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The Honolulu Advertiser

Posted on: Friday, February 4, 2005

Gas price cap hits pump in September

 •  Chart (opens in a new window): When Hawai'i prices go up, they stay up

By Sean Hao
Advertiser Staff Writer

Gov. Linda Lingle will implement the state's gasoline price cap law in September, if a repeal fails to pass the Legislature this session, according to a top adviser.

Price comparison

Yesterday's price on O'ahu: $2.32

Yesterday's price under the planned price cap*: $2.29

Note: The wholesale price cap formula is subject to change by the state Public Utilities Commission.

*Assumes a 12-cent-per-gallon retail margin. Sources: AAA travel club, Bloomberg News, Advertiser research.

Hawai'i is scheduled to be the first state to regulate gasoline prices starting Sept. 1.

Ted Liu, director for the Department of Business, Economic Development and Tourism, said Lingle would not stand in the way of implementing the law, even though the administration prefers alternatives such as stepped-up monitoring and oversight of the oil industry.

"We firmly believe that (price caps are) the wrong approach" Liu said in an interview this week. "If a repeal bill fails, the gas price cap law is the law. I want to absolve you of any notion that the governor is not going to implement it, or that DBEDT is not going to implement it."

Lingle could legally attempt to suspend the gas cap law, which puts a ceiling on wholesale gasoline prices, by citing concerns that it could result in higher retail prices or shortages. However, Liu indicated the governor wouldn't take that step.

Lingle said last week she would push for repeal of the law, but that is unlikely to succeed.

The chairman of the Senate committee that must approve any repeal of the price cap law has said he expects the law to stand.

Ron Menor, D-17th (Mililani, Waipi'o) chairman of the Senate Consumer Protection and Housing Committee, supports the price cap.

Capping wholesale prices "will enhance or increase competition on the retail level by reducing costs of doing business for retailers who are facing high wholesale prices," Menor said. "It's my hope that will result in stable or reduced prices.

"If that assumption proves to be inaccurate ... then of course the Legislature could always revisit the law."

Under the law, a complex formula will cap the wholesale price of gasoline on O'ahu and Neighbor Islands. The price-cap formula will be based on spot prices in several markets across the nation, but does not set a ceiling on what retailers can charge. The state Public Utilities Commission is investigating which benchmark and margins make sense in establishing ceilings on gasoline and diesel fuels.

Yesterday the average cost of a gallon of self-serve regular on O'ahu was $2.32. Under the planned price cap law, the price might have been cut to $2.29 if retailers pass on the saving from the lower wholesale price, and assuming a 12-cent-per-gallon retail margin.

The average price of regular gasoline statewide was about $2.40 a gallon this week, which was about 5 cents below a November record. Nationwide, the average price for regular was about $1.91 a gallon, or about 15 cents lower than a record set last May, according to the AAA travel club.

Liu said even if the caps bring down the price at the pump the law could result in higher fuel costs for Hawaiian Electric Co. and, ultimately, consumers.

Hawai'i's electricity rates — the nation's highest — could rise even further if oil company profits on gasoline sales are reduced, Liu said.

Utilities such as HECO rely on local refineries to supply fuel oil, which is used in power generation. Rising oil costs contributed to Hawai'i's 62 percent increase in electricity prices since 1990, according to DBEDT. Nationwide average electricity prices rose 13 percent over the same period.

"These markets are interrelated," Liu said. "You can't expect to squeeze one aspect of the market and not get some reaction in some other aspect of the market.

"The oil companies are rational economic players," Liu added. "They will find a way of getting a return on their investment."

HECO said it recently signed a 10-year contract to purchase fuel oil that ties local prices to national prices. It's unlikely ChevronTexaco would be able to raise HECO's fuel oil prices to offset lower profits from wholesale gasoline sales, HECO said.

Until now, no one has raised the issue of gasoline price caps affecting electricity costs, Menor said.

"In testimonies offered against the price cap, representatives of the oil companies didn't indicate that price increases in other petroleum products would result," Menor said.

"Unless more information could be provided to the Legislature at this time, such concerns would be theoretical. ..."

Also included in the gasoline price cap law is a provision that caps the rent that oil companies can charge their dealer-owned stations and prohibits oil companies from taking over those stations. That measure is similar to a rent cap law passed in 1997 that's still tied up in the courts.

The U.S. Supreme Court will hear testimony this month on the 1997 law as it decides whether Hawai'i went too far to keep gasoline affordable for residents when it imposed the rent cap. The lawsuit was filed by Chevron.

Lower courts said the 1997 law — intended to protect independent dealers, promote competition and lower gasoline prices — was unconstitutional. However, the state attorney general petitioned the Supreme Court to review the case on grounds the courts should give more deference to the state Legislature on economic and social policy matters.

A Supreme Court decision on the matter, which is expected this summer, likely will have implications on the current price/rent cap law, Menor said.

"I think the Supreme Court decision could impact the implementation of the price cap to the extent that a Supreme Court ruling that's favorable to the rent cap would reduce the chances of a legal challenge by the oil companies," he said.

Regardless of the outcome, Menor thinks that the current gas cap law would pass constitutional muster. However, according to advice provided to lawmakers last year by the state attorney general's office, capping wholesale rather than retail prices could invite a constitutional challenge.

At issue is whether a wholesale price cap, which can't guarantee lower retail prices, still satisfies the public interest requirement needed to override a U.S. constitutional prohibition against taking someone's property without just compensation.

"At the very least, however, the repeal of the retail price cap will likely raise constitutional questions as to the efficacy of the Legislature's indirect approach to reducing retail gasoline prices," the attorney general's office wrote.

A Chevron victory could embolden oil companies to seek court relief from September's price cap.

Albert Chee, a spokesman for ChevronTexaco, would not comment on any future actions the company might take regarding price caps.

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