Pressure mounting to overturn gas price cap

By Frank Cho
Advertiser Staff Writer

While the state got only 1 percent of the $2 billion it had sought in its antitrust suit against the oil industry earlier this year, it may have won a bigger victory this month when legislators passed a measure to cap Hawai'i's high gasoline prices.

Rep. Ed Case says oil firms are likely to take legal action. Advertiser library photo

The move vaults Hawai'i to the forefront of the nation, making it the first state since the 1970s to move to regulate gas prices.

It also puts the state in the spotlight amid a growing national firestorm and increasing federal scrutiny as gas prices rise across the country and the oil industry worries about other states following Hawai'i's lead. But the state's fledgling efforts to bring down gasoline prices face significant hurdles in what could be a years-long battle, and industry experts say it is unlikely that Hawai'i drivers will see relief at the pumps any time soon.

While state legislators moved to cap prices, the measure delays any implementation until mid-2004, opening the door for continued debate, political maneuvering and changes that could ultimately water down or overturn the measure.

The delay also means that key supporters, Gov. Ben Cayetano and Attorney General Earl Anzai, will both be out of office, and gives everyone from legislators to gasoline dealers to oil company lobbyists time to overturn the bill next Legislative session.

"The lobbying effort is already under way," said state Rep. Ed Case, D-23rd (Manoa), a supporter of the bill. "I think the oil industry intends to put a full-court press on all fronts."

While taking the lead in the nation, Hawai'i's gas price-cap measure still carries some uncertainty about the possible effects for consumers, the state's oil industry and gas station dealers.

The legislation would have state regulators determine the maximum price for regular unleaded self-serve gasoline by averaging prices in Los Angeles, San Francisco and the Pacific Northwest. A markup would be added to account for additional costs such as transportation. It also requires the oil companies to hand over internal documents so the state can monitor their profits.

But neither the state nor the oil industry conducted any research on the possible effect before the legislation was passed. And some experts say the government effort to rein in prices could backfire on Hawai'i motorists, leading to gasoline shortages, long lines at gas stations, and even higher prices.

"Price controls in the gasoline market have a pretty bad history," said Severin Borenstein, director of the University of California's Energy Institute.

Borenstein said price controls could make sense in a market like Hawai'i's, where firms have a lot of market power, but if prices are set too low, they tend to cause shortages and long lines for consumers.

"If there is one thing we learned in the 1970s," he said, "it was that consumers hate long lines just as much as they hate high gas prices."

Some in the oil industry express similar concerns. "Price controls have never provided long-term benefits and, in fact, have often had unintended consequences," said Albert Chee, a spokesman for Chevron Hawaii, the state's biggest gasoline refiner and dealer.

Chevron would be one of the key players affected by the measure, and Chee said the company is reviewing what action it might take in response to the legislation.

Still, supporters of the measure said the short-term uncertainty surrounding the future of the legislation could benefit local drivers in the form of lower gasoline prices.

Spencer Hosie, the lawyer who led the state's antitrust fight against the oil companies, said the industry will want to keep gas prices low to appease motorists and make it easier for friendly politicians to scrap the measure next session.

"Ironically, this statute will effectively keep prices low even though it has not taken effect yet," Hosie said. "But if the oil companies go back to their normal pricing patterns, it is going to be very hard for them to win that political fight next year. That is going to be the price of admission for the oil companies next session if they hope to overturn this bill next year."

Several legislators already are lining up to take a cut at the recently passed bill. Among changes they say they would like to see are bigger profit margins, especially for Neighbor Island dealers where costs are higher, and minimum gas prices to prevent corporate-owned stations from undercutting independent dealers.

"It's going to be a major issue next session," said state Rep. Joe Souki, D-8th (Waiehu, Ma'alaea, Napili). "I am going to be pushing hard for either repeal or for significant changes."

Souki said he does not care about the oil companies but is concerned about the effect the bill will have on gas station dealers in rural areas of his home district on Maui.

"The measure was hastily crafted at the end of the session, and no one really studied what was fair or not," Souki said.

Even if the state manages to keep much of the legislation intact next session, most observers agree it will still face a legal challenge by the oil companies in court.

"I would expect them to be evaluating right now bringing a lawsuit to defeat the law in the courts as soon as the governor signs it," Case said.

It would not be the first time the state and the oil companies faced off in court. Much of the information used in pushing for the legislation was gathered during Hawai'i's 1998 suit against Chevron, Texaco, Shell, Unocal, Tosco, Tesoro, and BHP Hawaii. The state said the evidence it gathered showed that the oil companies cooperated to keep gasoline prices high and allocated market among themselves. The oil companies denied the allegations.

The state eventually settled with Tesoro and BHP in 1999 for $15 million and with the remaining defendants in January for $20 million. The oil companies admitted no wrongdoing, but documents gathered in the suit showed the companies earned huge profits during the 1990s at the expense of Hawai'i drivers.

Frank Young, a former Chevron gas station dealer and president of the Hawai'i Automotive Repair & Gasoline Dealers Association, said the oil companies fear the current legislation because it will be effective in lowering profits and gasoline prices.

Young, a longtime critic of the oil companies, said many gas station dealers are worried the price cap will drive them out of business. But Young does not believe that is true.

Price caps will lower profit margins for the oil companies, making it harder for them to sell gasoline to competitors of the independent dealers at much cheaper prices than dealers are forced to pay, he said.

"The oil companies have to take full responsibility for this bill," Young said. "They are the ones who told the state they did not know how much it cost them to make a gallon of gas or how much profit they were making in Hawai'i. So, from now on the state is going to tell them."

Reach Frank Cho at 525-8088 or at fcho@honoluluadvertiser.com.