 Chapter 4
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Chapter 5
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 Table of Contents
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194. Letter to researcher from Ted Gamble Clause, Deputy Attorney
General, Department of the Attorney General, dated July 21,
1995, at 1-2.
195. Id. at 2.
196. Letter from John Tantlinger, Ed.D., Energy Planner for the
Department of Business, Economic Development, and Tourism,
to Wendell K. Kimura, Director, Legislative Reference
Bureau, dated June 13, 1995, at 1.
197. Id.; see United States, General Accounting Office, Energy
Security and Policy: Analysis of the Pricing of Crude Oil
and Petroleum Products (Washington, DC: March 1993)
(hereinafter, "GAO (1993)").
198. Letter to researcher from Richard C. Botti, Executive
Director of the Hawaii Automotive & Retail Gasoline Dealers
Association, dated July 1, 1995, at 2.
199. Id.
200. Letter to researcher from Alec McBarnet, Jr., Vice
President, Hawaii Petroleum Marketers Association, dated
July 7, 1995, at 2.
201. Id.
202. Letter to researcher from Jennifer A. Aquino, Administrative
Manager, Aloha Petroleum, Ltd., September 21, 1995, at 1.
203. Id. at 1-2.
204. Letter to researcher from R. A. Broderick, Western Region
Business Manager, Shell Oil Products Company, dated June 30,
1995, at 1-2.
205. Id. at 2.
206. Id. at 3.
207. Id.
208. Id. at 3-4 (footnote omitted).
209. Letter to Wendell K. Kimura, Director, Legislative Reference
Bureau, from Susan A. Kusunoki, Manager of State
Governmental Activities, BHP Hawaii Inc., dated July 18,
1995, at 1.
210. Id. at 1-2.
211. Id. at 2.
212. Letter from J. W. McElroy, Regional Manager, Chevron U.S.A.
Products Co., to Wendell K. Kimura, Director, Legislative
Reference Bureau, dated August 7, 1995, at 1 (emphasis in
original).
213. Id. at 1-2 (emphasis in original), citing written comments
submitted by the Federal Trade Commission in 1990 in
opposition to open supply legislation introduced in the
State of Virginia. A copy of these comments was submitted
to the Bureau as part of Chevron's "Exhibit 1" in response
to the survey. That exhibit consists of a binder containing
the following governmental and academic reports with respect
to retail divorcement and other issues relating to the sale
of gasoline:
1. March 26, 1991 editorial of Honolulu Star-Bulletin
opposing S.B. 1757.
2. Testimony of Federal Trade Commission opposition
to 1990 Virginia divorcement bill.
3. November 1988 review of divorcement legislation by
the Maryland Department of Fiscal Services.
4. Final report, the State of Competition in Gasoline
Marketing, U.S. Department of Energy, January,
1981, Executive Summary.
5. Title page of 1939 Congressional Hearing report on
divorcement.
6. "The Maryland Divorcement Experience Updated": A
summary by John M. Barren and John R. Umbeck,
Professors of Economics, Purdue University (1986).
7. April 22, 1985 editorial of New York Times "Let
the Gas Wars Continue."
8. December 1988 Report of the Arizona Legislature's
Joint Study Committee on Retail Divorcement.
9. Statement of William F. Baxter, Assistant Attorney
General, Antitrust Division, on federal
divorcement legislation, October 21, 1981.
10. Testimony of John H. Shenenfield, Assistant
Attorney General-Antitrust Division, in opposition
to divorcement legislation in Virginia, January
18, 1979.
11. Barron & Umbeck, A Dubious Bill of Divorcement,
January/February 1983.
12. The Effects of Refiner Divorcement on Retail
Gasoline Prices in Maryland, 1979-1984, Philip E.
Sorensen, Professor of Economics, Florida State
University, April 1985.
13. 1991 Study of Divorcement by State of Virginia.
14. March 3, 1987 Study on Divorcement by Washington
Attorney General.
15. December 1990 Study of the Retail Gasoline Market
in Georgia, Philip E. Sorensen, Professor of
Economics, Florida State University.
Although space limitations prevent duplication of the
documents included in this exhibit, a copy of the
exhibit is on file at the Legislative Reference Bureau
and is available for inspection upon request.
214. A recent Massachusetts bill proposing an open supply system
provides as follows:
It shall be unlawful for a supplier to, directly or
indirectly, prohibit any dealer at a retail outlet it
supplies from selling motor fuel which was purchased
from sources other than the supplier, even if the
supplier leases the underground storage and
[dispensing] equipment to the dealer and such
equipment is used for the storing and dispensing of
motor fuel other than the supplier's branded motor
fuel....
Any service station ... that offers or dispenses
motor fuel which was purchased from sources other than
the supplier shall not be required to purchase more
than sixty per cent of the branded product purchased
in the previous calendar year.
Massachusetts House Bill No. 4490 (1993); see Massachusetts,
Open Supply and Divorcement Task Force, Report Concerning
House Bills H861 and H4490 Currently Before the Joint
Committee on Energy (Boston: Aug. 11, 1993) at Appendix C
(hereinafter, "Mass. Report (1993)").
215. United States, Department of Energy, Deregulated Gasoline
Marketing: Consequences for Competition, Competitors, and
Consumers (Washington, DC: March 1984) at 118 (footnote
omitted) (hereinafter, "DOE (1984)").
216. See notes 1 to 20 and accompanying text in chapter 2 for a
discussion of vertical integration. Specifically, an
exclusive dealing arrangement is a form of interbrand
distribution restraint pursuant to which a buyer promises to
buy its requirements of one or more products exclusively
from a particular seller. See Herbert Hovenkamp, Federal
Antitrust Policy: The Law of Competition and its Practice
(St. Paul, MN: West Publishing Co., 1994) at 384 and 393.
Generally, a requirements contract is one in which one party
agrees to purchase that party's total requirements
exclusively from the other party. Black's Law Dictionary,
5th ed. (St. Paul, MN: West Publishing Co., 1979) at 294
and 1172. Requirements contracts are usually treated as
exclusive dealing in antitrust analysis. Hovenkamp (1994)
at 384 n. 1.
217. Hovenkamp (1994) at 388.
218. Id. at 386-387 (footnotes omitted). Hovenkamp also notes
that exclusive dealing contracts give both parties an
economic interest in productive facilities:
For example, the value of a gasoline refinery results
from future sales of refined gasoline. By arranging
in advance for a steady stream of such sales, the
refiner essentially shares the risk of the investment
with the gasoline retailers. In general, the more
specialized the plant, the greater the risk will be.
If the refiner builds without this assurance,
retailers can later take advantage of the refiner's
sunk costs and bargain for any price sufficient to
cover the variable costs of refining gasoline. As a
result, the refiner unsure about future demand is
likely to build a smaller refinery than it would if
the demand were certain, or else not build at all....
Exclusive dealing arrangements are analyzed under section 1
of the Sherman Act, section 3 of the Clayton Act, and
section 5 of the Federal Trade Commission Act. Id. at 384.
For judicial tests for exclusive dealing, see id. at 384-
391; Standard Oil Co. of California v. United States, 337
U.S. 293 (1949); and Tampa Electric Co. v. Nashville Coal
Co., 365 U.S. 320 (1961), on remand, 214 F.Supp. 647 (M.D.
Terr. 1963). See also Roger D. Blair and David L. Kaserman,
Law and Economics of Vertical Integration and Control (New
York, NY: Academic Press, 1983) at 171-180; and E. Thomas
Sullivan and Jeffrey L. Harrison, Understanding Antitrust
and its Economic Implications, Legal Text Series, 2d ed.
(New York, NY: Matthew Bender, 1994) at 176-182.
219. Hovenkamp (1994) at 384.
220. 337 U.S. 293 (1949).
221. Hovenkamp (1994) at 384; see also notes 152 to 165 and
accompanying text in chapter 16.
222. Id. "As long as new downstream facilities can readily be
constructed, effective foreclosure is unlikely. But suppose
that geographical location is critical to business survival,
and two or three sites for resale locations are
substantially better than alternatives. In that case, a
dominant upstream firm could 'foreclose' competition--thus
making entry more difficult--by entering into exclusive
dealing contracts with all of the preferred downstream
locations."
223. See Virginia General Assembly, Report of the Joint
Subcommittee Studying Divorcement and Representative
Offering for Inclusion in the Virginia Petroleum Products
Franchise Act (Richmond: 1991) at 5-6 (hereinafter, "Va.
Report (1991)"); see notes 60 to 65 and accompanying text in
chapter 15 for arguments for and against retail divorcement
laws.
224. Mass. Report (1993) at 13.
225. DOE (1984) at 119:
The major benefit of open supply is the increased
ability of the lessee dealer to shop around for the
lowest priced gasoline and perhaps passing on these
lower prices to consumers. Lessee dealers now buy
gasoline from their traditional supplier at the DTW
[dealer tankwagon] price. If the lessee dealer faces
vigorous price competition from other branded and
unbranded outlets, the lessee dealer may find that its
supplier's DTW price does not permit it to earn a
reasonable profit if it tries to meet low street
prices. If the lessee dealer can shop around for a
better price, then the lessee dealer may have a better
opportunity to meet low priced retail competition.
The lessee dealer has the option of passing on the
lower price to its customers, or keeping the
difference between its former DTW price and the open
supply price as increased profits, or some combination
of the two. Thus, open supply may mean an increased
ability on the part of the lessee dealer to increase
its profits by competing on price or by increasing its
margins.
226. Moreover, open supply "may lead to the demise of the
multitiered pricing structure that now exists in the
industry. If lessee dealers can buy at the unbranded rack
price, it may put sufficient pressure on the traditional
supplier to offer comparable prices. Thus prices may sink
to the lowest offered in the marketplace, namely the
unbranded rack price." Id.
227. See Mass. Report at vii.
228. DOE (1984) at 119:
The refiner has considerable investment in the
station, and expects a reasonable return on this
investment through the gasoline and other products
sold at the station. In this way the refiner builds
brand identity for which it can charge a premium. The
refiner obtains the assurance of certainty that the
lessee dealer will buy its product. The refiner
places a substantial premium on this certainty. Its
refinery operations are geared toward a certain
minimum volume level which are based substantially on
meeting the requirements of its marketing network. If
refinery operations cannot be maintained at this
irreducible minimum, then refining costs escalate to
an unreasonable level. Crude acquisition costs also
are dependent on the irreducible minimum of refinery
operations. In essence, the entire integrated
structure of the company relies upon the knowledge
that minimum amounts of crude will be processed by the
refinery and sold through the marketing network. The
efficiency of the integrated structure depends to a
great extent on maintaining an optimal level of
throughput through the various parts of the structure.
If this balance is disturbed, it ripples through
the integrated structure of the company. If the
branded refiner no longer can count on its lessee
dealers to buy gasoline from it, it must find some
other way to ensure that the irreducible minimum is
maintained. It can do this by forward integration
through company stores, or forward integration through
contractual arrangement with jobbers. In other words,
the value of the lessee dealer may be diminished to
the point where the refiner shifts away from the
lessee dealer to some alternate form of marketing.
Thus the lessee dealer may be abandoned, while company
stores and jobbers increase their position. Open
supply, therefore, can lead to the demise of the
branded lessee dealer network.
229. Philip E. Sorensen, An Economic Analysis of the Distributor-
Dealer Wholesale Gasoline Price Inversion of 1990: The
Effects of Different Contractual Relations (N.p., April
1991) at 33.
230. DOE (1984) at 120:
Another cost of open supply is decreased or more
costly quality control of gasoline. One aspect of
branded marketing is the refiner's knowledge that the
product sold through its branded marketing network
meets certain specifications. The consumer relies
upon this assurance when he or she buys product from
that branded refiner. The cost of quality control is
now borne by the refiner. The refiner can control
quality either by using its own refined product or by
using some other refiner's product that it can trust
or that it can test. Thus even though a refiner often
uses another refiner's product in its stations, the
quality of the product can be maintained. For
example, gasoline shipped through pipelines must meet
certain specifications usually established industry
wide. A common practice among refiners is to exchange
gasoline with each other at pipeline terminals. Thus
company A may be using company B's gasoline in its
stations. Company A has the assurance, however, that
the gasoline meets certain specifications; otherwise
it could not be shipped in the pipeline. Moreover,
Company A can test the gasoline on an economical
basis, since it is dealing with large batch shipments.
Thus quality control can be established and maintained
easily throughout the branded marketing network.
With open supply, quality control become more
difficult. If the lessee dealer can buy gasoline from
any supplier, the traditional supplier no longer can
guarantee the quality of the gasoline sold at its
station. Quality control now must shift to the lessee
dealer. The lessee dealer must accept the quality
assurance of its new supplier, or make tests on the
gasoline itself. This latter option probably is not
cost effective for the lessee dealer, since the tests
would be done on much smaller batches and would be
more costly. Thus the lessee dealer more than likely
would rely upon the quality assurances given by the
new supplier. Since the traditional supplier loses
control over quality, it now must worry about the
value of its brand, since quality problems can have a
severe effect upon its brand. Consumers may no longer
be able to rely upon the quality of the product coming
from particular stations or from particular brands.
If this becomes a widespread problem, then the
consumer is worse off, since he or she no longer can
be secure in buying problem-free gasoline from
particular brands. The branded marketing network is
adversely affected, since the value of the brand may
decrease to zero. Thus, unless quality control can be
maintained with open supply, there are substantial
costs to the branded network and to consumer
confidence.
See also Sorensen (1991) at 33: "Unlike most other branded
products, gasoline is not sold in a container or a package.
Thus, it would be difficult to assure a consistent level of
quality to the consumer in the absence of restrictions on
the dealer's ability to purchase supplies from the
alternative sources. ... The alternative of allowing
dealers to buy any gasoline meeting certain technical
specifications would provide neither the degree of consumer
protection nor the incentive for product improvements of the
present branded marketing system."
231. Herbert Hovenkamp, Antitrust, Black Letter Series, 2d ed.
(St. Paul, MN: West Publishing Co., 1993) at 181.
232. DOE (1984) at 120.
233. Hovenkamp (1994) at 387 (footnote omitted); see also
Sullivan and Harrison (1994) at 150-151.
234. See also notes 25 to 39 and accompanying text in chapter 11.
235. A 1993 Massachusetts study of open supply legislation noted
that Massachusetts courts may find that a taking has
occurred based on the property as a whole "and the extent to
which the regulation has interfered with a property owner's
investment-based expectations." Mass. Report (1993) at 23,
citing Steinbergh v. Cambridge, 413 Mass. 736, 742 (1992).
That study noted the following costs in determining the
investment-based expectations of tank owners:
A major oil company is in the business of selling
gasoline. It invests approximately $70,000 per tank,
including installation. Though tanks may be purchased
for less (about $55,000) the majority will install
state of the art, double-lined tanks because of
liability concerns.... Moreover, the tank that is
debranded is the one containing regular unleaded
gasoline. The majority of gasoline sold by a major is
regular unleaded (approximately 65%). Therefore, the
owner's tank which is the most profitable will be
lost. A very strong argument can be made that loss of
this tank, based on the result[ant] economic impact,
would affect the owner's investment-based expectations
in a substantial way. Further, the owner also invests
$35,000 for a multi-pump dispenser (MPD) which would
be utilized to dispense the generic gasoline. The
opposing argument would be that the owner is receiving
monthly rental payments, along with the sale of two
grades of gasoline, and thus, the regulation has not
interfered to the extent that a taking results. Id.
236. Mass. Report (1993) at 24-28; see also Anthony v. Kualoa
Ranch, Inc., 69 Haw. 112 (1987).
237. Mass. Report (1993) at vii.
238. Va. Report (1991) at 7.
239. Id. at 8.
240. Id.
241. Sorensen (1991) at 34:
It should be recognized that most consumers in
the U.S. presently have the option of buying "open
supply" gasoline from numerous unbranded marketers who
sell product obtained from whatever low-priced sources
are available on the market. The fact that unbranded
gasoline has not gained a majority share of the market
is an indication of the preference of most consumers
for the guarantee of quality offered by branded
marketers.
Dealers who have experimented with dual brands or
with branded/unbranded combinations have not been
successful, probably for the reason that consumers do
not want to buy gasoline in a situation in which there
is confusion about the identity or integrity of the
product. In addition, thousands of open or contract
dealers (who own their own stations and could buy
gasoline from anyone in the market) choose instead to
sign supply agreements with a single refiner under a
branded marketing system. These facts provide strong
evidence against the presumed advantages of open
supply to dealers.
242. DOE (1984) at 120.
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