Law to protect consumers at the pump has contrary effect

June 03, 2007|By Jay Hancock | Jay Hancock,Sun Columnist

The perpetrator: Sheetz gas station, Joppa.

The crime: Offering a great deal on regular unleaded.

The sentence: Raise prices, soak customers and pile up the profits.

Maryland may have trouble protecting residents from murder, robbery and al-Qaida. But it has triumphed over the threat of lower gas prices.

Since the beginning of last year the comptroller's office has received 85 allegations of service stations selling gas too cheaply, investigated 44 and ordered stores to increase prices in dozens of cases, according to spokesman Joseph Shapiro.

Sheetz got busted two weeks ago. For that, we'll sleep better tonight.

Maryland's 2001 ban on selling gas below stations' cost looks dumber than ever now that prices are threatening record highs.

The idea was to keep chains such as Sheetz, Wal-Mart and Costco from driving independent stations out of business with predatory pricing. By protecting the little guys, the thinking went, government could ensure the preservation of a competitive market and keep prices down in the long run.

Great idea. More than a dozen states do the same thing. Too bad there's not much evidence it works. Several studies have shown that banning "below cost" gas sales increases consumer expense and gas station profits by millions of dollars.

In 2003 the Federal Trade Commission studied a Wisconsin law similar to Maryland's and found that it "likely harms consumers and restricts competition."

There are contrary findings. An economist at the University of Wisconsin reported in 2004 that below-cost sales bans decreased gas prices by a penny a gallon, on average, five years after being implemented. Still, the impression left by most of the research is that a government price floor protects gas stations from competition and pads their profits.

Not that you need a Ph.D. to figure this out.

Montana voters got so mad at their state's below-cost gas law that in 1998 they repealed it via referendum after the Legislature refused to budge.

A few years ago George Mason University economist Alex Tabarrok challenged readers of his blog to distinguish actual government energy policies from joke policies on a David Letterman top-10 list.

Alongside zany ideas such as "Build a time machine; drive back to 1965 when gas was cheap," and "Cut out the expensive ingredient that gives it that delicious gas smell" was: "Stop Wal-Mart from selling gas at too low a price and thereby taking over the world."

The poor readers must have been baffled.

Unlike most states, which define "cost" as a retailer's invoice price or replacement price, Maryland focuses on wholesale costs published by the Oil Price Information Service, a private database. The most aggressive retailers complain about this because they claim the OPIS "rack rate" is easy to beat.

"OPIS isn't necessarily related to anybody's reality," says Mike Cortez, general counsel for Sheetz, which hates the Maryland measure and likes to think of it as "the anti-Sheetz law." "We hope the heck we're buying a lot better than rack."

True, Maryland allows stations to justify their prices by displaying an invoice cost if it's lower than that of OPIS. But for big chains, having an invoice and demonstrating freight charges and other markups at the store level is easier said than done.

For the gas station, it might be less of a hassle to raise the price a few pennies so the inspector goes away.

Stations ordered to increase prices recently include a Costco on Pulaski Highway in Baltimore; a Wawa and a Royal Farms in Easton and Redner's Warehouse Market and Sheetz in Joppa, according to Comptroller Peter Franchot's office. Each was ratted upon by competitors, whose identities I will protect to keep grateful gas consumers from showering them with gifts and praise.

The Joppa Sheetz was selling regular unleaded for $2.799 on May 15. The nerve. After being visited by a comptroller's inspector, the store increased the price to that week's legal minimum of $2.879 - a difference of 8 cents a gallon, or $1 for a typical tankful.

Several of Sheetz's 28 Maryland stores have been ordered to increase prices, Cortez said, although he didn't know how many.

In any event, there is no penalty. Inspectors don't issue citations if gas stations agree to charge more, which they always do. After all, the law requiring higher prices, which seems to accomplish what the Organization of Petroleum Exporting Countries seeks for Saudi Arabia and Venezuela, doesn't really hurt them. It hurts the consumer, whom it was supposed to protect.

jay.hancock@baltsun.com

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