California
Watches Hawaii's Gasoline Price Cap
By Elizabeth Douglass published in the LA
Times 30 August 2005
With chronically high pump prices straining its laid-back ethos, Hawaii
embarks this week on a radical experiment to cap gasoline prices,
a move being keenly watched nationwide by legislators and consumer
groups eager to rein in record fuel costs.
Interest will be especially high in California, a unique market that
some experts liken to Hawaii's because of the high prices charged
by gas stations and big profits reaped by a few in-state refiners.
This week, state Sen. Joe
Dunn (D-Santa Ana) will reintroduce legislation that would give
the California Public Utilities Commission the power to regulate
gasoline prices.
"Hawaii is taking the absolutely correct approach to the gasoline
industry," said Dunn, a strident critic of energy companies.
"The more states that follow Hawaii's lead, the sooner we'll
be able to force this industry to get back to normal market behavior
that benefits the consumer but also allows them a reasonable profit."
How the caps, which take effect Thursday, will alter Hawaii's gasoline
market remains a mystery. Lawmakers are hoping that the new system
will curb price surges and spur competition among service station
owners. However, there already are signs that the new caps might
not lower prices for island motorists — at least not immediately.
For starters, Hawaii's limits don't apply to the retail prices that
consumers pay at the pump. Instead, the caps will be placed on prices
charged by gasoline wholesalers Chevron Corp. and Tesoro Corp.,
which own the state's two refineries, and a range of smaller companies
that act as middlemen, buying fuel in bulk and delivering it to
service stations.
The law's proponents believe that capping wholesale prices will
reduce the profits of refiners without hurting retailers, whose
gasoline margins are relatively small. Even though gas stations
aren't obligated to pass along any savings from the price controls,
backers hope that "somebody will break ranks" and not
pocket the entire amount, said Scott Foster of Advocates for Consumer
Rights, one of two consumer groups that helped shape the gas cap
law.
"It's a grand experiment, and my hopes are very high,"
Foster said. "If this bill works here [in Hawaii], there are
a lot of other states that are watching it and might do likewise."
Cap opponent Fred Hemmings, Republican minority leader in the Hawaii
Senate, said the law was "making Hawaii a laughingstock of
the nation." He has called the price control effort "ludicrous"
and "foolhardy," and said of the bill: "We don't
need it and it won't work."
Oil industry executives warn of unintended consequences, including
gas shortages.
"We don't know what is actually going to happen. We've never
been faced with this before," said Albert Chee, a spokesman
for Chevron Corp., which operates one refinery in Hawaii, sells
fuel through 60 stations and has 60% of the Hawaii gasoline market.
"We have tried to put forth as much information as we could
gather … to convince them that this was not necessary."
Kevin Mattos, a taxi driver in Hilo on the big island of Hawaii,
hopes the new setup works.
"The gas [price] is really killing us," said Mattos, who
said he and other cab drivers pay the fuel bill for their daily
rounds. "We have just two refineries, and they've pretty much
got us over a barrel — an expensive barrel."
At Lina's Leis in Honolulu, Sonny Le is not sure what to make of
the coming price caps: "Some people are saying it's going to
be worse, and some people are saying it's going to be better."
The flower shop's suppliers have raised fees for deliveries to offset
higher gasoline costs, which average more than $3 a gallon in some
parts of Hawaii. But Le said competition was too fierce to risk
boosting the store's prices to compensate.
"It's getting really bad," he said.
Hawaii, despite its relaxed image, turned out to be the natural
spot for the nation's most aggressive attack on gasoline prices.
The cost of gasoline there is often the nation's highest by as much
as 40 cents a gallon.
Critics say that the state's gasoline prices tend to rise along
with fuel prices elsewhere in the country, but don't retreat when
prices fall in the continental United States. That pattern became
a sore point after a state antitrust lawsuit against Chevron revealed
that the oil company's Hawaii operations were far more profitable
than similar facilities on the mainland.
In 2002, the Legislature passed a wide-ranging law that included
controlling the retail and wholesale price of gasoline. But a backlash
from retailers and warnings by outside consultants about the sweeping
nature of the restrictions caused lawmakers to revise the law in
early 2004 to, among other things, eliminate the retail controls.
Chevron and Tesoro argued that limiting prices would artificially
depress profits and discourage them from investing in and expanding
their facilities. Republican Gov. Linda Lingle tried unsuccessfully
to have the final version repealed.
Under Hawaii's complex new plan, the wholesale gasoline price caps
will change weekly and will be tied to fluctuations in the cost
of regular gasoline on spot markets in Los Angeles, New York and
the U.S. Gulf Coast. The spot market is where refiners and others
can buy last-minute fuel supplies.
The caps, a maximum that wholesalers are allowed to charge, are
calculated using a five-day average of the spot prices to establish
a "baseline price."
Regulators at Hawaii's Public Utilities Commission then boost the
base price by 28 cents to 62 cents a gallon to account for differences
in delivery costs and other factors, resulting in eight price zones.
The first caps, made public Wednesday, set the lowest of the limits
for Oahu, home to Honolulu. Wholesalers on Oahu, where most of the
state's fuel is sold, can charge up to $2.158 a gallon. After adding
about 58 cents in federal, state and local taxes, the implied retail
price would be at least $2.74 a gallon.
The effects on consumers will depend on what gas station owners
do. If wholesalers charge up to the maximum price and dealers stick
with their usual markup of 12 cents a gallon, then the cost of gasoline
for Oahu could be as high as $2.86 a gallon for regular.
That's above Monday's record-high average retail price of $2.823
a gallon for Honolulu, according to a survey by AAA. Hawaii's statewide
average pump price for regular was $2.899 a gallon, California's
average was $2.801 a gallon and the U.S. average was $2.603 a gallon
Monday, the automobile association said. The law places no price
restrictions on diesel, jet fuel or fuel oil.
John Felmy, chief economist for the American Petroleum Institute,
worries that Hawaii's price controls will distort the gasoline market
and could cause fuel shortages and lines at the gas pump.
"I've got grave concerns," Felmy said. "I thought
we had learned this lesson 25 years ago."
Gasoline price limits haven't been tried in this country since the
early 1970s, when runaway inflation and the Arab oil embargo caused
oil and gasoline prices to soar. President Nixon responded with
a raft of price controls that included gasoline and oil.
There were fuel shortages and lines at gas stations in some areas
as oil companies shifted supplies around in a nation accustomed
to cheap and plentiful gasoline. The price controls were lifted
in 1981.
Since then, "we've had people say, 'Why don't we?' " Felmy
said of gasoline price controls. "But no other states have
tried it."
"In general, you have to have a pretty serious market power
concern before you go down this road [of price controls], because
the chances of causing shortages and causing gas lines are quite
significant," said Severin Borenstein, director of the University
of California Energy Institute in Berkeley. "Hawaii seems to
have designed this so it's much less likely to happen, and Hawaii
has a credible argument to be made that they face a significant
market power problem."
Consultants and others have described the Hawaiian gasoline market
as an oligopoly, because the state's two refiners have the power
to significantly affect prices throughout the state.
The last time gasoline price controls were considered in California
was in 2003, when Dunn first introduced his bill to put the state
Public Utilities Commission in charge of gas prices. The idea grabbed
headlines when Lt. Gov. Cruz Bustamante, who was running for governor,
proclaimed his support. The proposal died almost immediately.
In many states, including in California, the sale of gasoline is
covered by broad laws that prohibit unfair business practices such
as selling products at below-cost prices to drive competitors out
of business. Some states, such as hurricane-prone Florida, also
have laws that prohibit price gouging for gasoline and other items
during a state of emergency.
About a dozen states, including Colorado, New Jersey and Wisconsin,
have singled out gasoline in controversial statutes — sometimes
called minimum-price or fair-marketing laws — aimed at protecting
independent gas stations from below-cost pricing by Wal-Mart Stores
Inc., Costco Wholesale Corp. and other big-box retailers.
Frank Young, a member of Hawaii-based Citizens Against Price Gouging,
said he would not be alarmed if prices go up when the caps kick
in.
"This law was not intended to guarantee lower prices. It was
to guarantee that consumers would get fair prices," said Young,
a former Chevron dealer. "If [the prices] go up now, that's
fine … as long as they go down when everybody else goes down."
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