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The Honolulu Advertiser
Posted on: Sunday, December 7, 2003

Implementation of gas-price cap would hurt state

By Mike Fitzgerald

Whether we like it or not, publicity about the gas-price cap controversy in Hawai'i and on the Mainland is defining the business investment climate of our state. Some say this doesn't matter. However, consider these realities:

Three separate analyses independently of each other have recommended a repeal of the gas-price cap law. The reports propose several steps to increase competition and lower gasoline prices.

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• Government-imposed price controls of any kind are a warning sign to businesses that are considering locating and investing in Hawai'i, or in the case of local businesses, expanding.

• Price controls, rarely, if ever, achieve their goals. Instead, they distort an already chaotic market either by creating artificial shortages or, in the long run, by causing prices to rise.

• For business people and investors, price controls are poison pills. A business person's interpretation is, "If the government can tell certain industries how they can and cannot price their products and services, and define for them what constitutes a reasonable profit, how do we know they won't turn around and do the same thing to us next?"

• No other state has a price cap on gasoline. While the price of gasoline is a common topic of discussion almost anywhere, I don't know of any other state even considering price controls. If Hawai'i proceeds to impose the gas-price cap next July, it will show up on business radars everywhere and be translated as: "Take your investment dollars and jobs elsewhere."

• According to the Stillwater report, a consultant study commissioned by the state government, imposing a gas-price cap could cause the eventual departure of Hawai'i's two petroleum refiners, which would result in a loss of 1,400 jobs and an annual drop in economic activity of $405 million. We need to strengthen, expand and diversify the economy, not shrink it.

• The heated arguments we are hearing against the three separate analyses that independently of each other recommend repeal of the gas-price cap law provide strong evidence to the business community that Hawai'i may not yet be "open for business."

Those analyses are: the Stillwater report, legislative testimony by the deputy director of the Federal Trade Commission's office of policy and planning, and a study by the bipartisan National Conference of State Legislatures.

Our strategy should be to lower the volume of political rhetoric and seriously consider the recommendations of all three reports. All three recommend repeal and, together, they propose several steps to increase competition in the industry and lower gasoline prices. The charge that these reports were "fixed" in advance is neither likely nor reasonable. The Stillwater report, on which most of the attacks were focused, was commissioned not by the administration of Gov. Linda Lingle but by the previous Democratic administration of Ben Cayetano. (It concluded that price caps would cause higher and more volatile retail gasoline prices.)

If anyone doubts the report's validity, consider that the Federal Trade Commission and the bipartisan National Conference of State Legislatures reached similar conclusions.

The report also points out that contrary to public perception, the refiners' profitability is "not excessive." Because Chevron is the most frequent target of this accusation, it's worthwhile taking a closer look.

Based on the cost and operating profit figures contained in the Stillwater report, we can calculate that Chevron's before-tax profit is 6.4 percent. Is that reasonable? Consider the most recent rate cases for two of Hawai'i's regulated companies, Hawaiian Electric and Verizon (formerly GTE Hawaiian Tel). When reviewing rate-increase requests, the state Public Utilities Commission considered "reasonable" rates of return on equity — essentially how much each company's stockholders could expect to earn on their investment.

In both cases, the PUC decided an 11- to 12-percent return on equity was reasonable. Compared to that, a 6.4 percent pre-tax profit doesn't seem out of line. In fact, in working with companies considering where to locate their operations, my experience is that such profitability levels are reasonable; consistently lower profitability is often an indicator for companies to reassess their current operations in comparison to other locations.

Lingle came to office promising a "New Beginning." Hawai'i urgently needs to create better-paying jobs and offer interesting and challenging careers to young people. From 1991 to 2002, statewide employment grew by only about 16,000 net new jobs. During this period, however, O'ahu actually lost over 3,700 jobs.

According to "The Self Sufficiency Standard for Hawai'i," prepared for the Hawai'i Commission on the Status of Women, "8 of 10 jobs in the present economy in Hawai'i do not pay living wages." It's not hard to understand why more than 100,000 people ages 5 to 45 have left Hawai'i in the past decade.

It is probable that at least part of the reason for Hawaii's crystal-meth epidemic is the lack of interesting, good-paying jobs and challenging, worthy careers for our young people.

As long as Hawai'i proposes policies such as gas-price caps, which confirm the perception that Hawai'i is anti-growth and anti-business, it is unreasonable to expect significant new investment and job creation, either from existing businesses or new investors.

What's needed is to invent a more positive and hopeful economic future here for residents and kama'aina who would like to come home. Let's dedicate our time and energy to finding solutions such as more competition and better public transportation.

Mike Fitzgerald is president and CEO of Enterprise Honolulu, a private, nonprofit economic development organization whose goals are to diversify the economy by creating more good-paying jobs for residents and more technology and knowledge-based companies.

Mike Fitzgerald is president and CEO of Enterprise Honolulu, a private, nonprofit economic development organization whose goals are to diversify the economy by creating more good-paying jobs for residents and more technology and knowledge-based companies.