Los Angeles Times: Zones of Contention in Gasoline Pricing_ http://www.latimes.com/business/la-fi-calprice19jun19,1,6659437.story?coll=la-headlines-business WHAT'S DRIVING GAS PRICES Zones of Contention in Gasoline Pricing Refiners charge each dealer a different rate for the same fuel. They say it's fair, but critics contend the practice helps them boost profits and suppress competition. By Elizabeth Douglass and Gary Cohn Times Staff Writers June 19, 2005 Second in a Series On a recent Wednesday, 72-year-old veterinarian Charles Hendricks filled up his Mercury Grand Marquis at a Chevron in west Anaheim. On the other end of town, 22-year-old sandwich store manager Ryan Ketchum gassed up his Nissan Sentra at a Chevron in Anaheim Hills. Both men bought regular gasoline. Both pumped the gas themselves. But there was one important difference: Hendricks paid $2.399 a gallon, whereas Ketchum paid $2.539 — 14 cents more a gallon for the same Chevron gas. Such price variations may seem odd, but they are not unique to Anaheim. On any given day, in any major U.S. city, a single brand of gasoline will sell for a wide range of prices even when the cost to make and deliver the fuel is the same. The primary culprit is zone pricing, a secret and pervasive oil company strategy to boost profits by charging dealers different amounts for fuel based on traffic volume, station amenities, nearby household incomes, the strength of competitors and other factors. It's a controversial strategy, but the courts have thus far deemed it legal, and the Federal Trade Commission recently said the effect on consumers was ambiguous because some customers got hurt by higher prices while others benefited from lower ones. To be sure, other industries vary prices by area too. Supermarkets, for instance, price the same brand of bread or cheese differently in different neighborhoods. But gasoline price patterns provoke a response that bread can't match, partly because other commodities don't fluctuate as wildly as gasoline does and their prices aren't posted by the side of the road. Oil companies say the practice allows them to adapt to local market conditions by, for example, lowering prices to dealers who face stiff competition from high-volume sellers such as Costco Wholesale Corp. Most California gasoline retailers, however, declined to discuss their pricing practices, referring questions to industry groups. "It is a perfectly acceptable form of pricing," said Joseph Sparano, presidentof the Western States Petroleum Assn., a Sacramento-based industry trade group. Zone pricing, he said, "is a way for companies to price fairly in different areas." Said Trilby Lundberg, who produces the widely quoted Lundberg Survey of gasoline prices: "The flip side … is that locational pricing allows for prices to be lower in some areas than others." Such explanations haven't appeased consumer groups, lawmakers and state government critics such as Connecticut Atty. Gen. Richard Blumenthal, who has tried to outlaw the pricing method, calling it "invisible and insidious." "Zone pricing, on paper, sounds reasonable; in practice, it's despicable," said Michael Shames, executive director of the Utility Consumers' Action Network, a San Diego group that has tracked regional gasoline prices for almost a decade. "It undercuts price competition." The issue has particular resonance with consumers in California, where retail fuel prices are among the nation's highest and annual gasoline consumption outpaces demand in all but Japan and the United States as a whole. * Dissecting Prices Quantifying the effects of gasoline zone pricing on consumers, however, remains a difficult task. That's partly because the mechanics of the strategy are kept secret and partly because the effects on consumers — in terms of cents per gallon — are constantly changing. In addition, zone pricing kicks in at the end of a chain of complex transactions that take place between the oil well and the corner gas station. The largest chunk of the price of gasoline, about 50%, is a reflection of the cost of crude oil, the raw material used by refineries to make fuel. Experts say that for every $1 jump in the cost of a 42-gallon barrel of crude, there will be a 2.5-cent-per-gallon increase in gasoline prices. In California, sales and excise taxes also are a big part of the final tally. At today's prices, taxes represent about 55 cents a gallon — a number that rises and falls along with retail prices because the sales tax is assessed as a percentage of the bill. Critics say zone pricing is another factor that keeps the state's retail prices well above the national average; California prices have been as much as 50 cents higher than the average for the country as a whole. "The whole reason that people care about zone pricing is that they believe that this causes higher gas prices," said Justine Hastings, a Yale economics professor who has studied the phenomenon. Consumer groups and others are suspicious of the practice, she said, because to make it work, "it requires a substantial amount of market power on the part of refiners." In California, refiners have that power in the form of an oligopoly in which a handful of companies control the market, according to consultants for the California Energy Commission and economists.Oil companies in California have that kind of control because they sell and deliver their fuel directly to most of the state's branded stations — those that sell gasoline under brand names such as Chevron, Arco, Shell and 76. The refiners charge those dealers a wholesale price for the fuel, known as the dealer tank wagon price, based mostly on a carefully delineated map of price zones that have nothing to do with differences in costs. The strategy is not unique to California, but it is especially powerful here because the five largest refiners, as sole suppliers to about 70% of the retail market, can readily influence pump prices by changing how much the dealers pay for fuel. Nationwide, refiners directly supply 35% of gasoline retailers, according to the Energy Department. That control sticks because branded dealers are bound by long-term contracts that require them to buy fuel from the refiner at prices that are not negotiable. In other markets, refiners have less retail control because there are more unbranded competitors to challenge their pricing moves