Antitrust complaint filed against ConocoPhillips over “anti-competitive activities”

March 20, 2013 |
The Zarco 66 station in Lawrence, Kansas

The Zarco 66 station in Lawrence, Kansas

Is ConocoPhillips unlawfully attempting to limit competition in the fuels marketplace? We’ll find out soon.

In Florida, Biofuels Digest filed an antitrust violation complaint against ConocoPhillips with the US Department of Justice, regarding alleged activities in Lawrence, Kansas.

According to material received by the Digest, ConocoPhillips’ activities may be in violation of the Sherman Antitrust Act and the Clayton Antitrust Act, as well as other laws with respect to fair competition.

Certainly, the Renewable Fuels Association alleges that they are.

Yesterday, in a letter sent today to the Environmental Protection Agency, the Federal Trade Commission, the Department of Energy and the Department of Agriculture, the Renewable Fuels Association requested a multi-agency investigation into “the oil industry’s highly discriminatory and unlawful conduct — conduct that is impeding the delivery of renewable fuels to the American marketplace.”

Where in the world is Zarco 66?

The RFA’s complaint focused on recent events at Zarco 66, the first marketer in the United States to offer E15, at its fuel station at 1548 E. 23rd St. in Lawrence, Kansas.

The Kansas-based fuel retailer — with seven locations in Lawrence, Ottawa, Olathe and Paola — offers E15 at its 23rd Street location right off of Interstate 10. It also offers E20, E30, and E85 ethanol blends and B2, B5, B10 and B20 biodiesel blends at its Earth Friendly Fuels location on 9th Street in Lawrence.

What happened at Zarco 66?

In a letter yesterday to the USDA, the Federal Trade Commission, the EPA and the Department of Energy Renewable Fuels Association said:

“For many years, a ConocoPhillips franchisee, Zarco 66 Inc., offered E85 at its fueling station. One of the station’s fuel tanks contained “regular” gasoline and a second tank contained straight ethanol—a tank that might have otherwise been reserved for “premium” gasoline at a more antiquated station. Zarco 66 offered customers E85 by blending the appropriate mixture of gasoline and ethanol straight at the pump—using “blender” pumps that it obtained through a grant administered by the Department of Energy. Because only certain vehicles can use E85, the oil industry likely viewed this alternative fuel as a gimmick—one that posed no real threat to the industry’s monopoly.

“But shortly after Zarco 66 became the first fueling station in the nation to offer E15—a fuel that can be used in any light-duty vehicle manufactured over the last decade—the oil industry suddenly changed its tune. ConocoPhillips quickly threatened to terminate Zarco 66’s franchise agreement and charge Zarco 66 hundreds of thousands of dollars in penalties unless Zarco 66 started offering “premium” gasoline—gasoline that would replace the ethanol housed in one of Zarco 66’s fueling tanks, and a gasoline that is likely to result in far fewer sales than the ethanol blends that would be available if Zarco 66 maintained the current ethanol contents.”

The RFA letter is here.

The Sherman Antitrust Act

According to RFA, “As an initial matter, the oil industry is enforcing a classic “tying” arrangement in violation of Section 1 of the Sherman Act. A tying arrangement is “an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product.” Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 461 (1992). As the Supreme Court has long recognized: “Such an arrangement violates § 1 of the Sherman Act if the seller has ‘appreciable economic power’ in the tying product market and if the arrangement affects a substantial volume of commerce in the tied market. Id. at 462 (quoting Fortner Enters., Inc. v. U.S. Steel Corp., 394 U. S. 495, 503 (1969)).”

The RFA’s argument

“Here, the oil industry is forcing fuel stations to purchase and carry a product that they otherwise do not wish to carry (premium gasoline) as a condition for purchasing and carrying the tying product (regular gasoline).

“Because franchisees are locked into franchise agreements (and such a lock-in effect is magnified when, as in the case of Zarco 66, the oil franchisor changes the terms of the relationship midstream), an oil franchisor holds appreciable economic power over the franchisee, which it is using to force franchisees to purchase premium fuel that they might not otherwise wish to carry.

“Moreover, because premium gasoline requires a separate tank that would otherwise hold the ethanol necessary to offer gasoline-ethanol blends (and the oil industry is well-aware that most fuel stations have only two tanks devoted to gasoline), the oil industry is effectively eliminating ethanol competition by tying the sale of premium to regular gasoline.”

The Gasohol Competition Act of 1980

The RFA alleges: “In addition, the oil industry’s conduct is contrary to the Gasohol Competition Act of 1980. That legislation makes it unlawful to “unreasonably discriminate[] against or unreasonably limit[] the sale, resale, or transfer of gasohol or other synthetic motor fuel of equivalent usability.” 15 U.S.C. § 26a(a)(2). By enforcing a premium requirement to the exclusion of ethanol blends, the oil industry is unreasonably limiting the sale of E15, which both qualifies as gasohol in its own right and is also “synthetic motor fuel of equivalent usability” to E10. Indeed, in granting E15 a waiver under Section 3

“211(f)(4) of the Clean Air Act, the EPA effectively found that E15 was of “equivalent usability” to straight gasoline for use in model year 2001 and newer vehicles, extending the waiver that it had previously granted to E10 roughly three decades’ prior. As a result, the oil industry is unreasonably limiting the sale of E15 by enforcing its premium requirements on unwilling franchisees.”

The Petroleum Marketing Practices Act

The RFA adds: “Similarly, the oil industry’s actions violate the policies that underlie the Petroleum Marketing Practices Act. By forcing franchisees to purchase premium gasoline, franchisors are acting to preclude franchisees from “converting an existing tank or pump on the marketing premises of the franchisee for renewable fuel” in violation of that legislation. See 15 U.S.C. § 2807(b)(1)(B). What is more, the Act was intended to allow franchisees to sell “a renewable fuel in lieu of 1 . . . grade of gasoline.” Id. § 2807(c). As a result, the oil industry is directly subverting this legislation by making it impossible for franchisees to offer gasoline-ethanol blends higher than E10, such as E85 and biodiesel.”

The Energy Independence and Security Act

The RFA adds: “Put simply, the oil industry’s efforts to suppress renewable fuels belies the industry’s claims that it cannot meet the RFS that Congress included in the Energy Policy Act of 2005 and expanded in the EISA. As amended, the RFS requires qualifying refiners and importers of gasoline or diesel to introduce into American commerce a specified, annual increasing volume of renewable fuel. 42 U.S.C. § 7545(o)(2)(A)(i).

“The oil industry has claimed that it cannot meet these standards—in part, because few stations are offering E15 or greater gasoline. Yet, as made plain by the events related above surrounding the efforts of Zarco 66 to market E15 and the obstacles that ConocoPhillips has placed in its path, it is the industry’s own behavior that is limiting E15’s availability. Like a child who breaks all of his pencils and then tells his parents he can’t do his homework, the oil industry should not be permitted to claim the RFS is not achievable when it is deliberately taking steps to stifle the introduction of E15.”

The Digest’s action

The branch of the federal government clearly assigned the duty to enforce the Sherman Antitrust Act and the Clayton Antitrust Act is the US Department of Justice. All parties will benefit from an expedited review of the facts by the designated authority.

Allegations are not proofs. However, activity of a serious nature have been alleged — violations of the Sherman Act are crimes. Everyone benefits from swift action that exonerates the innocent or punishes the guilty, and everyone has a duty to report what may be a crime.

Therefore, the Digest took the step of filing an antitrust violation complaint with the DoJ.

That way, as quickly as possible, ConocoPhillips can get back to the business of refining and marketing fuels and chemicals, the RFA can get back to the promotion and protection of renewable fuels, and Zarco 66 can get back to selling E15 gasoline and its other renewable (and non-renewable) fuel blends, Sandbar Subs, Scooter’s coffee and car washes.

We wish a speedy resolution to all the parties — let the judgement be on the merits, and soon.

We look forward, also, to regularly bringing to our readers’ attention the speedy and professional work that we all ought to expect from the Department of Justice.

And, we certainly wish the very best to Zarco 66 and its customers.

You can download a copy of our antitrust violation complaint to DoJ here.

 

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