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The Honolulu Advertiser
Posted on: Wednesday, January 27, 2010

Hawaii gas prices above 'cap' level of suspended law

BY Greg Wiles
Advertiser Staff Writer

Hawai'i drivers are probably paying more at the pump than they would have been if the state's controversial gasoline price cap had not been suspended in 2006.

A study done for the state Public Utilities Commission found that wholesale gasoline prices in the first half of last year were 3 to 11 cents higher than they would have been under the cap. A portion of the increase was due to inflation in transportation and terminal costs.

The gas cap, which tied Hawai'i prices to those on the Mainland, was put in place in September 2005. As it took effect, hurricanes Katrina and Rita caused a spike in gasoline prices nationwide. Amid much public grumbling, the state abandoned the cap in May 2006.

"The problem with the gas cap is that it went into effect at the wrong time," said former Gov. Ben Cayetano, who supported its passage and has criticized gas companies for being quick to raise prices and slow to cut them.

"Now you have these studies that show that the gas cap would have done the public some good."

Others disagree and say the report includes information that explains why prices have risen. They say price controls on gasoline remain a bad idea.

"Looking backward at the price cap legislation isn't a productive exercise," said Tupper Hull, a spokesman for the Western States Petroleum Association, whose members include Hawai'i refinery operators Chevron Corp. and Tesoro Corp.

"It was a disaster for consumers. There's no example that we can point to or that anybody else can point to where attempting to legislate prices of a commodity that is subject to global economic factors like crude oil have benefited consumers."

The gas cap was implemented after years of discussion and concerns that oil companies were reaping excessive profits with what have been traditionally the nation's highest prices.

The cap tied price moves to Mainland markets by instituting a maximum wholesale price for gasoline. The cap was set once a week based on wholesale prices in Los Angeles, New York and on the Gulf Coast, along with factoring in costs for shipping, distribution and marketing.

Creators of the system designed it to react more immediately to wholesale gasoline price moves on the Mainland and thus address charges that gasoline prices were quick to rise and slow to fall in Hawai'i.

And that's what the system did, much to the chagrin of drivers who saw gas prices spike when petroleum prices rose on the Mainland. Some motorists complained about price swings from one week to the next, and said they favored the gradual increases and declines they had been used to.

In May 2006, the cap was suspended and a monitoring system on pricing was devised, with the state Public Utilities Commission consultant having to produce an annual report on pricing. The Legislature said having a way to track prices would result in more transparency in the market and help keep a lid on unreasonable prices.

Gov. Linda Lingle was also given the power to reinstitute the gas cap for 30 days at a time should she deem the reinstatement beneficial to the economic well-being and safety of the state when wholesale prices surpassed what they would have been under the cap.

Lingle had been against the gas cap and called the price controls deeply flawed in signing legislation suspending them. The gas cap was a "failed experiment to artificially control gas prices," Lingle said at the time.


A spokesman for Lingle said the governor has no plans to reinstate the gas cap. State energy administrator Ted Peck said he wouldn't recommend to Lingle that she reimpose the price controls and that if someone were to do so it might lead to one or both the refineries here shutting, given recent reports about weak profitability in the U.S. refining industry.

"Instituting the price cap is the absolutely worst thing we could do for our economy," Peck said.

The study also found that gasoline prices were below the cap during the eight months the program was in place, and have been above what the cap would have been since that time.

The report's other key findings include:

• Wholesale diesel prices for on-road use appear to be at levels well above those in Mainland markets when adjusted for shipping to Honolulu.

• Retail margins of gasoline at service stations increased during the sudden decline in global oil prices, but returned to more historical levels by early last year. Retail margins on diesel appear to have been extremely high in several markets in the state in June 2009.

• Hawai'i refineries were more competitive with other U.S. refineries during the January-to-June study period because margins at non-Hawai'i refineries have fallen.

• Sales data show there was a 19 percent decline in fuel purchases during the first half of 2009 compared with 2007 because of the recession and lower tourism.

• Wholesale prices here track other markets in price increases and decreases, but on about a one-month lag.

That last point is not lost on Hull, who said the overall report shows gasoline prices in the state are reasonably competitive with those on the Mainland when taking the state's higher costs into account.

"It very much affirms that market dynamics are what are driving prices in Hawai'i," Hull said, noting that lower demand also may drive up prices as suppliers deal with lower-volume sales.

He said there are a multitude of factors that can affect the pricing and that the gas cap formula might not have dealt well with the pricing volatility that's occurred in petroleum markets during the past year.

"Trying to compare something constructed at a time when the market was very, very different than it is today doesn't seem like a particularly productive activity," Hull said.


The report notes that the largest pricing variations with the cap typically occurred when crude prices were declining. During such times, Hawai'i's lag in pricing changes produced higher differentials with the cap.

But it notes that the 2009 gap of about 10 cents per gallon occurred during a period of rising crude prices.

"Consequently, it appears suppliers may be attempting to keep prices higher than in the past as markets rise," the report said.

It did note, however, that the cap formula used in the analysis was designed in 2006 and included costs that need to be updated.

"These costs have undoubtedly increased over the period and would have resulted in a modified price cap formula to reflect those cost differences (however, it is unlikely those cost adjustments would be as high as 10 cents per gallon, since only the transportations cost portion of the gas cap formula would be affected)," the report said.

Peck said work put into monitoring today's wholesale prices against a price cap may be moot in coming years anyway. He said much is happening when it comes to weaning the state from petroleum, including production of home-grown biofuels.

"There is a lot going on in the biofuel arena and it's exciting," he said. "It's going to be a whole new world."

Cayetano remains an advocate of the gas cap.

"The idea that transparency will have an impact on the market is a joke," he said. "The study shows the gas cap would have saved the consumer a few dollars."