Costco Caves on 'Hot Fuel'

Industry says issue "without merit," calls big-box retailer's settlement "bogus"

Greg Lindenberg, Editor, CSP

KANSAS CITY, Mo. -- While a consumer group is hailing the deal as a victory, an industry representative said Costco Warehouse Inc.'s settlement over "hot fuel" is "entirely bogus" and "completely without merit." Costco has agreed to change how it sells fuel to adjust prices when fuel temperatures rise above 60 degrees. The agreement, filed with the U.S. District Court of Kansas, would end its involvement in a lawsuit filed by consumers who allege U.S. oil companies and gasoline retailers have overcharged consumers by selling "hot" fuel that contains less energy.

The group [image-nocss] Consumer Watchdog applauded the discount chain's move. But Holly Alfano, vice president of government affairs for the National Association of Truck Stop Operators (NATSO), told CSP Daily News that automatic temperature compensation (ATC) at the retail level is not currently legal, and if it becomes legal, will end up costing consumers more at the pump.

Under the agreement, which requires a judge's approval, Issaquah, Wash.-based Costco, which sells fuel at about half of its more than 400 U.S. locations, would install pumps in 14 southern and southwestern states that adjust the price of fuel when temperatures rise above the industry standard of 60 degrees. It would also install the equipment at locations in seven other states and the District of Columbia if it ever begins buying temperature-adjusted fuel wholesale in those areas. The 14 states are Alabama, Arizona, California, Florida, Georgia, Kentucky, Nevada, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Utah and Virginia. The seven states are Indiana, Kansas, Maryland, Missouri, New Jersey, Oregon and Pennsylvania, as well as the District of Columbia.

Alfano, who faulted the media, and especially The Kansas City Star, for biased reporting, said the newspaper "has misrepresented and ignored any facts presented in this case." She added that it is "trying to position this as Big Oil versus the consumer, and that Big Oil has been ripping off the consumer.... They claim that retailers are raking in millions of dollars of profit on these 'expanded gallons'--particularly in the South. People are not raking in money in the hot states. Typically, that's where margins are actually lower."

She said that ATC has not been approved by the National Conference on Weights & Measures (NCWM), which is scheduled to vote in July on ATC. The NCWM previously rejected a proposal to require ATC at retail dispensers. (Click here to view previous coverage and testimony.)

"If ATC were installed on a fuel dispenser, based on the temperature of the fuel, it would change the size of the gallon. So based on temperature, they might get a little more or a little less product. The California Energy Commission found that if the retailer gives the consumer a larger gallon, the per-gallon price is going to go up. You give someone more, they pay more. Retailers can put in ATC, but at the end of the day, consumers will pay for any additional product they get, because the retailer is just trying to stay in business. They also found that consumers would pay for the cost of the equipment, because you can't stay in this business unless you are able to pass your costs on. [The media and others are] ignoring these facts," said Alfano.She added, "Under current law, ATC is not approved or allowed as a method of sale for gasoline or diesel fuel. The National Conference on Weights and Measures is only now considering whether to change the law to allow or mandate ATC. Under the settlement agreement, unless NCWM or individual states take action to change the law to allow ATC, Costco is not obligated to install ATC."

The California Energy Commission has determined that the costs of upgrading gas stations in that state with ATC equipment would offset any benefits to consumers. (Click here to view previous coverage and the full report.)

Further, a report released by several industry groups also determined that consumers are not being overcharged for gasoline and diesel fuel, and that requiring retailers to ATC equipment will increase costs to consumers.

The report, prepared by Mike Flynn, principal at global economic and financial consulting firm LECG Inc., was commissioned by the National Association of Convenience Stores (NACS), the Petroleum Marketers Association of America (PMAA), the Society of Independent Gasoline Marketers of America (SIGMA) and NATSO.The report found there are no excess profits generated by retailers selling motor fuels from dispensers not equipped with ATC devices; retail prices already reflect the volumetric effects of temperature on motor fuels; the use of ATC devices will not provide consumers with additional fuel at unchanged prices; consumers will pay the same amount for the same quantity of fuel regardless of unit size; and consumers' fuel expenditures will increase because they will pay for the costs associated with installation, maintenance and regulation of ATC equipment. (Click here to view previous coverage and the full report.)

Dan Gilligan, president of PMAA, characterized Costco's decision a "PR stunt" and doubted it would affect the outcome of the lawsuits. "Temperature never enters into retailers' pricing decisions," Gilligan told AP. "Consumers are getting the best price every single day regardless of temperature." He also noted that few states have standards for temperature-adjusted fuel pumps. "If Costco installs [that equipment] without regulation, it gives them a great opportunity to cheat consumers," he said.

"Any effort that will require retailers to install ATC equipment will have a major negative impact," Jim Smith, president and CEO of the Florida Petroleum Marketers & Convenience Store Association (FPMA), told CSP Daily News. "The cost of installation and maintenance is heavy. Here in Florida, we are already dealing with unfunded mandates for generator capable facilities and mandatory installation of double-wall underground storage tanks. In the current economic times, another mandate will cripple small retailers--particularly a mandate that is not ultimately good for the retailer or the consumer..... This is simply a matter of trial lawyers looking for easy money. Costco rolled over for public relations and nothing more."

Peter Horrigan, president of the Mid-Atlantic Petroleum Distributors Association (MAPDA), added, "This completely false premise is costing my members many thousand of dollars and a significant amount of time in defending the issue."

The petroleum industry has formed the Partnership for Uniform Marketing Practices (P.U.M.P.) Coalition to ensure fair competition, cost-effective distribution and equitable treatment of consumers in addressing the issue of temperature variation in the sale of gasoline and diesel fuels. (Click here to view a list of members.)

Jeff Cole, vice president of gasoline operations, said in a statement that the company entered the agreement "believing that some of our members may appreciate the additional transparency associated with selling gasoline in this fashion, not because such a step is or has been required by law or because our prior dealings with our members concerning sales of gasoline have been unlawful or deficient."

Bob Horn, one of the plaintiffs' attorneys, said he planned to talk with other defendants soon to see if they're willing to make similar settlements. "We certainly hope it has a positive effect on the rest of the defendants to consider using [ATC] pumps for their different retail outlets," he told AP.

Federal officials have consolidated dozens of lawsuits from consumers across the country in the Kansas City court.

Click hereto read Costco's Stipulation of Class-Action Settlement.