February 09, 2018

"Getting There" - Zone Pricing for Gasoline

Why does gasoline cost 52 cents a gallon more in Greenwich than Bridgeport?   Is it because folks in Greenwich are richer and can afford it?  Or is it because it costs gasoline station owners more to operate in that tony zip code?

While both factors are probably true, the reason gasoline costs more in some towns than in others is because of something called “zone pricing”, an industry practice that does all but set the price for the commodity that is charged by distributors and passed along to their customers.

Lawmakers have debated zone pricing many times in recent years, but it has never been killed. I wonder why, given its apparent unfairness.  But who’s to explain the mysteries of what our lawmakers do?

Let’s follow the gasoline distribution process to better understand price-setting.
An oil tanker arrives in New Haven and offloads its cargo (there are no pipelines to our state).  There are thirty gasoline distributors in Connecticut and as they truck their gasoline to gas stations, they obviously incur costs.

Big chains of gas stations can negotiate better deals than the independently owned stations.  So to compete “Mom and Pop” gas stations often sell snack foods and such.  In effect, your beef jerky is subsidizing your cheaper gasoline.

But it’s the secret zone pricing rules, set by the distributors, that breaks the state into about 50 different zones and determines how much station owners must pay for gasoline. Pricing is determined by traffic volume, nearby income levels, the competitive landscape and other factors.  And the gas station owner is making only seven cents a gallon profit.  But if the station owners must pay more for gasoline, so will you.

When he was Connecticut’s Attorney General, Richard Blumenthal called zone pricing “invisible and insidious”. Yet, the courts say its legal and the Federal Trade Commission says whatever costs are added in one zone are probably offset by discounts in another.  So it all averages out, right?

Gasoline distributors also say they need flexibility to offer lower prices to gas stations competing with super-discounters like Costco.  And they also remind us that other industries have their own answer to zone pricing:  like supermarkets that may charge less for the same product in Bridgeport than they do in Fairfield, right next door.

So while we may not be willing to drive five miles for a cheaper gallon of milk, we seem happy to go a few miles out of way to save ten cents per gallon of gasoline.  Fire up your “Gas Buddy” app and happy hunting. But remember, it your car only gets 20 mpg, driving ten miles for cheap gas will cost you a gallon on the roundtrip.  Some bargain!

The state also meddles with other kinds of pricing, like for liquor.  In fact, state law requires merchants to mark up prices to a minimum price per bottle, all in an effort to preserve Mom and Pop liquor stores. Why?  Because those merchants have better lobbyists.

We didn’t feel obliged to protect small town hardware stores when Home Depot and Lowes came to town.  But we do keep all sorts of prices in our state artificially higher than necessary to protect smaller merchants selling gas and liquor.

So is “zone pricing” for gasoline really unfair, or just a state sanctioned economic reality? 

Posted with permission of Hearst CT Media

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