California Watches Hawaii’s Effort to Cap Gasoline Prices

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.”