Secret formulas set the prices for gasoline By Alexei Barrionuevo WALL STREET JOURNAL March 26th, 2000 At Bill & Mitchs Exxon station in Potomac, Md., regular gasoline costs about $1.72 a gallon, 26 cents a gallon more than at Exxon stations in southern Maryland. And in Laurel, Md., motorists have been paying up to five cents more a gallon at Tommy Martins Shell station than at Art and Charlotte Harneks Shell about two miles away.

A key reason? Zone pricing, an increasingly common practice that boosts oil-company profits. Refining companies actually map out areas and charge dealers different wholesale prices based on secret formulas that often factor in location, the areas affluence or simply what the local market will bear.

And yes, its perfectly legal.

But as gasoline prices soar and former competitors merge into huge companies, the practice has drawn the ire of dealer groups and government officials in California, Oregon, Connecticut and Maryland. Some of them are pushing to make zone pricing illegal, or at least to establish clear rules for its use.

The Federal Trade Commission, in reviewing the merger of Exxon Corp. and Mobil Corp. last year, noted that big oil companies often set their prices based on competitors prices rather than their own costs. It called the practice an earmark of oligopolistic market behavior. Though it eventually approved the merger, the agency has continued to examine oil-industry pricing. Last month, it said it was looking into zone pricing in some areas, including Oregon.

I would be surprised if any other industry had the gall and arrogance to adopt this practice, says Richard Blumenthal, Connecticuts attorney general, who is pushing for a ban in his state. Ultimately, he contends, zone pricing raises prices for everyone.

Still, courts have generally sanctioned the practice. In fact, the use of zone pricing really caught on in Maryland after the state attorney general said in 1994 that it wasnt improper unless it hurt competition. In recent weeks, the attorney general has been weighing new evidence that oil companies are trying to expand pricing control by cutting zones into ever-smaller areas, sometimes stranding a single station in an island zone.

Zone pricing in Maryland has gotten completely out of whack, says Roy Littlefield, executive director of Service Station Dealers of America, a Washington, D.C., lobbying group. The number of zones that companies have here for such a small state and the variations in price are incredible.

That can make things tough for dealers. Every time I try to increase my margin they just raise my gas price, says Tommy Martin, the Shell dealer on Route 198 in Laurel.

Martin says he is paying two cents a gallon more for his wholesale gas than the Harneks pay, even though both stations get their deliveries from the same Springfield, Md., terminal. He says two or three other Shell stations along the same commuter route charge less than he can. Dealer groups estimate Shell now has more than 120 zones in the state.

Because price differences between zones can expand and contract like an accordion, usually narrowing somewhat when crude oil prices rise, proving that oil companies are gouging has been like trying to grab water, says Paul Fiore, a Shell dealer in Laurel.

The refining companies say they set wholesale prices based on the market. There may be differences in those prices that are set because of the nature of that market, says an Exxon Mobil Corp. spokesman. He declines to elaborate, citing restrictions tied to unfinished divestitures related to the Mobil purchase. Equilon and Motiva, the joint ventures of Shell and Texacos U.S. gasoline operations, say they dont comment on internal business practices, but they note that gasoline prices, like all products, are reflected in the consumer-shopping patterns of individual competitive markets.

Challenging zone pricing requires doing battle with arcane federal antitrust laws, including the Robinson-Patman Act. Those cases are very expensive and highly technical, and the companies know that, says Harry Storm, a Bethesda, Md., attorney who represents dealers.

Higher gasoline prices arent charged only in more affluent zones. In a lawsuit pending in Cleveland, Shell is accused of creating a zone on the citys poor and minority East Side that in 1997 was charging 11 dealers up to 12 cents more per gallon for wholesale gas than other Cleveland dealers were charged. We have never and would never base any pricing decisions on race or other discriminatory considerations, a spokesman says.

Not surprisingly, some drivers shop around for cheaper gas. David Venit, who owns a Shell station in Bethesda, says he is the lone station in a price zone that is charged five cents a gallon more than Shell stations only eight miles away. He says drivers who live nearby bypass his station because of its prices, which are about 15 cents a gallon more than those in southern Maryland. As a result, his monthly volume is down 21 percent since 1998, and he has cut his profit margin to 13 cents a gallon from 20 cents just to compete. Regular customers of 20 years now pull in and say, Give me $5 to get home with,  he says. It hurts.

On a recent Saturday, Nancy Dutton pulled in, as she has for years, with a mechanical question for Venit, but she wasnt interested in his gas. The higher prices are a shame, says Dutton, a lawyer. When you are dealing with the national chains you expect the same high-quality gas and you are perplexed as to why the prices would vary that much.

In southern Maryland, Exxon has given dealers allowances of about six cents a gallon to compete with two lower-price, high-volume gasoline marketers that recently moved into the area. That means those dealers pay about 11 cents a gallon less than Bill & Mitchs Exxon pays for wholesale gas. To get the allowances, those dealers had to agree to cut their profit margins, bringing retail gas prices even lower.

Of course, zone pricing isnt the only variable affecting prices at the pump. Ed Bowling, co-owner of Bill & Mitchs Exxon, a fixture in bucolic Potomac for 51 years, says his rent of about $19,000 a month and his higher employee costs force him to mark up prices 23 cents a gallon over wholesale to cover his costs. Thats about twice the margin of competitors about seven miles away on Rockville Pike, where a dense cluster of stations competes.

I am not trying to gouge anybody, Bowling says. The higher the price, the more people shop around, and I suffer for it.

Fueling up her Lexus SUV at Bowlings Exxon, Kim Kelly frowned at the $1.72-a-gallon price tag on regular unleaded. The Potomac resident says she recently began filling up 15 miles away in Washington, D.C., when she drops her children off at school. You like to patronize the local businessman, she says. Somebody should do something about this.

http://www.rgj.com/news/stories/business/954040490.html

-- Martin Thompson (mthom1927@aol.com), March 26, 2000