Motor Fuels
Stakeholder Views on Compensating for the Effects of Gasoline Temperature on Volume at the Pump Gao ID: GAO-08-1114 September 25, 2008The volume, but not the energy content, of hydrocarbon fuels, such as gasoline and diesel, varies in response to changes in temperature. Thus, because of expansion, the energy content per gallon of 90 degree fuel is less than that of 60 degree fuel. States and localities adopt and enforce weights and measures regulations, often using the model regulatory standards published by the National Institute of Standards and Technology (NIST). Although technology now exists to compensate for the effects of temperature on gas volume, the costs of doing so at the retail level have become the subject of much debate among weights and measures officials, consumer groups, and representatives of the petroleum and fuel marketing industries. GAO was asked to provide information on (1) the views of U.S. stakeholders on the costs to implement automatic temperature compensation, (2) the views of U.S. stakeholders on who would bear these costs, and (3) the reasons some state and national governments have adopted or rejected automatic temperature compensation. To do this work, GAO reviewed NIST and other documents and congressional testimony; interviewed stakeholders from 3 federal agencies, 17 states, and 15 groups representing a variety of interests, including consumers, truck drivers, and the oil and gas industry; and interviewed officials in 5 other nations. Various stakeholders and officials provided technical and other comments, which were incorporated in the report as appropriate
The costs to implement automatic temperature compensation are unclear. Most stakeholders said that implementing automatic temperature compensation for retail sales would involve the cost to purchase, install, and inspect new equipment on pumps, as well as costs to educate consumers about the change. Some stakeholders said the costs to adopt automatic temperature compensation ranged from $1,300 to $3,000 per pump, but none had estimated the total costs nationwide, in part because complete data are not available. Estimates of the cost to inspect the new equipment varied. Officials in a small number of states said inspection times would increase by 20 to 50 percent, while officials in three other states said the costs would not be significant. No stakeholders had developed estimates of the costs to educate consumers. Stakeholders differ on whether retailers, consumers, or both would ultimately bear the costs of implementing automatic temperature compensation at the retail level. Some stakeholders, including state officials and industry representatives, said that the costs would be passed on to consumers through higher prices for fuel or other goods sold at retail stations. Others, such as consumer groups, said that retailers and consumers would share the costs and benefits. That is, some retailers could use funds they receive from major oil companies for remodeling to pay for the equipment. These stakeholders also said the benefits include consistent energy content for consumers and improved inventory management for retailers. Stakeholder views were largely based on professional judgment and general economic theory rather than on studies or other data, and most stakeholders said that a comprehensive cost-benefit analysis would provide policymakers with important information. Governments that have adopted or permitted automatic temperature compensation for retail fuel sales cited improved measurement accuracy and greater equity between retailers and consumers as reasons for making the change; those that have prohibited it largely cited concerns that the costs would outweigh the benefits. Hawaii adopted temperature compensation more than 26 years ago because it provided purchasing equity for the industry and consumers. In 2008, Belgium mandated temperature compensation to help ensure more consistent energy content for consumers. Canadian officials cited improved measurement equity and accuracy as reasons for allowing retailers to sell temperature-compensated fuel in the early 1990s. In the United States, officials from eight states that have laws or regulations that prohibit automatic temperature compensation said the decision should be based on an analysis of the costs and benefits, with some expressing concern that the costs would outweigh the benefits. None of the governments that have adopted automatic temperature compensation have studied its impact.
GAO-08-1114, Motor Fuels: Stakeholder Views on Compensating for the Effects of Gasoline Temperature on Volume at the Pump
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Report to the Chairman, Committee on Science and Technology, House of
Representatives:
United States Government Accountability Office:
GAO:
September 2008:
Motor Fuels:
Stakeholder Views on Compensating for the Effects of Gasoline
Temperature on Volume at the Pump:
GAO-08-1114:
GAO Highlights:
Highlights of GAO-08-1114, a report to the Chairman, Committee on
Science and Technology, House of Representatives.
Why GAO Did This Study:
The volume, but not the energy content, of hydrocarbon fuels, such as
gasoline and diesel, varies in response to changes in temperature.
Thus, because of expansion, the energy content per gallon of 90 degree
fuel is less than that of 60 degree fuel. States and localities adopt
and enforce weights and measures regulations, often using the model
regulatory standards published by the National Institute of Standards
and Technology (NIST). Although technology now exists to compensate for
the effects of temperature on gas volume, the costs of doing so at the
retail level have become the subject of much debate among weights and
measures officials, consumer groups, and representatives of the
petroleum and fuel marketing industries.
GAO was asked to provide information on (1) the views of U.S.
stakeholders on the costs to implement automatic temperature
compensation, (2) the views of U.S. stakeholders on who would bear
these costs, and (3) the reasons some state and national governments
have adopted or rejected automatic temperature compensation. To do this
work, GAO reviewed NIST and other documents and congressional
testimony; interviewed stakeholders from 3 federal agencies, 17 states,
and 15 groups representing a variety of interests, including consumers,
truck drivers, and the oil and gas industry; and interviewed officials
in 5 other nations.
Various stakeholders and officials provided technical and other
comments, which were incorporated in the report as appropriate.
What GAO Found:
The costs to implement automatic temperature compensation are unclear.
Most stakeholders said that implementing automatic temperature
compensation for retail sales would involve the cost to purchase,
install, and inspect new equipment on pumps, as well as costs to
educate consumers about the change. Some stakeholders said the costs to
adopt automatic temperature compensation ranged from $1,300 to $3,000
per pump, but none had estimated the total costs nationwide, in part
because complete data are not available. Estimates of the cost to
inspect the new equipment varied. Officials in a small number of states
said inspection times would increase by 20 to 50 percent, while
officials in three other states said the costs would not be
significant. No stakeholders had developed estimates of the costs to
educate consumers.
Stakeholders differ on whether retailers, consumers, or both would
ultimately bear the costs of implementing automatic temperature
compensation at the retail level. Some stakeholders, including state
officials and industry representatives, said that the costs would be
passed on to consumers through higher prices for fuel or other goods
sold at retail stations. Others, such as consumer groups, said that
retailers and consumers would share the costs and benefits. That is,
some retailers could use funds they receive from major oil companies
for remodeling to pay for the equipment. These stakeholders also said
the benefits include consistent energy content for consumers and
improved inventory management for retailers. Stakeholder views were
largely based on professional judgment and general economic theory
rather than on studies or other data, and most stakeholders said that a
comprehensive cost-benefit analysis would provide policymakers with
important information.
Governments that have adopted or permitted automatic temperature
compensation for retail fuel sales cited improved measurement accuracy
and greater equity between retailers and consumers as reasons for
making the change; those that have prohibited it largely cited concerns
that the costs would outweigh the benefits. Hawaii adopted temperature
compensation more than 26 years ago because it provided purchasing
equity for the industry and consumers. In 2008, Belgium mandated
temperature compensation to help ensure more consistent energy content
for consumers. Canadian officials cited improved measurement equity and
accuracy as reasons for allowing retailers to sell temperature-
compensated fuel in the early 1990s. In the United States, officials
from eight states that have laws or regulations that prohibit automatic
temperature compensation said the decision should be based on an
analysis of the costs and benefits, with some expressing concern that
the costs would outweigh the benefits. None of the governments that
have adopted automatic temperature compensation have studied its
impact.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1114]. For more
information, contact David Maurer at (202) 512-3841 or maurerd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
The Magnitude of Equipment and Education Costs of Adopting Automatic
Temperature Compensation Is Unclear:
It Is Unclear Who Would Bear the Costs of Implementing Automatic
Temperature Compensation:
Governments That Have Adopted Automatic Temperature Compensation Did So
Largely to Improve Purchasing Equity, and Those That Have Not Cited
Concerns That the Costs Would Outweigh the Benefits:
Concluding Observations:
Appendix I: Scope and Methodology:
Appendix II: GAO Contact and Staff Acknowledgments:
Figure:
Figure 1: Distribution Network for Gasoline and Other Petroleum
Products:
Abbreviations:
EPA: Environmental Protection Agency:
EU: European Union:
FTC: Federal Trade Commission:
NCWM: National Conference on Weights and Measures:
NIST: National Institute of Standards and Technology:
United States Government Accountability Office:
Washington, DC 20548:
September 25, 2008:
The Honorable Bart Gordon:
Chairman:
Committee on Science and Technology:
House of Representatives:
Dear Mr. Chairman:
Consumers and businesses alike are concerned about the steep rise in
fuel prices in recent years. Because the volume of hydrocarbon fuels,
such as gasoline and diesel[Footnote 1], varies in response to changes
in temperature, some are concerned about the potential impact of
temperature-related changes in volume on the amount they pay. More
specifically, the volume of gasoline expands or contracts by 1 percent
for each 15 degree increase or decrease in temperature, while the
energy content of gasoline remains the same. For example, 10 gallons of
gasoline at 60 degrees Fahrenheit (F) expands to 10.2 gallons of
gasoline at 90 degrees F but maintains the same total energy
content[Footnote 2]. As a result, the average energy content per gallon
of the 90 degree fuel will be less than that of the 60 degree fuel. In
the United States, wholesale fuel transactions are routinely adjusted
for temperature-related changes in volume. However, at the retail
level, gasoline and diesel are sold by volume--specifically, 231 cubic
inches per gallon--without regard to temperature, leading some to
believe that the retail price of a gallon of fuel may not reflect its
true value. Advances in measurement technology have allowed the
development of devices that can automatically compensate for the
effects of temperature on volume when dispensing fuel at retail gas
pumps[Footnote 3]. While some argue that extending temperature
compensation to the retail level could provide greater transparency in
fuel prices, others contend that the cost to upgrade existing equipment
could be substantial and impose economic hardship on retailers.
The National Conference on Weights and Measures (NCWM), a consensus-
building organization composed of state and local regulatory officials
and other interested parties, has discussed whether to adopt standards
for temperature compensation of gasoline and diesel for over 30 years,
most recently at its meeting in July 2008. NCWM plays a key role in the
debate because states adopt and enforce weights and measures
regulations.
NCWM receives technical guidance on this and other matters from the
Office of Weights and Measures in the Department of Commerce's National
Institute of Standards and Technology (NIST). In partnership with NIST,
NCWM develops model regulatory standards that are available for
adoption and enforcement by state or local weights and measures
authorities. NIST publishes these standards in various handbooks, and
any proposed changes to these handbooks are considered by NCWM.
Since 2000, NCWM has considered various proposals related to automatic
temperature compensation, including proposals in 2007 and 2008 to adopt
model regulatory standards that states could use to implement
temperature compensation in retail sales of gasoline and diesel.
Neither of the proposed model standards has been adopted. In addition
to the deliberations of NCWM, the Congress has held hearings on the
issue, and federal legislation has been proposed to require the use of
temperature compensation in retail transactions. However, the economic
implications of temperature-induced changes in the volume of motor
fuels on the price of gasoline and diesel remains a topic of
considerable debate, and the issue continues to elicit strong opinions,
both for and against, from parties such as petroleum marketers,
retailers, independent truckers, fleet owners, and consumer advocates.
In the context of this debate, you asked us to provide information on
(1) the views of U.S. stakeholders[Footnote 4] on the costs to
implement automatic temperature compensation, (2) the views of U.S.
stakeholders on who would bear these costs, and (3) the reasons some
state and national governments have adopted or rejected automatic
temperature compensation. For each of these issues, we agreed to report
on the support, such as studies or data, that stakeholders use for
their views.
To obtain information from U.S. stakeholders on the costs to implement
automatic temperature compensation and who would bear those costs, we
reviewed NCWM documents and congressional testimony and performed a
literature search to identify relevant documents and stakeholders
likely to have a view on the implementation of automatic temperature
compensation in the United States. To identify additional stakeholders,
we asked each stakeholder we interviewed for recommendations of
knowledgeable other entities and selected for interviews those who
would provide us with a broad and balanced range of perspectives on
temperature compensation of gasoline and diesel. We used a standard set
of questions to interview each of these individuals to ensure we
consistently discussed each aspect of automatic temperature
compensation. Specifically, we interviewed representatives of two
consumer advocacy groups, five fleet owners and operators, a former
NIST official, and officials at seven organizations that represent
independent truck drivers, the oil and gas industry, independent
petroleum marketers, convenience store and truck stop owners, and the
trucking industry. To obtain views from governments that have adopted
or rejected temperature compensation, we contacted officials in 16
states that have taken specific steps to adopt or prohibit automatic
temperature compensation. We also contacted officials in California who
are conducting a cost-benefit analysis of temperature compensation. In
addition, we contacted officials from Australia, Belgium, Canada, the
United Kingdom, and a European weights and measures organization
because literature and interviews indicated these governments had
adopted or had considered implementing automatic temperature
compensation. We also interviewed officials from the Environmental
Protection Agency (EPA), the Federal Trade Commission (FTC), and NIST
because these agencies help oversee the marketplace generally or
oversee aspects of the retail petroleum industry. See appendix I for a
more detailed description of the methodology we employed.
We conducted our work from March 2008 to September 2008, in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for the information we present for
each of our audit objectives.
Results in Brief:
The costs to implement automatic temperature compensation are unclear.
Stakeholders said that implementing automatic temperature compensation
for retail fuel sales would involve costs to purchase, install, and
inspect new equipment on fuel pumps, as well as costs to educate
consumers about the change. Although some stakeholders had limited
estimates for costs associated with the adoption of automatic
temperature compensation, ranging from $1,300 to $3,000 per pump for
the costs to purchase and install automatic temperature compensation
equipment, none had estimated the total magnitude of these costs
nationwide. These estimates from stakeholders were generally consistent
with information we obtained from equipment manufacturers.
Specifically, costs ranged from $900 to $1,800 to buy a kit to retrofit
an existing pump and $200 to install the kit. Stakeholders said the
costs to adopt temperature compensation could be affected by such
factors as whether the investment to adopt the devices occurred
immediately or more gradually to accommodate routine replacement
decisions by retailers. A small number of stakeholders said estimates
of the magnitude of costs had not been developed, in part, because
certain data are missing, such as the number of mechanical pumps still
in use nationwide. Estimates of the cost to inspect the new equipment
as part of state enforcement of weights and measures standards varied.
Officials in a small number of states said inspection times would
increase by 20 to 50 percent, while in three other states, officials
said the costs would not be significant. However, none of these
officials had estimated the costs. Finally, although adopting
temperature compensation would require that consumers be educated about
it, no stakeholders had developed estimates of the costs to, for
example, provide disclosure on street signs, fuel pumps, and customer
receipts.
Stakeholders differ on whether retailers, consumers, or both would
ultimately end up paying the implementation costs. For example, some
stakeholders, including state officials and industry representatives,
said that the costs of implementing automatic temperature compensation
would be passed on to consumers. In their view, the costs to purchase
and install compensation equipment would be passed on to consumers
through higher prices for fuel or other goods purchased at retail
fueling stations. Other stakeholders, such as consumer groups, said
that retailers and consumers would share both the costs and the
benefits of implementing temperature compensation. That is, one
stakeholder said some retailers could use funds provided to them by
major oil companies for remodeling to pay for the equipment. Consumers,
they say, currently pay retailers for energy content they do not
receive when they buy fuel that is warmer than 60 degrees F. Moreover,
these stakeholders said that consumers would gain by receiving more
consistent energy content, and one said that retailers would benefit
because the automatic temperature compensation technology would make it
easier to detect gas leaks and to manage inventory. Stakeholder views
were based on professional judgment, general economic theory, and
assumptions about how the fuel market operates rather than on studies
or other data, and most stakeholders said that a comprehensive cost-
benefit analysis would provide policymakers with important information.
Governments that have adopted or allowed automatic temperature
compensation cited improved measurement accuracy and greater equity
between retailers and consumers as reasons for making the change,
whereas those that had not adopted automatic temperature compensation
cited concerns that the costs would outweigh the benefits. For example,
Hawaii adopted temperature compensation more than 26 years ago because,
according to Hawaiian officials, it provided purchasing equity for both
the industry and the consumer. According to Belgian officials, Belgium
mandated temperature compensation beginning in January 2008 to help
ensure greater consistency in the energy content of the fuel sold to
consumers. To improve measurement accuracy and equity, among other
things, Canada developed standards in the early 1990s that allowed, but
did not require, retailers to sell temperature-compensated fuel,
according to a Canadian official. In the United States, officials from
eight states that prohibited automatic temperature compensation said
the decision should be based on an analysis of the costs and benefits,
with some expressing concern that the anticipated costs would outweigh
any benefit to consumers and fuel retailers. Governments have not
formally studied the impact of their decisions to implement or allow
automatic temperature compensation. Specifically, neither Hawaii nor
Canada has studied the impact of temperature compensation, although
officials reported it had been well accepted by both consumers and the
industry and was not controversial. In Belgium, temperature
compensation has not been in effect long enough to study its impact.
Background:
From the beginning of the modern petroleum industry in the early 1900s,
both industry and the federal government have recognized the problem
that temperature-induced changes in volume present for inventory
control. Specifically, the fact that petroleum products, like most
other substances, expand when heated and contract when cooled means
that the amount of fuel in the inventories of retailers changes,
literally, with the weather. Following a study of the issue conducted
by the American Petroleum Institute from 1912 to 1917, the United
States and Great Britain established the standard measure for petroleum
products: at an ambient temperature of 60 degrees F, 231 cubic inches
equals a gallon.
The effect of temperature on fuel volume varies depending on the
density of the fuel. For example, gasoline's volume changes
approximately 1 percent for every 15 degree temperature change, whereas
diesel, which is a more dense fuel, changes approximately 1 percent in
volume for every 22 degree temperature change. In practice, the density
of gasoline and diesel sold to consumers varies depending on such
things as the crude oil used to produce the fuel and the addition of
other components to achieve certain ends. For example, federal efforts
to reduce petroleum consumption and greenhouse gas emissions require
the increased use of some components in fuel blends, such as ethanol,
biodiesel, and other alternative fuels. In addition, ethanol is added
to gasoline in certain geographic areas to help reduce the emissions
that contribute to the formation of ground-level ozone, which has been
linked to respiratory and other health problems. As a result, the
composition and density of gasoline and diesel products vary
considerably across the country. In 2004, at least 45 different kinds
of gasoline were produced in the United States.
Certain properties of fuels other than volume, such as mass and energy
content, do not change in response to changes in temperature. However,
energy content can be affected by changes in the density of fuel that
arise from the addition of alternative fuels or other blending
components that have densities different from the gasoline itself.
In the United States, the petroleum industry often adjusts for
temperature-related changes in wholesale transactions for gasoline and
diesel and in retail sales for other petroleum products, such as home
heating oil, liquefied petroleum gas, and prepackaged liquids such as
motor oil. In contrast, virtually all gasoline and diesel sold at the
retail level is sold at 231 cubic inches per gallon regardless of the
temperature of the fuel.
Temperature compensation can be achieved through several methods.
First, volumetric changes can be calculated manually when the fuel
density and temperature are known. Second, technological advances have
led to the development of devices that automatically measure both the
volume and temperature of the fuel at the time of purchase and correct
the volume to the amount that would exist if the fuel were at 60
degrees F. Finally, in areas where the ambient temperature remains
relatively constant throughout the year, pumps can be recalibrated to
dispense the volume a gallon would occupy at 60 degrees F. For example,
if the temperature in an area is relatively constant at 75 degrees F,
pumps can be recalibrated to dispense 233 cubic inches per gallon.
Gasoline and diesel are distributed nationwide to fuel wholesalers
through a supply infrastructure composed of pipelines, barges, tanker
vessels, marine terminals, railroads, trucks, and storage tanks. At
various points along the distribution chain, fuel is stored at terminal
stations that generally have several large storage tanks. Fuel is then
distributed, usually by trucks, to retail gasoline stations, where it
is typically stored in underground tanks (see fig. 1).
Figure 1: Distribution Network for Gasoline and Other Petroleum
Products:
This figure is an illustration showing distribution network for
gasoline and other petroleum products.
Crude oil (from various sources);
Refinery;
Fuel/terminal;
Tanker truck.
[See PDF for image]
Source: GAO and Art Explosion (clip art).
[End of figure]
Changes in the temperature of gasoline and other petroleum products can
occur for several reasons from the time these products leave the
refinery until they are deposited into a vehicle. For example, retail
fueling stations located near a refinery or a pipeline may receive fuel
that is still hot from the refining process, and the heated fuel will
affect the temperature of the fuel already in the storage
tank.[Footnote 5] In addition, the use of underground storage tanks--
particularly those with double walls--may lengthen the time required
for the fuel to cool to ground temperature of about 55 degrees F. A
common misconception is that the use of underground storage tanks helps
ensure that fuel remains at or below 60 degrees F. According to a 2004
NIST study based on 2 years of data, the average temperature nationwide
for fuel stored underground was about 64 degrees and varied among
states from about 82 degrees in Florida to 53 degrees in Minnesota.
Finally, the temperature of the fuel in the supply line to the pump
will affect the temperature of the fuel initially deposited into the
vehicle.
State and local governments adopt and enforce weights and measures
regulations, including those to ensure that retail fuel pumps
accurately measure motor fuels. Unlike many other countries, the United
States does not have a federal weights and measures regulatory agency,
although two federal agencies help oversee the marketplace generally,
and a third oversees aspects of the retail petroleum industry. Among
other things, NIST cooperates with other entities, including state and
local governments, to establish standard practices, codes, and
specifications. The FTC enforces consumer protection laws, including
laws related to unfair and deceptive practices in the marketplace. EPA
and authorized states regulate underground storage tanks that store
petroleum.[Footnote 6] These regulations require a leak detection
system on the underground storage tanks. None of these agencies has
formally endorsed or opposed the implementation of automatic
temperature compensation.
State and local governments develop regulations for weights and
measures with input from NCWM and NIST. Established in 1905, NCWM is
composed of state and local weights and measures officials, as well as
related public and private sector members. A key goal of NCWM is to
help ensure that consumers get the quantity of goods they pay for and
that businesses sell the quantity that they advertise and intend to
sell. NCWM helps ensure that uniform standards are applied to
commercial transactions by developing regulatory standards for
consideration by each jurisdiction, with technical, scientific, and
administrative support provided by NIST. Membership in NCWM is open to
all interested individuals, including regulatory officials, device
manufacturers, and consumers; however, only regulatory officials may
vote on the disposition of proposals under consideration by NCWM.
Most proposals for regulatory standards that come before NCWM originate
in one of its regional weights and measures groups located throughout
the nation or in one of its four standing committees, each of which
focuses on a specialized area, such as laws and regulations. At each of
NCWM's annual conferences, standing committees review the proposals
submitted for consideration and hold open hearings to discuss them.
Final reports containing the NCWM-approved model regulatory standards
are presented in open forum to representatives and voted upon. Actions
or subjects under consideration, but not proposed for voting, may be
carried over for further consideration at a later time. NIST publishes
NCWM's newly adopted model regulatory standards in handbooks. If a
state chooses to adopt the model regulatory standards in state law or
regulation, they will then have the effect of law in that state.
For over 30 years, NCWM has debated the pros and cons of compensating
for temperature-induced changes in the volume of petroleum products,
including gasoline and diesel. This debate is guided in part by NCWM's
principles that any method of sale or measurement must provide accurate
and adequate information about products so that purchasers can make
price and quantity comparisons. In 2007, a standing committee
recommended a proposal to allow, but not require, automatic temperature
compensation at the retail level. NCWM did not reach consensus on the
proposal, and the issue was deferred for further consideration. In
2008, a steering committee established by NCWM recommended a proposal
to require automatic temperature compensation following a 10-year
period during which retailers could decide when to purchase the
equipment based on their business needs. According to the committee,
this would allow the marketplace to determine when and whether to
adjust retail sales for temperature. However, NCWM members did not
reach consensus on the proposal, and the issue was deferred for further
consideration. Also in 2007, the California legislature directed the
state Energy Commission to study the costs and benefits of using
automatic temperature compensation devices for retail sales, among
other things. The commission is to complete its work by February 2009.
The Magnitude of Equipment and Education Costs of Adopting Automatic
Temperature Compensation Is Unclear:
Stakeholders said that implementing automatic temperature compensation
for retail fuel sales would involve costs to purchase, install, and
inspect new equipment on gasoline pumps, as well as costs to educate
consumers about the change. Some stakeholders estimate the costs to
purchase and install the temperature compensation devices would range
from $1,300 to $3,000 per pump. To provide context for the estimates
from stakeholders, we obtained information from two equipment
manufacturers. These manufacturers said the costs can vary by the type
of equipment. More specifically, the price of retrofit kits for
electronic pumps ranges from $900 to $1,800, plus $200 to install them.
Costs to retrofit mechanical pumps are higher: $2,000 to purchase and
install a kit for one hose and $3,800 for a dual hose pump. The costs
to individual retailers would vary, in part, depending on the number of
pumps, the number of hoses per pump, and the mix of electronic and
mechanical pumps that would need to be replaced or retrofitted. In
addition, an equipment manufacturer said that maintenance costs for
electronic pumps would be negligible over the useful life of a pump, 10
to 12 years. Some stakeholders noted that the magnitude of costs has
not been estimated, in part, because certain data, such as the number
of mechanical pumps still in use across the country, are not available.
As a result, the costs to adopt automatic temperature compensation are
not known.
Several stakeholders said costs to purchase and install temperature
compensation equipment could also be affected by other factors. For
example, under a phased implementation schedule, retailers could
upgrade their equipment in the normal course of replacing equipment,
whereas immediate implementation would require retailers to invest in
the equipment without regard to their business plans or ability to pay
immediately. Also, a small number of companies in North America
manufacture new pumps equipped to automatically compensate for
temperature or kits to retrofit existing pumps. Two stakeholders said
that the costs to purchase and install the equipment could rise in the
face of shortages of both equipment and skilled installers that would
occur if implementation of automatic temperature compensation were to
occur suddenly rather than over a longer period of time.
Estimates of the magnitude of inspection costs varied. A small number
of state officials said that automatic temperature compensation could
increase inspection time by 20 to 50 percent and might require the
purchase of testing equipment. In contrast, officials in three other
states said that inspection costs to adopt temperature compensation
would not be significant, although they had not estimated the cost. In
Missouri, state officials said legislation was introduced, but not
enacted, to divide the state into regions, each of which would adopt a
new reference temperature based on its average ambient temperature.
State officials reported that adoption of temperature compensation by
changing reference temperatures would require increasing staff by six
inspectors and one clerical person for a cost of about $1 million in
the first 3 years.
No stakeholders have developed estimates of the costs to educate
consumers when automatic temperature compensation is in use. However,
costs would be incurred to provide disclosure on fuel pumps, customer
receipts, and the street signs that show the retail price of fuel. A
number of stakeholders noted that, if some retailers sold compensated
fuels and others did not, consumers could be confused and might lack
the ability to make informed value comparisons for their fuel
purchases. According to some stakeholders, disclosure on pumps might be
accomplished by adding the phrase "Volume corrected to 60 degrees F" to
the face of the pump near the display of total gallons purchased. For
customer receipts, printers could be programmed to add the same phrase.
If automatic temperature compensation is in place throughout the
nation, the need to disclose its use on pump signs might no longer be
needed.
It Is Unclear Who Would Bear the Costs of Implementing Automatic
Temperature Compensation:
Stakeholders differ on whether consumers or a combination of retailers
and consumers would bear the costs of implementing automatic
temperature compensation. Specifically, many stakeholders, including
state officials and industry representatives, said that the costs to
purchase, install, and inspect compensation equipment would be passed
on to consumers, generally through higher retail fuel prices, higher
prices for nonfuel goods sold at retail fueling stations, or a
combination of both. A few of these stakeholders said that retail
prices must generally reflect the cost of goods sold or businesses will
not remain in operation. However, since the information retailers use
to make pricing decisions is proprietary in nature, it would be
difficult to estimate how much prices would increase to cover the costs
of implementing automatic temperature compensation. Some of these
stakeholders also noted that differences in the cost of fuel and other
goods sold could vary among retailers based on such factors as whether
they owned or leased the land, the number of staff they employ, and
whether the costs of inspections are paid directly by retailers or
funded from tax receipts. However, one state official said that the
ability of states to increase inspection fees may be limited by state
statute.
Some stakeholders said the costs to implement automatic temperature
compensation may result in disproportionate economic impacts on certain
classes of retailers, such as small retailers and those in rural areas,
that might be put out of business in the face of the investment to
upgrade their equipment. Retailers that are small or located in rural
areas may dispense fewer gallons of fuel than larger retailers and,
consequently, have fewer gallons from which to recover any costs
associated with upgrading their equipment. A few stakeholders said an
exemption for small retailers may be needed, such as an exemption based
on the number of gallons dispensed. In contrast, another stakeholder
said implementation that allowed retailers to make the decision of
whether to add the devices to their equipment would eliminate the
potential for disproportionate impacts.
However, other stakeholders, such as consumer groups, said that
retailers and consumers would share in both the costs and the benefits
of implementing temperature compensation. For example, one stakeholder
noted that some retailers could use funds they receive from the major
oil companies for remodeling to cover the cost of temperature
compensation equipment. According to these stakeholders, consumers have
already paid retailers for energy content they did not receive. That
is, consumers generally buy fuel that is warmer than 60 degrees and has
less energy content, according to these stakeholders. Such overpayments
are greater in southern and western states than in other areas.
Moreover, these stakeholders said consumers would benefit from greater
transparency in fuel pricing, the ability to purchase fuel with more
consistent energy content, and an enhanced ability to compare purchases
from competing retailers because price differences would be based
largely on differences in customer service or amenities such as clean
rest rooms. One noted that retailers would also benefit because the
automatic temperature compensation technology would allow retailers to
manage inventory for both their deliveries and their sales of fuel on a
temperature-compensated basis. Moreover, retailers could more easily
identify fuel leaks by reconciling their inventory records to
measurements of the fuel in their storage tanks. Specifically, if a
measurement of stored fuel showed a retailer had less fuel on hand than
it had sold, the difference could be the result of a leak.
Stakeholders also differed on the benefits of automatic temperature
compensation. Many noted that temperature compensation provides a more
accurate and replicable measurement method, but some expressed concern
that the potential cost outweighed the benefit. Within the weights and
measures community, support has been growing for the adoption of
automatic temperature compensation standards, in part because of the
improved accuracy and the availability of equipment that makes
implementation more feasible than in the past. Several stakeholders
noted that automatic temperature compensation brings equity to the
marketplace and provides both consumers and retailers with comparable
information about their fuel purchases. Specifically, when retailers
and consumers purchase temperature-compensated fuel, they each receive
comparable products. According to two stakeholders, consumers currently
cannot determine before or after a purchase the actual best price for a
gallon of gas because they do not know the temperature of the fuel.
Some stakeholders who thought the cost would outweigh the benefit said
that the increased accuracy in measurement would not benefit consumers
because fuel costs would increase as retailers recouped their
investment in the compensation devices.
Stakeholders also held different opinions on whether automatic
temperature compensation would ensure consistent energy content in each
gallon of fuel. While temperature compensation adjusts for the impact
of fuel temperature on the energy content of each gallon, it would not
affect other factors that impact energy content, such as the use of
fuel blends and additives. That is, multiple stakeholders said that the
use of ethanol and other additives, as well as seasonal fuel blends,
results in fuels that may vary in energy content by season or by retail
outlet. More specifically, they noted other factors may affect the
energy content of fuel, including the refining process itself and the
crude oil used as the source for the gasoline. Others said automatic
temperature compensation will ensure greater consistency in energy
content and mileage per gallon. One stakeholder said that, as fuel
prices increase, the issue of energy loss from the lack of temperature
compensation will become more important, while another said that the
use of blends could increase the significance of the effect of
temperature on fuel in the future.
Stakeholders' views that various factors may affect fuel prices are
consistent with our prior work on gasoline pricing.[Footnote 7]
Specifically, in a series of reports issued from 2000 through 2007, we
concluded that higher gasoline prices resulted from a range of local
and global factors, including higher crude oil prices, recent mergers
and increased market concentration in the petroleum industry, the
increased use of blended fuels, the level of state gasoline taxes, and
costs to transport gasoline from refineries to retailers. We also found
in our work on the use of special gasoline blends that it can be
difficult to establish a definitive causal link between factors and
prices because only some of the many factors that may affect gasoline
prices at various times are readily and consistently observable.
Regardless of their views, stakeholders based their opinions largely on
professional judgment and general economic theory or assumptions about
how the fuel market operates rather than on studies or other data. For
example, one stakeholder commented that it was unreasonable to assume
that retailers would absorb the costs to upgrade 14 or 16 pumps without
trying to recoup those costs through the prices of retail goods they
sell. However, none of the stakeholders based their views on studies of
the impact of the costs on fuel or retail goods. Some stakeholders said
that because the petroleum market is fiercely competitive, particularly
in areas that sell high volumes of fuel, consumers already receive the
lowest fuel price that retailers can offer, and one said that
temperature is not likely to be a relevant factor in their pricing
decisions. Because the fuel market is so competitive, one stakeholder
said, retailers do not generate enough profit to cover the costs of
temperature compensation equipment and so would pass the costs on to
consumers. In contrast, other stakeholders said that retailers may
already adjust their prices to account for the expansion and
contraction of fuel, while still others questioned the benefit to
consumers from investing in temperature-compensating devices in areas
where the average ambient temperature is close to 60 degrees F.
The majority of stakeholders--including state officials, consumer and
industry representatives, and fleet owners--said that a cost-benefit
study such as the one under way in California would provide
policymakers with important information. The California study will
examine the costs for retailers to purchase and install appropriate
equipment and calibrate it. In addition, the study will develop data on
the costs to agencies to develop appropriate test procedures, acquire
calibration equipment, and inspect the pumps at retail stations.
Information on the costs and benefits was needed to make an informed
decision on automatic temperature compensation, according to many
stakeholders. A small number said they would wait to see the results of
California's study before deciding whether to support or oppose the
implementation of automatic temperature compensation. Moreover, some
who oppose automatic temperature compensation said they would support
it if a cost-benefit analysis showed a benefit for the consumer.
Governments That Have Adopted Automatic Temperature Compensation Did So
Largely to Improve Purchasing Equity, and Those That Have Not Cited
Concerns That the Costs Would Outweigh the Benefits:
Governments that have adopted or permitted automatic temperature
compensation, or are considering doing so, cited improved measurement
accuracy and greater equity between retailers and consumers as reasons
for making the change, whereas those governments that do not allow
temperature compensation cited concerns that the costs would outweigh
the benefits. Hawaii, Belgium, Canada, and the European Union (EU) have
each adopted a policy on temperature compensation--mandatory in Hawaii
and Belgium and permissive in the remaining jurisdictions. In addition,
the United Kingdom is considering a national approach to temperature
compensation, and Australia may do so again. Both countries debated the
issue in the 1990s but did not adopt nationwide policies for retail
fuel sales at that time.
Because retail motor fuel dispensers equipped with automatic
temperature compensation devices were not readily available 26 years
ago, Hawaii developed its own method to achieve temperature
compensation for retail sales of fuel to provide purchasing equity for
both the industry and the consumer, according to a state official. The
method is based on test procedures that rely on both the temperature
and density of the fuel. A 5-year study of the average temperature of
fuel delivered to consumers in Hawaii found that the fuel temperature
was approximately 80 degrees F. More specifically, Hawaiian weights and
measures officials test retail pumps to ensure that they meet the state
standard--to deliver the amount of fuel a 231 cubic inch gallon would
occupy at 60 degrees F, or its expanded or contracted equivalent at any
other temperature. In Hawaii, the expanded equivalent is about 234
cubic inches per gallon--to reflect the increased volume at the higher
fuel temperature. Implementation was phased in over 1 year. A state
official said retailers may apply for a variance from the state
standard provided they can demonstrate that the temperature of the fuel
they deliver to consumers in their location differs from 80 degrees F.
According to a state official, temperature compensation is a matter of
fairness and equity.
Belgium mandated temperature compensation for retail sales of fuel
beginning in January 2008. Belgium adopted temperature compensation for
retail sales, in part, because some retailers were artificially heating
fuel, and the government sought greater consistency in the energy
content of the fuel sold to consumers, according to a weights and
measures official. After January 2008, any newly installed pumps must
be equipped for temperature compensation and, by January 2015, all
pumps must be equipped to dispense temperature-compensated fuel. A
Belgian official told us that the 7-year transition period will allow
retailers to make adjustments over time, in the normal course of their
operations, thereby reducing the overall cost to implement temperature
compensation. While retailers will decide when to install temperature
compensation equipment, they are prohibited from turning it off. That
is, once the equipment is in place and dispensing temperature-
compensated fuel, all hoses attached to the equipment must continue to
dispense temperature-compensated fuel. To date, the Belgian government
has not developed guidance for consumers or retailers, in part because
the transition to temperature compensation has just begun, according to
the official.
Canada has adopted a permissive policy on automatic temperature
compensation for the retail sale of liquid petroleum products, such as
gasoline, diesel, and home heating oil. Specifically, Canada
established technical and other standards in the early 1990s that
allowed retailers to sell temperature-compensated fuel, but it did not
require them to do so. According to a Canadian official, Canada
developed the standards largely for three reasons: advances in
measurement technology had made temperature compensation equipment more
readily available, automatic temperature compensation is thought to be
a more equitable and accurate method of measuring fuel, and temperature
compensation addresses retailers' concerns about inventory losses
potentially due to temperature-related changes in volume. Today, over
90 percent of Canadian fuel retailers sell temperature-compensated
fuel. Canada imposed policy controls on the use of temperature-
compensated equipment to prevent practices that might harm consumers or
businesses, and any change to pumps requires an inspection by
government officials. For example, pumps with automatic temperature
compensation devices must be operable and dispense temperature-
compensated fuel at all times throughout the year. In addition, pumps
equipped with the devices must have a sticker that says "Volume
Corrected to 15 degrees C"[Footnote 8] adjacent to the pump's visual
and printed net quantity display. Retailers may elect to convert only
selected pumps or product lines, provided that all pumps for the same
grade or blend of fuel are converted and the compensation equipment is
activated at the same time.[Footnote 9] Because Canada's regulations
are permissive rather than mandatory, retailers may choose to stop
using compensation devices provided they obtain permission from
Canadian weights and measures officials. Permission would not be
granted if retailers wanted to only use automatic temperature
compensation seasonally when it was to their benefit, according to a
Canadian official, who also said no retailers have sought to stop using
the devices.
In addition, the EU currently permits member states to adopt
temperature compensation, although fewer than 2 percent of retailers
have installed the necessary equipment, according to an official with a
European weights and measurement organization. This official said that
making adoption possible, but not required, allows the market to make
the decision when business owners decide it is in their interests to do
so. As a result, implementation will occur gradually, thereby avoiding
a "shock wave" from immediate mandatory implementation, according to
the official. A shock wave would occur if retailers were required to
purchase the equipment without regard to whether they had the funds to
do so. The EU does not have a harmonized policy on temperature
compensation, but, according to the official we interviewed,
information on fuel temperature received by the retailer and dispensed
to consumers would be important to the debate. However, the official
also noted that retailers may, at their discretion, adjust prices to
compensate for temperature-related changes in volume.
Currently, in Australia the states and territories require retailers to
sell fuel on a compensated basis. However, by July 2010, responsibility
for weights and measures regulation will shift from the states and
territories to the federal government. According to an Australian
official, the new national trade measurement legislation will replicate
the current state and territory requirements for the sale of fuel. As
part of the consultation process for developing new trade measurement
regulations, comments on any aspect of trade measurement controls, such
as temperature compensation, will be invited from all stakeholders, and
the matter of temperature conversion of fuel sales at the retail level
may well be raised.
Officials in the United Kingdom said they anticipate issuing a
statement in the fall of 2008 that temperature compensation for retail
fuel sales will be permitted nationwide but not mandated.
In the United States, officials in eight states that have laws or
regulations prohibiting automatic temperature compensation largely said
the decision should be based on an analysis of the costs and benefits,
with some expressing concern that the anticipated costs would outweigh
any benefit to consumers and fuel retailers. In some cases, these
decisions were made more than 20 years ago, and the officials we
interviewed had limited information about the reasons. More recently,
Missouri and Texas considered state legislation to implement
temperature compensation. In Missouri, where the average temperature of
stored fuel is 62 degrees F, officials said that consumers would be
negatively affected if temperature compensation were adopted by
changing the reference temperature because they would have to buy more
temperature-adjusted gallons than uncompensated gallons to obtain the
same amount of fuel. In addition, the state would need to add six
inspectors and one clerical person at a cost of about $1 million in the
first 3 years. Moreover, they said retailers would face significant
expense to purchase the compensation equipment if temperature
compensation were achieved by the use of compensation devices.
Specifically, Missouri officials in 2006 estimated that 65 percent of
the state's pumps could be retrofitted, and 35 percent would need to be
replaced, at a cost of about $341 million. In Texas, officials have
postponed further consideration of temperature compensation until a
comprehensive nationwide cost-benefit analysis has been completed. In
addition, officials in some states said that evidence of benefits to
consumers from automatic temperature compensation could lead states to
reconsider their current position.
Finally, governments have not formally studied the impact of their
decisions to implement or not to implement automatic temperature
compensation. Specifically, neither Hawaii nor Canada has studied the
impact of temperature compensation, although officials reported it was
not controversial and was generally well accepted by both consumers and
the industry. In Belgium, temperature compensation has been implemented
too recently to study its effects.
Concluding Observations:
The weights and measures community has debated the costs and benefits
of automatic temperature compensation for more than three decades with
no resolution. The issues have not changed substantively, and both
sides continue to passionately put forth their views. In general,
supporters say that extending temperature compensation to the retail
level could provide more transparency in fuel prices, while those who
are opposed argue that upgrading existing equipment would be costly and
pose potential economic hardship on retailers.
It remains unclear, however, what it would actually cost to implement
automatic temperature compensation and whether consumers or businesses
would end up paying those costs. Moreover, the two governments with the
longest experience in temperature compensation of retail fuel sales
(Hawaii and Canada) have not studied the effect of their policies. As a
result, a policy debate is being played out without good information
about the potential costs and benefits, and with both proponents and
opponents basing their views on their professional judgment and their
general understanding of economic theory.
Looking forward, there appears to be a real need for an objective
analysis of the key issues stakeholders raise about costs and benefits,
including the potential for higher costs to consumers and improved
inventory management for retailers. Such a study would need to bring
together petroleum-related scientific, engineering, and economic
expertise. Absent such analyses, NCWM and state governments face
potentially significant challenges to informing their decisions
regarding automatic temperature compensation.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to the Chief, Weights and Measures Division, National Institute of
Standards and Technology; stakeholders we interviewed; appropriate
congressional committees; and other interested parties. We will also
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or maurerd@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made contributions to this
report are listed in appendix II.
Sincerely yours,
Signed by:
David C. Maurer:
Acting Director:
Natural Resources and Environment:
[End of section]
Appendix I: Scope and Methodology:
In conducting our work on each of our objectives, we reviewed National
Conference on Weights and Measures (NCWM) documents and congressional
testimony and performed a literature search to identify relevant
documents and stakeholders likely to have a view on the implementation
of automatic temperature compensation. We used the individuals
identified through our document review and literature search as a
starting point for the sampling technique that we used to identify
additional stakeholders. That is, we used an iterative process (often
referred to as the "snowball sampling" technique) to identify other
stakeholders and selected for interviews those who would provide us
with a broad and balanced range of perspectives on temperature
compensation of gasoline and diesel. We used a standard set of
questions to interview each of these individuals to ensure we
consistently discussed each aspect of automatic temperature
compensation. We also asked open-ended questions to allow people to
share their views on this issue. To develop the questions, we reviewed
NCWM and National Institute of Standards and Technology (NIST)
documents, as well as congressional testimony. We used content analysis
to identify the main themes among responses.
We continued interviewing and soliciting names until we determined we
had appropriate coverage from all the relevant stakeholder groups.
During the course of our review, we interviewed officials from the
following 15 organizations, listed alphabetically: American Automobile
Association; American Petroleum Institute; American Trucking
Association; Consumer Watchdog; Defense Energy Support Center; National
Association of Convenience Store Owners; NATSO, an organization
representing travel plaza and truck stop owners; Owner Operator
Independent Drivers Association; Petroleum Marketing Association of
America; Society of Independent Gasoline Marketers of America;
Schneider National, Incorporated; Swift Transportation Incorporated;
United Parcel Service; United States Postal Service; and Weights and
Measures Consulting. In addition, we interviewed federal officials at
NIST, the Environmental Protection Agency, and the Federal Trade
Commission because these agencies help oversee the marketplace
generally or oversee aspects of the retail petroleum industry. We also
obtained information from two of the three manufacturers who produce
equipment that allow for automatic temperature compensation at retail
pumps.
We also contacted officials in 17 states that the literature suggested
may have taken or considered specific steps to adopt or prohibit
automatic temperature compensation. Some of these states had proposed
legislation, were identified in a survey conducted by NIST on state
practices, or were recommended by other officials. One state--
California--is conducting a state-mandated cost-benefit analysis of
automatic temperature compensation. These 17 states included a mix of
states that could be considered hot (5), cold (4), or neutral (7) based
on NIST's analysis of temperature data for stored fuel. The 17th state
was not included in NIST's analysis because of a lack of data. We
interviewed officials in the following 17 states, listed
alphabetically: Arizona, California, Florida, Hawaii, Iowa, Maine,
Massachusetts, Minnesota, Missouri, Montana, Nebraska, New York,
Oregon, Pennsylvania, South Dakota, Texas, and Wyoming.
Finally, we interviewed officials in Australia, Belgium, Canada, the
Netherlands, and the United Kingdom because literature indicated they
either had adopted or had considered implementing automatic temperature
compensation, as well as officials at a European weights and measures
organization.
We conducted our work from March 2008 to September 2008 in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for the information we present for
each of our audit objectives.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
David C. Maurer, (202) 512-3841 or maurerd@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Cheryl Williams (Assistant
Director), Cynthia Norris, and Henry Clay made key contributions to
this report. Also contributing to this report were Pedro Almoguera,
Nancy Crothers, and Cindy Gilbert.
[End of section]
Footnotes:
[1] This report focuses on gasoline and diesel rather than other
petroleum products, such as heating oil or jet fuel.
[2] This example assumes the use of the same blend of gasoline. Energy
content can also vary depending on the blend of gasoline.
[3] Throughout this report, we refer to the devices that dispense fuel
as pumps. Individual pumps may dispense multiple types of fuel, such as
regular and high-octane gasoline.
[4] Throughout this report, we use the word "stakeholder" to refer to
domestic individuals and groups with an interest in the current debate
in the United States on this issue, including NCWM, NIST, current and
former government officials, consumer groups, representatives of the
petroleum and trucking industries, and fuel retailers.
[5] The refining process "boils" crude oil to separate it into its
various components. Gasoline is distilled from crude oil at
temperatures ranging from 194 degrees F to 428 degrees F, while diesel
is distilled at temperatures up to 698 degrees F.
[6] The underground storage tank regulations apply to underground tanks
and pipes used to store or move petroleum and certain other hazardous
chemicals.
[7] GAO, Energy Markets: Increasing Globalization of Petroleum Products
Markets, Tightening Refining Demand and Supply Balance, and Other
Trends Have Implications for U.S. Energy Supply, Prices, and Price
Volatility, GAO-08-14 (Washington, D.C.: Dec. 20, 2007); GAO, Gasoline
Markets: Special Gasoline Blends Reduce Emissions and Improve Air
Quality, but Complicate Supply and Contribute to Higher Prices, GAO-05-
421 (Washington, D.C.: June 17, 2005); GAO, Energy Markets: Mergers and
Many Other Factors Affect U.S. Gasoline Markets, GAO-04-951T
(Washington, D.C.: July 7, 2004); GAO, Motor Fuels: Gasoline Prices in
Oregon, GAO-01-433R (Washington, D.C.: Feb. 23, 2001); and GAO, Motor
Fuels: California Gasoline Price Behavior, GAO/ RCED-00-121
(Washington, D.C.: Apr. 28, 2000).
[8] The reference standard of 15 degrees Celsius (C) is roughly
equivalent to 60 degrees F.
[9] Canada also allows partial conversion to automatic temperature
compensation based on "trade levels" that use different types of pumps,
such as those mounted on vehicles or those that dispense fuel at high
speed. In such cases, all pumps for a given trade level must be
converted and activated at the same time.
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