Expert says price caps
on isle gas no panacea

Some predict global market
forces will eclipse its influence

Hawaii's one-of-a-kind gasoline price-cap law is scheduled to go into effect Sept. 1, but there's disagreement among both politicians and industry experts on whether it will actually lower prices.

Gov. Linda Lingle, who unsuccessfully sought repeal of the 2004 law, has said she feels the cap will actually increase prices and create fuel shortages.

But state Sen. Ron Menor, the chief architect of the law, said he is convinced it will lead to lower prices at the pump and should at least be given a chance.

Some say it doesn't matter what the state does, because Hawaii is powerless to affect the impact of international oil prices.

"Having a gas cap will not make a difference at the end of the day," said Fereidun Fesharaki, energy expert with the East-West Center. "It's like throwing a leaf in the ocean to try to stop an oncoming wave."

Fesharaki called the gas price cap "a very bad law."

"It is doomed to failure," he said, adding, "I don't think it will lower prices" that are driven by unpredictable global market forces.

There is a slim possibility the governor could be given the authority to determine when to implement the cap. The Senate Ways and Means Committee urged Menor to consider the merits of this approach during conference committee sessions that will determine the final version of any amendments to the law.

While Menor remains opposed to that suggestion, Rep. Kenneth Hiraki (D, Kakaako-Downtown) chairman of the House Consumer Protection and Commerce Committee, said that is the position of the House.

The Legislature enacted the gas caps, and it should be left to the executive branch to implement it, Menor said.

"If not implemented correctly, it could cause problems," he said.

Menor proposed the price caps when Hawaii's gasoline prices were the highest in the nation. With the recent surge in gasoline prices nationwide, California and Nevada have at times moved ahead of Hawaii.

The law allows the state Public Utilities Commission to set a maximum wholesale price at which gasoline can be sold in Hawaii. That price would be based on the weekly average of spot prices in Los Angeles, New York and the U.S. Gulf Coast.

The law would not put a cap on retail prices.

Implementation of the gas caps "will represent a core change in the gasoline market in Hawaii," said Thomas O'Connor, project manager for ICF Consulting of Fairfax, Va., hired by the state Public Utilities Commission to help it implement the new law.

If the gas caps had been in place between 1999 and 2004, wholesale unleaded gasoline prices on Oahu would have been reduced by about 10 cents per gallon for fuel delivered by truck, and by 13 cents per gallon for purchases directly from a storage facility, O'Connor said in his report delivered to legislators last week.

The report indicates the gasoline caps would save Hawaii consumers $45 million annually, said Menor (D, Mililani).

However, O'Connor warned that the cap can go up, and it has "nothing to do with anything going on in the state of Hawaii," referring to international events that can affect wholesale prices.

His report also shows that, even with the caps, wholesale prices in Hawaii could go up by as much as 20 cents a gallon in today's market.

Consumers can expect to see more frequent price changes at the wholesale level, O'Connor said, but he emphasized that lower prices may not necessarily trickle down to the pump.

Frank Young, a former Chevron dealer, believes they will.

"I have no doubt they will," said Young, chairman of Citizens Against Gasoline Price Gouging, an advocacy group that includes academics and former oil industry executives. "Retailers will react to wholesale price changes."

Young said he has talked to many dealers, and they are telling him that if they don't lower prices, someone else will and they will be forced to follow.

Bill Green, former owner and consultant to Kahala Shell, disagrees.

Dealers are operating on a very narrow margin and don't have any savings to pass on, he said. The cap will cause prices to fluctuate with little, if any, impact at the pump.

But Menor believes that if wholesale prices drop, dealers will also lower their prices to remain competitive and attract more customers.

"If the dealers don't reduce their prices, we're no worse off," he said. "But if they do pass on the price savings, the consumers finally benefit."

While Menor champions the price caps, others are skeptical.

Sen. Gordon Trimble (R, Downtown-Waikiki) the Senate minority policy leader, sees potential problems that could lead to "catastrophe" if the gas price cap is implemented.

"Demand will continue to increase, while our refining capacity in the U.S. market stays constant," said Trimble, an economist, citing China's increasing demand for gasoline as it industrializes. "That is a recipe for much higher prices and shortages."