September 23, 2009

Costco Fuel Temperature Class Action Lawsuit : What does it mean?

I just got an email from Costco about a class action lawsuit against them. The mail has the subject of "IMPORTANT INFORMATION ABOUT A CLASS ACTION SETTLEMENT"

One of my first thoughts seeing this email was "oh, so Costco has been ripping us off forever and now I'll get a 10% off coupon and the lawyers get $8M in fees?" But my cynical conclusion is not right in this situation. I decided to take a closer look at this settlement and see what its all about.

Note : I'm not a lawyer and what I'm saying below is my own personal opinion reflecting on the documentation I'm reading about the law suit. Nothing here is meant to constitute legal advice or legal opinion.

The email is addressed to residents of various states who are Costco customers. The body of the email starts with :
"The Court in In re Motor Fuel Temperature Sales Practices Litigation, Case No. 07-MD 1840 (U.S. Dist. Ct., KS) has preliminarily certified a class comprised of the persons identified above and preliminarily approved a proposed class action settlement. The complaint alleges that Costco (and others) misled consumers by marketing motor fuel at temperatures above 60 degrees Fahrenheit without adjusting for the fuel's temperature. Costco denies any wrongdoing."

So basically there is a lawsuit against Costco saying that they sold gasoline at a high temperatures without compensating for the temperature difference.

Why does the temperature of gasoline matter?

If you remember your high school science class you'll recall that things expand when they get hot. Gasoline will expand in volume when it has higher temperature. However the amount of energy in the gasoline is based on the weight not the volume. So when gasoline is warmer its volume expands and you're essentially paying for less energy. Think of it as kind of like paying for some hot air along with your gasoline. That analogy is not exactly accurate but gets the idea across.

How much does the temperature of gasoline it matter?

This report from a Oversight and Government Reform Committee in the House of Representatives on the topic says that the volume will change by 0.069% difference per degree Fahrenheit. So if you have a 30 degree difference then thats about 2% change. Therefore if gasoline costs $2.80 at the pump and you pump it at 60 degrees you'd get 1 gallon but if you pumped it at 90 degrees the volume would be 2% difference so you'd have to pay $2.856 to get the same amount of energy. This represents a worst case situation. So at the very worst you might be paying a few cents more a gallon. However this can add up over millions of consumers.

The impact depends on the climate. Here is a report that shows the average temperature per state over the year. Of course its colder in Alaska and hot in Arizona. But for most states the average temperature is in the 60-70 degree range. For states like Idaho or Indiana the average temperature is close to 60 degrees. While the temperatures are higher in the summer they also drop in the winter. So the average is what you're really paying over the year. Your gas may be 1-2% more in the winter and 1-2% less in the summer. For Southern states the temperatures are higher and average gas volume is 1-2% worse. Georgia has an average temperature of 72 and Florida's average is 82. So those states are paying 0.8% and 1.5% more than the 60 degree level. In Alaska the average temperature is only 46 degrees so they are coming out ahead in the deal.

Is Costco evil? No.

Costco is not being evil here at all. In fact it turns out that "everyone does it". According to the report cited by the Oversight and Government Reform Committee study they said "Though technology exists and has been accepted for near universal use in Canada, no U.S. retailer of gasoline compensates for temperature when selling to consumers." So this appears to be standard practice in the gasoline industry. Costco simply did what every gasoline vendor does.
I would not say that Costco is doing anything particularly misleading. In fact in the suit points out that in Dec. 2007 that Costco posted notices at their gas pumps saying: "This device dispenses gasoline solely by volume measured in standard gallons (231 cubic inches). It does not adjust for temperature or other factors which may affect the energy content of each gallon dispensed." So Costco even told us what they were doing explicitly if anyone had bothered to read the notices.

What will the class action lawsuit do? Will I get some money or at least a lame coupon?

The details of the class action are in a couple documents posted at the Costco website. The document
Fuel Settlement Detailed Notice explains the basics of the suit.

It has a section 4. "WHAT DOES THE PROPOSED SETTLEMENT PROVIDE?" that explains what the proposed settlement will require Costco to do. The meat of it is that "The proposed settlement provides that Costco will convert its motor fuel pumps in ... [list of states] ... to “automatic temperature correcting” pumps over the next five years ... " The document then goes on to say that : "No payments will be made to any class members, except as stated in 9 below." and section 9 covers the cost of legal fees and rewards of $2,500 for the people who filed the suit initially.

Bottom line is that Costco has agreed to convert their gas pumps to automatically correct for the temperature difference and they are not going to pay customers anything.

To sum up:

  • Costco has sold gasoline without accounting for temperature. This is apparently what every gas retailer does and Costco had a notice posted saying so. I don't see any wrong doing on Costco's part.
  • The impact of the temperature can be minimal in some states with cold and hot days averaging out over time. However warmer Southern regions can see up to 1-2% difference in the actual gasoline received.
  • Costco has admitted no wrong doing but they agreed to install temperature adjusting equipment at their gasoline pumps as the proposed settlement.

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