Restrictions on Vertical Integration (Divorcement)

Date: 1 Dec 2001 | posted in: Retail | 0 Facebooktwitterredditmail

Independent retailers often have difficulty surviving in industries marked by a high degree of vertical integration. In the petroleum industry, for example, many gas stations are owned and operated by oil refineries. These companies are able to control the wholesale price of gasoline sold to locally owned franchise stations. They also set the going rate at the pump through company-operated stations. By narrowing the difference between the wholesale and retail prices, oil refiners can squeeze independent and franchise gas stations out of the market.

Although the Robinson-Patman Act bars discriminatory pricing (favoring one company with a lower price not made available to other buyers), the law does not adequately address sales between different segments of a vertically integrated company. For example, refiners may sell gasoline to their company-operated stations at a lower rate than the price charged to franchise or independent stations.

Cities or states can correct this imbalance by restricting a manufacturer’s ability to own or operate retail outlets. Several states, for instance, have enacted gas station divorcement laws that bar refineries from operating retail gas stations. Divorcement is one step removed from divestiture. While divestiture requires that a company sell-off the businesses in question, divorcement allows the company to continue to own the outlets, provided that the outlets are controlled by an independent franchise dealer operating under contract.

In states without divorcement laws, gas station owners are facing an unlevel paying field where their wholesale suppliers are also their retail competitors in a highly vertically-integrated market.

State legislators representing San Diego and San Francisco have been trying for more than a decade to pass a divorcement law. They appeared to have succeeded in early 1998 when San Diego’s City Council and a San Francisco economic development committee passed divorcement ordinances. Both eventually backed down, however, from intense industry pressure.

A May 2000 report by the California Attorney General’s Office, “Report on Gasoline Pricing in California,” concludes that California has the highest gas prices in the nation because big companies control the market and are forcing independent businesses out of business. The report recommends divorcement and branded open supply (which allows branded franchise stations to purchase their brand from any supplier. Now they are under contract to purchase only from the refiner at prices inflated by as much as 10 cents/gallon.)

Below is a model state divorcement ordinance written by Tim Hamilton, Executive Director, AUTO (Automotive United Trades Organization), 608 Columbia SW, Olympia, WA 98501 and James Carroll,Esq. of Law Offices of Carroll, Gilbert, & Bachor at 711 South Brea Blvd., Brea, CA 92621.


MODEL ACT AMENDING EXISTING STATE ANTITRUST LAWS

Anact amending antitrust laws to prevent an oligopoly of refiners from encouraging artificially high consumer prices for motor fuel.

NEWSECTION. Sec. 1. The Legislature hereby finds and declares that there are circumstances affecting the marketing of motor fuel which are unique to the State of ______________. Such circumstances are resulting in artificially high prices to consumers in the State of _____________. The existing anti-trust laws are inadequate to solve this problem. These circumstances require the measures contained herein for the purpose of preserving competition in the long term in order to protect the interests of consumers.

NEW SECTION. Sec. 2. Unless the context clearly requires otherwise, the definitions in this section apply throughout this chapter.

(1)”AffiliateÓ means any person who directly or indirectly controls, is controlled by, or is under common control with any other person.

(2)”Control” means the direct or indirect power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.

(3)”Cost of doing business” means the expenses, on a per gallon sold basis, incurred by a refiner, to sell motor fuel at a company-operated retail service station. “Cost of doing business” includes without limitation, the value of all goods, the costs of delivery of any such goods or commodities, services, facilities, real property and improvements, labor, and overhead used, consumed, expended, or reasonably allocated by a refiner in connection with such retail activity. “Cost of doing business” does not include the cost of extracting, or purchasing raw crude oil, the costs of refining crude oil into motor fuel, or the cost of delivering motor fuel to the truck loading terminal.

(4) “Grade of motor fuel” means motor fuel for a particular quality or class and sold under a particular trademark, trade name, or brand.

(5)”Independent service station dealer” means a person, firm or corporation that is not an affiliate of a refiner and that buys motor fuel exclusively for resale to end-users and ultimate consumers at a retail service station.

(6)”Market retail price” means the per gallon price at which a refiner sells or offers to sell to the public a grade of motor fuel at a company-owned service station, less the cost of doing business at that service station.

(7) “Motor fuel” means any liquid petroleum product used for the propulsion of motor vehicles, not including airplanes, trains, or marine vessels and excluding propane.

(8) “Person” means a natural person, partnership, corporation, trust, or unincorporated association.

(9)”Price” means the price of a gallon of motor fuel paid to a refiner by an independent service station dealer less the value, on a per gallon sold basis, of all rebates, discounts, credits, incentives, and other benefits extended by the refiner to the independent service station dealer.

(10) “Refiner” means any person, firm or corporation or affiliate thereof, engaged in the refining of petroleum into motor fuel, whether such refining occurs in this state or elsewhere.

(11) “Retail service station” or”service station” means a facility, including land and improvements, where motor fuel is sold at retail to the motoring public.

(12)”Company operated station” means a service station owned or controlled by a refiner and operated with company personnel, a subsidiary company, or a commissioned agent or under contract with any person, firm or corporation managing any such outlet on a fee arrangement or on any fee for service arrangement with the refiner.

(13) “Set or attempt to set” includes but is not limited to actions that put an independent service station dealer at an economic disadvantage if the dealer fails to comply with a suggested price or margin.

(14)”OverchargeÓ means a sale or offer to sell motor fuel to an independent service station dealer at a price that exceeds the price charged any other independent service station dealer for motor fuel supplied from the same truck loading terminal. However, the term “overchargeÓ shall not be construed to prevent due allowances for the refiner’s actual costs, including delivery, marketing, facility and real estate costs.

NEWSECTION. Sec. 3. On or after January 1, 1998 no refiner may open a new company-operated service station in the State of ___________.

NEWSECTION. Sec. 4. On or after January 1, 1999, no refiner may company operate more than one-half (1/2) the number of service stations within the State of ____________. that such refiner lawfully operated on January 1, 1998.

NEW SECTION. Sec. 5. On or after January 1, 2000, no refiner may company operate any retail service station in the State of _____________.

NEW SECTION. Sec. 6. Any refiner may open and temporarily operate any retail service station for a period not exceeding ninety (90) days in circumstances where an independent service station dealer voluntarily determines to terminate or not to renew the motor fuel franchise or the franchise is terminated or not renewed by the refiner in accordance with applicable state and federal laws.

NEW SECTION. Sec. 7. No refiner may

(1) offer to sell motor fuel to an independent service station dealer at a price that exceeds the then-current market retail price of motor fuel of the same grade being sold at any company operated station which is supplied from the same truck loading terminal.

(2) overcharge an independent service station dealer for motor fuel.

(3)set or attempt to set, control or economically influence, either directly or indirectly, the retail prices or margins of profit of motor fuel at any retail service station other than a company-operated service station.

(4) deliver motor fuel from different truck loading terminals to company-operated service stations and independent service station, or restrict the truck loading terminals from which independent service station dealers may purchase motor fuel, where the effect of such action is to circumvent subsections (1) or (2) of this section, unless such delivery or restriction serves a legitimate business purpose.

NEWSECTION. Sec. 8. If any provision of this act or its application to any person or circumstance is held invalid the remainder of the act or the application of the provision to other persons or circumstances is not affected.

NEW SECTION. Sec. 9. Notwithstanding any other provision of law, this article shall be enforced as provided in the antitrust laws of the state of ________________

Follow Stacy Mitchell:
Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance, and directs its Independent Business Initiative, which partners with a wide range of allies to implement policies that counter concentrated power and strengthen local economies.