Hearings and Business Meetings
November 9, 2005
SD-106 09:30 AM
Mr. Henry McMaster
TESTIMONY OF HENRY MCMASTER
ATTORNEY GENERAL FOR THE STATE OF SOUTH CAROLINA
BEFORE THE UNITED STATES SENATE COMMITTEE ON COMMERCE, SCIENCE & TRANSPORTATION
BEFORE THE UNITED STATES SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES
PRICE GOUGING DURING PERIODS OF ABNORMAL MARKET DISRUPTIONS
November 9, 2005
Thank you Mr. Chairman and members of the Committees on Commerce, Science & Transportation and Energy and Natural Resources for the opportunity to testify on the issue of price gouging during periods of abnormal market disruptions. My name is Henry McMaster and I am the Attorney General for South Carolina.
South Carolina's most recent experience with allegations of price gouging in the sale of a commodity occurred during the time periods immediately before and after Hurricanes Katrina and Rita struck the Gulf Coast on August 29 and September 24, 2005, respectively. The lessons learned in this period with regard to retail gasoline pricing are also applicable to possible price gouging for any other commodity which may result from abnormal disruptions in the market. For this reason, I will review the complexities of the gasoline pricing situation and then discuss its applicability to other commodities in general.
Like other states, South Carolina does not produce many of the resources necessary to drive its economy. With regard to gasoline, South Carolina does not have any native oil production; no refineries are located in South Carolina. South Carolina's supply of gasoline, as well as other commodities, is dependent on events which occur elsewhere.
My office received more than five hundred and fifty complaints directly from consumers and another 1,000 by referrals about alleged price gouging by gasoline retailers in South Carolina after Hurricanes Katrina and Rita struck the Gulf Coast. Our investigation of these complaints opened our eyes to the complexities of investigating allegations of price gouging, including (1) the difficulty of determining whether complaints are legitimate and credible, (2) the complexity of making determinations of whether price increases were truly "gouging" or were based on legitimate business decisions or increases in the costs to the retailer, (3) the importance of having the tools necessary to investigate allegations of price gouging immediately while the data are fresh, and (4) the interdependence of all regions of the country with regard to price and supply allocation when a catastrophic event occurs. To conduct our investigation to enable us to understand the factors underlying the run-ups in the retail price of gasoline, we met with representatives of the various companies involved in the flow of gasoline from its origin as crude oil to the pump at retail gasoline stations. Enforcement specialists from my office visited approximately one hundred gasoline retailers in twenty counties in South Carolina (we have 46). We have also met with representatives of Marathon Ashland Petroleum, LLC, BP America, Inc., Shell Oil Products US, and ConocoPhillips. Additionally, we had a conference call with the chief economist and others of the American Petroleum Institute, the trade association for the oil producers. To further understand the retail marketing of petroleum products, we met with representatives of the South Carolina Petroleum Marketers Association. We met with an oil jobber to help us understand the problems associated with supplying gasoline to retailers during a period when less gasoline is physically available for distribution than is needed to continue to supply retailers at the same rate as prior to a market disrupting event.
As demonstrated by our efforts, the investigation of price gouging complaints for any commodity will necessarily be a complex investigation. As the result of the on-site investigations of various retailers, we are doing follow-up investigations of four corporate entities that own seven retail outlets. The complexities of the production and marketing of any commodity, petroleum in particular, makes it difficult to determine whether price increases are the result of market forces and the workings of free enterprise or the result of short-term profiteering which takes untoward advantage of the market disruption. For example, we received a number of complaints about one multi-station retailer whose prices for regular gasoline went up to $3.519 per gallon on September 29. However, after reviewing his records, it was determined that his supply costs had risen substantially in line with his retail prices, so that the price increases appeared to be the results of increased costs to the retailer rather than price gouging. The records of another retailer indicate that one of the retailer's employees, without direction from the retailer, made an unauthorized price increase out of panic because the employee thought the station would run out of gasoline; the employee wanted to slow down the sales volume in order to avoid running out of supply. As to the retailers under investigation, it is still too early to determine whether or not they acted improperly. But we have learned how difficult it is to make a determination of the true cause of fluctuations in market price.
Investigative powers which can be implemented immediately are necessary to determine whether rapid and large increases in the retail prices of any necessary commodity are the result of short-term profiteering or fraud instead of the market forces balancing the demand for the commodity with the available supply. South Carolina has those under the Unfair Trade Practice Act, 35-5-10 et seq.
The power to file civil actions concerning these changes in prices also arise under the Unfair Trade Practice Act. Further, during a declared state of emergency (by the Governor of South Carolina or the President of the United States), one specific section of the Act also makes it a crime (1) to rent or sell or offer to rent or sell a commodity (broadly defined, including goods and services) at an unconscionable price within the area for which the state of emergency is declared during the time period that the state of emergency is declared and (2) to impose unconscionable prices for the rental or lease of a dwelling unit, including a motel or hotel unit or other temporary lodging or self-storage facility. A willful violation constitutes a misdemeanor punishable by a fine of not more than one thousand dollars or imprisonment for not more than thirty days. An "unconscionable price" is a price which either represents a "gross disparity" between the price of the covered commodity and the average price at which the covered commodity was available during the thirty days prior to the declaration of the state of emergency or that "grossly exceeds" the average price that was readily available for the covered commodities and services in the trade area thirty days prior to the declaration of the state of emergency. A price is not considered to be an "unconscionable price" if the increase is attributable to additional costs incurred or regional, national, or international market trends. See South Carolina Statute § 39-5-145, a copy of which is attached as Attachment I.
As mentioned, even without a declared emergency the Attorney General in South Carolina has the power to investigate and punish violations under the other sections of the Unfair Trade Practices Act, all civil in nature, which declares "unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce" unlawful. The Attorney General may recover, on behalf of the state, civil penalties not exceeding five thousand dollars per violation for willful violations. See South Carolina Statutes § 39-5-20 and § 39-5-110, copies of which are attached as Attachment II. But other than price gouging during a declared state of emergency, there are no statutes which specifically address “price gouging” in South Carolina. This makes it difficult to prove price gouging, as the available statutory authority in non-emergency times is only the general prohibition against practices that are "unfair" or "deceptive", but which lacks a precise definition.
Under our competitive economic system, high prices or quick run-ups in prices are not and should not be illegal absent certain compelling circumstances. Taking risks and making a profit - or a loss - is the American way. To effectively fight true price gouging, however, we need authority to pursue price gougers in South Carolina when we are suffering an abnormal disruption of our market as the result of an event elsewhere. To this end, we are proposing an addition to South Carolina's price gouging statute which would apply to a direct and abnormal disruption in the market in South Carolina caused by an event happening outside of South Carolina which results in the governor of the other state, or the President, declaring a state of emergency or disaster. This approach recognizes the regional impacts of events and allows prosecutorial authorities to act quickly when unconscionable prices are being charged, without the necessity of a locally declared state of emergency. I believe such a law would have a salutary deterrent effect. See proposed amendment to South Carolina Statute § 39-5-145, a copy of which is attached as Attachment III. I see no need for additional federal legislation on these points.
Thank you for the opportunity to testify before this Committee on the topic of price gouging. I will be glad to respond to any questions.