oversight

Consumers Have Limited Assurance That Octane Ratings Are Accurate

Published by the Government Accountability Office on 1990-06-20.

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

                   United   States General   Accounting   Office
                   Testimony




For Release        Consumers Have Limited    Assurance
on Delivery        That Octane Ratings    Are Accurate
Expected at
10:00 a.m. EDT
Wednesday
June 20, 1990




                    Statement    of
                    Victor    S. Rezendes
                    Director,    Energy Issues
                    Resources,    Community,   and Economic
                       Development    Division
                    Before the
                    Subcommittee  on Energy and Power
                    Committee on Energy and Commerce
                    House of Representatives




GAO/T-RCED-90-90
                                                                   GAO   Fom 160(12/87)
Mr.   Chairman     and Members of the         Subcommittee:

       We are pleased to be here today to discuss                the results      of our
nationwide     review,     which you requested,        on gasoline    octane
1abeling.l       A major concern of consumers buying gasoline                is that
they purchase       gasoline    with an octane rating        that meets their
vehicles'    octane requirements.           Gasoline     is generally    sold to
consumers in three different           octane    levels--87,     89, and 91 or
above.     These octane ratings        are posted on the retail          gasoline
pumps*     Octane mislabeling        occurs when gasoline        is sold with an
octane rating       lower than posted on the pump.

     In summary, we found that consumers have little assurance    that
they are receiving the octane they are paying for at the gasoline
PumPa Our review showed the following:

       --   While the Petroleum         Marketing       Practices      Act provides      for
            federal      regulatory    controls      to ensure the accuracy           of
            gasoline       octane ratings,      neither     the Federal       Trade
            Commission        (FTC) nor the Environmental            Protection      Agency
            (EPA), who are tasked with octane posting                      and enforcement
            responsibilities        under the act, have implemented                 a system
            of controls        to ensure that the act’s           objectives      are met.


       --   Octane mislabeling         is occurring--and      it     is costly    to
            consumers--but     the     extent  of mislabeling          nationwide    is
            unknown.

       --   According     to the FTC, not all motor fuels       are covered by
            the act--particularly     newer alternative      fuels used to
            combat automotive     air pollution. .    The act needs to be
            amended to ensure that octane ratings         are posted for all


lGasoline    Marketina:         Consumers Have Limited          Assurance      That   Octane
Ratinas   Are Accurate,         (GAO/RCED-90-50,  Apr.         16, 1990).
                                              2
            motor fuels.       It should     also be amended to allow states
            more latitude      in taking     enforcement actions  against  octane
            mislabelers.

       --   Ensuring     the accuracy         of octane ratings       need not be
            entirely     a federal       effort.      There are options        for involving
            the states      more in implementing           the act which could provide
            greater     assurance      that consumers receive           the octane they
            pay for.       About half the states           currently      have or are
            considering      instituting         octane testing      programs.

FTC AND EPA HAVE NOT EFFEcTIvEzY IMPRINTED                      THr PETROLEUM
    FETING PRACTICES ACT

        In 1988 American consumers purchased              over 113 billion         gallons
of gasoline.        As gasoline    is refined     and transported         through     a
complex distribution         system to retail       stations,      gasoline     octane
ratings     can be accidentally       or intentionally        mislabeled.         Using
gasoline     with too little      octane can damage an engine,              lower engine
efficiency,      reduce mileage      and even increase        polluting       emissions.
Unfortunately,       consumers cannot determine           octane ratings        visually
or in other ways that allow them to know if they are getting                          what
they are paying       for.

        The 1978 Petroleum      Marketing     Practices        Act provides       for a
uniform    nationwide    system for ensuring          that octane ratings            are
posted at the gasoline        pump so that the consumer is assured of
getting    the correct    octane gasoline        for his vehicle.           The act
requires     FTC to set and define        gasoline      certification       and octane
posting    requirements     and directs     EPA to (1) inspect           retail      stations
nationwide      to ensure that octane ratings            are correctly        posted and
 (2) test the gasoline       sold to ensure that the posted ratings                     are
accurate.       EPA is to report     inspection       and test results          to FTC,
which is authorized       to prosecute      violators         and monitor     compliance
with the act.
                                              3
      Our review showed that octane ratings            are generally      posted on
the pump, and that in 1980 and 1981, the first              years after      the act
was enacted,    EPA did test gasoline      octane ratings.         Our analysis       of
1,388 samples that EPA was able to provide             us from those early
tests  showed that about 7 percent        of these samples were mislabeled
below the posted rating       by at least   six-tenths      of one point.
However EPA has not tested       octane ratings      at retail     stations     since
1981.   We also found that generally        FTC has not followed           up to
ensure that the act's      octane testing     requirements      are met: nor has
FTC prosecuted    any violators.

        EPA and FTC officials       cited    staff   and budget cuts as reasons
for not implementing         the act's    requirements.       These officials
stated     that the Congress had not provided            any funds to test octane
ratings:      each test costs about $100.          Neither    agency, however,
informed      the Congress of any inability         to execute the program
without      additional   funds.    EPA officials       also told us that since
FTC did not use the early         test results      to prosecute     octane
violators,       they could see few benefits         from spending    additional
public     funds to test octane ratings.           Thus, there are no federal
controls      in place to ensure the accuracy           of octane ratings.

1
J4            G                                      OWN

       Although      there    is no current      information      at the federal         level
on the nationwide          extent    of mislabeling,        we did obtain      industry
and state      information       that indicates       that mislabeling       is occurring.
While the information            is not sufficient        to determine     the extent        of
octane mislabeling          nationwide     or the source of mislabeling,               it does
indicate     that consumers may be paying millions                 of dollars      for
gasoline     octane they do not receive.




                                             4
Industrv       Mislabelina       Information

        During our review,           we asked EPA to analyze          data it compiles
from biannual         gasoline      quality    surveys conducted        by the Motor
Vehicle     Manufacturers         Association       (MVMA). MVMA is a trade
association        that tests       gasoline     characteristics      nationwide.        One
characteristic         tested     is the octane rating.            EPA's analysis       of
surveys conducted           between 1979 and 1987 revealed              an average of
about 9 percent          of the gasoline         sampled in markets        representing
over 90 percent          of total     domestic      consumption     was mislabeled       by
more than six-tenths            of a point       below the posted octane rating.             In
addition,      the analysis         showed that mislabeling          occurred     more
frequently       in premium (higher           octane)    gasoline.      About 11 percent
of the premium samples tested                 were mislabeled.

       Since our report,       we have obtained   data from EPA on MVWA's
1988 test     results--   which is the most current      full year for which
data are available.          The results  of the 1988 tests    show an overall
decrease    in mislabeling      by about 2 percent    from the 1979-87
average.      Although    the statistics   are better    for 1988 when compared
with prior     years,   the data continue     to show that mislabeling    is
occurring.

State      Mislabelins       Information

        Currently,      23 states   test gasoline    octane ratings   through
their    own initiative.2         We obtained   test results    from 11 of the
testing     states    and found that in the majority         of these states,
mislabeling        was less than 2 percent      for the 1985-88 period.


2At the time of our field       work, 20 states       had octane testing
programs.      Subsequent to our field       work, Missouri,        Tennessee,   and
Arizona    began octane testing     programs and the State of Washington
will   begin its testing    program in July 1990.           Michigan     plans to
begin testing     in 1991 when its testing        laboratory      is completed.
Attachment     I shows the testing     states.
                                               5
Officials       from the testing        states       attributed    the low rate       of
mislabeling        to their state       octane       testing    and enforcement       programs.

        On the other hand, officials        in seven states       we visited    that
did not have an octane testing          program believed       that mislabeling
was a problem in their       states.     Two of these states,          Oregon and
Tennessee,    conducted   their    own one-time     tests    in 1987 and 1988,
respectively,     because state officials        were concerned        about
mislabeling.      Each states'     test results     reported     about 22 percent
mislabeling.      The average difference        between the actual         and posted
octane ratings     was 1.5 and 1.9 octane numbers, while the largest
difference    was 5.9 octane numbers.          (See attachment       II.)

         During our review,          officials        from two other non-testing
states,      Michigan     and Missouri,         expressed       concerns      about octane
mislabeling        in their     states.        At our request,         EPA arranged        to test
the octane ratings           of 65 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.
Although      the number of samples was small,                   the test results          showed
52 and 53 percent           mislabeling,        respectively.          The average
difference        between the actual           and posted octane ratings               in each
state was about 2.2 octane numbers-- the largest                          difference       was 5.6
octane numbers.            (See attachment          II.)    We turned       these tests
results      over to FTC. The agency told us that they will                           be taking
enforcement        action    against       the violators.

TeStinU       Protects   Auainst     Octane      Mislabelinq

        Officials     from both testing         and non-testing      states   agree that
testing      octane ratings       to ensure that posted ratings            are accurate
is an effective         deterrent     to mislabeling.        According     to officials
from testing       states,     highly   visible    and frequent      octane testing,
                                                 6
combined with strict        penalties,     decreases    octane mislabeling        and
cheating.     For example,     during Arkansas's        first     year of octane
testing,    1975, officials       reported   24 percent       mislabeling.
Mislabeling     in the state has decreased          considerably        since then,
averaging    about 4 percent        between 1985 and 1988.

         In addition,      after   our field        work, Missouri         began an octane
testing     program in September 1989, and Tennessee began a testing
program in March 1990.             Missouri       officials       reported    mislabeling         of
about 14 percent          during   the last quarter             of 1989 and about 8
percent     during     the first     quarter      of 1990.        Tennessee officials
reported     about a 15-percent           violation        rate in their       initial     tests.
Officials       of both states       reported       that the presence          of a program
has helped bring down the violation                     rate.     While we cannot say that
mislabeling        is a problem in all states                that do not have a testing
program,      information       and comments provided             to us during         our review
indicate     that there is a strong possibility                     that mislabeling         is
occurring       in those states        that do not test octane.

mPACT OF MISLABELING             ON CONSUMERS

        When consumers buy gasoline               with an octane rating       lower than
the rating        posted on the pump, they are paying               for octane they do
not receive.          The amount of money can be significant                on a
nationwide        basis.      For example,      let's   assume that 9 percent        of the
113 billion        gallons     of gasoline      sold annually      was mislabeled--which
is the amount found in the MVMA data --by just one-half                       octane
number and that each octane number represents                      3 cents.     This would
mean that consumers could be paying about $150 million                        for octane
they do not receive.              Should the mislabeling          be on the order of two
octane numbers,           as was the case in the Missouri             and Michigan     tests,
the nationwide           costs to the consumer could be $600 million                or more.
Until     we have better        testing    information,      which is EPA's
responsibility,           it is difficult       to predict     with any degree of
certainty       the magnitude        of mislabeling      costs.
                                                 7
SOURCES OF MISLABELING            IN THE DISTRIBUTION            SYSTEM

        While mislabeling           may occur at any place in the gasoline
distribution         system,     industry       officials       told us that there is more
potential       for it to occur at distributors                     or retail     stations     than
at refineries,          pipelines,      or bulk terminals.                They said that
quality      control     procedures       exist       throughout       the distribution
system,      but they cover the refiners,                   pipelines,      and large bulk
terminals       more extensively          than distributors              and retail     stations.
Refinery      and bulk terminal           officials         said that they have little
control      over the gasoline          after       it leaves the terminal.

         State and industry         officials        noted that quality          control
procedures         are generally     more lax at the lower distribution                     and
retail      levels     of the gasoline        distribution        system.       Also,    in some
areas,      deliveries      of gasoline       are commonly made when a retail
station       is closed and there are no station                  personnel      present,      and
in many cases the stations                are staffed       with inexperienced           or part-
time personnel.            Wholesale      and retail       gasoline     station     association
officials        generally    did not believe           octane mislabeling          was a
problem but agreed that there are fewer controls                           to detect       octane
mislabeling         at the distribution          and retail       levels.

THE ACT'S RESTRICTIONS

       During our review we found that FTC has interpreted                   the act
as applying    only to traditional       gasoline      fuels and excluded       the
newer gasoline-alcohol      blends from the act's           octane posting
requirements.      In 1979, an FTC staff         opinion    exempted gasohol,
which is a blend of go-percent          gasoline     and lo-percent      ethanol,
from the act's     octane certification        and posting      requirements
because the statutory      definition     of gasoline       did not include       such
fuels.



                                                a
        FTC has not issued similar           staff     opinions    on other gasoline-
alcohol     blends or other alternative             fuels:     however,   FTC officials
told us that such fuels would also be exempt following                        the same
rationale      used in 1979.       As federal,        state,    and local    governments
increasingly       require    the use of these and other alternative                 fuels
in urban areas to reduce air pollution,                    consumers could be without
information       on the octane levels         of these newer fuels.            At the
close of our review,          FTC officials        advised us that they are
reconsidering        the rationale     behind the 1979 opinion            with a view
toward making gasoline-alcohol              blends and other composite            fuels
subject     to the act.

       We are also concerned     that the act appears to preempt any
applicable     state or local   enforcement    provisions     differing      from
those of the act.      Section    204 of the act provides         that provisions
in state    laws are to be the same as the applicable             provisions     of
the federal      act. State officials     are concerned      about this apparent
preemption     of some existing    state enforcement      provisions.

        Officials       from states   that test octane ratings         believe      other
remedies       and penalties      can be more effective        and cost-efficient         in
ensuring       posted octane ratings        are accurate     but expressed        concern
that such actions           could be challenged      as being outside        the
authority       of the act.       For example,   state   officials     contend that
the formal        court procedures      required   to bring a civil        action     are
too time-consuming           and cumbersome.     They believe      that stop-sale
orders,      which some states       use to immediately       halt the sale of
mislabeled        gasoline,     can be more effective      in ensuring       compliance
with the goals of the act.              The act would seem to preempt this
option.

        Up to n&w this conflict      has caused few problems,         since most
states    have not considered     the effects     of the act's     preemption
clause.      However, in early    1988 California      officials    dropped
criminal     charges against    a large distributor        for octane
                                             9
mislabeling    because a San Diego City Attorney's              opinion  concluded
that the 1978 act preempted         the state       law and precluded    action   by
the state.     In this case, the state           law was much stricter      than the
1978 act because it included          criminal      prosecution    and up to 6
months in jail     and a $1-million        fine.

        Draft   legislation  you have proposed to amend the act
addresses      both these issues.    Enactment of these amendments                        should
clarify     the act on these points.

OPTIONS FOR INCREASING THE STATE ROLE;

        According        to FTC and EPA, monitoring            compliance       with the act
and prosecuting            violators       are not possible      without      additional
funds.      Neither        FTC nor EPA had an estimate            of how much it would
cost to carry out their                testing    and enforcement        responsibilities.
We believe       that since about half the states                 currently       have or are
considering        instituting         octane testing      programs,       there may be
options     for formally           involving    the states     in carrying        out the
act's    objectives.            State officials      interviewed       during     our review
indicated      an interest           in such an approach.

         Officials        we talked      to from all of the states              we visited     were
generally         in favor of state testing              and enforcement.           According    to
officials         from the testing           states,    ensuring     that octane ratings         are
posted accurately              and that mislabeling           is prosecuted       is primarily      a
local     responsibility             and it is more effectively            dealt with at the
state --not         national--level.            However, several        state officials        were
against       the federal         government's       mandating     state     octane testing
without       providing        funds for or sharing          the costs of such programs.
An argument          for involving         the states     in implementing         and enforcing
the act is that 23 states                  are already      performing       octane tests      and
more are planning              or considering        octane testing        programs.



                                               10
         In summary, Mr. Chairman,         the Congress     passed the 1978 act to
provide      assurance    to consumers that the posted gasoline                  octane
ratings      were accurate    nationwide.       This assurance,         however,       is not
being provided        because there are no federal          controls        in place to
monitor      the accuracy    of octane postings.         Furthermore,          there is (1)
doubt that newer gasoline-alcohol              blended   fuels--or        future     fuels
that may become available           to abate vehicle       pollution--are           subject
to the act's       octane posting      requirements     and (2) concern in the
states     that the act's     provisions      may limit    state enforcement
efforts.

       We believe     that there are options          for   including     the states    in
the program in a way likely           to result    in greater        assurances    that
the act's    objectives       are achieved.     Our April        1990 report
recommended that such options            be explored,       and in doing so a
number   of factors       such as the cost,     staff     requirements,       range of
enforcement     actions,      and the risk to consumers need to be
considered.       Control     measures needed to ensure program success also
should be an integral          part of each option        considered.

        We also recommended that the Petroleum              Marketing    Practices
Act be amended to (1) include            octane certification         and posting
requirements       for gasoline-alcohol       blends and other alternative
motor fuels      that may become available         to reduce air pollution         and
 (2) make it clear that states           may employ a range of remedies
broader    than those available         under the act to enforce         octane
posting    requirements.



      This concludes  my prepared  statement.   I would be pleased to
respond to any questions    you or Members of the Subcommittee   may
have.


                                            11
                                  ATTACHMENT I
ATTACHMENT I




w          States With Gasoline Octane
           Testing Programs




                      12
ATTACHMENT II                                                          ATTACHMENT II

                                      E TEST RESULTS

                    Total            Samples             Percent       Mislabeling
state             samnles       I&g.labeled         &islabeleQ             criteriaa
Oregon               110              24                21.8                 0.6
Tennessee             81              18                22.2                 0.6
Michigan              27              14                51.9                 0.6
Missouri              38              20                52.6                 0.6

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.




                                           13