Will Open Supply Lower Retail Gasoline Prices

I. INTRODUCTION When a lessee-dealer enters into a contract to lease a retail gasoline station from a refiner, the dealer simultaneously agrees to purchase all gasoline supplies from the same refiner. (1) One of the most interesting characteristics of these lease agreements is that although the lease price of the station and equipment is clearly specified in the lease contract, the wholesale price of gasoline is not specified anywhere in the supply contract. In other words, the lessee-dealer agrees to purchase gasoline at whatever price the refiner chooses to charge. (2) By contract, the lessee-dealer cannot shop around for the lowest price. The wholesale price charged to the lessee-dealer is usually called the dealer tank wagon (DTW) price, which reflects the fact that the gasoline is delivered by the refiner to the retail station via tanker truck. Most (but not all) U.S. refiners also market gasoline through independent wholesale distributors, called jobbers. These jobbers often own their own tanker trucks and can shop around for the lowest price among the various refiners. Jobbers then purchase the gasoline at their chosen refiner's truck rack and then deliver and resell the gasoline to retailers who have contracted with the jobber for delivered gasoline. The price the jobber pays the refiner for the gasoline is called the rack price. On any given day, this rack price is usually lower than the DTW price charged to lessee-dealers. (3) For years, lessee-dealers have complained about the practice of refiners selling to jobbers at rack prices lower than DTW prices. According to Bill Ligon, executive director of the Texas Service Station Association in 1986: What we are upset about ... is that the major oil companies are raping the consumer by about 15-20 cents per gallon in the difference between dealer tank wagon [price] and the unbranded rack [price]. If [lessee-]dealers got the same break as the [open-dealers] and the jobbers, they'd pass on to the consumers all the cost cuts they could manage. (emphasis added) (4) Since this complaint made 17 years ago, lessee-dealers have been working through the legislative process and through litigation to obtain the right to open supply, a provision that would allow any lessee-dealer to have the option to stop buying its gasoline from its contracted refiner and to begin purchasing gasoline from any other source. In 1997, California Senate Bill 404 proposed to give lessee-dealers the right to open supply. (5) This bill passed in the Senate but failed to come to a vote in the State Assembly. Frustrated lessee-dealers tried again with similar bills in California in 1999 and 2000, but without success. Lessee-dealers in Arizona introduced an open-supply bill in 2000, but that bill never made it out of committee. In 2001, open-supply bills were introduced in state legislatures in Oregon, Minnesota, Michigan, and Connecticut. Once again, all met with failure. Given the national attention paid to open-supply legislation and its debated effects on retail gasoline prices, the U.S. Federal Trade Commission (FTC) held sessions on open supply in 2002. (6) Turning attention to the courts, open-supply proponents have filed a number of lawsuits. For example, in the recent cases of HRN, Inc. et al. v. Shell Oil Company et al.; Kristine Becher et al. v. Shell Oil Company et al.; Coast Village, Inc. et al. v. Equilon Enterprises LLC; and Plainview Gulf, Inc. v. Cumberland Farms, Inc. (Gulf Division), plaintiffs have each made claims of unfair competition with same-brand jobbers who are able to purchase gasoline at the lower rack price. The open-supply plaintiffs lost in summary judgment in HRN (2001), settled in Becher (2000), and refilled under a different name in Coast Village (2002); the Plainview Gulf case has yet to go to court. (7) Thus, the courts have yet to provide any ruling in support of open supply. Whether in the courts or the legislatures, open supply continues to be a hotly debated topic in the retail gasoline industry. …