Ky. AG Sues Marathon for Gouging

Ky. AG Sues Marathon for Gouging

Published in CSP Daily News

FRANKFORT, Ky. -- Kentucky Attorney General Greg Stumbo filed litigation yesterday in Franklin Circuit Court against Marathon Oil Corp., Marathon Petroleum Co. LLC and Speedway SuperAmerica LLC, charging the corporations with profiteering during the time of emergency following hurricanes Katrina and Rita. The companies are alleged to have overcharged Kentucky consumers more than $89 million in grossly excessive motor fuel pricing.

Today Kentucky becomes the first state in the nation to file suit protecting its citizens against price gouging by a major [image-nocss] oil refiner, said Stumbo. Following an 18-month investigation, my Consumer Protection & Rate Intervention divisions have uncovered evidence of massive overcharging for gasoline, affecting nearly every family and business in the state.

The defendants are charged with violating Kentucky's price gouging law ( KRS 367.374) and Consumer Protection Act ( KRS 367.170) during the declared state of emergency following the hurricanes in August and September 2005. Marathon Petroleum is alleged to have overcharged Kentuckians by $86 million in wholesale transactions, while Speedway SuperAmerica, Marathon's wholly owned retail distributor, allegedly overcharged an additional $3 million, resulting in at least $89 million in consumer overcharges during the declared emergency.

The price gouging law says that during a declared emergency, No person shall sella good or servicefor a price which is grossly in excess of the price prior to the declaration and unrelated to any increased cost to the seller. The price of gasoline and other motor fuels are included among the goods and services covered by the law.

Based on an exhaustive review of the evidence, we are confident that Marathon's price increases during the emergency period were not justifiable, Stumbo added.

"We are very disappointed with the actions taken by the state of Kentucky, and Marathon will vigorously defend itself in this enforcement action," said Gary R. Heminger, Marathon executive vice president and president of refining, marketing and transportation operations in a statement.

Angelia Graves, spokesperson for Marathon, told CSP Daily News, We had held some preliminary discussions with the AG's office right up until January of this year, and actually we were awaiting further contact from them. They had indicated that they would contact us for any additional discussions or before they would pursue anything, and the first we heard about it was right before the press conference. They had not made any other attempt to contact us.

She added, The [AG], when he first had his press conference over a year ago, and even [at the current press conference], he made comments about how vague the law was and how there were problems with the current law, so it's just unfortunate that he would choose to pursue litigation by singling out one individual company over a law that he himself has admitted has problems. I'm not going to draw any conclusions from this, but I can tell you that this action was taken just two weeks prior to the upcoming primary elections in the state.

Stumbo is running in the May 22 primary for lieutenant governor.

Marathon believes that the law, which Kentucky Attorney General Stumbo cited in bringing suit, is not only unclear, but unconstitutional. The Attorney General himself has stated the law on price gouging is unclear, both today and previously. Due to the lack of clarity and other issues with the current law, Marathon today filed suit in federal court in Frankfort, Ky., challenging the constitutionality of the law and the interpretation taken by the Attorney General.

Marathon is Kentucky's biggest wholesale supplier of gasoline, the AG's office said. In the months following the hurricanes, Marathon produced record amounts of product; and, after months of investigating, the AG has found no significant cost increases for the companies during the state of emergency that would justify the major spike in gasoline prices, the office said. Stumbo has not ruled out pursuing other companies.

Hurricane Katrina made landfall on Aug. 29, 2005. On August 31, at Stumbo's request, Governor Ernie Fletcher implemented the price gouging statute pursuant to Kentucky's declared state of emergency. Immediately, Stumbo began to review the petroleum industry's pricing and established a hotline for gasoline price gouging complaints. It received nearly 700 consumer calls and allegations of price gouging reviewed and/or investigated.

On Sept. 24, 2005, Hurricane Rita made landfall. One month later, on October 27, Marathon released its earnings and claimed an increase in profits directly resulting from the hurricanes.

"We do not believe that we violated the law'" Heminger said. "In fact, we are very proud of our company's response in the wake of hurricanes Katrina and Rita to keep fuel supplies available when 25% of the domestic crude oil production and 15% of the nation's refinery capacity was shut down by these historic storms. Our product pricing during the time in question was made responsibly, using the same market-based, supply and demand pricing fundamentals we use every day."

In February 2006, Stumbo issued subpoenas to 30 Kentucky gas stations regarding pricing during the state of emergency. In April 2006, he issued subpoenas to 13 petroleum refiners and suppliers requiring the same data. On August 1, he issued subpoenas to Speedway for data on all stations and announced settlements in the price gouging investigation totaling more than $50,000.

Richard Maxedon, president of the Kentucky Petroleum Marketers Association (KPMA), attended Stumbo's press conference. He said that a reporter asked the AG if the complaint accused any retail facilities of price gouging. According to Maxedon, Stumbonoted, that his officehad previously investigatedthose chargesand that today's complaintwas not aimed at any Kentucky wholesale gasoline distributors or gasoline retailers'."

Maxedon added, KPMA represents the vast majority of retail gasoline fueling facilities in Kentucky. KPMA members own or operate virtually all of the convenience stores and gasoline stations in the Commonwealth. Many people mistakenly believe that because there is an Exxon or Mobil sign at the gas station, that the major oil company with the sign out front ownsthe facility.Most major oil companies left the direct market in Kentucky many years ago and have now done the same in most other states. The members of KPMA that own and operate these facilities are your neighbors. They purchase their gasoline from the major oil companies. KPMA members, the owners of the gas stations, constantly complain about the increasing gasoline prices they have to pay to fill their underground storage tanks. Because of the high pricesthey have to pay, many of them actually lose money on every gallon of gasoline they sell. In order to stay in business,the station ownershope their customers will come inside the c-store to purchase a soft drink or snack. This is demonstrated by the record number of bankruptcies of gasoline distributors over the last several years.

Speedway SuperAmerica is not a member of KPMA, Maxedon said.

Meanwhile, in other news, Marathon Oil said in a Securities & Exchange Commission (SEC) filing earlier this week: On April 12, 2007, Marathon Petroleum Co. LLC (MPC) was notified by the Division of Enforcement of the Commodity Futures Trading Commission of its intent to recommend that the Commission name MPC in an enforcement action alleging that on Nov. 26, 2003, MPC attempted to manipulate the price of West Texas Intermediate crude oil. It is Marathon's understanding that the proposed enforcement action involves allegations that on the day mentioned in the notice MPC offered to sell crude oil in a physical cash market at a price lower than contemporaneous bids and, further, that there are no allegations of false reporting. Marathon intends to vigorously defend the proposed enforcement action.

Click here to view a copy of the complaint.

Click here to view the investigation timeline.

Click here to view Mararthon's complete statement.