Hawaii instigates cap on gas prices

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Sacramento Bee (California)

Californians fed up with high gasoline prices might take some inspiration from Hawaii.

The only state with higher average prices than California, the Aloha State will put into effect next week a new state law slapping a ceiling on gas prices. The law, apparently the first of its kind, imposes a wholesale-price cap that’s pegged to average prices on the mainland.

Consumer advocates say the law will bring some order to an out-of-control market. But oil industry executives, while reluctant to predict the effect of the Hawaii law, said price caps historically have backfired.

“Those of us who were old enough to drive in the ’70s remember — We all sat
in gas lines,” said Sacramento-based industry lobbyist Joe Sparano, who unsuccessfully lobbied Hawaii lawmakers to abandon their idea.

Many economists say price controls sometimes discourage supply, leading to shortages. It’s widely believed that federal price controls contributed to the long gas lines in the United States in the 1970s. On the other hand, it’s also believed that price ceilings have helped reduce electricity costs in the West.

Some California consumer advocates and Democratic leaders have periodically advocated some form of gas price ceilings. Running for governor in the 2003 recall, Lt. Gov. Cruz Bustamante endorsed a constitutional amendment that would have established price regulation by the Public Utilities Commission. The idea went nowhere.

Jamie Court, a prominent California consumer advocate, said the idea should be revived.

“I’m all for price controls to the extent that they limit profiteering,” said Court, of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “Profiteering’s the problem.”

His lone criticism of the Hawaii plan was using mainland prices as a baseline. “The flaw is that it assumes your baseline market is a reasonable one,” Court said. “There is no reasonable or sane gasoline market in the United States of America right now.”

The Hawaii law creates a fluctuating wholesale ceiling tied to an index based on average prices in Los Angeles, New York and the Gulf Coast. With taxes, the first ceiling would limit the wholesale price in Honolulu to $ 2.74 for a gallon of self-serve regular starting Sept. 1, according to the Associated Press. If retailers charge their usual 12-cent markup, prices in Honolulu would actually increase to $ 2.86 a gallon — a dime above the city’s average Wednesday.

“The purpose of the cap is so that we move with the rest of the country,” said Frank Young of Hawaii’s Citizens Against Gasoline Price Gouging.

The statewide average in Hawaii on Wednesday was a record $ 2.84 a gallon, according to AAA. That was 4 cents above California, which has the second-highest prices, and 23 cents above the U.S. average. In Wailuku, on the island of Maui, prices were an average $ 3.02 a gallon.

Economist Severin Borenstein of the University of California, Berkeley, said the Hawaii price ceiling is set up in a way that reduces the risk of shortages and gas lines.

“They’ve erred on the side of caution,” he said. “They’re just saying the price shouldn’t be too much above the price on the mainland.”

Borenstein said price ceilings can be effective if they’re set at the right level. When the federal government, after months of pleading from California, imposed ceilings on the wholesale price of electricity in the West in 2001, it helped tame the runaway energy market.

But the trick is finding the appropriate level. Price ceilings that are too low can result in major shortages, Borenstein said.

David Hackett, an Irvine petroleum industry consultant who advised Hawaii officials to scrap the gas-price idea, said the ceilings could create hiccups in supply.

That’s because the ceilings, which will change every week, will be posted a few days before they take effect. If motorists know prices are going to fall, they’ll wait until the new prices kick in before filling up. If they know prices are heading up, then they’ll run out and buy gas in advance, Hackett said.

Either way, “that could result in lines at gas stations,” he said.

The Hawaii Legislature first passed the price cap in 2002, but it wasn’t implemented. Last year it passed the amended version that takes effect next week. Hawaii Gov. Linda Lingle unsuccessfully urged lawmakers to repeal the law, arguing it would create shortages and raise prices.

And at least one Hawaiian energy expert, Fereidun Fesharaki at the University of Hawaii’s East-West Center in Honolulu, said the gas cap was “a stupid idea” that would be bad for competition and, ultimately, consumers.

Consumer Watchdog
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