Hawaii is about to scrap its effort to legislate away high gasoline prices, after the state's "gas cap" law failed to lower prices at the pump and led to claims that the regulation cost drivers tens of millions of dollars since it went into effect in September.
"It's farcical, to be honest," the president of a gas station chain on the islands, Richard Parry, said in an interview yesterday. "Everyone sort of says, 'This obviously hasn't worked.'"
In a vote earlier this month, only one of Hawaii's 51 state representatives voted to retain the cap. Even the state senator who led the drive to institute the cap last year has endorsed the idea of suspending the cap indefinitely, though he has also proposed modifying the price controls so they would only kick in under certain conditions.
The gas cap, aimed at reining in Hawaii's highest-in-the-nation gas prices, set a maximum wholesale price for gasoline linked to a five-day moving average of spot prices in New York, Los Angeles, and on the Gulf Coast. As it happened, the cap went into effect three days after Hurricane Katrina tore through the Gulf, sending gas prices on the mainland sharply higher. The state-set caps quickly shot up and so did gas prices. They have remained at similar levels since, with the average gallon of gas in the state going for about $2.90,according to recent AAA surveys.
Mr. Parry, whose firm owns or runs almost 50 stations in Hawaii, said the state's petroleum prices have historically been independent of those on the mainland. "It didn't go up as much and it didn't go down as much," he said. The caps, he said, linked the price directly to the mainland and intensified the impact of a hurricane thousands of miles away.
A study released in February by the state's Department of Business, Economic Development, and Tourism concluded that the caps cost consumers as much as $55 million, largely because of the ties to mainland pricing.
An oil industry analyst who worked with the sponsors of the cap legislation, Timothy Hamilton, dismissed that study and others suggesting that the caps led to higher prices. "You couldn't get through a junior high school with it," he said. "They're political documents."
Mr. Hamilton said it's impossible to predict what wholesalers and retailers would have done if the caps were not in place. He said he can't see how the caps could have increased prices because wholesalers are free to charge prices lower than the cap. "They absolutely refuse to recognize that this bill was about the maximum allowable price," he said.
However, Mr. Parry said the caps encourage wholesalers to hike gas prices. "It's a natural business decision that if you're not sure if you can make money when the prices go down, I better make money when the prices go up," he said. "What happened is the market basically follows the cap. A bunch of independent decision-makers come up with the same logical choice."
However, Mr. Hamilton said in Hawaii very few players actually make those pricing decisions. There are only two refiners on the islands, Chevron and Tesoro. A series of investigations have found no evidence of conspiracy to fix prices, but backers of the gas cap contend that wholesale prices there move in tandem as a result of "conscious parallelism."
Mr. Parry acknowledged that there seems to be little competition between the refiners, who make it unprofitable to bring gasoline in by sea. "There is an import alternative, but the two refiners always keep the price just attractive enough so you don't import," he said. High taxes, mandatory health insurance, and skyrocketing real estate prices also drive costs higher for all businesses in Hawaii, he noted.
Mr. Parry said he was sympathetic to the lawmakers' desire to see lower gas prices, but didn't think they could fend off the economic forces at work. "You can't pick a piece of the market and regulate only that," he said. Mr. Hamilton contends that the gas cap may not have failed at all, but may have headed off even greater increases in price.
The cost of diesel fuel, which is not covered by the cap, jumped in Hawaii by about 70 cents since last year, he noted. "It's not been in effect long enough to tell what it's done," said the analyst, who works with independent station owners often at odds with the oil companies.
Hawaii's house has voted to address the price concerns by lowering gas taxes by 8 cents a gallon, but proponents of the gas cap have not given up on it altogether. The latest proposal from the state senator who initiated the legislation, Ron Menor, calls for adding Singapore's wholesale spot prices to the three mainland prices already included.
The most expensive price would be dropped from the average in order to weed out local disruptions like hurricanes in the gulf. The cap, which already includes local adjustments for the costs of transporting fuel among Hawaii's six main islands, would be triggered only if prices exceed the "fair price" target over a two-week period.
Mr. Parry said the escalating complexity of the caps and targets will only bring more volatility in what has traditionally been a stable market
"It's artificially trying to emulate a free market and there's just no way government can effectively do that. We've proven that in the last six months," he said.