Will Connecticut get squeezed at the pump?

Though motorists could be seeing some modest relief at the pumps by Memorial Day, the gradual rise in oil prices over the past year has gasoline marketers and retailers pressing for new safeguards against price gouging – by both private corporations and state government.

Associations representing 560 petroleum marketers and 450 gasoline station owners recently wrote Gov. M. Jodi Rell urging her to sign legislation that defines when businesses sale gasoline at an “unconscionably excessive price.”

The Independent Connecticut Petroleum Association and the Gasoline & Automotive Service Dealers of America also want the state legislature to convert a volatile wholesale gasoline tax – which spikes as fuel prices rise – into a fixed levy.

“We all use the term ‘gouging,’ but now that it’s defined we can do something about it,” Michael J. Fox, executive director of the Stamford-based GASDA, said Wednesday. “It will absolutely have an impact on controlling prices in the long-term.”

gas prices 5-14-10

The measure is aimed at big companies that gobble up large shares of the petroleum market through mergers or acquisitions, and tries to assess when profit margins are inflated excessively due to a lack of competition, rather than extraordinary circumstances such as weather conditions, accidents, strikes or civil disorders.

Under current law, companies cannot sell gasoline for an “unconscionably excessive price” during periods of “abnormal market disruption,” but that excessive price is undefined. Patterned after a Federal Trade Commission test for market concentration, the bill defines a company’s “unconscionably” excessive profit margin as one that exceeds the top profit rate achieved in the 90 days prior to any abnormal market disruption.

Current law allows for civil penalties up to $10,000 for firms guilty of gasoline price-gouging. The bill also allows a fine up to $2,000 for companies that fail to cooperate with the attorney general’s investigation of suspected gouging.

Rell’s spokesman, Adam Liegeot, said Wednesday that the governor has not taken a position on the bill yet.

But Rell raised concerns about gasoline price-gouging back in 2008, shortly after the fuel prices set a record high, setting up a hotline for consumers to report unwarranted spikes.

“I don’t see any reason why anyone wouldn’t support it,” said Sen. Thomas Colapietro, D-Bristol, co-chairman of the General Law Committee, which first raised the measure.

The House of Representatives approved the bill 106-36 while the Senate adopted it unanimously.

Fox said years of consolidation have allowed industry giants to artificially inflate their profit margins. “They build up their cash reserves, buy out their competitors and fatten the wholesale margin.”

But Steven Guveyan, executive director of the Connecticut Petroleum Council, said the bill unfairly singles out an industry with no evidence of wrongdoing to support that action.

“There has been no showing of any monopolistic behavior,” said Guveyan, whose group represents major oil companies, refiners and terminal operators. “Why do we have a bill singling out one industry? They seem to have picked on gasoline and no one else.”

Guveyan added that the Federal Trade Commission and U.S. Department of Justice already oversee a similar process to guard against price-gouging, making the Connecticut proposal redundant and unnecessary.

But Fox said Connecticut consumers need more safeguards, and not just against private companies.

Fox, who referred to state government as “the biggest price gouger in Connecticut,” said the legislature needs to cap a volatile wholesale fuel levy that has the potential to add several cents per gallon to gas prices in a matter of months during times of spiking prices.

Unlike the fixed, 25-cents-per-gallon retail tax imposed on gasoline sales, the state also imposes a 7 percent levy on gasoline and other fuels, but not on home heating oil.

According to the ICPA, the average wholesale price at New Haven harbor – the single-largest fuel importing site in Connecticut – stood at $2.23 on Wednesday.

Based on that average and the 7-percent rate, the tax adds 15.6 cents per gallon to the price.

Further complicating matters, the state allows fuel distributors, who actually collect and pay the wholesale tax, to pass the cost along to station owners by building an even higher, 7.53 percent rate into their bill. This is part of a complicated system, affirmed by the state Supreme Court in 1987.

For example, a distributor who plans to sell $1,000 worth of gasoline to a station owner would owe $70 in taxes to the state. But the distributor wants the station owner to cover that $70.

So the Department of Revenue Services allows the distributor to bill the owner for $1,075.30 instead of $1,000. That’s enough to cover the 7 percent tax applied both to the base charge of $1,000, and to the $70 extra fee imposed to pass the tax burden onto the retailer.

Sound confusing?

What’s less confusing, Fox said, is that station owners almost universally pass along that entire wholesale tax, which, according to the ICPA, now stands at 16.7 cents after the inflated rate is applied, to the consumer.

Combined with the 25-cent retail gasoline tax, and a fixed, 18.4-cent federal fuel tax, and Connecticut motorists are paying just over 60 cents per gallon. Based on the Connecticut AAA’s average retail price for unleaded gasoline of $3.08 per gallon, nearly one-fifth of the total price is tied to state and federal taxes. Connecticut’s average retail price exceeds the national average of $2.89 by 19 cents per gallon.

That tax burden – which already ranks fourth-highest in the nation according to the American Petroleum Institute – would be far worse if wholesale prices get back to where they stood in July 2008.

At that time, wholesale prices in New Haven hovered around $3.50 per gallon, and Connecticut set a record-high retail price of $4.39. State taxes alone comprised nearly 52 cents, including a 26-cent wholesale levy.

There has been some good news in the short-term.

The U.S. Energy Information Administration reported the price of crude oil has fallen to around $75 per barrel, down from about $87 in April, pushed down by concerns about the strength of the global economic recovery.

But federal analysts also warn that as crude oil inventories fall, retail gas prices could rise back toward $3 per gallon and higher this summer.

Though the ICPA doesn’t make fuel price forecasts, association Vice President Chris Herb said that when wholesale prices spiked here two years ago, “gas taxes rose quickly and exponentially punished” consumers.

The wholesale tax rose to $335 million in the 2007-08 fiscal year, more than 180 percent the amount expected this year.

And with the next governor and state legislature facing a projected $3.37 billion shortfall in the 2011-12 fiscal year, could they be hoping for a wholesale price spike – and a corresponding state tax windfall?

“The gross receipts tax shouldn’t be used to balance the budget,” Fox said, adding those few consumers who know of it assume fuel revenues either support transportation improvements, or help cover the cost of fuel spill clean-ups. Legislators “like that tax because people blame someone else when the price of gas goes up,” he added.

The solution, according to both Fox and Herb, would be to settle on a fixed wholesale tax. On this issue, the retailers, marketers and big oil companies all agree.

“We’re fine with converting the (wholesale) tax to a flat number,” Guveyan said. “That way everyone will know what the number is. It will be predictable.”

Rep. Cameron C. Staples, D-New Haven, co-chairman of the legislature’s Finance, Revenue and Bonding Committee, said “I think people are willing to look at” a flat wholesale tax. “There’s no question that the volatility of any tax creates problems for our budgets. The hard part would be: What would you set the rate at?”