oversight

Gasoline Marketing: Consumers Have Limited Assurance That Octane Ratings Are Accurate

Published by the Government Accountability Office on 1990-04-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 IJnited   States   General   Accounting   Office

GAO              Report to ~n~ssional                        Requesters




April   1990
                 GASOLINE
                 MARKETING
                 Consumers Have
                 Limited Assurance
                 That Octane Ratings
                 Are Accurate

                                                                              T&
                                                                    I 11
                                                                     141203




GAO/RCED-90-50
    Resowces, Community,   and
    Economic Development   Division

    B-227776
    April 16,199O

    The Honorable Philip R. Sharp
    Chairman, Subcommittee on Energy and Power
    Committee on Energy and Commerce
    House of Representatives
    The Honorable Charles E. Schumer
    House of Representatives
    As you requested, we reviewed the Federal Trade Commission’s(FK) and the Environmental
    Protection Agency’s (EPA) implementation of the Petroleum Marketing Practices Act’s
    gasoline octane certification and posting requirements. This report discusseswhether the
    act’s objective of providing consumerswith accurate information about gasoline octane
    ratings is being met.
    As arranged with your offices, we plan no further distribution of this report until 30 days
    from the date of this letter. At that time, we will send copies to the Chairman, FTC,the
    Administrator, EPA, and other interested parties. We will also make copies available to others
    upon request.
    This work was done under the direction of Victor S. Rezendes,Director, Energy Issues,(202)
    2751441. Other major contributors are listed in appendix I.




V   J. Dexter Peach
    Assistant Comptroller General
l!Cxecutive


                   A major concern of consumersbuying gasoline is that they purchase a
Purpose            gasoline with an octane rating that meets their vehicles’ octane require-
                   ments. In 1978, the Congressenacted the Petroleum Marketing Practices
                   Act to provide a uniform nationwide system for posting accurate octane
                   ratings at the point of sale (on the pump), informing consumersof the
                   octane rating of the gasoline they were purchasing. The act requires the
                   Environmental Protection Agency (EPA) and the Federal Trade Commis-
                   sion (FTC),respectively, to test the octane ratings and enforce compli-
                   ance with the act. The Chairman, Subcommittee on Energy and Power,
                   House Committee on Energy and Commerce,and Representative Charles
                   E. Schumer asked GAO to determine (1) the effectiveness of the act in
                   ensuring that octane ratings are posted accurately, (2) the extent and
                   source of any octane mislabeling-the sale of gasoline with an octane
                   rating lower than posted on the pumps-in the gasoline distribution sys-
                   tem, and (3) the appropriate federal role in ensuring that octane ratings
                   are posted accurately.

                   Gasoline is generally sold to consumersin three different octane
Background         levels-87,89 and 91 or above. The price of gasoline is tied to the
                   octane level; higher octane gasolinescost more then lower octane gaso-
                   lines. As gasoline is refined and transported through a complex distribu-
                   tion system to retail stations, gasoline octane can be accidentally or
                   intentionally mislabeled. For example, gasoline labeled as 89 octane
                   might be lower in octane than the posted rating. The lower octane could
                   result in reduced vehicle engine efficiency, possible engine damage,and
                   increased emissions.In addition, the consumer would be paying for
                   octane that is not received. To guard against mislabeling, the act
                   requires the determination and certification of octane levels at the time
                   gasoline leaves the refinery and at subsequentpoints in the distribution
                   system and the posting of octane ratings at the gasoline pump. In addi-
                   tion to EPA and FM:responsibilities to enforce accurate octane postings,
                   20 states, on their own initiative, also test octane ratings.


Results in Brief   BecauseFTC and EPA have not carried out their octane testing and
                   enforcement responsibilities under the act, there are no federal controls
                   to ensure that gasoline octane postings are accurate. Although nation-
                   wide information on the accuracy of octane ratings is not collected at
                   the federal level, industry and state information indicates that octane
                   mislabeling is a problem in somestates. While this information is not
                   sufficient to determine the nationwide extent or source of mislabeling, it



                   Page 2                         GAO/RCED-90-60Gasoline Marketing: Octane Labeling
                        indicates that consumersmay be paying millions of dollars each year for
                        gasoline with lower octane levels than what is posted on the pump.
                        GAO also is concernedthat   the act lacks provisions for posting octane
                        ratings for gasoline-alcoholblends and has other provisions that may
                        interfere with state octane enforcement efforts. GAO believes that
                        options exist for redefining federal responsibilities for implementing the
                        act in a way likely to result in greater assurancethat posted octane rat-
                        ings are accurate.


Principal Findings

Extent of Mislabeling   FIGhas not monitored compliance with the act’s octane posting require-
Unknown                 ments or prosecuted violators, nor has EPA tested octane ratings at retail
                        stations since 1981. FM:and EPA officials cited staff and budget cuts as
                        reasonsfor not implementing the act’s requirements. EPA officials also
                        said that during the period in which they tested octane, FE never used
                        the test results to prosecute violators.
                        EPA compiled data   for GAO from biannual gasoline quality surveys con-
                        ducted between 1979 and 1987 by the Motor Vehicle Manufacturers
                        Association. The surveys cover markets representing over 90 percent of
                        the total domestic gasoline consumption. An analysis of these data
                        revealed that over 9 percent of the gasoline sampled was mislabeled by
                        more than one-half point below the posted octane rating. Any mislabel-
                        ing can result in consumerspaying a significant amount for octane they
                        do not receive. For example, assuming that 9 percent of gasoline sold in
                        1988 was mislabeled by only one-half octane number, GAO estimates that
                        consumerscould have paid about $160 million for octane they did not
                        receive.
                        GAO obtained test  results from 11 of the 20 states that test octane and
                        found that in the majority of these states mislabeling was less than 2
                        percent for the 1986-1988period of GAO'S review. Officials from these
                        states attribute the low rate of mislabeling to their state octane testing
                        programs. On the other hand, officials in seven states GAO visited that do
                        not have an octane testing program believe that mislabeling is a problem
                        in their states. One-time tests of gasoline octane levels in four of these
                        seven states, including tests conducted for GAO by EPA primarily in two
                              .      I *
                                                                                                 ,
                         Exeentive   Snmmary




                         areas in two states, revealed that mislabeling of gasoline samples ranged
                         from 22 to 63 percent.
                         While mislabeling may occur at any place in the gasoline distribution
                         system, there is more potential for it to occur at distributors or retail
                         stations than at refineries, pipelines, or bulk terminals, becausethese
                         latter locations are covered by extensive quality control programs that
                         include frequent testing of octane ratings. Few distributors or retailers
                         test octane ratings, primarily becauseof the cost,


The Act’s Restrictions   FTChas taken a narrow interpretation of the act and limited its applica-
                         tion to traditional gasoline fuels and excluded the newer gasoline-alcohol
                         blends from the act’s octane posting requirements. As the use of these
                         and other alternative fuels is increasingly required in urban areas to
                         reduce air pollution, consumerscould be without information on the
                         octane levels of these newer fuels.
                         Further, the act authorizes only limited civil remedies and penalties for
                         mislabeling violations and appears to preempt any applicable state or
                         local enforcement provisions differing from those of the act. Officials
                         from states that test octane ratings believe other remedies and penalties
                         can be more effective and cost-efficient in ensuring that posted octane
                         ratings are accurate but expressedconcern that such actions could be
                         challenged as being outside the authority of the act. For example, stop
                         sale orders, although not allowed under the act, are used by some states
                         to immediately halt the sale of mislabeled gasoline.


Federal Role             According to FTCand EPA, monitoring compliance with the act and prose-
                         cuting violators are not possible without additional funds-a problem
                         given the current budget deficit. Neither FTC nor EPA had an estimate of
                         how much it would cost to carry out their testing and enforcement
                         responsibilities. Since about half the states currently have or are consid-
                         ering instituting octane testing programs, there may be options involv-
                         ing both federal and state efforts for carrying out the act’s objectives.
                         State officials interviewed in GAO'S review indicated an interest in such
                         an approach.




                         Page 4                         GAO/RCED&O-SO
                                                                    Gasoline Marketing: Octane Labeling
                         Executive Summary




                         GAO recommendsthat    the Congressamend the Petroleum Marketing
Recommendationsto        Practices Act to
the Congress
                     . include octane certification and posting requirements for gasoline-alco-
                       hol blends and other alternative motor fuels that may becomeavailable
                       to reduce air pollution and
                     . make it clear that states may employ a range of remedies broader than
                       those available under the act to enforce octane posting requirements.

                         GAO recommendsthat     the Chairman, FTC,and the Administrator, EPA, in
Recommendationsto        consultation with the appropriate congressionalcommittees and the
the Federal Trade        states take the following actions:
Commission and the     Develop and assessoptions that could be employed to monitor compli-
Environmental        l


                       ante with the act’s octane certification and posting requirements. Such
Protection Agency      options should include a total federal role, joint federal-state roles, and a
                       total state role.
                     . Report the results of their evaluations and their recommendations, along
                       with funding requirements and recommendations for any neededlegisla-
                       tive changes,to the Congress.


                         GAO discussedthe   information contained in this report with FTCand EPA
Agency Comments          officials and incorporated their comments where appropriate. Agency
                         officials generally agreed with the accuracy of the information pre-
                         sented relating to their agency’s activities. However, as requested, GAO
                         did not ask either agency for official written comments on this report,




                         Page5
Contents


Executive Summary                                                                                  2

Chapter 1                                                                                          8
Introduction             Octane Ratings
                         Federal OctanePosting Requirements
                                                                                                   8
                                                                                                   9
                         State Octane Testing                                                     10
                         Objectives,Scope,and Methodology                                         12

Chapter 2                                                                                         16
Mislabeling Occurs but   Federal and Industry Mislabeling Information
                         State Mislabeling Information
                                                                                                  16
                                                                                                  16
Extent Is Unknown        Sourcesof Mislabeling in the Distribution System                         20
                         Impact of Mislabeling on Consumers                                       26
                         Conclusions                                                              26

Chapter 3                                                                                         27
FTC and EPA Have         PMPA Not Fully Implemented
                         Posting Requirement Only Covers Gasoline
                                                                                                  27
                                                                                                  29
Not Effectively          PMPA May Interfere With State Enforcement Efforts                        30
Implemented the          Options to Implement Monitoring and Enforcement                          31
Pe&oleum Marketing       Conclusions                                                              33
                         Recommendationsto the Congress                                           34
Practices Act            Recommendationsto the Federal Trade Commission and                       34
                             the Environmental Protection Agency

Appendix                 Appendix I: Major Contributors to This Report                            36

Related GAO Products                                                                              40

Tables                   Table 1.1: Octane Ratings and Market Sharesof the Four                    8
                             Most Common GasolineGradesSold in 1988
                         Table 2.1: Mislabeling in 11 States That Test Octane                     17
                             Ratings for the Years 1986-88
                         Table 2.2: Oregon and TennesseeOctaneTest Results                        18
                         Table 2.3: Michigan and Missouri OctaneTest Results                      19

Figures        y         Figure 1.1: Federal Octane Rating Label                                  10
                         Figure 1.2: States With OctaneTesting Programs                           11
                         Figure 2.1: Domestic Gasoline Distribution System                        21


                         Page 0                       GAO/RCED-BMOGasoline Marketing: Octane Labeling
Abbreviations

API         American Petroleum Institute
EPA         Environmental Protection Agency
FIT         Federal Trade Commission
GAO         General Accounting Office
MVMA        Motor Vehicle Manufacturers Association
PMPA        Petroleum Marketing Practices Act
RCED        Resources,Community, and Economic Development Division


Page7                         GAO/lKXD-B&50 Gasoline Marketingz Octane Labeling
Chapter 1

Introduction


                                       In 1988 millions of American consumerspurchased over 113 billion gal-
                                       lons of gasoline. A major concern of consumerswhen buying gasoline is
                                       that they purchase a gasoline with an octane rating that meets their
                                       vehicles’ octane requirements. The price of gasoline is tied to the octane
                                       rating-higher octane gasolinescost more than lower octane gasolines.
                                       In 19’78the Congressenacted the Petroleum Marketing Practices Act
                                       (PMPA), in part, to provide a uniform nationwide system for posting
                                       octane ratings at the point of sale (on the pump) so consumerswould be
                                       informed of the octane rating of the gasoline they were purchasing.


                                       Octane is a rating applied to gasoline used in spark ignition engines’ that
Octane Ratings                         indicates their resistance to engine knock: the higher the rating, the
                                       greater the resistance to engine knock. Engine knock is a metallic “ping-
                                       ing” or “knocking” noise causedby improper combustion; instead of
                                       burning smoothly, a portion of the fuel-air mixture explodes prema-
                                       turely in the engine cylinder.

                                       Table 1.1 shows the typical octane ratings and market shares of the four
                                       most common gasoline grades sold in the United States in 1988, accord-
                                       ing to information compiled from industry market surveys.
Table 1.1: Octane Ratings and Market
Shares of the Four Most Common                                                                                 Octane       Market share
Gasoline Grades Sold In 1988           Gasoline grade                                                           rating         (percent)
                                       Unleaded
                                         Premium unleaded                                                       91-94                    28
    /                                    Midgrade unleaded                                                          89                    5
                                         Reaular unleaded                                                           87                   54
                                       Leaded
                                         Regular leaded                                                             89                   13




Engine Octane                          The octane requirements of enginesvary. In general, higher perform-
Requirements Vary                      ance and higher compressionengineshave higher octane requirements
                                       becausethey have higher internal operating temperatures. Most auto-
                                       mobiles sold in the United States are equipped with engines designedto
                                       use 87 octane (regular) unleaded gasoline.



                                       ‘The vast majority of motor vehicles in the United States are powered by such engines; the remainder
                                       are powered by diesel engines.



                                       Page 8                                    GAO/RCED-90-50Gasoline Marketing Octane Labeling
                         Chnptm 1
                         Introduction




                         Octane requirements also vary depending on driving conditions.
                         Requirements are lower for moderate driving conditions, such as driving
                         at a constant speedon a level road, and higher under stressful driving
                         conditions, such as during rapid acceleration or pulling a heavy load up
                         a hill. Similarly, octane requirements vary depending on environmental
                         conditions, such as altitude and temperature.


Consumers Need to Know   Consumersneed to buy gasoline with an octane rating that matches
Octane Ratings           their engines’ octane requirements. Buying gasoline with too little octane
                         can causeengine knock, which can damage an engine, lower engine effi-
                         ciency, reduce mileage, and increase emissions.On the other hand, buy-
                         ing gasoline with more octane than neededgenerally doesnot increase
                         engine efficiency or power, and since higher octane gasoline has a
                         greater retail price than lower octane gasoline, consumerspay for
                         octane they do not need. As gasoline is refined and transported through
                         a complex distribution system to retail stations, gasoline octane ratings
                         can be accidentally or intentionally mislabeled. For example, gasoline
                         labeled as 89 octane might be lower in octane than the posted rating. As
                         discussedpreviously, octane lower than neededcould have harmful
                         effects, Unfortunately, consumerscannot determine octane ratings visu-
                         ally or in other ways that allow them to know if they are getting what
                         they are paying for. Assurancesare therefore neededthat octane rat-
                         ings are accurate.

                         The Congressenacted PMPAin 1978, in part, to provide consumerswith
Federal Octane           information about the octane ratings of the gasoline they were buying.
Posting Requirements     Before the enactment of PMPA,octane posting was not universal or
                         uniform.
                         Title II of PMPAdirects the Federal Trade Commission(IWC)to promul-
                         gate a rule to implement and enforce a uniform nationwide system of
                         octane posting, to monitor the accuracy of posted ratings, and to prose-
                         cute violators. FTCwas given this role becauseit had the responsibility
                         for enforcing regulations prohibiting unfair or deceptive acts in com-
                         merce under the Federal Trade CommissionAct. PMPAalso directs the
                         Environmental Protection Agency (EPA) to test the octane ratings of gas-
                         oline samplestaken from retail stations nationwide and to report the
                         results to FTC. EPAwas given the sampling and testing duties to minimize
                         the cost of the program. EPAat that time was sampling and testing gaso-
                         line to enforce its gasoline lead content regulations.



                         Page 9                        GAO/WED-90-50 Gasoliue Marketlug: Octaue Labeliug
                                            Chapter 1
                                            Introduction




                                            Title II of PMPA also
                                          . requires (1) refiners and importers to determine and certify octane rat-
                                            ings to their customers,(2) distributors to certify octane ratings to their
                                            customers, and (3) retailers to post octane ratings on their pumps;
                                          9 requires automobile manufacturers to discloseengine octane require-
                                            ments to consumersby posting a label in the vehicle or by including the
                                            information in the vehicle owner’s manual;.and
                                          . authorizes FTCto seek civil penalties in federal district court against vio-
                                            lators of up to $10,000 per violation under provisions of the Federal
                                            Trade CommissionAct.
                                            Figure 1.1 shows an example of the label gasoline retailers are required
                                            to post on their pumps.
Flgure 1.1: Federal Octane Rating Label



                                                                       MINIMUM OCTANE RATING
                                                                                    (R + M)/2 METHOD




                                                                                 89
                                            Note: Labels are bright yellow with black lettering.

                                            Source: 16 C.F.R. 306.11



                                            In addition to the federal testing and enforcement requirements, 20
State Octane Testing                        states test gasoline octane ratings through their own initiative to ensure
                                            that posted ratings are accurate (see fig. 1.2). Someof these states have
                    4                       their own gasoline testing laboratories, while others contract with other
                                            states’ laboratories or with private laboratories. Somelocal governments



                                            Page 10                                       GAO/RCRD-90-50Gasoline Marketing: Octane Labeling
                                           Chapter 1
                                           Introduction




                                           also test octane ratings. Most state and local octane testing predates
                                           PMPA.

Figure 1.2: States With Octane Testing Programs




                                             I       No Octane Testing Program
                                                     Octane Testing Program in Effect




                                           Thirty states and the District of Columbia do not test octane ratings.
                       Y
                                           However, 13 of these states are considering such testing.




                                           Page 11                                      GAO/RCED-90-50GasoWe Marketiugz octane Labeliug
                            Chapter1
                            Introduction




                            The Chairman, Subcommittee on Energy and Power, HouseCommittee
Objectives, Scope,and       on Energy and Commerce,and Representative Charles E. Schumer asked
Methodology                 GAO to evaluate the implementation of PMPA'S octane certification and
                            posting requirements. Specific questions posed by the Chairman and
                            Representative Schumer included:
                        .   What is the extent and source of any octane mislabeling-the sale of
                            gasoline with an octane rating lower than posted on the pump-in the
                            domestic gasoline distribution system?
                            Has PMPA been effective in ensuring that octane ratings are posted
                            accurately?
                            What is the appropriate federal role in ensuring that octane ratings are
                            posted accurately?
                            To answer these questions, we discussedthem and related issueswith
                            officials from
                            FTC, EPA, the Federal Energy Regulatory Commission, and the Depart-
                            ments of Commerceand Transportation;
                            seven states that test gasoline octane (Arkansas, California, Florida,
                            Georgia, Maryland, North Carolina, and Virginia);
                            seven states that do not test gasoline octane (Indiana, Michigan, Mis-
                            souri, Montana, Oregon,Tennessee,and Washington);
                            the New York City Department of Consumer Affairs;
                            General Motors ResearchLaboratories;
                            the Motor Vehicle Manufacturers Association (MVMA), a trade associa-
                            tion which gathers various types of information for domestic motor
                            vehicle manufacturers;
                            interested consumer groups, including the American Automobile Associ-
                            ation, the Center for Auto Safety, and the ConsumersUnion;
                            eight large and one small refiner;
                            three large common carrier interstate petroleum products pipeline
                            companies;
                            four independent distributors of gasoline and other petroleum products;
                            and
                            petroleum industry associations,including the American Petroleum
                            Institute, the National Petroleum Refiners Association, the Petroleum
                            Marketers Association of America, the Service Station Dealers of
                            America, the Society of Independent Gasoline Marketers of America,
                            and the Western States Petroleum Association.
                            To determine the extent and source of any octane mislabeling, we
                            obtained and reviewed octane test results from the following sources:


                            Page 12                       GAO/RCFfD-90-50
                                                                        Gasoline Marketing: Octane Labeling
    chapter 1
    Introduction




. MVMA'S biannual surveys of gasoline quality for the years 19791987.
. Eleven states that tested octane ratings primarily for the years 1986-
  1988 (Arkansas, California, Florida, Georgia, Louisiana, Maryland,
  North Carolina, North Dakota, Oklahoma, South Carolina, and Virginia).
  The states used various testing methodologies from random selectionsto
  targeted selections.
l Oregon and Tennessee,which conducted limited one-time gasoline qual-
  ity surveys in 1987 and 1988, respectively. Gasoline sampleswere
  selectedprimarily at random; however, Oregontargeted somestations
  for sampling.

    In addition, we requested that EPA test the octane ratings of 66 samples
    collected by state officials from retail stations primarily in the Detroit,
    Michigan, and St. Louis, Missouri, areas. We selectedthese cities for test-
    ing becauseMichigan and Missouri officials were concernedthat there
    was a mislabeling problem in these and other locations in their states.
    The samples were taken from retail stations suspectedof mislabeling
    gasoline. We did not evaluate any of the testing methodologies nor ver-
    ify any of the test results obtained from MVMA, states, or EPA; thus, none
    of the data obtained from our sourcesis projectable on a nationwide
    basis.
    We also obtained information about the quality control procedures that
    exist in the gasoline distribution system from refiners and pipeline com-
    panies. To observe how these procedures were applied, we visited 6
    refineries and refinery quality control laboratories, 3 pipeline company
    pumping and switching facilities, 8 bulk terminals, 10 wholesalers, and
    8 state gasoline testing laboratories. We compared the quality control
    procedures found in the gasoline distribution system with PMPA'S octane
    certification and posting requirements to determine whether the proce-
    dures were consistent with PMPA. We also examined octane testing labo-
    ratory reports, gasoline shipment invoices, and other related documents.

    To evaluate how effective PMPA has been in ensuring that posted octane
    ratings are accurate, we reviewed FTC'S and EPA'S enforcement and test-
    ing activities since PMPA was enacted in 1978. As part of this effort, we
    reviewed both agencies’Federal Managers’ Financial Integrity Act
    reports for previously reported weaknessesin their enforcement and
    testing programs. Neither agency had reported any weaknessesin this
    area.
    To address the question regarding the appropriate federal role in ensur-
    ing that posted octane ratings are accurate, we reviewed Senateand


    Page 13                        GAO/RCElD-90-50   Gasoline   Market&   Octane Labeling
chapter 1
Introduction




House Committee Reports and other documents to obtain the rationale
for enacting PMPA; determined the past and current federal role and the
extent of state involvement; and discussedthe role of the federal gov-
ernment with petroleum industry officials and associations,consumer
groups, and federal, state, and local government officials.

We discussedthe information contained in this report with FTC and EPA
officials and incorporated their comments where appropriate. Agency
officials generally agreed with the accuracy of the information pre-
sented relating to their agency’s activities. However, as requested, we
did not ask either agency for official written comments on this report.

Our review was conducted between April 1988 and August 1989, and,
except as noted above, in accordancewith generally acceptedgovern-
ment auditing standards.




Page 14                       GAO/RCED-90-130
                                           Gasoline Marketing: Octane Labeling
Chapter 2

Mislabeling Occursbut Extent Is Unknown
                                                         .




                       Although there is no current information at the federal level on the
                       nationwide extent of mislabeling, industry and state information indi-
                       cates that mislabeling is occurring. While the information is not suffi-
                       cient to determine the extent of octane mislabeling nationwide or the
                       source of mislabeling, it indicates that consumersmay be paying mil-
                       lions of dollars for gasoline octane they do not receive. There appears,
                       however, to be a greater potential for mislabeling at gasoline wholesal-
                       ers (distributors) and retail stations than at refiners or bulk (storage)
                       terminals where quality control procedures are more extensively used.


                       Although PMPA directs EPA to test gasoline octane ratings at retail sta-
Federal and Industry   tions nationwide to ensure that posted ratings are accurate, EPA did so
Mislabeling            for only 2 years. In fiscal years 1980-81EPA tested 2,264 gasoline sam-
Information            pies. Our analysis of 1,388 available samplesshowed that about 7 per-
                       cent were mislabeled below the posted rating.’ EPA stopped testing
                       octane ratings at the end of 1981, according to EPA officials, in part
                       becauseof staff and budget cuts. No other federal agency tests gasoline
                       octane ratings to ensure that posted ratings are accurate.

                       While there is no recent federal information available either at EPA or
                       FTC,there are industry surveys of gasoline quality that include tests of
                       octane ratings at retail stations, for example, the biannual surveys con-
                       ducted by the Motor Vehicle Manufacturers’ Association. According to a
                       MVMA official, these surveys currently cover 26 markets, which repre-
                       sent over 90 percent of domestic gasoline consumption, MVMA data show
                       posted and actual octane ratings found at the stations included in their
                       surveys. At our request, EPA analyzed MVMA survey data conducted
                       between 1979 and 1987 using a six-tenths octane point tolerance level
                       and provided the results to us. The results showed that about 9 percent
                       of all gasoline samplestested were mislabeled below the posted octane
                       rating. Mislabeling occurred more frequently in premium (higher octane)
                       gasolines-about 11 percent of the premium samplestested were misla-
                       beled. From 1979 to 1983, the percentageof all samplestested that were
                       mislabeled was decreasing;however, the percentagehas been going up
                       since 1984. According to an MVMA official, the number of gasoline sam-
                       ples taken in each survey is small-about 600 per survey-thus, the
                       results give an indication of gasoline quality and octane ratings but are
                       not projectable nationwide.
                       ‘These were mislabeled by six-tenths of one point or more below the posted rating. We applied a six-
                       tenths octane point mislabeling criteria to determine the number of violations based on tolerance
                       levels used by some testing states and the American Society of Testing and Materials in their proce-
                       dures for testing octane.



                       Page 15                                   GAO/RCED-90450      Gasoline Marketing: Octane Labeling
                            Chapter 2
                            Mislabeling Occurs but Extent Is Unknown




                            The major domestic automobile manufacturers use MAMAsurveys to
                            track the quality of gasoline available to consumers.Engineers at the
                            General Motors ResearchLaboratories told us that MVMA surveys are a
                            generally accurate indicator of nationwide trends in gasoline quality,
                            including octane ratings.

                            We obtained information from both testing and non-testing states on
State Mislabeling           gasoline mislabeling. Testing states report that generally little mislabel-
Information                 ing is occurring. Officials from the sevennon-testing states we visited,
                            however, believe that mislabeling is a problem in their states. This was
                            supported by the results of recent one-time octane tests conducted in
                            four of these states. In two of the states, the testing was conducted for
                            us by EPAand state officials primarily in two cities. These tests revealed
                            that mislabeling was occurring. Officials from both testing and non-test-
                            ing states agree that testing octane ratings to ensure that posted ratings
                            are accurate is an effective deterrent to mislabeling.


Testing States Generally    We obtained octane testing results from 11 states that routinely test gas-
Report Little Mislabeling   oline octane ratings. We visited seven of these states to obtain the data
                            with the remaining four states reporting their results to us. As shown in
                            table 2.1, seven of the states found that less than 2 percent of the sam-
                            ples tested were mislabeled from 1986 to 1988. The far right column of
                            the table shows the criteria used by these states for determining when
                            gasoline is mislabeled. The samples mislabeled, as indicated in the table,
                            are all instances where the actual octane was below the posted rating.
                            State officials told us that almost all violations found are under rather
                            than over the posted octane.




                            Page 16                              GAO/WED-90-50 Gasoline Marketing: Octane hbeliug
                                           Chapter 2
                                           Mislabeling Occurs but Extent Ia Unknown




Table 2.1: Mlrlabeling in 11 States That
Tolit Octane Ratlngr for the Years 1985-                                                  Total          Samples        Percent        Mislabeling
88                                         State                                       samples         mislabeled    mislabeled            criteria*
                                           Arkansas                                        6,171              248              4.0               1 .o
                                           California                                     10,983              651              5.9          0.6 - 0.7b
                                           Florida                                       217,512              305              0.1               1 .o
                                           GeorgiaC                                       13,219              253               1.9               0.5
                                           Louisianad                                     22,829            1,782              7.8                0.5
                                           Maryland                                       56,421              564               1 .o        0.6 - 0.7b
                                           North Carolina                                 66,332            1.116              1.7          0.6 - 0.7b
                                           North Dakota                                    2,871               88              3.1                0.7
                                           Oklahoma                                       18,063              326              1.8                0.0
                                           South Carolina                                  8,091              113              1.4                0.5
                                           Virainia                                       16,844              151              0.9                1 .o
                                           ?f posted ratings exceed actual ratings by this amount or more, a violation has occurred. In the case of
                                           Oklahoma, any variance is a violation.
                                           bRange varies depending on octane level.

                                           ‘Information   for Georgia was available only for 1986-87

                                           din Louisiana, the percent of samples mislabeled declined steadily between 1985 and 1987, from a high
                                           of 9.8 percent in 1985 to a low of 4.2 percent in 1987.


                                           According to California officials, their state reports a high percentageof
                                           samples mislabeled becausea substantial number of California’s sam-
                                           ples are taken from retail stations suspectedof mislabeling or taken to
                                           confirm that previous sampleswere mislabeled, rather than randomly.
                                           California officials cited random surveys conducted in each county
                                           every 6 years as better overall measuresof mislabeling in the state; less
                                           than 3 percent of gasoline samplesin recent county surveys were misla-
                                           beled. Arkansas officials did not explain why the percentage of samples
                                           mislabeled was higher than other states but reported that it had varied
                                           between 1 and 6 percent since 1980.


Tests Conducted in Four                    One-time tests of gasoline octane ratings conducted in four states with-
States Without Testing                     out testing programs included in our review showed frequent octane
                                           mislabeling. Two of these states, Oregonand Tennessee,conducted their
Programs Indicate                          own tests, and two other states, Michigan and Missouri, helped EPAtest
Mislabeling Is a Problem                   gasoline samples for our review primarily in one city in each state.

                                           The Oregon and Tennesseetests were conducted in 1987 and 1988,
                      Y
                                           respectively, becauseofficials from these states were concernedabout




                                           Page 17                                       GAO/RCEBBO-50Gasoline Marketing: Octane Labeling
                                  chapter2
                                  &fMhUng      Occurs but Extent L Unknown




                                  mislabeling in their states. The tests were conducted primarily on a ran-
                                  dom basis; however, Oregon also focused on someretail stations sus-
                                  pected of mislabeling gasoline. Table 2.2 shows the results of the tests
                                  conducted in these two states.
Table 2.2: Oregon and Tonnesroe
Octane Test Results                                                            Total        Samples            Percent       Mlslabelinq
                                  State                                     samples       mislabeled        mislabeled           criteria
                                  Oregon                                          110                24             21.8               0.6
                                  Tennessee                                        81                18             22.2               006
                                  aWe applied a six-tenths octane point mislabeling criteria to determine the number of violations based
                                  on tolerance levels used by some testing states and the American Society of Testing and Materials in
                                  their procedures for testing octane. If posted ratings exceeded actual ratings by this amount or more, a
                                  violation occurred.


                                  In Oregonthe average difference between the actual and posted octane
                                  ratings for the 24 mislabeled samples was 1.6 octane numbers; this is
                                  equivalent to selling 87-octaneregular unleaded gasoline as 89-octane
                                  midgrade unleaded gasoline. The largest difference between the actual
                                  and posted octane rating was 4.0 octane numbers; this is equivalent to
                                  selling 87-octane regular unleaded gasoline as 91-octanepremium
                                  unleaded gasoline.

                                  In Tennesseethe average difference between the actual and posted
                                  octane ratings for the 18 mislabeled samples was 1.9 octane numbers.
                                  The largest difference between the actual and posted octane rating was
                                  6.9 octane numbers.
                                  During our review, officials from Michigan and Missouri expressedcon-
                                  cerns about octane mislabeling in their states. At our request, EPA
                                  arranged for the North Carolina Department of Agriculture’s Standards
                                  Division to test the octane ratings of 66 gasoline samples collected by
                                  state officials from retail stations primarily in the Detroit and St. Louis
                                  areas. State officials collected the samples from retail stations suspected
                                  of selling mislabeled gasoline, based on consumer complaints and the
                                  observations of state inspectors. Missouri officials collected 38 samples
                                  between December1988 and April 1989; Michigan officials collected 27
                                  samples between February and April 1989. Table 2.3 shows the results
                                  of the tests conducted in these two states.




                                  Page 18                                     GAO/RCED-90-M)Gasoline Marketing Octane Labeling
                                          chapter    2
                                          &Wabeling Occurabut Extent Ia Uuknowu




Table 2.3: Mlchlgan and Mlrsourl Octane
Test Result0                                                                           Total        Samples            Percent       Mislabeling
                                          State                                     samples       mislabeled        mislabeled           criteria’
                                          Michigan                                         27                14             51.9                0.6
                                          Missouri                                         38                20             52.6                0.6

                                          BWe applied a six-tenths octane point mislabeling criteria to determine the number of violations based
                                          on tolerance levels used by some testing states and the American Society of Testing and Materials in
                                          their procedures for testing octane. If posted ratings exceeded actual ratings by this amount or more, a
                                          violation occurred.


                                          In Michigan the average difference between the actual and posted
                                          octane rating for 13 of the 14 mislabeled sampleswas 2.3 octane num-
                                          bers with the largest difference being 6.6 octane numbers. The remain-
                                          ing mislabeled sample had an actual octane rating 11.8 octane numbers
                                          below the posted rating. According to state officials, this gasoline proba-
                                          bly was contaminated. In Missouri, the average difference between the
                                          actual and posted octane rating for the 20 mislabeled samples was 2.2
                                          octane numbers with the largest difference being 4.6 octane numbers. At
                                          the end of our review, Michigan and Missouri officials were planning to
                                          take actions against the more serious violators.


State, Industry, and                      Officials from the seven states visited that test gasoline octane ratings,
Consumer Group Officials                  as well as officials from the industry and consumer groups, attribute the
                                          low number of samplesmislabeled in these states to their gasoline qual-
Attribute Mislabeling to                  ity testing programs, which include testing octane ratings to ensure that
the Lack of Octane Testing                they are posted accurately. They believe that testing octane ratings has
                                          improved the integrity of the gasoline distribution system in these states
                                          and that as a result of these state programs, consumersbuying gasoline
                                          in those states are more likely to receive the octane that they pay for.
                                          According to these officials, highly visible and frequent octane testing,
                                          combined with strict penalties, decreasesoctane mislabeling and cheat-
                                          ing, Such testing increasesthe risk of violators getting caught selling
                                          mislabeled gasoline and thus of facing stiff penalties and negative pub-
                                          licity. As a result, distributors and retail stations are encouragedto pay
                                          more attention to quality control procedures, and potential cheaters are
                                          discouraged.
                                          Such a deterrent effect was evident in two states where mislabeling
                                          declined significantly after they began testing octane ratings to ensure
                                          that posted ratings were accurate. Information obtained from Arkansas,
                                          which began testing octane ratings in 1976, shows that the percent of
                                          samplesmislabeled fell from 24 percent in 1976 to 2 percent by 1979


                                          Page 19                                    GAO/RCED-9060Gasoline Marketing: Octane Labeling
                            Chapter 2
                            MWabeLiq Ckcum but Extent Is Unknown




                            and has varied between 6 percent and 1 percent since. Similar informa-
                            tion obtained from Maryland, which also began testing octane ratings in
                            1976, shows that the percent of samplesmislabeled fell from about 10
                            percent in 1976 to about 1 percent by 1980 and has remained at that
                            lower level since, according to state officials.

                            Basedon information and comments obtained from industry officials, it
Sourcesof Mislabeling       appears that there is more potential for octane mislabeling at the lower
in the Distribution         levels in the distribution system, such as distributors and retail stations
System                      rather than at refineries, common carrier pipelines, or bulk terminals,
                            where gasoline octane ratings are tested frequently. Large refiners and
                            common carrier pipelines have extensive quality control programs that
                            include testing octane ratings; however, these programs focus on refin-
                            eries, pipelines, and bulk terminals, not distributors and retail stations.
                            Officials from the sevenstates visited that test octane ratings all agree
                            that they have found little mislabeling above the wholesale distributors
                            and retail levels of the distribution system.


Octane Ratings Can          The domestic gasoline distribution system for moving gasoline to the
Change Along the Gasoline   consumer can be divided into three broad levels: refining (manufactur-
                            ing), wholesale (distributors), and retail. Figure 2.1 is a simplified dia-
Distribution System         gram of the domestic gasoline distribution system showing the flow of
                            gasoline through these three levels.




                            Page 20                           GAO/RCED-90-50Gasoline Marketing: Octane Labeling
                                           chapter 2
                                           Mid&eling Occur@but Extent IB Unhewn




Figure 2.1: Domrotlc Qaooline Di8tributlon Syrtem




                                                                Refinery                                    Domestic Crude




                                                          Barge Pipeline Tanker




                                                                       I
                                                             r3
                                                              Bulk Terminal




                                                                   Truck



   -----m---e---------                                                     --------------e----m


                                                                   u

   AOtell
                                                                 !I -.
                                                              Service Station
                                                     :_




                                                                  Consumer
                         Y




                                           Page 21                                                GAO/RCED-90450
                                                                                                               Gasoline Marketin@ Octane Labeling
    Chapter 2
    Mislabellug Ckcuro but Extent In Unknown




    According to the American Petroleum Institute (API), over 100 domestic
    gasoline refiners supply the domestic gasoline market, with the 10 larg-
    est refiners accounting for over 60 percent of the nation’s total gasoline
    production. Most gasoline is transported from refineries to bulk termi-
    nals by common carrier pipeline (60 percent) and barge or ship (30 per-
    cent). A small amount (10 percent) is transported by railroad car or
    tanker (truck). At the wholesale level, over 11,000 gasoline wholesalers
    distribute gasoline from bulk terminals to other terminals and retail sta-
    tions. At the lowest level of the distribution system, there are about
    166,000 gasoline retail stations, including traditional full-service sta-
    tions, self-serve and “super” (volume) stations, and conveniencestores.
    There are a number of points along the gasoline distribution system
    where gasoline octane ratings are changed:
l Refiners raise the octane rating of gasoline by more intensively refining
  the crude oil to increase its hydrocarbon content; by adding certain met-
  als (such as lead);2by blending it with ethanol, methanol, or methyl ter-
  tiary butyl ether; or by somecombination of the previous three methods.
l Below the refineries, wholesalers changethe octane rating of gasoline
  by blending it with higher or lower octane gasolinesor with ethanol,
  methanol, or methyl tertiary butyl ether.
. Someretail stations are equipped with special gasoline pumps that blend
  two grades of gasoline into a variety of intermediate grades.

    Unintended changesin gasoline octane ratings can also occur. For exam-
    ple, pipelines can accidentally mix shipments with different octane rat-
    ings, or trucks can pick up the wrong loads or deliver them to the wrong
    storage tanks at retail stations. Such events can lead to octane mislabel-
    ing. If the mislabeling occurs intentionally, it is known as octane cheat-
    ing. Intentional mislabeling, or octane cheating, may take place because
    the incentive to mislabel gasoline octane ratings is great. For example,
    the difference in gasoline prices at the wholesale level of the distribu-
    tion system between regular and premium unleaded is about 13 cents
    per gallon, while at the retail level the difference may be up to 20 cents
    per gallon.




    ‘To protect people’s health and the environment, the federal government prohibits or severely
    restricts the use of these metals to enhance octane.



    Page 22                                   GAO/RCED-SO-50
                                                           Gasoline Markethgz Octane Labeling
                        Ckaptar 2
                        MMabeUng Occurs but Extent Ie Unknown




Octane Testing in the   Octanetesting of gasoline is part of an overall quality assurancepro-
Distribution System     gram employed by the petroleum industry to ensure the integrity of gas-
                        oline supplies. According to petroleum industry officials, quality control
                        procedures exist throughout the distribution system, but they cover the
                        refiners, pipelines and large bulk terminals more extensively than dis-
                        tributors and retail stations. According to API, the 20 largest gasoline
                        refiners, which have the capacity to refine over 76 percent of all gaso-
                        line sold in the United States and Puerto Rico, have extensive quality
                        control programs that include testing octane ratings. Other refiners also
                        have similar programs. Officials from the nine refiners we visited
                        informed us that they test octane ratings extensively during and after
                        refining-during refining to ensure correct octane ratings are achieved
                        and after refining to ensure correct ratings are maintained as the gaso-
                        line moves through the distribution system. Our visits to refineries and
                        bulk terminals revealed extensive octane testing at these locations with
                        controls built into the quality control system to ensure accuracy.3

                        According to industry officials, it is very important to the large refiners
                        to test octane ratings at bulk and other terminals to ensure that gasoline
                        received from other refiners and pipelines was not altered during ship-
                        ment. This is becauserefiners make extensive use of “product exchange
                        agreements” to trade gasoline supplies with each other. Moreover, an
                        increasingly large percentageof gasoline is “fungible’‘-refined to meet
                        generic industry specifications so it can be exchanged.Such gasoline is
                        then customized by adding proprietary additives-like detergents that
                        clean engine parts -when the gasoline is loaded into tankers for trans-
                        portation to retail stations. According to API officials, over 50 percent of
                        all pipeline gasoline shipments are fungible. According to industry and
                        state officials, refiners use product exchangeagreementsand fungible
                        gasoline to minimize their transportation costs and increase their supply
                        flexibility throughout the distribution system. Becauseof the large
                        quantities of gasoline involved, these features of the distribution system
                        give refiners a great incentive to test.
                        Also according to API,large common carrier pipeline companieshave
                        extensive quality control programs as well, including octane testing, to
                        ensure that the ratings certified by shippers are accurate and to protect
                        the pipeline companiesfrom accusationsthat they altered the quality of
                        the gasoline during shipment. About 60 percent of all gasoline is trans-
                        ported by pipeline at somepoint along the distribution system. Officials

                        ?ndustry officials were willing to show us their quality control systems but because the data was
                        considered proprietary, they were not willing to provide data for us to analyze.



                        Page 23                                   GAO/RCED-90-60Gasoline Marketing: Octane Labeling
                                                                              c
Cimptm 2
1)HslabeIingOccurs but Extent Ia Unknown




from three large common carrier pipelines told us that their companies
have extensive quality control programs including octane testing. Offi-
cials at the largest of these pipeline companiessaid the company tests
samples from 30 to 60 percent of all gasoline shipments transported
through its pipeline facilities. Laboratory reports obtained from this
company showed that it was conducting an averageof 66 octane tests
per monthB4

According to industry and state officials, there is less testing of octane
ratings after gasoline leaves bulk terminals. Officials we spoke to at
refineries and bulk terminals said that they have little control over the
gasoline after it leavesthe terminal, other than limited testing at retail
stations by large refiners. Officials from testing and non-testing states
also agreethat mislabeling is more likely to occur at the wholesale or
retail levels of the distribution system, and officials from testing states
point out that the results of their octane tests support this position-
they have found very little, if any, mislabeling at bulk terminals. State
and industry officials noted that quality control procedures are gener-
ally more lax at the lower levels of the distribution system and that
many large-volume retail stations or conveniencestores have part-time
or inexperienced personnel. In some areas, deliveries of gasoline are
commonly made when the retail station is closed for businessand there
are no station personnel present, according to state and industry offi-
cials. Wholesalers and retail gasoline station associationswe spoke to
generally did not believe octane mislabeling was a problem but agreed
that there are less controls in place to detect octane mislabeling below
the refiners and bulk terminals.

Several large refiners we talked to test or hire a private laboratory to
test octane ratings at company owned and operated retail stations and
at retail stations using their brand names. However, the number of tests
is relatively small6 Moreover, officials of the large refiners state that
they generally have limited control over the independently owned and
operated retail stations using their brand names,which represent about
60 percent of all retail stations. One gasoline retail association we con-
tacted agreed with this statement and pointed out that many indepen-
dently owned and operated retail stations cannot afford to test for
octane, which costs about $100 per sample.


4Seefootnote 3.

“See footnote 3.



Page 24                              GAO/RCED-90-60Gasoline Marketing Octane Labeling
                        Chapter 2
                        Mislabeling Occurs but Extent Ia Unknown                           ,




Observed Instances of   Officials in sevennon-testing states visited during our review believe
Octane Cheating         octane cheating is a problem. They basedtheir belief on observed or sus-
                        pected instances of cheating. All sevenof these states have weights and
                        measuresprograms where state inspectors visit distributors and retail
                        stations to check gasoline pump accuracy. In two of these states, inspec-
                        tors also collect gasoline samples at retail stations to be tested for ingre-
                        dients or characteristics, such as vapor pressure or the presenceof
                        metals (e.g., lead), but not octane ratings. State officials informed us
                        that state inspectors had observedpractices during their visits to dis-
                        tributors or retail stations that indicated cheating was occurring at some
                        of these locations.
                        Onepractice observed in several states by state inspectors at someretail
                        stations was the sale of gasoline from pumps posted with different
                        octane ratings, but which were supplied by the samestorage tank. State
                        officials said that at least one of the posted octane ratings had to be
                        wrong. Another practice observed in several states was the sale of 87-
                        octane unleaded gasoline as 89-octaneleaded gasoline. According to
                        state officials, this occurs becausethe wholesale price of 87-octane
                        unleaded gasoline is less than the wholesale price of 89-octaneleaded
                        gasoline. While state officials discussedthese observations with us, they
                        were anecdotal in nature and we were not provided documentation sup-
                        porting them.

                        When consumersbuy gasoline with an octane rating lower than the rat-
Impact of Mislabeling   ing posted on the pump, they are paying for octane they do not receive.
on Consumers            How much they pay for these misrepresented octanes dependson a
                        number of factors, including the variance or degreeof mislabeling and
                        the cost differential between gasoline grades.Our analysis shows that
                        even a small amount of mislabeling can result in consumerspaying a
                        significant amount for octane they do not receive. For example, assum-
                        ing that 9 percent of gasoline sold is mislabeled by only one-half octane
                        number and that each octane number represents 3 cents, consumersin
                        1988 could have paid about $160 million for octane they did not receive,
                        basedon 1988 gasoline sales.

                        Octanemislabeling is occurring; however, only limited information is
Conclusions             available on the extent of mislabeling on a nationwide basis. An analysis
              Y         of the latest available octane data collected by MVMA indicated an aver-
                        age mislabeling of 9 percent. Also, one-time tests in four states without
                        testing programs revealed frequent octane mislabeling. Information


                        Page 26                              GAO/RCED-SO-50
                                                                          Gasoline Marketing: Octane Labellug
Chapter 2
Mislabeling Occurabut Extmt Ie Unknown




from states that have implemented octane testing programs, however,
indicates that mislabeling was less than 2 percent in the majority of
these states and suggeststhat such programs can reduce the occurrences
of octane mislabeling. While mislabeling may occur at any place in the
gasoline distribution system, there is more potential for it to occur at the
lower levels of the system, such as at distributors or retail stations, than
at refineries, pipelines, or bulk terminals, becausethese latter locations
are covered by extensive quality control programs that include frequent
testing of octane ratings.




Page 26                            GAO/RCED-90-50Gamline Marketingz Octane Labeling
FTC and EPA Have Not Effectively
Implementedthe Petroleum Marketing
PracticesAct
                             FTC and EPAhave not carried out their gasoline octane testing and
                             enforcement responsibilities under PMPAto ensure that the octane rat-
                             ings posted on gasoline pumps are accurate. Thus, there are no federal
                             controls in place to ensure the accuracy of octane ratings. Moreover,
                             although not explicitly stated in its regulations, FTChas taken the posi-
                             tion that PMPA'Soctane certification and posting requirements only apply
                             to gasoline and not to the more recent gasoline-alcoholblend fuels that
                             are being used to reduce automotive air pollution. Also, states are con-
                             cerned that PMPAmay interfere with their efforts to ensure that posted
                             octane ratings are accurate becausethey believe it limits the remedies
                             and penalties they may take against violators.

                             Given the current federal budgetary constraints, it may be difficult for
                             FTC and EPAto increase their efforts in enforcing PMPA.There may be
                             options, however, for redefining federal responsibilities for implement-
                             ing PMPArequirements, which would involve the states in a joint federal-
                             state program, or perhaps a total state enforcement program is possible.

                             PMPArequired FTCto    set and define gasoline certification and octane
PMPA Not Fully               posting requirements and directed EPAto (1) inspect retail stations
Implemented                  nationwide to ensure that they were complying with the octane posting
                             requirements and (2) test gasoline octane ratings at retail stations to
                             ensure that the posted ratings were accurate. EPAwas further directed
                             to report the test results to FTC.In caseswhere violations were identi-
                             fied, PMPAauthorized F”E to prosecute and seek civil penalties against
                             violators in Federal District Court. While octane ratings are being posted
                             on pumps at retail stations, there are no federal controls in place to
                             ensure the accuracy of octane ratings becauseEPAstopped testing the
                             accuracy of octane ratings at the end of 1981 and FTChas not prosecuted
                             any octane violations.


Octane Posting Regulations   In 1979, as required by PMPA,FTCissued the OctaneCertification and
                             Posting Rule to establish standard procedures for determining, certify-
                             ing, and posting the octane ratings of automotive gasoline. PMPArequires
                             refiners to determine and certify octane ratings to their customers and
                             requires anyone who receives and distributes gasoline to another party
                             (i.e. pipeline companies)other than the ultimate purchaser to certify the
                             octane rating of such gasoline to its customers.
                             Petroleum industry officials, including nine refiners and three pipeline
                             companies,advised us that they comply with PMPAoctane certification


                             Page 27                        GAO/RCED-90-50Gasoline Marketing Octane Labeling
                            Chapter 3
                            FTC and EPA Have Not Effectively
                            Implemented the Petroleum Marketing
                            Practices Act




                            requirements at every level of the distribution system. During our visits
                            in 10 states to the nine refineries, three pipeline companies,various ter-
                            minals, and four distributors, we discussedcompany certification proce-
                            dures and reviewed documents, such as gasoline shipment invoices for
                            evidence of octane certifications, and confirmed that with one excep-
                            tion, these facilities and their parent companieswere complying with
                            these requirements. We did not, however, validate the accuracy of the
                            octane certifications. The exception involved a small independent dis-
                            tributor in Missouri. The owner said that he was unaware of PMPA’S
                            octane certification requirements and promised to comply as soon as
                            possible by printing the octane ratings of the gasolineshe sold on his
                            customers’ invoices. We advised FTCofficials of the facts surrounding
                            this caseduring our field work and they agreedto follow up to ensure
                            that the owner was fully informed of PMPA’Srequirements. An FI%offi-
                            cial advised us that they sent a letter to the distributor in August 1989
                            along with a copy of FTC’Soctane certification and labeling rules.
                            Since 1979, during visits to retail stations in conjunction with its nation-
                            wide lead testing program, EPAhas ensured that retail stations posted
                            octane ratings on their gasoline pumps. EPAofficials report that retail
                            stations generally post octane ratings on their pumps, as required by
                            PMPA,but occasionally they find stations without posted ratings. These
                            are subsequently reported to FTC. FTCofficials told us that they send out
                            letters to these stations telling them to comply with PMPA’Sposting
                            requirement. Somestates, such as Washington, enforce PMPAposting
                            requirements in conjunction with their weights and measuresprograms.


EPA Stopped Testing         In 1980 and 1981 EPAtested gasoline octane at retail stations. According
Octane Ratings After 1981   to EPAofficials, EPAdiscontinued testing after fiscal year 1981 because
                            of staffing and budget cuts and also becauseEPAconsidered it to be a
                            low priority, given the Agency’s other enforcement programs. EPAoffi-
                            cials noted that the Congresshad not provided any funds to test octane
                            ratings, which cost about $100 per test. However, EPAdid not inform the
                            Congressof any inability to execute the program without additional
                            funds. EPAofficials also said that FTChad not used the 1980-81test
                            results to prosecute octane violators and that they could seefew bene-
                            fits from spending additional public funds to test if FTCwas not going to
                            take action.




                            Page 28                               GAO/RCED-SO-60
                                                                               Gasoline Marketingz Octane hbeling
                       chaptm    3
                       FIG and EPA Have Not Eiiectively
                       Implementad the Petroleum Markethg
                       Practlce~ Act




                       Up to now this conflict has causedfew problems, since most states have
                       not considered the effects of PMPA'Spreemption clause.However, in
                       early 1988 California officials dropped criminal chargesbrought against
                       a large distributor for octane mislabeling, becausein the San Diego City
                       Attorney’s opinion, PMPApreempted the state law and precluded action
                       by the state. In this case,the state law was much stricter than PMPAin
                       that it included criminal prosecution and up to 6 months in jail and a $1
                       million fine. California officials believe that such substantial penalties
                       are sometimesnecessaryto deal with large distributors engagedin
                       octane mislabeling at a number of retail stations (as was alleged in this
                       case)since the profits from mislabeling can be large. In this case,the
                       distributor had already paid more than $160,000 in civil fines during a 1
                       year period.
                       In other cases,somestate officials contend that the formal court proce-
                       dures required in bringing a civil action are too cumbersome.State offi-
                       cials told us that the time required to prepare and bring a caseto court
                       under current civil enforcement procedures results in an extensive
                       period of time before corrective action can be taken. On the other hand,
                       they believe that their state enforcement actions can be more effective
                       becausethey are immediate and thus result in greater compliance with
                       the goals of PMPA.In this regard, we noted that FIX’Sfirst formal investi-
                       gation of octane mislabeling has been on-going since 1987 and still has
                       not been settled or brought to trial.
                       FE officials agreed with these state arguments and stated that the
                       states’ concern over PMPApreempting their own state enforcement
                       actions hinders FTC’Sefforts to encouragestates to test and enforce
                       octane posting. They noted that the preemption issue was not a practical
                       problem for most states becauseit seldom has been raised as a defense
                       by violators; however, it is a legal problem that has yet to be settled in
                       court, FM=officials support an amendment to PMPAthat would allow
                       states to employ a broader range of enforcement options, including
                       immediate stop sale orders or criminal prosecution, yet preserve PMPA'S
                       uniform nationwide posting and certification requirements.

                       BTCand EPAofficials   advised us that testing octane ratings to ensure that
Options to Implement   posted ratings are accurate is not possible without additional funds.
Monitoring and         However, neither FE or EPAhad an estimate of how much it would cost
Enforcement ’          to test octane ratings nationwide to ensure that they are accurate and to
                       prosecute violators. In 1978, the CongressionalBudget Office estimated
                       that establishing a nationwide federal octane testing program would


                       Page 31                              GAO/RCEDBO-50Gasoline Marketing: Octane Labeling
Chapter 3
FI’C and EPA Have Not Effectively
Implemented the Petroleum Marketing
PracticesAct




cost $1.1 million in 1979 and between $2.1 and $2.4 million a year in the
1980-1983time frame. EPAofficials did not know how much it would
cost to establish an octane testing program today but stated that it
would be much higher today than the earlier estimates.

Ensuring the accuracy of posted octane ratings, however, need not be
entirely a federal effort. While FTC and EPAare faced with budgetary
constraints in implementing PMPAoctane testing requirements, a number
of states have taken action to implement their own testing programs. In
view of this, there may be options worth exploring involving both fed-
eral and state efforts, which would provide greater assurancethat the
objectives of PMPAare met. We did not evaluate the effectiveness or cost
of such options; however, we did obtain information on them from fed-
eral, state, industry, and consumer group officials.
Officials we talked to from all of the testing and non-testing states we
visited were generally in favor of state testing and enforcement. Accord-
ing to officials from the testing states, ensuring that octane ratings are
posted accurately and that mislabeling is prosecuted is primarily a local
responsibility and more effectively dealt with at the state-not
national-level. However, one official added that he would favor a fed-
eral role for casesinvolving interstate issues,for example, a distributor
in one state supplying retail stations in another state. Several state offi-
cials were against the federal government mandating state octane test-
ing without providing funding for that testing.
Officials from two states in favor of state testing said that the biggest
obstacle to state octane testing was the cost of constructing and equip-
ping a testing laboratory-about $1.6 million according to estimates pre-
pared by Tennesseeofficials. The cost of collecting gasoline samples for
testing would probably be less of an obstacle,becausemost states have a
weights and measuresprogram where inspectors visit retail stations at
least once a year to check pump calibration. Officials from testing and
non-testing states believe that testing octane ratings to ensure that
posted ratings are accurate would be cost-effective. They said that it
savesconsumersmore money than the testing costs-even though, as
noted previously, constructing and equipping a testing laboratory is
expensive.

Officials in two states specifically suggestedthat the federal govern-
ment might consider encouraging the non-testing states to test octane
ratings by sharing this cost. One state official said that in the long run



Page 32                               GAO/RCED-90-50Gasoline Marketing: Octane Labeling
                                                                                                                   I




                            Ckapter 3
                            FTC and EPA Have Not Effectively
                            Implemented the Petroleum Marketing
                            Practices Act




Fi’C Has Never Prosecuted   FTChas never prosecuted an octane violation, even in 1980-1981,when
an Octane Violation         it had octane test results from EPA.FTCofficials cited staff shortages and
                            budget cuts as reasonsfor its lack of action. They noted that between
                            1980 and 1988, FX’S staff was cut by about 44 percent as part of the
                            federal government’s deregulation efforts. FM=officials also noted that
                            the Congressdid not provide additional funds to FTCto enforce PMPA,
                            however, as with EPA,FTChas not advised the Congressof their inability
                            to carry out the program without additional funding.
                            Currently, FTCis taking some actions in responseto complaints and
                            other information received from outside sources.For example, since
                            1987 FE’S Dallas Regional Office has been investigating a caseof sus-
                            pected octane mislabeling brought to its attention by an outside party,
                            which it intends to settle or bring to trial. Partly as a result of this case
                            and complaints from state enforcement officials, informants, consumers
                            and consumer groups, FTCofficials told us that they would like to
                            assumea more active role in enforcing PMPA'Soctane certification and
                            posting requirements. However, FTCofficials noted that future efforts
                            will be hindered becauseEPAhas stopped testing octane ratings and FTC
                            has limited funds for its enforcement activities.

                            In a 1979 letter to the state of Nebraska, FTCexpressedthe opinion that
Posting Requirement         gasohol, which is a blend of 90 percent gasoline and 10 percent ethanol,
Only Covers Gasoline        was exempt from PMPAoctane posting and certification requirements
                            becausethe statutory definition of gasoline did not include such fuels.
                            According to this letter:
                            “No mention of composite fuels such as gasohol is found in either the statute or its
                            legislative history. This indicates to us that Congressdid not contemplate coverage
                            of gasohol by either PMPAor the Commission’s Rule.”

                            FTC officialsadvised us that staff opinions were not binding unless they
                            are adopted by the Commission and that this staff opinion has not been
                            so adopted. Nevertheless, according to FTCofficials, as a result of this
                            opinion gasohol and other gasoline-alcoholblends are viewed as exempt
                            from PMPAoctane certification and posting requirements. M‘Chas not
                            issued similar staff opinions on other gasoline-alcoholblends or other
                            alternative fuels; however, FTCofficials told us that they also would be
                            exempt following the samerationale used in the 1979 letter.

                            Currently, as a result of this opinion, octane ratings are not required to
                            be posted for gasoline-alcoholblends. However, octane ratings are


                            Page 29                               GAO/RCEDBO-50Gasoline Marketing: Octane Labeling
                                                                                                       .
                      Chapter 3
                      Fl’C and EPA Have Not Effectively
                      Implemented the Petroleum Marketing
                      Practices Act




                      posted for these fuels in somestates becausethey have their own laws
                      requiring such postings. The areas affected by this opinion may grow as
                      more urban areas require the use of gasoline-alcoholblends and other
                      alternative fuels to fight air pollution.
                      In August 1989, the close of our review, FTCofficials advised us that
                      they are reconsidering the rationale behind the 1979 opinion with a
                      view toward making gasoline-alcoholblends and other composite fuels
                      subject to PMPA.FTCofficials stated that the opinion expressedin the
                      1979 letter was appropriate at the time becausegasohol and other com-
                      posite fuels were viewed as alternatives to gasoline. However, market
                      conditions have changed, and I?K officials now view these fuels as gaso-
                      line containing an octane-enhancingadditive (in this case,alcohol). FTC
                      officials believe that consumer perceptions of these fuels have changed
                      similarly and that PMPArequirements should apply to these fuels,
                      although they noted that the courts might interpret PMPAmore narrowly
                      as FTCdid in 1979.
                      However, FIX officials doubt that PMPAcould be interpreted broadly
                      enough to cover all alternative fuels for spark ignition engines,such as
                      pure methanol, that may be used in the future. For example, the Presi-
                      dent’s recently announcedplan for amending the Clean Air Act could
                      lead to the use of such fuels in at least nine major U.S. cities by 1995.
                      FTCofficials stated that there is a need to amend PMPAto clarify and
                      expand the definition of gasoline to include all fuels used in spark igni-
                      tion engines,such as any new alternative fuel that may becomeavaila-
                      ble to reduce air pollution,

                      PMPAauthorizes the FTCto seek civil penalties of up to $10,000 for each
PMPA May Interfere    mislabeling violation. Section 204 of PMPAsets forth its relationship to
With State            state laws and provides that state laws (including remedies or penalties)
Enforcement Efforts   dealing with any act or omission covered by PMPAare to be the same as
                      the applicable provisions of PMPA.State officials are concernedabout
                      this apparent preemption of someexisting state enforcement provisions.
                      Officials from states that test octane ratings believe that prosecuting
                      octane labeling violators may becomea problem if their laws are pre-
                      empted by PMPAand they cannot use more effective measuresthan civil
                      penalties to prosecute violators and correct problems. For example, the
                      seven states we visited that test octane use administrative stop sale
                      orders to immediately halt the sale of mislabeled gasoline. PMPAwould
                      seemto preempt this option.


                      Page 30                               GAO/RCED-90-60Gasoline Marketing: Octane Labeling
.
    Chapter 3
    FTC and EPAHave Not J.Wectively
    Implemented the Petroleum Marketing
    Practices Act




    the cost to the federal government of sharing the expenseof construct-
    ing and equipping state laboratories would be less than the cost of estab-
    lishing and maintaining a nationwide federal octane testing program.

    Another argument for involving the states in implementing and enforc-
    ing PMPAis that 20 states are already performing octane tests and more
    are planning or considering octane testing programs. Both Michigan and
    Missouri plan to begin testing gasoline octane ratings as soon as they
    complete construction of new testing laboratories. Moreover, both the
    Tennesseeand Washington legislatures were considering such testing at
    the time of our review.

    Officials from three consumer groups believe that federal or state test-
    ing is acceptable;however, these officials feel that the federal govern-
    ment should set national posting requirements. They noted that federal
    posting requirements have significant advantagesfor consumers,includ-
    ing uniformity. If posting were left up to the individual states, labels
    might vary between states, creating confusion for consumers.Moreover,
    somestates might not require any posting or testing, leaving consumers
    without critical information about gasoline quality.




    were accurate. This assurance,however, is not being provided because
    there are no federal controls in place to monitor the accuracy of octane
    postings. EPAand FTChave not taken the steps required by PMPAto test
    octane ratings and take actions against violators, primarily becauseof
    funding limitations. Furthermore, there is (1) confusion as to whether
    newer gasoline-alcohol blended fuels- or future fuels that may become
    available to abate vehicle pollution-are subject to PMPA’Soctane post-
    ing requirements and (2) concern in the states that PMPAprovisions may
    limit state enforcement efforts.
    We believe there needsto be assurancethat consumersare getting the
    octane they pay for. We also believe that in addition to a total federally
    administered PMPA,there are options for including the states in the pro-
    gram in a way likely to result in greater assurancesthat PMPA’Sobjec-
    tives are achieved. Such options need to be explored, and in doing so a
    number of factors such as the cost, staff requirements, range of enforce-
    ment actions, and the risk to consumersneed to be considered.Neces-
    sary control measuresneededto ensure program successalso should be
    an intregal part of each option considered.


    Page 33                               GAO/RCED-9@60Gasoline Marketing: Octane Labeling
                                                                                                      c

                         Chapter 3
                         FTC end EPA Have Not Effectively
                         Implemented the Petroleum Marketing
                         Practices Act




                         We recommendthat the Congressamend PMPAto
Recommendationsto
the Congress         . include octane certification and posting for gasoline-alcoholblends and
                       other alternative motor fuels that may becomeavailable to reduce air
                       pollution and
                     l make it clear that states may employ a range of remedies broader than
                       those available under PMPAto enforce octane posting requirements.


Recommendationsto        We also recommendthat the Chairman, FTC,and the Administrator, EPA,
                         in consultation with the appropriate congressionalcommittees and the
the Federal Trade        states take the following actions:
Commission and the
                         Develop and assessthe options that could be employed to monitor com-
Environmental        l
                         pliance with the act’s octane certification and posting requirements.
Protection Agency        Such options should include a total federal role, joint federal-state roles,
                         and a total state role in implementing PMPA'Srequirements. This analysis
                         should include, among other things, the benefits and costs of the various
                         options, including necessarycontrol measures,as well as milestones for
                         their implementation.
                     .   Report the results of their evaluations and their recommendations,along
                         with funding requirements and recommendations for any neededlegisla-
                         tive changes,to the Congress.




                         Page34                                GAO/RCED-!KMiO
                                                                           GasolineMarketing: Octane Labeling
Page 36   GAO/WED-90-50 Gasoline Marketing Octane Labeling
Appendix I                                                                                          ,
Major Contributors to This Report


                                Flora H. Milans, Associate Director
Resources,                      JamesA. Fowler, Assistant Director
Community, and                  Barry R. Kime, Assignment Manager
Economic
Development Division,
Washington, D.C.

                                Michael D. Rohrback, Evaluator-In-Charge
Detroit      Re@onal   Office   Audley M. Smith Jr Evaluator
                                Michael J. Jones,‘Ev’&uator
                                RebeccaL. Thompson, Evaluator




              Y




                                Page 36                     GAO/RCED-30-60Gasoline Markethgz Octane Labeling
Page 37   GAO/RCED-!I040Gasoline Marketing; Octane Labeling
Page33   GAO/RCE?D-9040
                     GasolineMaretine; OctaneLabeling
Y




    Page39   GAO/RCRD9O-IO
                        GasolineMarketing:OctaneLabeling
Related GAO Products


              Gasoline Marketing: States’ Programs for Gasoline OctaneTesting (GAO/
              RCEDm-91Fs, April 12, 1989).

              Gasoline Marketing: States’ Programs for Pump Labeling of Gasoline
              Ingredients (GAO/RCED-89-6, January 12, 1989).
              Gasoline Marketing: Octane Mislabeling in New York City   (GAO/
              RCED87-180BR, August 18, 1987).




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