BHP, Tesoro settle;
companies to help
state gather evidence

The settlement beefs up the state's
$2 billion suit, experts say

Funds will filter to consumers slowly

By Rob Perez
Star-Bulletin

The state has substantially bolstered its $2 billion antitrust lawsuit against Hawaii oil companies by striking a proposed settlement with two defendants who have agreed to assist in the evidence-gathering process, antitrust and industry experts say.

In a surprising development late yesterday afternoon, the state, BHP Hawaii Inc. and Tesoro Petroleum Corp. announced a tentative settlement that dismisses the two companies and Tesoro's Hawaii subsidiary from the lawsuit in exchange for $15 million and a pledge of continued cooperation in the case.

The agreement, under which BHP and Tesoro deny wrongdoing or liability, still must be approved by a federal judge.

'This creates massive
problems for the rest of
the (defendants).'

Tim Hamilton
PETROLEUM ANALYST

Experts say getting the cooperation of two key industry players -- a past and current owner of one of only two Hawaii refineries -- will be instrumental as the price-fixing case moves toward trial in February 2001.

"This is very significant," said Robert F. Miller, who headed the state's antitrust division in the Attorney General's office from 1979 to 1981 and now is in private practice. He has characterized the state's case in the past as very weak.

Tim Hamilton, a mainland petroleum analyst who accused oil companies of gouging Hawaii consumers even before the state filed the lawsuit, said the proposed settlement is a major plus for the state.

"This creates massive problems for the rest of the (defendants)," Hamilton said. "They are in big trouble."

Suit accused 7 companies

Following a series of Star-Bulletin articles in 1998 on Hawaii's high gas prices, the state in October of that year filed a federal lawsuit accusing seven oil companies and several related subsidiaries of conspiring to fix Hawaii's wholesale gas prices. The conspiracy, the state alleged, resulted in hundreds of millions of dollars in excess profits for the companies throughout the 1990s. The government also alleged the defendants concealed the conspiracy for years.

The companies have steadfastly denied the allegations.

Chevron Corp., the state's market leader and one of the remaining defendants, yesterday said it will continue fighting the charges.

By eliminating two of the seven main defendants, the state strengthened its hand because it now can concentrate on the remaining players, several of whom have or had a larger share of Hawaii's retail gas market, according to local antitrust experts not connected with the case.

In the retail market, BHP -- and subsequently Tesoro, which acquired BHP Hawaii in May 1998 --had only an 11.9 percent share, according to the state. Chevron has the largest chunk at roughly 30 percent and owns Hawaii's other, larger refinery.

"We can focus on the larger players now, and that's what we're going to do," said Spencer Hosie, the San Francisco attorney whose law firm is handling the antitrust case on behalf of the state.

Hosie declined further comment, citing the pending litigation.

Faye Kurren, president of Tesoro Hawaii Corp., had a more benign take on yesterday's announcement.

The agreement simply means Tesoro and BHP will continue cooperating with the state -- providing information and documents -- just as the companies have in years past when the attorney general's office investigated the local industry, Kurren said.

"It's not anything that's extraordinary by any means," Kurren said.

Some industry watchers were skeptical, however, saying such a reaction would be expected because Tesoro and BHP's parent still are part of the industry and want to downplay whatever help they may provide that could be used against the other defendants.

First settlers get discount

Under the proposed settlement, BHP has agreed to pay $12 million and Tesoro $3 million, reflecting the fact that Tesoro entered the Hawaii market via the BHP acquisition only months before the lawsuit was filed.

The state said the settlement reflects a discount that was offered to the two companies because they were the first to settle. Presumably, any other settlements would come at a steeper price.

Kurren said the agreement does not require Tesoro to change any of its business practices. The two companies made a purely business decision to settle even though the state's allegations were untrue, she said.

Over the past year, Tesoro alone spent well over $1 million in outside legal fees and costs, plus substantial staff time has been devoted to the case, Kurren said.

Faced with the prospect that the lawsuit could drag on for several more years, the companies -- at the state's initiative -- began settlement negotiations, she said. The negotiations took about one month to complete.

"It's just a sound business decision." Kurren said. "We settled basically for what amounts to less than three years of legal fees."

Miller, the antitrust lawyer, and some industry analysts scoffed at such reasoning, noting that one of the industry's defenses has been that the lawsuit lacked merit and was politically motivated, allegedly designed to help in Gov. Ben Cayetano's 1998 re-election bid. The complaint was filed a month before Cayetano won re-election.

If the lawsuit was just political posturing, companies wouldn't consider settling, they said.

"Somebody doesn't give you $15 million ... to settle a political shibai case," said Miller, who last year represented Texaco dealers in an unrelated lawsuit against Texaco Inc., one of the remaining defendants in the state case.

The other main defendants include Shell Oil Co., Tosco Corp. and Unocal Corp.

Timing called a surprise

Another antitrust lawyer who asked not to be named said the amount of the proposed payment suggests that the case has enough merit to prompt the two companies to avoid potentially greater liability down the road.

The settlement would free the two companies from any claims stemming from the state's lawsuit.

Several experts said they were surprised a settlement came so early in the process. The trial isn't scheduled to begin until February 2001, and discovery -- the evidence-gathering process -- is nowhere near finished.

Among those still to be questioned is Cayetano. He is expected to answer in writing more than 200 questions from Chevron, including what role the Star-Bulletin's coverage played in a decision to file the lawsuit. Lawyers for the state previously have said that coverage was a key factor.

Cayetano declined comment yesterday through a spokeswoman. From the start, Chevron has taken the lead among the defendants in challenging the state repeatedly in court as the case has slowly progressed. The other companies typically have agreed with Chevron.

Hamilton, the petroleum analyst, said yesterday's announcement indicates the industry's cohesion is beginning to unravel, perhaps paving the way for more settlements. "The brotherhood is breaking up," he said.

Chevron spokesman Albert Chee Jr. declined to comment on the two defendants' decisions to settle and assist in the state's discovery. Chee said Chevron's intent remains unchanged. "Simply put, we plan to prove the state's charges of price-fixing are absolutely unfounded."

The other defendants could not be reached for comment.

The state yesterday filed a motion asking the court to approve the proposed settlement agreement. A hearing is expected to be held early next year.

---

First funds will filter
to consumers slowly

A portion of the initial settlement will
go toward paying litigation expenses,
both present and future

By Rob Perez
Star-Bulletin

If a federal judge approves the proposed settlement involving two oil companies, Hawaii consumers could get some of the $15 million.

But don't plan your holiday shopping based on an expected share.

Even if the proposal is approved, any money that filters to consumers likely won't be seen for years.

The state wants to use about $1.23 million of the $15 million settlement amount to reimburse litigation costs the state and private lawyers helping the government have incurred so far in the case.

The San Francisco law firm of Hosie Frost Large & McArthur, which the state hired on a contingency basis to handle the lawsuit, also would get about 20 percent of any settlement proceeds after costs are reimbursed. That amounts to an estimated $2.7 million.

In addition, the state wants to set aside $3 million for future litigation costs to pursue the lawsuit against the remaining defendants.

(Tesoro Petroleum Corp. and BHP Hawaii Inc. are the two main defendants who agreed to the proposed settlement and would be dismissed from the lawsuit. Five other main defendants would remain).

What money is left would be deposited in an interest-bearing account and probably held until the lawsuit is resolved, a process that could take several years at a minimum.

If consumers don't like this proposed settlement and figure they can do better on their own, they can ask the court to be excluded from this deal.

The state filed the $2 billion antitrust lawsuit on behalf of Hawaii residents.

A federal judge ultimately will decide whether the proposed settlement is fair and, if so, how the money will be distributed. The soonest a hearing will be held is early next year.