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The Honolulu Advertiser
Posted on: Thursday, April 4, 2002

Attorney says cap oil profits in Hawai'i

By Frank Cho
Advertiser Staff Writer

HOSIE: Gas market "broken" in Hawai'i
The attorney who led the state's effort to sue several major oil companies over price-fixing allegations said yesterday that oil company profits in the Islands should be restricted to bring down gasoline prices for Hawai'i drivers.

Spencer Hosie, the San Francisco-based antitrust attorney who agreed to sue the seven major oil companies on behalf of the state, said it is no more expensive to produce gasoline in Hawai'i than anywhere else — in fact, it is probably cheaper. Still, Hawai'i drivers continue to pay the highest price for a gallon of gas in the nation.

"This market is broken, and it needs to be fixed," Hosie told lawmakers at a special briefing yesterday.

Hosie recommended lawmakers consider tying Hawai'i's wholesale price of gasoline to the OPIS (Oil Price Information Service) benchmark price.

OPIS is a widely accepted fuel-price benchmark and it's used as the benchmark price by much of the oil industry, Hosie said.

If adopted, Hosie told legislators, such a move could bring down the price of gasoline by 20 cents a gallon or more in the state.

"That kind of approach is legal, it's based firmly in the economics of this market, it would guarantee a fair and legal return to these companies, and it would finally bring Hawai'i's gas prices back in line with the rest of the country," Hosie said.

The Legislature has been considering several proposals to address Hawai'i's high cost of gasoline.

House lawmakers have passed a measure that would set a cap on gas prices, but it is tied to another benchmark.

The Senate is considering whether to set up a joint House-Senate committee to review information on how gas prices are set and then make recommendations to the Legislature.

Lawmakers at yesterday's briefing said they planned to consider Hosie's recommendations and review legislative options.

The state in January agreed to settle a $2 billion lawsuit against Chevron, Texaco, Shell, Unocal and Tosco for $20 million, or 1 percent of the original claim.

In 1998, the state accused the oil companies of agreeing to fix Hawai'i gasoline prices artificially high during the 1990s and filed suit. In 1999, the state settled with two other companies, BHP Hawaii and Tesoro Hawaii, for $15 million.

Hosie said he believed the state had a strong case, but recommended the settlement because of recent court decisions that made it increasingly difficult to advance antitrust cases beyond summary judgment phases.

"We got signals during oral arguments, and during the mediation, that he (U.S. District Court Judge Samuel King) was very concerned..." Hosie said. "Given those things, we thought it prudent to settle the case, and the state did.

"It's an odd case where $35 million is viewed as a kick-me-in-the-mouth. We are disappointed in that; we think it should have been higher, but that is not an insignificant amount of money.

"These companies are not quick to settle a lawsuit. They are vigorous in their defense. They want to make each case an Armageddon."

Under Hosie's proposal, the state would add 3 cents per gallon to the OPIS benchmark to account for transportation costs, and then another 10 to 12 cents a gallon to cover marketing and other costs. That total would be the wholesale price of a gallon of gasoline in Honolulu.

Neighbor Island dealers would pay an additional three to five cents per gallon to cover extra transportation costs.

"(The oil companies) are going to make real money, but just not extraordinary profits at that level," Hosie said.

During its preparation for its suit, the state discovered that oil companies were making returns upwards of 50 percent on capital invested, Hosie said.

Chevron, Hawai'i's market leader in retail gasoline, at one point represented just three percent of sales for the company nationwide but brought in more than 20 percent of its profits.

"There's no economic reason for us to be paying the highest gasoline prices in the nation," State Attorney General Earl Anzai said yesterday. "Obviously, there's a business reason, and that business reason is high profits."

Albert Chee, a spokesman for Chevron in Hawai'i, said the Legislature should consider studying the problem more before taking any action.

"The prudent thing to do is to proceed cautiously and make sure we have a thorough review before we start passing judgment and jumping into perhaps additional legislation," said Chee.

Chee attended the briefing yesterday but said he was not asked to participate.

Anzai disagreed with the need for further studies, saying the state already has all the information it needs.

"How is the Legislature going to collect more information than we already have from the lawsuit?" Anzai said.

Added Hosie: "We know, to the penny, what it costs to make gasoline here. Hawai'i was the most uncompetitive gasoline market in the country."