September 12, 2005
HAWAII GASOLINE PRICE CAP LAW
By: Kevin E. McCarthy, Principal Analyst
You asked for information on Hawaii's law capping wholesale gasoline prices, including its history and the impact it has had.
HAWAII GASOLINE PRICE CAPS
In 2002, the legislature adopted Act 77 (Ha. Rev. Stat. Ch. 486H) which established maximum pre-tax wholesale and retail prices for regular unleaded gasoline sold in the state. The act was originally scheduled to go into effect on September 1, 2004. It subjected wholesalers and jobbers who knowingly violated the law to a fine of three times the amount of the overcharge or $250,000, whichever is greater, plus reasonable attorney's fees and costs as determined by the court.
The act was passed after the state settled a price-fixing lawsuit with the state's two major refiners for $22 million. The act makes extensive findings, including that “the major oil companies have been realizing profit margins far in excess of the margins realized in other oligopolistic and equally concentrated markets.” (An oligopoly exists when there are only a few suppliers serving a market.)
Under the act, the governor may suspend the gasoline cap law or any implementing regulation by issuing a written determination that strict compliance will cause a major adverse impact on the economy, public order, or the health, welfare, or safety of state residents, Under most
circumstances, the suspension remains in effect until the earlier of (1) the adjournment of the next regular or special session of the legislature or (2) the effective date of any legislation intended to address the major adverse impact.
The act required the Department of Business, Economic Development, and Tourism to conduct a comprehensive study of the petroleum industry, gasoline market, and price controls and other policy options to lower gasoline prices. The department's report presented a number of recommendations aimed at fostering competitive gasoline prices. It recommended the price caps not be imposed, because its analysis showed they would actually raise retail prices and cause other unintended negative consumer, economic, and policy impacts.
In 2004, the legislature amended the law by passing Act 242, which found that the problem of high gasoline prices is principally due to a lack of vigorous competition in the wholesale market. In contrast, the legislature found that there is competition at the retail level. Among other things, Act 242: (1) limited the cap to wholesale prices, (2) extended the cap to apply to mid-grade and premium gasoline, (3) changed the baseline for the cap by using the average of the spot prices on the New York, Gulf Coast, and Los Angeles markets, (4) established price zones within the state and allowed the Public Utilities Commission (PUC) to vary the cap by zone, and (5) extended the effective date of the caps to September 1, 2005. The act went into effect without the governor's signature.
On August 24, 2005, the PUC issued its order setting caps for the period September 1 through September 4. The wholesale cap ranged from $2.16 for unleaded regular on Oahu to $2.50 on Lanai. Chevron, Shell Oil, and Tesoro, the major wholesalers in the state, and the Hawaii Petroleum Marketers Association, asked the PUC to reconsider the order, but it declined to do so.
On August 31, 2005, the PUC issued its caps for the period September 5 through September 11. The caps range from $2.43 for Oahu to $2.77 for Lanai. Also on August 31, 2005, the PUC increased the cap for Kauai, upon the petition of gasoline jobber, after finding that this adjustment might be needed to avoid supply shortages. The PUC's Webpage, http://www.hawaii.gov/budget/puc/gaspricecaps/, provides information about the caps. As noted above, the caps do not include federal, state, and county taxes, which amount to about 58 cents per
gallon. The caps also do not include the dealer's markup, which the Honolulu Star-Bulletin estimates have been historically about 12 cents per gallon.
Since the caps were just implemented it is too soon to determine the impact, if any, they will have on prices or supply. According to the American Automobile Association's Fuel Gauge Report (http://www.fuelgaugereport.com), the average retail price for regular, unleaded gasoline on September 7, 2005 in Honolulu, Oahu was $3.005. Assuming the markup remains the same, the current wholesale cap would allow retail prices to be approximately $3.13 per gallon on Oahu.
It is worth noting that the increase in gasoline prices on the mainland in the year before the caps went into effect was substantially greater than the price increase in Hawaii during this period. On October 6, 2004, the nationwide average price for regular unleaded was $1.84, compared to $2.31 in Hawaii (i.e., gasoline was 47 cents per gallon more in Hawaii). In contrast, by August 6, 2005, the nationwide average was $2.34 and the Hawaii average was $2.68 (a 34 cents difference). By the time the caps went into effect, the Hawaii average was only a few cents less per gallon than the nationwide average. This suggests that Hawaii is subject to market forces that differ substantially than those affecting the rest of the country.
Governor Linda Lingle has said she would suspend the price cap if either or both of the state's refineries indicated plans to close. She also said she would suspend the cap if Hawaii were to experience wholesale or retail gas shortages stemming from curtailed shipments to the state.