State probed 50 potential cases; no charges

THE SAN FRANCISCO CHRONICLE

Price gouging at the gas station is a crime in California.

Just don’t expect the authorities to do much about it.

Most drivers consider themselves gouged whenever they see a sudden price spike at the corner gas station. But California, like most states with anti-gouging laws, defines the offense in such a specific way that businesses rarely face prosecution. The state last year investigated about 50 potential cases. It charged no one.

Federal law avoids the topic altogether. The federal government can prosecute companies and people for price fixing — conspiring with each other to raise prices — but not for gouging.

With gasoline prices nationwide parked above $2.90 per gallon, complaints ofgouging are pouring in to government agencies. The U.S. Department of Energy logged 3,000 in two weeks last month, forwarding all of them to the states for investigation.

But few of those complaints will ever lead to charges, fines or trials. If people are prosecuted, they probably will be gas station owners, not executives of the oil companies those stations represent. State anti-gouging laws tend to target dealers, not big corporations.

“It’s the oil companies who are getting fat and rich, and they’re the ones who are largely safe from gouging laws,” said Jaime Court, executive director of the Foundation for Taxpayer and Consumer rights, a watchdog group. “The only ones who are going to get prosecuted are the little guys.”

Why doesn’t government come down harder on gouging? In part, it’s because gouging is difficult to define.

When you fork over $3.37 for a gallon of regular, you know — just know — you’ve been gouged. When prices at the pump climb faster than the cost of crude oil — gasoline’s main ingredient — you know someone has made a tidy profit at your expense.

But to economists, that just looks like capitalism as usual. They note that most businesses charge what the market will bear. If a company finds its customers will pay higher prices, it usually will charge higher prices.

So how do you craft laws against gouging when it’s just an extreme example of what businesses do every day?

“Price gouging is in the eye of the beholder,” said Jerry Taylor, head of the energy program at the Cato Institute, a libertarian think tank. “If marking up a product that’s important to people is going to be a crime, then we ought to throw every member of the National Association of Realtors in jail and throw away the key.”

Some members of Congress, eager to be seen doing something about gas prices, passed a bill last week directing the Federal Trade Commission to come up with a definition of gouging and impose fines or jail terms for violators. Critics note that the representatives avoided writing a definition themselves.

It’s not that states haven’t tried.

More than half of the states have some form of anti-gouging law on the books, usually covering not just gasoline but such other vital goods as food and medicine.

Almost all of these laws, however, cover a specific kind of gouging — jacking up prices after a disaster or emergency.

California’s law is typical. For 30 days after the proclamation of a state of emergency, the price of goods vital to public health and safety can’t rise more than 10 percent. That includes gas.

But the law contains a big exception. No business can be prosecuted if its own costs rose at as high a rate or higher than the prices it charged after the disaster. In other words, if a service station owner has to pay 15 percent more for wholesale gasoline and raises his pump prices 15 percent in response, he’s safe.

Last year’s hurricane season provided a perfect example. Prices nationwide soared after hurricanes Katrina and Rita tore through Gulf Coast gasoline refineries. President Bush declared a state of emergency, and California’s anti-gouging law kicked in.

More than 1,150 complaints reached the California attorney general’s office within the law’s 30-day window. The office picked roughly 50 that contained precise details on prices at specific gas stations, then interviewed those station owners and examined their books.

The result? No prosecutions. All of the station owners were able to prove that their costs rose as fast or faster than their prices.

“We found that in every instance, there wasn’t a violation of the law,” Attorney General Bill Lockyer said in an interview.

The experience illustrates what Lockyer considers a major problem with California’s anti-gouging law. Not only is it linked to a specific situation — a disaster — it mainly targets small business owners, not larger companies. He’d prefer that the law look at both.

“The current law allows us to investigate the corner gas station but not the refinery,” Lockyer said. “And what we’ve seen multiple times, especially this year, is a very large run-up in refinery (profit) margins.”

Lockyer, whose office has been investigating gasoline prices for seven years, recently subpoenaed financial records from the state’s refineries and is seeking depositions from the chief executive officers of the companies that own those facilities. Since California’s anti-gouging law doesn’t seem to apply to the current gas-price increase, which wasn’t triggered by a disaster, Lockyer is checking whether other state laws are being broken.

Other states have charged individual gas station owners for gouging, although such instances remain rare.

Last year’s hurricane season brought a small flurry of price-gouging cases along the Gulf Coast. For example, Florida Attorney General Charlie Crist sued two gas station owners. One had raised the price of regular 62 cents in two days even though, according to the attorney general, the business’ costs had not increased. The other reportedly advertised regular for $2.89 but charged people 40 cents more per gallon once they’d filled up.

The first owner settled in April, issuing rebates to customers and paying $15,000 to a state hurricane fund. The other suit is still pending.

The states and the federal government also have the ability to prosecute companies that agree with each other to raise prices — price fixing instead of gouging. But consumer advocates say such laws are almost impossible to enforce since they require proof that the companies directly consulted with one another in setting prices. Many investigations have tried and failed to find such evidence.

“The oil industry keeps saying, ‘They’ve investigated us and they haven’t found us breaking the law,’ ” Lockyer said. “But those of us who understand the antitrust law realize how un-useful it is. They can stick it to consumers without private price fixing. It’s possible to run up the price significantly without collusion.”

None of this will comfort drivers who see prices at their corner gas stations jump a dime per gallon overnight. Or those who find some stations suddenly charging far more than others.

Dennis DeCota, executive director of the California Service Station and Automotive Repair Association, lays some of the blame on “zone pricing,” the oil companies’ system of charging different dealers different amounts for the same wholesale gasoline based on the location of their stations.

“You’ve got situations where the difference between, say, San Francisco and Fairfield is 38 cents — same gas,” DeCota said. “Wouldn’t you as a consumer feel that someone is gouging you if the difference is 40 cents in 40 miles?”
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What is gouging?

What does the law say? In California, gouging is defined as raising the price of any vital commodity more than 10 percent after an emergency declaration unless the seller’s costs rise as much.

Who enforces anti-gouging laws? States, not the federal government, are responsible for investigating and prosecuting gouging cases.

What businesses are covered? In the oil and gas market, most states, including California, direct anti-gouging enforcement almost exclusively at retail dealers rather than large oil companies.

What do the oil companies say? Refiners maintain that prices are set by the market.

Source: SF Chronicle research