
whether or not such retail service station will be
operated under a trademark owned, leased, or otherwise
controlled by such producer, refiner, or manufacturer,
with employees, servants, commissioned agents, or
subsidiaries of such producer, refiner, or manufacturer
or with a person or entity who operates or manages such
retail service station under a contract with such
producer, refiner, or manufacturer which provides a fee
arrangement. However, any entity, which as of
October 9, 1979, operates a retail service station in
the District of Columbia, and of which a producer,
refiner, or manufacturer as defined in §10-201 (12)
only has no more than 49 per centum voting control, may
continue to operate such station after January 1, 1981,
so long as no producer, refiner or manufacturer as
defined in §10-201 (12) only has more than 49 per
centum voting control of the entity.600
Maryland
In 1974, Maryland became one of the first states to enact a
divorcement law.601 Maryland's divorcement statute was challenged in
court and ultimately upheld by the United States Supreme Court in 1978
in Exxon Corp. v. Governor of Maryland.602 Following a one-year
transition period allowing producers and refiners to enter into
alternative arrangements, Maryland's divorcement statute became
effective on July 13, 1979; however, because of further litigation,
several service stations remained company-operated until 1981.603
Maryland's statute, which has been the subject of numerous studies on
the effects of divorcement, was rewritten and recodified on October 1,
1992, as follows:604
§10-311. Operation of station
(a) In General. -- Except as provided in subsection
(c) of this section, each retail service station in the
State:
(1) shall be operated by a retail service station
dealer; and
(2) may not be operated by a producer or refiner
of motor fuel;
(i) with a commissioned agent, company
personnel, or a subsidiary company; or
(ii) under a contract with a person who
manages the station on a fee arrangement with
the producer or refiner.
(b) Scope of section. -- This section does not apply
to facilities that an agricultural cooperative
association owns and operates ...
(c) Exemption. -- A retail service station shall be
exempt from subsection (a) of this section for a fiscal
year that starts July 1, if:
(1) on January 1, 1979, the station was operated
by a subsidiary of a producer or refiner of motor fuel;
and
(2) the gross revenues of the subsidiary from the
sale of motor fuel in the State for the preceding
calendar year is less than 2% of the gross revenues of
the subsidiary from all retail operations in the State
for the preceding calendar year.605
Nevada
Nevada's divorcement law reads as follows:
§597.440. Restrictions on refiner's operation of
service stations.
1. On or after July 1, 1987, except as provided
in subsection 3, a refiner shall not commence the:
(a) Direct operation of a service station, with
his own employees or through a subsidiary or
commissioned agent or a person on the basis of a fee;
or
(b) Sale of motor vehicle fuel at a service
station.
2. On or after July 1, 1988, except as provided
in subsection 3, a refiner shall not engage in the
direct operation of more than 15 service stations in
this state, with his own employees or through a
subsidiary or commissioned agent or a person on the
basis of a fee.
3. A refiner may operate a service station for
not more than 90 days if the:
(a) Retailer voluntarily terminates or agrees not
to renew the franchise; or
(b) Franchise is terminated by the refiner...
.606
Virginia
Virginia's divorcement law reads as follows:
§59.1-21.16:2. Operation of retail outlet by
refiner; apportionment of fuels during periods of
shortage; rules and regulations. -- A. After July 1,
1979, no refiner of petroleum products shall operate
any major brand, secondary brand, or unbranded retail
outlet in the Commonwealth of Virginia with company
personnel, a parent company, or under a contract with
any person, firm, or corporation, managing a service
station on a fee arrangement with the refiner; however,
such refiner may operate such retail outlet with the
aforesaid personnel, parent, person, firm, or
corporation if such outlet is located not less than one
and one-half miles, as measured by the most direct
surface transportation route, from the nearest retail
outlet operated by any franchised dealer; and provided,
that once in operation, no refiner shall be required to
change or cease operation of any retail outlet by the
provisions of this section.
During the period July 1, 1990, through June 30,
1991, no refiner may construct and operate with company
personnel as defined in this section any new major
brand, secondary brand, or unbranded retail outlet in
the Commonwealth of Virginia, except on any property
purchased or under option to purchase by March 1, 1990.
* * *607
B. State Reports
Hawaii and several other jurisdictions have completed reports
regarding retail divorcement, including the following:
Arizona
In 1987, a joint legislative study committee on petroleum pricing,
marketing practices, and retail divorcement was convened, inter alia,
to investigate these issues, study the laws of other states, and
determine the impact of retail divorcement in Arizona.608 After
reviewing Maryland's divorcement statute and Georgia's proposed
divorcement legislation, as well as testimony from all aspects of the
petroleum industry, the committee rejected legislation that would
address the issue of retail divorcement. The committee noted that the
antitrust division of the Arizona Attorney General's office and the
Bureau of Competition of the Federal Trade Commission both testified
that they had no knowledge or evidence of predatory pricing practices
in the State. The Attorney General's office further noted that current
laws were "more than adequate to handle any possible case involving
predatory pricing or anticompetitive behavior" and that "evidence
supports the fact that any legislation in this area will increase
prices".609
Hawaii
The merits of retail divorcement legislation in Hawaii have been
reviewed in several recent reports, including the following:
Attorney General. In 1993, the Attorney General reviewed a number
of studies, mostly relating to Maryland's divorcement law, and
concluded that "none of the studies establish a conclusive case for or
against divorcement"; the decision to implement divorcement in Hawaii,
according to the Attorney General, ultimately comes down to a policy
decision: "If the better policy favors the protection of independent
dealers from competition even at the cost of higher prices to the
public and perhaps inefficiency in the market, divorcement is
appropriate. If the better policy is to promote competition, efficiency
in marketing, and lower consumer prices, divorcement should be
rejected."610
In 1995, the Attorney General was asked by the Legislature for a
legal opinion as to whether permanent divorcement would constitute a
taking in violation of the Fifth Amendment of the United States and
Hawaii Constitutions, and any other legal ramifications that may arise
from permanent divorcement legislation. The Attorney General concluded
that section 486H- 10, Hawaii Revised Statutes, does not violate the
eminent domain clauses of the United States or Hawaii Constitutions.
In particular, the Attorney General found that section 486H-10 does not
deprive manufacturers and jobbers who own retail service stations of
all economically viable use of their property, nor does that section
"prohibit an oil company from leasing their property to independent
dealers" or "from owning retail service stations or from making
arrangements for them to be operated as retail outlets for the oil
company's products."611
Department of Commerce and Consumer Affairs. In a study prepared for
that department, Schoen (1993) sought to answer the question whether
consumers derived any benefits from divorcement by focusing on dealers
and divorcement at the "grass roots" level in Maryland, and concluded
that divorcement does not appear to have harmed consumers, who "have
accepted divorcement".612
University of Hawaii Professors Walter Miklius and Sumner J. LaCroix.
Professors Miklius and LaCroix (1993) believed that divorcement
legislation would lead to higher gasoline prices in Hawaii and reduce
the number of retail outlets. On the basis of Maryland's experience
with divorcement613 and their own independent analysis, Miklius and
LaCroix concluded that retail divorcement legislation in Hawaii would
similarly increase gasoline prices in Hawaii and result in fewer
service stations.614 They concluded that Hawaii's divorcement law is
anticompetitive and would impose large financial burdens on Hawaii's
consumers.615
University of California at Berkeley Professor David J. Teece.
Pacific Resources, Inc. commissioned Professor David Teece in 1991 to
prepare a study of retail divorcement in Hawaii with the assistance of
the Law and Economics Consulting Group.616 Teece also believed that
divorcement legislation would be harmful to Hawaii's consumers, based
in part on his findings that the impact of divorcement legislation on
the mainland "has been to increase prices and lower service, thus
protecting inefficient competitors by making the market less
competitive, all at the expense of consumers."617
Maryland
Maryland was one of the first states to pass a retail divorcement law
in 1974 (effective in 1979), which has generated a significant amount
of controversy.618 In 1978, Maryland's statute was upheld by the
United States Supreme Court in Exxon Corp. v. Governor of Maryland.619
After reviewing various studies conducted regarding the economic impact
of Maryland's divorcement statute, Maryland's Department of Fiscal
Services concluded that "divorcement led to both higher gasoline prices
and shorter hours of operation in the period following divorcement."620
Although the department found that available data was insufficient to
produce a reliable estimate of the adverse dollar impact on the state's
motorists since that statute became operative, the department's
analysis indicated that both economic theory and empirical research
showed that divorcement had cost consumers money.621 The department
further noted that while changes in gasoline marketing had made its
analysis more difficult, divorcement nevertheless could not be
considered to be in the financial interests of Maryland's consumers.622
Massachusetts
A task force was convened by the Joint Committee on Energy of the
Massachusetts Legislature in 1992 to study retail divorcement, open
supply, and related issues. After conducting an in-depth study on
these issues, the task force concluded that it could not determine
whether predatory pricing and company store subsidization was being
practiced in local markets. The task force nevertheless concluded that
company operated stations were most likely not a strong enough
influence in that state's markets since their numbers and respective
market shares were small; "[w]hile there may be isolated cases of such
behavior, divorcement cannot be recommended without stronger evidence
of the anti-competitive nature of company operated stores."623 The
task force further recommended that the Massachusetts Attorney General
examine company operated stations to determine their pricing influence
on the local market.624
Montana
In March, 1989, the Montana Legislature approved a House Joint
Resolution requesting a joint subcommittee to conduct an interim study
of the system of marketing motor fuels in Montana to determine if
subsidized pricing and predatory motor fuel franchise practices give
unfair competitive advantage to certain retailers and wholesalers.625
The subcommittee, after considering testimony presented, recommended
that the legislature enact bills regulating the price of motor fuel at
the wholesale and retail levels and prohibiting below-cost sales of
motor fuels, and creating a new Montana antitrust law. The latter
bill, which would enact a version of the Robinson-Patman
antidiscrimination act, prohibits a business from discriminating in
price between purchasers of commodities of like grade and quality if
the effect is to lessen competition or to tend to create a monopoly.
The subcommittee rejected several other bills, including one that would
have provided for divorcement of the refining and marketing segments of
the motor fuel industry.626
Virginia
During its 1990 session, the Virginia General Assembly appointed a
joint subcommittee to study divorcement and representative offering627
pursuant to a House Joint Resolution. The Resolution sought an
examination of dealers' allegations that refiners were attempting to
force dealers out of business by imposing rigid operating standards and
using unfair marketing practices in the sale of motor fuel. Refiners
contended that changing business and economic conditions were the
reasons behind dealer troubles.628 Since 1979, Virginia has had in
effect a partial retail divorcement statute that prohibits the
operation of refiner-operated retail stations closer than 1.5 miles
from any franchised dealer stations. The subcommittee recommended
against the implementation of total retail divorcement in Virginia,
reflecting "the concern that total retail divorcement would reduce
competition in the market place and therefore limit consumers' freedom
of choice in the products that they buy."629 The subcommittee also
rejected an attempt to relax the application of the 1.5 mile rule. In
general, the subcommittee "failed to discern a clear pattern of unfair
competition or other abuses alleged to exist in the sale of motor
fuels."630
Washington State
In 1985, the Washington State Senate Select Committee on Petroleum
Marketing Practices was convened to conduct an investigation and
recommend legislation, if necessary, that would protect independent
gasoline dealers and prevent refiners from using unfair business
practices.631 After studying the petroleum industry in Washington, as
well as existing and pending federal and state legislation, the
committee recommended the enactment of divorcement legislation that
included a "trigger" clause to provide that the legislation would
become effective only when the gasoline volume sold through major
refiner operated retail stations reached twenty percent of the total
volume statewide, as determined by the department of licensing of the
State of Washington. Upon reaching the twenty percent figure, the
major oil companies would be forced to divorce or lease their company
operated stores to other operators.632 In addition, the committee
recommended that the Washington State Attorney General conduct a study
to determine the extent that refiner actions have affected the state's
retail gasoline market since the time of deregulation, as well as the
possible future effects of major refiner involvement in the retail
sector.633 In 1986, the Washington State Legislature directed the
Attorney General to investigate retail gasoline marketing in that state
to determine whether motor oil companies injured the competition of
lessee- dealers.634 The attorney general concluded that the number of
instances in which dealer tankwagon (DTW) prices were equal to or
higher than retail prices were "clearly too infrequent to sustain the
allegation that lessee dealers are being systematically driven from the
market because their DTW prices are at or above the retail price levels
at competing company-operated stations."635
C. Arguments For and Against Divorcement
Generally, arguments frequently advanced in favor of divorcement
legislation include the following:
Allows independents to survive. Divorcement is necessary to
assure the economic survival of independent service stations
and enhance their ability to compete as small businesses;
Increases competition. Oil companies are attempting to
control, monopolize, and unduly influence the retail
gasoline market. Divorcement will increase competition in
that market;
Gives dealers greater control over their operations. Oil
companies control a large portion of dealers' operating
costs, including station rent, wholesale price costs, and
branding charges, through lease agreements. Dealers have
been forced out of business due to artificial increases in
these costs and other unreasonable clauses in renewal
leases. Elimination of these controls will allow dealers to
make business decisions to more effectively compete in the
market; and
Eliminates predatory pricing made possible by vertical
integration. Vertical integration has allowed oil companies
to engage in predatory pricing by permitting them to
subsidize low gasoline prices at their company stores
through profits obtained at other levels of operation.
These prices, which are below cost and below the wholesale
prices charged to lessee dealers, are intended to drive
lessee-dealers out of the retail gasoline market so that
they can be replaced with company-operated stations.636
Opponents of divorcement legislation, on the other hand, have argued
that divorcement will result in:
Less efficiency. Oil companies vertically integrate
downstream to enable them to more efficiently market their
petroleum products, not to engage in predatory pricing.
Government and academic studies have shown that gasoline
marketing is highly competitive and that there is no
evidence of predatory pricing. The U. S. Departments of
Justice and Energy and the Federal Trade Commission have
found no evidence of predatory pricing in the industry.
Reductions in the number of service stations can be
attributed to changing economic conditions such as
escalating construction and operating costs, crude oil
prices, government oil pricing, and changing consumer
preferences;
Reduced competition. Divorcement would sharply reduce
competition, thereby limiting consumers' freedom of choice.
Consumers would be unable to choose among a range of
gasoline brands, services, prices, and hours of operation if
refiners are excluded from the gasoline market;
Higher gasoline prices and reduced hours of operation.
Restricted competition will result in higher gasoline prices
for consumers. Studies of Maryland's divorcement statute
indicated that divorcement raised gasoline prices reduced
the average hours of operation of stations which were
divested; and
Fewer employment opportunities, reduced tank safety, and
less market innovation. Divorcement would reduce
opportunities for employment, training, and advancement in
gasoline retailing offered by refiner-operators. The safety
of underground storage tanks, which has been enhanced by
refiner investments in new and safer tanks, would be
reduced. Refiners would be forced to reduce their
investment in gasoline marketing, thereby reducing market
innovation, which has typically been a strength of refiners'
operations.637
Floor debates preceding the enactment of Hawaii's first divorcement
law in 1991, which established a two-year moratorium prohibiting
refiners and distributors from opening any new directly operated
service stations except in certain circumstances,638 reflect similar
concerns. One legislator speaking in favor of this legislation, after
reviewing the Hawaii Attorney General's preliminary findings, expressed
her concern over the declining number of independent gasoline dealers
and the need to prevent the monopolization of Hawaii's oil industry.639
Speaking in opposition to this legislation, on the other hand, one
legislator argued that there was no evidence of predatory pricing by
the incumbent oil companies, and that this legislation constituted an
unnecessary intrusion of government into the marketplace.640 Another
legislator concurred, citing the potentially harmful effects of this
legislation on Hawaii's consumers and the need for stricter enforcement
of existing antitrust laws.641
D. Predatory Pricing
A frequently made argument is that divorcement legislation is
necessary to prevent large oil companies from using their
company-operated gasoline stations to engage in predatory pricing.
Predatory pricing is considered one of the primary ways that large
firms force smaller competitors from the market; once driven from the
market, potential competitors are further deterred from re-entering the
market by the threat of future predatory behavior:
Much of our antitrust policy is based on the
notion that large firms, if unconstrained by government
regulation, will frequently drive smaller competitors
out of the market through "unfair" business practices.
Chief among such alleged practices is predatory
pricing. The idea behind predatory pricing is simple:
by setting price below cost, a predator can impose
losses on his rivals. Although the predator firm also
incurs current losses, its greater financial resources
allow it to withstand such losses. Eventually, when
prey are driven from the market, the predator raises
its price and receives monopoly profits which exceed
its earlier losses. Furthermore, it need not worry
about potential competitors re-entering the market.
New entrants are deterred by the knowledge that their
entry will induce the monopolist to engage in predatory
pricing once again.642
The oil industry has been one of the most frequent targets of
allegations of predatory pricing. One reason is the historical
distrust of major oil companies dating back to the time of
pre-dissolution Standard Oil, in which Standard Oil was alleged to have
used price cutting to achieve monopoly power.643 This distrust
continues despite the comparatively low levels of retail market
concentration maintained by these companies compared to levels
maintained earlier in this century.644
Proponents of divorcement contend that in the absence of divorcement
legislation, predatory pricing on the part of the large oil refiners
could lead to monopolization of the gasoline market.645 However,
studies undertaken at the federal, state, and industry levels indicate
that the petroleum industry is not engaged in predatory pricing against
dealer-operated stations.646
For example, in one study that tested whether predatory pricing had
occurred in the Maryland retail gasoline market, Barron, Loewenstein,
and Umbeck (1985) concluded that refiner- operated gasoline stations
were not charging predatory prices, and argued that predatory pricing
by large oil companies generally made little economic sense:647
Do the allegations of predatory pricing by
petroleum firms make sense from an economic point of
view? At least two reasons indicate that they do not.
First, ... a policy of predation generally would be
quite costly to a predator.... If a petroleum firm
were to prey on its lessee dealers, it would drive down
the value of its leased stations. Thus, it would
impose direct costs on itself. If major petroleum
firms wanted to drive their lessee dealers from the
market, they could do so at much less cost simply by
not renewing the leases upon expiration. Second, for
the sake of argument, suppose that major petroleum
firms do have some monopoly power in the production and
refining of oil. The best way to use that power would
not be to attempt monopolizing the retail gasoline
market--in which entry is relatively easy--but, rather,
to promote a competitive, efficient market.
Sorensen (1991) also found that predatory pricing in the gasoline
industry is both unprofitable and unlikely to lead to monopolization of
the gasoline market, and that a successful predator would probably be
exposed to antitrust action.648
Despite the relatively high entry barriers to the gasoline marketing
industry in Hawaii, Miklius and LaCroix (1993) have similarly concluded
that it is "extremely unlikely that refiners or jobbers are predating
on their own branded dealers",649 and further note that predatory
pricing is unlikely in Hawaii's retail markets:
First, several major oil companies have no company-
operated stations (UNOCAL and Shell) and, therefore,
lack the vehicle for predation. By contrast BHP has no
lessee dealers and, therefore, lacks a lessee dealer
target for its predatory behavior. Second, the two
major oil companies with refineries in Hawaii, Chevron
and BHP, have incentives to maintain competition in
down-stream marketing. Reducing down-stream
competition via predatory pricing behavior is not in
their long-run interest if they are acting as
duopolists in the refining industry. Finally, while
predatory pricing might drive one major player out of
the market, several major players would still remain in
the marketplace to ensure competitive pricing.650
E. Independent Dealers
Does retail divorcement legislation increase the viability of
independent dealers? Some believe that it does, at a cost. In
reviewing Maryland's divorcement statute, the Maryland Department of
Fiscal Services concluded that divorcement legislation was not in the
financial interests of consumers, and could only be justified on the
basis of assuring the viability of small, locally owned businesses in
the retail petroleum industry.651 As noted earlier, Hawaii's Attorney
General similarly concluded that a decision to continue retail
divorcement legislation involved a policy determination as to whether
independent retail dealers should be protected from competition
(through divorcement legislation) at the cost of higher consumer prices
and potential market inefficiencies.652
Independent dealers contend that retail divorcement legislation would
allow them to remain in business and would increase competition.
Because many of these stations are converting or being replaced by
larger self-service stations and convenience store configurations, it
is argued, divorcement legislation will help to preserve the viability
of small independent dealers and, presumably, assist in retaining the
automotive service component of their stations.
Others, however, maintain that divorcement is anticompetitive and
does not substantially increase the viability of independent dealers.
For example, Dougher and Hogarty (1991) found no evidence that retail
divorcement and other legislation purporting to help preserve retail
gasoline outlets had done so: "One reason may be that the laws
addressed non-existent problems (e.g., refiner predation), while the
number of outlets was being affected by fundamental market forces
(e.g., increases in the public preference for large volume
outlets)."653
Honeycutt (1985) believed that divorcement legislation protects
lessee dealers from competition from refiners, but that this protection
may be short-lived: "Dealers will continue to be subject to new
competitive pressures, since wholesalers may introduce more efficient
marketing methods and lower prices. For example, after divorcement in
Connecticut, wholesalers began to increase their share of gasoline
sales. This led to efforts to extend divorcement legislation to
include these wholesalers."654 He concluded that despite the decline in
the number of lessee dealers, "the data do not support the thesis that
refiner-owned- and-operated outlets have driven lessee dealers from the
marketplace."655
Finally, Miklius and LaCroix (1993) found that divorcement would not
substantially increase lessee dealer viability, and that the State
should explore more effective ways to help small businesses in Hawaii:
Given its $10 million-plus per year price tag, the
crucial issue is whether the divorcement law will have
a significant effect on the probability of lessee
dealer survival. While under the best case scenario,
i.e., conversion of company-operated stations to lessee
dealer-operated stations, revenues would increase but
profits may not improve.... [T]o the extent that
vertical integration reduces supplier's costs, the
prohibition of company-operated stations would increase
costs. The post divorcement DTW price, therefore, may
be higher. Furthermore, divorcement will not directly
affect other factors producing lessee dealer attrition.
For all these reasons divorcement is unlikely to
improve substantially a dealer's probability of
survival. This conclusion is consistent with evidence
showing that the number of lessee dealer-operated
gasoline stations has continued to decline in states
(including Maryland) where divorcement laws are in
effect.
In all likelihood past trends will continue into
the future leading to fewer gasoline stations servicing
the market. With increasing costs (particularly from
land rentals) the relatively low-volume, conventional
stations will become increasingly noncompetitive and
will be replaced by fewer large-volume, self-service
stations.... [T]he lessee dealer arrangement had a
distinct advantage in a conventional station with a
repair bay. There is very little, if any, advantage in
using this arrangement for operating large-volume,
self-service stations. It is not at all surprising
that BHP, being a latecomer to the market, adopted this
mode of operation.
Divorcement is not going to change these matters.
In fact, it is difficult to figure out what it will
accomplish aside from increasing gasoline prices to
consumers. The large volume self-service stations will
still be the most efficient outlets regardless of who
operates them and will continue to provide intense
competition for the conventional stations.
In short, there is no reason to believe that
divorcement in spite of its hefty price tag will
substantially increase lessee dealer viability. It
does not affect the factors that have caused the
decrease in lessee dealer-operated stations. The State
should explore other, more effective ways to help small
businesses.656
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Endnotes |
Chapter 16
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