Petroleum Marketers Respond to Costco's Attempt To Settle 'Fair Fuel' Lawsuit

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Petroleum Marketers Respond to Costco's Attempt To Settle 'Fair Fuel' Lawsuit

By Barbara Grondin Francella

ARLINGTON, Va. – When Costco last week agreed to settle a lawsuit over the sale of "hot gasoline" by installing automatic temperature compensation (ATC) equipment at the pump, the Consumer Watchdog group applauded the move. Other players in the gasoline industry, however, made a few other gestures.

Facing litigation from consumer groups who say drivers are getting less gasoline than they pay for when the motor fuel expands at temperatures 60 degrees expands, Costco agreed to install (ATC) equipment at its pumps. The move, which got wide press coverage, would affect Costco motor fuel sales in Arizona, California, Florida, Georgia, Kentucky, Nevada, New Mexico, North Carolina, Tennessee, Texas, Utah and Virginia. The deal, if fully approved, would go fully into effect within five years and remove Costco from national and state class action lawsuits by drivers.

"It is very troubling to me, but it is mostly a PR stunt, at the expense of 160,000 other gasoline retailers," said Dan Gilligan, president of Petroleum Marketers Association of America, based here. "Installing ATC on retail pumps is not legal in any state, except California, and that is a toss up." [California has not forbidden the use of the pumps, but has no structure in place to inspect them.]

ATC pumps should not be permitted, Gilligan told CSNews Online. "It is an easy way to cheat people if you use ATC in an unregulated fashion. Retailers could turn ATC on cold days and turn it off on warm days. Also, the ATC may be calibrated incorrectly. Without inspectors, this would all be on the honor system.

"But it saves Costco the costs of defending themselves in this class-action litigation," Gilligan added, noting there are 120 other retailers and groups being sued. "And Costco gets the public relations bump, proclaiming they are going to install ATC, insinuating it is good for consumers. But ATC at retail is not legal, and won't be for many, many years going forward, if it ever is.

In the last few years, some states have proposed dividing states into different regions with different size gallons, based upon average regional fuel temperatures. Also, legislation was introduced in the Senate requiring all retailers to retrofit their ATC devices within six years, with an aver¬age cost per dispenser estimated at $2,000.

While there’s been no further action on federal legislation, the litigation continues, and the National Conference on Weights and Measures votes on the issue this July. Regional Weights and Measures commissions meet sooner.

"We will make our argument that ATC should never be approved until the day it is proven cost effective for consumers and retailers, which it is not now," Gilligan said.

The California Energy Commission (CEC), which studied the hot fuels issue for a year, found if ATC was mandated, consumers would pay more, as retailers passed on the cost of the equipment -- from $1,500 to $2,000 per dispenser for installation, plus ongoing maintenance costs -- than they would gain.

"The fact is, temperature has nothing to do with the price of fuel." Gilligan said.

"If Costco did install it, consumers would be totally confused. Costco would be selling a different gallon than their competitors. How could consumers compare price?"

Gilligan questioned whether or not any state's attorney general would allow the installation of ATC pumps, because there is no existing legal basis to regulate their use.

In California, Carl Boyett, president of the Society of Independent Gasoline Marketers and CEO of Boyett Petroleum Modesto, Calif., who served on the CEC, said everyone admits gasoline expands when hot and contracts when cold. "But if you start selling gasoline in a different form, how can [consumers] judge the price? If Hershey has a 6-ounce bar and someone changes it to an 8-ounce bar, what should the price be?"

Installing ATC has his 35 Kwik Serv stations, which average 12 fueling positions, would cost at least $25,000 per location, Boyett said. "I won't do it unless I have to. No one else will, unless it becomes law.

"I just shelled out $50,000 per station to install enhanced vapory recovery systems," he said, "and have hundreds of thousands of dollars in costs associated with PCI compliance and in-station diagnostics requirements. The cost of installing ATC would cause petroleum marketers to go out of business, reducing competition, which would raise retail prices.

Boyett is concerned consumers will be confused about pricing and what they are buying if California adopts permissive ATC.

There is a strong possibility, however, Costco may never have to install ATC equipment in that state or anywhere, since the agreement requires Costco to install ATC equipment within five years in some states if ATC is legal, according to industry groups, such as the National Association of Truck Stop Operators and NACS, the association of convenience and petroleum retailing.

Unless the National Conference on Weights and Measures or individual states change the law to allow ATC, Costco would not be obligated to follow through on its agreement.

NACS maintains that the installation of ATC would do nothing but increase the price of gasoline to consumers and provide them with no tangible economic benefit, citing the CEC's study and one by international consulting firm LECG.

"Both studies found that the costs of implementing ATC at retail would far outweigh any potential benefit received by consumers," NACS said in a statement.

The CEC study found that, even when using its the lowest estimated annual costs for maintaining and regulating an ATC market, costs would exceed estimated benefits of additional consumer information by a margin of $7 million to $247,000. LECG found that the actual costs to consumers would be substantially higher, NACS noted.

"NACS is committed to educating policymakers and opinion leaders about the retail petroleum marketplace because we know that once they understand how the market works, they are better able to make informed decisions about regulatory matters," explained NACS Vice President of Government Relations John Eichberger.

"Unfortunately, trial attorneys have become quite skilled at presenting companies with difficult decisions: either incur significant expense to erect a legal defense against outrageous claims or cut costs by reaching some sort of settlement. Neither are attractive options when the retailer has done nothing wrong, but the trial attorneys are good at setting this trap."

One other point: Costco's agreement including payment of the plaintiffs' attorney fees.

"I can predict what will happen: Nothing," Gilligan said. "If the judge approves of the deal, Costco will save some legal fees. That's it."