Reasonable Doubt

As the AG's office tries to figure out if price increases at area gas pumps were "reasonable," questions remain as to just how those prices were set

Here's what we know so far: Knoxville gas prices were higher than anywhere else in the country last week—up to a $4.652 average on Sept. 15. Many local pumps were as high as $4.99 for a gallon of regular unleaded. And that's about it. What caused Knoxville's average prices to jump so high, while average prices, even in relatively nearby markets such as Chattanooga and Nashville, remained 50 to 60 cents lower, is still something of a mystery. But it's one that may begin to unravel as the Tennessee Attorney General's office, in conjunction with the state's Consumer Affairs office, gets responses back from a letter asking for wholesale vs. retail gas prices at area pumps. The letter asks for the responses to be returned by Sept. 30, says Jeff Hill, senior counsel for the Attorney General's office.

"We are still waiting on the information at this point," says Hill.

Tennessee law says that retailers may make "reasonable" price increases as market fluctuations dictate, and, in the wake of refinery shutdowns during Hurricane Ike, Gulf Coast prices did jump last week. But Hill says there is no specific formula for determining what constitutes a reasonable price increase.

"I think that was probably intentional so that we can remain flexible. There are all different types of situations that we might run into," Hill says. "In this situation, some of the questions we're asking are what people paid for the gas and what the markup is, and whether that's normal or that's different, and why it's different. We have asked for information from a lot of different retail locations."

Some area economics experts are still scratching their heads for an explanation of the local price increases, too.

"This is a question I have been asked repeatedly over the past couple of years, and I just don't know," says Dr. Matt Murray, professor of economics and the associate director of the Center for Business & Economic Research at the University of Tennessee. "Particularly in such a localized area as Knoxville. You can go to Roane County, for example, and you can find gas prices 20 cents different. I don't have a good explanation for it."

Well, one explanation may lie in the "spot" market for refined fuel wholesale prices. Spot market prices change from day to day, and it's where most midsize and large retailers buy their refined fuels. In a press conference last Monday, Pilot Travel Centers CEO Jimmy Haslam told reporters that Pilot's prices reflected Gulf Coast suppliers' prices, and that in some cases, Pilot was actually selling gas below cost.

According to figures from the Department of Energy, average prices for refined regular unleaded fuel from the Gulf Coast jumped from $3.07 to $4.87 between Wednesday, Sept. 10, and Friday, Sept. 12, settling back to about $4.63 (two cents below Knoxville's retailer average) on Monday, Sept. 15. That shift in the spot market might have been driven just as much by consumer panic—in short, people hoarding gas before the storm hit—as it was by refinery output, explains Murray.

"I think the spot market works reasonably well in dealing with short-run price determinations," Murray says. "But when there's any form of panic, the market can be driven more by the panicked behavior of consumers than it is by the fundamentals of supply and demand at that time."

Still, other parts of the state didn't see (and still haven't seen) the increases we've had here.

Throughout last week, Alan Wright, vice president of supply and distribution for Pilot, sent out a series of statements explaining the increases. Yes, Hurricanes Gustav and Ike caused massive refinery shutdowns along the Gulf Coast. And yes, shipments to Knoxville were affected and delayed. But in Nashville, for example, despite experiencing the worst gas shortages in the country, average prices on Monday, Sept. 22, held at about $4.08 per gallon, according to the AAA Fuel Gauge Report.

"You must not be well-served by infrastructure" is the best guess that Dr. Michelle Foss, head of the Center for Energy Economics at the University of Texas at Austin, can offer. By infrastructure, she means things such as fuel pipelines, refineries, and fuel storage facilities. The relative dearth of fuel infrastructure, says Foss, is a common issue in this region. "This was something I was recently discussing with a colleague. Given the population growth in the Southeast in the past couple of years, why haven't they done anything about this infrastructure?"

"It's really hard to get infrastructure built, though," she says. "Usually because of public resistance, people not wanting refineries, storage terminals, things like that."

Knoxville is served by one main fuel pipeline—the Colonial Pipeline that carries fuel from the Gulf Coast—and has no significant refining capacity, according to the American Petroleum Institute. When Colonial, an underground pipeline that got through the storm with little damage, began to dry up last week after the hurricane, gas had to be trucked in—which, given fuel costs, is an expensive proposition—from around the region. Chattanooga, though, is primarily served by the same pipeline, and so is Nashville. Chattanooga had a $3.97 average last Monday, and Nashville's average was $4.04. So how are these stations setting their prices in Knoxville?

"A good profit on gasoline is about 14 cents a gallon," Haslam says. "Now you have to remember that about two-thirds of our business is credit cards. They get about two percent."

Which leaves Pilot at about 8 or 9 cents per gallon on average, Haslam says. Last week when they were at $4.99, they were buying gas at $4.87. Cutting into that is both the credit card charges and the extra cost—about 5 cents per gallon on average, he says—of trucking gas in to try to meet consumer demand.

"During this time period, when we were selling gas at $4.99, we were actually making much less in profit than we normally do," Haslam says. "And we had two choices: Either run out of gas or supply the city with gas, and try not to lose money doing so. We felt like we did the right thing."

Haslam attributes the regional price discrepancies to a Knoxville shortage from the pipeline when spot prices were at their highest. Why it happened then in Knoxville and nowhere else, he says he can't answer.

While Hill still can't say just which stations are under investigation, Haslam says that Pilot has received information requests from the Tennessee AG's office. Representatives from Weigel's, Knoxville's other major locally owned gas retailer, did not return requests for comment on the investigation by press time.

"These investigations aren't unusual after a hurricane," Wright says. The company, and several others, faced similar scrutiny following Hurricane Katrina in September 2005.

"We sent in thousands of pages of documents after Hurricane Katrina. In one case, we had one small fine in Florida for diesel fuels," Haslam says. "We're 99 percent sure we've done everything right."

The only post-Katrina prosecution by the Tennessee AG's office was the Tip-Top Food Mart in Chattanooga. Tip-Top, according to court documents, had been selling gas at about an average of $3.50 per gallon or below prior to Sept. 1, 2005, when its prices jumped to $4.99 per gallon. The store was fined $1,000, the standard fine for one instance of price gouging.

Now the issue's gone political. Last week, the Democratic Party of Tennessee demanded that Republican beneficiaries of campaign contributions from Pilot executives return them because of the gouging investigation.

"I stay out of that sort of crap," says Wright. "That's just dirty politics."

And Foss says she believes that the investigation itself just amounts to political gamesmanship. "There's usually a lot of blame," she says. "It's just a typical political response, especially from attorneys general. They launch these investigations, and that helps them get re-elected."

But the Attorney General's office and Consumer Affairs have said that they're simply responding to massive public outcry. East Tennessee, it turns out, complained a lot.

"We've received more than 2,700 calls and e-mails," says Christopher Garrett, of the Tennessee Department of Commerce and Insurance, the department that oversees the Consumer Affairs Office. Some of them, as yet unverified, complained of prices as high as $8 or $9 per gallon of regular unleaded, he adds. "The overwhelming majority of those were from East Tennessee."

And that's not all. Last week, State Rep. Stacy Campfield delivered a petition to the state Attorney General's office asking for an investigation into area price gouging at fuel retailers. The petition, started by Knoxville car dealer David Garrett Jr., had more than 5,000 signatures, according to Campfield.

Now things have quieted down a bit at the pumps. The average price of a gallon of unleaded gas in Knoxville, which, as of this writing, was hovering around the $3.50 mark, may be re-approaching what passes for normal in the current market. But questions linger in the minds of politicians, state officials, and, of course, consumers.