Motor Fuels: Stakeholder Views on Compensating for the Effects of Gasoline Temperature on Volume at the Pump
Published: 2008-09-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The volume, but not the energy content, of hydrocarbon fuels, such as gasoline and diesel, varies in response to changes in temperature. Thus, because of expansion, the energy content per gallon of 90 degree fuel is less than that of 60 degree fuel. States and localities adopt and enforce weights and measures regulations, often using the model regulatory standards published by the National Institute of Standards and Technology (NIST). Although technology now exists to compensate for the effects of temperature on gas volume, the costs of doing so at the retail level have become the subject of much debate among weights and measures officials, consumer groups, and representatives of the petroleum and fuel marketing industries. GAO was asked to provide information on (1) the views of U.S. stakeholders on the costs to implement automatic temperature compensation, (2) the views of U.S. stakeholders on who would bear these costs, and (3) the reasons some state and national governments have adopted or rejected automatic temperature compensation. To do this work, GAO reviewed NIST and other documents and congressional testimony; interviewed stakeholders from 3 federal agencies, 17 states, and 15 groups representing a variety of interests, including consumers, truck drivers, and the oil and gas industry; and interviewed officials in 5 other nations. Various stakeholders and officials provided technical and other comments, which were incorporated in the report as appropriate
section_title: What GAO Found
paragraphs: The costs to implement automatic temperature compensation are unclear. Most stakeholders said that implementing automatic temperature compensation for retail sales would involve the cost to purchase, install, and inspect new equipment on pumps, as well as costs to educate consumers about the change. Some stakeholders said the costs to adopt automatic temperature compensation ranged from $1,300 to $3,000 per pump, but none had estimated the total costs nationwide, in part because complete data are not available. Estimates of the cost to inspect the new equipment varied. Officials in a small number of states said inspection times would increase by 20 to 50 percent, while officials in three other states said the costs would not be significant. No stakeholders had developed estimates of the costs to educate consumers. Stakeholders differ on whether retailers, consumers, or both would ultimately bear the costs of implementing automatic temperature compensation at the retail level. Some stakeholders, including state officials and industry representatives, said that the costs would be passed on to consumers through higher prices for fuel or other goods sold at retail stations. Others, such as consumer groups, said that retailers and consumers would share the costs and benefits. That is, some retailers could use funds they receive from major oil companies for remodeling to pay for the equipment. These stakeholders also said the benefits include consistent energy content for consumers and improved inventory management for retailers. Stakeholder views were largely based on professional judgment and general economic theory rather than on studies or other data, and most stakeholders said that a comprehensive cost-benefit analysis would provide policymakers with important information. Governments that have adopted or permitted automatic temperature compensation for retail fuel sales cited improved measurement accuracy and greater equity between retailers and consumers as reasons for making the change; those that have prohibited it largely cited concerns that the costs would outweigh the benefits. Hawaii adopted temperature compensation more than 26 years ago because it provided purchasing equity for the industry and consumers. In 2008, Belgium mandated temperature compensation to help ensure more consistent energy content for consumers. Canadian officials cited improved measurement equity and accuracy as reasons for allowing retailers to sell temperature-compensated fuel in the early 1990s. In the United States, officials from eight states that have laws or regulations that prohibit automatic temperature compensation said the decision should be based on an analysis of the costs and benefits, with some expressing concern that the costs would outweigh the benefits. None of the governments that have adopted automatic temperature compensation have studied its impact.

section_title: Letter
paragraphs: Consumers and businesses alike are concerned about the steep rise in fuel  prices in recent years. Because the volume of hydrocarbon fuels, such as  gasoline and diesel, varies in response to changes in temperature, some  are concerned about the potential impact of temperature-related changes  in volume on the amount they pay. More specifically, the volume of  gasoline expands or contracts by 1 percent for each 15 degree increase or  decrease in temperature, while the energy content of gasoline remains the  same. For example, 10 gallons of gasoline at 60 degrees Fahrenheit (F)  expands to 10.2 gallons of gasoline at 90 degrees F but maintains the same  total energy content. As a result, the average energy content per gallon of  the 90 degree fuel will be less than that of the 60 degree fuel. In the United  States, wholesale fuel transactions are routinely adjusted for temperature- related changes in volume. However, at the retail level, gasoline and diesel  are sold by volume—specifically, 231 cubic inches per gallon—without  regard to temperature, leading some to believe that the retail price of a  gallon of fuel may not reflect its true value. Advances in measurement  technology have allowed the development of devices that can  automatically compensate for the effects of temperature on volume when  dispensing fuel at retail gas pumps. While some argue that extending  temperature compensation to the retail level could provide greater  transparency in fuel prices, others contend that the cost to upgrade  existing equipment could be substantial and impose economic hardship on  retailers.
The National Conference on Weights and Measures (NCWM), a consensus- building organization composed of state and local regulatory officials and  other interested parties, has discussed whether to adopt standards for  temperature compensation of gasoline and diesel for over 30 years, most  recently at its meeting in July 2008. NCWM plays a key role in the debate  because states adopt and enforce weights and measures regulations.
NCWM receives technical guidance on this and other matters from the  Office of Weights and Measures in the Department of Commerce’s  National Institute of Standards and Technology (NIST). In partnership  with NIST, NCWM develops model regulatory standards that are available  for adoption and enforcement by state or local weights and measures  authorities. NIST publishes these standards in various handbooks, and any  proposed changes to these handbooks are considered by NCWM.
Since 2000, NCWM has considered various proposals related to automatic  temperature compensation, including proposals in 2007 and 2008 to adopt  model regulatory standards that states could use to implement  temperature compensation in retail sales of gasoline and diesel. Neither of  the proposed model standards has been adopted. In addition to the  deliberations of NCWM, the Congress has held hearings on the issue, and  federal legislation has been proposed to require the use of temperature  compensation in retail transactions. However, the economic implications  of temperature-induced changes in the volume of motor fuels on the price  of gasoline and diesel remains a topic of considerable debate, and the  issue continues to elicit strong opinions, both for and against, from parties  such as petroleum marketers, retailers, independent truckers, fleet  owners, and consumer advocates.
In the context of this debate, you asked us to provide information on (1)  the views of U.S. stakeholders on the costs to implement automatic  temperature compensation, (2) the views of U.S. stakeholders on who  would bear these costs, and (3) the reasons some state and national  governments have adopted or rejected automatic temperature  compensation. For each of these issues, we agreed to report on the  support, such as studies or data, that stakeholders use for their views.
To obtain information from U.S. stakeholders on the costs to implement  automatic temperature compensation and who would bear those costs, we  reviewed NCWM documents and congressional testimony and performed a  literature search to identify relevant documents and stakeholders likely to  have a view on the implementation of automatic temperature  compensation in the United States. To identify additional stakeholders, we  asked each stakeholder we interviewed for recommendations of  knowledgeable other entities and selected for interviews those who would  provide us with a broad and balanced range of perspectives on  temperature compensation of gasoline and diesel. We used a standard set  of questions to interview each of these individuals to ensure we  consistently discussed each aspect of automatic temperature  compensation. Specifically, we interviewed representatives of two  consumer advocacy groups, five fleet owners and operators, a former  NIST official, and officials at seven organizations that represent  independent truck drivers, the oil and gas industry, independent petroleum  marketers, convenience store and truck stop owners, and the trucking  industry. To obtain views from governments that have adopted or rejected  temperature compensation, we contacted officials in 16 states that have  taken specific steps to adopt or prohibit automatic temperature  compensation. We also contacted officials in California who are  conducting a cost-benefit analysis of temperature compensation. In  addition, we contacted officials from Australia, Belgium, Canada, the  United Kingdom, and a European weights and measures organization  because literature and interviews indicated these governments had  adopted or had considered implementing automatic temperature  compensation. We also interviewed officials from the Environmental  Protection Agency (EPA), the Federal Trade Commission (FTC), and NIST  because these agencies help oversee the marketplace generally or oversee  aspects of the retail petroleum industry. See appendix I for a more detailed  description of the methodology we employed.
We conducted our work from March 2008 to September 2008, in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for the information we present for  each of our audit objectives.
subsections: section_title: Background
paragraphs: From the beginning of the modern petroleum industry in the early 1900s,  both industry and the federal government have recognized the problem  that temperature-induced changes in volume present for inventory control.  Specifically, the fact that petroleum products, like most other substances,  expand when heated and contract when cooled means that the amount of  fuel in the inventories of retailers changes, literally, with the weather.  Following a study of the issue conducted by the American Petroleum  Institute from 1912 to 1917, the United States and Great Britain established  the standard measure for petroleum products: at an ambient temperature  of 60 degrees F, 231 cubic inches equals a gallon.
The effect of temperature on fuel volume varies depending on the density  of the fuel. For example, gasoline’s volume changes approximately 1  percent for every 15 degree temperature change, whereas diesel, which is  a more dense fuel, changes approximately 1 percent in volume for every 22  degree temperature change. In practice, the density of gasoline and diesel  sold to consumers varies depending on such things as the crude oil used to  produce the fuel and the addition of other components to achieve certain  ends. For example, federal efforts to reduce petroleum consumption and  greenhouse gas emissions require the increased use of some components  in fuel blends, such as ethanol, biodiesel, and other alternative fuels. In  addition, ethanol is added to gasoline in certain geographic areas to help  reduce the emissions that contribute to the formation of ground-level  ozone, which has been linked to respiratory and other health problems. As  a result, the composition and density of gasoline and diesel products vary  considerably across the country. In 2004, at least 45 different kinds of  gasoline were produced in the United States.
Certain properties of fuels other than volume, such as mass and energy  content, do not change in response to changes in temperature. However,  energy content can be affected by changes in the density of fuel that arise  from the addition of alternative fuels or other blending components that  have densities different from the gasoline itself.
In the United States, the petroleum industry often adjusts for temperature- related changes in wholesale transactions for gasoline and diesel and in  retail sales for other petroleum products, such as home heating oil,  liquefied petroleum gas, and prepackaged liquids such as motor oil. In  contrast, virtually all gasoline and diesel sold at the retail level is sold at  231 cubic inches per gallon regardless of the temperature of the fuel.
Temperature compensation can be achieved through several methods.  First, volumetric changes can be calculated manually when the fuel  density and temperature are known. Second, technological advances have  led to the development of devices that automatically measure both the  volume and temperature of the fuel at the time of purchase and correct the  volume to the amount that would exist if the fuel were at 60 degrees F.  Finally, in areas where the ambient temperature remains relatively  constant throughout the year, pumps can be recalibrated to dispense the  volume a gallon would occupy at 60 degrees F. For example, if the  temperature in an area is relatively constant at 75 degrees F, pumps can be  recalibrated to dispense 233 cubic inches per gallon.
Gasoline and diesel are distributed nationwide to fuel wholesalers through  a supply infrastructure composed of pipelines, barges, tanker vessels,  marine terminals, railroads, trucks, and storage tanks. At various points  along the distribution chain, fuel is stored at terminal stations that  generally have several large storage tanks.  Fuel is then distributed, usually  by trucks, to retail gasoline stations, where it is typically stored in  underground tanks (see fig. 1).
Changes in the temperature of gasoline and other petroleum products can  occur for several reasons from the time these products leave the refinery  until they are deposited into a vehicle. For example, retail fueling stations  located near a refinery or a pipeline may receive fuel that is still hot from  the refining process, and the heated fuel will affect the temperature of the  fuel already in the storage tank. In addition, the use of underground  storage tanks—particularly those with double walls—may lengthen the  time required for the fuel to cool to ground temperature of about 55  degrees F. A common misconception is that the use of underground  storage tanks helps ensure that fuel remains at or below 60 degrees F.  According to a 2004 NIST study based on 2 years of data, the average  temperature nationwide for fuel stored underground was about 64 degrees  and varied among states from about 82 degrees in Florida to 53 degrees in  Minnesota. Finally, the temperature of the fuel in the supply line to the  pump will affect the temperature of the fuel initially deposited into the  vehicle.
State and local governments adopt and enforce weights and measures  regulations, including those to ensure that retail fuel pumps accurately  measure motor fuels. Unlike many other countries, the United States does  not have a federal weights and measures regulatory agency, although two  federal agencies help oversee the marketplace generally, and a third  oversees aspects of the retail petroleum industry. Among other things,  NIST cooperates with other entities, including state and local  governments, to establish standard practices, codes, and specifications.  The FTC enforces consumer protection laws, including laws related to  unfair and deceptive practices in the marketplace. EPA and authorized  states regulate underground storage tanks that store petroleum. These  regulations require a leak detection system on the underground storage  tanks. None of these agencies has formally endorsed or opposed the  implementation of automatic temperature compensation.
State and local governments develop regulations for weights and measures  with input from NCWM and NIST. Established in 1905, NCWM is  composed of state and local weights and measures officials, as well as  related public and private sector members. A key goal of NCWM is to help  ensure that consumers get the quantity of goods they pay for and that  businesses sell the quantity that they advertise and intend to sell. NCWM  helps ensure that uniform standards are applied to commercial  transactions by developing regulatory standards for consideration by each  jurisdiction, with technical, scientific, and administrative support provided  by NIST. Membership in NCWM is open to all interested individuals,  including regulatory officials, device manufacturers, and consumers;  however, only regulatory officials may vote on the disposition of proposals  under consideration by NCWM.
Most proposals for regulatory standards that come before NCWM originate  in one of its regional weights and measures groups located throughout the  nation or in one of its four standing committees, each of which focuses on  a specialized area, such as laws and regulations. At each of NCWM’s  annual conferences, standing committees review the proposals submitted  for consideration and hold open hearings to discuss them. Final reports  containing the NCWM-approved model regulatory standards are presented  in open forum to representatives and voted upon. Actions or subjects  under consideration, but not proposed for voting, may be carried over for  further consideration at a later time.  NIST publishes NCWM’s newly  adopted model regulatory standards in handbooks.  If a state chooses to  adopt the model regulatory standards in state law or regulation, they will  then have the effect of law in that state.
For over 30 years, NCWM has debated the pros and cons of compensating  for temperature-induced changes in the volume of petroleum products,  including gasoline and diesel. This debate is guided in part by NCWM’s  principles that any method of sale or measurement must provide accurate  and adequate information about products so that purchasers can make  price and quantity comparisons. In 2007, a standing committee  recommended a proposal to allow, but not require, automatic temperature  compensation at the retail level. NCWM did not reach consensus on the  proposal, and the issue was deferred for further consideration. In 2008, a  steering committee established by NCWM recommended a proposal to  require automatic temperature compensation following a 10-year period  during which retailers could decide when to purchase the equipment  based on their business needs.  According to the committee, this would  allow the marketplace to determine when and whether to adjust retail  sales for temperature. However, NCWM members did not reach consensus  on the proposal, and the issue was deferred for further consideration. Also  in 2007, the California legislature directed the state Energy Commission to  study the costs and benefits of using automatic temperature compensation  devices for retail sales, among other things. The commission is to  complete its work by February 2009.
section_title: The Magnitude of Equipment and Education Costs of Adopting Automatic Temperature Compensation Is Unclear
paragraphs: Stakeholders said that implementing automatic temperature compensation  for retail fuel sales would involve costs to purchase, install, and inspect  new equipment on gasoline pumps, as well as costs to educate consumers  about the change. Some stakeholders estimate the costs to purchase and  install the temperature compensation devices would range from $1,300 to  $3,000 per pump. To provide context for the estimates from stakeholders,  we obtained information from two equipment manufacturers. These  manufacturers said the costs can vary by the type of equipment. More  specifically, the price of retrofit kits for electronic pumps ranges from  $900 to $1,800, plus $200 to install them. Costs to retrofit mechanical  pumps are higher: $2,000 to purchase and install a kit for one hose and  $3,800 for a dual hose pump. The costs to individual retailers would vary,  in part, depending on the number of pumps, the number of hoses per  pump, and the mix of electronic and mechanical pumps that would need to  be replaced or retrofitted. In addition, an equipment manufacturer said  that maintenance costs for electronic pumps would be negligible over the  useful life of a pump, 10 to 12 years. Some stakeholders noted that the  magnitude of costs has not been estimated, in part, because certain data,  such as the number of mechanical pumps still in use across the country,  are not available. As a result, the costs to adopt automatic temperature  compensation are not known.
Several stakeholders said costs to purchase and install temperature  compensation equipment could also be affected by other factors. For  example, under a phased implementation schedule, retailers could  upgrade their equipment in the normal course of replacing equipment,  whereas immediate implementation would require retailers to invest in the  equipment without regard to their business plans or ability to pay  immediately. Also, a small number of companies in North America  manufacture new pumps equipped to automatically compensate for  temperature or kits to retrofit existing pumps. Two stakeholders said that  the costs to purchase and install the equipment could rise in the face of  shortages of both equipment and skilled installers that would occur if  implementation of automatic temperature compensation were to occur  suddenly rather than over a longer period of time.
Estimates of the magnitude of inspection costs varied. A small number of  state officials said that automatic temperature compensation could  increase inspection time by 20 to 50 percent and might require the  purchase of testing equipment. In contrast, officials in three other states  said that inspection costs to adopt temperature compensation would not  be significant, although they had not estimated the cost. In Missouri, state  officials said legislation was introduced, but not enacted, to divide the  state into regions, each of which would adopt a new reference  temperature based on its average ambient temperature. State officials  reported that adoption of temperature compensation by changing  reference temperatures would require increasing staff by six inspectors  and one clerical person for a cost of about $1 million in the first 3 years.
No stakeholders have developed estimates of the costs to educate  consumers when automatic temperature compensation is in use. However,  costs would be incurred to provide disclosure on fuel pumps, customer  receipts, and the street signs that show the retail price of fuel. A number of  stakeholders noted that, if some retailers sold compensated fuels and  others did not, consumers could be confused and might lack the ability to  make informed value comparisons for their fuel purchases. According to  some stakeholders, disclosure on pumps might be accomplished by adding  the phrase “Volume corrected to 60 degrees F” to the face of the pump  near the display of total gallons purchased. For customer receipts, printers  could be programmed to add the same phrase. If automatic temperature  compensation is in place throughout the nation, the need to disclose its  use on pump signs might no longer be needed.
section_title: It Is Unclear Who Would Bear the Costs of Implementing Automatic Temperature Compensation
paragraphs: Stakeholders differ on whether consumers or a combination of retailers  and consumers would bear the costs of implementing automatic  temperature compensation. Specifically, many stakeholders, including  state officials and industry representatives, said that the costs to purchase,  install, and inspect compensation equipment would be passed on to  consumers, generally through higher retail fuel prices, higher prices for  nonfuel goods sold at retail fueling stations, or a combination of both. A  few of these stakeholders said that retail prices must generally reflect the  cost of goods sold or businesses will not remain in operation. However,  since the information retailers use to make pricing decisions is proprietary  in nature, it would be difficult to estimate how much prices would  increase to cover the costs of implementing automatic temperature  compensation. Some of these stakeholders also noted that differences in  the cost of fuel and other goods sold could vary among retailers based on  such factors as whether they owned or leased the land, the number of staff  they employ, and whether the costs of inspections are paid directly by  retailers or funded from tax receipts. However, one state official said that  the ability of states to increase inspection fees may be limited by state  statute.
Some stakeholders said the costs to implement automatic temperature  compensation may result in disproportionate economic impacts on certain  classes of retailers, such as small retailers and those in rural areas, that  might be put out of business in the face of the investment to upgrade their  equipment. Retailers that are small or located in rural areas may dispense  fewer gallons of fuel than larger retailers and, consequently, have fewer  gallons from which to recover any costs associated with upgrading their  equipment. A few stakeholders said an exemption for small retailers may  be needed, such as an exemption based on the number of gallons  dispensed. In contrast, another stakeholder said implementation that  allowed retailers to make the decision of whether to add the devices to  their equipment would eliminate the potential for disproportionate  impacts.
However, other stakeholders, such as consumer groups, said that retailers  and consumers would share in both the costs and the benefits of  implementing temperature compensation. For example, one stakeholder  noted that some retailers could use funds they receive from the major oil  companies for remodeling to cover the cost of temperature compensation  equipment. According to these stakeholders, consumers have already paid  retailers for energy content they did not receive. That is, consumers  generally buy fuel that is warmer than 60 degrees and has less energy  content, according to these stakeholders. Such overpayments are greater  in southern and western states than in other areas. Moreover, these  stakeholders said consumers would benefit from greater transparency in  fuel pricing, the ability to purchase fuel with more consistent energy  content, and an enhanced ability to compare purchases from competing  retailers because price differences would be based largely on differences  in customer service or amenities such as clean rest rooms. One noted that  retailers would also benefit because the automatic temperature  compensation technology would allow retailers to manage inventory for  both their deliveries and their sales of fuel on a temperature-compensated  basis. Moreover, retailers could more easily identify fuel leaks by  reconciling their inventory records to measurements of the fuel in their  storage tanks. Specifically, if a measurement of stored fuel showed a  retailer had less fuel on hand than it had sold, the difference could be the  result of a leak.
Stakeholders also differed on the benefits of automatic temperature  compensation. Many noted that temperature compensation provides a  more accurate and replicable measurement method, but some expressed  concern that the potential cost outweighed the benefit. Within the weights  and measures community, support has been growing for the adoption of  automatic temperature compensation standards, in part because of the  improved accuracy and the availability of equipment that makes  implementation more feasible than in the past. Several stakeholders noted  that automatic temperature compensation brings equity to the  marketplace and provides both consumers and retailers with comparable  information about their fuel purchases. Specifically, when retailers and  consumers purchase temperature-compensated fuel, they each receive  comparable products. According to two stakeholders, consumers  currently cannot determine before or after a purchase the actual best price  for a gallon of gas because they do not know the temperature of the fuel.  Some stakeholders who thought the cost would outweigh the benefit said  that the increased accuracy in measurement would not benefit consumers  because fuel costs would increase as retailers recouped their investment  in the compensation devices.
Stakeholders also held different opinions on whether automatic  temperature compensation would ensure consistent energy content in  each gallon of fuel. While temperature compensation adjusts for the  impact of fuel temperature on the energy content of each gallon, it would  not affect other factors that impact energy content, such as the use of fuel  blends and additives. That is, multiple stakeholders said that the use of  ethanol and other additives, as well as seasonal fuel blends, results in fuels  that may vary in energy content by season or by retail outlet. More  specifically, they noted other factors may affect the energy content of fuel,  including the refining process itself and the crude oil used as the source  for the gasoline. Others said automatic temperature compensation will  ensure greater consistency in energy content and mileage per gallon. One  stakeholder said that, as fuel prices increase, the issue of energy loss from  the lack of temperature compensation will become more important, while  another said that the use of blends could increase the significance of the  effect of temperature on fuel in the future.
Stakeholders’ views that various factors may affect fuel prices are  consistent with our prior work on gasoline pricing. Specifically, in a series  of reports issued from 2000 through 2007, we concluded that higher  gasoline prices resulted from a range of local and global factors, including  higher crude oil prices, recent mergers and increased market  concentration in the petroleum industry, the increased use of blended  fuels, the level of state gasoline taxes, and costs to transport gasoline from  refineries to retailers. We also found in our work on the use of special  gasoline blends that it can be difficult to establish a definitive causal link  between factors and prices because only some of the many factors that  may affect gasoline prices at various times are readily and consistently  observable.
Regardless of their views, stakeholders based their opinions largely on  professional judgment and general economic theory or assumptions about  how the fuel market operates rather than on studies or other data. For  example, one stakeholder commented that it was unreasonable to assume  that retailers would absorb the costs to upgrade 14 or 16 pumps without  trying to recoup those costs through the prices of retail goods they sell.  However, none of the stakeholders based their views on studies of the  impact of the costs on fuel or retail goods. Some stakeholders said that  because the petroleum market is fiercely competitive, particularly in areas  that sell high volumes of fuel, consumers already receive the lowest fuel  price that retailers can offer, and one said that temperature is not likely to  be a relevant factor in their pricing decisions. Because the fuel market is  so competitive, one stakeholder said, retailers do not generate enough  profit to cover the costs of temperature compensation equipment and so  would pass the costs on to consumers. In contrast, other stakeholders said  that retailers may already adjust their prices to account for the expansion  and contraction of fuel, while still others questioned the benefit to  consumers from investing in temperature-compensating devices in areas  where the average ambient temperature is close to 60 degrees F.
The majority of stakeholders—including state officials, consumer and  industry representatives, and fleet owners—said that a cost-benefit study  such as the one under way in California would provide policymakers with  important information. The California study will examine the costs for  retailers to purchase and install appropriate equipment and calibrate it.  In  addition, the study will develop data on the costs to agencies to develop  appropriate test procedures, acquire calibration equipment, and inspect  the pumps at retail stations. Information on the costs and benefits was  needed to make an informed decision on automatic temperature  compensation, according to many stakeholders. A small number said they  would wait to see the results of California’s study before deciding whether  to support or oppose the implementation of automatic temperature  compensation. Moreover, some who oppose automatic temperature  compensation said they would support it if a cost-benefit analysis showed  a benefit for the consumer.
section_title: Governments That Have Adopted Automatic Temperature Compensation Did So Largely to Improve Purchasing Equity, and Those That Have Not Cited Concerns That the Costs Would Outweigh the Benefits
paragraphs: Governments that have adopted or permitted automatic temperature  compensation, or are considering doing so, cited improved measurement  accuracy and greater equity between retailers and consumers as reasons  for making the change, whereas those governments that do not allow  temperature compensation cited concerns that the costs would outweigh  the benefits. Hawaii, Belgium, Canada, and the European Union (EU) have  each adopted a policy on temperature compensation—mandatory in  Hawaii and Belgium and permissive in the remaining jurisdictions. In  addition, the United Kingdom is considering a national approach to  temperature compensation, and Australia may do so again. Both countries  debated the issue in the 1990s but did not adopt nationwide policies for  retail fuel sales at that time.
Because retail motor fuel dispensers equipped with automatic temperature  compensation devices were not readily available 26 years ago, Hawaii  developed its own method to achieve temperature compensation for retail  sales of fuel to provide purchasing equity for both the industry and the  consumer, according to a state official. The method is based on test  procedures that rely on both the temperature and density of the fuel. A 5- year study of the average temperature of fuel delivered to consumers in  Hawaii found that the fuel temperature was approximately 80 degrees F.  More specifically, Hawaiian weights and measures officials test retail  pumps to ensure that they meet the state standard—to deliver the amount  of fuel a 231 cubic inch gallon would occupy at 60 degrees F, or its  expanded or contracted equivalent at any other temperature. In Hawaii,  the expanded equivalent is about 234 cubic inches per gallon—to reflect  the increased volume at the higher fuel temperature. Implementation was  phased in over 1 year. A state official said retailers may apply for a  variance from the state standard provided they can demonstrate that the  temperature of the fuel they deliver to consumers in their location differs  from 80 degrees F. According to a state official, temperature compensation  is a matter of fairness and equity.
Belgium mandated temperature compensation for retail sales of fuel  beginning in January 2008. Belgium adopted temperature compensation  for retail sales, in part, because some retailers were artificially heating  fuel, and the government sought greater consistency in the energy content  of the fuel sold to consumers, according to a weights and measures  official. After January 2008, any newly installed pumps must be equipped  for temperature compensation and, by January 2015, all pumps must be  equipped to dispense temperature-compensated fuel. A Belgian official  told us that the 7-year transition period will allow retailers to make  adjustments over time, in the normal course of their operations, thereby  reducing the overall cost to implement temperature compensation. While  retailers will decide when to install temperature compensation equipment,  they are prohibited from turning it off. That is, once the equipment is in  place and dispensing temperature-compensated fuel, all hoses attached to  the equipment must continue to dispense temperature-compensated fuel.  To date, the Belgian government has not developed guidance for  consumers or retailers, in part because the transition to temperature  compensation has just begun, according to the official.
Canada has adopted a permissive policy on automatic temperature  compensation for the retail sale of liquid petroleum products, such as  gasoline, diesel, and home heating oil.  Specifically, Canada established  technical and other standards in the early 1990s that allowed retailers to  sell temperature-compensated fuel, but it did not require them to do so.  According to a Canadian official, Canada developed the standards largely  for three reasons: advances in measurement technology had made  temperature compensation equipment more readily available, automatic  temperature compensation is thought to be a more equitable and accurate  method of measuring fuel, and temperature compensation addresses  retailers’ concerns about inventory losses potentially due to temperature- related changes in volume. Today, over 90 percent of Canadian fuel  retailers sell temperature-compensated fuel. Canada imposed policy  controls on the use of temperature-compensated equipment to prevent  practices that might harm consumers or businesses, and any change to  pumps requires an inspection by government officials. For example,  pumps with automatic temperature compensation devices must be  operable and dispense temperature-compensated fuel at all times  throughout the year. In addition, pumps equipped with the devices must  have a sticker that says “Volume Corrected to 15 degrees C” adjacent to  the pump’s visual and printed net quantity display. Retailers may elect to  convert only selected pumps or product lines, provided that all pumps for  the same grade or blend of fuel are converted and the compensation  equipment is activated at the same time. Because Canada’s regulations are  permissive rather than mandatory, retailers may choose to stop using  compensation devices provided they obtain permission from Canadian  weights and measures officials. Permission would not be granted if  retailers wanted to only use automatic temperature compensation  seasonally when it was to their benefit, according to a Canadian official,  who also said no retailers have sought to stop using the devices.
In addition, the EU currently permits member states to adopt temperature  compensation, although fewer than 2 percent of retailers have installed the  necessary equipment, according to an official with a European weights  and measurement organization. This official said that making adoption  possible, but not required, allows the market to make the decision when  business owners decide it is in their interests to do so. As a result,  implementation will occur gradually, thereby avoiding a “shock wave”  from immediate mandatory implementation, according to the official. A  shock wave would occur if retailers were required to purchase the  equipment without regard to whether they had the funds to do so. The EU  does not have a harmonized policy on temperature compensation, but,  according to the official we interviewed, information on fuel temperature  received by the retailer and dispensed to consumers would be important  to the debate. However, the official also noted that retailers may, at their  discretion, adjust prices to compensate for temperature-related changes in  volume.
Currently, in Australia the states and territories require retailers to sell fuel  on a compensated basis. However, by July 2010, responsibility for weights  and measures regulation will shift from the states and territories to the  federal government.  According to an Australian official, the new national  trade measurement legislation will replicate the current state and territory  requirements for the sale of fuel. As part of the consultation process for  developing new trade measurement regulations, comments on any aspect  of trade measurement controls, such as temperature compensation, will be  invited from all stakeholders, and the matter of temperature conversion of  fuel sales at the retail level may well be raised.
Officials in the United Kingdom said they anticipate issuing a statement in  the fall of 2008 that temperature compensation for retail fuel sales will be  permitted nationwide but not mandated.
In the United States, officials in eight states that have laws or regulations  prohibiting automatic temperature compensation largely said the decision  should be based on an analysis of the costs and benefits, with some  expressing concern that the anticipated costs would outweigh any benefit  to consumers and fuel retailers. In some cases, these decisions were made  more than 20 years ago, and the officials we interviewed had limited  information about the reasons. More recently, Missouri and Texas  considered state legislation to implement temperature compensation. In  Missouri, where the average temperature of stored fuel is 62 degrees F,  officials said that consumers would be negatively affected if temperature  compensation were adopted by changing the reference temperature  because they would have to buy more temperature-adjusted gallons than  uncompensated gallons to obtain the same amount of fuel. In addition, the  state would need to add six inspectors and one clerical person at a cost of  about $1 million in the first 3 years. Moreover, they said retailers would  face significant expense to purchase the compensation equipment if  temperature compensation were achieved by the use of compensation  devices. Specifically, Missouri officials in 2006 estimated that 65 percent of  the state’s pumps could be retrofitted, and 35 percent would need to be  replaced, at a cost of about $341 million. In Texas, officials have  postponed further consideration of temperature compensation until a  comprehensive nationwide cost-benefit analysis has been completed. In  addition, officials in some states said that evidence of benefits to  consumers from automatic temperature compensation could lead states to  reconsider their current position.
Finally, governments have not formally studied the impact of their  decisions to implement or not to implement automatic temperature  compensation. Specifically, neither Hawaii nor Canada has studied the  impact of temperature compensation, although officials reported it was  not controversial and was generally well accepted by both consumers and  the industry. In Belgium, temperature compensation has been  implemented too recently to study its effects.
section_title: Concluding Observations
paragraphs: The weights and measures community has debated the costs and benefits  of automatic temperature compensation for more than three decades with  no resolution. The issues have not changed substantively, and both sides  continue to passionately put forth their views. In general, supporters say  that extending temperature compensation to the retail level could provide  more transparency in fuel prices, while those who are opposed argue that  upgrading existing equipment would be costly and pose potential  economic hardship on retailers.
It remains unclear, however, what it would actually cost to implement  automatic temperature compensation and whether consumers or  businesses would end up paying those costs. Moreover, the two  governments with the longest experience in temperature compensation of  retail fuel sales (Hawaii and Canada) have not studied the effect of their  policies. As a result, a policy debate is being played out without good  information about the potential costs and benefits, and with both  proponents and opponents basing their views on their professional  judgment and their general understanding of economic theory.
Looking forward, there appears to be a real need for an objective analysis  of the key issues stakeholders raise about costs and benefits, including the  potential for higher costs to consumers and improved inventory  management for retailers. Such a study would need to bring together  petroleum-related scientific, engineering, and economic expertise. Absent  such analyses, NCWM and state governments face potentially significant  challenges to informing their decisions regarding automatic temperature  compensation.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date.  At that time, we will send copies of this report to the Chief,  Weights and Measures Division, National Institute of Standards and  Technology; stakeholders we interviewed; appropriate congressional  committees; and other interested parties. We will also make copies  available to others upon request. In addition, the report will be available at  no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-3841 or maurerd@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made contributions to this report are listed  in appendix II.
section_title: Appendix I: Scope and Methodology
paragraphs: In conducting our work on each of our objectives, we reviewed National  Conference on Weights and Measures (NCWM) documents and  congressional testimony and performed a literature search to identify  relevant documents and stakeholders likely to have a view on the  implementation of automatic temperature compensation. We used the  individuals identified through our document review and literature search  as a starting point for the sampling technique that we used to identify  additional stakeholders. That is, we used an iterative process (often  referred to as the “snowball sampling” technique) to identify other  stakeholders and selected for interviews those who would provide us with  a broad and balanced range of perspectives on temperature compensation  of gasoline and diesel. We used a standard set of questions to interview  each of these individuals to ensure we consistently discussed each aspect  of automatic temperature compensation. We also asked open-ended  questions to allow people to share their views on this issue. To develop the  questions, we reviewed NCWM and National Institute of Standards and  Technology (NIST) documents, as well as congressional testimony. We  used content analysis to identify the main themes among responses.
We continued interviewing and soliciting names until we determined we  had appropriate coverage from all the relevant stakeholder groups. During  the course of our review, we interviewed officials from the following 15  organizations, listed alphabetically: American Automobile Association;  American Petroleum Institute; American Trucking Association; Consumer  Watchdog; Defense Energy Support Center; National Association of  Convenience Store Owners; NATSO, an organization representing travel  plaza and truck stop owners; Owner Operator Independent Drivers  Association; Petroleum Marketing Association of America; Society of  Independent Gasoline Marketers of America; Schneider National,  Incorporated; Swift Transportation Incorporated; United Parcel Service;  United States Postal Service; and Weights and Measures Consulting. In  addition, we interviewed federal officials at NIST, the Environmental  Protection Agency, and the Federal Trade Commission because these  agencies help oversee the marketplace generally or oversee aspects of the  retail petroleum industry. We also obtained information from two of the  three manufacturers who produce equipment that allow for automatic  temperature compensation at retail pumps.
We also contacted officials in 17 states that the literature suggested may  have taken or considered specific steps to adopt or prohibit automatic  temperature compensation. Some of these states had proposed legislation,  were identified in a survey conducted by NIST on state practices, or were  recommended by other officials. One state—California—is conducting a  state-mandated cost-benefit analysis of automatic temperature  compensation. These 17 states included a mix of states that could be  considered hot (5), cold (4), or neutral (7) based on NIST’s analysis of  temperature data for stored fuel. The 17th state was not included in NIST’s  analysis because of a lack of data. We interviewed officials in the following  17 states, listed alphabetically: Arizona, California, Florida, Hawaii, Iowa,  Maine, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New  York, Oregon, Pennsylvania, South Dakota, Texas, and Wyoming.
Finally, we interviewed officials in Australia, Belgium, Canada, the  Netherlands, and the United Kingdom because literature indicated they  either had adopted or had considered implementing automatic  temperature compensation, as well as officials at a European weights and  measures organization.
We conducted our work from March 2008 to September 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for the information we present for  each of our audit objectives.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Cheryl Williams (Assistant  Director), Cynthia Norris, and Henry Clay made key contributions to this  report. Also contributing to this report were Pedro Almoguera, Nancy  Crothers, and Cindy Gilbert.