Report advises no cap on Hawai'i's gas prices
By Sean Hao
Advertiser Staff Writer
Hawai'i could encourage competition in the gasoline business by repealing regulations that keep operating costs high and by refusing to place caps on fuel prices, according to a study released yesterday.
In addition to eliminating gasoline price caps, scheduled to take effect next July 1, the state-financed report by Stillwater Associates LLC suggests increasing competition by eliminating laws restricting where refiners can build gas stations and governing the rent that can be charged dealer-operated stations. It also seeks to eliminate inspection and audits of the oil industry.
The report, which cost the state $250,000, also recommends increased data analysis and a consumer awareness campaign to persuade drivers to buy cheaper regular gasoline, instead of more expensive premium grades.
The release of the report came on the same day that the average price of a gallon of regular gasoline hit a new high in Honolulu: $2.044, according to AAA. Criticism of the report was immediate, with consumer groups and some politicians saying the skyrocketing fuel prices clearly demonstrate the need for price caps.
Frank Young, a service station owner and president of the Hawai'i Automotive Repair & Gasoline Dealers Association, said the state needs to increase oil industry regulations rather than eliminate them. Young and a small group of others in a newly formed group calling itself Citizens Against Price Gouging, which favors price caps, said the Stillwater report doesn't address ways to increase competition beyond Hawai'i's two refineries, ChevronTexaco Corp. and Tesoro Petroleum Corp.
"We think this thing is seriously flawed and that it is not a serious report designed to deal with a serious problem for every person in this state," he said.
Alternatives that should be considered include having the state import fuel and tax excessive oil industry profits, Young said.
However, David Hackett, president of Stillwater Associates, said that the oil industry isn't overcharging Hawai'i customers.
"We don't think that the oil industry in Hawai'i is excessively profitable" he said, in earning "20 percent to 25 percent return on capital employed in a good year and zero percent to 10 percent in a bad year."
Hackett pointed to problems such as Hawai'i's low-tech, small-volume refineries that refine expensive forms of crude oil. Also, local refiners charge higher prices for gasoline to compensate for lower-margin products such as jet fuel and fuel oil, which is used to generate electricity. Overall, these factors as well as higher operating costs and taxes, lead to gas prices that are 30 cents to 35 cents higher than the Mainland, Hackett said.
If gas prices were forced down, or if the state started selling gasoline, refiners would lose money and leave the state, lowering competition, Hackett said. He estimated that the loss of Hawai'i's two refineries would cost 1,400 jobs and $405 million a year in economic benefits.
The Legislature passed price caps, which tie Hawai'i prices to the West Coast, in 2002 after the state settled a price-fixing lawsuit with refiners for $22 million. The study released yesterday was required by the legislation to determine what the affects of a cap might be.
U.S. Rep. Ed Case, D-Hawai'i, who attended Hackett's briefing at the Capitol, said he believed the report started with the conclusion that the gas cap law should be repealed "and then proceeded to try to justify the result."
The Stillwater study found that caps on Hawai'i gasoline prices would result in higher, more volatile prices at the pump.
Critics of the price caps also contend that they would result in higher prices as stations try to recoup profits during periods when prices were capped at a lower level.
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. That average for last week was about $1.08 a gallon, which results in a local wholesale price cap of $1.30 a gallon. Hawai'i's law also would cap retail prices at 16 cents above wholesale prices, which would result in a price of $1.46 a gallon.
Tack on about 58 cents in federal, state and local taxes, and gas prices on O'ahu would be capped at $2.04 a gallon under the price-ceiling formula.
Had they been in effect over the past year, the caps would have led to higher prices on several occasions because of a spike in West Coast prices. Meanwhile, Neighbor Island prices would have been lower. Hackett said the study did not look at options such as basing the price caps on Mainland regions beyond the volatile California market.
Young criticized Gov. Linda Lingle for opposing the gas cap legislation and handed out a list of contributions totalling $67,500 by ChevronTexaco to state Republicans, including Lingle, in 2002.
Stillwater's findings were largely backed by data from the Federal Trade Commission and the National Conference of State Legislators, which found that price controls were not effective when they were imposed during the fuel crisis of the 1970s.
Melissa Pavlicek, a lobbyist for the Western States Petroleum Association, said the group favors repealing the price caps, as well as other regulations such a rent caps and laws governing where gasoline stations can be built.
She said consumers should look at state and local taxes, which are another key component of gas prices.
"Legislators should also consider addressing Hawai'i's gasoline taxes, which are the highest in the nation," Pavlicek said.
The Associated Press contributed to this report.
Reach Sean Hao at 525-8093 or shao@honoluluadvertiser.com.
