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Post date: December 28 2011

A.G. Schneiderman Releases Findings Of Gas Pricing Study

AG Takes Enforcement Actions On Gas Price Gouging Incidents Related To Major Storms

Identifies Flaws In Zone Pricing Law & Recommends Changes

Schneiderman: My Office Will Take Action And Penalize Those Who Have Violated The Law

ALBANY - Attorney General Eric T. Schneiderman today announced the results of his 2011 comprehensive review of gasoline prices across the state. The review, which was initiated earlier this year and stretched across several months, was part of an effort to examine how prices are determined at various levels and to protect New Yorkers from gas price gouging. The review, which escalated in the aftermath of Tropical Storm Irene, resulted in two enforcement actions by the Attorney General against retailers in Yonkers and Farmingdale, Long Island.

"I am committed to protecting consumers against gasoline price gouging and will continue to monitor and closely scrutinize gasoline prices in New York State," said Attorney General Schneiderman. "When there are clear violations of the price gouging law, my office will not hesitate to take action and hold violators accountable, and we have done so this year."

In late August, the Attorney General, mindful of the fact that price gouging has occurred following catastrophic weather-related events such as ice storms, wind storms and hurricanes, issued a stern warning to vendors as Tropical Storm Irene was bearing down on New York. Vendors were warned against charging unconscionably excessive prices for essential items such as gasoline, food, water, generators, batteries and flashlights. Warnings such as this provide a strong deterrent against price gouging, as businesses must weigh the economic benefit of increasing prices during an emergency against the risk of being charged with price gouging, incurring substantial fines, and suffering a loss of good will with their customers.

As is turned out, some gouging did occur during Tropical Storm Irene. The Attorney General's office is looking closely at pricing data in its ongoing investigation and has already taken enforcement action against two gas stations that were found to be charging "unconscionably excessive" prices.

The first action was taken against JW Station Corp. (d/b/a Gulf Gas Station) located at 1350 Route 110, Farmingdale, NY. Before the storm, the gas station was selling unleaded gasoline at $4.05 per gallon. However, over the course of two days during Tropical Storm Irene, the station sold gas for $4.89 per gallon. The station will pay $3,061.74 in civil penalties and costs.

The second action was taken against Parmod Food Mart, Inc. (d/b/a Ultimate Quality Food and Fuel Mart and Parmod Pitt Stop) located at 60 Elm Street, Yonkers, NY. Before the storm, the gas station was selling unleaded gasoline at $3.82 per gallon. Over the course of two days during Tropical Storm Irene, the station sold gas for $4.79 per gallon. The station will pay  $7,500 in civil penalties and costs.

In March 2011, in response to consumer complaints and in an effort to understand why prices rose so rapidly, the Attorney General's office launched a comprehensive review of gasoline prices in New York State. The goal was to determine whether gas prices accurately reflected market conditions, or if there were unjustifiable price increases. By publicly announcing the commencement of the inquiry, the Attorney General also sought to temper market volatility by deterring the gasoline industry from engaging in price gouging and profiteering. The Attorney General cautioned that there may not have been wrongdoing behind the price spikes, but vowed to thoroughly review the matter. 

The review looked closely into possible gasoline price gouging when gas prices increased as unrest spread throughout the oil-rich Middle East. While the results showed that the threatened disruption of the world oil market did not lead to price gouging in New York, the study revealed three key findings:

  • When gas prices surged past $4 per gallon for regular unleaded in the Spring of 2011, price gouging in violation of General Business Law § 396-r was not the reason. Instead, analysis showed that gasoline price increases were primarily driven by changes in the price of crude oil, not actions taken by gasoline retailers or wholesalers.
  • Gas price gouging did occur during Tropical Storm Irene in August of 2011 and the Attorney General has taken enforcement action against several retailers.
  • Zone pricing is prohibited by General Business Law § 399-ee, but several flaws in the statute preclude effective enforcement. The Attorney General has offered recommendations to fix the statute.  

The Attorney General's office requested detailed wholesale and retail pricing information from gas stations across the state. For the period from February 1 to April 1, 2011, the stations provided the daily prices they paid for gasoline on the wholesale market, and the prices they charged consumers at the pump. Analyzing this data enabled the Attorney General's office to determine whether the gas stations engaged in price gouging by charging "unconscionably excessive prices," or whether the stations were merely passing along increased wholesale costs.

The results clearly demonstrated that, although gasoline prices rose dramatically during this period of time, retail gas stations did not significantly increase their markup - - the spread between the wholesale price and the retail price - - as prices were rising. To the contrary, retailer markups were generally consistent throughout the period. As the stations paid increasingly higher wholesale prices for gasoline, they passed those increased costs along to consumers. Thus, it was apparent that price gouging by gas stations was not behind the price spikes.

Finally, the Attorney General found that some wholesalers continue to charge different prices to different retail gas stations, even after the enactment of New York's ban on zone pricing in 2008.

For example:

  • One wholesaler acknowledged dividing its own retail service station customers into "pricing zones." Prices charged to stations in different zones vary by as much as 25 cents per gallon.

The zone pricing statute includes the following weaknesses:

  • The statute prohibits wholesalers from charging different prices within the "relevant geographic market," but does not provide a meaningful definition of the "relevant geographic market."
  • The zone pricing law only prohibits "arbitrary" price differences. Wholesalers argued that their price differences are not "arbitrary" as prohibited by law, but  based on business-related factors such as differing marketing conditions, costs of operation and degree of competition.

For these reasons, among others, no enforcement actions have been brought pursuant to the zone pricing law since it was enacted in 2008, and it is uncertain what effect, if any, the law has had on wholesaler pricing policies -- or pump prices -- across the state.

Ultimately, for New York to have an effective zone pricing law, the statute must be amended by the state Legislature. Key terms such as "relevant geographic market" and "zone pricing" must be clearly defined, and the definition of zone pricing must take into account the varying costs a wholesaler may incur in delivering gasoline to different locations.

The report can be obtained here.

The Attorney General's investigation was handled by Assistant Attorney General In-Charge of the Westchester Regional office, Gary Brown and Assistant Attorney General in the Syracuse Regional office, Judith Malkin under the direction of Executive Deputy Attorney General for Regional Offices, Martin J. Mack.

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