Hawaiian Punch

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Hawaiian Punch

By Mitch Morrison - 06/17/2002
Frustrated by paying as much as 50 cents a gallon above the national average for gasoline, Hawaii lawmakers, sensing public pain in an election year, wielded their political daggers at the petroleum industry.

In May, the state legislature approved a cap on gas prices effective 2004, making Hawaii the first state in more than 20 years to regulate prices at the pump.

With only two refineries in the Aloha State, fuel competition is severely limited. Capitol Hill lawmakers fear Hawaii is a microcosm of what's happening to competition nationally and vowed to monitor fuel prices more closely.

Mainland operators could face the same hardships if they mistakenly dismiss the Hawaiian action as one by an island isolated from the rest of the nation, cautioned a national energy analyst. "My concern is that Hawaii's action will embolden other states to follow suit," said petroleum economist Philip Verleger, citing the Federal Trade Commission's decision in May to monitor gasoline price movements in 360 cities across the country.

Verleger said contrary to the opinion of some fuel marketers, Hawaii's actions are perfectly legal, upheld by a U.S. Supreme Court ruling 14 years ago involving the Puerto Rico Departments of Consumer Affairs vs. ISLA Petroleum Corp., which supported state rights to impose gasoline caps.

For one Hawaiian retailer, the decision came as a huge blow. "My father has been in the fuel business for 40 years and I've never seen him more worried than now," said Scott Swartz. "We're talking about my father being without a job, my stepmother being without a job, my being without a job and our 30 workers being without a job."

For years on the mainland, Swartz pumped gas, wiped windows, worked in the garage and pretty much did whatever had to be done at his father's former West Coast Chevron locations.

After stepping away from the business, the 38-year-old lifelong Californian made a momentous decision. He gave up life on the mainland to join his father, Bob, who moved to Hawaii 15 years ago and operates three Chevron stations and convenience stores under the corporate name Koolau Enterprises Ltd.

The Swartzes now find themselves facing high taxes and business uncertainty. "This isn't a case of government against big oil," he continued. "It's about regular people like ourselves trying to make a living. We're going to fight this. But until something happens, our attitude is we still come in at 7 a.m. every day and do the best we can."

Hawaiian Topic

As Hawaiian lawmakers imposed a cap on the wholesale and retail sale of regular unleaded gasoline, legislators in the nation's capital were assembling to examine Big Oil pricing strategies and the impact of mergers of petroleum giants on the industry and on the motorist.

A Senate panel in May conducted hearings into pricing strategies after a report blamed recent oil mergers for wild price swings at the pump. The Senate Permanent Investigations Subcommittee heard from major oil executives and state attorneys general.

Shortly after, the FTC conducted hearings to consider how American gasoline prices are set.

Lei-ed Up

Back in Hawaii, industry experts fear that instead of bringing about lower prices, the measure will crimp competition.

"Even for a big company like Tesoro, we will have to see how this impacts on our smaller stations and whether they're worth keeping open," said Nathan Hokama, spokesman for Tesoro Petroleum Corp.'s Hawaiian division. The San Antonio-based company, which operates 35 stations in Hawaii, is, along with Chevron Texaco Corp., the primary refiner of product on the islands.

"What's especially troubling about this," he said, "is that it doesn't address the reasonable rate of return. It's discriminating to competitors with higher operating costs."

Michael Young, petroleum analyst at Gerald Klauer Mattison, described the policy as an ill-conceived solution to an imaginary problem. "I think it's an extremely misguided policy that reflects no understanding of the industry itself and zero appreciation of the plentiful and cheap gasoline we have," he said. "Let's face it, a gallon of gasoline is cheaper than a liter of Coke."

The legislation requires oil companies operating in Hawaii to turn over pricing strategies to the state to determine whether suppliers are colluding to drive up prices. From there, the bill would allow the state Public Utilities Commission to impose a maximum charge on gasoline based on average prices in three West Coast markets. Profit margins for station dealers would be sealed at 16 cents per gallon on regular unleaded gasoline, regardless of rent and other ongoing operating costs.

If Hawaiian lawmakers expect to score a political win with voters, they haven't surveyed the motorists at Swartz's Chevron locations. "I spoke with customers of mine who come to the station and 100 percent of them — with not one dissenting — felt it was bad legislation," Swartz said. "They know this is about politics and about putting people out of business."