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FTC Staff Sends North Carolina Comments On Bill Regarding Below-cost Sale of Motor Fuels

Agency: Federal Trade Commission Date: 21 May 2003

Proposed Legislation Called Unnecessary, With the Potential to Harm State's Consumers

Staff of the Federal Trade Commission's Office of Policy Planning, Bureau of Economics, and Bureau of Competition yesterday filed comments with North Carolina Attorney General Roy Cooper and State Senator Daniel G. Clodfelter, Chairman of the Judiciary I Committee, stating that the proposed amendments to the state's Motor Fuel Marketing Act are not only unnecessary, but have significant potential to harm consumers by causing them to pay more at the pump.

A current North Carolina statute says it is unlawful "where the intent is to injure competition" to sell motor fuel below cost "with such frequency as to indicate a general business practice of selling [below-cost]." For most vendors, North Carolina law currently defines "cost" as the vendor's own invoice or replacement cost, plus taxes and freight expenses.

North Carolina House Bill 1203/Senate Bill 787, which has passed the House and is now in committee in the Senate, would eliminate the "intent" and "business practice" requirements, so that vendors could be liable for inadvertently pricing motor fuel below cost, even on a single occasion. The bill also redefines cost by reference to Oil Price Information Service (OPIS) prices, which may not accurately reflect discounts that may be available to retailers, according to the comments. Therefore, a jobber or retailer who is able to negotiate prices better than those reported by OPIS would not be able to pass those savings on to consumers.

"Under this bill, a retailer could violate the law even if it sold gasoline at a price higher than the price it paid for the gasoline," said FTC Chairman Timothy J. Muris. "Such a law would obviously deter pro-competitive price cutting."

The bill's goal is to ensure that a seller cannot undercut the prices of gasoline for a period of time, driving other competitors out of the market, then returning with higher prices once competition has been eliminated. According to the FTC staff comments, however, such a situation is unlikely to occur, and the bill could result in other types of consumer harm. The staff noted that the issues discussed in the comments are not new to the Commission, stating that the FTC filed similar analyses regarding bills introduced in a variety of states during the early 1990s, as well as in Virginia and New York last year.

In summarizing its comments, the staff wrote:

• Low prices benefit consumers. Consumers are harmed only if low prices allow a dominant competitor to raise prices later to anticompetitive levels.
• Scholarly studies indicate that below-cost pricing that leads to monopoly rarely occurs. The Supreme Court has found such studies to be credible.

• Past studies suggest that below-cost sales of motor fuels that lead to monopoly are especially unlikely.
• Federal antitrust laws deal with below-cost pricing that has a dangerous probability of leading to monopoly. The FTC, Department of Justice's Antitrust Division, state attorneys general, and private parties can bring suit under the federal antitrust laws against anticompetitive below-cost pricing.
  If the proposed legislation leads to higher prices in circumstances in which there is no danger of lower prices leading to monopoly, consumers will be harmed.
• The bill likely would deter pro-competitive activity. By eliminating the Act's intent and business practice requirements, the bill could subject a vendor to civil liability for cutting prices, even if the vendor had no intent to engage in anticompetitive conduct, and even if the vendor priced below cost on just one occasion. As a result, many vendors likely would avoid pro-competitive price cutting.
• There is substantial risk that the bill will cause some vendors to raise their prices. In redefining cost as the average or low reseller rack cost rather than the vendor's own cost, the bill could force vendors to sell motor fuel based on their competitors' costs rather than their own costs. This requirement likely would cause some vendors to raise their prices.

In concluding its comments, which are available on the Commission's Web site as a link to this press release, staff wrote, "For these reasons, [we] believe that House Bill 1203/Senate Bill 787 would more likely harm than promote competition. The bill addresses a problem that is unlikely to occur ... [and] to the extent that anticompetitive below-cost pricing is a danger in the retail gasoline market, federal antitrust laws are sufficient to address the problem. Moreover, the bill likely would deter pro-competitive price-cutting and cause some vendors to raise their prices, to the detriment of North Carolina's consumers."

The Commission vote authorizing staff to file the comments with North Carolina Attorney General Cooper and State Senator Clodfelter was 5-0. The comments represent the views of the staff of the FTC's Office of Policy and Planning, Bureau of Economics, and Bureau of Competition, and are not necessarily those of the Commission or any individual Commissioner.

Copies of the documents mentioned in this release are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. Call toll-free: 1-877-FTC-HELP.

(FTC File No. V030011)

Media Contact:

Mitchell J. Katz
Office of Public Affairs
202-326-2161

Staff Contact:

Jerry Ellig, Deputy Director
Office of Policy Planning
202-326-3683