September 19, 2006

Wyden Gas Price Competition Bill Sees Action in Senate Committee

FTC fails to commit to investigation of anti-competitive practices in gas markets;Wyden legislation would direct FTC to identify and prevent market manipulation

Washington, DC - Continuing his efforts to reduce high gas prices, U.S. Senator Ron Wyden (D-Ore.) today testified about his Gasoline Free Market Competition Act (S.1737) before the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy, and Consumer Rights. Wyden's legislation would compel the Federal Trade Commission (FTC) to identify and stop market manipulation that drives up the price of gasoline. Also today, Chairman Timothy Muris failed to commit the FTC to an investigation of the closure of Shell's Bakersfield, California refinery and the impact that closure would have on the West Coast gasoline market. A letter from Muris came in response to Wyden's February 18 and March 23 requests for investigation. "It's time the Federal Trade Commission got off the bench and went to bat for Americans who are getting drilled by high gas prices," said Wyden. "Documented proof of price manipulation should be evidence enough for the Senate to move forward with common sense legislation that will force the FTC to team up with consumers take on the oil companies." Wyden's Gasoline Free Market Competition Act would write into law a number of consumer protections that the FTC has failed to implement. It would: * Direct the FTC to act against anti-competitive practices that stifle competition and increase gasoline prices for consumers; * Establish "consumer watch zones" in markets where four or fewer gasoline companies control more than 60 percent of gasoline supplies. In areas with so little competition, companies would have to prove that anti-competitive practices like redlining and zone pricing are not hurting consumers. * Empower the FTC to issue "cease and desist" orders to companies engaging in anti-competitive practices within these consumer watch zones. A committee hearing is often a bill's first step on its way to passage. Before the bill can be considered by the full Senate, the bill must be reported out by the committee(s) of jurisdiction. The text of Wyden's prepared testimony follows. Mr. Chairman, gasoline prices have soared to the highest levels ever and the response of the Federal government has been to do nothing. As bad as the situation is today, prices are expected to go even higher. I believe gasoline consumers are about to be hit by a perfect storm - a combination of high OPEC prices, refinery cutbacks and anti-competitive practices that siphon competition out of the marketplace. That perfect storm is going to soak consumers for even more money at the pump unless Congress takes action to protect our citizens. I asked to testify today because I believe that inaction in the face of spiraling gas prices is the worst possible response Congress and the Administration could have at this time. Chairman DeWine, you clearly share that view because you have introduced legislation to take head on the role of OPEC in gouging U.S. consumers. By extending our anti-cartel laws to reach OPEC member countries when they are essentially acting not as countries but as giant petroleum companies, your legislation would provide a new approach to combat OPEC's role in the current high gas prices. I support your effort. But OPEC isn't the only problem. According to an analysis by the Consumer Federation of America's director of research, oil companies' refinery margins are taking three times as big a bite out of consumers' pockets as the actions of the OPEC cartel. Taking action against the OPEC cartel will help U.S. consumers some, but it won't provide full relief if Congress looks the other way when it comes to anti-competitive and anti-consumer practices that are going on in our own gasoline markets. Just as the "NOPEC" bill introduced by Chairman DeWine and others on the Committee would give the Federal government a new tool to use against the anti-competitive practices of the OPEC cartel, Congress needs to provide comparable new tools to use against anti-competitive actions that raise prices in U.S. gasoline markets. I have introduced a bill, "The Gasoline Free Market Competition Act," (S. 1737) that provides the new powers needed to attack the problems in our own markets. Today, I would like to discuss a textbook case of anti-competitive action that's going on right now in our own markets that will raise gasoline prices for U.S. consumers. Shell Oil is currently in the process of shutting down its refinery in Bakersfield, California. This is a 70,000-barrel-per-day refinery that is critical for gasoline supplies for the entire West Coast. In my testimony today, I will briefly describe how the deliberate shutdown of not only the Bakersfield refinery but refineries all around the country is one of the biggest problems that gasoline consumers are now facing. I will also describe how the current law is inadequate to deal with this problem and what my bill would do to change the law. Mr. Chairman, as a Senator from Ohio, you may be wondering what impact the shutdown of a refinery in California will have on your state. The short answer is the Bakersfield shutdown won't hurt Ohio consumers directly, but inaction by the Federal Trade Commission (FTC) on the growing problem of refinery shutdowns can and will affect consumers all around the country. What happened in Bakersfield exemplifies how refinery shutdowns are allowed to happen because the FTC can't or won't take action. I documented this problem in a report I released in 2001. My 2001 report included a number of internal oil company documents that revealed a deliberate strategy to reduce refining capacity as a strategy to boost oil company profits. These efforts included working to prevent the restart of the closed Powerine refinery in Southern California. One company document revealed that if the Powerine refinery was restarted, the additional gasoline supply on the market could bring down gas prices and refinery profits by two to three cents per gallon and called for a "full court press" to keep the refinery down. The Powerine refinery's capacity was 20,000 barrels per day. Because of the much larger capacity of the 70,000 barrels-per-day Bakersfield refinery, Shell's shutdown of this refinery could have an even larger impact on prices at the pump. My report also identified 24 refineries that closed between 1995 and 2001 with a combined capacity of more than 800,000 barrels per day, including several in the Midwest (Illinois, Indiana, Michigan and Kansas) as well as refineries in the South and West Coast. This loss of refinery capacity means less supply is available in U.S. gasoline markets and that, in turn, means higher prices for consumers at the pump and higher profits for the oil companies. That's not just my opinion - the oil company documents I revealed in 2001 made clear this was part of a deliberate strategy to boost refinery margins and profits. Now, Shell is deliberately shutting down its Bakersfield refinery. As Yogi Berra once said, it's "déjà vu all over again." Shell's announcement of its decision to close the Bakersfield refinery claimed that "there was simply not enough crude supply to ensure the viability of the refinery in the long-term." But recent news articles have reported that both Chevron Texaco and State of California officials estimate that the San Joaquin Valley where the Bakersfield refinery is located has a 20-25 year supply of crude oil remaining. In fact, The Bakersfield Californian reported on January 8, 2004, that Chevron Texaco plans on drilling more than 800 new wells in the San Joaquin Valley this year which is "300 more new wells than last year." The fact that Texaco, Shell's former partner in the Bakersfield refinery, is increasing its drilling in the area calls into question Shell's claim that a lack of available oil supply is the real reason for closing its Bakersfield refinery. Another reason to question Shell's claim about the availability of crude oil is the fact that Shell is currently the subject of an investigation for misstating its crude oil reserves. Shell has also claimed its decision to shut the refinery was not made to drive up profits, but the company admitted to The Wall Street Journal that "There will be an impact on the market." That impact will be to drive up prices even higher. The question is, by how much? What makes Shell's decision to close its Bakersfield refinery especially curious is the company never even tried to find a buyer. But to date, the FTC has done nothing to stop Shell's refinery closure. The FTC argues that they can only prosecute if they find out and out, blatant collusion, setting out a standard that is almost impossible to prove against savvy oil interests. That's not acceptable. The law needs to be changed to give the FTC additional tools to do its job. That's where my bill, S. 1737, come in. Under my bill, there would be three changes from current law. First, the FTC would be empowered to issue cease and desist orders to prevent individual companies from gouging consumers. Second, under my bill, Congress would stipulate that certain anti-competitive practices, like redlining and zone pricing, are per se anti-competitive in highly concentrated markets. When oil companies engaging in anti-competitive practices that manipulate supply or limit competition in these concentrated market, they would have to prove these practices do not hurt consumers. The FTC could also put the burden on oil companies to show that other practices, such as the Bakersfield refinery shutdown, that reduce supply or drive up prices are not harming consumers in any concentrated market. Finally, highly concentrated gasoline markets would be designated "consumer watch zones." In these consumer watch zones, there would be greater monitoring of anti-competitive activities by the FTC. Mr. Chairman, the major players in the gasoline industry don't need to get together in a smoke-filled room in order to engage in anti-competitive actions. They can get away with anti-competitive practices that reduce supply and drive up prices because in scores of communities, including those in my home state, there are few if any choices for gasoline consumers. Nationwide, the gasoline markets in Oregon and at least 27 other states are now considered to be "tight oligopolies" with 4 companies controlling more than 60 percent of the gasoline supplies. In these tightly concentrated markets, numerous studies have found oil company practices have driven independent wholesalers and dealers out of the market. One practice they employ called "redlining" limits where independent distributors can sell their gasoline. As a result, independent stations must buy their gasoline directly from the oil company, usually at a higher price than the company's own brand-name stations pay. With these higher costs, the independent stations can't compete. They go out of business - and the oil companies widen their net to grab consumers' cash. The FTC isn't taking action to address these problems now because they say the agency can only take action in cases of collusion. If the FTC can't or won't take action to protect consumers at the pump, there is a vehicle today, S. 1737, through which Congress can give the agency the power now to address the problem of skyrocketing gasoline prices. In a case like Shell's Bakersfield refinery, the FTC could issue a cease and desist order to halt shutdown of the refinery. Because California is a highly concentrated market, Shell could be required to show that closure of the refinery would not have anti-competitive impacts by reducing supply or increasing the price of gasoline. If Shell can show that it will be increasing its production at the company's other West Coast refineries to make up for the lost production at Bakersfield, the closure could still be allowed to go forward. But my legislation would protect consumers where an oil company was closing its refinery as part of a deliberate effort to reduce supply and drive up prices. Congress needs to act to protect gasoline consumers because both the industry and the Bush Administration agree that gasoline price spikes are going to be a continuing problem. Last August, a report by the Rand Corporation revealed that even oil industry officials are predicting more price volatility in the future. That means consumers can expect more frequent and larger price spikes in the next few years. Last November, the Energy Information Administration also issued its report on the causes of last summer's record high gasoline prices. The EIA report also found "there is continuing vulnerability to future gasoline prices spikes." Mr. Chairman, I urge the Committee to consider my legislation, S. 1737, as one of the actions that Congress can take now to protect consumers from skyrocketing gasoline prices. But if you don't agree that the approach in my legislation is the best way to address anti-competitive practices in U.S. gasoline markets, I urge the Committee to come up with your own plan for improving competition in gasoline markets. Mr. Chairman, your OPEC legislation is a strong first step toward protecting gasoline consumers from getting soaked at the pump, but it won't provide full protection from the perfect storm now threatening our citizens unless Congress also addresses the anti-competitive actions that are occurring here in our own gas markets. To fully shelter consumers, the Committee needs to build on the efforts to address offshore forces with a new wall of protection against the anti-competitive forces buffeting markets here at home.