Franchise agreement for nation's first E15 retailer in jeopardy

By Holly Jessen | March 19, 2013

The Renewable Fuels Association is calling for a multi-agency investigation after a recent incident involving Zarco 66 Inc., the convenience store company that opened the first E15 pump in the nation in July.

Zarco 66 has offered E85 at its gas stations for years, RFA said, but it wasn’t until after the company began offering E15 that the oil industry began viewing ethanol as more than a gimmick that could pose a threat to its monopoly on the transportation fuels market.  “ConocoPhillips quickly threatened to terminate Zarco 66’s franchise agreement and charge Zarco 66 hundreds of thousands of dollars in penalties unless Zarco 66 started offering ‘premium’ gasoline,” said RFA’s Bob Dinneen, president and CEO, “gasoline that would replace the ethanol housed in one of Zarco 66’s fueling tanks, and a gasoline that is likely to result in far fewer sales than the ethanol blends that would be available if Zarco 66 maintained the current ethanol contents.”

RFA sent a three-page letter to the U.S. EPA, Federal Trade Commission, U.S. DOE and USDA March 19, requesting each of the agencies investigate and put an end to the “oil industry’s highly discriminatory and unlawful conduct—conduct that is impeding the delivery of renewable fuels to the American marketplace,” the letter said. “Otherwise, Zarco 66 will simply represent the first casualty in the oil industry’s war against the marketing and delivery of cheaper, more sustainable renewable fuels.”

The station has two fuel tanks, one containing regular gasoline and a second one for straight ethanol, RFA explained. Zarco offers customers E85 by blending ethanol from the second tank using its blender pumps, which were installed with the help of a grant administered by the DOE. “For franchisees like Zarco 66, the message that the oil industry is delivering is loud and clear: Stop selling renewable fuels, or face the consequences,” Dinneen said in the letter.

At this point, Zarco 66 has not begun offering premium gasoline, Scott Zaremba, owner of Zarco 66, told Ethanol Producer Magazine.“ I am a true believer in energy independence, alternatives [and] domestic fuels, and I will continue to fight for that, because I believe that is what is in the best interest of our country,” he said.

Dinneen went on to say that, in the Zarco 66 situation, the oil industry is violating Section 1 of the Sherman Antitrust Act through a “tying” agreement. “Here, the oil industry is forcing fuel stations to purchase and carry a product that they otherwise do not wish to carry (premium gasoline) as a condition for purchasing and carrying the tying product (regular gasoline),” he said. “Because franchisees are locked into franchise agreements (and such a lock-in effect is magnified when, as in the case of Zarco 66, the oil franchisor changes the terms of the relationship midstream), an oil franchisor holds appreciable economic power over the franchisee, which it is using to force franchisees to purchase premium fuel that they might not otherwise wish to carry.”

In addition, the oil industry is well aware that most fuel stations have only two gasoline-devoted tanks, Dinneen said. In essence, requiring that a station sell premium gasoline, and therefore displacing ethanol, effectively takes ethanol—the oil industry’s competition—out of the picture.

RFA also said the oil industry’s conduct violates the Gasohol Competition Act of 1980 and the policies of the Petroleum Marketing Practices Act. “The story of a Lawrence, Kansas, fuel station illustrates just how far Big Oil will go to obstruct congressional purposes in enacting the [renewable fuel standard], limit the availability of renewable fuels in the  American marketplace, and, not coincidentally, bolster their campaign to repeal the RFS altogether.”

For more information, see the full text of the letter.