Guest Editorial for Wednesday — September 21, 2005

• Gas price cap law has flaws

Gas price cap law has flaws

By John Cole

Recent events have exposed the flaws in the gasoline price cap law. The new law artificially ties Hawai’i’s wholesale gas prices to those in several mainland markets. Because of events in those markets—Hurricane Katrina and a refinery fire on the west coast—the price consumers pay for gasoline has skyrocketed.

Meanwhile, since they buy oil from Asia and Alaska, Hawai’i refiners’ cost to supply that gasoline has remained relatively constant. Although the price cap law was intended to help consumers, so far it has had exactly the opposite effect.

In my view, the Legislature is where this issue must be addressed. Although the Legislature passed the gas cap law and allows the Governor to suspend the cap, she can do so only if she determines the cap “will cause a major adverse impact on the economy, public order, or the health, welfare, or safety of the people of Hawai’i,” and states specific reasons for that determination. That is a very high threshold, and I don’t believe there is yet a basis for such a determination. Having said that, it is clear the high gasoline prices are greatly affecting individual consumers and businesses.

Likewise, while the law provides the Public Utilities Commission with some discretion to make adjustments to the components of the gas cap formula, it does not have the power to make arbitrary changes in the formula or suspend the law. No adjustment to the formula can protect Hawai’i consumers from price increases caused by events in distant markets to which we are artificially tied.

Just two weeks after the gasoline price cap law became effective, pump prices have risen by nearly $1.00/gallon in some locations.

While mainland prices are on the decline and the gas caps are lower this week, Hawai’i consumers will again pay higher prices after the next hurricane, refinery fire, or other outside of Hawai’i event that causes a large spike in mainland prices.

If protecting consumers from unjustifiably high prices (and profits) is the goal, we must take a different approach. We should start by requiring gasoline wholesalers and the oil companies to report their actual costs and wholesale prices. This information will invite real competition if profits margins are large, and force lower margins if the current suppliers want to fend off new market participants.

When the Legislature convenes in approximately 120 days, they should take the opportunity to change course in favor of a direction that will provide real answers about how gasoline is priced and whether consumers are a being charged a fair price.

  • John Cole is with the Divison of Consumer Advocacy.

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