The House of Representatives, faced with pressures to take "action" on escalating gasoline prices, in the wake of the Katrina disaster, has enacted the Federal Energy Price Protection Act of 2006. The bill was introduced on May 2, 2006 by Representative Heather Wilson (R-N.M.), and passed on May 3, 2006 by a vote of 389 to 34.
The bill provides that not later than six months after enactment, the Federal Trade Commission shall promulgate, pursuant to the Administrative Procedures Act,1 any rules necessary, including a definition of the term "price gouging",2 to enforce the rule as violations of Section 5 of the Federal Trade Commission Act.
As the bill declares "price gouging", as to be defined, a violation of Section 5 of the Federal Trade Commission Act, there is no private right of action for private plaintiffs. However, enforcement actions may be brought by not only the Federal Trade Commission, but by the United States Department of Justice, and States Attorneys General. Attorneys General are authorized as parens patriae to bring civil actions on behalf of the residents of their respective states in a United States District Court. In such actions, however, the Federal Trade Commission is granted rights of intervention.3
The bill would provide for civil penalties, including three times the difference between the total amount charged in a wholesale sale and the total amount that would be charged in such a wholesale sale at a "fair market price", plus an amount not to exceed $3 million per day, for a continuing violation. In the case of a retail sale in violation of the bill, a civil penalty is to be three times the difference between the total amount charged in the sale and the total amount that would have been charged at a "fair market price."
In addition, the bill provides for criminal penalties for a wholesale sale, by a fine of not to exceed $150 million, or imprisonment for not more than 2 years, or both. In the case of a retail sale violation, a fine may not exceed $2 million, or imprisonment for more than 2 years, or both.
H.R. 5253 is in addition to the enactment by Congress of the Energy Policy Act of 2005.4 Section 632 of the Energy Act directs the Federal Trade Commission to identify price gouging as
"Any finding that the average price of gasoline available for sale to the public in September, 2005, or hereafter in a market area located in an area designated as a State or National disaster area because of Hurricane Katrina, or in any other area where price-gouging complaints have been filed because of Hurricane Katrina with a federal or state consumer protection agency, exceeding the average price of such gasoline in that area for the month of August, 2005."
Pursuant to the Energy Act, the Federal Trade Commission, on May 22, 2006, released its report on "Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases ("Report")." While it is not yet know whether the Federal Trade Commission will use the Energy Act definition of "price gouging" in performing its obligations under H.R. 5253, should that bill be enacted into law, it was mandated to use this definition in issuing its Report.
The Report details the result of an intensive, congressionally-mandated Commission investigation into whether gasoline prices nationwide were "artificially manipulated by reducing refinery capacity or by any other form of market manipulation or price gouging practices."
In its investigation, the FTC found no instances of illegal market manipulation leading to higher prices during the relevant time period. However, it found 15 examples of pricing at the refining , wholesale, or retail level that fit the Energy Act’s definition of "price gouging."5
In its May 22, 2006 Report, the Federal Trade Commission found no evidence to suggest that refiners had manipulated prices. Nor, did if find any evidence that indicated that refiners produced less gasoline than was economically feasible, using computer models to determine their most profitable slate of products. Nor, did it find any evidence to suggest that refinery expansion decisions over the past 20 years resulted from either unilateral or coordinated attempts to manipulate prices. Rather, the pace of capacity output resulted from competitive market forces.
The Report also examined state and federal perspectives on "price gouging." It describes investigative activity by various states and the effects of state price gouging laws on gasoline retailers. It concludes by presenting the Commission’s views on calls for federal gasoline price gouging legislation. It identifies the difficulty of distinguishing "gougers" from those who are reacting in an economically rationale manner to a temporary disconnect between demand, and a shortfall in available supplies during an emergency. The policy section concludes that if natural price signals are distorted by price controls, consumers may ultimately be worse off, as a result of gasoline hording at an artificially mandated lower price, and a resulting disincentive for additional supplies of scarce product to flow into an affected market.
A quick check of the internet discloses numerous articles relating to what is generically described as "price gouging." For example, the United States Department of Energy has posted a "Gas Price Watch Reporting Form for consumers who believe that they may be victimized by "price-gouging", or price-fixing."6 Deborah Pryce, Chairman of the House Republican Conference has posted a website listing each of the Attorneys General of states that have consumer protection laws that would implicate "price gouging", however defined.7
A search of the web also discloses postings by a number of economists advising that "price gouging" legislation will exacerbate consumer shortages, and thus disadvantage the very persons whom "price gouging" legislation would be designed to protect. As stated by economist Thomas Sowell:
"’Price gouging’ is one of those emotionally powerful but economically meaningless expressions that most economists pay no attention to, because it seems too confused to bother with. But a distinguished economist named Joseph Schumpeter once pointed out that it is a mistake to dismiss some ideas as being too silly to discuss, because that only allows fallacies to flourish – and their consequences can be very serious."
"What do prices do? They not only allow sellers to recover their costs, they force buyers to restrict how much they demand. More generally, prices cause goods and the resources that produce goods to flow in one direction through the economy rather than in a different direction …
"When either supply or demand changes, prices change. When the law prevents this, as with … anti-price-gouging laws, that reduces the flow of resources to where they would be most in demand. At the same time, price control reduces the need for the consumer to limit his demands on existing goods and services."8
This "Econ 101" analysis has been trumpeted by none other than Michael A. Salinger, Director, Bureau of Economics of the Federal Trade Commission. In an address to the Antitrust Committee of the Boston Bar Association, given on February 27, 2006, Dr. Salinger, in stating his own views, and not necessarily reflecting the views of the Federal Trade Commission or any individual Commissioner, stated:
"Price gouging legislation, in my view, be an example of a bad decision resulting from focusing on the wrong statistics. The wrong statistics to focus on are the price of gasoline and the profits of the oil companies. … From the standpoint of energy policy, the problem created by Katrina is that it shut down 95% of the crude oil production in the Gulf Coast, 13% of the refining capacity in the United States, and major pipelines, particularly those bringing supplies from the Gulf Coast to the mid-Atlantic seaboard. … The statistic to focus on was not the price, but rather, the shortfall of energy relative to demand."
He states further
"By allowing the price of gasoline to rise, individuals have an incentive to buy just the gasoline they really need rather than to make sure to have a full tank in every car and a few gallons of inventory to boot. … The other predictable consequence of price caps is to blunt the incentives to divert supplies from less effected to more effected areas. … What I have said so far about price gouging is straight out of econ 101. To me, and I believe to all or virtually all of the very talented people who worked in the Bureau of Economics, the answers to these questions seem obvious."9
Finally, Dr. Salinger advises
"Price gouging legislation … would be a tragic mistake."10
It will be with interest to watch what definition of "price gouging" is adopted by the Federal Trade Commission, and what actions, if any, flow from the implementation of the House bill, should it become law.
- 5 U.S.C. § 1553 (2006).
- The term is undefined in the bill itself.
- Section 2 of the bill declares it to be an unfair and deceptive act or practice, under Section 5 of the Federal Trade Commission Act, for any person to sell crude oil, gasoline, diesel fuel, home heating oil, or any biofuel at a price that "constitutes price gouging." Under Section 2(b), the Federal Trade Commission is directed to promulgate a definition of the term, "price gouging." In addition, States Attorneys General are precluded from instituting civil actions for violations, during the pendency of an action brought by the Federal Trade Commission against any defendants named in a Federal Trade Commission complaint. See, Section 2(d)(2)(B).
- Pub. L. No. 109-58 & 1809, 119 Stat. 594 (2005). (Hereinafter "Energy Act")
- Numerous State consumer protection laws have defined "price gouging" in one manner or another. For example, California Penal Code Section 396 defines the practice of charging "excessive and unjustified increases" as an offer to sell or sell any consumer food items or goods, including gasoline and other motor fuels for a price of more than ten percent above the price charged for those goods or services immediately prior to a proclamation of an emergency declared by the President of the United States or the Governor of the State of California. However, a price increase is not unlawful if that person can prove that the increase in price was directly attributable to additional costs imposed upon it by the supplier of the goods or directly attributable to additional costs for labor or materials.
- See United States Department of Energy, http://gaswatch.energy.gov/
- Pryce, Hurricane Aid Update, www.gop.gov/Katrina, Sept. 6, 2005.
- Thomas Sowell, "Price Gouging in Florida," http://www.townhall.com/opinion/column/thomassowell/2004/09/14/12996.html, March 8, 2006. See also, Ed Lotterman "What is ‘Price Gouging’ and Do We Need Pricing Laws?," http://www.edlotterman.com/pricegouging.htm, March 8, 2006. ("Price controls lead to wasted resources and even greater unfairness than the market … Punishing price "gouging", defined after the fact, introduces greater uncertainty into business that can only be overcome with average higher cost to consumers. If potential producers know that their prices may be lowered arbitrarily at times in a certain sector such as oil, they will be less inclined to enter that sector.")
- Emphasis supplied.
- Michael A. Salinger, "Moneyball and Price Gouging", www.ftc.gov/speeches/salinger/060227moneyballandpricegouging.pdf