Hearings and Business Meetings

SD-106 02:30 PM

Mr. William Shipley III

TESTIMONY OF
WILLIAM S. SHIPLEY III
CHIEF EXECUTIVE OFFICER, SHIPLEY STORES, LLC
REPRESENTING
THE NATIONAL ASSOCIATION OF CONVNIENCE STORES
AND
THE SOCIETY OF INDEPENDENT GASOLINE MATERS OF AMERICA
AT A HEARNG OF
THE SENATE COMMITTEE ON ENERGY AND NATURA RESOURCES
ON
"GASOLINE PRICES AND FACTORS CONTRIBUTING TO CURRNT HIGH
PRICES"
September 6, 2005
I. Introduction
Good afternoon, Mr. Chainnan and members of the Committee. My name is Bill
Shipley. I am Chainnan and Chief Executive Officer of Shipley Stores, LLC, headquartered in .
York, Pennsylvania. I am proud to be the fourth generation leader of a family business started
by my great-grandfather in 1929. My company owns and operates 26 convenience stores and
supplies gasoline and diesel fuel over 100 retail locations throughout the south central
Pennsylvania.
I appear before the Committee today representing the National Association of
Convenience Stores ("NACS") and the Society of Independent Gasoline Marketers of America
("SIGMA").
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II. The Associations
NACS is an international trade association comprised of more than 2,200 retail member
companies operating more than 100,000 stores. The convenience store industry as a whole sold
142.1 billon gallons of motor fuel in 2004 and employs 1.4 million workers across the nation.
SIGMA is an association of more than 240 independent motor fuel marketers operating in
all 50 states. Last year, SIGMA members sold more than 58 billion gallons of motor fuel,
representing more than 30 percent of all motor fuels sold in the United States in 2004. SIGMA
members supply more than 35,000 retail outlets across the nation and employ more than 350,000
workers nationwide.
.~~
Together, NACS and SIGMA members sell approximately 80 percent of the motor fuel
retailed in the United States each year.
III. Summary of Testimonv
Thank you for inviting me to testify before you today on the impact of Hurrcane Katrina
on the nation's wholesale and retail motor fuel supply and prices. The past ten days have been
some of the most challenging in my twenty-five years as a motor fuel marketer and I welcome
this opportunity to share my personal experiences, and the experiences and impressions of other
NACS and SIGMA members with whom I have talked, with you.
As an initial matter, I would like to express my personal sympathy, and the sympathy of
our entire industry, for the victims of Hurcane Katrina. Individually and collectively, our
industry shares the suffering of our fellow citizens and will do all in our power to alleviate this
suffering at the earliest possible date.
My testimony will touch on three broad topics today. First, I will provide the committee
with as much infonnation as I have available on the impact of Hurrcane Katrina on gasoline
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supplies and prices. Specifically, I will share with you my personal experiences over the past ten
days and summarize, to the extent possible, the infonnation I have received from my fellow
retailers.
Second, I am here to respond to allegations that I, and my industry, have taken advantage
of this tragedy by "gouging" our customers by raising retail motor fuel prices. Such allegations
are personally offensive to me, and in general reflect a lack of understanding of the market
events that have led to the gasoline and diesel fuel price spikes of the last ten days. While it is
certainly possible that some "bad actors" have sought to exploit this crisis for personal gain, I can
assure you that their actions are not the actions of the vast majority of our industr.
Third, my testimony contains recommendations to the committee on steps that should be
taken to lessen the likelihood that such supply disruptions and wholesale and retail price spikes
will occur in the future. Unfortunately, these recommendations are remarkably similar to the
steps NACS and SIGMA have been urging public policymakers to take for the last ten years.
While the enactment of the "Energy Policy Act of 2005" earlier this summer was a good first
step towards implementing some of these recommendations, much remains to be done.
iv. Impact of Hurricane Katrina on Wholesale and Retail Gasoline Prices
For much of the eastern two-thirds of the nation, the impact of Katrina on wholesale and
retail gasoline prices could not have been more immediate and profound. I will leave it to other
witnesses here today to discuss the impact Katrina had on crude oil production and imports,
crude oil movements from production to refineries, domestic refining capacity, and the
movement of finished gasoline and diesel fuel throughout the country via pipeline, barge, and
truck. That is not my area of expertise. Instead, I will concentrate my testimony on my personal
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experiences over the past ten days as a marketer in Pennsylvania, and on the experiences of
fellow marketers in other areas over the past ten days.
It will be helpful for me to use several chars to graphically make these points. This first
chart (Chart 1) depicts the daily movements of wholesale prices in my south central
Pennsylvania market last week. This is the "rack," or wholesale price -- the price at which my
suppliers are willing to sell me, and other marketers, truckloads of 87 octane conventional
gasoline. As you can see, these wholesale prices increased daily, and dramatically, last week.
On August 28th, before Katrina struck, my wholesale gasoline cost was $2.44 per gallon
including federal, state, and local taxes. Early last week, as Katrina struck the Gulf Coast, these
wholesale prices jumped an average of over fifteen cents per day, for a total increase between
Monday, August 29th and Friday, September 2nd of75 cents per gallon.
I must point out that I am primarily a branded marketer -- the stations I own and supply
fly the flag of a major refiner. The wholesale prices in this chart reflect branded rack prices, not
unbranded, or independent, rack prices. However, I also operate two unbranded outlets. During
this same five day period, wholesale prices for these unbranded stores rose $1.00 per gallon, or
over 20 cents per day.
This second chart (Chart 2) shows how my company reacted to these rack price increases
in tenns of our retail outlet prices. As you can see, our retail prices in general rose by a similar,
and in some cases, lower amount than our wholesale costs. In short, my company reacted
primarily to changes in wholesale price increases when detennining where to set our retail
prices. In some cases, because of competition from other retailers in our market area, we did not
pass the entire increase in rack prices through to retaiL. On these days, virtually every gallon we
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sold from our stations resulted in no or negative profit margins for our company, once our
operating costs are taken into account.
My personal experience is similar to the experiences of other retailers across the nation.
NACS and SIGMA obtained rack pricing data from the Lundberg Survey, an independent report
on wholesale motor fuel prices, for several major metropolitan areas for last week. This chart
(Chart 3) provides a broader look at wholesale gasoline prices in the Philadelphia market last
week.
The next two chars (Charts 4 & 5) indicate that my experience in Pennsylvania was not
unique. Chart 4 summarzes the changes in rack pricing in each region of the country, broken
down by P ADD. As you can see, wholesale prices were up significantly last week in all areas of
the country. Chart 5 provides a look at wholesale rack prices last week in five randomly chosen
cities -- Atlanta, Boston, Dallas/Fort Worth, Detroit and Philadelphia. All of these cities
witnessed substantial increases in rack gasoline prices last week.
I have used these charts to provide you with detailed evidence that Katrina had a
widespread impact on gasoline prices in much of the country last week -- not just in the areas
devastated by the stonn itself. Because crude production was reduced, refineries crippled, and
gasoline pipelines were taken out of service, gasoline supply shortages began to occur, first in
areas close to the areas hit by Katrina and rapidly moving outwards to areas of the country
served directly or indirectly by the production, refining and transportation hub of the nation's
Gulf Coast.
.,
These statistics confinn that retail gasoline price increases last week were justified by
movements in the wholesale cost of gasoline. While two months from now hindsight may
provide us with additional facts that will indicate that the markets could have responded to this
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supply crisis differently, as we are going through this crisis, the fundamental laws of economics
tend to apply forcefully -- if demand remains the same or increases and supply is reduced, prices
will rise. This is the situation we have experienced for the last ten days.
v. Alle2ations of Price "Gou2in2"
Last week, there were widespread media reports, and even some comments by
congressional leaders, of gasoline price "gouging" by gasoline marketers in the wake of Katrina.
I can not assure the committee that all of these reports are false or that isolated instances of
profiteering for personal gain in the midst ofthis crisis did not occur last week. I wish I could.
However, I can tell you that such actions were not the nonn in our industry. The vast
majority of gasoline marketers are fair and scrupulous businesses. As my testimony has shown, I
personally responded to wholesale price hikes in my area in setting my retail prices. I am not
aware of any credible instance in which retail price increases were not justified by the supply
crisis faced by a retailer.
It is important for this committee to understand how I and other gasoline retailers
establish our retail prices in a market with escalating wholesale prices. Simply stated, I try to set
my prices on the basis of the replacement cost of the gallons I have at my outlets. This is an
important concept which may not be readily grasped. When wholesale prices are rising, and I
know that the next load of gasoline I purchase from my supplier will cost me substantially more
than my last load, my sales must generate sufficient cash for me to make that next purchase and
to pay my supplier.
For example, assume the gasoline at one of my retail stations cost me $2.00 per gallon
yesterday. I know that the next gasoline truckload from my supplier, to be purchased tomorrow,
will cost me $2.25 per gallon. I wil, if I can based on competition in my area, set a retail price at
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my outlet today that wil cover the higher price I will have to pay tomorrow. If I don't, I will be
forced to borrow money from my company's banks to pay for tomorrow's gasoline. Such debt
only increases my cost of staying in business and adds to the upward pressure on retail gasoline
prices. It is a sound business practice for a retailer to price today on the replacement cost of
gasoline at the outlet, not the cost of product actually at the outlet.
If instances of profiteering on this tragedy have occurred, federal and state officials have
ample legal recourse for dealÍng with those bad actors, including Section 5 of the Federal Trade
Commission Act. Such behavior must not be tolerated now or in the future in our industry or
any industry.
However, just as such behavior must not be tolerated in our industry, neither should the
media or other opinion leaders react to such anecdotal reports by issuing blanket indictments of
all motor fuel marketers. Such generalizations may make for good "sound bites," but they do not
reflect what is actually happening across the country and unfairly damage the reputations of
many companies that are struggling to meet the challenges of the current crisis.
If the only thing you knew about my company was that I raised by retail gasoline prices
by over 70 cents per gallon last week, would you suspect that I was attempting to profit from this
crisis? Maybe. But based on the infonnation I have given you today, I trust that you would
reach a different conclusion after you had investigated the facts. I urged this committee and your
colleagues to gather the facts on last week's gasoline supply and retail pricing situation before
reaching conclusions about my actions or the actions of other motor fuel marketers.
As a final point with respect to retail pricing, I have one more chart to share with you
(Char 6). This chart outlines the approximate gross revenues that several different parties in the
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petroleum exploration, refining, and distribution system realize from each barel of crude oiL.
Simply stated:
. In August 2003, the royalty owner of the crude oil received approximately $4 per barel;
in August 2005, the royalty owner received about $8 per barel;
. In August 2003, the crude exploration and extraction company was reCeIVIng
approximately $28 per barrel of oil; in August 2005, this company received about $67 per
barel;
. In August 2003, a refiner was receiving around $11 per barel; in August 2005, this
company received about $27 per barel;
. In August 2003, a gasoline retailer was receiving approximately $6 per barrel; in 2005,
that retailer still received about $6 per barrel; and,
. In August 2003, a credit card company was receiving approximately $1.50 per barrel; in
2005, that company is receiving approximately $3 per barreL!
Based on this infonnation, I question whether it is appropriate to single retailers out for pricing
scrutiny.
VI. Recommendations for the Future
In 1996, Tom Robinson, a fonner president of SIGMA, offered the following testimony
to this committee as part of a hearing on "Recent Increases in Gasoline Prices." "The federal and
state governents regulate the gasoline refining and marketing industry with little or no thought
given to costs, distribution diffculties, or market effciencies. Congress must acknowledge that.
. . the present course will lead to further market disruptions and higher gasoline prices at the
pump." Mr. Robinson made that statement over nine years ago.
Last year, Bill Douglass testified on behalf ofNACS and SIGMA at a House Energy and
Commerce Committee hearing on gasoline prices and stated:
"Our nation's gasoline and diesel refining industry is shrnking at a time when
consumer demand continues to rise. Unless we collectively change course, ..
i All information based on publicly available sources.
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domestic refining capacity will be unable to keep pace with demand, gasoline and
diesel fuel price spikes such as the one we have experienced this year will become
the nonn rather than the exception, and our nation will become more reliant on
imports of gasoline and diesel fuel to meet increased consumer demand in the
coming years. Congress has a choice, it can either pursue policies that will
encourage the expansion of domestic refining capacity, or it can turn its gaze
overseas for our nation's future gasoline and diesel fuel needs."
'.
Unfortunately, both Mr. Robinson's and Mr. Douglass' predictions have come true.
Domestic refining capacity continues to shrnk, wholesale and retail motor fuel price spikes have
become the nonn rather than the exception, and more of our nation's gasoline needs are being
met by foreign sources. NACS and SIGMA assert that it is time to stop talking about these
problems and do something about them.
In my opinion, the enactment of the "Energy Policy Act of2005" (EPAct 2005) is a good
first step. towards addressing these problems. I commend you, Mr. Chainnan, and your
colleagues for taking the lead in making this important legislation a reality after five long years.
Specifically, EP Act 2005 gave the Environmental Protection Agency the statutory authority to
waive certain gasoline and diesel fuel controls last week, providing the market with much needed
flexibility to move product between markets to mitigate supply disruptions. This is an
immediate example ofthe positive impact this energy bill has had on the market.
There are other important provisions in the 2005 energy bil that wil assist in expanding
domestic refining capacity and in mitigating gasoline supply dislocations and price spikes,
including:
. Repeal of the refonnulated gasoline program's oxygenate mandate;
. Restrictions on creation of new "boutique fuels" which strain refining capacity and the
distribution system;
. Authority for retailers to blend compliant RFGs for limited periods each summer; and,
. Federal tax incentives to encourage the expansion of domestic refining capacity.
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NACS and SIGMA urge this committee and this Congress to build on the progress made
through EP Act 2005 in the following ways:
. Assure prompt implementation of the EP Act 2005 provisions outlined above, including
the joint Environmental Protection Agency and Department of Energy study on
increasing gasoline and diesel fuel supplies while protecting the environment;
. Streamline pennitting and siting procedures for expanding existing domestic refining
capacity and for the construction of new grassroots refineries;
. Adopt additional tax incentives to expand our domestic refining capacity, or a federal
governent-led effort to site and build three new 500,000 barrels per day refineries on
federal lands to augment domestic production;
. Encourage increased price transparency and lower price volatility in the nation's gasoline
futures markets by increasing the number of delivery points and product types under such
contracts; and,
. Investigate the pricing policies of credit card companies, whose charges make up an everincreasing
portion of the price of gasoline at retail outlets, particularly when gasoline
prices are high.
None of these recommendations will result in a substantial short-tenn increase in gasoline
supplies or retail price decreases. However, if we do not undertake these initiatives now, we will
be sure to repeat the experiences of the ten days in the future.
VII. Conclusion
Thank you for inviting me to testify today on this important topic. I would be pleased to
answer any questions my testimony may have raised.