IE 11 is not supported. For an optimal experience visit our site on another browser.

What is price ‘gouging,’ and can it be stopped?

Congressional Democrats Visit Capitol Hill Gas Station
Five Democratic senators, including Sen. Maria Cantwell, D-Wash., right, protest gasoline prices at a Capitol Hill filling station Wednesday. Win Mcnamee / Getty Images
/ Source:

WASHINGTON — If you had a quarter for every time the word “gouging” has been uttered this week on Capitol Hill, you’d be able to afford a tank of gasoline.

Both Republicans and Democrats are urging the Federal Trade Commission to find out whether energy companies are “gouging” the American driver with high prices.

But what exactly is “gouging”?

Apart from a driver’s unhappy feeling of being victimized when he pays $70 to fill up the gas tank of that SUV he just bought, what makes selling gasoline at $3.00 per gallon a case of “gouging” — as opposed to selling it for $2.50 per gallon or $2.25 per gallon?

When does a price increase cross the line to become gouging — and where is that line?

No federal law on gouging
There is no federal law defining or punishing gouging. But Sen. Maria Cantwell, D- Wash., wants to change that.

She is proposing a new federal definition of gouging which she adopted from a New York state statute. The core phrase: “excessively unconscionable price increases.”

Her bill would give the president the power to declare a national emergency whenever he found that “the health, safety, welfare, or economic well-being” of Americans is at risk because of a shortage of gasoline or oil or when he sees “significant pricing anomalies in national energy markets.”

According to her bill, in such an emergency those oil companies, refiners, distributors, or retailers who are “taking unfair advantage of the circumstances to increase prices unreasonably” or imposing “excessively unconscionable price increases” could be subject to up to $3 million in civil penalties.

They could also be criminally prosecuted and fined up to $1 million and thrown in jail for five years.

But how would an oil company executive know if he is imposing “excessively unconscionable” price increases?

What is a 'gross disparity'?
The Cantwell bill says that it depends on whether the price charged amounts to “a gross disparity” with the usual price of oil and gasoline prior to the energy emergency.

The Cantwell bill does not set any specific dollar amount increase or percentage increase, such as a price 150 percent above pre-emergency prices, to define what “a gross disparity” would be.

It would be up to judges to determine what the terms “excessively unconscionable” and “gross disparity” were in practice.

Cantwell said a couple of cases from New York using the “excessively unconscionable” standard had held up in court tests. “As with all standards, they come to be interpreted over time in court decisions to mean certain things,” she said. “You have to come up with some terminology and hope that that terminology has the ability for law enforcement to set a course.”

A separate section of Cantwell’s bill deals with companies manipulating markets.

Asked whether she saw today’s gas pump prices as a case of a national energy emergency under her bill, Cantwell said she’d opt instead to proceed under the market manipulation section of her bill.

28 state statutes
According to the Congressional Research Service, 28 states have emergency price-gouging statutes.

Some of them are based on a specific percentage increase in prices during an emergency compared to a non-emergency period.

Alabama law, for instance, deems it gouging if a business sells goods at a price that is 25 percent higher than the average price at which the same commodity was sold during the 30 days immediately prior to the state of emergency.

But in Florida, where state law on the books since 1992 uses the same “gross disparity” language that Cantwell uses in her bill, the law does not specify any percentage increase or dollar amount.

In one case settled last year, a Vero Beach, Fla., motel agreed to pay $75,000 for restitution and legal fees.

During the six-week period following Hurricane Frances, the motel’s daily rate for rooms increased 41 percent from the rate during the 30-day period preceding the storm. That was enough to qualify as “gross disparity” -– or at least the hotel attorneys decided they’d be better off settling rather than battling in court.

Since Attorney General Charlie Crist took office in 2002, the state has launched 72 formal investigations of alleged gouging and filed 15 lawsuits. “In 2004 and 2005, with each successive storm we saw fewer and fewer complaints about price gouging,” said Crist spokeswoman JoAnn Carrin. The law, she said, is having a deterrent effect. And its “gross disparity” standard was held constitutional in a recent test in a Florida court.

Is collusion required?
The Bush administration hasn’t indicated that it sees any need for a federal anti-gouging bill.

According to Al Hubbard, President Bush’s Assistant for Economic Policy, existing antitrust laws are sufficient to prevent price-fixing.

“We have very good anti-trust laws,” Hubbard told reporters Tuesday. “Those laws prevent collusion: companies getting together to regulate supply, to regulate pricing. Those laws prevent monopolistic pricing.”

But Cantwell emphasizes that no conspiracy or collusion is necessary to meet her test of gouging.

“Part of our challenge has been that the current federal law always looks at collusive pricing activities. That's what the federal law now says. So we're not saying that Exxon and Shell all got together and set a price,” she said.

Asked about Cantwell’s bill last fall during Senate testimony, Federal Trade Commission chairman Deborah Platt Majoras warned that it could end up hurting consumers.

“If on a widespread scale we do not allow retailers to price to control for shortages, in other words, if we only look at their cost, their historic cost, and we don't allow them to look at the fact that they're about to run out of gasoline, then we will have shortages. We've seen it happen in the past,” said Majoras. “The last thing in the world our consumers need during an emergency is to not have access to any gasoline whatsoever.”

And federal appeals court judge Richard Posner, an expert on anti-trust law and a prolific author said on his blog last year in the wake of Hurricane Katrina that calls for anti-gouging laws reflect “sheer ignorance of basic economics (a failure of our educational system) and demagogic appeals by politicians to that ignorance.”

But he added that it was understandable that lawmakers would respond to calls for gouging legislation.

“In times of catastrophe, with consumers hurting, the spectacle of sellers benefiting from consumers' distress, while (it seems) deepening that distress by charging them high prices, is a source of profound resentment, and in a democratic society profound resentments trigger government intervention,” Posner said.