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The Honolulu Advertiser

Posted on: Thursday, April 28, 2005

ISLAND VOICES

Repeal gasoline cap law before it's too late

By Bruce Coppa

It's time for candid talk about the gasoline price cap. The Legislature is scheduled to adjourn for the year on May 5. Rumor has it that the negative consequences of the gas cap have begun to stir misgivings among a number of legislators.

The Legislature should listen to those misgivings, gather up some courage and repeal the law before it's too late.

What's wrong with the gas cap? The law was born as an effort to "do something" about the high price we all pay for gasoline, a glaring symbol of the high price of most things in Hawai'i and a tempting target, since it can be blamed on "Big Oil," which has few friends.

The gas cap is like the emperor who wore no clothes. Let's look at the bare essentials.

First, gasoline is the wrong target to pick if the goal is to bring down the state's high cost of living. For most Hawai'i families, gasoline represents a far smaller expenditure than food, housing and taxes, which are among the highest in the nation. Bringing down the cost of any of these would do far more to benefit family budgets than capping gasoline prices.

In addition, having nonetheless targeted gasoline, the gas cap is unlikely to lower the price at the pump. As initially written, the gas cap did indeed target the retail price of gas. Unfortunately, it also contained several fatal flaws. It would have driven many retailers out of business and encouraged surviving retailers to always charge the maximum price allowable under the law.

This price was to have been pegged to the wholesale price of gasoline on the West Coast. The West Coast, like most Mainland markets, is highly volatile. Under the law's initial formula, the price Hawai'i gasoline retailers would have been allowed to charge would often have been higher than what they actually were charging.

It has been shown that under the first version of the gas cap law, local motorists would, on average, often have been paying more for gasoline, not less.

That is why the gas cap law was amended and its entry into force postponed. As the law is currently written, the wholesale price is capped, not the retail price. Under the law, the Public Utilities Commission was charged with determining the formula to be used in implementing the law.

The PUC, in turn, retained ICF Consulting, experts in the field of petroleum markets, to make recommendations. ICF issued its report, a 97-page document, on April 15.

ICF made it clear that despite its best efforts to develop a formula that would set an appropriate wholesale price for gasoline in Hawai'i, retailers would be free to charge whatever they wish. "Retail marketers are under no obligation to lower street price if wholesale prices are reduced," the report says.

Under the ICF-recommended formula, when wholesale prices are low, retailers would not have to drop the price at the pump. And when wholesale prices rise, retailers would be free to raise their price to maintain their profit margins.

"If we could get more margin, we'd keep it," one prominent member of the gasoline retailing community was quoted as saying. "I know that's not a good public thing to say. (But) there'd be no reason for us to lower a price because we're already on the ragged edge."

Not only did this law pick the wrong target, it doesn't even come close to the bull's-eye. It will do little or nothing to lower the price at the pump.

Finally, the gas cap will probably set in motion a chain of unintended harmful consequences whose result will be, among other things, to raise the price of gasoline!

Let's just look at the most likely consequences. By limiting the profitability of Hawai'i's two refineries, the gas cap could well cause one or both of them eventually to close down. In ICF's bland formulation, "... the impact could be reduced profits. ... (This) may push Hawai'i's refiners to closely examine refinery profitability and sustainability."

The loss of jobs — including hundreds of good, high-paying specialist jobs — is the least of the harm that would flow from the closure of one or both refineries. In the view of ICF, this would "significantly increase Hawai'i's dependence on imported products, including gasoline, diesel, residuals (to supply most of the state's electric power plants) and jet fuel, directionally raise prices and require additional inventory for contingency supply." It would almost certainly raise the price we pay at the pump as well as for other petroleum products, and create new upward pressure on the price of almost everything we buy in Hawai'i.

Moreover, the complex gas cap law will not administer or enforce itself. For that, a large new bureaucracy will be needed, which we will be obliged to support with our tax dollars. Since the gas cap will save us nothing at the pump, why should we also have to pay for the administration of this complex law?

But the biggest harm that would result from the gas cap would be the damage to Hawai'i's economy in the perception it would create that Hawai'i has little aloha for business or investment. As ICF points out, "the implementation of price controls on commodities can create a perception of an anti-business climate in Hawai'i." This could have profound negative consequences for future investment and job creation.

Is all this what the people of Hawai'i really want or deserve? Of course not. The time has come to admit the gas cap has been a "good college try," but is not good enough. Let's hang up this cap and move on.

Bruce Coppa is a business consultant. He wrote this commentary for The Advertiser.