MINUTES OF THE SENATE COMMITTEE ON COMMERCE AND LABOR Sixty-eighth Session May 23, 1995 The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 8:30 a.m., on Tuesday, May 23, 1995, in Room 227 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator Randolph J. Townsend, Chairman Senator Ann O'Connell, Vice Chairman Senator Sue Lowden Senator Kathy M. Augustine Senator Raymond C. Shaffer Senator John B. (Jack) Regan Senator Joseph M. Neal, Jr. STAFF MEMBERS PRESENT: Scott Young, Senior Research Analyst Molly Dondero, Committee Secretary OTHERS PRESENT: Marie Saldo, Vice President, Government Affairs, Sierra Health Services Bob Martin, Lobbyist, Executive Director, Nevada Association of Homeopathic Physicians, Board of Homeopathic Medical Examiners Charles Joerg, Lobbyist, Nevada Manufactured Housing Association John Sande III, Lobbyist, Western States Petroleum Association Harvey Whittemore, Lobbyist, Arco Jack Greco, Chairman, Nevada Gasoline Retailers Peter D. Krueger, State Executive, Nevada Petroleum Marketers Association Steve Yarborough, President, Nevada Gasoline Retailers Frank Shearer, Leasee, Flamingo and Pecos Texaco John Arfuso, Leasee, Expressway Texaco Nick Fakhimi, Leasee, Nick's AM/PM Hank Lavi, Leasee, Sahara Decatur Texaco The hearing was opened with the introduction of four bill draft requests (BDRs). BILL DRAFT REQUEST 57-1797: Authorize provision for mandatory binding arbitration in certain group health insurance contracts. Marie Saldo, Vice President, Government Affairs, Sierra Health Services, discussed the BDR. She explained they would like to be able to submit benefit issues to binding arbitration. She indicated this bill will benefit the consumer. SENATOR REGAN MOVED TO INTRODUCE BDR 57-1797. SENATOR SHAFFER SECONDED THE MOTION. THE MOTION CARRIED. (SENATORS AUGUSTINE AND LOWDEN WERE ABSENT FOR THE VOTE.) ***** BILL DRAFT REQUEST 54-840: Makes changes concerning duties of homeopathic clinician. Bob Martin, Lobbyist, Executive Director, Nevada Association of Homeopathic Physicians, Board of Homeopathic Medical Examiners, explained the bill draft allows homeopathic assistants to be licensed. The bill draft allows for an alternative method of licensing. Senator Townsend directed Mr. Martin to produce a copy of the budget for the board when he testifies for the bill. SENATOR REGAN MOVED TO INTRODUCE BDR 54-840. SENATOR SHAFFER SECONDED THE MOTION. THE MOTION CARRIED. (SENATOR LOWDEN WAS ABSENT FOR THE VOTE.) ***** BILL DRAFT REQUEST 43-1791: Eliminate requirements for continuing education for dealers, installers and salesmen of modular, mobile and manufactured homes. Charles Joerg, Lobbyist, Nevada Manufactured Housing Association, commented the Nevada Manufactured Housing Association requested the requirements for continuing educations several sessions ago but do not feel the need to continue the requirement. They have been unsuccessful in recruiting teachers for classes and have found that they are giving the same class each year. He stated the idea did not work out as planned and they feel it is not necessary to continue the requirement. SENATOR NEAL MOVED TO INTRODUCE BDR 43-1791. SENATOR AUGUSTINE SECONDED THE MOTION. THE MOTION CARRIED. (SENATOR LOWDEN WAS ABSENT FOR THE VOTE.) ***** BILL DRAFT REQUEST 57-1801: Revise assessments paid by life and health insurance guaranty associations. SENATOR SHAFFER MOVED TO INTRODUCE BDR 57-1801. SENATOR REGAN SECONDED THE MOTION. THE MOTION CARRIED. (SENATOR LOWDEN WAS ABSENT FOR THE VOTE.) ***** The hearing was opened on Senate Bill (S.B.) 481. SENATE BILL 481: Removes prohibition against operation of service station by refiner of petroleum. John Sande III, Lobbyist, Western States Petroleum Association, spoke in favor of the bill. He presented a slide show featuring graphs and visual material to support his testimony in favor of repealing divorcement. Exhibit C (Original is on file in the research library.), Exhibit D, Exhibit E, Exhibit F, Exhibit G, and Exhibit H were all offered in support of testimony in favor of the bill. Mr. Sande explained petroleum companies direct supply. He stated Arco direct supplies to its service stations. He stated some companies use branded and unbranded jobbers. A jobber is a wholesaler. He stated many independent stations use unbranded jobbers to fill their orders. Mr. Sande discussed Exhibit H. He explained divorcement froze the refiner operated station as a source of retail sales. Mr. Sande discussed the progression of gasoline marketing. He used a chart to discuss price increases, the decline in demand due to the prices, which led to a decline in service stations. He pointed out how price controls changed the use of gasoline. He explained that divorcement has been introduced 250 times into many state legislatures during the past 20 years. He stated price increases have nearly eliminated brand loyalties. People go where the prices are lowest and they are not interested in the full service gas station as it once was. Specialty service stations have taken the place of the local mechanic with a gas station. There are tire stores, muffler shops, and lube shops. He explained the Petroleum Market Practices Act (PMPA) changed the marketing of petroleum. It allows the dealer to stay in the market forever by requiring the petroleum company to continue to renew a contract with a leasee for life. Mr. Sande listed the stations owned by companies in Nevada. They are Arco-15, Texaco-7, Chevron-1, Unical-0, Conoco-0. He stated Conoco has left the state because they only sell through company owned stations and do not lease stations. Mr. Sande discussed the arguments in favor of divorcement as they were presented in 1987 to the Legislature. It was said, in 1987, that Arco was planning to drive out the independent marketer so that they may drive up prices. It was reported in 1987 that divorcement was necessary to keep the independent owners from being driven out of business. Mr. Sande pointed out that Nevada is the only western state with divorcement. He stated the independent market share of those states without divorcement has not suffered. Senator O'Connell asked if other western states have had divorcement then repealed it. Mr. Sande stated it has been introduced, but has never been implemented in any other western state. Harvey Whittemore, Lobbyist, Arco, stated Arizona has the Session law which only has effectiveness during the time when the legislature is in session. It is a sunsetted law. Arizona tried divorcement but rejected it. Hawaii has divorcement, but it is being sunsetted there, also. He said of 50 states, Nevada is the only western state and is only 1 of 5 where divorcement has been in effect for any length of time. Senator O'Connell asked how our prices compare. Mr. Whittemore stated if Nevada did not have divorcement, the prices would be lower. Divorcement causes the prices to increase. He stated prices increase due to the limitation on competition. Mr. Sande stated in 1987, the reason given for needing divorcement, was that the independent was being driven out of business by the oil companies. He pointed out that states without divorcement have had an increase in the independent market share. Senator Shaffer mentioned in 1987 it had been mentioned that there was a plot to eliminate competition. Mr. Sande commented that was the "smoking gun" report. He stated the claims from 1987 have not materialized anywhere in the country. He stated a fully competitive market will deliver the lowest prices for gasoline. He discussed Exhibit D. He stated the freely competitive market is best for the consumer. Mr. Sande read Exhibit F. Mr. Whittemore introduced Arco executives present at the hearing. He expressed their support of S.B. 481. Mr. Whittemore explained since 1970 over 45 states have considered legislation calling for divorcement. Only six states have adopted any of those measures. Mr. Whittemore illustrated his discussion with a slide show in support of his views. He discussed Arco's competitive pricing plan. He explained why Arco eliminated its credit card to bring prices down. He explained the elimination of the card was a marketing strategy to benefit the consumer. He pointed out how the AM/PM program has been a benefit to the consumer. He stated the leasing program is a "value-rent" program. Arco has kept gasoline prices low in the western states due to this program. Mr. Whittemore discussed Exhibit C. He discussed the phrase "a critical mass of market control . . ." on the second "confidential" page of Exhibit C. He stated this phrase has been misused and misquoted extensively. This phrase has been used to prove there was a conspiracy to control the market when it meant to understand the needs of the marketplace. He stated Arco decided not to use unbranded gasoline because they would be competing against their own customers. He stated it was said that Arco was trying to control the market with predatory pricing. He commented that was totally untrue. Mr. Whittemore pointed out there are, currently, several independent retailers such as Herbst and Rebel which have a larger percentage of the retail market than the petroleum companies have. He stated competitive advantages have developed because of divorcement. He stated certain classes of competitors have been allowed to grow while others have had to remain static. He reminded the committee to study the market share before divorcement, and in the non- divorcement states and compare them to the market share now. Senator Neal asked, "Is it your testimony to the committee that your client . . . has not been able to grow in this state?" Mr. Whittemore stated it has not been able to own company stores. He stated: Their market share with respect to the gasoline it sells, has risen along with the growth that has taken place in the state. They are still very aggressive competitors with respect to the fact that they need a market to sell their gasoline. With respect to part of your question, the answer is yes. With respect to another part, the answer is no. Senator Neal questioned if the company wishes to sell gasoline or operate convenience stores. Mr. Whittemore indicated they wish to continue to develop the AM/PM concept. Senator Neal asked what prevents them from opening a store and selling gasoline. Mr. Whittemore indicated there is a provision in the law which precludes that, which is the section requested for repeal, Nevada Revised Statutes 597.440. Senator Neal disagreed with "vertical integration." Mr. Whittemore explained "vertical integration" is a process by which those who have the means of production also engage in the process of retailing the product. Senator Neal pointed out that means the gasoline companies control the product from the pump to the gas station. He asked if all the stores which are now connected to Arco and to other companies who have been prohibited from having total "vertical integration" of their product will go back to the way it was prior to 1987. Mr. Whittemore stated they will not return to those numbers of owned stores. He stated the bill allows for the repeal of divorcement. The companies will be able to open new company owned stores. They will be able to place stores where they choose, based on market analysis. Mr. Whittemore emphasized the companies have no interest in putting stations with whom they have a business relationship out of business. Mr. Whittemore pointed out that the marketplace dictates the direction the market takes. The consumer decided to pay cash and to use self-service pumps to save money. Consequently, more of the self-service stations appeared to take care of the increase in business. The full-service station dropped behind in the market share. Senator Neal asked if Arco will accept removing the cap, but keeping the existing marketing area. Mr. Whittemore stated there have been many discussions over what is an appropriate method to resolve the dispute. He stated: Arco will agree to the following changes in the existing law and to put this matter before a study committee during the interim, a binding study, where both parties will accept the results of that committee in terms of its recommendations to the 1997 Legislature if the majors could increase their market penetration and be guaranteed that on a permanent basis, they will be allowed to build some additional stores. Those provisions will require the following changes in the existing law. Rather than be limited to 15 service stations, John's [Sande] clients and my client have agreed that they would be willing to accept an increase of 12 service stations, and that the following minor change be made with respect to how long a refiner can operate a service station, for not more than 90 days. We would ask that it go to 180 days . . . If, in fact, the committee chooses to process the legislation in that fashion we would give, on behalf of Arco, our commitment that if that committee came back with a no recommendation that we come back and present this issue in 1997. If the committee comes back with the recommendation that the repeal not be removed, we would accept that judgement for 1997. If, in fact, it comes back and says the repeal should occur, we, obviously would support that, and expect the other side would live with that. Mr. Whittemore explained he feels a geographical limitation would be the height of irresponsible overregulation rather than fair regulation. He suggested letting the market decide where the regulation should take place. He insisted no company will build a company store in close proximity of an existing dealership. Mr. Whittemore stated Rebel, who is part of the association opposing this bill, said that the 1987 divorcement laws were barriers to competition. He indicated his client is not afraid to have the issue studied. He stated it is unfair to keep an entire class of competitors out of the market while divorcement is being studied. Senator Augustine disclosed for the record that she served as a paralegal on the Alyeska Pipeline service company of which Arco was a partner, but she no longer has a financial interest in the company. Senator Shaffer asked Mr. Whittemore if he was correct in understanding Mr. Whittemore's proposed compromise. He asked if it is correct that Arco would like 12 more stations and an interim study of the stations. Senator Shaffer asked who would run the 12 stations. Mr. Whittemore stated they would be company operated. Senator Shaffer asked who will be on the interim study committee. Mr. Whittemore stated that is up to leadership. Senator Shaffer asked if Mr. Whittemore and his client will abide by the decision of the committee, no matter what it is. Mr. Whittemore stated they would for the next 2 years. Senator Lowden asked if the 12 stations to be built will stay with Arco even if the interim committee decides not to end divorcement. Mr. Whittemore agreed. She questioned what the term "binding study committee" meant. Mr. Whittemore commented he will put on the record, "we [Arco] will agree to the results." Senator Lowden asked if he has discussed his proposed compromise with the opponents of the bill. Mr. Whittemore stated he has and they have rejected the compromise. Mr. Whittemore stressed there is so much competition no one company can grab the monopoly share of the market and cannot control the price in that market. Senator Neal expressed his concern that a monopoly can occur, thus, driving up prices. Mr. Whittemore said there are no controls on the leasee or contract dealer from having more stations. He stated there is a dealer who owns 29 stations. He stated there is another company which has 80 stations. He stressed these people are not subject to market controls. He stressed Arco did not conduct predatory pricing. Senator Townsend asked if Senate Bill (S.B.) 459 is capable of affecting relationships between oil companies and their operators. Mr. Whittemore stated S.B. 459 is exempt in its current form. SENATE BILL 459: Regulates operating of franchises. Senator Augustine asked for the percentages of Herbst and Rebel stations as compared to other operators. Senator Neal asked what would Arco build if the cap was lifted allowing it to build more stations. He asked if they will be service stations or convenience stores. Mr. Whittemore stated they will be AM/PM stations. Senator Lowden commented her constituents are outraged at the loss of full-service gas stations. Mr. Whittemore explained it is up to the consumer to dictate the market. He expressed his hope that the full-service stations will continue to survive. Jack Greco, Chairman, Nevada Gasoline Retailers, spoke in opposition to the bill. He pointed out that Mr. Whittemore stated there was a dealer with 29 stations. Mr. Greco commented Arco has 868 stations. Mr. Greco presented Exhibit I and Exhibit J. He commented there have been thousands of stations who have gone out of business in other states because those states do not have divorcement and they have been driven out of business by the oil companies. He stated the Petroleum Market Practices Act (PMPA) has been circumvented by the oil companies. He commented the market share for the independent dealer has dropped and disagreed with Mr. Whittemore. Mr. Greco commented that Conoco not only left Nevada, they left the western United States, and those other states do not have divorcement. He stated divorcement has never been repealed where it was fully enacted. He stated divorcement is in Washington, D.C., Puerto Rico, and Australia has divorcement. Mr. Greco doubted prices will go down if divorcement is eliminated. He explained the oil companies subsidize their company stations by 10 cents a gallon to make a profit. He stated divorcement has been introduced 250 times because it works, and the oil companies know it works and fight it. Oil companies have been forced to divest stations in other states due to lawsuits in Washington. Senator O'Connell asked for an example where the major oil companies have decreased prices, eliminated competition, then raised prices again. Mr. Greco stated that has occurred in a number of places. He stated in California where there are still independent dealers, he has seen an Arco company station with 32 cents a gallon lower prices than at the Arco company station in a town just up the road where independent dealers have been eliminated. He stated it is the intent of the oil companies to remove or discipline the independents, set the gas price, then go back and discipline any remaining independents again. He stated this has gone on with all the major oil companies over the years. He stated the independents have nearly been eliminated from Arizona. Senator Shaffer asked if divorcement is so good, why have none of the other western states adopted it. Mr. Greco stated Hawaii has divorcement, but with a sunset provision. He stated other states have tried to pass other types of legislation to address the issue, but they have been costly. He stated divorcement has not been a cost to Nevada. He commented the oil companies have very good lobbyists at the state levels. Mr. Greco stated divorcement is a control issue to the oil companies. They want to control the prices at the pumps. He referred to Exhibit I and stated the chart is incomplete because it does not show where the control of prices is indicated. Mr. Greco explained Exhibit J is a list of those retailers no longer in business due to the Arco-Shell swap which occurred prior to divorcement. He explained since divorcement was passed, there was a Texaco-Exxon swap and those dealers are still in business. He explained during this same swap in southern California, Exxon dealers were eliminated. California does not have divorcement. Senator Regan asked how many dealers in the audience operate full-service gas stations. Mr. Greco stated they all have full- service stations. Mr. Greco presented the committee with a petition of 15,000 signatures to keep divorcement. He presented a package of support information (Exhibit K. Original on file in the research library.) and discussed many of the letters in the package. Mr. Greco gave a detailed presentation from a series of charts. (Those charts were not available for use as exhibits.) He indicated at one time independent dealers held 60 percent of the market in Clark County. By the time divorcement was implemented, they held only 16 percent of the market. He commented since the passage of divorcement, the independents have increased to 24 percent of the market share. Senator Lowden asked Mr. Greco if he is against an interim study. Mr. Greco stated he is not. He explained what he is against is the oil companies proposal that they be given the 12 stations they want which translates into an increase of 96 company stores for the state because it is more than just Arco asking for the changes. He pointed out having the study to decide whether they should receive those stations after giving the oil companies what they want is not a good idea. He explained he is opposed to giving the stations to the oil companies before the study. He stated he wants to see all the information given to the study committee, including the raw data concerning the company stations. Senator Lowden commented there is so much information to study, it is overwhelming and more time is needed for the issue. She indicated she favors the study. Mr. Greco expressed his concern that the oil companies will all want what Arco is asking. Peter D. Krueger, Executive Director, Nevada Petroleum Marketers Association, commented he is in favor of a full, interim study. He commented if the major oil companies have not been hurt by divorcement, as Mr. Sande indicated in previous testimony in the Assembly, then why is there a rush to push this bill through. He suggested using 18 to 24 months to adequately study divorcement then abide by the results. Senator Shaffer stated he feels the stations should be allowed to be built during the time divorcement is being studied. Mr. Greco stated there is nothing prohibiting the oil companies from building the stations. Divorcement precludes the oil companies from directly operating the stations. Senator Shaffer stated: I do not really see how we can do a real study without having some additional stores [which are] company operated. That is the biggest argument . . . the effect the company operated stores would have [independent dealers] on you people. There is no way we can tell if we do not see what happens. Mr. Greco played a tape from a telephone answering machine to illustrate what happens when he tried to get information as to who is sharing the market in gasoline totals. The tape played as follows: This is Mac Beavers, Whitney-Lee Corporation, we decided we are not going to sell you guys that information. It is not that we do not like you, or the dealers, I have a great deal of respect for the dealers and independent businessmen. I wish we, in this industry can get along, but, we just do not want to provide ammunition that can be used against our clients and you guys seem to be doing a pretty good job without us, so, I appreciate your interest, but we are not going to sell you that information right now. Mr. Greco doubted the information will be made available if there is a study. He stated the oil companies are indicating the independents still have 32 percent of the market share in the non-divorced western states. Mr. Greco disagreed. He illustrated the major oil corporations have 92 percent of the share in Seattle, 86 percent in Portland. Senator Townsend commented if a community demands a full-service station someone will put one in that community. Mr. Greco said divorcement is not here to keep full-service gas stations. The needs of the marketplace determine whether there will be a full- service station or not. He commented over $400 million has been invested in Nevada in gasoline stations since divorcement was passed. Before divorcement, Mr. Greco pointed out Arco had surrounded the independent retailers with company stores and started a pricing game by selling all three grades of gasoline 1 cent above the independent's cost. He expressed his fears that the same thing will begin again if S.B. 481 passes. Senator Townsend commented, if Arco has 15 stations, why should the other oil companies not be allowed to have the same number of stations. Mr. Greco stated allowing more company stores is a control issue for the oil companies. Mr. Greco stated there are only 13 Texaco dealers in Clark County and Texaco could eliminate all of its dealers to gain stores. He commented if every oil company is allowed 15 stores, they can eliminate most of their independent dealers. He suggested bringing Arco and Texaco to zero to even out the situation. Mr. Greco discussed Exhibit L. He commented Nevada consumers are paying higher prices due to the Valdez incident and the Kuwait war. Exhibit L shows the increase in prices for Nevada in comparison to California markets. He stated the dealers in Nevada reduced their profit margin during those incidents and the out-of-state companies increased their prices. He commented one telephone call can change the prices across town when there is only one competitor. Independent dealers will set their prices competitively. Mr. Greco discussed page 2 of Exhibit L. He pointed out there are no company stores in Reno and they have the lowest prices with Las Vegas being second. Las Vegas has 22 company stores. Senator Augustine pointed out the taxes are not included in the chart which will change the price structure. Mr. Greco commented Nevada averages 14 cents a gallon higher than Arizona due to high taxes. Steve Yarborough, President, Nevada Gasoline Retailers, presented Exhibit M. He pointed out this issue has been studied a great deal over the years. Senator O'Connell asked how long Maryland has had divorcement. Mr. Yarborough stated since 1982. He stated there are no company stations in Maryland. He indicated the prices paid for gas by the Maryland consumers is less than in the non-divorced states around Maryland. He stated they have a growing, diversified market. Mr. Yarborough commented the United States is the only oil-producing country in the world whose government does not own title to the crude oil. The oil companies charge a symbolic royalty. The oil companies have total control over their product. Mr. Yarborough pointed out the oil companies are asking for the repeal of divorcement, not the consumers. He reminded the committee that thousands of people signed a petition in support of divorcement indicating they are happy with the way things are today. Mr. Krueger stated divorcement has allowed a level playing field for the retailer. He pointed out Mr. Sande and Mr. Whittemore have tried to convince the committee that the legislation is bad, even though, in his opinion, the consumer has benefited from the legislation. He stated he is interested in seeing that Nevada businesses continue to prosper. He pointed out competition is healthy for Nevadans. Senator Shaffer asked how many members are in the retailers' association. Mr. Krueger stated there are 48. Senator Shaffer asked if any of the members own more than 15 stations. Mr. Krueger stated there are three members with more than 15 stations. Senator Shaffer asked if Mr. Krueger would agree to amending the bill to limit those members to 15 stores each. Mr. Krueger stated "no." He pointed out they do not control the market. Senator Augustine asked if a lesser figure of 10 stations would be acceptable to the retailers' association. Mr. Greco commented that is a total of 80 stations. He pointed out the 15 stations allowed to Arco was a grandfather clause. All other oil companies were restricted by the 1987 legislation to the number of stores they had in operation at that time. They were not allowed to equal Arco's number. Senator Neal commented the oil refiners, by law, are not prevented from building stations, just from operating stations. He commented ". . . oil companies, if allowed to take, will continue to take." Frank Shearer, Leasee, Flamingo and Pecos Texaco, read Exhibit N. Senator Augustine commented the independent retailers like Mr. Shearer offer a service which is needed. He has a full-service gas station. Mr. Shearer commented there are fewer and fewer full-service, independent gas stations. They cannot compete with the self-service stations. Senator Augustine commented his volume should be increasing if there are fewer stations. Mr. Shearer stated if he cannot sell gasoline at a competitive price, then he will be forced out of business because people will forget about the full-service stations. He commented that in 1978, 68 percent of his business was full-service, today full-service is 15 percent of his business. John Arfuso, Leasee, Expressway Texaco, read Exhibit O Nick Fakhimi, Leasee, Nick's AM/PM, asked the committee to vote against S.B. 481. He stated if divorcement is repealed his business will be ruined. He asked the committee to consider that every company-owned store is a gasoline station. He stated they offer no other services for automobiles to the customers. He asked for help in fighting the big oil companies. Hank Lavi, Leasee, Sahara Decatur Texaco, asked the committee to defeat S.B. 481. He asked how the repeal of divorcement will benefit the public. He stated he must pass a company-owned store on his way to work in the morning. He compares prices each morning. He stated the store down the street from his has a car wash. He asked for an equal discount from his supplier. He stated it averages out to be a 12.5 cents per gallon discount. The oil company told him to build his own car wash. He was told to build it himself, but the property does not belong to him, and if he puts one in for over $120,000 he must leave it if he sells his business. He stated when he opened he had to sign a contract stating whatever he does to the real property he must turn over to Texaco if he leaves. He asked why he should spend that much money, to give a discount out of his own profits to his customers just so he might compete with the company-owned store across the street. Exhibit P and Exhibit Q were offered in opposition to S.B. 481. The hearing was closed at 11:07 a.m. RESPECTFULLY SUBMITTED: Molly Dondero, Committee Secretary APPROVED BY: Senator Randolph J. Townsend, Chairman DATE: Senate Committee on Commerce and Labor May 23, 1995 Page