UH economist
blasts gas price cap

GOP candidate Lingle welcomes
the report, which predicts controls
will disrupt the market

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By Richard Borreca
rborreca@starbulletin.com

A new report from a University of Hawaii economist calls the state's plan to regulate the price of locally sold gasoline a mistake that will lead to shortages, a gasoline black market and protection of the profits of existing gas companies.

The report, from Christopher Grandy, an economist and professor of public administration, recommends encouraging competition as the best way to lower gas prices.

The new state law to cap gasoline prices has become a debate topic for candidates for governor.

Democratic Lt. Gov. Mazie Hirono supports Gov. Ben Cayetano, who strongly pushed for the price controls after the state was unable to go forward with a lawsuit against the major gasoline suppliers in the islands.

In reaction to the report, Hirono said the state has "to do something" to help consumers lower the price of gasoline. She added that the report was not conclusive evidence.

Republican Linda Lingle, however, praised the report.

"I am glad an independent organization is stepping forward, because my opponent has been making a big issue of this," Lingle said.

Grandy criticized the law, which goes into effect in 2004, explaining that "price controls are tried over and over again, and they can lead to some pretty bad unintended consequences."

"It is really hard to control prices by mandating that they not go higher or lower; the marketplace will always find a way around it," said Grandy, who used to work for the state Department of Business, Economic Development & Tourism.

To lower prices or keep local gasoline prices in check, both Lingle and Grandy urged the state find more ways to increase competition. Lingle said the state should repeal laws that limit gas stations to be at least an eighth of a mile apart and also how station operators can sell their stations.

Grandy, however, says the state needs to do more than that to foster competition.

"Those proposals may have some effect on competition, but it strikes me on the surface that the problem is upstream.

"We have two refiners in Hawaii, and the problem lies there and not at the retail level because we have lots of retail outlets," Grandy said.

When the gas cap bill passed the Legislature, a spokesman for Chevron Texaco Corp. said it would hurt the state.

"While it is impossible to forecast exactly what will happen in any market, creating a hostile climate for business will inevitably hurt Hawaii and its people," Chevron said.

Lingle opposed the bill when it passed and said it was a product of election-year politics.

Grandy agreed that limiting prices by law is a reaction that politicians frequently use to help consumers.

In his report, Grandy said if the gasoline retailers or refiners are making high profits, those extra profits should attract more competitors.

"That this has not happened in Hawaii suggests that something is truly amiss," Grandy wrote.

"Capping gasoline prices has the merit of being a bold response in an election year. But a better solution may lie in using the information generated by the state's lawsuit to identify, and attempt to alleviate, barriers to competitive entry in Hawaii's gasoline market," Grandy recommended.

Lingle said yesterday that if she is elected, she would not implement the law, while Hirono has pledged that she will promote the gas cap plan.