380. Letter to researcher from Ted Gamble Clause, Deputy Attorney
General, dated July 26, 1995, at 1-2.
381. Letter from John Tantlinger, Ed.D., Energy Planner for the
Department of Business, Economic Development, and Tourism,
to Wendell K. Kimura, Director, Legislative Reference
Bureau, dated July 26, 1995, at 1.
382. Letter to researcher from Richard C. Botti, Executive Director of the Hawaii Automotive & Retail Gasoline Dealers
Association, dated August 1, 1995, at 2.
383. Letter to researcher from Alec McBarnet, Jr., Vice President
of the Hawaii Petroleum Marketers Association, dated August
14, 1995, at 1.
384. Letter to researcher from Jennifer A. Aquino, Administrative
Manager, Aloha Petroleum, Ltd., dated September 21, 1995, at 6.
385. Letter to researcher from R. A. Broderick, Western Region
Business Manager, Shell Oil Products Company, dated July 31,
1995, at 1, citing the United States Department of Justice's
1980 report to the President concerning the gasoline
shortage of 1979.
386. Id. at 1-2.
387. Letter from Susan A. Kusunoki, BHP Hawaii Inc., to Wendell
K. Kimura, Director, Legislative Reference Bureau, dated
August 10, 1995, at 1-2.
388. Letter from J. W. McElroy, Regional Manager, Chevron U.S.A.
Products Co., to Wendell K. Kimura, Director, Legislative
Reference Bureau, dated August 7, 1995, at 7.
389. Gregory R. Kirsch, "Note: Hurricanes and Windfalls:
Takings and Price Controls in Emergencies," 79 Va. L. Rev.
1235, 1239-1241 (Aug. 1993) (footnotes omitted); Black's Law
Dictionary, 5th ed. (St. Paul, MN: West Publishing Co.,
1979) at 1041.
390. Kirsch (1993) at 1241 (footnotes omitted); see text
accompanying notes 25 to 39 in chapter 11 for a discussion
of eminent domain.
391. See United States, President's Commission for a National
Agenda for the Eighties, Panel on Government and the
Regulation of Corporate and Individual Decisions, Government
and the Regulation of Corporate and Individual Decisions in
the Eighties (Washington, DC: 1980) (hereinafter,
"President's Commission (1980)") at 15.
392. Even in emergency situations, it has been argued, price
controls are not only ineffective but hurt consumers by
giving rise to black markets or, if these are prevented by
strict enforcement of price controls, queuing. For example,
Kirsch (1993) noted the following:
When prices are held below their free market
equilibrium level, black markets arise. The
"invisible hand" of profit-seeking forces an
approximation of the free market price in the form of
under-the-table payments, bribes, or "back-alley"
sales at illegal prices. Black market sellers demand
prices even higher than the free market emergency
price to compensate for the risk of being caught and
punished, further exacerbating disaster victims'
inability to afford needed goods. Thus, price
controls often result in a "double whammy": consumers
pay black market prices that are higher than the
hypothetical free market equilibrium price, yet the
quantity of goods supplied does not increase as it
would under free market pricing because incentives to
market entry are reduced by enforcement of price
controls.
Even if black markets are prevented by strict
enforcement of the price controls, some new mechanism
must perform the allocative function served by prices
in a free market. Queuing is the typical replacement
mechanism by which scarce supplies are allocated when
consumers cannot "vote with their wallets." Queuing
wastes human resources as consumers spend their time
waiting in lines. The government could put rationing
mechanisms in place to allocate goods on a more
logical basis than one's willingness to wait in line.
But one suspects that government rationing, like
queuing, involves "red tape," inefficiency, graft, and
favoritism. Thus, price controls do not help to get
needed goods into the hands of disaster victims, and
if effectively enforced, they will probably reduce the
quantity of available goods.
Id. at 1259-1260 (footnotes omitted); see also Hawaii,
Department of Planning and Economic Development, Managing a
Gasoline Shortage in Hawaii (Honolulu: Oct. 1981) at 42
(vol. 1): "The overriding effect of price controls is to
sustain a shortage because price is not free to rise to
choke off demand."
The Hawaii Legislature, finding that "any severe disruption
in petroleum product supplies for use within the State would
cause grave hardship, pose a threat to the economic well-
being of the people of the State, and have significant
adverse effects upon public confidence and order and
effective conservation of petroleum products...", has
granted to the Governor or the Governor's representative the
authority to control the distribution and sale of petroleum
products in the event of a shortage or anticipated shortage
of these products. See Haw. Rev. Stat. §125C-1. Among the
powers granted to the governor are restricting the sale of
petroleum products to specific days or hours, instituting a
statewide rationing plan, and purchasing and reselling or
otherwise distributing petroleum products. Haw. Rev. Stat.
§125C-3. The state Department of Business, Economic
Development, and Tourism is also required to prepare a
biennial state energy emergency preparedness plan "to be
implemented in the event of, or in anticipation of, a change
in the State's petroleum supply or demand situation that is
judged by the governor to be unmanageable by the free
market." Haw. Rev. Stat. §125C-31(a). Counties must also
prepare energy emergency preparedness plans in coordination
and consistent with the state plan. Haw. Rev. Stat. §125C-
32.
393. Philip E. Sorensen, An Economic Analysis of the Distributor-
Dealer Wholesale Gasoline Price Inversion of 1990: The
Effects of Different Contractual Relations (N.p., April
1991) at 31 (footnote omitted):
A price control system based on historical costs would
require that the government establish and enforce
complex accounting controls over refiner pricing.
Such controls are economically justified only in a
public utility setting, where the economic character
of the industry are those of "natural monopoly" (i.e.,
economies of scale which continue up to such large
output levels that single-firm production is more
efficient than production shared among any larger
number of firms).
But gasoline marketing does not fit the requirements
of "natural monopoly". Government price controls for
gasoline markets are no more justified than for food
retailing or the marketing of office machinery. In
these and other important U.S. industries, dual
distribution is commonplace and serves to enhance
efficiency by permitting various degrees of
specialization to be adopted by sellers. The
flexibility and price-responsiveness provided by this
system would be lost under a system of price controls,
as would the commitment of American society to maximum
freedom of markets.
394. Id.
395. H. A. Merklein and W. P. Murchison Jr., Those Gasoline Lines
and How They Got There (Dallas: Fisher Institute, 1980) at
111.
396. Id.
397. See Robert Fenili, "The Impact of Decontrol on Gasoline
Wholesalers and Retailers," Contemporary Policy Issues, vol.
3, no. 3, pt. 2 (Spring, 1985) at 119-129; see also United
States, Department of Energy, Deregulated Gasoline
Marketing: Consequences for Competition, Competitors, and
Consumers (Washington, DC: March 1984) (hereinafter, "DOE
(1984)") at 33: "Decontrol has brought about significant
changes in the way oil companies are distributing their
product. These alterations in distribution strategy are in
direct response to the confluence of factors affecting the
industry--decreasing demand, increasing costs, and changing
consumer buying patterns." See generally id. at 33-53.
398. Sorensen (1991) at 31 ("Public utility-type regulation of
gasoline prices would ... impose major new cost burdens on
the refining and marketing industry, reducing its efficiency
and leading to higher prices for its products. Consumers
would share a large part of these costs directly and
indirectly in higher gasoline prices and higher taxes paid
to support the regulatory bureaucracy.")
399. Id. at 31, 32.
400. Nancy D. Yamaguchi and David T. Isaak, Hawaii and the World
Oil Market: An Overview for Citizens and Policymakers
(Honolulu: East-West Center Energy Program, Aug. 1990) at
76 (emphasis in original); see also id. at 76-77:
To take an example of what might occur in Hawaii:
Suppose that the government has assessed the
"reasonable" cost of gasoline, either based on
California prices plus some transport cost, or based
on some formula that estimates what it costs the
refiner to manufacture. Then suppose that one of the
refiners installs additional hydrocracking to meet a
great increase in demand for jet fuel. The
hydrocracker will produce substantial quantities of
naphtha as a "byproduct" (although in another state,
it might be the jet fuel that was the "byproduct");
with proper processing, this naphtha can be changed
into gasoline. If this gasoline is in excess of the
needs of the local market, then it would have to be
exported. In this case, the free-market price locally
would drop below the Californian price, probably by an
amount equal to the transport cost. The current
regulated price would be too high, under either the
formula approach of the "California plus transport"
approach.
Obviously, there would be a need for readjustment
of the price. But according to what? To determine
what would not be "fair," it would be necessary to
look at the cost of the hydrocracker, and the sales
price of the jet fuel that it produces. Thus, the
problem of setting the gasoline price hinges on the
jet fuel prices. Furthermore, only one of the
refiners has installed this new equipment; should the
other refiner be penalized (or receive additional
benefits) based on the investment decisions taken by
its competitor? ...
401. Id. at 77.
402. United States, General Accounting Office, Energy Security
and Policy: Analysis of the Pricing of Crude Oil and
Petroleum Products (Washington, DC: March 1993)
(hereinafter, "GAO (1993)") at 127-128. The GAO also cited
anti-price-gouging laws, which prohibit refiners from
charging excessively high prices for petroleum products.
Citing statistics of the American Petroleum Institute, the
GAO noted that in 1990, forty-two states had considered
legislation regarding gasoline pricing; this number dropped
to twenty-five the following year. Between 1990 and 1991,
petroleum pricing legislation was passed in five states:
below-cost sales and minimum-markup laws in Florida,
Montana, and Utah, and anti-price-gouging laws in
Connecticut and Massachusetts. Id. at 128. The GAO further
noted that states have proposed two other types of laws to
deal with similar concerns, namely, divorcement and open-
supply statutes. Open supply proposals are discussed in
chapter 4 of this study; retail divorcement is discussed in
chapter 15.
403. See cases cited at Sixty Enterprises, Inc. v. Roman & Ciro,
Inc., 601 So.2d 234, 237 (Fla. 3d Dist. Ct. of App. 1992).
404. Id. at 238 n. 7; see also Francis M. Dougherty, "Annotation:
Validity, Construction, and Application of Statutory
Provision Prohibiting Sales of Commodities Below Cost-
-Modern Cases," 41 A.L.R. 4th 612, 617 (1985).
405. Haw. Rev. Stat. §481-1. That section provides in pertinent
part:
§481-1 Unlawful practices. It shall be unlawful
for any person, firm, or corporation, doing business
in the State and engaged in the production,
manufacture, distribution, or sale of any commodity,
or product, or service, or output of a service trade,
of general use or consumption, or the product or
service of any public utility, with the intent to
destroy the competition of any regular established
dealer in the commodity, product, or service, or to
prevent the competition of any person, firm, private
corporation, or municipal or other public corporation,
who or which in good faith, intends and attempts to
become such dealer, to discriminate between different
sections, communities, or cities or portions thereof,
or between different locations in such sections,
communities, cities, or portions thereof in this
State, by selling or furnishing the commodity,
product, or services at a lower rate in one section,
community, or city, or any portion thereof, or in one
location in such section, community, or city or any
portion thereof, than in another after making
allowance for difference, if any, in the grade or
quality, quantity and in the actual cost of
transportation from the point of production, if a raw
product or a commodity, or from the point of
manufacture if a manufactured product or commodity,
and in the overhead cost....
This part shall not be construed to prohibit the
meeting in good faith of the rates of a competitor as
herein defined, selling the same article or product,
or service or output of a service trade in the same
locality or trade area, or to prevent a reasonable
classification of service by public utilities for the
purpose of establishing rates.
The inhibition hereof against locality
discrimination embraces any scheme of special rebates,
collateral contracts, or any device of any nature
whereby such discrimination is, in substance or fact,
effected in violation of the spirit and intent of this
part.
406. Haw. Rev. Stat. §481-3. That section provides:
§481-3 Sales at less than cost. No person,
partnership, firm, corporation, joint stock company,
or other association engaged in business within the
State shall sell, offer for sale, or advertise for
sale any article, or product, or service or output of
a service trade, at less than the cost thereof to such
vendor, or give, offer to give, or advertise with the
intent to give away any article or product, or service
or output of a service trade, with the intent to
destroy competition.
The term "cost" as applied to production includes
the cost of raw materials, labor, and all overhead
expenses of the producer; and as applied to
distribution "cost" means and includes the invoice
cost of the merchandise to a distributor or the
replacement cost of the merchandise to a distributor,
whichever is lower; less all trade discounts except
customary discounts for cash; to which shall be added
(1) freight charges not otherwise included in the
invoice cost or the replacement cost of the
merchandise as herein set forth, and (2) cartage to
the distributor outlet if done or paid for by the
distributor, and (3) a markup to cover a proportionate
part of the cost of doing business, which markup, in
the absence of proof of a lesser cost, shall be six
per cent of the cost to the distributor as herein set
forth after adding thereto freight charges and cartage
but before adding thereto a markup; provided that in
the case where a person, partnership, corporation, or
association is engaged in the business or makes sales
both at retail and wholesale, the "invoice cost"
includes all elements recognized by good accounting
practice as proper elements of the cost; provided
further that taxes passed on to a purchaser as a
separate item from the price of merchandise shall be
included in the advertised price or offer of sale of
the merchandise if such taxes are used to compute the
markup of six per cent as provided herein.
The "cost of doing business" or "overhead
expense" means all costs of doing business incurred in
the conduct of the business and includes without
limitation the following items of expense: labor
(including salaries of executive officers), rent,
interest on borrowed capital, depreciation, selling
cost, maintenance of equipment, delivery costs, credit
losses, all types of licenses, taxes, insurance, and
advertising.
407. Haw. Rev. Stat. §481-6. That section provides as follows:
§481-6 When sale at less than cost permitted.
Sections 481-3 to 481-5 shall not apply to any sale
made:
(1) In closing out in good faith the owner's
stock or any part thereof for the purpose of
discontinuing the owner's trade in any such
stock or commodity, and in the case of the
sale of seasonal goods, or to the bona fide
sale of perishable goods to prevent loss to
the vendor by spoilage or depreciation,
provided notice is given to the public
thereof;
(2) When the goods are damaged or deteriorated
in quality, and notice is given to the
public thereof;
(3) By an officer acting under the orders of any
court;
(4) In an endeavor made in good faith to meet
the lawful prices of a competitor, as herein
defined, selling the same article or
product, or service or output of a service
trade, in the same locality or trade area;
(5) By the government or any agency thereof, of
the United States, the State, or any county,
or by post exchanges or ships' service
stores operating under and in accordance
with United States army or naval
regulations.
In case of any sale at less than cost which does
not fall within (1) to (5) of this section, the burden
of proof shall be on the defendant to show that the
sale was not made for the purpose of injuring
competitors and destroying competition within the
meaning of this part.
Any person, firm, or corporation who performs
work upon, renovates, alters, or improves any personal
property belonging to another person, firm, or
corporation, shall be construed to be a vendor within
the meaning of this part.
408. See, e.g., Rayola Dougher and Thomas F. Hogarty, The Impact
of State Legislation on the Number of Retail Gasoline
Outlets, Research Study #062 (Washington, DC: American
Petroleum Institute, Oct. 1991) at 1, 7:
General laws requiring minimum markups or
prohibiting sales "below-cost" are on the books in
about one-half of the states, but "below-cost" selling
laws specific to gasoline existed in about nine states
during the mid-1980s. These specific laws were
promulgated in response to claims by retailer
representatives that major refiners use company-
operated outlets to sell motor gasoline at prices
"below-cost," and thus put them out of business.
Proponents have argued that "below-cost sales" laws,
if effectively designed and enforced, would preserve
the number of outlets selling gasoline.
409. Tenn. Code Ann. §47-25-611(a)(1) (1994).
410. Tenn. Code Ann. §47-25-603(b) (1994):
Independent and small dealers and distributors of
petroleum and related products are vital to a healthy,
competitive marketplace, but are unable to survive
subsidized below-cost pricing at the retail level by
others, who have other sources of income. Below-cost
selling laws have been effective in preserving
independent and small retailers and wholesalers in
other trades and businesses from subsidized pricing.
Subsidized pricing is inherently unfair and
destructive to, and reduces competition in, the motor
fuel marketing industry, and is a form of predatory
pricing. An additional purpose of this part is to
prevent and eliminate subsidized pricing of petroleum
and related products.
See also D. E. Jones and A. M. Alfano, "Injury to
Competitors Is Injury to Competition: Predatory Pricing
Under State Law," 24 Antitrust L. & Econ. Rev. 57 (Summer
1992).
411. Mont. Code Ann. §30-14-802 (1993); see also Utah Code Ann.
§§13-16-1 to 13-16-12 (Michie 1994) ("Motor Fuel Marketing
Act").
412. Sixty Enterprises, Inc., 601 So.2d at 235 n. 1.
413. Fla. Stat. Ann. §526-304(1)(a) and (b) (West 1995).
414. Fla. Stat. Ann. §526-304(2)(a) and (b) (West 1995).
415. Fla. Stat. Ann. §526-302 (West 1988):
The Legislature finds that fair and healthy
competition in the marketing of motor fuel provides
maximum benefits to consumers in this state, and that
certain marketing practices which impair such
competition are contrary to the public interest.
Predatory practices and, under certain conditions,
discriminatory practices, are unfair trade practices
and restraints which adversely affect motor fuel
competition. It is the intent of the Legislature to
encourage competition and promote the general welfare
of citizens of this state by prohibiting such unfair
practices.
The constitutionality of Florida's Motor Fuel Marketing
Practices Act was upheld by Florida's third district court
of appeal, finding that the Act was "rationally related to
furthering the legislature's legitimate objective of
protecting competition in the retail motor fuel market by
prohibiting predatory pricing practices which the
legislature has determined are unfair." Sixty Enterprises,
Inc., 601 So.2d at 238-239. The court further noted that
"[i]t is beyond question that protecting competition is in
the public interest and is an important objective of both
state and federal legislative bodies. Healthy competition
is valued because it increases the economic benefits to the
public as a whole." Id. at 236-237 (footnote omitted).
416. For example, Dougher and Hogarty (1991) cited studies
indicating that below-cost sales laws that are specific to
gasoline sales raise prices by limiting price competition:
A study of general below-cost selling laws that
applied to gasoline sales in 24 metropolitan areas
found that retail gasoline prices were higher in these
areas than in 19 metropolitan areas without below-cost
laws. Even after accounting for a range of other
factors, the study found that prices for all grades
and types of service examined were consistently higher
in states with below-cost laws than in states without
them. ...
A study of below-cost laws specific to gasoline
sales in three such states found the same results;
below-cost laws raised prices by limiting price
competition. Motor gasoline prices were found to have
increased in states after implementation of "below-
cost" selling laws relative to gasoline prices in
nearby states without similar legislation. Moreover,
the study also showed that within the states with
"below-cost" laws, resellers recorded greater price
increases on average than did major refiners. This
result suggested that marketers' pricing practices
were those affected most by such laws, an outcome
expected if aggressive price competition by chain
retailers were stifled. Thus, while such laws are
designed to prevent predatory price cutting, their
impact on consumers was found to be adverse.
Id. at 8 (footnotes omitted). They further noted that the
results were inconclusive regarding the impact of minimum-
markup and below-cost sales laws on the number of retail
gasoline outlets. In a comparison of the percentage change
in the number of outlets in states prohibiting below-cost
sales with the percentage change in corresponding regional
and national totals from 1977 to 1987, Dougher and Hogarty
found that "only five of the nine 'below-cost' states
experienced changes that suggest the possibility of the
preservation or growth of outlets when comparisons are made
with regional averages." Id.
417. See note 72 and accompanying text in chapter 15.
418. See, e.g., T. Crawford Honeycutt, "Competition in Controlled
and Uncontrolled Gasoline Markets," Contemporary Policy
Issues, vol. 3, no. 3, pt. 2 (Spring, 1985) at 107.
Honeycutt maintained, however, that "minimum-markup laws
protect high-cost firms from the competition of low-cost
firms...", and concluded that "protectionist legislation,
such as minimum-markup requirements or divorcement,
inevitably forces consumers to support less efficient
marketers and reduces competition." Id. at 107, 117.
419. DOE (1984) at 107.
420. Id. (footnote omitted).
421. See id. at 107-108.
422. Id. at 108.
423. Id. at 109 (footnotes omitted):
To the extent that minimum markup laws restrain
gasoline marketers from lowering prices and
introducing more efficient distribution methods, they
result in higher prices to the consumer. Some
consumers may benefit from increased services, frills,
and promotional deals as marketers turn to nonprice
forms of competition. On the other hand, consumers
who do not value these services will be denied the
option of foregoing them in order to purchase gasoline
at lower prices. In effect, minimum markup
legislation forces consumers to purchase less gasoline
(because of the higher price) and more service
(because of increased nonprice competition) than they
would under free market conditions. Minimum markup
legislation reduces consumer welfare because it does
not allow consumers to optimize their consumption decisions.
Minimum markup legislation may restrain the
introduction of new gasoline marketing methods that
not only involve less service, but also are more
efficient than traditional methods. To the extent
that prices are higher because minimum markup laws
present a barrier to the entry of more efficient
distribution systems, the laws impose a cost on
consumers that is not offset by other factors such as
increased service. Thus, consumers may have to pay
higher prices not only because they are forced to pay
for more service than they would consume in a free
market, but also because they are denied the benefits
of more efficient new distribution and marketing
methods.
Finally, it should be noted that significant
costs would be involved in effective enforcement of
minimum markup laws. The laws tend to be vague and
complex, resulting in costly legal proceedings. Given
the poor history of effectiveness of minimum markup
and fair trade legislation in general, it is doubtful
that any benefits from the legislation would be worth
the cost.
424. The Fourteenth Amendment of the U.S. Constitution provides:
"nor shall any State ... deny to any person within its
jurisdiction the equal protection of the laws." Article I,
section 5 of the Hawaii Constitution provides that "[n]o
person shall be ... denied the equal protection of the
laws....".
425. Hasegawa v. Maui Pineapple Co., 52 Haw. 327, 329 (1970)
(citations and footnote omitted); see also Allied Stores of
Ohio v. Bowers, 358 U.S. 522, 527-528:
The guarantee of the equal protection of the laws,
found in both the Hawaii and Federal Constitutions, was
not intended to interfere with the power of the State to
prescribe regulations to promote the general welfare of
the people. Nor was it intended that the demand for
equal protection require that all laws apply universally
to all persons and that they never classify when imposing
special burdens upon or granting special benefits to
distinct groups. It has been recognized that a state
cannot function without classifying its citizens for
various purposes and treating some differently from
others. ... However, in exercising this right to
classify in order to achieve social goals the legislature
may not act arbitrarily; that is, the classification must
be reasonable in relation to the purpose of the
legislation.
426. Baehr v. Lewin, 74 Haw. 530, 571 (1993), reconsideration
granted in part, 74 Haw. 650 (1993) (citations omitted).
427. Id. at 572 (citation omitted); Richardson v. Sport Shinko
(Waikiki Corp.), 76 Haw. 494, 516 (1994).
428. Baehr v. Lewin, 74 Haw. at 572 (citation omitted).
429. Housing Finance and Development Corporation v. Castle, 1995
WL 307742 (Hawaii) (May 19, 1995), slip op. at 15 (citation
omitted).
430. Kaneohe Bay Cruises, Inc. v. Hirata, 75 Haw. 250, 260 (1993)
(citation omitted) (emphasis in original).
431. 437 U.S. 117 (1978).
432. Id. at 124-125 (1978) (citations and footnote omitted).
Chapter 10
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Chapter 11
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