Rent cap on gas stations invalid
By Dan Nakaso
Advertiser Staff Writer
A state law that limits the rent that oil companies can charge service-station owners has once again been ruled unconstitutional by a federal judge.
U.S. District Judge Susan Oki Mollway, in a ruling released yesterday, said Act 257, passed by the Legislature in 1997, "will not advance its stated interest of lowering consumer gasoline prices. ...
"Instead, dealers will pocket the savings for themselves. ... Gasoline suppliers will raise wholesale gasoline prices to offset the reduction in rental income, causing dealers to raise retail gasoline prices in response."
The ruling affects, by a rough estimate, 175 service-station owners who lease from oil companies such as Chevron USA Inc., which sued the state and Gov. Ben Cayetano over the law.
State attorneys were unavailable yesterday to say whether they will appeal Mollway's ruling.
A spokesman for Chevron, one of the largest oil companies in the state, said he did not know how Mollway's ruling might affect station owners' future leases.
Chevron operates 11 stations and has three-year leases with 63 dealers statewide.
"Our leases follow federal law, so those leases that exist today are certainly leases that we will honor," said Chevron spokesman Albert Chee. "What happens when these leases expire, I can't tell you."
Chee estimated that Hawai'i has 350 gas stations and that perhaps 50 percent of them are leased.
The state law capped rent at 15 percent of a dealer's gross margin on gasoline sales, but Mike Kitagawa, the Maui representative to the Hawaii Automotive Repair & Gasoline Dealers Association and a Chevron dealer for 30 years, believes that most Hawai'i dealers do not generate enough sales to reach the 15 percent cap.
"Most O'ahu dealers don't hit the minimum anyway," Kitagawa said. "On the outside islands, we enjoy a healthier margin so most of us do hit the threshold. But there's not one law that would be good for all of us."
Still, being below the 15 percent cap hasn't necessarily meant cheap rent.
Bill Green, owner of Kahala Shell across from Kahala Mall, said he has seen his rent jump from $12,000 a month last year to $18,000 a month. Next year it's supposed to go to $25,000 a month.
"I can't pay it," Green said.
Green does a booming business between his convenience store, car wash, quick lube operation, repairs and full-service station. But he's still well under the 15 percent cap.
"The law itself was no help or hindrance," he said. "It had no effect on me. The rent I pay is based on the value of the building and the location, which is less than the 15 percent."
Yesterday's ruling is the second on the state legislation. U.S. District Judge Alan Kay ruled in 1998 that Act 257 amounted to an unconstitutional taking of property from Chevron.
The 9th U.S. Circuit Court of Appeals reversed Kay and remanded the case back to U.S. District Court to answer the questions of whether oil companies would raise wholesale gasoline prices to offset Act 257, as well as whether dealers would sell their rent-capped leaseholds at premium rates — therefore canceling any benefits for the new dealer.
"Act 257 will enable lessee-dealers to sell their leaseholds at a premium," Mollway concluded.
She also cited testimony from the state's expert witness who said gasoline prices are relatively high in Hawai'i for a variety of reasons: high taxes and barriers that discourage new companies from entering the market.
Among the barriers, the judge wrote, are "an oversupply of gasoline stations ... and an adverse political climate, including rent controls, government proposals to take over petroleum terminals, and restrictions on the location and types of stations that may be built."
Reach Dan Nakaso at dnakaso@honoluluadvertiser.com or 525-8085.
