Gas price cap fuels debate

By Sean Hao
Advertiser Staff Writer

If a price-cap law scheduled to take effect next summer were in effect now, Hawai'i's high gasoline prices would be sharply lower.

The law, which was passed last year with a July 2004 effective date, would tie the state's gas prices to the West Coast markets where prices at the pump have fallen substantially in response to lower crude-oil costs.

At the same time, prices statewide that stood at about $2.05 Friday have hardly budged since hitting a high of nearly $2.07 in late May, according to AAA auto club.

If the gas price limits were in place today, consumers on O'ahu would be paying no more than about $1.83 a gallon for regular self-serve gas. That's 7 percent less than Friday's average of $1.97.

Prices on Maui would be capped at $1.88 a gallon — 17 percent lower than Friday's price of $2.27. And on the Big Island, prices would be capped at $1.84 a gallon — 12 percent lower than Friday's price of $2.10.

Concerns that price caps could result in higher prices as well as shortages have led a state-paid consultant, the Federal Trade Commission, several state legislators and others to weigh in against allowing the price caps to take effect next year.

However, the longer Hawai'i gas prices remain high despite a drop in crude-oil prices, the stronger the argument in favor of price controls, said Sen. Ron Menor, D-17th (Mililani, Waipi'o), chairman of the Senate Committee on Commerce and Consumer Protection.

"This is going to be one of the key issues in the next session," said Menor, who helped craft the price-cap law. "I think that given the fact that Hawai'i consumers are paying significantly higher gas prices than consumers on the Mainland displays that our market is broken.

"I don't think that doing nothing in this kind of market situation would be satisfactory."

Apart from price controls, other options aimed at addressing Hawai'i's historically high gas prices are being drafted by the state's consultant, Stillwater Associates based in Irvine, Calif.

In an interim report to the Legislature earlier this year, Stillwater recommended the state not impose price caps, and instead investigate alternatives such as boosting fuel price-monitoring efforts, exploring alternative fuel sources such as ethanol, and creating a state-owned oil terminal to lower barriers to imported fuel.

David Hackett, president for Stillwater, maintains that price ceilings would discourage competition, result in higher, more volatile prices at the pump and possibly lead to supply shortages.

For example, in the March-April time frame, when California gas prices were higher than Hawai'i, the price cap law would have allowed retailers to charge as much as $2.35 a gallon on O'ahu, he said. Honolulu gas prices peaked at nearly $1.99 a gallon in mid-April, according to AAA.

Part of the problem is Hawai'i's low-tech, small-volume refineries that process expensive forms of crude oil. Local refiners also charge higher prices for gasoline to compensate for lower-margin products such as jet fuel and fuel oil used to generate electricity, Stillwater found.

But the bottom line is that Hawai'i's small, low-volume market has not attracted enough competition to drive prices lower, Hackett said.

"The fundamental problem is known fairly well — there's not much competition," he said.

The price caps would work by preventing Hawai'i wholesalers from charging more than 22 cents than the five-day average spot price for regular gasoline in Los Angeles, San Francisco and Portland, Ore. That average for the week of May 25 was about 88 cents a gallon, which results in a local wholesale price cap of $1.10 a gallon. Hawai'i's law also would cap retail prices at 16 cents above wholesale prices, which would result in a price of $1.26 a gallon.

Tack on nearly 57 cents in federal, state and local taxes, and gas prices on O'ahu would be capped at $1.83 a gallon under the price ceiling formula.

While price caps would mean lower prices for consumers today, over the long run they would drive up prices, said Albert Chee, a spokesman for ChevronTexaco Corp., operator of one of only two refineries in the state.

During the last year or so, consumers would have paid on average about 11 cents a gallon more for regular gasoline 75 percent of the time had Hawai'i's price caps been in effect, Chee said. The remaining 25 percent of the time, prices would have been about 16 cents lower.

Overall, ChevronTexaco estimates price caps would have cost consumers $16 million more since May of last year. While that would appear to bode well for the refiner, Chee said costs associated with enforcing the caps could offset gains derived from higher gas prices.

"I don't know that this would be looked at as a plus for us," he said. "It remains to be seen."

Tesoro, Hawai'i's other gasoline refiner, said Friday that it agreed with Stillwater's findings that argue against the price caps.

Among the larger concerns about the law is that it only caps self-serve regular gasoline prices and has no effect on premium-grade fuels. Retailers could stop selling regular gas, forcing consumers to buy higher-priced, unregulated grades of gasoline, said Rep. Joe Souki, D-8th (Wailuku, Waiehu).

Souki said he would not support keeping the price caps intact, unless they are expanded to cover all gasoline grades. "Then it may have some possibilities," he said. Otherwise, "I think it's going to die."

Critics of price caps also contend the law ignores unique factors in Hawai'i's gas market such as high land values, interisland distribution costs and low per-station volumes. That is a fundamental flaw of the price ceilings, said Fereidun Fesharaki, an energy expert at the East-West Center.

"The price cap is a stupid idea," Fesharaki said. "It has no basis in economics."

Fesharaki said that compared to other local items such as housing, gasoline prices have remained relatively low.

Still, East-West Center officials, who earlier this year predicted that Hawai'i gas prices would drop about 30 percent after the war in Iraq, are surprised at how local gas prices have remained stubbornly high.

One solution to Hawai'i's expensive gas prices is for consumers to become more price savvy, Fesharaki said.

"I think the oil companies know that people are not price sensitive in Hawai'i," he said. "The solution is for people to become more discriminating by not buying from anybody that's offering you one cent more" than the competition.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.

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