10.27.06

Cantwell Responds to FTC Report Confirming Record Eastern Washington Gas Prices

Cantwell poses additional detailed questions to uncover root factors behind elevated prices in Spokane area

WASHINGTON, DC – On October 19, answering a request by U.S. Senator Maria Cantwell (D-WA), the Federal Trade Commission (FTC) pointed to refineries in the Rocky Mountain region as a primary cause of the disproportionately high gasoline and diesel prices in eastern Washington. Unlike the western portion of the state, much of eastern Washington receives its fuel from refineries in the Rocky Mountain area. Friday, in response to the Commission’s preliminary assessment, Cantwell sent a second letter asking the FTC to answer detailed questions on refinery-level supply market structure, local pricing data, and profit taking to help find the root cause of the Spokane-area price spikes. Cantwell also hopes answers to these questions will help her ongoing efforts to prevent future fuel price spikes nationwide.

Spokane-area prices have been significantly higher than those in Seattle since the beginning of August—at one point becoming the highest in the 48 contiguous United States. In mid-September, while regular gasoline in western Washington was available at many locations for less than $2.70 per gallon, Spokane-area drivers paid an average price of $3.04. Spokane-area diesel fuel, important to farmers and other low profit-margin businesses, averaged $3.46 per gallon. Currently, according to AAA’s Daily Fuel Gauge Report, regular gasoline in Spokane sells for an average of $2.54 per gallon with diesel at $2.80, compared to $2.48 per gallon of regular in the Seattle area, where diesel is averaging $2.73 per gallon.

For more on the FTC’s initial analysis and Cantwell’s work to confront record gas prices and improve energy market transparency, click here

To view the FTC’s preliminary assessment, click here

The text of Cantwell’s follow-up letter to the FTC, sent Friday, follows below:

Dear Chairwoman Majoras:

Thank you and the Commission staff for your letter of October 19, 2006. I greatly appreciate your timely response and the effort entailed in your preliminary assessment of the troubling recent fuel price spikes harming families, businesses, and farmers in Eastern Washington.

The Commission’s report confirmed many of my concerns about how petroleum markets currently function, and the factors that may be contributing to inflated gasoline and diesel prices. Specifically, the Commission concluded that the problem most likely originates at the refinery level, that local small business retailers or jobbers are not profiting from recent price spikes, and that the world crude oil price accounts for only about half of the price of refined petroleum products. The FTC also found that Spokane’s recent fuel prices have exceeded Seattle’s by the highest amount in the 57-month period analyzed, confirming the anecdotal evidence provided by many of my constituents.

The Commission’s analysis also raises a number of additional important questions; and given the complexity of these fuel markets, I recognize this is par for the course. But since volatile petroleum prices are an issue of intense and ongoing concern for members of Congress and the general public, I hope we can work together to focus on the factors that led to the recent gasoline price spikes in Spokane between August 15th and October 15th of 2006 –at one point, the highest price in the lower 48 states—and use this situation as a case study to better understand, and hopefully mitigate, future price and market anomalies nationwide.

I’d like the Commission to provide answers to the following additional questions raised by your letter of October 19, 2006:

Market Structure

I appreciate that existing infrastructure for gasoline and diesel supply to the Spokane area may constrain the market, contributing to the recent price spikes. And as the Commission has pointed out, the price movements in Spokane generally align more closely with communities also supplied from refineries within Petroleum Administration for Defense District IV (PADD IV) sources then those of PADD V, which supply Western Washington. This dynamic implies that the remaining price differentials should be due to either local demand variations or transportation costs within a PADD. This raises the following questions:

  1. According to the figures included in the Commission’s letter, the reported retail prices in Spokane and Salt Lake City (SLC) track very closely for diesel, but show gasoline prices in Spokane that are often 10 to 15 cents per gallon (cpg) higher than in SLC-- at one point, reaching 20 cents higher per gallon. Have you assessed the cause for these differentials between fuels?
  2. The Commission’s preliminary analysis offered the possibility that shifts in refinery output mix at PADD IV refineries account for the recent prices, above the Commission’s predicted range for both Spokane and SLC. For the two month period beginning August 15th, were there any refinery product allocation shifts or attendant downtimes that could account for the observed price effects?
  3. The Commission speculated, based on third party sources including press accounts, that PADD IV experienced “greater difficultly in handling this year’s nationwide conversion to ultra-low sulfur diesel (ULSD) fuel.” That raises the question of why PADD IV refineries experienced this problem, while other refineries nationwide (such as in PADD V) presumably did not. Were these conversion difficulties encountered by all PADD IV refineries, or a subset of those supplying Eastern Washington? I understand that refiners had years to prepare for the transition to ULSD, and would presume any individual refinery would know of its own impending transition issues. As such, why didn’t parent companies with refineries across the country work to shift ULSD product from successful production areas to those with shortages?
  4. The Commission’s preliminary analysis concluded that exogenous supply factors account for all of the Spokane area’s high gas prices. Did the Commission test this theory by comparing prices in small rural markets surrounding Spokane, which often have lower prices than the metropolitan area? I understand from the Commission’s letter that the FTC’s Gasoline and Diesel Price Monitoring Project monitors fuel price data from a number of these locales.
  5. Figures 1 and 2 in the Commission’s letter show average weekly differences in retail gasoline and diesel prices between Spokane and Seattle were reasonably consistent between 2000 and 2005. What explains the markedly increased volatility over the past year? To what extent is this driven by increased volatility in the Spokane market versus the Seattle market?

Comparability of Local Pricing Data

The analysis presented used the OPIS published rack price for both Spokane and Seattle. I understand that OPIS data is an accurate reflection of wholesale prices charged by the oil companies in the Spokane area, since all the branded stations there purchase supply from a jobber or distributor paying the published rack price. In Seattle, however, the OPIS rack price may not be accurate because the overwhelming percentage of stations in Puget Sound metro markets buy directly from their affiliated oil company -- not from a jobber or distributor. The wholesale price these direct-supplied dealers pay (known as the “dealer tank wagon” (DTW) price) often varies by 15 to 30 cents per gallon, compared to the rack price in Seattle published by OPIS.

I understand that oil companies also commonly grant discounts off the jobber rack price in Seattle called “temporary competitive allowances” (TCAs), which are not reflected in the published OPIS rack price. These TCA discounts have reached up to 31.5 cents per gallon for jobbers delivering the fuel to stations located in Skagit, Snohomish, King, Pierce, Kitsap, Thurston, and Lewis Counties. Given the magnitude of the differences between OPIS and DTW prices, and the importance of TCA discounts in determining the actual prices paid by consumers, answering the following questions would provide more clarity to the Commission’s preliminary analysis of Seattle/Spokane price differentials:

  1. After accounting for the DTW variations and TCA discounts, how do Seattle and Spokane gasoline prices compare? How do these results differ from the Commission’s earlier analysis?
  2. How does the practice of extensive discounting against rack prices in the Seattle area (without similar practices in Spokane) affect the prices paid by consumers at the gas pump in Spokane? What is the typical experience in similarly-sized markets? Does the Commission believe these discounting practices could be used to artificially dictate prices in certain geographic areas?

Profit Taking

As the federal governmental entity charged with protection of American consumers, and the recipient of complaints from the Energy Department’s Gasoline Hotline, the Commission is surely aware of widespread consumer concern over elevated and volatile gasoline and diesel prices. When my constituents hear press reports related to unprecedented oil company profits --including this week’s announcement that ExxonMobil earnings rose to $10.49 billion in the third quarter of 2006-- and compare it to historic high prices they see at the gas pump, they question whether the oil industry is earning excessive profits. As such, I believe further analysis of the recent price spikes in Spokane may help illustrate the strategies used by refiners to maximize their profits in periods of short supply. In particular:

  1. Did refineries in the PADD IV region derive profits higher than historic averages following supply shortages caused by difficulties transitioning to ULSD? In general, how have PADD IV refineries expanded output to meet growing demand in the Rocky Mountain region?
  2. I understand that there is some amount of gasoline and diesel entering Eastern Washington from coastal sources within PADD V. Fuel is transported regularly over the Cascades from Seattle into the central region of Yakima and the Tri-Cities, and is also barged up the Columbia River into Tri-Cities, which is then shipped to Spokane. Accounting for this dynamic, what percentage of the Spokane market was supplied from PADD V during August 15th to October 15th of this year? Given that small marginal supply increases can have a relatively large impact on prices in a tight supply market, how have these inter-PADD transfers affected prices in Spokane during the two months beginning August 15th of this year?
  3. The Commission’s preliminary analysis only compared Spokane prices with those in SLC. However, I understand that gasoline and diesel in Montana and elsewhere in PADD IV fell faster than in Spokane. What explains these differences within the same supply area? Please detail which refiners with PADD IV supply the Spokane market and any reductions those specific refiners may have had as compared to previous years. Please assess the refining and marketing margins for the refiners that supplied Spokane, and compare them with those of other PADD IV and PADD V refineries.
  4. The Commission’s letter speculates that PADD IV refiners may have decided to “maximize profits by increasing the production of diesel at the expense of gasoline production.” What is the basis of the Commission’s speculation? Has this practice been documented in the past? Does the Commission believe that oil companies profited at the time more from shifting production to the relatively more expensive diesel, or from the resulting shortage in gasoline which increased gas prices? How were these PADD IV refiners able to switch to additional diesel production at the same time they were reportedly having problems producing ULSD?
  5. Refiners’ ability to dictate refined product inventory levels seem to be a key factor behind wholesale and retail fuel prices. For the period of August 15th to October 15th of this year, what were the inventory levels within PADD IV, and how do they compare with those in PADD V? Based on this data, does the Commission believe there was a correlation between low inventory levels and recent elevated gasoline and diesel prices?

I hope you will agree that the recent price spikes in Spokane can serve as an ideal case study in our joint efforts to better understand the current volatility in our nation’s fuel markets and ensure the protection of American consumers. It is my hope that a thorough investigation on the FTC’s part, which may require refinery level audits and subpoenas of temporal information, will help policymakers and the public alike better understand the dynamics influencing the prices our nation’s consumers and businesses are paying at the pump. Once again, thank you in advance for your diligence and timely response to these additional questions.

Sincerely,

Maria Cantwell
United States Senate

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