Such were the findings of a comprehensive report on the state's fuel industry released last week that has become the center of a heated political debate between state Democrats and Republicans.

Oil industry profits — and whether they are excessive — will be discussed in the coming months as lawmakers decide whether to allow gasoline price controls to take effect next July.

Democrats have accused Gov. Linda Lingle's Republican administration of cooking the report to support its anti-gas cap position. Lingle countercharged that Democrats had politicized a serious issue.

The debate comes as the average price statewide of regular gasoline hit a high of $2.119 Friday, ranking Hawai'i again as the state with the most expensive gasoline in the nation.

The Legislature appropriated $250,000 for the report by state consultants Stillwater Associates to investigate Hawai'i's gasoline prices.

Instead of supporting price caps, as some lawmakers had expected, the report recommends repealing them and other regulations that limit competition and contribute to higher consumer prices.

While the report confirms speculation that the refiners and gasoline sellers are profitable, it backs the oil industry's claims that Hawai'i consumers aren't being gouged.

The consultants even raise doubts about the long-term viability of local refiners ChevronTexaco and Tesoro Petroleum Corp. because of increasing competition.

The Stillwater report predicts that if the price caps are allowed to take effect, stations will set prices at the ceilings to offset periods when the caps cut into profits.

Instead of price caps, the report suggests increased monitoring and analysis of the industry and boosting competition by cutting regulations.

The consultants also suggest launching a consumer awareness campaign to persuade drivers to buy cheaper regular gasoline instead of more expensive premium.

Bipartisan split

Last week, several prominent Democratic leaders slammed the report, saying it ignored expert testimony in the state's settled anti-trust lawsuit and failed to offer effective alternatives to price caps.

"I just don't think that the report offers any meaningful solutions to high gas prices," said Sen. Ron Menor, D-17th (Mililani, Waipi'o), an architect of the price-cap law.

Menor plans to introduce changes to the formulas used in calculating the price-cap ceilings to give more price relief, and might recommend that the Public Utilities Commission regulate the gasoline industry.

U.S. Rep. Ed Case, whose rural and Neighbor Island district suffers the highest gas prices in the state, said the price caps were the only practical option for holding down costs.

State Sen. Fred Hemmings, R-25th (Kailua, Waimanalo, Hawai'i Kai), said if the caps had been in place, they would have allowed dealers to set prices higher than current local prices.

Hemmings also argued that high costs are a fact of life in the Islands.

"Gasoline prices are high in Hawai'i, no doubt about it," he said in a commentary for The Advertiser. "But, the truth is, so is everything else."

Even without price caps, Hawai'i's oil market is changing to the benefit of consumers, the Stillwater report suggests.

The consultants maintain that nonrefiners such as Aloha Petroleum and high-volume dealers such as Costco are slowly gaining market share by undercutting ChevronTexaco and Tesoro.

And while the two refiners enjoy significant market power, high operating costs and low volume keep their profits from being unduly large, the report states.

According to the consultants, so-called gasoline marketers such as Aloha can negotiate lower prices from the refineries because they can import gasoline if needed. That allows them to undercut ChevronTexaco and Tesoro, which must bear the costs associated with running a refinery.

"Chevron, we understand, is the company everybody loves to hate in Hawai'i," said David Hackett, president of Stillwater Associates, the main author of the report. But Hackett believes that at the end of the day, gasoline companies such as Aloha make more money.

"They're the one making the big dough in this market," he said.

Profits vary

Based on crude oil prices of $25 a barrel, the consultants estimate that ChevronTexaco earns about $22 million a year, or a return on investment of 12 percent.

Tesoro earnings are comparable, but represent a 6 percent return on investment because of higher expenses.

That compares with an industry return on investment ranging between -5.5 percent to 16.7 percent, according to the report.

For gasoline sellers such as Aloha and Shell, which own their own shipping terminals that can receive imported gasoline, capital returns ranged from 12 percent to 17 percent, the report found.

Hackett said those figures represent a snapshot from court filings in the state's anti-trust lawsuit against the oil industry, and profits probably are greater today.

ChevronTexaco said the consultants' estimates of its profits were accurate.

"They did a good job. We find no objection to it," said ChevronTexaco spokesman Albert Chee.

"It's a good business, but nothing that warrants words like 'excessive' " profits, he added.

Tesoro said it agreed with the report's position on price caps, but had no comments on the profit estimates.

Aloha's business is growing, said corporate counsel Bob Fung, but he disagreed with the report's claim that it is more profitable than its refiners.

For one thing, Stillwater's estimates don't take into account debt payments on money spent in 1997 on Aloha's Barbers Point terminal, he said.

"It just doesn't seem right, because we've had some OK years, but we've also had some very, very tough years," Fung said.

Governor responds

The report's recommendations are in line with Lingle's 2002 campaign pledge to seek repeal of the gasoline gas caps, a point made by Democrats after the report's release.

But Lingle called Democrats' reaction curious, given that the consultant's study was required by the gas-cap law and arranged by the administration of former Democratic Gov. Ben Cayetano.

"The Legislature, the taxpayers have paid a quarter of a million dollars to get a report, and the report is telling them don't do this, it will be bad," Lingle said.

"And now to go against the report that you just paid for, it seems to me you'd have to have some dramatic evidence that proves what you are saying is true, that if we do this gas cap that prices will come down and that shortages will not be created."

Prices could be lower

The Stillwater report did not dismiss the need for some action to lower Hawai'i's gas prices. It makes the following points:

• Hawai'i meets three of four conditions that may warrant the need for price controls in the short term.

• Gasoline prices could be lowered by shifting some of the state's gasoline tax burden to imported jet fuel.

• If Hawai'i's gasoline prices were truly competitive with import prices, both refineries would lose money and likely close, which would cost the state 1,400 jobs and $405 million in economic benefits.

Frank Young, a service station owner and president of the Hawai'i Automotive Repair & Gasoline Dealers Association, said he disagreed with Stillwater's position on price caps, but the report provides needed insight into the state's oil industry.

"There's some very valuable information in this," Young said. "The research is correct, but it's spun."

Hackett acknowledged that it was highly debatable whether Hawai'i oil industry profits are excessive.

"At what point are you paying too much, and how do you decide if you're being gouged and if profits are obscene?" he said. "Those are hard questions to answer."