HAWAII

Major Findings on Fuel Prices and
Legislative Initiatives for the State of Hawaii

In anticipation of the new gasoline price cap legislation scheduled to take effect in July, 2004, the Democrat-controlled Hawaii Legislature in 2002 commissioned a study to evaluate the state’s petroleum fuels market, as well as the likely impacts of the price cap legislation, known as Act 77. Democratic governor Ben Cayetano hired the consulting firm of Stillwater Associates to perform the analysis, and the state’s Department of Business, Economic Development and Tourism in September 2003 delivered the final report, under Republican Governor Linda Lingle. Here are some of the key conclusions resulting from this bi-partisan effort:

Market factors determine gas prices

• “The gasoline wholesale marketing and retail segment in Hawaii suffers from high costs and small volumes, which combine to make Hawaii significantly more expensive than most other regions of the US.”

• “It can be argued that the overhead cost for each of the six major marketers, the large number of retail outlets and the small average throughput per dealer with stations occupying high cost real estate, all contribute to the high cost of gasoline.”

• “Hawaii’s gasoline taxes are on average 12.5 cents per gallon higher than the average of the US as a whole.”

Price caps are bad for consumers and business
“The Act 77 price caps should not be implemented” because:

• “The price caps are not expected to have any significant benefit effect for Hawaii’s gasoline consumers. In fact, recent analysis suggests that they would increase consumer costs.”

• “Price caps are likely to bring unwanted volatility and seasonality to the Hawaii market.”

• The caps’ link to California gas prices, which are moving higher, “would harm Hawaii under the current price formula.”

• “A comprehensive examination of price cap regulations implemented elsewhere failed to identify any examples where such schemes resulted in clear consumer benefits.”

• “A likely impact of price caps is that essential fuel services in rural areas would significantly decline and, potentially, disappear.”

• “The price caps project an anti-business image for the State of Hawaii, which is detrimental to the investment climate in general and to the specific investments in Hawaii’s energy infrastructure in particular.”

Retail gas station ‘divorcement’ = higher prices
“The current divorcement legislation should be repealed” because:

• “Extensive studies in other gasoline markets show that this type of regulation is anti-competitive and has, over time, resulted in higher prices.”

• “The regulations are not effective in protecting dealers from competition by wholesale suppliers in lucrative locations…”

Refining profits are not excessive

• “Despite high margins in gasoline, and contrary to public perception, the petroleum industry in Hawaii overall does not realize excessive profits. “

• “Overall profitability [of Hawaii’s refineries] is not beyond reasonable returns on investment, and a long term trend can be discerned that shows eroding profitability in gasoline.”

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Rev. 9-18-03

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