SUNDAY EDITION | Six years later, no results from investigation - WDRB 41 Louisville News

SUNDAY EDITION | Six years later, no results from investigation into Louisville gas prices

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LOUISVILLE, Ky. (WDRB) -- Six years ago, when local gas prices reached a record of almost $4.30 per gallon, Kentucky Attorney General Jack Conway said it was “imperative” to figure out why Louisville drivers were paying “some of the highest prices for gasoline in the region.”

A few months later, as Conway’s investigation began to zero-in on the price of wholesale gas entering the Louisville market, Gov. Steve Beshear said he was “determined to get to the bottom of this inequity.”

Yet, with Louisville prices again hovering around $4 a gallon, no changes have resulted from Beshear and Conway’s 2008 investigation, despite Conway’s assertion last summer that he “refuse(s) to let this matter rest.”

Over the last year, Louisville gas prices have averaged $3.55 a gallon for regular unleaded – six cents higher than in Lexington, 24 cents higher than in Nashville and 26 cents higher than St. Louis, according to a WDRB.com analysis of data from AAA.

Louisville’s cost of living – a selling point for the city – is about 8 percent lower than the national average, according to the latest version an index developed by the Council for Community and Economic Research.

But that’s not the case when it comes to gasoline. From January 2009 to July 2014, Louisville gas prices averaged $3.17 a gallon – one cent shy of the national average, according to WDRB’s analysis of AAA data. Louisville prices have been particularly higher in the last two months, exceeding the national average by as much as 30 cents per gallon on May 22.

Comparisons of prices at the pump are complicated by that fact that state and local taxes vary from city-to-city. And only some cities, like Louisville, are required to sell reformulated gasoline, a cleaner-burning blend that costs at least a few cents more per gallon to produce. 

The real problem in Louisville, according to Conway, is that Marathon Petroleum Corp. has a “regional monopoly,” supplying “nearly 100 percent” of the reformulated gas that must be sold in Jefferson County and parts of Bullitt and Oldham counties . (See the boundaries for reformulated gas in Oldham County and Bullitt County).

Marathon’s power in the Louisville market goes back to 1998, when it began a joint venture with Ashland Inc. and put the two oil refineries closest to Louisville – in Robinson, Ill. and Catlettsburg, Ky. -- under common control. Marathon took complete control when it bought out Ashland’s stake in 2005. 

“Whether you buy gas at a Chevron station, BP or Thorntons, you are likely buying Marathon gas,” Conway wrote a year ago in an op-ed for The Courier-Journal.

Yet, only federal regulators such as Federal Trade Commission have the power to do anything about it, Conway said last year.

Despite personal appeals from Conway, the FTC has not publicly shown any interest in pursuing his assertions about Marathon’s alleged monopoly.

Last summer, Conway said he asked the new FTC chairwoman, Edith Ramirez, to take a second look at the evidence from 2008 investigation. A year later, the FTC has not indicated whether it will act on the matter, Conway spokeswoman Allison Martin said.

“We don’t comment on whether we even have investigations going on,” FTC spokesman Mitch Katz told WDRB.

Last month, Conway’s office denied WDRB’s request under the Kentucky Open Records Act for a final report from his 2008 investigation, saying the “premature release” of records from the inquiry could “harm the Office’s ability to continue and complete its investigation.”

The denial is despite the fact that Conway said the investigation was “completed…in 2008” in his op-ed last summer.

Martin said records from the investigation can’t be released because it’s still possible that the FTC could act on the information. The agency has not affirmatively denied its interest, she said.

It’s also possible that, if federal regulators pass on the case, Conway’s office could bring a state-based legal action.

“Marathon is an interstate company, and as a result, our office is limited in what actions we can take related to antitrust violations. With that said, our office continues to explore any and all available avenues that may allow us to provide relief to consumers,” Conway spokesman Daniel Kemp said in a statement.

Conway has a separate case against Marathon that has been dragging on in state court for years. It began in 2007 when Conway’s predecessor, Greg Stumbo, accused the Findlay, Ohio-based company of violating Kentucky’s price-gouging law by jacking up the cost of gas in the wake of hurricanes Katrina and Rita in 2005.

Nothing has been filed in the court record of the price-gouging case since February 2012, according to Franklin Circuit Court. Neither side of the case will say why.

Kemp said the price-gouging litigation “remains active and ongoing.” Angelia Graves, a spokeswoman for Marathon, declined to comment on the case.

FTC looked at Louisville in late ‘90s

As part of the 2008 investigation, economists with Beshear’s office found that wholesale prices in Louisville from 2006 to 2008 were higher than in two other areas that also use the cleaner-burning reformulated gas: Northern Kentucky and Chicago.

During that period, the wholesale price in Louisville was $2.45 per gallon, compared to $2.37 in Northern Kentucky and $2.36 in Chicago.

Graves, the Marathon spokeswoman, noted that the FTC has studied the effect of Marathon’s merger with Ashland on Louisville prices.

That study, last updated in 2004, found no evidence of increased retail prices in Louisville during the two years following Marathon’s joint venture with Ashland – 1998 and 1999.

It did find that wholesale prices increased “significantly,” but because of “a regional supply shock” not related to Marathon and Ashland’s newfound market power.

In 2008, Conway said the FTC study was out of date and that the issue needed to be re-examined.

Matthew Lewis, a Clemson University economist who has studied gas pricing, said whether Louisville has a competitive market for wholesale gas is “kind of difficult question to answer” without a detailed study of all the players in the system – refineries, terminals, pipelines.

“What you really need to know is, how easily can other suppliers sell in that market if the price goes up? How easy is it to get competition there?” he said.

On a recent drive through Kentucky, Lewis said he found the high price of gas “a little surprising.”

Reformulated gas might limit market

At least part of the elevated cost in Louisville is reformulated gas, which is slightly more expensive to make. Kentucky began requiring the cleaner-burning blend in 1995 to reduce volatile organic compound emissions as part of complying with the federal Clean Air Act, said John Gowins of the state Division for Air Quality.

Estimates of the additional cost of producing reformulated gas, or RFG, range from 1 to 3 cents per gallon (Gowins) to 10 cents (Conway). Marathon’s Graves referred the question to the U.S. Environmental Protection Agency, where a spokesman said he would try to get an answer.

Without the cleaner-burning fuel in Louisville and Northern Kentucky, it would be very difficult for Kentucky to comply with federal clean-air standards, Gowins said.

But it’s “very plausible” that RFG reduces competition because there are only so many refiners for whom it “makes sense” to produce the particular blend of gas needed in Louisville or Northern Kentucky, Lewis said.

“That becomes a very small market of its own; you can’t substitute gas from Tennessee into there,” he said.

Beyond Louisville and Northern Kentucky, the next closest areas where reformulated gas must be sold are St. Louis and Chicago.

Lewis said a place as populous Chicago would presumably have more competitors producing its reformulated blend of gas.

The FTC acknowledged how Louisville’s market is limited by RFG in the 2004 study: “Louisville uses RFG, which makes arbitrage from nearby regions (that use conventional gasoline) more difficult.”

WDRB tried to contact FTC economists to talk about their work, but Katz said no FTC staff would be allowed to answer questions for this story.

Marathon’s Graves noted that RFG is required in markets like Chicago and the New England area, so “there are several other refiners that make these products.” She did not say whether any of those refiners serve the Louisville area.

In a statement issued through a spokesman, Beshear said it's important for business practices to be "fair, particularly when it comes to indispensable products like fuel," and he "worked diligently" with Conway, then-Louisville Mayor Jerry Abramson and U.S. Rep. John Yarmuth to investigate Louisville gas prices in 2008.

"I fully support efforts to protect citizens from inappropriate pricing of needed products, and expect the appropriate authorities will continue to monitor business practices of providers," Beshear said.

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