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Lawmakers considering bills that would authorize a study of ‘zone pricing’ of gasoline in Maryland

Originally published in the Daily Record

By Danielle Ulman, Daily Record Business Writer
Published on March 17th, 2008
MPPI IN THE NEWS

If you have ever wondered why some Maryland gas stations charge astronomical prices and others skate by selling the same fuel for far less, you're not alone.

In Annapolis, lawmakers are considering a bill that would create a task force to study the practice of "zone pricing," which allows wholesalers to sell gasoline at varying prices to retailers based on what each market will bear.

Zone pricing is determined by geographic boundaries and competition, meaning that wholesalers charge dealers more where demand is high and competition is low.

Economists have said it allows gas stations in aggressive markets to stay open because the wholesalers charge them less. But lawmakers have said the system is too arcane.

Comptroller Peter Franchot "supports the goal of opening up this secretive strategy that oil companies have used to price the gas products they sell," said Joe Shapiro, director of communications for Franchot's office.

"The comptroller's goal is to get the information out in the open," he said.

If the House and Senate pass the Task Force to Study Gasoline Zone Pricing in Maryland, HB 1138 and SB 949, Franchot's office, which oversees gas sales, would supervise the study and issue a final report on Dec. 1, 2009. Franchot called for action on zone pricing last year.

AAA supports taking a better look at zone pricing, said Lon Anderson, a spokesman.

"Zone pricing is kind of that little black box of the oil company and nobody quite knows what goes into it or why it comes out the way it does," he said. "I think that every look that we can get is worthwhile to make sure that the marketplace is operating at a fair level."

Maryland could be the first state to outlaw zone pricing.

One expert said oil companies would have to charge a flat statewide price, which would be set higher than the current lowest prices to maximize profit.

"It won't be that any of these highly competitive gas stations will be put out of business, but all of those highly competitive gas stations will raise their prices at the same time," said Thomas Firey, a senior fellow with the Maryland Public Policy Institute.

"Specifically, it will be consumers who buy their gas in the place in the market where the prices are doing the best for them that will be hurt," he said.

Wholesalers started using zone pricing when they saw the profits retailers made in some areas and wanted a piece of the excess. According to Firey, zone pricing did not make gas prices go up for consumers, but it cut into retailers' earnings.

Ron Planting, an economist with the American Petroleum Institute, a trade association for the oil and natural gas industry, said without the system in place, prices would be less predictable.

"Indications are that without zone pricing, prices would be higher because it removes one of the tools of competition," Planting said.

The state has two laws in place that bump up the cost of a gallon of gas by a total of 4 cents, Firey said.

"Maryland has a very nasty history of passing laws that purposely tamp down on competition so that businesses can then charge higher prices," he said.

One law stipulates that all gasoline must be sold through franchisees, causing a 2.5 cent markup, Firey said. The other law forces discounters to adjust their prices to the wholesale standard, adding another 1.5 cents per gallon for consumers.

Anderson, from AAA, agreed that the state's laws make it harder for people to get a deal.

"Maryland has a ban on low-price selling," he said. "If I own a gas station and I want to sell gas for 5 cents, I can't do that."

Firey said lawmakers should leave these decisions to economists.

"Once you do the study of the industry and understand what's going on, there's a high chance that this legislature could make things worse," Firey said. "They're stepping into a food fight between the wholesalers and the retailers, and it's one that could really hurt the consumers."