The Eighteenth Legislature of the State of Hawaii, Regular 
Session of 1995, adopted House Resolution No. 174, H.D. 2 (Appendix A),
requesting the Legislative Reference Bureau to conduct a study to obtain
useful data and views from selected state agencies and representatives
of Hawaii's petroleum industry--gasoline dealers, wholesalers 
(jobbers), and large oil companies--to assist the Legislature 
in formulating policies that protect the interests of Hawaii's 
gasoline consumers.  The Resolution specified that the protection 
of these consumers' long- and short-term interests was to be 
accomplished by ensuring the:  (1) lowest possible gasoline prices;
(2) availability of automotive services; and (3) convenient access to
retail gasoline outlets.  In particular, the Resolution requested the
Bureau to obtain information and data from the participants on the
following topics: 	
     
     (1)  The effects of prohibiting franchise agreements
          from requiring franchisees to purchase all of
          their gasoline from the franchisor or restraining
          franchisees from dealing with the franchisors'
          competitors;

     (2)  The effects of limiting the amount of gasoline
          franchisors require franchisees to purchase from
          the franchisor;

     (3)  The effects of prohibiting gasoline allotment
          under exchange agreements on the basis of
          historical market share;

     (4)  Measures to ensure the lowest retail gasoline
          prices for the consumer in the short and long-
          term;

     (5)  Whether price inversion has occurred or is
          currently occurring in the distribution of
          gasoline in Hawaii;

     (6)  The effects of encouraging the establishment of a
          public bulk gasoline terminal facility, which
          could make the importation of gasoline cost
          effective and could also lead to a reduction in
          wholesale gasoline prices;

     (7)  The effects of establishing a petroleum regulatory
          commission having general supervision over all
          petroleum manufacturers and jobbers in the State
          with the authority to:

          (A)  Authorize new retail service stations and
               determine whether they may be operated by a
               petroleum manufacturer or jobber;

          (B)  Restrict price increases when prices rise
               above a certain percentage over a benchmark
               market, as determined by rules adopted by the
               commission under chapter 91 [the Hawaii
               Administrative Procedure Act];

          (C)  Decide when a petroleum manufacturer or
               jobber may convert a retail service station
               from one operated by a gasoline dealer to one
               operated by a petroleum manufacturer or
               jobber, and vice versa;

          (D)  Decide when a petroleum refiner may close a
               retail service station, to prevent
               communities from being underserved;

          (E)  Review management decisions of petroleum
               manufacturers and jobbers regarding
               infrastructure, strategic planning, and other
               areas to ensure market compliance; and

          (F)  Review profits for reasonableness in light of
               the need for petroleum utilities to promote a
               safe workplace and ensure environmental
               protection;

     (8)  The effects of regulating retail gasoline prices
          of company-operated retail service stations;

     (9)  The effects of requiring manufacturers, terminal
          operators, and jobbers of petroleum products to
          file with the State, a tariff listing all prices
          at which the manufacturer or jobber offers goods
          or services for sale or lease;

    (10)  The effects of prohibiting any terminal operator
          having excess capacity from refusing to provide
          terminalling services to any person at the prices
          published in the tariff that the terminal operator
          filed with the State;

    (11)  The effects of prohibiting manufacturers of
          petroleum products not only from directly
          operating retail service stations, but also from
          franchising them or owning and leasing them to
          branded dealers (divestiture);

    (12)  The effects of establishing a public petroleum
          products storage authority with power to import,
          store, and market petroleum products;

    (13)  The effects of active enforcement of the Petroleum
          Industry Information Reporting Act of 1991 and Act
          291, Session Laws of Hawaii 1991 (codified as
          chapter 486I, Hawaii Revised Statutes);

    (14)  Measures that could be initiated to reduce the
          cost of conducting business for independent
          dealers (i.e., lease rent and environmental
          regulations);

    (15)  The effects of the provision contained in section
          486H-10(a), Hawaii Revised Statutes, that allows
          manufacturers and jobbers to open one company
          operated retail service station for each dealer
          operated service station owned by that
          manufacturer or jobber, up to a maximum of two
          company owned retail service stations;

    (16)  Whether laws in other states prohibit or limit the
          number of retail service stations that may be
          opened or operated by wholesalers, producers, or
          refiners of petroleum products, or their
          subsidiaries; and

    (17)  Whether or not the existing moratorium has
          resulted in lower gasoline prices for consumers.


     Survey Participants

	House Resolution 174, H.D. 2, requested that the Bureau seek the above
information and data from the following persons: 	
	
	(1)  Petroleum industry participants:
	
	(A)  The Hawaii Automotive and Retail Gasoline Dealers Association
		 (HARGD);1
	
	(B)  The Hawaii Petroleum Marketers Association (HPMA);
	
	(C)  Western States Petroleum Association (WSPA);
	
	(D)  Chevron USA Products Company (Chevron); and
	
	(E)  BHP Hawaii Inc. (BHP); and
	
     (2)  State government agencies:

          (A)  The Attorney General (AG);

          (B)  The Department of Commerce and Consumer Affairs
               (DCCA);

          (C)  The Department of Business, Economic Development,
               and Tourism (DBEDT); and

          (D)  The Public Utilities Commission (PUC).

	The Hawaii Automotive and Retail Gasoline Dealers Association has a
membership of approximately 175, of which approximately 125 are service
stations and the remainder are auto repair shops or suppliers.  Of the
125 service stations represented, 86 are three-party oil company
franchises, 36 are two-party independents under a supply contract, and
three are one-party independents/jobbers.2
	
	The Hawaii Petroleum Marketers Association represents fourteen oil
wholesalers in the State, which are referred to in chapter 486H, Hawaii
Revised Statutes, and in this study as "jobbers".3  Hawaii's gasoline
retail market is served by one large jobber, Aloha Petroleum, which
sells gasoline under its own brand, while the remaining jobbers are
smaller in size and mostly sell gasoline under the major brands.4 Aloha
Petroleum has contributed to this study on its own initiative.
	
	Western States Petroleum Association is a trade association of oil
companies doing business in the Western United States, and functions as
an information clearinghouse.  The Hawaii Petroleum Resources Group
(PRG) was created as a committee within the WSPA to focus on
legislative issues that are pertinent to Hawaii. The Association's
Hawaii membership consists of Texaco, Shell, Unocal, and Chevron.5
Hawaii's petroleum industry is served by five major oil companies,
namely, the four Hawaii members of PRG, and BHP Hawaii, which is not a
member of the WSPA.6  Although the WSPA did not contribute to this
study under the name of that organization,7 the positions of the major
oil companies are represented by Chevron, BHP, and Shell Oil Products
Company (Shell).  While Chevron and BHP were specifically named in the
House Resolution as participants in this study, Shell contributed to
this study on its own initiative.
	
	The names, addresses, and phone numbers, as available, of each of the
study participants named in the Resolution and others participating in
the survey is contained in Appendix B.
	
	Only two of the four Hawaii government agencies requested to
participate in the survey--the Department of the Attorney General and
the Department of Business, Economic Development, and Tourism--have
actually participated.  The Public Utilities Commission refused the
request of the House of Representatives to participate in this study,
noting that "the Commission has never regulated this industry and,
thus, does not possess the information sought by the questionnaire."8
The Department of Commerce and Consumer Affairs also refused to
participate other than to submit copies of an earlier study conducted
on behalf of the department regarding consumer and gasoline marketing
in the State, stating that "it does not appear that DCCA can add
anything further to this inquiry."9  While the DCCA study is relevant
on matters relating to divorcement and gasoline retailing, it is not
responsive to most of the remaining questions specified in House
Resolution No. 174, H.D. 2.10  It would appear that the refusal of
these agencies to participate indicates that they take no position with
respect to any of the issues specified in the Resolution.11 	

	Methodology, Organization, and Focus of Study
	
	The Bureau's survey questionnaire, a copy of which is contained in
Appendix C, requested the information specified in the House Resolution
from the persons identified in that Resolution.  Due to the broad scope
of the study and the potentially large volume of information sought,
the questionnaire requested that the study participants submit their
responses on sixteen of the seventeen questions in accordance with
three staggered deadlines in order to ensure that all materials would
be received and compiled in a timely manner.
	
	This study is organized into sixteen chapters.  This chapter
introduces the study.  Chapters 2 and 3 provide background information
to assist readers in understanding the issues discussed in the
remainder of the report.  Chapter 2 provides a brief overview of the
petroleum industry generally, while chapter 3 gives an overview of the
petroleum industry in Hawaii.
	
	Chapters 4 through 15 present the views of the petroleum industry and
government agencies surveyed with respect to the questions in the
Resolution other than question (16), which requested information from
the Bureau regarding the laws of other states concerning what is
generally referred to as "divorcement" legislation.  The following
table outlines which of the Resolution's questions are discussed in
each chapter: 	
               CHAPTER            QUESTIONS
                  4               (1) and (2)
                  5                  (3)
                  6                  (4)
                  7                  (5)
                  8               (6) and (12)
                  9                  (7)
                  10                 (8)
                  11              (9) and (10)
                  12                 (11)
                  13                 (13)
                  14                 (14)
                  15              (15), (16), and (17)

	Specifically, chapter 4 contains the responses of the survey
participants regarding open supply legislation and exclusive dealing.
Chapter 5 discusses responses regarding exchange agreements.  Chapter 6
reviews measures to ensure the lowest retail gasoline prices.  Chapter
7 discusses price inversions. Chapter 8 discusses the proposed
establishment of a public bulk gasoline terminal facility and a public
petroleum products storage authority.  Chapter 9 discusses the proposed
establishment of a petroleum regulatory commission.  Chapter 10
discusses the effects of regulating retail gasoline prices of
company-operated retail service stations.  Chapter 11 discusses the
filing of tariffs with the State and providing terminalling services.
Chapter 12 discusses vertical divorcement, or divestiture.  Chapter 13
discusses the Petroleum Industry Information Reporting Act of 1991.
Chapter 14 reviews measures to assist independent dealers.  Chapter 15
reviews divorcement laws of other jurisdictions and discusses retail
divorcement generally.
	
	The survey responses in chapters 4 through 15 are arranged in the
following order:

     (1)  State government.  The government's positions are
          advanced by the Hawaii Departments of the Attorney
          General (AG) and Business, Economic Development, and
          Tourism (DBEDT).

     (2)  Gasoline dealers.  The positions of Hawaii's gasoline
          dealers are advanced by the Hawaii Automotive and
          Retail Gasoline Dealers Association (HARGD).

     (3)  Jobbers.  The positions of wholesalers of petroleum
          products are advanced by the Hawaii Petroleum Marketers
          Association (HPMA) and Aloha Petroleum.

     (4)  Oil companies.  The positions of the major producers or
          refiners of petroleum products are advanced by Shell,
          BHP, and Chevron.

Some of the responses have been edited for length.  A discussion
section follows the responses, either to provide additional background
information or to discuss issues that were not sufficiently addressed
by the survey participants.

	Finally, chapter 16 reviews various alternatives to regulation and
policy options available to legislators with respect to Hawaii's
petroleum industry.
	
	There is some degree of overlap among the questions presented in the
Resolution.  This study therefore reviews those questions together that
relate to the same subject matter.  In addition, many of these
questions ask for the "effects" resulting from certain actions; for
example, question number (7) of the Resolution asks for the "effects of
establishing a petroleum regulatory commission ...".  Because the
intent of the Resolution is to provide useful information and data that
the Legislature may consider in developing policies that protect the
short- and long-term interests of Hawaii's gasoline consumers, the
survey requested the participants to respond, whenever possible, along
these lines.  For example, with respect to question number (7), the
survey summarizes participants' responses regarding whether
establishing a petroleum regulatory commission would or would not
protect the interests of gasoline consumers in this State.
	
	In addition, it is important to note at the outset that the House
Resolution requests a compilation and presentation of the views of
participants in the petroleum industry in Hawaii and selected
government agencies on a variety of loosely related issues.  The
purpose of this report is to present these views to the Legislature in
a reasonably concise, manageable format to allow the Legislature to
draw its own conclusions as to the appropriateness of any particular
view.  This report therefore avoids drawing conclusions as to which of
these views are preferable, but rather summarizes the competing policy
arguments and presents them from the standpoint of protecting the
interests of Hawaii's gasoline consumers.
	
	
	Use of Terms
	
	For the purposes of this report, except where otherwise noted, the
following terms (most of which are used in House Resolution No. 174,
H.D. 2) are deemed to have the same meanings as defined in section
486H-1, Hawaii Revised Statutes.  That section contains the following
definitions:

     "Franchise" means:

	(1)   Any agreement or related agreements between a petroleum
          distributor and a gasoline dealer under which the
          gasoline dealer is granted the right to use a
          trademark, trade name, service mark, or other
          identifying symbol or name owned by the distributor in
          connection with the retail sale of petroleum products
          supplied by the petroleum distributor; or
	
     (2)  Any agreement or related agreements described in
          paragraph (1) and any agreement between a petroleum
          distributor and a gasoline dealer under which the
          gasoline dealer is granted the right to occupy the
          premises owned, leased, or controlled by the
          distributor, for the purpose of engaging in the retail
          sale of petroleum products supplied by the distributor.

	"Gasoline" includes gasoline, benzol, benzine, naphtha, and any other
liquid prepared, advertised, offered for sale, sold for use as, or used
for, the generation of power for the propulsion of motor vehicles,
including any product obtained by blending together any one or more
petroleum products with or without other products, if the resultant
product is capable of the same use.
	
	"Gasoline dealer" means any person engaged in the retail sale of
petroleum products in the United States under a franchise agreement
entered into with a petroleum distributor.
	
	"Good faith" means the duty of a gasoline dealer and a petroleum
distributor to act in a fair and equitable manner in the performance
and in the demanding of performance of the terms and provisions of the
franchise.  The petroleum distributor shall not impose on a gasoline
dealer by contract, rule, or regulation, whether written or oral, any
standard of conduct that is not reasonable and of material significance
to the franchise relationship.
	
	"Inventory" means any product sold to a gasoline dealer for resale
purposes by a petroleum distributor.
	
	"Jobber" means every wholesaler of petroleum products.
	
	"Major brand" means the primary trade name or trademark most commonly
associated and identified with a manufacturer's retail service station.
	
	"Manufacturer" means a producer or refiner of petroleum products,
or any subsidiary of that producer or refiner.12
	
	"Motor vehicle fuel" means gasoline, diesel fuel, alcohol, and any
mixture of those fuels suitable for use in vehicles registered under
chapter 286.13
	
	"Petroleum distributor" means any person engaged in the sale,
consignment, or distribution of petroleum products to retail outlets
that it owns, leases, or otherwise controls.
	
	"Petroleum products" includes motor vehicle fuel, residual oils
number 4, 5, and 6, and all grades of jet (turbo) fuel.
	
	"Purchase" means any acquisition of ownership.
	
	"Retail" means the sale of a product for purposes other than
resale.
	
	"Retail service station" means a place of business where motor
vehicle fuel is sold and delivered into the tanks of motor vehicles.
	
	"Sale" means any exchange, gift, or other disposition.
	
	"Secondary brand" means a trade name or trademark, other than a major
brand, used to identify a manufacturer's retail service station.
	
	"Unbranded" means an independent retail service station dealer,
jobber, heating oil distributor, motor fuel wholesaler, or peddler
marketing gasoline or special fuels under its own brand, trade name, or
trademark, other than those of a manufacturer, or any subsidiary
thereof.
	
	
	Additional Terms Defined
	
	In addition, the following additional terms, as used in this report,
are defined as follows: 	
	
	"Barrel" (of crude oil or petroleum product) is equivalent to
forty-two gallons.14
	
	"Bulk terminal" means a facility used primarily for the storage or
marketing of petroleum products, or both, that has a total bulk storage
capacity of fifty thousand barrels or more, or receives petroleum
products by tanker, barge, or pipeline.15
	
	"Company-operated retail service station" means a retail service
station owned and operated by a manufacturer or jobber.16
	
	"Crude oil" means a mixture of hydrocarbons that exists in liquid
phase in underground reservoirs and remains liquid at atmospheric
pressure after passing through surface-separating facilities.  Domestic
crude oil is produced in the United States or from its outer
continental shelf; foreign crude oil is produced outside of the United
States.17  "Sour crude" is crude oil containing sufficiently large
quantities of sulfur and sulfur compounds as to require chemical
treatment for removal.18 "Sweet crude" is crude oil containing so
little sulfur as to render unnecessary chemical treatment for the
removal of sulfur or sulfur compounds.19
	
	"Dealer-operated retail service station" means a retail service
station owned by a manufacturer or jobber and operated by a qualified
gasoline dealer.20
	
	"Dealer tank wagon price" or "DTW price" means the wholesale price
a dealer pays to a supplier for gasoline delivered in bulk to the
dealer's outlet.  Typically, the delivery is by tank truck and the
transaction takes place between a dealer and a refiner or jobber.  The
dealer tank wagon price may be higher than the total of the unbranded
(rack) price since it may often includes the price for gasoline,
transportation costs, and the value of the brand name including
additive package.21
	
	"Divestiture" or "vertical divorcement" means the divestment of a
vertically integrated oil company of all or a portion of its major
operations.
	
	"Divorcement" or "retail divorcement" means the prohibition of a
producer or refiner from directly operating a retail service station.22
	
	"Downstream" generally means starting with one stage of a sequential
production process and encompassing all subsequent stages.23  More
specifically, "downstream processing" refers to the upgrading of
distillation products into materials suitable for blending into motor
gasoline.24
	
	"Economies of scale" means decreases in the cost of production from
any type of plant which are associated with increases in the size of
the plant.25
	
	"Exchange agreement" means an agreement allowing a party ("A") that
does not refine gasoline in one locality to obtain the gasoline it
needs from another party ("B") that does refine gasoline in that
locality, in exchange for providing B with the gasoline it needs in
areas in which B does not refine gasoline. For example, a hypothetical
exchange agreement would permit Shell, which does not refine gasoline
in Hawaii, to obtain gasoline from Chevron, which does refine gasoline
locally, in exchange for providing Chevron the gasoline it needs in
areas in which Chevron does not refine gasoline, but Shell does.26
	
	"Feedstock" means the use of crude oil, residual fuel oil, and
refined petroleum products for processing in a petrochemical plant.27
	
	"Independent dealer" means a firm that is engaged in the retail sale
of petroleum products that is neither controlled by nor in a
partnership with a major oil company.28
	
	"Lessee dealer" means an independent marketer who leases the station
and land from a supplier and has the use of tanks, pumps, signs, etc. 
The lessee dealer typically has a supply agreement with a refiner or
distributor and purchases products at dealer tank wagon prices.29
	
	"Major oil company" means a vertically integrated oil company that
refines and distributes oil and owns retail service stations.30
	
	"OPEC" means the Organization of Petroleum Exporting Countries,
consisting of Algeria, Equador, Gabon, Indonesia, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela,
and the neutral zone between Kuwait and Saudi Arabia, which has
organized for the purpose of negotiating with oil companies regarding
matters of oil production, prices, and future concession rights.31
	
	"Open dealer" means an independent marketer who owns the station or
land of a retail outlet, and has use of tanks, pumps, signs, etc.  The
open dealer typically has a supply agreement with a refiner or a
distributor and purchases products at or below dealer tank wagon
prices.32
	
	"Open supply" legislation would permit retail dealers to buy gasoline
from more than one supplier (i.e., from sellers other than the refiners
who lease them their stations) and sell that gasoline through the
leased outlet.33
	
	"Price competition" means the attempt by a seller to increase sales
by lowering its own price in relation to its competitors' prices.34
	
	"Price discrimination" occurs when a seller obtains different rates
of return from the same product from different groups of customers.35
	
	"Price elasticity" refers to the percentage change in demand for a
product for each percentage change in price.36
	
	"Price inversion" or "wholesale price inversion" means a market
anomaly in which the price jobbers pay to oil refiners for quantities
in bulk becomes higher than the retail price available from branded
retail outlets.37
	
	"Pump prices" are prices charged by retail gasoline outlets.38
	
	"Rack price" means the wholesale price to nonbranded independent
marketers and jobbers, typically set at a terminal or refinery rack.39
	
	"Spot price" means a transaction price concluded "on the spot", i.e.,
on a one-time, prompt basis.  The transaction usually involves only one
specific quantity of product, in contrast with a term contract sale
price, which obligates the seller to deliver a product at an agreed
price and frequency over a certain period.40
	
	"Terminal" or "terminalling" means the receipt of gasoline for
storage into a terminal facility, including pipelines; storage of
gasoline; delivery of the gasoline as directed by the distributor into
a tanktruck, vessel, or pipeline; maintenance of inventory records and
other records of account; quantity and quality testing of the gasoline;
volume measurement; and pipeline throughput services.41
	
	"Terminal facility" means storage tanks and other appurtenant
equipment, including pipelines, where gasoline will be commingled with
other products of similar quality.42
	
	"Throughput" means the volume of crude oil, unfinished oil, and
natural gas liquids refined during a specified time period.43
	
	"Underground storage tank", "tank", or "UST" means any one or
combination of tanks (including pipes connected thereto) used to
contain an accumulation of regulated substances, and the volume of
which (including the volume of the underground pipes connected thereto)
is ten per cent or more beneath the surface of the ground.44
	
	"Upstream" generally means starting with one stage of a sequential
production process and encompassing all prior stages.45
	
	"Vertical integration", in the case of a major oil company, means the
ownership or control of all phases of the production of petroleum
products, including the drilling, pumping, refining, distribution, and
resale of the petroleum products by a person, firm, partnership, or
corporation, from the well to the gasoline pump.46
	
	"Vertically integrated oil company" means an oil company controlling
all phases of petroleum production and sale from the well through
distribution to dealers.47
	
	
	Scope of Study
	
	The oil industry, both in the United States mainland and in Hawaii,
has been the subject of numerous investigations and studies.  House
Resolution No. 174, H.D. 2, seeks the views of the petroleum industry
and state government on a wide range of complex issues, all connected
to the petroleum industry, but in many instances otherwise unrelated.
Previous studies have focused solely on one or two of these topics. For
example, two recent studies in Hawaii are devoted entirely to retail
divorcement legislation and its impact on gasoline retailing and
consumer prices.48  Hawaii's Attorney General recently engaged the
services of a professional economist specializing in petroleum markets
to provide assistance in one aspect of its investigation on gasoline
pricing in the State.49  Other states have delegated selected issues,
such as divorcement and open supply legislation, to special task forces
or legislative study committees and their staff.50
	
	This study does not purport to be, and should in no way be viewed as,
definitive with respect to any of the topics specified in the
Resolution.  Rather, this study reviews relevant literature regarding
each such issue and reports the viewpoints of the industry and state
government as requested in the Resolution.  Efforts have been made to
unify the diverse issues specified in the Resolution and discuss them
in the context of the wholesale and retail gasoline industries in the
United States and Hawaii, as applicable, focusing on information that
the Legislature may consider useful in formulating policies to protect
the interests of Hawaii's gasoline consumers. 

		Endnotes	Chapter 2	Table of Contents