Knowledge Problem

Michael Giberson

Fall 2008 was a time of rapidly falling wholesale and retail gasoline prices throughout the United States, interrupted briefly due to the market disruptions of Hurricanes Gustav and Ike in early September.

In Tennessee, retail price increases surrounding Hurricane Ike resulted in more the 4,000 complaints to the state government. Resulting investigations by the Tennessee’s Attorney General and Department of Commerce and Insurance led to settlements with 16 gasoline retailers in April 2009. The AG filed suit in April 2009 against the sole hold-out, a Knoxville-area gasoline retailer, that declined to enter into a settlement at that time. The hold-out, Weigel Stores, Inc., reached a settlement with the Tennessee AG’s office last week. (Links to Tennessee AG provided material.)

Both in the settlements of April 2009 and in the Weigel’s settlement of April 2010, the retailers denied wrongdoing and said they entered into the settlement to avoid the the time and expense associated with litigation.  Weigel’s held out longer and, in the “Agreed Final Order” insisted upon a stronger than usual denial of wrongdoing.  Where the 2009 settlement statements included one sentence (For example: “The Defendant denies any wrongdoing and enters into this Judgment to avoid the time and expense associated with litigation.”), Weigel’s insisted on two paragraphs:

DEFENDANT’S POSITION: Defendant has denied and continues to deny each and all of the claims alleged by Plaintiff.  Defendant expressly has denied and continues to deny any charges of wrongdoing or liability against it arising out of any of the conduct, statement, acts, or omissions alleged, or that could have been alleged, in the Amended Complaint.  This Order of Settlement shall in no event be construed or deemed to be evidence of an admission or concession on the part of Defendant with respect to any claim or of any fault, liability, wrongdoing, or damage whatsoever, or any infirmity in the defenses that Defendant has asserted.  Defendant’s decision to settle the litigation was based on the conclusion that further conduct of the litigation would be protracted and expensive, and it is desirable that the litigation be fully and finally settled in the manner and upon the terms and conditions set forth in this Order, and the uncertainty and risks inherent in any litigation.

This Order only resolves matters set forth in the State’s Amended Complaint commenced under the Tennessee Consumer Protection Act of 1977 and the Tennessee Price Gouging Act of 2002.

In a statement released by Weigel’s, the company said, “Pursuant to the settlement, Weigel’s will make a payment to the State which is well below Weigel’s costs of continuing to litigate the matter….”  The payment to the state will be $57,000 (assuming the agreement is accepted by the court), which says something about the company’s expected cost to defend itself against the State.

The week-end that Hurricane Ike hit the Texas coast, Knoxville temporarily held the dubious distinction of having the highest gasoline prices in the United States according to AAA. While prices rapidly subsided, folks in the area were left wondering how prices went so high, so fast.  I’d offer the following explanation based on several contemporaneous news reports by The Knoxville News-Sentinel (found via LexisNexis, but not freely available online as far as I can tell):

• Key data to explain: typically gasoline prices in Knoxville are as low as or slightly lower than the rest of the state, but over the Hurricane Ike weekend prices in Knoxville were briefly much higher.
• News reports indicate Pilot Travel Centers and Weigel’s procured gasoline supplies at spot market prices.  Likely other retailers did, too, but at least these two large gasoline retailers serving the area did.
• Buying at spot, rather than through longer term supply contracts, can help retailers shave a little off of costs most of the time, but exposes the retailer to price risk when wholesale supplies get tight.
• If Knoxville-area retailers are more reliant on spot purchases than retailers in other areas of the state, it could explain why prices are typically a low in Knoxville, but supplies were shorter and prices much higher during the market disruption.

So I don’t know whether or not Knoxville-area retailers are more reliant on spot purchases than retailers in the rest of the state, but if it is true it could explain the severity of the price spike.  As the chart above shows, the price effects of the disruption were especially brief, too.  While prices in Nashville and Memphis took one or two weeks to fall back to pre-Ike levels, prices in Knoxville fell back to pre-Ike levels in a matter of days.

The news reports indicate that gasoline was in short supply in Knoxville even before Ike reached the Texas coast.  Some stations had already shut off pumps due to a lack of supply.  The September 12, 2008 News-Sentinel reported Bill Weigel as saying, “We’re working around the clock hunting. We’re not even asking the price. It doesn’t matter right now… There is just no gasoline.” (“Knox hit with gas shortage.”)  A September 13, 2008 News-Sentinel story, “Knoxville, TN area gas prices soar,” describes a bit more of the extraordinary efforts by Pilot Travel Centers and Weigel’s to secure supplies for their stores.

Both Pilot and Weigel’s were later charged with price gouging by the state.

Nothing in the law says retailers have to work hard to keep resupplied during a market disruption. All the law does is make it hard to be compensated for any extra time and trouble. Perhaps next time company executives will just take the weekend off, let the pumps run dry, add to the general market confusion, let consumers suffer, and keep the Tennessee Attorney General off their back.

RELATED:

• Retail gasoline stations shutting down to avoid price gouging complaints
• Predictable consequences of anti-price gouging laws
• Many more price gouging posts here at Knowledge Problem