Hawaii drivers have had to pay more for gasoline than on the mainland to stay mobile.

State’s attorneys blast
gas price cap report

They label the study "company
friendly" as another showdown over
high costs looms at the Legislature

The San Francisco lawyers who fought the state's now-settled antitrust lawsuit against major oil companies say that a state report, critical of capping gas prices, intentionally downplays the profitability of the industry in Hawaii and doesn't come up with real solutions.

The lawyers, Spencer Hosie and John McArthur, call the report "company friendly," saying that part of it could have been drafted by Chevron or any other oil company. The report was done by California-based oil industry consulting firm Stillwater Associates.

Last month, a citizens group and Ron Menor, a state senator who favors a gas price cap, took Stillwater to task over the report, particularly for its use of pro-forma data in estimating the profitability of the oil companies locally.

"A major problem with the report is that it advocates only remedies that are unlikely to be effective," Hosie and McArthur said in a letter yesterday to the Star-Bulletin. The report advocates more monitoring of the market and consumer education, among other long-term suggestions.

The lawyers also told U.S. Rep. Ed Case and others in a separate letter Tuesday that Stillwater ignored the state's own expert reports from the lawsuit.

The renewed debate indicates the issue of Hawaii's highest-in-the-nation gas prices may come to a head again soon at the state Capitol. The Legislature opens Jan. 21.

The gas price cap passed by the Legislature in 2002 and signed by Gov. Ben Cayetano does not take effect until July, and Gov. Linda Lingle, who opposes a price cap measure, has the ability to suspend the cap.

Meanwhile, the Democrat-controlled Legislature faces an election in November. Menor has said he plans to pursue an amended price cap tied to national gasoline prices instead of West Coast prices.

For nearly 10 months, Hawaii's gas prices have remained at near-record levels. The Honolulu average price for regular gasoline has generally been just above $2 a gallon since August, and was about $2 a gallon yesterday, according to AAA.

Hosie, the state's lead attorney in the litigation, testified in support of the price cap measure in 2002. The lawyers point out that Stillwater's report errs in using a quote from one of the state's experts, Keith Leffler, that, "the refineries in Hawaii do not earn a profit or income disproportionate to that earned by refineries in California."

The quote comes from a 1995 analysis, done by Leffler before the state sued Chevron in 1998. Leffler later changed his position based on better information that became available from the lawsuit, the lawyers said.

"This is an egregious error," Hosie and McArthur said. "How could Stillwater ignore the state's expert reports, which were fully available to it?"

"A lot of that's picking at nits," said David Hackett, president of Stillwater. The underlying issue is the amount of money the oil companies are making in Hawaii, he said. "Is that illegal? We didn't think so."

Hackett said Stillwater's employees have no ties to the oil companies, though Stillwater has consulted for oil companies.

The Leffler recitation is one of dozens that Stillwater used in presenting its report, which is regarded as the most comprehensive picture of the oil industry in the islands. The state paid $250,000 for the report after the Legislature passed a price cap in 2002, then delayed the law for further study. Cayetano's administration hired Stillwater.

The state, also under Cayetano, hired the Hosie Frost Large & McArthur law firm in 1998 to investigate and sue the oil companies over allegations of collusion. After summary judgment hearings, the state settled the suit for $35 million, far short of the $2 billion the state had sought. The state had failed to find direct evidence of collusion, and the companies admitted no wrongdoing.

Hosie and McArthur said the state should ask its experts from the lawsuit to compare their findings with those of Stillwater.

In a 2000 expert report, economist Barry Pulliam calculated that Chevron's profit from sales through its Hawaii gasoline dealers represented 22 percent of the company's national dealer sales, though Hawaii represented only 3.1 percent of the market. Stillwater said that a true picture of oil company profitability needs to include other products made from a barrel of crude oil. Gas represents only 17 percent of oil products consumed in Hawaii.

Stillwater calculated Chevron's hypothetical return on capital at 12 percent in Hawaii, down from the past.

The lawyers said that Stillwater failed to mention that Pulliam calculated Chevron's overall Hawaii return between 1992 and 1998, and found it was much better than Chevron's U.S. return.

Stillwater's report basically reaches the same conclusion, though in different terms. Still, Hosie and McArthur criticized the report for only looking at comparative refining industry returns in 2000 and 2001, when the Hawaii market briefly became more competitive than it was.

The bottom line, Hosie and McArthur said, is that the historical information provided by state experts shows the longer-term conduct of the oil companies and what they can do without stronger regulatory oversight.

Hackett said Stillwater still rejects price caps.

Pulliam, senior economist with Econ One Research Inc. in Los Angeles, said yesterday that he would advise caution and careful monitoring in enacting price controls, since economists typically favor market forces. Policy makers should avoid discouraging investment in the market, he said.

Regulation is meant for monopoly markets, but there is a gray area when it comes to dealing with markets that aren't competitive, Pulliam added.

What remains unclear is when Hawaii's gas prices will go down again. When the 2002 Legislature considered the price-cap law, Hawaii's gasoline prices were lower, and the price was slow to follow an increase in mainland prices.


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