A Penny Here A Penny There: Why Certain Stations Charge More For Gasoline [Commentary]

March 18, 2011

Have you ever noticed the differences in the price of gasoline around the state? We drive up to the pump nearest to our house and may pay five to twenty cents more per gallon than at the pump nearest to work. Why is this the case? Zone pricing.

Zone pricing is a gasoline industry practice of selling the same brands and grades of fuel to retail sellers at different prices depending on the ‘price zone’ in which the retail seller is located. These price zones are established by gasoline suppliers, not by law. Gasoline suppliers actually have the ability to establish as many or as few zones as they determine best suit their needs. To establish zones, factors such as competition, gas taxes, type of product, traffic patters, distance, natural barriers and roadways are all taken in to consideration. The act of creating zones based on geographical features and demand patterns is done to define an effective area of local competition.

Gas suppliers began zone pricing due to the enormous profits made by low-competition gas stations. By charging these types of stations more for gasoline, profits were shifted from the retailer to the wholesaler without cost to consumer. Suppliers have used zone pricing throughout the country for more than thirty years. And here in Connecticut, some have established nearly fifty zones.

This year, there are three bills before the General Assembly’s General Law Committee that would either ban the wholesale pricing of gasoline based on a service station’s geographic location, prohibit zone pricing, or eliminate it all together and then create a standard gasoline pricing model for the state. Supports of outlawing zone pricing argue that the current system is anticompetitive and particularly unfair to certain regions on our state. Folks living in Fairfield county are especially receptive to a ban as the cost of gasoline is continually higher downstate. Many stations in that area charge over fifty cents more per gallon, and proponents think a ban will level out the playing field. Others argue that zone pricing deters prospective retailers from entering a particular market.

There in no guarantee that enacting a ban will result in lower gas prices for residents. Opponents even argue that a ban would result in high gas costs overall. Many oil companies and distributors who currently offer price breaks to gas retailers in areas with a higher density of stations say that a ban will prevent this from occurring. Some also claim zone pricing is beneficial because it helps to lower gas prices along state’s borders.

The state of New York passed a bill placing a partial ban on zone pricing in 2008, making it the only state with such law. Studies have shown little effect on the overall costs of gasoline in New York since its implementation. Other states, like Maryland, have considered proposals and even set up task forces to study effects, but no legislature has passed a ban. In Connecticut, members of the General Assembly have been proposing legislation to ban, modify or investigate zone pricing since 1997, but all proposals have failed.

It is important that the legislature fully research all the effects of such a ban, especially considering current events. Governor Malloy has proposed adding an additional three cent tax on every gallon of gasoline we purchase, and the state and nation have grappled with an average forty cent increase in gas just in the past month due to political unrest and concerns from suppliers around the world. We need to be certain that maintaining zone pricing or banning it will have a positive reaction on Connecticut’s troubled economy. As always, as the legislative session continues, I remain committed to researching and supporting legislation that truly benefits our quality of life.