Analyst expects
bad end for gas cap

Hawaii could pay in the long run,
the oil economist says

Although it is still unclear how prices at the pump will be affected when the state's gasoline price cap takes effect Sept. 1, an oil industry economist contends that even if prices go down immediately, the long-term consequences could be dire.

"While you may have a short-run, feel-good period, the long-run consequences could be far more negative," said John Felmy, director of the Washington, D.C.-based American Petroleum Institute, an oil and natural gas industry trade association.

Hawaii's "gas cap" was among the energy issues addressed Friday during a panel discussion at the National Lieutenant Governors Association's annual conference in Waikiki.

The law, passed in 2002 and later revised, requires the state Public Utilities Commission to set a maximum pretax wholesale price at which gasoline can be sold in Hawaii based on the weekly average of spot prices across the mainland United States. Other charges can be added by retailers to account for operating costs resulting from factors such as Hawaii's location or the added cost of providing gasoline on neighbor islands.

The commission has been working on the price cap rules to have them ready by the law's Sept. 1 start date.

Earlier this month, three oil companies filed papers with the PUC seeking to have the cap's implementation delayed while more study is done to determine its effect on the economy and consumers.

Kevin Katsura, a PUC attorney, said the request by Shell Oil Co., Tesoro Hawaii and Chevron USA is still being reviewed, and a ruling is expected before Sept. 1.

Felmy said his biggest concern with the price cap is the unintended consequences it could have.

The demand for gasoline in Hawaii is driven by the state's robust economy, he said, and a cap on wholesale prices could lead to distributors leaving the market and causing shortages.

"What would that manifest itself as? Well, it'd be gas lines," Felmy said. "I think the last thing the Hawaii economy needs is to see national pictures on the news of gas lines in Hawaii; that could be devastating to your tourist business, to your condo business and so on.

"I would be very concerned about those types of unintended consequences in terms of what you have as a really robust economy and what could be a negative in terms of promotion of the economy."

While similar predictions have been made by other oil industry officials, supporters of the cap have staunchly stood by the measure.

Advocates argue there is no economic reason why gasoline prices in Hawaii have traditionally been among the highest in the nation, accusing oil companies of gouging consumers in the islands.

Scott Foster, spokesman for the group Advocates for Consumer Rights, notes that in Canada, where Prince Edward Island and Newfoundland have adopted price controls, "it's working well, has a proven track record."

According to Maple Leaf Web, which bills itself as a nonprofit, nonpartisan Canadian political education Web site based at the University of Lethbridge in Alberta, gas prices in Prince Edward Island and Newfoundland have been among the lowest in the country in recent years.

But a study prepared for the Legislature earlier this year suggested otherwise.

The study by Fairfax, Va.-based ICF Consulting showed that if the cap had been in place between 1999 and 2004, the average wholesale cost of gas would have been about 10 to 13 cents a gallon lower. However, under more recent market conditions, the maximum price at which wholesale gas could be sold in Hawaii would have been about 20 cents a gallon higher.

Felmy said Hawaii's gasoline prices are mostly the result of market conditions -- higher taxes, the overall high cost of doing business in the islands and the limited capacity of the state's two oil refineries. The "relatively simple" refineries are only able to refine a certain type of crude oil that generally costs more than other grades, Felmy said.

He was cautious in predicting how prices would be affected under the price cap.

"I've looked at the studies, and there's so many caveats in those studies I would be very, very cautious about saying, 'Well, the number is this,'" Felmy said. "I'd have to see what the PUC comes out with."

Meanwhile, at the lieutenant governors conference, Felmy said that while officials from other states are aware of Hawaii's legislation, none appear ready to take a position on whether their constituents would benefit from similar measures.

"They're just standing back and watching," Felmy said. "I got the sense that they were following it, but it wasn't personal enough to them.

"Their big interests were more in the overall area of energy policy."