Franchisees Forced To Buy Imaginary Products

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Being forced to buy imaginary products is just one of the nonsensical results of government policy affecting franchisors and franchisees.

A South Park episode captured the sanctimonious aspect of environmentalism, but even they could not have imagined some actual government mandates now burdening petroleum franchisees.

The admirable desire to address the negative impact of fossil fuels led to issuance of federal renewable fuel standards (RFS), under which "obligated parties" (including petroleum franchisor-producers) have a "renewable volume obligation" (RVO). One obligation is for a percentage of product to be cellulistic biofuels.

Since there is no commercial production of cellulosic biofuels, the companies have to "buy" the product from the Environmental Protection Agency. Of course, the EPA doesn't make fuel, and so the companies are paying for a nonexistent product--at a cost last year of $6.8M in 2011, with RFS mandated annual increases in of 100% in 2012 and 2013. Nobody knows how much (if any) cellulosic fuel will be produced and so the final cost to "buyers" is unknown.

A more logical mandate is far more threatening to franchisees: the RFS effectively push the production of corn-based ethanol fuels, but the 10% ethanol (E10) market is saturated and the slowing economy has reduced the demand for energy (including ethanol).

This saturation is dubbed "hitting the ethanol blend wall" and the obvious solution (increasing the ethanol percentage or going to alternatives such as biodiesel) is expensive and risky for franchisors and franchisees.

Many of the alternatives require the retail franchisee to install new (or retrofitted) gas pumps, at a cost averaging in excess of $250K per station.

In addition, franchisees who have sought to retrofit pumps discovered that Underwriter Laboratories will not certify the pumps, resulting in legal liability, insurance coverage issues, and violations of municipality fire codes.

A speaker at the recent ABA Petroleum Marketing Attorney's Meeting expressed frustration at being caught in the middle.

Chemical Engineer Scott Jensen noted that "the cellulostic fuel industry is at a crawl. They need to be sprinting to meet [RFS] requirements."

Jensen turned to the existing E85 fuel and began with the observation that E85 can only be used in "flex-fuel" vehicles which only account for 6% of domestic vehicles on the road.

Drawing on the experience with E85, Jensen said that consumers quickly figured out that E85 gives 25% less energy and hence is more costly than E10 despite the lower (subsidized) price of E85.

Biodiesel fuel



Federal officials and environmentalists are pushing for a rise in regular gasoline ethanol content from 10% (E10) to 15% (E15), but this is going to be very expensive and fraught with liability issues.

The difficulty to start with is that only 2001+ model vehicles can use E15, and that is only half the vehicles on the road today.

E15 misfueling is expected to be a significant problem. The EPA has approved an E15 sticker which looks like a warning label and therefore expected to engender consumer resistance to E15.

Also an issue is whether vehicle warranties will be honored once the owner uses E15 fuel; and franchisors are expected to prohibit franchisees from selling E15 unless this issue is resolved.

Biodiesel is highly-touted since it can be made from sources ranging from restaurant grease to canola oil. Proponents of biodiesel gloss over the obvious problem: the nature (and hence quality) of the end-product is highly dependent on both the source material and the expertise of the blender.

Jensen analyzed the experience of Minnesota, where school buses famously stopped dead in the winter as the fuel coagulated in the engine.

Jensen also noted that some independent marketers "splash blend" the fuel.

This means that  they put petroleum diesel into the delivery tanker, then dumped in the biodiesel feedstock, and relied on the mixture sloshing together in the tanker as it drove to the retail gas station!

Jensen concluded by observing that while the goals are worthy and the legislators and regulators mean well, the current RFS standards are a "wish list" that are imposing significant costs on petroleum refiners and retail dealers, which negatively impact not only the petroleum industry but the US economy.

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About this Entry

This page contains a single entry by Paul Steinberg published on June 5, 2012 10:54 AM.

10+ Ways to Effective Sales Prospecting was the previous entry in this blog.

Who is Outsourcing Franchise Sales? is the next entry in this blog.

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