Proposed New York fuel legislation could harm consumers, says FTC

| Tuesday, September 03, 2002

The Federal Trade Commission told New York Gov. George Pataki the state's proposed fuel legislation could harm consumers.

In comments provided in early August at the request of Gov. Pataki, the FTC's Bureau of Competition and Office of Policy Planning noted the two pieces of pending legislation concerning retail fuel prices and the operation of retail service stations are duplicative and unnecessary, and, if signed into law, would "have a significant potential to harm consumers."

The comments, submitted to the governor at his request via letter, concerned S4522, the "New York Motor Fuel Marketing Practices Act (MFMPA)," and A6942, "An Act to Amend the General Business Law, in Relation to the Operation of Retail Service Stations (the Amendment)." The MFMPA would prohibit below-cost sales of motor fuel, where the effect is to injure competition. The amendment would prohibit a crude oil producer or refiner from opening new stations that compete with its own franchised dealers within certain geographic areas.

Each of these provisions could significantly raise the cost of fuel to consumers; the FTC staff comments pointed out that "even a 1-cent increase in the retail price of fuel would cost New York consumers approximately $57 million annually."

The comments then detailed the reasons for FTC staff concerns regarding each piece of proposed legislation. According to FTC staff, "The MFMPA merely duplicates existing protections against 'predatory pricing' found in federal antitrust law; at worst, it may discourage or even prevent competitive pricing. Similarly, considerable economic research shows that laws limiting intrabrand competition in fuel (as the Amendment would) harm, rather than promote, the competitive process, and can result in significantly higher prices."

Joe Simons, director of the FTC's Bureau of Competition, noted, "This legislation could outlaw more types of pricing behavior than federal antitrust laws do, and therefore it runs the risk of penalizing pro-competitive price-cutting that benefits consumers."

Ted Cruz, director of the FTC's Office of Policy Planning, stated, "New laws to limit price-cutting and prevent refiners from opening new (fuel) stations are especially inappropriate at a time when many Americans are concerned about fuel prices."

The FTC staff letter provided specific comments related to each piece of proposed legislation, as detailed below.

With respect to the MFMPA, the comments stated:
Low prices benefit consumers. Consumers are harmed only if, as a result of low prices, a dominant competitor is able later to raise the prices to supra-competitive levels. Scholarly studies and court decisions indicate below-cost pricing that leads to monopoly rarely occurs. Consumers are harmed by public policies intended to increase low prices that arise as a result of the competitive process in situations where there is no danger monopoly might later be created. The federal antitrust laws deal specifically with below-cost pricing that has a dangerous probability of leading to monopoly. The FTC, the Department of Justice's Antitrust Division, attorneys general and private parties can bring suit under the federal antitrust laws against anti-competitive below-cost pricing. If the proposed legislation leads to higher prices in circumstances in which there is no danger of the lower prices leading to monopoly, then consumers will be harmed. With respect to the Amendment, the comments stated, "Consumers benefit if a private company decides to increase the number of retail outlets selling fuel. The benefits come from locational advantages for some consumers, potentially increased variety of fuel retailers and the potential for increased competition."

In concluding its comments to the governor, the FTC staff wrote, "In short, in the judgment of the Office of Policy and Planning and the Bureau of Competition . Bill Nos. S4522 and A6942, if signed into law, are likely to raise prices significantly at the gas pump, to the detriment of New York consumers."

S4522 and A6942 both are in the Senate. For bill status, call (518) 455-7545.

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