Allegations, investigations
Gouging takes center stage as cost of fuel soars

By Reed Black
staff writer

Webster's defines gouging as "scooping out" as in "forcing out an eye with the thumb."

What's happening at the fuel pumps these days probably isn't quite that painful. But Webster's second definition of gouging may ring true: "An excessive or improper exaction, or extortion."

If extortion sounds about right to you, you're not alone.

The U.S. Energy Department received more than 5,000 calls alleging price gouging right after Hurricane Katrina hit on Aug. 29. Also following Katrina, fuel prices shot up 35 to 50 cents overnight in many areas and crude hit a record of $70.85 per barrel in early September.

As those records were being recorded, the Boston Herald reported that Mobil-Exxon was projecting profits of more than $10 billion for the third quarter of 2005. That works out to $110 million per day.

In light of all that, there's now the most widespread demand for price-gouging investigations in the nation's history.

Here's a look at what's going on at the state and federal level.

At the state level, 44 state attorneys general are involved in a joint price-gouging investigation.

The initiative is being spearheaded by Alabama Attorney General Troy King - who said he's received more than 1,100 calls from consumers who allege that price gouging is occurring. He said he thinks this is the biggest joint investigation ever in to oil companies.

"I want to understand what caused prices to go up," King told Land Line.

"How can gas that was bought, paid for, delivered and in the ground in Alabama before this storm came ashore (cost more)? To what can we attribute the fact that gas rose in price? I don't know the answer to that right now."

King said there can be only one of three answers: somebody broke the law and price gouged, or they took advantage of a loophole in the law, or they didn't break the law.

He said if he finds there was a loophole he will work to close it and if the prices are found to be justifiable, he will explain that justification to the people of Alabama.

In addition to the attorneys general investigation, a group of eight Democratic governors is calling on Congress to pass a law forcing oil companies to refund much of their profits to consumers.

In Wisconsin alone, officials estimate that consumers were overcharged $88 million in September, Ethnie Grove, a spokeswoman for Gov. Jim Doyle told Land Line.

Doyle and seven other governors - from Illinois, Iowa, Michigan, Montana, New Mexico, Oregon and Washington - sent a letter to President Bush and congressional leaders, citing a study by University of Wisconsin economist Don Nichols.

The Wisconsin economist isn't involved in the governors' effort to get refunds - he did the study independent of them and found intriguing data.

In that study, Nichols looked at the historic differential between the price of a gallon of gas and a gallon of oil - that's the price of a gallon of oil, not a barrel. Nichols said for the past 15 years the difference has been stable at about 80 cents. Half of the difference goes for taxes and half goes for refining and distribution costs.

Suddenly, after Katrina, that 80 cents jumped to $1.40. Nichols said as an economist he understands "market forces driving prices," but that he also understands why the governors have asked who pocketed all that money.

The governors also raised the question of whether this is the way our system should respond to a national emergency caused by weather. As of press time, there was no word on whether Bush would meet the governors' challenge to explore the issue.

There are, however, two developments to report at the federal level.

The Senate Commerce Committee has conducted two days of hearings on possible price gouging and some committee members wondered aloud if federal anti-trust laws need to be updated.

The way those laws read now, a seller who's gained market share by operating legally can charge any price for a product so long as they're not conspiring with other companies or illegally try to restrict supplies.

The other development on Capital Hill is a big about-face by the Federal Trade Commission.

When congressional leaders were calling on the FTC to investigate possible price gouging, agency officials said they had neither the authority nor the desire to conduct such an inquiry.

An FTC spokesman said the agency investigates allegations of collusion between companies to fix prices, but an investigation of alleged price gouging could come dangerously close to setting price controls.

After that statement, Congress turned up the heat and the FTC announced a price-gouging investigation had begun. But, the FTC's John Seesel previously testified that gouging is not prohibited by federal law.

In fact, price gouging isn't specifically prohibited in most states. And in the states where it is prohibited, the criteria and penalties vary. As a general rule, the state laws look at price changes over a 30-day period and consider a price increase of 10 percent or more, during emergencies, as suspect.