Chevron
threatened rivals,
state says

Other gas companies
were warned of retaliation if
they tried to compete on
price, says a state suit

By Rob Perez
Star-Bulletin

Executives with Chevron Corp., the leader in Hawaii's gasoline market, met with competitors to discuss an agreement to keep Hawaii wholesale prices artificially high and warned the companies of retaliation if they tried to compete on price, the state says.

The stunning allegation was contained in a lawsuit the state filed yesterday, accusing Hawaii's two refiners and major wholesalers of overcharging local dealers and motorists tens of millions of dollars over the past decade.

The state is seeking at least $500 million in damages.

A Chevron spokesman denied company executives met with competitors to conspire on pricing. "That's certainly not the case," said Michael Neeley, Chevron's pricing manager for Hawaii.

Neeley, like spokesmen from several other oil companies, also disputed the state's contention that Hawaii consumers have been overcharged, saying prices are fair and driven by competition.

The state is alleging that the refinery operators and major wholesalers agreed to fix prices at artificially high levels and to divvy up the market in violation of state and federal antitrust laws.

Chevron runs one Oahu refinery, which produces about 60 percent of Hawaii's gas, and has the largest share of the retail market here. The other Oahu refinery is run by Tesoro Petroleum Corp., which purchased it from BHP Hawaii Inc. in May.

All three companies plus 10 others were named as defendants in the lawsuit.

If the state can prove price-fixing meetings took place, it would clear a major legal hurdle in what is expected to be a years-long battle with the oil companies.

"That is a classic antitrust violation," said Spencer Hosie, partner in a San Francisco law firm the state has hired to handle the federal lawsuit.

Hosie's firm -- Hosie, Wes, Sacks & Brelsford -- specializes in antitrust issues. It has obtained two large settlements -- one for $680 million, the other for $200 million -- in cases against oil companies in Alaska.

Hosie said the state has "credible evidence" the pricing meetings took place, though he characterized that evidence as indirect and circumstantial. "Typically with price-fixing cases, you don't have someone who was there and gives you a tape recording," he said.

As a consequence of the pricing agreements, the lawsuit alleged, the defendants' retail prices moved in concert.

In 102 changes between July 1996 and July 1998, for instance, prices for Chevron and Shell Oil Co., another defendant, were identical 93 times, according to the lawsuit. In the other nine instances, the prices differed by only 1 or 2 cents a gallon, and "most frequently the price difference reflected a momentary lag in Shell following Chevron's price up or down," the lawsuit states.

But Neeley said Chevron has never met with competitors to discuss pricing other than individually to negotiate sales agreements.

"Our price discussions are between Chevron and our customers, period," Neeley said.

Many of the allegations in the lawsuit mirror the findings of a series of Star-Bulletin stories over the past several months. Those stories indicated the oil companies were making huge profits since early 1997 because their wholesale prices barely changed even as the price of crude oil -- the largest single cost of producing gas -- was plunging. The drop in crude prices triggered big declines in mainland gas prices.

In the lawsuit, the state notes that mainland prices dropped 15 percent between June 1996 and June 1998 as crude prices fell 37 percent. Yet local gas prices remained essentially unchanged, the lawsuit said.

The major wholesalers -- Shell, Texaco Inc., Unocal Corp. and, later, Tosco Corp., which bought Unocal's local stations in 1996 -- purchased gas from the two refiners at a price close to a West Coast amount plus the cost of shipping to Hawaii, according to the lawsuit.

The prices the companies, including the refiners, charged to dealers typically were about 25 cents to 40 cents higher, the state said, calling such markups unconscionable. Hosie said the markups, easily the highest in the nation, resulted in enormous profits.

At current wholesale prices, Gov. Ben Cayetano said, the companies each day earn $200,000 in extra profits. If such a margin is maintained for a year, the companies take $73 million in extra profits from Hawaii consumers, Cayetano said.

Tim Hamilton, a mainland petroleum consultant, did a similar analysis for the Star-Bulletin in March and concluded that Hawaii consumers were overcharged more than $81 million over the previous 14 months.

Hamilton yesterday said he wasn't surprised by the state's lawsuit.

"What it all boils down to is, a large portion of consumers' paychecks are going into the pocketbooks of the oil companies," he said.

But the oil companies, as they did in March, yesterday said such findings are flawed.

Tesoro spokesman Nathan Hokama said six studies by various government agencies over the past seven years found no evidence of antitrust violations.

Unocal spokesman Barry Lane likewise disputed the lawsuit's allegations.

"We've seen these kinds of things before, and we've prevailed in every case," Lane said.

East-West Center petroleum expert Fereidun Fesharaki said that while oil companies might be sluggish in bringing down prices, they also were sluggish in raising prices.

"At the moment, the oil companies in Hawaii might be doing pretty well, but they look at it as a time to recover costs from the times when they were doing much less or not making any money," he said.

Dealers in Hawaii had mixed reactions to the lawsuit.

It shows "the dealers weren't the ones getting rich in this whole thing," said Chevron dealer Frank Young.

John Mayo, president of Lex Brodie's Tire Co., which operates two Oahu dealerships, questioned the timing of the lawsuit, coming a month before Cayetano's re-election bid. "I'm too cynical to think this isn't politically motivated," Mayo said.

But Cayetano, who announced the lawsuit at a news conference yesterday, said the timing had more to do with a new law enacted last year that gives the state access to previously inaccessible financial data from the oil companies.

Consumers said they hoped the lawsuit led to lower pump prices.

"Everything here is higher (priced) than elsewhere, so I'm not surprised about this," said Rowena Asuncion as she waited for a ride at a Kakaako gas station.

If the state is able to get any money through the lawsuit, it could be distributed to consumers, deposited into a special fund for the benefit of all taxpayers or used in other ways.

But Hosie acknowledged the case will be difficult to prove, may take years to resolve and that a quick settlement is unlikely.

He said, however, he was so confident in the case that his firm took it on a contingency basis, meaning it will not get paid even for costs unless money is recovered. The firm's fee will be 22 percent of the recovered amount after costs are paid.