FL MORRIS / FMORRIS@STARBULLETIN.COM Sharon and Priam Stewart stand inside Priam's Automotive Service and Repair. Their one-pump station on the corner of Pauoa Road and Pacific Heights Road in Pauoa is feeling negative effects from the state gas cap.

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Small gas stations get pinched

Remote retailers get squeezed
as the gas cap threatens
profits of delivery middlemen

Although gasoline sales make up just a fraction of its business, Priam's Automotive Service and Repair has developed a loyal following of customers.

"We're a full service gas station, we check the fluids and tires and wash the windows of cars that come in -- real old-fashioned style," said Sharon Stewart, who owns and operates the station with her husband, Priam.

"Gas is a very small part of our business," she added, "but it's important to our gas customers, most of whom are elderly and rely on us to keep their cars in good working order."

Now, because of the state's new gasoline price cap law, Stewart says a lot of those customers will probably have to find someplace else to go.

"They basically say, 'You can't stop selling gas,'" she said. "They're asking me what they can do and I just don't know what to tell them at this point."

Until it can find another supplier, Priam's may have sold its last tank of gas this week.

"I don't want to admit defeat yet," Stewart said Friday. "I'm still holding out hope."

The Stewarts are not alone.

Priam's is among the dozens of small-volume gasoline retailers throughout the islands who, by virtue their size or remote location, sell less gas than larger competitors.

Most buy their gasoline from jobbers -- middlemen who buy it from refiners and resell it to stations -- who say the state's gasoline price cap law makes it difficult, if not impossible, to deliver gas to such smaller operations.

"This is the type of unintended consequence that the various analyses anticipated could happen," said John Tantlinger, a researcher in the Department of Business, Economic Development and Tourism, and one of the governor's top advisers on the "gas cap."

The price caps, determined each week by the Public Utilities Commission, set the maximum at which gas can be sold at wholesale.

If refiners charge jobbers up to the maximum of the cap, jobbers would be unable to make any profit because they would not be able to charge above the cap when reselling that gas to stations. This would leave no way for them to recoup costs of delivering small volumes to remote locations.

To date, the Stewarts and Elmer Udd, owner of a station at Dillingham Airfield, have been the only dealers identified by the Public Utilities Commission as being in danger of losing gasoline supply because of the law.

Some small volume dealers on Kauai avoided a similar situation.

Days before the law's Sept. 1 start date, the island's two jobbers notified customers that they would be unable to deliver gasoline because it would not be cost effective under the price caps.

Princeville Service Station said it would have to close if it was unable to get gasoline. The move also threatened to dry out pumps at military exchanges and rental car agencies.

Businesses won a reprieve when one of the jobbers, Senter Petroleum Inc., successfully petitioned the PUC to raise the price caps for Kauai.

The additional 7 cents granted by the commission allowed for uninterrupted deliveries, although jobbers say the situation could change every week, because that's how often the price caps change.

"Ultimately, it is suppliers who will price gasoline to jobbers," Senter President Brian Barbata said. "If they price it at or near the cap, jobber margins will be squeezed. How much will determine where we can deliver."

Supporters of the gas cap say the Kauai situation shows the law works as it is supposed to -- with suppliers being able to ask for adjustments and the PUC taking quick action.

But under the law, only gasoline manufacturers, wholesalers or jobbers may petition for a revision. Individual stations, like Priam's, would have to persuade their jobber to petition the PUC for a change.

So far that hasn't happened. Since the law started, only Senter has petitioned for the change, said Lisa Kikuta, chief researcher at the PUC.

Rep. Hermina Morita, who also had asked the PUC to adjust the caps on behalf of Princeville Service Station, said the commission should reconsider the marketing margins it has established for wholesalers.

The price caps are determined by taking an average of spot prices in three mainland markets and adding fixed costs to account for shipping, storing and delivering gasoline across the state.

Morita suggested that the PUC consider additional margins for each step in the supply chain, which would allow jobbers to recoup some of the costs for delivering to small volume stations if their wholesaler charges up to the maximum of the cap.

"There can be multiple wholesale transactions prior to delivery of gasoline to the retail service station," said Morita (D, Hanalei-Kapaa). "Thus, the flat rate marketing margin can be entirely consumed by the first wholesale transaction, the refiner, leaving nothing for the next transaction."

The public does not know what the price of wholesale gas is. Such bookkeeping is kept confidential for competitive reasons.

Analysts say they expect the oil companies to charge up to the maximum of the cap when they can, to make up for times when they may be forced to sell at a lower price. Oil companies say competitive forces in the marketplace determine the wholesale cost.

Morita noted that ICF Consulting, a firm hired by the state to advise on implementing the gas cap law, also recommended different margins for the various steps in the supply chain.

The current margins were established by the Legislature in the final version of the law passed in 2004, although lawmakers gave the PUC authority to use its discretion in setting the caps. Despite the recommendations from ICF, the PUC said it found no "sufficient justification" to alter the methodology defined by the Legislature.

"The Public Utilities Commission is doing an outstanding job of implementing something that we just don't believe in," Lingle said Friday. "But the Legislature passed it, they're a branch of government and now our obligation is to carry it out."

Lingle, who opposes the caps, said she will again try to repeal the measure next year.

Meanwhile, small volume retailers and jobbers are keeping a close eye on the bottom line each week.

"Definitely, we're treading in unknown waters right now," said Terry McBarnet, president of Lanai Oil Co. and vice president of Maui Oil Co., a family-owned jobber that delivers to five stations on the two islands.

"We will supply our public," McBarnet said. "If we are upside down on an account, we will fight like heck to put it in a fair position, but we're not going to let our community down.

"We might get driven into the ground, we may have to become flexible, but we sure as heck aren't going to let our community down."