If consumers would take the time to find the lowest priced gasoline in Chittenden County and purchase it, other stations would be forced to drop their prices, Joe Choquette III of the Vermont Petroleum Producers, a trade group, stated at a field hearing of the Senate Energy and Natural Resources Committee held Monday in Burlington.
The hearing was organized by U.S. Sen. Bernie Sanders, I-Vt., who is on a crusade to find out why Chittenden, Franklin and Grand Isle counties have higher gas prices – and higher gross profit margins – than the rest of Vermont and most of the nation.
Choquette was the primary witness on behalf of gas station owners. Other witnesses included Rob Leuck of Costco, Ben Brockwell of the Oil Price Information Service and Jim Coutts of the Franklin County Senior Center.
On July 7, the price for gas at the Maplefields in Middlebury was $3.35 per gallon. It was 24 cents higher at a Maplefields in Burlington. Sanders wanted to know why.
“Each of these markets behaves as an individual market,” Choquette answered. Rutland, he noted, is known for its more competitive market; apparently Middlebury’s is more competitive than Burlington’s, Choquette observed.
“The players in this market have not been as aggressive,” said Choquette of Burlington.
“Consumer behavior is a part of the market,” he continued, reiterating there are varying gas prices in Burlington, if only consumers would seek out the lowest priced gas. That variation, he argued, was equivalent to the variation between Burlington and other parts of the state.
Coutts pointed out that while gas prices may differ in Chittenden County, Franklin County prices are relatively stable: St. Albans gas prices differ by more than a cent or two from one station to the next, he said.
Sanders also focused in on gross profit margin – the difference between the station’s cost for gas and what it charges customers.
The gross margin in the greater Burlington market, which includes Franklin and Grand Isle counties, has fallen below the national average only twice since January 2009.
For the majority of that time, the profit margin in Burlington was a minimum of 5 cents per gallon higher than the national average. In June, it was nearly 40 cents higher.
Choquette said the petroleum industry is volatile and that the margin was narrow and sometimes negative between October 2011 and March 2012.
However, Sanders’ data indicated no periods in which the margin was negative between those dates. Also, there were no periods since January 2009 when the margin was negative.
In October, profit margins in Burlington fell briefly below the national average but were still between 20 and 25 cents per gallon during the month. In March, the margin in Burlington dropped briefly below the national average again. At that time, the margin remained between 17 and 20 cents per gallon.
Choquette said gross margin is not the same as profit. Out of that gross margin, companies must pay other expenses, such as wages, insurance, utilities and capital cost for the building, tanks and pumps. What remains is profit.
However, Brockwell of OPIS stated it was “disingenuous to call it not a profit margin.” Margin is directly connected to profit, since the larger the margin, the more money will remain as profit after expenses are paid. Brockwell also pointed out that expenses are higher in markets with lower gross margins than Burlington, including New York City and Washington, D.C.
What’s the difference?
Sanders asked Brockwell why there’s a difference in margins between northwestern Vermont and the rest of the country. Brockwell is in charge of data collection at OPIS and has studied the oil and gas markets since the 1970s.
“I have no reasonable explanation,” Brockwell replied. “I’m open to anyone offering me an explanation.”
Brockwell testified he had examined several possibilities, including taxes, the type of gasoline sold and transportation costs. None of those factors explained the difference in prices.
Indeed, the transportation costs for gasoline are remarkably low. It costs 3.4 cents per gallon to deliver between 26 and 50 miles, Brockwell said. Thus, the difference in price between Burlington and St. Albans should only be that amount.
Tuesday morning, gas prices in St. Albans ranged from $3.68 to $3.73 per gallon. In Burlington, prices ranged from $3.53 to $3.69, according to the website gasbuddy.com.
Over the past three years, gas prices in St. Albans have exceeded national and state averages 90 percent of the time, Sanders said. Prices were better in Burlington, where the national average was exceeded 76 percent of the time, although by as much as 29 cents per gallon, and worse in Waterbury, where customers paid higher gas prices than the rest of the nation 97 percent of the time.
Sanders suggested that a lack of competition might be a factor. There are 185 stations in the greater Burlington market. S.B. Collins either owns or distributes to 43 of those. Champlain Oil distributes to or owns 35 stations, and R.L. Vallee 22.
Fifty-four percent of the stations in northwestern Vermont are owned or supplied by just three companies.
Wesco owns or supplies another 18 stations, giving four companies control of nearly two-thirds of the market, Sanders said.
Choquette disagreed with that interpretation, asserting that 61 of the 105 stations in Chittenden County are independently operated. Those operators, he said, set their own prices, regardless of who distributes the gasoline or owns the pumps.
There are multiple types of arrangements between gas stations and distributors. In some instances, such as Maplefields and the Jolley convenience stores, the distributor owns the convenience store and the station. Sometimes the distributor owns and controls the pumps, while the store is owned separately. Sometimes the distributor owns the pumps and the store, but leases the store to another company.
Gail Horne is the co-owner of the Keelers Bay Variety Store in So. Hero.
Champlain Oil owns the tanks and pumps. Horne said this reduces the risk to her business and allows them to pay for the gas as it is sold instead of when it is pumped into the tank.
Horne said Champlain Oil doesn’t place limits on what she charges for gasoline.
Brockwell, however, said, “Competition ought to be looked at, and competition seems to be a factor.”
Rob Leuck, vice president and regional manager for Costco, testified his company has tried for four years to sell gasoline at its Colchester location. Other gasoline retailers have resisted their efforts.
“Competition serves the needs of the community – Costco members and nonmembers alike,” Leuck testified. “In the absence of our type of competition, markets typically charge what the market will bear. Our model is different, in that as we are able, we seek to maximize sales by providing the lowest possible prices on all of the items we sell.”
Costco believes it could lower gasoline prices in the region.
Brockwell supported that position: “Statistics show having a low-cost competitor lowers the price,” he said.
In St. Albans, R.L. Vallee opposed the introduction of a low-cost competitor into the market, successfully arguing that Walmart should not be allowed to sell gasoline in St. Albans.
On a separate but related note, Brockwell said Wall Street speculators also determine the price at the pump.
Sanders has called on the Federal Trade Commission and the Department of Justice to launch an inquiry into gas prices. The record of yesterday’s hearing will become part of the official record of the Senate and the Natural Resources Committee.