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Summer began this week, which means panic about rising gas prices—an annual tradition in the media—can’t be far behind. In the District, though, this year is a little different than usual: Some of the panic may be justified.
According to the American Automobile Association, gas in D.C. cost just a nickel more than the national average in 2007; on Tuesday, that gap had widened to 31 cents. If you drove across the border to Virginia, meanwhile, you could have filled up for 42 cents a gallon less for the same regular unleaded gasoline.
“Nothing explains this huge gap. All three of these jurisdictions [Maryland, Virginia, and D.C.] have been planets in the same obit” for decades until the District’s prices took flight four years ago, says John B. Townsend II of AAA Mid-Atlantic. Today AAA says D.C. has the second-highest gas prices in the continental United States, behind Connecticut. The only explanation, Townsend says, it excessive profit-taking.
Who is pocketing the profit, and what to do about it, is at the center of a dispute between a group of Exxon station operators; their embattled landlord, Joe Mamo, chairman of Springfield-based Capitol Petroleum Group, which today owns nearly half of all gas stations in the District; and the District government, where officials suddenly seem to be rethinking years of support for Mamo. Just ask Attorney General Irv Nathan, who’s investigating whether Capitol Petroleum violated antitrust rules, or the D.C. Council, which is considering legislation that would make it illegal for companies like Mamo’s to both supply and operate gas stations in the city. A similar law that used to be on the books was repealed in 2007—after a lobbying campaign by Mamo.
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Mamo says a small group of Exxon franchises are engaged in price gouging that’s inflated the citywide average cost of a gallon of gas, and insists that his company and other “jobbers,” as they’re known in the industry, are all that stand between District drivers and even higher gas prices. If he’s forced to sell some of his stations or move them to a franchise operating model, it would drive up prices, he says.
“These guys in wealthy neighborhoods that make a lot of money are using their councilmembers to eliminate competition,” Mamo says, leaving no doubt about what he thinks of the bill, introduced by Ward 3 Councilmember Mary Cheh.
But a council hearing last week featured testimony from antitrust experts who say Mamo’s company is the problem, not the solution. The reason gas prices have gone up here, the theory goes, is an unhealthy competitive landscape that emerged in the last five years or so as big oil companies sold off their retail stations to jobbers like Mamo.
Jobbers own most of the city’s gas outlets; Mamo’s 45 stations represent about 42 percent of city’s 108 stations. His company, and another that owns all two dozen BP stations, represent control of about 70 percent of the market.
That “tight duopoly” has diminished competition and driven prices higher, says David Balto, a senior fellow at the Center for American Progress and a former Federal Trade Commission lawyer.
“The history of the oil industry has been that this kind of vertical integration has been a problem,” he says. “The District needs to put a stop to it, or it’s only going to get worse.”
Mamo, a 44-year-old Ethiopian immigrant who started out with a single Amoco station on South Dakota Avenue NE two decades ago, built a huge empire quickly. In the last two years, Mamo has expanded to 164 stations in the D.C. region—about 25 percent of the total—plus 71 in New York City. In 2010, the company distributed 260 million gallons of fuel and earned approximately $778 million in revenues.
But the expansion in the District might not have happened without the council’s help four years ago, when lawmakers repealed legislation that had banned jobbers from operating stations (the law the council is now considering reinstating). Back then, the FTC put out an advisory ruling agreeing with Mamo: The ban would drive up prices. But Balto and Townsend told councilmembers last week that the agency got things wrong in 2007—and that subsequent price increases proved it.
For decades, the conventional wisdom has been that divorcement laws drive prices up, while jobbers lower them by keeping competition lively. But just like the FTC letter, those theories harkened back to the heyday of the Big Oil station. Nobody seems to have tested them out now that so-called “mega-jobbers” like Mamo dominate markets.
As last week’s hearing droned on for six hours, Mamo and his franchisee tenants swapped allegations and details about the costs of doing business. But the deluge of data brought little clarity. Both sides cherry-picked facts that made them look more like the victim in an increasingly no-holds-barred fight.
Team Mamo went so far as to make a slideshow out of some pretty sensitive competitive information on profits by several CPG tenants. The slides, however, left out a key figure: CPG’s markup for delivering the same gas. When pressed, Mamo later said it was about 30 cents a gallon—significantly higher than the 19 cents per gallon average Mamo usually quotes.
Meanwhile, Roland Joun, co-operator of the notorious Watergate Exxon, sputtered about price hikes and rent increases when asked why the station slaps $1.25 on every gallon. That’s 48 cents more profit than the second-most “gouging” gas station in Mamo’s slideshow.
Amid so much mudslinging, Robert Lande, board member of the American Anti-Trust Institute, says the best approach is to stop focusing on the individuals and look at the competitive picture. An anti-trust professor at the University of Baltimore law school who hasn’t taken a formal side in the fight, Landle says two companies that control 70 percent of the stations can influence each other’s pricing through casual observation, without ever resorting to anything illegal, such as collusion.
“You can’t play those mental games when you have 20 companies that each have 5 percent of the market,” he says.
No matter how the investigations play out, one thing’s for sure: None of it will help lower gas prices in D.C. this summer. Cheh says her bill probably won’t be up for a vote until the fall. Maybe it’s time to think about buying a bike.