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Law puts brakes on fleeting gas price war

A gasoline price war erupted in St. Mary's County last week after one station slashed its price for regular to $1.999 a gallon and spurred three others to follow suit, giving drivers some hope of relief at the pump.
/ Source: a href="" linktype="External" resizable="true" status="true" scrollbars="true">The Washington Post</a

A gasoline price war erupted in St. Mary's County last week after one station slashed its price for regular to $1.999 a gallon and spurred three others to follow suit, giving drivers some hope of relief at the pump.

But the price dip proved fleeting.

Maryland regulators quickly stepped in and told the stations that their prices were too low. They needed to go up by 5 cents.

In as much time as it takes to fill the tank of an SUV, prices at BJ's Wholesale Club, Sheetz and two Wawa outlets bounced to $2.049 a gallon.

The sudden fluctuation in the Lexington Park area was the result of a little-noticed Maryland law that took effect in 2001. The General Assembly mandated that stations cannot charge less than what they pay for gas -- unless they're lowering prices to compete with a nearby station.

Independent service station owners pressed lawmakers for the measure as a way to protect themselves from big retailers selling gas below cost to drive them out of business and limit competition. Maryland is one of at least 13 states to adopt similar laws, which are not in effect in the District or Virginia.

Gas prices have hit highs in recent weeks because of rising crude oil prices driven by a growing worldwide thirst for oil and limited supplies.

With prices in Maryland averaging $2.20 a gallon for regular, drivers said they were displeased to learn the state had ordered the stations to boost their prices.

Mark Culbert, who lives near Lexington Park, was thrilled when he saw prices come down to $1.999 a gallon. But by the time he pulled his Ford van with a 35-gallon tank into the Sheetz, it was too late. "That kind of makes me upset that the state is going to say you have to pay a higher price," said Culbert, 36, a military contractor. "As a consumer, I'd like to see the lowest prices possible."

Regional differences
The Maryland law is one of many state and regional differences that can affect how much motorists pay to fill their tanks.

Gas taxes -- the biggest factor in price differences among states -- can vary widely. In Maryland, state taxes on regular gas total 23.5 cents a gallon, whereas the District's rate is 20 cents a gallon. In Virginia, the state tax is 17.5 cents a gallon; there's also a 2 percent sales tax in locations that are part of a Northern Virginia transportation district.

Environmental regulations that force some areas of the country to use cleaner-burning gasoline also affect prices. Different blends required in some urban areas and in California typically cost more to produce than conventional gasoline. Local competition, real estate prices and regional supply and demand can also show up in prices at the pump.

Maryland law prohibits companies that refine gas from operating stations. That means all Exxons and Chevrons, for example, must be operated independently. The independent operators argue that this creates more competition and lowers prices, though the Federal Trade Commission staff has said companies that operate both refineries and stations have efficiencies that can bring prices down. The District, Virginia and some other states have similar laws.

A debate also exists over the impact of laws governing minimum gas prices. In Maryland, independent operators stand on one side of the issue, with the FTC, the AAA auto club and big chains on the other.

‘After competition...’
Paul Fiore, director of government affairs for the Washington, Maryland, Delaware Service Station & Automotive Repair Association, said that without the law, chains would force independent operators out of business and eventually increase their prices. With the assistance of an Annapolis lobbyist, Bruce C. Bereano, the Bowie association argued to lawmakers that the law would benefit consumers in the long term.

"You have to look at where the market will be . . . after competition is removed," Fiore said. "Protecting competition creates a better consumer market. I don't see any hard evidence that this has been harmful to consumers."

Opponents say the law deprives consumers of the benefit of competition because it creates an artificial price floor. Even if independent operators were driven out of business, they said, the market would remain competitive.

"These laws are not necessary," said Mitchell J. Katz, an FTC spokesman. "They hurt competition."

Several economics professors were unable point to any definitive research showing that the law would ultimately hurt or benefit consumers.

R. Michael Cortez, vice president and general counsel for Sheetz, said the Altoona, Pa., retailer would like to sell below cost on occasion but not for extended periods. He compared a brief drop in gas prices to a sale held at a clothing store designed to draw in new customers.

He said the Maryland law dampens competition. "It forces companies to increase the price artificially, and it forces companies to become price followers and not price leaders," Cortez said. "All of that results in increasing gas prices."

But independent operators said the chains sometimes keep prices down for extended periods to put competitors out of business. They said the chains can do so by relying on profits from stores in less competitive markets.

"We bring our price down to where we feel we need to make a profit," said Elliott Burch Jr., president of Burch Oil Co., which operates about 15 stations in Southern Maryland. "They're always undercutting us. . . . My plight is no different from the folks that complained against the Wal-Marts."

Since the Maryland law took effect in 2001, the state has logged 31 violations. State officials said no citations were issued because the stations had agreed to raise prices.

In the most recent incident, last Tuesday, a state investigator questioned operators of a BJ's, Sheetz and two Wawas about their $1.999-a-gallon prices after receiving a complaint from Burch Oil, officials said.

‘Tired of this game’
Sheetz and the Wawas said they lowered prices to match the price of the nearby BJ's, according to the state. BJ's denies it was the first to drop to the lower price and says the price was still above cost. But BJ's did not have paperwork on hand to show how much it paid for the gas.

So the Maryland official made a calculation based on average wholesale prices and concluded that the stations should be charging no less than $2.049 a gallon. Station managers at Wawa and Sheetz responded to the investigator by saying, "We're happy to raise our prices. We're tired of this game that BJ's keeps playing," according to Robert A. Crawford, assistant director of licensing and registration for the Maryland comptroller.

BJ's does not "lead markets lower" by reducing prices to gain customers but rather lowers prices to meet the competition, said Brian J. Earley, vice president of the Natick, Mass., company's fuel and automobile operations. Maryland officials, however, said they had received reports to the contrary.

While the state successfully pushed up prices, market forces eventually regained control.

Late in the week, several stations were again selling gas for $1.99 a gallon. State officials said the lower prices appeared permissible because wholesale prices had declined.