By Rob Perez
Star-Bulletin
Local oil companies have dropped gasoline prices to federal agencies as much as 40 percent over the past 15 months, but prices to service-station dealers and consumers have barely budged.
Consumers have been shut out from such savings largely because the wholesale prices dealers pay are not subject to the same competitive factors that ensure federal agencies get good deals.
As a result, retail pump prices have fallen only pennies while prices charged federal customers have plummeted as much as 32 cents a gallon since January 1997, according to a Star-Bulletin review of federal gas purchases.
"That's appalling," said Jim Spenceman, a retired auto mechanic as he filled his car tank with $1.58-a-gallon gasoline in Kakaako. "Sounds to me like somebody's making a killing."
By late March, federal agencies were paying as little as 46.7 cents a gallon -- excluding taxes -- for regular unleaded, thanks to contract provisions tying the price to mainland benchmarks that likewise have plunged.
Yet Oahu dealers, in some cases buying gas from the same companies supplying the federal agencies, were charged more than 90 cents a gallon for the same gasoline, again excluding taxes.
From January 1997 to March 1998, the average wholesale price to dealers has dropped only 7.5 cents, or about 7 percent, according to industry figures. All the savings has come in the past few months, but not all has been passed to motorists.
That has helped keep Hawaii's average pump price for regular unleaded above $1.60, once taxes totaling more than 50 cents a gallon, dealer overhead and profits are added. It is the highest state average in the nation and has changed little despite steep drops in crude oil costs for Oahu's two refineries.
The larger-than-usual gap between Hawaii and mainland prices has fueled allegations of price gouging by local oil companies.
In recent weeks at least three resolutions have been introduced at the Legislature calling for investigations. Gov. Ben Cayetano has directed the attorney general's office to look into the matter.
But the companies have vigorously defended their marketing practices, saying competition ensures fair pricing. They also argue that Hawaii and the mainland are two separate and entirely different markets that shouldn't be compared.
Even as they were sounding that defense, though, the companies were selling gas to federal agencies at prices directly tied to West Coast levels. In most instances the federal government required the mainland indexing.
Differing opinions
The wide differences between dealer wholesale and federal prices triggered a strong response from Tim Hamilton, a mainland petroleum consultant and dealer lobbyist who recently did an analysis of Hawaii's market."What this proves beyond a shadow of a doubt is that oil companies' claims of a free, competitive market are just not true," Hamilton said in a phone interview from Olympia, Wash. "It's hard to imagine they've been able to get away with this for so long."
Hamilton's analysis alleged that Hawaii motorists were overcharged $81 million since January 1997 because of excessive prices.
The industry disputed his findings, saying his assumptions were flawed.
Companies likewise downplayed the plunge in federal prices, which can fluctuate as often as weekly, depending on movement of the mainland benchmarks.
"Attempting to compare wholesale prices paid under government contract to retail prices paid at the pump is at best an extreme apples-to-oranges comparison," said Joseph DeMattos Jr., spokesman for Aloha Petroleum, smallest of the three companies that supply the islands with gasoline. (Chevron and BHP Hawaii are the others, producing fuel at their Oahu refineries; Aloha imports it.)
"At the retail pump, fuel is sold gallon by gallon," DeMattos said. "In wholesale agreements with government, fuel is sold by the thousands of gallons."
State, county miss out
Not all government customers have reaped windfall fuel savings.The state's regular unleaded price actually has increased a fraction of a cent. The City and County of Honolulu's has dropped only a few cents.
The reason? Adjustments are pegged to local benchmarks that have hardly changed, resulting in little movement of gas prices.
Fuel buyers and industry experts on the mainland say the city and state's pricing methods are unlike those used by most local governments, which typically track the same benchmarks as federal agencies.
Being different cost Hawaii taxpayers a premium of late.
Though prices paid by local and federal agencies have varied considerably for much of 1997 -- with local governments sometimes paying significantly less -- the feds have had far better deals since late last year.
As recently as last month, the city and state were charged 20 to 28 cents more per gallon, even in situations where they had much bigger contracts.
The city, for instance, paid 74.5 cents a gallon last month for regular unleaded gasoline from Diamond Head Petroleum. The contracting requirements estimate delivery of 1.5 million gallons annually.
The state paid 71.86 cents a gallon under an Aloha Petroleum contract that projects delivery of nearly 600,000 gallons over one year.
The U.S. Postal Service, on the other hand, paid only 51.45 cents a gallon to Aloha Petroleum for gas delivered to a Hawaii Kai facility. Estimated annual use under that contract is only 22,500 gallons.
Big contracts, big savings
Larger federal contracts generated even greater savings.
According to the Army and Air Force Exchange Service, which last fiscal year purchased more than 11 million gallons for Oahu military bases, the per-gallon price near the end of March was 46.68 cents, a 40.7 percent tumble from January 1997.
BHP, which supplies the bases under a three-year contract, said the company loses money at that price. But BHP said the price, adjusted weekly, already has increased 5 cents.
"Naturally, we do not bid on supply agreements anticipating to lose money, but over the course of the three-year contract we would expect it to be profitable for the company," said spokesman Stafford Kiguchi.
Mum on federal prices
Neither BHP nor Aloha would specifically address how federal prices could drop so much while dealer wholesale prices changed so little.Although BHP's Kiguchi insisted the market is competitive, he said state interference has not allowed a truly free marketplace.
When BHP entered the retail market in the 1980s with company-owned and operated stations, as opposed to company stations operated by independent dealers, it offered low prices to lure customers. But BHP was criticized by legislators and competing dealers for pricing too low, and a state law eventually was passed crippling BHP's expansion plans, Kiguchi said.
He also noted that past investigations by the attorney general's office determined oil companies here were not making unfair profits. He said BHP welcomes another investigation.
"It's totally inappropriate to suggest any price gouging is going on," BHP executive Richard Parry told legislators recently.
Excess profits?
But a former industry executive who said he was privy to sensitive financial data disputed that contention.Given the nearly 50 percent drop in crude costs the past 15 months, a typical oil company-operated station on Oahu could lower its pump price to at least $1.40 a gallon and still cover overhead, capital expansion needs and unusually high profit margins, the executive said. He spoke on condition of anonymity, fearing retaliation if his name were disclosed.
Most oil companies here have at least a handful of company-operated stations, but the majority are run by dealers. Chevron is the market leader and is considered the price-setting leader as well.
The fact that pump prices have not fallen to anywhere near the $1.40 level means consumers are paying the companies' excess profits, the executive said.
"There are too many people taking too many profits, and in the end the consumer is getting ripped off," he said.
What the consumer pays is determined primarily by what dealers are charged for the gasoline.
And what the dealer pays is determined by his supplier. It's a price unilaterally set for a captive market. Unlike federal agencies, the brand-name dealer is not able to shop around and seek competitive bids. His supplier, however, shoulders some costs of running the station.
Chevron dealer Frank Young said the magnitude of the gap between federal and dealer wholesale prices surprised him.
"That's corporate structure -- charge whatever the market will bear," Young said. "But dealers aren't getting a fair deal."
Continued
