Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser

Posted on: Saturday, April 16, 2005

Gas cap would often cut wholesale prices

By Sean Hao
Advertiser Staff Writer

Hawai'i's new gasoline price cap law, set to take effect in September, would cut wholesale prices as much as 13 cents a gallon on O'ahu, under a new formula developed for the state Public Utilities Commission.

Presentations on price caps

The gasoline price cap formula will be the subject of two public presentations at the State Capitol on Tuesday:

• 9 a.m. in Room 016

• 2 p.m. in Room 325

The commission hired Fairfax, Va.-based ICF Consulting to devise a formula that reflects the cost of importing gasoline to Hawai'i. ICF did that and calculated that over the past five years the formula would have reduced wholesale prices by 10 cents a gallon at dealer-owned-and-operated stations and 13 cents at distributor-owned stations. The report cautioned there is no guarantee the savings will be passed on to consumers because the cap applies only to wholesale prices.

The ICF report is a key step in the state's move toward implementing the nation's only gasoline price cap. The ICF formula is likely to form the basis on which the Public Utilities Commission sets gasoline prices if the new law takes effect.

Whether it does take effect Sept. 1 as planned depends on the state Legislature. Support among legislators for the law, which was passed last year, appears to be waning. Both the House and Senate have debated bills that would effectively kill the price cap by giving Gov. Linda Lingle the discretion not to implement the law, which she opposes.

The ICF report could shore up support for the price caps, said price cap supporter state Sen. Ron Menor, D-17th (Mililani, Waipi'o), chairman of the Senate Consumer Protection and Housing Committee.

"The report shows that a workable and enforceable price cap can be achieved," Menor said.

The ICF report will be the subject of public hearings at the Legislature on Tuesday.

According to ICF, which will receive about $121,000 from the state, price caps will result in more market-driven wholesale gasoline prices. However, the proposed price cap formula and monitoring system is complex, doesn't guarantee low prices for consumers and may be difficult to put in place by Sept. 1.

The report reiterated concerns raised in a previous $250,000 study conducted by Irvine, Calif.-based Stillwater Associates, which found the ceilings could result in gasoline shortages and oil companies leaving Hawai'i.

"What is the intent (of the law), because if it's to lower prices, the report states you can't guarantee it," said Melissa Pavlicek, a spokeswoman for the Western States Petroleum Association, which represents ChevronTexaco Shell Oil and Tesoro Petroleum. "They also confirm that the law could also affect the viability and sustainability of our energy sector."

Although there's no guarantee retailers will pass on any savings achieved under the law, "If wholesale prices go down I think that ultimately those savings will be passed on to consumers," Menor said. "The intent behind the price cap is to try to provide for fairer and more reasonable gasoline prices that would more closely track Mainland prices as well as provide savings for consumers at the pump."

Part of the impetus for the cap was public frustration over Hawai'i's high gasoline prices. Oil companies operating in the state argue gasoline prices remain high because of the cost of doing business in Hawai'i and the state's high taxes. Other commonly cited factors include the state's geographic isolation, lack of wholesale-level competition and relatively small market.

According to the 83-page ICF report, determining maximum wholesale prices will involve a complex formula that requires setting 96 separate price caps each week.

The ICF report suggests basing the price cap on wholesale prices in Singapore and the Caribbean instead of several Mainland markets. That should better reflect the price Hawai'i distributors have to pay for their gas, the ICF said.

Maximum wholesale prices would be fixed each week based on average prices from the previous week plus various adjustments. The proposal now will be vetted by the industry and others before the Public Utilities Commission decides on a final formula before September.

While the formula would have resulted in an average savings of 10 cents to 13 cents from 1999 to 2004, it would not lead to lower prices if in effect today. Under the proposed formula the price of regular gasoline on O'ahu this week would be about $2.55 a gallon at dealer-owned-and-operated stations, assuming retailers maintain a 12-cent retail margin. That's 12 cents higher than current average prices.

In recent weeks, Hawai'i gasoline prices haven't risen as fast as prices on the Mainland. The price cap law would force Hawai'i prices to react more quickly to global swings in prices.

Among other key findings in the ICF report: The proposed caps would place more competitive pressures on petroleum suppliers, forcing the industry to reduce costs. That also would lead to more market-driven wholesale prices, which currently don't change on a regular basis.

Also, the caps as proposed are meant to ensure the industry remains profitable. However, limits on industry profits could cause some companies and the state's two refineries to re-evaluate their financial viability, ICF said.

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