1 Council of the District of Columbia Committee on Government Operations and the Environment Draft Report 1350 Pennsylvania Avenue, N.W., Washington, D.C. 20004 To: Members of the Council of the District of Columbia From: Mary M. Cheh, Chairperson Committee on Government Operations and the Environment Date: July 11, 2011 Subject: Bill 19-299, the Retail Service Station Amendment Act of 2011 The Committee on Government Operations and the Environment, to which Bill 19-299, the Retail Service Station Amendment Act of 2011 was referred, reports favorably on the legislation, which the committee revised to better achieve the aims of the original act, and recommends its approval by the Council of the District of Columbia. Statement of Purpose and Effect Page 2 Legislative History Page 2 Background and Committee Reasoning Page 2 Section-by-Section Analysis CONTENTS _____ Page 14 Fiscal Impact _____________ _____ Page 14 Analysis of Impact on Existing Law _____ Page 15 Committee Action _____________ _____ Page 15 Attachments ____________ _____ Page 15 2 Bill 19-299, the Retail Service Station Amendment of 2011, was introduced on May 17, 2011. The legislation would prohibit gasoline distributors from operating retail service stations in the District, clarify that marketing agreements may not preclude competition by prohibiting the purchase of competitively priced fuel from third parties who are not part of the agreement, provide franchisees with the right of first refusal when a sale, assignment, or transfer is set to take place, and empower the Attorney General of the District of Columbia to bring legal actions in Superior Court for violations of this chapter. STATEMENT OF PURPOSE AND EFFECT May 17, 2011 Introduction of B19-299 by Councilmembers Cheh, Evans, Mendelson, and Wells May 17, 2011 Referral of B19-299 to the Committee on Government Operations and the Environment May 27, 2011 Notice of Intent to Act on B19-299 is published in the District of Columbia Register June 3, 2011 Notice of Public Hearing on B19-299 is published in the District of Columbia Register June 17, 2011 Public Hearing on B19-299 held by the Committee on Government Operations and the Environment July 11, 2011 Consideration and vote on B18-521 by the Committee on Government Operations and the Environment LEGISLATIVE HISTORY I. Background A. Retail Service Station History in the District BACKGROUND/COMMITTEE REASONING The District has a long history of regulating the retail service station industry dating back to the passage of the Retail Service Station Act of 1976 (RSS). Out of concern over domination of the market by major oil companies like BP or Exxon, the District passed the RSS, which is a divorcement law preventing refiners from operating retail stations.1 1 D.C. Law 1-123. The Retail Service Station Act of 1976. During the same time period, several other states passed divorcement laws as well. In 1979, the District amended the RSS, enacting the first of several laws establishing a moratorium on conversions of full-service retail 3 service stations without a waiver from the Mayor.2 In 2004, the Council again amended the RSS by enacting the moratorium permanently and adding jobbers into the divorcement law with a two-year phase-out period. By 2007, however, the jobber divorcement provision had not yet been fully implemented.3 The Committee report on the 2007 legislation noted that the provision adding jobbers to the divorcement law in 2004 had not been included in the introduced version of the bill, which deprived potential opponents of the measure an opportunity to speak against it.4 Taken together, the lack of adoption and less visible notice of the change prompted Councilmember Mary Cheh and then-Councilmember, now-Chairman Kwame Brown to introduce a measure removing jobbers from the divorcement law, so all interested parties would have an opportunity to testify on the matter.5 The Committee on Public Services and Consumer Affairs conducted a full hearing on the amendment to remove jobbers from the statute on May 24, 2007. The Committee report concluded that any expansion of the divorcement statute would only create further disincentives for new competitors to enter the marketplace. 6 With these pieces of legislation and with changing market conditions, the gasoline industry has changed significantly in the District. Over the years, the total number of retail service stations has steadily decreased. According to a September 2008 report prepared by the District Department of the Environment (DDOE), the total number of service stations fell from 270 (1977) to 108 (2006). More recent data shows that number to have dropped to 105. Subsequently, the Council passed the 2007 legislation, and jobbers were once again free to operate service stations. The Council then amended the RSS in 2009. In that year, the legislation added new restrictions on converting full-service stations and provided franchisee station operators with a right of first refusal if a franchisor sought to sell, transfer, or assign his interest in a station to a third party. The added protections also included a duty to negotiate a lease in good faith. Although the enhanced requirements for converting a full-service station remain, the other protections sunset on January 1, 2011. 7 2 D.C. Law 3-44. Also, because the Act contained a two-year sunset clause, the Council was forced to reexamine the issue in 1981. The Council passed nine subsequent emergency and temporary measures, keeping the moratorium in place until 2004, when the moratorium was finally made permanent. 3 Committee on Public Services and Consumer Affairs Report on Bill No. 17-142, the Retail Service Station Amendment Act of 2007, September 25, 2007, at 3. 4 Id. 5 Id. at 4. 6 Id. 7 Robert W. Doyle Testimony, Committee on Government Operations and the Environment Hearing on B19-299, June 17, 2011, at 4. As of 2006, only 47 full-service stations were left in the District. Those that do remain have engendered significant goodwill from their respective communities. Notably, the Committee received dozens of letters, emails, and calls praising the service provided by one local operator, whose station has been serving a District neighborhood for years. The letters and support demonstrate that in spite of any changes to the industry, the community still values independent operators, who are able to devote time and energy to develop a relationship with the neighborhoods they serve. 4 B. Market Shifts The RSS set out the following goals in the regulation of service stations through divorcement: (1) the further deterioration of free and open competition in the retail motor fuel market by increases in the number of directly operated retail service stations will be prevented; (2) competition in the motor fuel market will be enhanced by a dispersion of the concentration in control and economic power inherent in existing directly operated retail service stations; (3) the competitive position of independently operated retail service stations will be strengthened; and (4) a downward pressure on retail motor fuel prices will be created.8 During the 1970s, a few oil refiners like BP, Shell, and Exxon controlled the vast majority of stations in the District. Unfortunately, market shifts seem to have frustrated the Councils purpose. 9 In 2004, the Council recognized that jobbers had begun to resemble large oil refiners in the way that they interacted with the retail service station market and passed legislation adding jobbers into the divorcement statute. The corresponding committee report explained: jobbers instead of the oil companies are the entities exerting pressure to convert and otherwise threatening the independence of the local retail operators. The legislative intent undergirding divorcement is being undermined. In cases where the refiners also operated stations, a refiner could serve as the landlord, supplier, and competitor of a station it supplied. That situation threatened the competitive viability of an independent service station operator. 10 Currently, fewer companies actually control a larger share of the market than in 2007. During that year, five jobbers owned 68 of the Districts 108 service station, with the two largest jobbers owning a combined 47 stations. The concern was justified. Reversing the 2004 legislation by removing jobbers from the divorcement statute in 2007 has led to greater market concentration and reduced competition. 11 Today, the two largest jobbers account for 72 of the Districts 105 service stations, which is nearly 70%.12 District customers are paying the second highest prices in the nation for gasoline. Moreover, the pricing gap between the District and other jurisdictions has increased, sharply. The prediction that removing jobbers from the divorcement law would reduce disincentives to market entry made in the Committees 2007 report has not come true. Instead, removing jobbers from the divorcement statute has created rather than eliminated disincentives to enter the gasoline market in the District. C. Prices 13 8 Committee on Transportation and Environmental Affairs Report on Bill No. 1-133, the Retail Service Station Act of 1976, September 10, 1976. 9 Subcommittee on Public Interest on Bill No. 15-914, the Retail Service Station Amendment Act of 2004, October 27, 2004, at 5. 10 Id. 11 Ralph McMillan Testimony, Committee on Public Services and Consumer Affairs Hearing on B17-142, June 12, 2007 (contained in attachment I), at 2. 12 Doyle Testimony on B19-299, at 5. 13 http://www.washingtoncitypaper.com/articles/41082/why-does-gas-cost-so-much-in-dc-joe-mamo/ More troubling is the fact that the gap between prices in the District and the rest of the nation, 5 including nearby suburban Virginia and Maryland, is growing. Gas prices will invariably rise and fall with crude oil prices, but those variations do not explain the growth of the pricing gap. Although opinions vary over the extent of the increase, no evidence presented to the Committee disputes that the gap has grown. In a May 27, 2011 editorial, a local paper attributed the Districts historically higher gas prices to the higher insurance and rents paid in town.14 Nevertheless, AAA reports that the price gap between the District and national average stood at just five cents in 2007.15 On June 17, 2011, the price gap stood at 28 cents, according to AAA.16 On the same day, gas could be purchased for an average of 41 cents per gallon less in Virginia than in the District.17 Higher rents and insurance costs may explain the smaller, historical pricing gap that had existed for years in the District, but they do not explain the gaps rapid growth over the past four years, as AAA testified in the Committees hearing.18 The same local paper argued that the growth over the past two years, which it reports has increased by seven cents since 2009, between the District and nearby Virginia and Maryland suburban areas is attributable almost entirely to tax increases. 19 That argument is questionable and premised partially on an error. While the Districts excise tax on fuel did increase 3.5 cents per gallon in 2010, that change accounts for only half of the reported seven-cent increase. The newspapers report errantly relies on a sales tax increase of 0.25 percent to account for the remainder of the growth. The District, however, does not apply sales tax to motor vehicle fuels; it applies only an excise tax to them.20 Currently, neither the District nor Maryland applies any sales tax to motor vehicles fuels. In contrast, Virginia imposes a 2.1% sales tax on motor vehicle fuels sold in Northern Virginia.21 The Committee notes the value of objective expert testimony, particularly in complex economic matters such as this one. When the Committee on Public Services and Consumer Consequently, ifas AAA reported at the hearinga gallon of gas is approximately a dollar more expensive than it was a year ago, the gap between the District and Northern Virginia should have actually decreased by two cents as the result of sales tax, significantly offsetting the Districts excise tax increase. The District and Maryland apply identical excise taxes to unleaded fuels, and the District applies a lower excise tax to diesel fuels. Virginia applies a smaller excise tax than does the District, but adds the 2.1% sales tax in Northern Virginia. Taxes may help explain some very small fluctuations, but they do not account for anything approaching the price gap growth the District has experienced since 2007. D. Expert Testimony 14 http://www.washingtonpost.com/opinions/pumped-up-for-gas-price-scapegoating-in-dc/2011/05/26/AGkamyCH_story.html 15 John B. Townsend II Testimony, Committee on Government Operations and the Environment Hearing on B19-299, June 17, 2011, at 4. 16 Id. at 1. 17 Id. 18 Id. at 5. 19 http://www.washingtonpost.com/opinions/pumped-up-for-gas-price-scapegoating-in-dc/2011/05/26/AGkamyCH_story.html 20 D.C. Code 47-2005 (20) 21 Va. Code 58.1-1720 6 Affairs moved forward with a provision removing jobbers from the divorcement statute in 2007, the corresponding report relied on a recommendation from the Federal Trade Commission (FTC) and analysis from the Districts Office of the Attorney General.22 In 2007, the FTC concluded that removing jobbers from the statute would increase competition and eliminate a potential double markup resulting from both a distributor and a retailer earning profits for their efforts.23 According to the FTC, prices would likely drop as a result of the legislation.24 The Attorney General, without taking a firm position on the legislation argued that entry into the jobber market was not difficult and predicted that removing jobbers from the divorcement statute would not lead to further market concentration.25 The Attorney General, along with other neutral experts, argued at the June 17, 2011 Committee hearing that adding jobbers back into the divorcement statute is the right course of action and would to help to restore competitive balance to the market. Those predictions, however, did not bear out. 26 David A. Balto, a current senior fellow at the Center for American Progress, a former policy director at the FTC, and a long-time antitrust attorney, testified in strong support of the bill. He argued that removing jobbers from the divorcement law and allowing vertical integration from the distribution level to the retail level has created a market that is not competitively healthy. 27 Mr. Balto also explained that the FTC study offered in 2007 was flawed in several critical ways. The study began with a faulty premise, failing to examine the Districts specific market and instead examining the retail service station industry as a whole nationally. The mistake prevented the FTC from taking into account the high levels of market concentration already present in the District in 2007 and how a partial repeal of divorcement would affect a market The retail service station market has been harmed in three primary ways, he explained. First, the retail service station industry suffers from weak competition, particularly at the wholesale level. Mr. Balto referred to the current market structure as a tight duopoly. With two major jobbers controlling 70% of that market, competition for price and business simply isnt sufficient to drive prices down. Second, high barriers for entry into the wholesale market preclude conditions from improving. He explained that the presence of integrated stations, which are owned by a distributor, limits the number of stations looking to competitively purchase fuel. Consequently, little business is available for a jobber interested in entering the Districts wholesale gasoline market. Third, as the landlord, supplier, and competitor of station operators, jobbers control rent prices, gasoline prices, and have access to sensitive business data for competing stations. With knowledge of overhead costs and profit margins, Mr. Balto warned that jobbers can manipulate prices to maximize profits at the expense of fair competition. 22 See generally Committee Report on B17-142 23 Comment from United States Federal Trade Commission, Office of Policy and Planning (June 8, 2007) (contained in attachment I) at 5. 24 Id. at 6 25 Committee Report on B17-142, at 7 26 The Districts Attorney General did not appear in person at the June 17, 2011 hearing, but the office submitted a letter detailing its views, which Councilmember Cheh read into the record. 27 Committee on Government Operations and the Environment Hearing on B19-299, June 17, 2011 (available at: http://oct.dc.gov/services/on_demand_video/on_demand_June_2011_week_3.shtm). 7 structured in that specific way.28 Mr. Balto concluded by stating that he strongly supports the legislation because it would break the ownership bind over service stations and help to restore competition at both the retail and wholesale levels. He also noted concern that the District is losing excise tax revenues as consumers choose to purchase gasoline outside the District due to higher pricesa proposition supported by a drop in excise tax revenues from 2009 to 2010. Next, the study examined the effects of refiner divorcement while failing to address the specific issue of jobber divorcement in any meaningful way. Refiner ownership of stations offered the District some benefits that jobber ownership has not. Refiners like Exxon or BP not only wished to sell fuel, they also wished to protect the value of a trademark. For example, Mr. Balto noted that a major oil company like Exxon might seek to ensure that all its stations were in good repair to maintain a uniformly positive image of its branded stations. In contrast, jobbers do not have a visible brand name to protect and may devote fewer resources to leased stations. Finally, Mr. Balto argued that whatever the basis for the FTCs study in 2007, it is clear in 2011 that they were simply wrong. Prices are higher, and competition has decreased. 29 Robert W. Doyle, a former trial attorney at the FTC and a long-time antitrust practitioner, also testified in support of the legislation. He identified concerns over market concentration with ownership ties, particularly after a large merger in 2009, and potential sales of gasoline stations to developers. Mr. Doyle presented a study of the gasoline service stations in the District concluding that 46% of all stations in the District and 53% of all branded stations in the District are owned by one jobber. 30 Mr. Doyle argued that the jobbers share of the market, which had increased considerably since acquiring 30 stations in 2009, had allowed jobbers to set prices irrespective of the competition. For example, if the jobber owned a Shell station on one corner and its only nearby competitor is an Exxon station across the street, the jobber, who owns both stations, could simply set both stations prices at higher levels because the jobber could no longer be pressured into lowering prices through competition. Prior to the 2009 acquisition, brands were forced to compete. After the merger, though, as Mr. Doyle put it, that jobber, who now owns multiple brands, would be disinclined to go head to head with himself.31 28 Mr. Balto noted in oral testimony that the District has one of the highest concentrations of jobber ownership in the nation. 29 Excise tax revenues from gasoline dropped more than $1.5 million from 2009 to 2010. Source: Districts Office of Revenue Analysis. Nevertheless, the consumption of finished motor gasoline nationally increased over that same time period, according to the U.S. Energy Information Administration. http://www.eia.gov/dnav/pet/pet_cons_psup_dc_nus_mbblpd_a.htm 30 Prior to one jobbers acquisition of the Districts 30 Exxon stations in 2009, the market had been less concentrated. 31 Committee Hearing on B19-299. He argued that the situation could be magnified throughout the city, leading to much higher comparative prices. Mr. Doyle also emphasized the danger that a jobber might simply begin to sell stations, particularly given the two-year phase-out period required by the legislation. He noted that Capitol Petroleum had already sold one station on Capitol Hill and had obtained permits to sell another. He then said that he supported adding a right of first refusal to the legislation to prevent jobbers from selling stations without giving operators the right to buy it and retain it as a service station for the benefit of District residents. 8 In summation, Mr. Doyle supports the legislation because he believes that it will break the ownership tie present in integrated stations. Breaking the tie, he argued, should inject some needed competition into the retail and wholesale markets.32 John B. Townsend II, Manager of Public and Government Affairs for AAA Mid-Atlantic, discussed changes in pricing over the past four years, since the jobber divorcement was repealed. Mr. Townsend explained that, historically, District gas prices were only marginally higher than the national average and than in neighboring suburban areas in Maryland and Virginia. He also explained that divorcement should offer more opportunities for small businesses, as stations will each need an independent operator to run them. 33 Since 2007, however, the pricing gap has widened rapidly.34 He testified that taxes, rents, and insurance costs could not account for the price gap growth, noting that the District and Maryland applied identical excise taxes to unleaded fuels and that rents in the District are not necessarily higher than in surrounding areas such as Bethesda, Maryland.35 The Attorney General for the District of Columbia, Irvin B. Nathan, also submitted testimony strongly supporting this legislation. Mr. Nathan acknowledged that this support represented somewhat of a reversal from 2007 when a representative from his office testified, [b]y allowing jobbers to operate their own retail stations in D.C., Bill 17-142 ha[d] the potential to encourage retail competition by increasing the number of stations that [were] not controlled and supplied by the major oil companies." Moreover, distributors in the District purchased gasoline at the same rack prices as distributors traveling to stations in nearby Maryland and Virginia. Mr. Townsend reported that his research showed delivery costs for gasoline to be somewhere around 4 cents per gallon nationally and less than 3.5 cents per gallon locally. He said that neither rack prices nor delivery costs could account for the price gap growth either. He argued that the only significant change over the past four yearsand the only plausible explanation for the price gap increaseis the change in market concentration at the jobber level. 36 The reversal comes out of recognition that [s]ince 2007, the landscape has changed dramatically in D.C.'s retail gasoline market.37 Whereas in 2007, the retail gasoline market was shared by oil companies and jobbers, the current market is dominated by two jobbers.38In contrast to 2007, when the Office of the Attorney General suggested in its written testimony that the Council might "consider additional statutory changes in order to allow D.C.'s independent [gasoline station] operators to operate more independently of particular oil companies" (emphasis added), now the primary Mr. Nathan also notes that: 32 Although fully supportive of the legislation, Mr. Doyle went further and argued that full divestiture might be needed to ensure adequate competition at the retail level. 33 Mr. Townsend testified that prices were generally 2-5 cents per gallon higher in the District. 34 Mr. Townsend testified that prices in the District were 40 cents per gallon higher than in Virginia as of June 17, 2011, the day of the Committee hearing. 35 Committee Hearing on B19-299. 36 Letter from the Attorney General for the District of Columbia, Irvin Nathan (June 17, 2011) (contained in Committee Report, attachment G at 2). 37 Id. 38 Id. 9 concern at the retail level is the high proportion of D.C. gasoline stations owned by particular wholesalers.39 The proposed bill would prohibit distributors from operating retail service stations in the District. The change is needed to help restore a competitive balance in the retail service station market in the District. Market concentration allows jobbers to use market power to increase prices to the detriment of consumers. Thus, the Attorney General strongly supports enacting B19-299 because he argues that it will reduce the risk that jobbers could use market power to increase prices. In 2007, the Committee relied on the FTCs recommendation and the Attorney Generals analysis, in no small part, because they lacked a pecuniary interest in the outcome of the legislation. However valuable and informative testimony from supporters of station operators or supporters of jobbers may be, their positions remain essentially unchanged since 2007 because their pecuniary interests remain largely the same. Each side presented illuminating facts, but the conclusionssupporting or opposing the legislationwere foregone. In contrast to 2007, though, the weight of expert testimony supports the passage of jobber divorcement. Mr. Balto, Mr. Doyle, Mr. Townsend, and Attorney General Irvin Nathan lack pecuniary interest in the outcome of the legislation. In fact, as stated before, the Attorney Generals position represents a partial reversal from 2007 because of changes in the gasoline industry. Taken with rising prices, declining station numbers, and increased market concentration, the experts recommendations for jobber divorcement, along with accompanying measures, are well justified. II. Legislative Action: Description & Analysis As experts testified, the retail service station industry in the District is no longer structurally competitive. The result is fewer service stations in the District and higher prices at those that remain. Legislative changes are needed to restore a competitive balance in the industry and to achieve the long-established and accepted goals of the RSS. Bill 19-299 will make the needed changes to achieve both of these objectives. A. Divorcement 40 Approximately 70% of stations in the District are controlled by two jobbers. This structure has led to more rapid price growth in the District than has been experienced in surrounding jurisdictions and creates significant barriers to market entry, preventing meaningful competition from entering the market.41 In 2007, the Council removed jobbers from the divorcement statute, enabling a more vertically integrated market to take shape. At the time, the FTC argued that vertical integration 39 Id. 40 See generally David A. Balto Testimony, Committee on Government Operations and the Environment Hearing on B19-299, June 17, 2011; Doyle Testimony on B19-299. 41 Balto Testimony on B19-299, at 2. 10 would lower prices because the price at the pump would reflect fewer markups.42 The FTCs analysis, however, relied on the assumption that wholesale and retail markets would be structurally competitive.43 In the Districtwith two jobbers controlling a large majority of the wholesale marketthis assumption is unsound.44 Although vertical integration offers the potential to maximize efficiencies and lower prices, prices have increasedand industry representatives report that service from distributors has deteriorated.45 For any potential benefits vertical integration offers, it presents dangers as well. In the District, vertical integration has permitted three significant issues to develop. First, barriers to entry into the Districts wholesale or retail gasoline markets have become very tough to overcome. 46 Nonintegrated jobbers report that it is extremely difficult to enter the District market, given the prevalence of integrated stations.47 Second, current law permits a jobber to too easily manipulate the prices of competing stations by allowing jobbers to serve as landlord, supplier, and competitor of independent station operators. As landlord and supplier, a jobber has access to sensitive information such as overhead costs, volume, and sales trends. Jobbers can use that information to modify prices in a way that is anticompetitive, such as through the use of zone pricing. The lack of nonintegrated systems means that fewer stations are seeking to competitively purchase fuel from third-party distributors. Vertical integration has allowed significant barriers to restrict entry into the jobber market in the District. 48 Zone pricing establishes a station or a group of stations as part of a zone that will pay the same thing for gasoline. Station operators report that the gap in what they pay for gasoline versus some closely situated competitors has grown significantly. One operator reported to Anacostia Realty, a subsidiary of Capitol Petroleum, I have been advised by other dealers in Northwest Washington that I am paying a premium of about ten cents per gallon over [their dealer tank wagon prices].4950 Third, a system permitting vertical integration and encouraging concentrated ownership is generally detrimental to small businesses, who wish to establish relationships with the community. Vertical integration and market concentration may, in some situations, benefit consumers if efficiencies and economies of scale are used to drive down prices. Other station operators reported at the hearing that stations in Virginia and Maryland were charging less at the pump than they were paying for wholesale gasoline. The existing statute has contributed to a competitively unhealthy gasoline marketand higher prices. 51 42 [W]hen both suppliers and station operators have the ability to price above cost, each will add a mark-up to the final price. This double mark-up problem reduces supplier profits because retail prices are higher than they would be if the supplier set them, causing business to be lost to lower-priced retailers. Comment from Federal Trade Commission at 5. 43 Balto Testimony on B19-299 at 4. 44 Id. 45 Id. at 3. 46 Id. at 2. 47 Id. 48 Id. 49 Letter from Stacy Milford, Circle Exxon, to Anacostia Realty (Feb. 17, 2011) (contained in attachment F) 50 Dealer tank wagon price is the price paid by a dealer to a distributor when gasoline is delivered to the station. 51 Comment from FTC on B17-142, 4-6. Even when they benefit consumers in terms of the prices paid, thoughwhich they have not done for the 11 Districts gasoline pricesthe system prefers larger businesses positioned at several layers of the market to the detriment of smaller ones. Unlike the larger businesses, single station operators cannot, for example, raise prices at one isolated station as a way to lower them at a station facing greater competition. Particularly when faced with anticompetitive practices, independent station operators will find it difficult to compete. Protecting the viability of independent station operators is one of the four stated goals of the RSS.52 District residents continue to find the protection of independent station operators to be a worthy goal. As stated earlier, dozens of community members contacted the Committee to express support for the continued operation of an independent service station operator. 53 His excellent service and connection to the community are greatly valued by nearby residents. Mat Thorp, who testified on behalf of the Palisades Citizens Association (PCA), reiterated the importance of full-service stations to the community. PCA testified at the Committee Hearing because it seeks to protect its neighborhoods last remaining full-service station. This legislation would ensure that stations are operated by independent operators. This will mean that the Districts 105 stations will support the development of small community businesses, which is an aim of the RSS and a desire of District residents.54 Reinstituting jobber divorcement will break the vertical control that jobbers currently exercise over individual stations. By breaking the ownership bind, more stations will be in position to competitively select their suppliers and negotiate the lowest possible price. 55 With more stations free to purchase fuel from their preferred supplier, more jobbers may choose to enter the market.56 The proposed bill would reinstate the right of first refusal. The right of first refusal allows franchisees the opportunity to purchase the franchisors interest in a station if the franchisor seeks to sell, assign, or transfer its interests to third party. Such a right had been added to the RSS as an amendment in 2009the provision, however, sunset on January 1, 2011. More jobbers in the market will mean better competition at the wholesale level. At the retail level, all market entrants should, after the passage of B19-299, be similarly situated. No longer will some participants have access to competitors sensitive business information or the ability to control their pricing. This will lead to lower comparative prices for consumers and help to ensure the continued viability of independent station operators. B. Right of First Refusal 57 In 2009, the Committee explained that action was needed to protect the interests of retaining service stations in the long term.58 52 Committee Report on B1-133. 53 Letters from Community (contained in attachment H) 54 Doyle Testimony on B19-299. Mr. Doyle explained at the hearing that divorcement would open up additional opportunities for small businesses because all stations would need to be run by independent dealers. 55 Balto Testimony on B19-299, 3-4. 56 Doyle Testimony on B19-299, at 1. 57 The right of first refusal included in the 2009 legislation applied to sales, assignments, or transfers by a refiner. 58 Committee on Government Operations and the Environment Report on Bill No. 17-142, the Retail Service Station Amendment Act of 2009, April 2, 2009, at 6. Many district service stations are located on valuable pieces of propertyoften property coveted by a developer. This issue was explored in a February 18, 2011 Washington City Paper article. When discussing the future of his stations, Capitol Petroleum 12 owner Joe Mamo noted, We are really a real estate company . . . . [l]ong term, the real estate is where the value is.59 Capitol Petroleum already converted and sold one station on Capitol Hill, which is now the site of condominiums.60 Mr. Mamos company has reportedly obtained permits to convert another as well. Protecting the viability of independently operated, neighborhood service stations is a well-established goal of the RSS, which the reinstitution of a right of first refusal would help to accomplish.61 The District was not the first jurisdiction to enact a right of first refusal for dealers. California has extended this right to dealers for more than twenty years. 62 New Jersey recently extended this right to dealers as well.63 Courts have found Californias law to be Constitutional and not preempted by the Petroleum Marketing Practices Act, which regulates the termination and non-renewal of franchise agreements.64 The Committee finds that as in 2009, extending the right of first refusal is consistent with federal law [] and is a proper exercise of the legislature.65 B19-299 would clarify that existing District law prohibits marketing agreements that preclude the purchase of fuel from any person or entity who is not a party to the marketing agreement. C. Clarification of Nonwaiverable Conditions 66Prohibit a retail dealer from purchasing or accepting delivery of, on consignment or otherwise, any motor fuels, petroleum products, automotive products, or other products from any person who is not a party to the marketing agreement or prohibit a retail dealer from selling such motor fuels or products, provided that if the marketing agreement permits the retail dealer to use the distributor's trademark, the marketing agreement may require such motor fuels, petroleum products, and automotive products to be of a reasonably similar quality to those of the distributor, and provided further that the retail dealer shall neither represent such motor fuels or products as having been procured from the distributor nor sell such motor fuels or products under the distributor's trademark[.] The language in the statute is straightforward and states that no marketing agreement shall: 67 59 http://www.washingtoncitypaper.com/articles/40430/joe-mamo-dc-gas-station-master/page5/ 60 http://www.washingtoncitypaper.com/articles/40430/joe-mamo-dc-gas-station-master/page5/ 61 See generally Committee Report on 1-133. 62 Cal Bus. & Prof. Code 20999 et seq. 63 N.J. Stat. 56:10-6.1 64 Forty-Niner Truck Plaza, Inc. v. Union Oil Co. of Cal., 589 Cal. App. 4th 1261 (Cal. Ct. App. 1997). 65 Committee Report on B18-89, at 7. 66 Marketing agreement is defined broadly as a contract, lease, franchise, or other agreement, which is entered into between a distributor and a retail pertaining to, inter alia, the sale or distribution of gasoline, the use of a trademark for the purposes of selling gasoline, and the occupancy of property for the purposes of selling gasoline. D.C. Code 36-301.01 (7). 67 D.C. Code 36-303.01 13 The provision, as the Attorney General explains, means that a distributor may seek to secure a station operator's loyalty through better prices or better service, but not through contractual restraints on the station operator's ability to buy gasoline from other suppliers.68 Recent decisions out of the Superior Court of the District of Columbia reiterate that the provision applies to franchise arrangements and preclude exclusivity agreements. Kazemzadeh v. Eastern Petroleum Corp., 2006 CA 009077, at 15 (D.C. Super. Ct. R. Civ. August 19, 2010) (holding that D.C. Code 36-303.01(a)(6) precludes exclusivity arrangements even when franchise agreements are present). Despite the seemingly plain language, local jobbers are not complying, according to testimony provided at the Committees June 17 hearing. 69 The Attorney General explains, []while District law does not permit a gasoline station operating under the Brand "X" trademark to purchase Brand "Y" gasoline and dispense it from a Brand X pump, the law does give the Brand X gasoline station the right to purchase Brand X gasoline from any available supplier.70 Finally, B19-299 would expressly empower the Attorney General to bring actions in the name of the District of Columbia for violations of the RSS. This comes at the request of the Attorney General and is a logical extension of the RSS. Available legal interpretations and the plain language of the statute all point to the same thing: District law permits dealers to purchase gasoline from any available source. Nonetheless, testimony provided at the hearing demonstrates that marketing agreements do not adhere to the law as written or are being implemented in a way that does not adhere to the law as written. A jobber and station operators indicated that their marketing agreements precluded the purchase of fuel from anyone but that jobber. Consequently, the Committee finds that clarifying language is necessary to underscore the original meaning and purpose of the statute. D. Empower Attorney General to Bring Actions 71 As explained, the legislation sought to encourage competition and drive prices down, for the benefit of consumers. If the law is not being adhered to, however, consumers are not well equipped to either detect a violation or to bring an action as result of one. Unless a consumer could assemble a suitably large class, individual damages would likely prove quite small and prohibitive to bringing a complicated lawsuit.72 Station operators are also poorly situated to bring an action against owners. Although the operators are in much better position to detect violations of RSS, the operators would be forced to bring a suit against their landlord, supplier, and competitor. Whatever the legal protections in place to prevent retaliation, most station operators have not brought actions against their The Attorney General is best situated to bring an action on behalf of District residents and consumers. 68 Letter from Attorney General on B19-299, at 2. 69 See also, Kazemzadeh v. Eastern Petroleum Corp., 2006 CA 009077, at 15 (D.C. Super. Ct. R. Civ. July 18, 2007). 70 Id. at 3. 71 Letter from Attorney General on B19-299, at 3. 72 Hypothetically, if a consumer drives 12,000 miles per year and consumes one gallon of gasoline per 25 miles, that consumer would pay an extra $96 per year as a result of a 20-cent per gallon pricing gap. 14 respective distributors, despite documented concern surrounding pricing, as discussed earlier in this report. Bringing legal action is also a financial drain on operators, who may not have the resources to bring a complex legal action against a much wealthier adversary. The Attorney General can pursue actions against any party violating this act to the detriment of District residents and consumers without fear of reprisal or significant concern over being priced out of pursuing the action. The Committee notes that empowering the Attorney General to bring actions on behalf of the District in no way extends or removes existing protections. It merely enables the most appropriate agency in the District to ensure that a consumer protection law is implemented as written. SECTION-BY-SECTION ANALYSIS Section 1 provides the long and short title of the legislation. Section 2 amends the Retail Service Station Act of 1976 as follows: Subsection (a) adds jobbers back into the divorcement statute, prohibiting jobbers from operating service stations in the District. Subsection (b) provides jobbers with two years to come into compliance with subsection (a). Subsection (c) clarifies the meaning of D.C. Code 36-303.01 (a)(6) to include franchise agreements and branded fuel. Subsection (d) empowers the Attorney General of the District of Columbia to bring legal actions in the name of the District against parties who violate this act. Subsection (e) creates a right of first refusal in the event that a franchisor sells, transfers, or assigns its interest in the premises of a retail service station to a third party. It also establishes a judicial remedy for failure to provide a right of first refusal. Section 3 contains the fiscal impact statement. Section 4 contains the effective date. FISCAL IMPACT A fiscal impact statement prepared by the Chief Financial Officer and dated July 5, 2011 is attached to this report. The fiscal impact statement notes that B19-299 would have no fiscal impact. 15 IMPACT ON EXISTING LAW Bill 19-299 would amend the Retail Service Station Act of 1976 (D.C. Law 1-123; D.C. Official Code 36-301.01 et seq.). The bill will (1) prevent jobbers from operating service stations in the District after a two-year phase-out period, (2) clarify the meaning of D.C. Code 36-303.01 (a)(6), so that it is clear that operators may purchase branded fuel from any available supplier, (3) empower the Attorney General to bring actions on behalf of the District for violations of this Act, and (4) creates a right of first refusal for station operators. [to be added] COMMITTEE ACTION LIST OF ATTACHMENTS (A) Bill 19-299, as introduced (B) Notice of Intent to Act, published in the District of Columbia Register (C) Public Hearing Notice, published in the District of Columbia Register (D) Public Hearing Agenda and Witness List (E) Committee Print of Bill 19-299 (F) Testimony (G) Letter from Attorney General for the District of Columbia (H) Letters from Community (I) Testimony from Previous Hearings (J) Fiscal Impact Statement Attachment A _______________________ ________________________ 1 Councilmember Phil Mendelson Councilmember Mary M. Cheh 2 3 _______________________ ________________________ 4 Councilmember Tommy Wells Councilmember Jack Evans 5 6 7 8 9 A BILL 10 11 _________ 12 13 14 IN THE COUNCIL OF THE DISTRICT OF COLUMBIA 15 16 _______________ 17 18 19 Councilmembers Mary M. Cheh, Phil Mendelson, Jack Evans, and Tommy Wells 20 introduced the following bill, which was referred to the Committee on 21 ___________. 22 23 To amend the Retail Service Station Act of 1976 to prohibit gasoline distributors from 24 owning and operating retail service stations in the District of Columbia. 25 26 BE IT ENACTED BY THE COUNCIL OF THE DISTRICT OF COLUMBIA, 27 That this act may be cited as the Retail Service Station Amendment Act of 2011. 28 Sec. 2. Section 3-102 of the Retail Service Station Act of 1976, effective April 19, 29 1977 (D.C. Law 1-123; D.C. Official Code 36-302.02), is amended as follows: 30 (a) Subsections (a) and (b) are amended by striking the phrase no producer, 31 refiner, or manufacturer wherever it appears and inserting the phrase no jobber, 32 producer, refiner, or manufacturer in its place. 33 (b) Subsection (c) is amended to read as follows: 34 (c) Any jobber in violation of subsections (a) or (b) of this subsection as of the 35 effective date of this Act, shall have 2 years following the effective date to come into 36 compliance.. 37 2 Sec. 3. Fiscal impact statement 1 The Council adopts the fiscal impact statement in the committee report as the 2 fiscal impact statement required by section 602(c)(3) of the District of Columbia Home 3 Rule Act, approved December 24, 1973 (87 Stat. 813; D.C. Official Code 1- 4 206.02(c)(3)). 5 Sec. 4. Effective date 6 This act shall take effect following approval by the Mayor (or in the event of veto 7 by the Mayor, action by the Council to override the veto), a 30-day period of 8 Congressional review as provided in section 602(c)(1) of the District of Columbia Home 9 Rule Act, approved December 24, 1973 (87 Stat. 813; D.C. Official Code 1- 10 206.02(c)(1)), and publication in the District of Columbia Register. 11 Attachment B Attachment C Attachment D C O U N C I L O F T H E D I S T R I C T O F C O L U M B I A 1 3 5 0 P ENNS YL VANI A AVENUE, N. W. S UI TE 1 1 1 WAS HI NGTON, DC 2 0 0 0 4 T EL EP HONE: ( 2 0 2 ) 7 2 4 - 8 0 6 2 F AX: ( 2 0 2 ) 7 2 4 - 8 1 1 8 COMMITTEE ON GOVERNMENT OPERATIONS AND THE ENVIRONMENT MARY M. CHEH, CHAIRWITNESS LIST COUNCILMEMBER MARY M. CHEH, CHAIRPERSON COMMITTEE ON GOVERNMENT OPERATIONS & THE ENVIRONMENT ANNOUNCES A PUBLIC HEARING ON B19-299, the Retail Service Station Amendment Act of 2011 June 17, 2011 11:00 AM Room 412 John A. Wilson Building 1350 Pennsylvania Ave., N.W. WITNESSES David Balto, Law Offices of David A. Balto Robert Doyle, Doyle, Barlow & Mazard PLLC Melvin Sherbert, The Washington, Maryland, Delaware Service Station and Automotive Repair Association Kirk McCauley, The Washington, Maryland, Delaware Service Station and Automotive Repair Association Lynn Cook, Parkers Exxon John Connor, BP Station Operator John Townsend, AAA Mid-Atlantic Matt Thorpe, Palisades Citizens Association John Ray, Partner, Manatt Phelps & Phillips Joe Mamo, President, Capitol Petroleum Group, Inc. David L. Calhoun, Senior RAM, Capitol Petroleum Group, Inc. Al Alfano, Partner, Bassman, Mitchell & Alfano Steven Smith, Representative, Rainbow PUSH Coalition Pete Horrigan, Mid Atlantic Petroleum Dealers Association Pierpont Mobley, Private Citizen Bruce Bereano, Offices of Bruce Bereano John Distad, BP Station Operator James Giles, Former Shell Station Operator John Johnson, Exxon Station Operator Alma Gates, Neighbors United Trust Petros Kiflu, Commission Operator, Shell Station @ 3355 Benning Road NE Alexander Anenia, Commission Operator, Shell Station at 1830 Rhode Island Ave NE Dawit Habte Selasie, Commission Operator, Shell Station at 6201 New Hampshire Ave NE Redi Hassan, Commission Operator, Shell Station @ 4140 Georgia Ave NE Frank Wilds, Private Citizen Robert Vinson Brannum, President, DC Federation of Civic Associations, Inc. Attachment E Draft Committee Print, B19-299 1 Committee on Government Operations and the Environment 2 July 11, 2011 3 4 5 A BILL 6 7 _________ 8 9 10 IN THE COUNCIL OF THE DISTRICT OF COLUMBIA 11 12 _______________ 13 14 15 To amend the Retail Service Station Act of 1976 to prohibit gasoline distributors from 16 operating retail service stations in the District of Columbia, to clarify that 17 marketing agreements may not prohibit the purchase of fuel from any nonparties 18 to the agreement, to empower the Attorney General of the District of Columbia to 19 bring legal actions in Superior Court for violations of this chapter, and to provide 20 franchisees with the right of first refusal if a sale takes place. 21 22 BE IT ENACTED BY THE COUNCIL OF THE DISTRICT OF COLUMBIA, 23 That this act may be cited as the Retail Service Station Amendment Act of 2011. 24 Sec. 2. The Retail Service Station Act of 1976, effective April 19, 1977 (D.C. 25 Law 1-123; D.C. Official Code 36-301.01 et seq.), is amended as follows: 26 (a) Section 3-102 is amended as follows: 27 (1) Subsection (a) is amended by striking the phrase no producer, refiner, 28 or manufacturer wherever it appears and inserting the phrase no jobber, 29 producer, refiner, or manufacturer in its place. 30 (2) Subsection (b) is amended by striking the phrase no producer, 31 refiner, or manufacturer wherever it appears and inserting the phrase no jobber, 32 producer, refiner, or manufacturer in its place. 33 (b) Subsection (c) is amended to read as follows: 34 2 (c) Any jobber in violation of subsections (a) or (b) of this section as of the 1 effective date of this Act, shall have 2 years following the effective date to come into 2 compliance.. 3 (c) Section 4-201(f) is amended by adding new paragraph (1) to read as follows: 4 (f)(1) this subsection shall apply to all marketing agreements, including 5 marketing agreements under which a retailer would sell a particular brand of fuel under a 6 trademark. Marketing agreements shall not prohibit a retailer from purchasing any brand 7 of fuel from any person not a party to the marketing agreement. 8 (d) Section 4-206 is amended by adding new (d) to read as follows: 9 (d) (1) The Attorney General for the District of Columbia, or any of his 10 assistants, is hereby empowered to maintain an action or actions in the Superior Court for 11 the District of Columbia in the name of the District of Columbia to enjoin any refiner, 12 distributor, or retail dealer, and those acting in concert with such refiner, distributor, and 13 retail dealer, from violating this subchapter, to recover a civil penalty of not more than 14 $5,000 for each violation, and to recover the costs of the action and reasonable attorneys 15 fees. 16 (2) If the Attorney General, in the course of an investigation to determine 17 whether to bring a court action under this section, has reason to believe that a person may 18 have information, or may be in possession, custody, or control of documentary material, 19 relevant to the investigation, the Attorney General may issue in writing and cause to be 20 served upon the person or entity, a subpoena or subpoenas requiring the person or entity 21 to give oral testimony under oath, or to produce records, books, papers, contracts, 22 electronically-stored data and other documentary material for inspection and copying. 23 3 (3) Information obtained pursuant to this authority to subpoena is not admissible 1 in a later criminal proceeding against the person who provided the information. 2 (4) The Attorney General may petition the Superior Court of the District of 3 Columbia for an order compelling compliance with a subpoena issued pursuant to this 4 authority to subpoena.. 5 (e) A new title III-A is added to read as follows: 6 III-A. Franchisee Purchase Rights. 7 Sec. 5A-301. Definitions. 8 For the purposes of this title, the term: 9 (1) Distributor means any person, including any affiliate of such person, who 10 either purchases fuel for sale, consignment, or distribution to another, or receives fuel on 11 consignment for consignment or distribution to his or her own fuel accounts or to 12 accounts of his or her supplier, but shall not include a person who is an employee of, or 13 merely serves as a common carrier providing transportation service for, such supplier. 14 (2) Franchise means any contract between a refiner and a distributor, between 15 a refiner and a retailer, between a distributor and another distributor, or between a 16 distributor and a retailer, under which a refiner or distributor authorizes or permits a 17 retailer or distributor to use, in connection with the sale, consignment, or distribution of 18 gasoline, diesel, gasohol, or aviation fuel, a trademark which is owned or controlled by 19 such refiner or by a refiner which supplies fuel to the distributor which authorizes or 20 permits such use. The term "franchise" includes the following: 21 (A) Any contract under which a retailer or distributor is authorized or 22 permitted to occupy leased marketing premises, which premises are to be employed in 23 connection with the sale, consignment, or distribution of fuel under a trademark which is 24 4 owned or controlled by such refiner or by a refiner which supplies fuel to the distributor 1 which authorizes or permits such occupancy; 2 (B) Any contract pertaining to the supply of fuel which is to be sold, 3 consigned, or distributed under a trademark owned or controlled by a refiner or 4 distributor; and 5 (C) The unexpired portion of any franchise, as defined by this paragraph, 6 which is transferred or assigned as authorized by the provisions of such franchise or by 7 any applicable provision of District law which permits such transfer or assignment 8 without regard to any provision of the franchise. 9 (3) Franchisee means a retailer or distributor who is authorized or permitted, 10 under a franchise, to use a trademark in connection with the sale, consignment, or 11 distribution of fuel. 12 (4) Franchise relationship means the respective fuel marketing or distribution 13 obligations and responsibilities of a franchisor and a franchisee that result from the 14 marketing of fuel under a franchise. 15 (5) Franchisor means a refiner or distributor that authorizes or permits, under 16 a franchise, a retailer or distributor to use a trademark in connection with the sale, 17 consignment, or distribution of fuel. 18 (6) Leased marketing premises means marketing premises owned, leased, or 19 in any way controlled by a franchisor and which the franchisee is authorized or permitted, 20 under the franchise, to employ in connection with the sale, consignment, or distribution 21 of fuel. 22 (7) Refiner means any person engaged in the refining of crude oil to produce 23 fuel, and includes any affiliate of such person. 24 5 (8) Retailer means any person who purchases fuel for sale to the general 1 public for ultimate consumption. 2 Sec. 5A-302. Franchisees right of first refusal. 3 (a) In the case of leased marketing premises as to which the franchisor owns a 4 fee interest, the franchisor shall not sell, transfer, or assign to another person the 5 franchisor's interest in the premises unless the franchisor has first either made a bona fide 6 offer to sell, transfer, or assign to the franchisee the franchisor's interest in the premises, 7 other than signs displaying the franchisor's insignia and any other trademarked, 8 servicemarked, copyrighted or patented items of the franchisor, or, if applicable, offered 9 to the franchisee a right of first refusal of any bona fide offer acceptable to the franchisor 10 made by another to purchase the franchisor's interest in the premises. 11 (b) In the case of leased marketing premises which the franchisor leases from a 12 third party, following notice by the franchisor to the franchisee of termination or 13 nonrenewal of the franchise by reason of the expiration of the franchisor's underlying 14 lease from the third party, the franchisor shall, upon request by the franchisee and subject 15 to the franchisee purchasing or leasing the premises from the third party prior to the date 16 of termination or nonrenewal of the franchise set forth in the notice, make a bona fide 17 offer to sell to the franchisee any interest the franchisor may have in the improvements on 18 the premises, other than signs displaying the franchisor's insignia and any other 19 trademarked, servicemarked, copyrighted or patented items of the franchisor, at a price 20 not to exceed the fair market value of the improvements or the book value, whichever is 21 greater, or, if applicable, offer the franchisee a right of first refusal of any bona fide offer 22 acceptable to the franchisor made by another to purchase the franchisor's interest in the 23 6 improvements. For the purposes of this subdivision, "book value" means actual cost less 1 actual depreciation taken. 2 (c) This section shall not require a franchisor to continue an existing franchise 3 agreement or to renew a franchise relationship if not otherwise required by federal law. 4 Sec. 5A-303. Remedy for violation of title. 5 (a) Any person who violates any provision of this title may be sued in the 6 Superior Court of the District of Columbia for temporary and permanent injunctive relief 7 and damages, if any, and the costs of suit. 8 (b) No action shall be maintained to enforce any liability created under any 9 provision of this title unless brought before the expiration of 2 years after the violation 10 upon which it is based or the expiration of one year after the discovery of the facts 11 constituting such violation, whichever occurs first.. 12 Sec. 3. Fiscal impact statement 13 The Council adopts the fiscal impact statement in the committee report as the 14 fiscal impact statement required by section 602(c)(3) of the District of Columbia Home 15 Rule Act, approved December 24, 1973 (87 Stat. 813; D.C. Official Code 1- 16 206.02(c)(3)). 17 Sec. 4. Effective date 18 This act shall take effect following approval by the Mayor (or in the event of veto 19 by the Mayor, action by the Council to override the veto), a 30-day period of 20 Congressional review as provided in section 602(c)(1) of the District of Columbia Home 21 Rule Act, approved December 24, 1973 (87 Stat. 813; D.C. Official Code 1- 22 206.02(c)(1)), and publication in the District of Columbia Register. 23 Attachment F Statement of Alexander Anenia on Retail Service Station Amendment Act of 2011 (Bill 19-299) My name is Alexander Anenia. Like Petros KifIu, I run the convenience store at the Shell gas station at 1830 Rhode Island Avenue NE. I have been working at this station for 4 years. There is also a repair bay at my gas station. A total of eight employees work at these facilities. As I understand this legislation, it would force Mr. Mamo to go to the single franchise system. If Bill 19-299 becomes law, DAG Petroleum may be forced to sell this station. It will surely have to bring in a franchisee. As for me, the cost to purchase a service station franchise business is beyond my reach. So there will be a lot of unknown if the station is sold to someone else. Bill 19-299 is creating a lot of troubles and worries for me and my family. A change from DAG to someone else means I will have to deal with a new operator of the gas station who mayor may not renew my lease at the mini-market. This is bad. It is bad for me and my family. It is bad for my employees and their families. I assume that what you are doing is legal and that you have the power to do it, but why does the government want to meddle in our jobs? I along with other tenants at these gas stations ! are small, hardworking entrepreneurs and employees. We go to work every day and we provide : a needed and a convenient service to our customers. At my store, I do not know of any . complaints from our customers. Madam Chair and other members of the City Council, I petition: you today not to support such a legislation. Please let us work in peace. Do not interfere with my business and threaten my and my employees' livelihoods. I ask for your help. Thank You! COUNCIL OF THE DISTRICT OF COLUMBIA' COMMITTEE ON GOVERNMENT OPERATIONS AND THE ENVIRONMENT Mary M. Cheh, Chairperson Friday, June 17, 2009 RETAIL SERVICE STATION AMENDMENT ACT OF 2011 BILL 19-0299 Testimony of Alma Hardy Gates on behalf of Neighbors United Trust Good morning Councilmember Cheh and Members of the Committee. My name is Alma Gates. I live at 4911 Ashby Street, NW. I am pleased to appear before the committee today in support of Bill 19-0299, the "Retail Service Station Amendment Act of 2011." (The Bill) I sat before this Committee on March 25, 2009, in support of an amendment to prohibit converting Washington's full-service filling stations into gas-and-go stations; and, in particular to support World Famous Parker's Exxon, located at 4812 MacArthur Boulevard that has served residents ofthe Palisades for five generations. When Exxon sold off a group of stations to Joe Mamo three years ago, he became distributor and owner ofthe stations, the same role Exxon exercised in the past. Now he wants to operate his stations, and replace operators who held the station franchise under Exxon. Lynn Cook, an operator the Palisades community has come to know and respect, would be replaced by a manager of Mamo' s choice and : it is safe to assume a similar fate would befall station operators across the city as well as their employees. This would allow the jobber to pocket all the receipts. As you are aware similar legislation was passed by Council in 2004 and then repealed in 2007 under heavy lobbying on behalf of Mamo. Today John Ray and Jessie Jackson are actively lobbying on behalf of gas station magnate Joe Mamo so he might function as distributor, owner and operator of his many retail service stations. Yes, they oppose the Bill. There is also the issue of homeland security in the Nation's Capital. As jobber for his many stations, Mr. Mamo controls whether or not gasoline is available. The proposed amendment to the Retail Service Station Act of 1976 would ensure ' the current management structure at Parker's continues and with it the service uponi which the Palisades community depends. It would prevent a total monopoly. Neighbors United Trust supports Bill 19-0299 to prohibit gasoline distributors from owning and operating retail service stations in the District of Columbia, and suggests its scope be broadened to allow existing station operators to hire their replacements, independent of the and, to divorce station operators from the requirement they purchase petroleum from a single source distributor. Please, let's get the legislation right this time! TESTIMONY OF ALPHONSE M. ALFANO Before The Council of The District of Columbia Committee on Government Operations And The Environment Friday, June 17,2011 John A. Wilson Building 1350 Pennsylvania Avenue, N.W. Room 412 Madam Chairperson and Members of the Committee F or the past 28 years, I have been engaged in the practice of law in the District of Columbia. All of my clients are wholesale distributors of refined petroleum products, sometimes referred to as "jobbers." The purpose of this hearing is to determine whether jobbers should be prohibited from selling motor fuels at retail in the District of Columbia. Jobbers purchase motor fuels from nlajor oil companies, like Shell, Exxon, and Chevron, and resell the products at wholesale and retail. In some cases, they act as middlemen, purchasing from a major oil companies and selling at wholesale to independent dealers. In other cases, they own and operate stations and sell motor fuels directly to the general motoring public. In still other cases, they consign motor fuels to . an operator who sells the products on their behalf and the operator is paid a commission for each gallon sold. Jobbers decide the most economical and efficient means of selling their motor fuels; if it is most efficient to make a nlajor capital investment to purchase a service station and sell directly to consumers, they will do it. Where it is more efficient to sell at wholesale to independent dealers, they confine their activities to wholesale sales. They operate in the manner that is most efficient and economical for the particular geographic market in which they operate so they can be as competitive as possible. Other than the District of Columbia, no state or other political subdivision in the country has ever enacted a jobber divorcement law. That is, no state or political subdivision prohibits jobbers from selling motor fuels at retail. Service station dealers, however, and the organizations that represent them, have been pushing jobber divorcement for decades. They've pushed it in a number of states without any success. This lack of success is understandable. The 2 legislatures in the various states saw jobber divorcement for what it is, special interest legislation (protectionism, if you will) that eliminates all competition for service station dealers. More importantly, it is special interest legislation with no benefit to consunlers in the District of Columbia and with significant anticompetitive effects. Because of the anti-competitive nature ofjobber divorcement, the Federal Trade Commission's Bureau of Economics determined that divorcement regulations would raise the price of gasoline by about 3 cents per gallon. Speaking to a joint subcommittee of the Virginia Senate and House of Delegates, Ronald B. Rowe, Director for Litigation of the Federal Trade Commission's Bureau of Competition stated: "There appears to be no factual support for divorcement legislation, but there are compelling reasons to believe that such legislation would be harnlful to competition and to Virginia consumers and visitors." The same would be true in the District of Columbia. In fact, the only benefits ofjobber divorcement accrue to about 30 independent service station dealers who may not even be residents of the 3 District. It eliminates their competition so that they compete only with one another. The only basis given by these dealers for jobber divorcement is that jobbers will somehow "get rid of the dealers," so that jobbers can engage in direct operations. If this happens, the dealers argue, District of Columbia residents will be deprived of the services offered by independent dealers at their stations, like automotive repairs. This argument has no merit whatsoever. The Petroleum Marketing Practices Act was enacted by Congress in 1978, and it prohibits jobbers from terminating a dealer lease or motor fuel supply contract, or even nonrenewing a lease or supply contract, except on specified grounds that are explicitly set forth in the Act. Quite simply, a jobber cannot terminate (or "get rid of') a dealer unless there are proper grounds therefor and there is proper notice. Nor can jobbers take other actions to deprive communities of the automotive repair services that independent dealers offer at their stations. As you know, the Retail Service Station Act of 1976 placed a moratorium on the conversion of service stations from bay operations (that is, automotive repair facilities) to convenience stores or other 4 methods of operation. Thus, dealers are fully protected by federal law and by the laws ofthe District of Columbia. In short, if the jobber divorcement law is allowed to go into effect, there will be no benefits to the District of Columbia or its residents. The only beneficiaries would be a group of service station dealers who would be insulated from any effective competition. Jobbers, on the other hand, who invested millions of dollars to purchase service stations with an eye towards operating them directly, will have to tum them over to dealers and earn a significantly lower return on the investments they made and the entrepreneurial risks they took to build, modernize, and improve service stations in the District. Jobber divorcement would discourage these types of investments leading to a deterioration ofthe condition of service stations in the City. And, of course, with less competition, gasoline prices will rise. These are true effects ofjobber divorcement and, for these reasons, Bill 19299 should not be enacted. C:Wfano\2011 Testimony Before DC Council.doc 5 GOVERNMENT OF THE DISTRICT OF COLUMBIAOFFICE OF THE ATTORNEY GENERAL***--June 17,2011BY HANDCouncilmember Mary M. Cheh, ChairpersonCommittee on Government Operations and the EnvironmentCouncil of the District of Columbia1350 Pennsylvania Avenue, N.W.Washington, DC 20004Re: Bill 19-299, the "Retail Service Station Amendment Act of2011"Dear Chairperson Cheh:I am pleased to provide the Committee on Government Operations and the Environment with theviews of the executive branch of the District of Columbia Government ("District") in support ofBill 19-299, the "Retail Service Station Amendment Act of2011."In recent years, the Attorney General's office has sought to apply consumer protection andantitrust laws to protect D.C. consumers from anti-competitive practices by sellers of gasolinethat result in higher prices to consumers. Bill 19-299 would provide a major assist to our efforts.It would amend the provision of the Retail Service Station Act of 1976 that has prohibitedgasoline producers, refiners, and manufacturers from opening or operating gasoline servicestations in D.C. D.C. Official Code 36-302.02. The proposed amendment would extend thisprohibition to "jobbers," which are defined by statute as "wholesale supplier[s] or distributor[s]of motor fuel." D.C. Official Code 36-301.01(6A). Jobbers that currently operate gasolineservice stations in D.C. would have two years to come into compliance with the new restriction.The primary benefit of prohibiting jobbers from operating gasoline service stations in D.C. is tomake it more difficult for jobbers to use any market power they may have as the owners ofmultiple D.C.-area service stations in a way that increases the retail gasoline prices charged byD.C. stations. The recent trend towards concentration of D.C. service station ownership in thehands of a few major jobbers leads the Administration to conclude that additional statutoryprotection is needed. For this reason, we support Bill 19-299.We point out, however, an inconsistency between the caption of the bill and the statute it isamending. The long title says the intent of the bill is to prohibit gasoline distributors from441 Fourth Street, NW, Suite 1100S, Washington, D.C. 20001, (202) 724-1301, Fax (202) 741-0580Councilmember Mary M. Cheh, ChairpersonJune 17,2011Page 2"owning and operating retail service stations in the District of Columbia." The statute, however,as it presently exists, simply prevents producers, refiners, and manufacturers from "opening" and"operating" retail gas stations. The premise of the existing law is that those covered - i. e, theproducers, manufacturers, and refiners - can continue to own the stations but cannot operatethem; the stations need to have independent operators. Thus, if jobbers and wholesalers weresimply added to the list ofthose covered by the law, they could continue to own the stations butcould not operate them. If the intent of the legislation is to prevent jobbers from "owning" thestations and the real estate on which they are located, as the long title seems to suggest, then thetext of the bill would need to be amended to reflect that intent.Back in May 2007, at a Council Committee hearing on Bill No. 17-142, the "Retail ServiceStation Clarification Amendment Act of2007," the Office of the Attorney General presentedtestimony that offered some support for allowing jobbers to own and operate gas stations in D.C.The focus at that time was to keep producers, manufacturers and refiners from controlling theprice at the pumps. It was believed that jobbers would be a pro-competitive force. According tothe written testimony, "[b]y allowing jobbers to operate their own retail stations in D.C., Bill 17-142 ha[ d] the potential to encourage retail competition by increasing the number of stations that[were] not controlled and supplied by the major oil companies." Testimony of Bennett Rushkoff(May 24,2007). The Committee also received a letter from the Federal Trade Commission staffin support of allowing jobbers to operate gasoline service stations. The FTC staff stated thatvertical integration of suppliers and service stations is often "based on efficiency concerns," andthat "[l]imiting the ability of suppliers to operate service stations when it is efficient to do so islikely to lead to higher retail prices." Letter from FTC Office of Policy Planning, Bureau ofEconomics, and Bureau of Competition (June 7, 2007).Since 2007, the landscape has changed dramatically in D.C.'s retail gasoline market. In 2009,Exxon sold all of its D.C. gasoline stations, resulting in just two major gasoline wholesalersowning a substantial majority ofD.C.'s gasoline stations. In contrast to 2007, when the Office ofthe Attorney General suggested in its written testimony that the Council might "consideradditional statutory changes in order to allow D.C.'s independent [gasoline station] operators tooperate more independently of particular oil companies" (emphasis added), now the primaryconcern at the retail level is the high proportion ofD.C. gasoline stations owned by particularwholesalers. Last month, I indicated publicly that, as part of the District's efforts to try to reducethe exorbitant prices that D.C. consumers pay for gasoline, this Office is actively investigatingwhether there have been antitrust law violations in the D.C. gasoline market that have resulted inunnecessarily high prices. That investigation is continuing.In D.C., as in most other large cities; a major constraint on retail gasoline competition is therelatively small number of retail stations. In addition, in many parts of D.C., it is not easy to findsuitable sites for new stations. Given the significant barriers to entry into D.C.'s retail gasolineCouncilmember Mary M. Cheh, ChairpersonJune 17,2011Page 3market, the recent concentration of gasoline station ownership in the hands of a small number ofwholesalers has the potential to enable those wholesalers to exercise market power, resulting inhigher retail prices for consumers.The District's current law on gasoline marketing agreements makes it harder than it wouldotherwise be for a wholesaler to exercise market power through direct manipulation of gasolineprices. The law does so by prohibiting a distributor from requiring a station operator - includingthe operator of a station owned by the wholesaler itself - to buy gasoline from that distributor.D.C. Official Code 36-303.01(a)(6). Under this law, a distributor may seek to secure a stationoperator's loyalty through better prices or better service, but not through contractual restraints onthe station operator's ability to buy gasoline from other suppliers. Put another way, while Districtlaw does not permit a gasoline station operating under the Brand "X" trademark to purchaseBrand "Y" gasoline and dispense it from a Brand X pump, the law does give the Brand Xgasoline station the right to purchase Brand X gasoline from any available supplier.The threat to consumer welfare posed by these market conditions calls for vigorous enforcementof federal and District antitrust laws, careful antitrust review of transactions that could furtherincrease market concentration, and serious efforts to reduce unnecessary barriers (includingregulatory barriers) to the opening of new gasoline stations. Bill 19-299 is an important step inthe right direction. By forbidding wholesalers from directly operating their D.C. gas stations,Bill 19-299, together with the District's existing restrictions on gasoline marketing agreements,would help to prevent wholesalers from exercising market power. If not restricted in this way,wholesalers could maintain their positions as the exclusive suppliers of particular gasolinestations simply by becoming the operators of those stations and choosing themselves as theirsuppliers. Accordingly, the Administration supports Bill 19-299.We fully support the bill as written. We further suggest that, either as part of this bill or as partof a future bill, the Council may wish to consider additional statutory measures that could offerconsumers more effective long-term protection from the combination of (1) high concentration inthe ownership of D. C. gasoline stations and (2) significant barriers to the entry of new retailgasoline stations in D.C. First, we respectfully request the Council to consider providing theAttorney General with express authority to seek injunctions and civil penalties, on behalf of thepublic, against distributors that violate the District's gasoline marketing agreement law or engagein any other presumptively anti-competitive practices that could have the effect of increasingprices at the pump. Second, if the current bill is intended to allow wholesalers to own gasolinestations, but not operate them, then a new bill should provide that wholesalers with a highconcentration of gasoline station ownership may not use their market power, over time, in otherways besides increasing wholesale gasoline prices. 'For example, a wholesaler with a highenough concentration of gasoline stations could choose to raise rents and/or provide little or nofacility maintenance. The station operators would probably have little choice but to pass on theirhigher rental and maintenance costs in the form of higher retail prices to consumers.Councilmember Mary M. Cheh, ChairpersonJune 17,2011Page 4In conclusion, passage of Bill 19-299 should increase the effectiveness of the District's gasolinemarketing agreement law as a means of preventing gasoline wholesalers, at least in the shortterm, from exercising market power to the detriment of consumers. We support Bill 19-299,commend the Members of the Council for its introduction, and urge its favorable considerationby the Committee, and, ultimately, by the full Council.Sincerely,/\ (C _ J ,\ I (l/ ,;t..VV "--t ~ L- ~ L~ ;::...= -_ _Irvin B. NathanAttorney Generalfor the District of ColumbiaIN THE COUNCIL OF THE DISTRICT OF COLUMBIA BEFORE THE COMMITTEE ON GOVERNMENT OPERATIONS AND THE ENVIRONMENT Mary M. Cheh, Chairperson Public Hearing on B19-299 - the Retail Service Station! Amendment Act of 2011 Remarks Prepared By: David A. Balto Law Offices of David A. Balto David. balto@dcantitrustlaw.com June 17,2011 I TESTIMONY OF DAVID A. BALTO BEFORE THE DC CITY COUNCIL IN SUPPORT OF PROPOSED LEGISLATION B19-299 JUNE 17,2011 INTRODUCTION Madam Chair and other distinguished members of the council, I want to thank you for giving me the opportunity today to speak about B19-299. The proposed legislation to amend the Retail Service Station Act of 1976 to prohibit gasoline distributors from owning and operating retail service stations in the District of Columbia. As I will detail in my testimony, the retail gasoline market in the District of Columbia is not competitively healthy. Two gasoline distributors (jobbers) control approximately 70% of the retail market. Since the council passed legislation to permit jobbers to own service stations four years ago, there have been numerous service station acquisitions which have led to a significant increase in gasoline prices. This tremendous vertical integration between jobbers and retailers raises serious competitive concerns I and has led to significantly higher prices for hundreds of thousands of DC consumers. My testimony today is based on over 25 years of experience as an antitrust practitioner, the majority of which I spent as a trial attorney in the Department of Justice and in several senior i management positions including Policy Director of the Federal Trade Commission. As a trial attorney in the Justice Department, I helped to bring several criminal enforcement actions against gasoline jobbers for price fixing. As the Policy Director of the Federal Trade Commission, I investigated numerous gasoline mergers including ExxonIMobil and BP/Arco-both of which led to major divestitures. Finally, on multiple occasions I have contributed to studies on retail gasoline competition. I am here before the committee today with a simple message: the repeal of the DC divorcement law harms consumers. By diminishing competition, the law results in higher prices at the pump. The DC gasoline market is a tight duopoly controlled by two gasoline jobbers with a combined market share of approximately 70% -- a market share higher than jobbers in any other US metropolitan market. The price gap between DC and its suburban neighbors has increased by more than 7 cents since 2009, according to the Washington Post. The elimination of divorcement law has caused consumers in DC to pay far more for gasoline. But the council can correct this mistake by enacting BI9-299. Enactment of this proposed divorcement legislation, along with sound antitrust enforcement actions by the DC Attorney General, would appropriately address this broken market. I will begin my testimony with a discussion of the issues with vertical integration in the gasoline industry and will then, make three major points. 1. Elimination of the divorcement legislation has harmed consumers through higher retail gasoline prices, greater concentration and a less than competitive gasoline market. . 1 i 2. Enactment ofB19-299 will restore competitive balance to this market and should in turn, lead to lower gasoline prices. 3. The 2007 FTC letter to the DC Council and other FTC studies which claim the ban on divorcement to be procompetitive are inapt. CONCERNS OVER VERTICAL INTEGRATION Since the proposed legislation importantly prohibits the vertical integration ofjobbers and retailers, let me first raise a few concerns about vertical integration in this market. In many markets, vertical integration among complimentary levels can be beneficial. By coordinating the production and distribution of products, vertical integration can promote efficiency and eliminate the need for firms on different levels ofthe market to secure profits. With one firm controlling both production and distribution, there is only a single margin to be secured. But vertical integration is not innocuous. As the early history of Standard Oil has demonstrated, vertical integration can also be a very effective tool for stifling competition. There are three tendencies of vertical integration that may explain how the elimination of divorcement legislation has harmed competition in the DC gasoline market. For one, vertical integration can raise entry barriers or foreclose nonintegrated firms from a market. In the case ofthe DC gasoline, for example, having two dominant jobbers that control approximately 70% ofthe retail market makes it is much more difficult for new jobbers to enter. In preparation for this testimony, I spoke with jobbers from outside the Washington area. They explained that because of the vertical integration between the two dominant jobbers and their service stations, it was particularly difficult to enter into the Washington wholesale gasoline market. Because of the lack of nonintegrated independent gasoline retailers, it is exceedingly difficult for a nonintegrated jobber to effectively enter into this market. Second, vertical integration may enable integrated firms to raise its competitors' costs in an anticompetitive manner and reduce the incentive for nonintegrated firms to compete. For example, a dominant jobber may diminish the ability of independent firms to compete by limiting its supply or by raising prices strategically. Positioned at two l