Question (14) of the Resolution requests the views of survey
participants regarding the following:
	
     (14) Measures that could be initiated to reduce the cost of
          conducting business for independent dealers (i.e.,
          lease rent and environmental regulations).


     State Government

	AG:  "Rent control, tax reductions, and environmental exemptions
easily come to mind.  But the cost of such measures would have to be
paid by tax payers generally or some other class of persons.  Reducing
the cost of doing business for independent dealers and increasing it
for others raises serious political questions.  The Department of the
Attorney General is not competent to evaluate political questions."538
	
	DBEDT:  The department suggested that assistance could be provided
in complying with environmental regulations.  It further noted that
while independent dealer stations have declined, the ability of
consumers to obtain gasoline has not been jeopardized:
	
     While sympathetic to the plight of independent dealers
     as they deal with the high cost of doing business in
     Hawaii, it is unclear what the government could do to
     help them reduce this cost.  Of course, compliance with
     environmental regulations, especially those dealing
     with underground petroleum storage tanks is costly.
     However, most of these regulations are imposed by the
     federal government which under the new Congress may be
     more amenable to loosening certain restrictions.
     Nevertheless, in Hawaii where our primary fresh water
     supply is the Islands' aquifers, it would seem
     imprudent to relax these standards simply to cut costs.

     Over the period 1980-1991 there was a 45% increase of
     motor vehicles registered in Hawaii.  The number of
     service stations had decreased by 71%; however, the
     number of retail fuel pumps in the state had climbed
     dramatically by 62%.  Over the same period, annual
     gasoline sales rose by 63.3 million gallons, or 20%.
     During this period, a new type of gasoline retailer --
     the convenience store -- seems to be overtaking the
     traditional gasoline retailer -- the full-service
     gasoline station.  Statistical information bears out
     the fact that while independent dealer stations have
     declined, the ability of the motoring public to obtain
     gasoline has not suffered.539 


     Gasoline Dealers
	
	HARGD:  The Association maintained that the State could assist
independent dealers by reducing the cost of doing business generally,
and that the State should have provided financial assistance to these
dealers in meeting underground storage tank (UST) requirements.  In
addition, the Association noted that the retail divorcement moratorium
has assisted independent dealers:
	
     Because of the complexity of requirements for petroleum
     products, and the fact that federal laws and
     regulations play a major part in increasing the costs
     involved with compliance, measures that could be
     initiated to reduce the cost of conducting business
     would be in the areas of regulation.  They would
     include issues affecting business in general, such as
     workers' compensation, liability insurance, lab or
     regulations, etc.  If the State had adopted a State UST
     Financial Obligation Program when other states were
     doing so, it would have provided protection for
     independent dealers.  The Legislature chose not to
     adopt a program, and it is now too late.  The
     legislature did however prohib[it] petroleum suppliers
     from opening more vertically integrated consumer
     locations.  This in itself has paid benefits to both
     the dealer and consumer by providing a value to
     suppliers wishing to maintain or gain marketshare.
     Because operating via a dealer network is the only way
     to sell to the consumer, suppliers waived the UST
     insurance requirement in franchise agreements.  This
     meant the suppliers "self insured" the locations while
     UST liability insurance was not available.  We believe
     this played a major roll in either controlling or
     reducing costs of dealers, while the actual costs
     involved were included in the wholesale price of
     gasoline.540 


     Jobbers

	HPMA:  The HPMA noted the following general and specific measures to
assist independent dealers:
	
     There are several measures that would be beneficial to
     independent dealers.  Some of these are common to all
     business in Hawaii and are as follows:

     .    The revision of the Workers' Compensation laws in
          Hawaii that would significantly reduce the WC
          premium.

     .    A reduction in property taxes by zoning retail
          facilities at a lower tax rate, rather than the
          highest and best use.

     .    Revision of Tort laws in Hawaii, thereby reducing
          the insurance required to defend oneself against
          frivolous law suits.

     Specific measures to reduce the independent dealer cost
     that applies to the petroleum industry would be:

     .    To deregulate the Petroleum industry in Hawaii,
          for example:  Rescind Chapter 486I and Act 238
          [Session Laws of Hawaii 1995].

     .    Government accepting the role of the facilitator,
          not [adversarial] to business.

     .    To assist the independent dealers in establishing
          a state tank fund that would provide remediation
          funds and facilitate underlying insurance
          coverage.  Small dealers are being forced out of
          business because of their inability to obtain
          insurance coverage to meet EPA regulations.

     .    To remove some onerous restriction from Weights &
          Measurements that are costly and encumbering to an
          independent dealer's operation.541 

	Aloha Petroleum:  Aloha Petroleum noted that while certain measures
could be adopted to assist dealers, including subsidies and loans, the
real issue is the change in consumer demand away from full-service
stations with repair facilities in favor of retail outlets with
convenience stores and other configurations:
	
     There are various methods that could be implemented to
     assist gasoline dealers with reducing the cost of doing
     business in Hawaii, such as lease rent subsidies or
     caps, or low interest loans to assist with
     environmental compliance.  However, these programs
     ignore the real problem which is consumer preference
     and changing market trends and they fail to recognize
     the fact that consumer buying habits have changed.
     Full-service gasoline stations with repair shops
     similar to those operated by dealers are becoming
     obsolete.  Consumers are looking for convenience and
     quick service.  Gasoline stations with convenience
     stores and/or fast food service have in many cases
     replaced most repair shops at gasoline stations.  Most
     gasoline dealers do not have the expertise and/or the
     equipment necessary to repair today's automobiles.
     Extended new car warranties require certified
     technicians to perform repairs.  Almost all of this
     business is now being done at car dealerships.  More
     government regulations won't solve this problem.  The
     business costs faced by dealers are the same as they
     are for any other business.  Government cannot protect
     a few at the expense of the majority and the
     consumer.542 


     Oil Companies

	Shell:  Reduced insurance costs, taxes, and environmental costs would
assist independent dealers:
	
     -    Avoid placing additional costs on the dealer, such
     as requirements to collect premiums for automobile
     insurance or to pay for mandatory medical insurance for
     employees;

     -    Reduce real estate and ad valorem taxes;

     -    Relax any environmental regulations that are not
     cost-effective because they provide a low benefit
     relative to their high cost.543 

	BHP:  BHP believed that it would be more appropriate to review
assistance to all businesses in the State, rather than subsidizing only
one particular interest group that is unable to meet the needs of
consumers without assistance:
	
     Independent or open dealers, the "true" mom and pop
     businesses that service rural or outlying areas,
     usually own or lease their own land and hold title to
     the assets on the property.  It is these individuals
     that are most in jeopardy of closing due to increasing
     environmental, insurance and labor costs.  Based upon
     estimates developed by the Whitney Leigh Corporation as
     of 12/31/94, open dealers represent approximately 40%
     of the total number of dealers in the state, and are
     more heavily concentrated on the neighbor islands.

     It is important to note that any measures instituted to
     reduce the cost of conducting business for such dealers
     would result in subsidizing, in some form or fashion, a
     business that is no longer capable of independently
     meeting the needs of the consumers.  If consumers no
     longer patronize that establishment and purchase their
     goods or services elsewhere, it would be illogical to
     take that same consumer's taxes to support that
     business.  If it is governments's desire to support
     this special interest group, it would be appropriate
     that recommendations be obtained directly from the
     independent dealers, as they are in a better position
     to clearly and accurately discuss their issues.

     If measures are to be consistent with the desires of
     the consumers of the State of Hawaii, then the list
     should consist of items which support all business in
     Hawaii, and not only independent dealers.  These
     measures could consist of tax credits, changes to land
     use regulations, workers' compensation laws, relief
     from certain environmental regulations and rising land
     costs, and expediting of the permit application
     process.

     While some of these measures may assist the independent
     dealer, they do not guarantee the success of any
     business.544 

	Chevron:  Chevron maintained that all government regulations should
be reviewed under a cost-benefit analysis to minimize costs; lessee
dealers are already overprotected under federal and state laws and do
not require further protections provided by lease rent and other
special interest legislation:
	
          This item appears to cover two unrelated subjects.
     First, it appears to relate to minimizing the impact of
     regulations on independent dealers.  Chevron believes
     that all governmental regulations should be reviewed
     using cost/benefit analysis and that care should be
     taken that the regulations achieve their desired goal
     in such a manner as imposes the minimum costs on the
     regulated community and through that community on the
     consumer.

          The reference to "lease rent" suggests that the
     item may also be asking about special interest
     legislation to protect lessee dealers, i.e., reducing
     the rents that might be charged to such dealers.  It is
     hard to imagine why service station dealers, who are
     already the most protected class of middlemen in the
     nation (see for example, the federal Petroleum
     Marketing Practices Act, 15 U.S.C. §2801, et seq.;
     Hawaii Revised Statutes, chapter 486H), should be
     singled out for rent protection.  Further, because
     service station rents are an element of competition
     between oil companies, service station rents are
     significantly below those typically charged for other
     commercial properties of equal value.  For example,
     during 1994, rents paid to Chevron by its lessee
     dealers did not even cover Chevron's out of pocket
     costs for rents paid to third parties, taxes and
     maintenance, let alone cover depreciation or provide a
     return on Chevron's $100 million investment in service
     stations leased to dealers in Hawaii.  Any level of
     rent control which could constitutionally be imposed
     would still permit rents to dealers at a level double
     those typically charged by Chevron to its lessee
     dealers in Hawaii.545 


     Discussion

	The responses to question (14) include a number of measures to aid
independent dealers as well as small businesses generally, including
workers' compensation and tort law reform, tax reductions, relief from
paying employees' unemployment and mandatory medical insurance, and
other proposals to reduce government bureaucracy and the high costs of
doing business in Hawaii.546  These proposals are generally consistent
with the desire of many small businesses to reduce government
regulation which impacts more heavily on them than on larger firms.547
This section focuses on the two items specifically mentioned in
question (14), namely, environmental regulations and lease rent, and
examines proposals to reduce the cost of conducting business for
independent dealers in these areas.
	
	
	Environmental Regulations
	
	As noted in chapter 3, Miklius and LaCroix (1993) argued that the
cost of complying with environmental regulations "already has been and
will continue to be the single most important factor affecting gasoline
marketing."548 Environmental regulations include underground storage
tank (UST), financial responsibility, environmental cleanup, and other
environmental regulations.
	
	(1)  UST regulations.
	
	Federal Environmental Protection Agency (EPA) regulations regarding
USTs specify requirements for new tank installations, upgrading
existing tanks, and installation of leak detection systems.549  Many
UST owners in Hawaii are faced with increased costs to replace or
upgrade their older tanks.550  In a 1990 study, the Hawaii Department
of Health found that the majority of tank owners and operators in the
State--approximately fifty-seven percent--fall into the category of
small business enterprises.551 The Department noted that smaller firms
are more likely to have older tank systems that have an increasing
likelihood of leaking, yet are inherently less likely than large firms
to have the financial resources to upgrade their tank systems or to pay
for corrective action.  Many of these small owners and operators,
moreover, are located in rural areas and have older, unprotected steel
tanks.552
	
	The Department further noted that Hawaii's unique hydrogeology
aggravates the UST problem.  Generally, Hawaii's high ground-water
table and highly permeable soil in the areas where most USTs are
located poses a greater health and environmental risk in the event of a
UST release than in other areas with a deeper ground-water table.553 
However, the Department found that health risks may be moderated to
some extent by the selective sourcing of drinking water wells in areas
that are distant from USTs and commercial development.554
	
	Miklius and LaCroix cite two reasons why the high cost of complying
with UST regulations affected open dealers and independents more
severely than lessee dealers.  First, open dealers and independents had
to incur these costs immediately, whereas at the lessee dealer-operated
stations, complying with the EPA regulations was the responsibility of
the lessor.  In the long run, the lessors would seek to recoup these
investments through higher lease rents.  Second, open dealers and
independents encountered difficulties in securing loans to upgrade
their facilities.  Many financial institutions had decided to stop
making loans to these retailers because of a court decision that
exposed lenders to liability for leaks, environmental damage, and
third-party claims.555
	
	Without access to credit, many open dealers and independents were
unable to comply with the UST regulations and were forced to close
their stations.  According to the EPA's own estimates, approximately 64
percent of small retail firms and 40 percent of single station owners
were expected to at least experience temporary financial hardship,
while approximately 30 percent of single service stations and 25
percent of small retail firms were expected to close or file for
bankruptcy.  Miklius and LaCroix further note that the UST compliance
costs reinforced the trend toward large volume stations; according to a
University of California study, a station selling 25,000 gallons per
month would need 6.6 cents per gallon to recover the cost of tank
replacement, while an outlet selling 300,000 gallons would require only
0.6 cents per gallon.556
	
	(2)  Financial responsibility regulations.
	
	Under EPA regulations, marketers are required to show that they are
financially able to pay for clean-up of an underground storage tank
leak or spill, including correcting environmental damage and
compensating third parties for property damage or personal injury. 
This can be accomplished by demonstrating the ability to manage at
least $1,000,000 in costs resulting from tank leaks.557  Financial
responsibility requirements may be met through one of several different
means, including self-insurance; pollution liability insurance;
guarantees, surety bonds, or letters of credit ensuring their ability
to pay; coverage under state-required mechanisms or state trust funds
approved by the EPA; or an owner-established trust fund.  While large
firms can generally meet the requirements through self-insurance,
smaller firms must generally purchase insurance or obtain coverage
under a state trust fund to demonstrate financial responsibility.558
	
	Because of potentially high liability, private liability insurance
is expensive, and costs have been rapidly increasing. In order to
assist marketers, twenty-seven states have established trust funds that
have been approved by the EPA which help to lessen the impact of high
clean-up costs, and another ten state funds are being reviewed for
compliance with EPA guidelines.  Hawaii, however, has not established
such a fund.559
	
	(3)  Cleanup and other environmental regulations.
	
	Additional costs must also be incurred when a gasoline station is
closed.  EPA regulations require removal of USTs and an environmental
investigation, costing a minimum of $15,000 and $7,000, respectively. 
If soil contamination is found, remediation must meet specified
standards; in some cases, contaminated soil must be transported to the
mainland for appropriate treatment.  Station closing costs may exceed
$1,000,000, depending on the nature of the contamination.560 Delays may
also force stations to close for as long as a year before their leases
expire, adding a year's lease rental to the closing costs.561  Other
proposed environmental regulations include the adoption of vapor
recovery systems and production of oxygenated and reformulated motor
fuels.562
	
	(4)  Small business assistance.
	
	Act 317, Session Laws of Hawaii 1990, amended chapter 342L, Hawaii
Revised Statutes (underground storage tanks) to:  (1) require the
Department of Health to perform a study to establish an actuarially
sound financial assurance fund to help UST owners and operators meet
federal financial responsibility requirements that were adopted to
ensure adequate funding to pay for the clean up of future releases and
associated liability costs, and (2) require the Department to establish
a financial responsibility guarantee fund.563  The Department's study
determined that Hawaii could develop its UST financial responsibility
program using a combination of four different types of programs,
namely, financial assurance funds, cleanup funds, reinsurance programs,
or loan programs:564
	
     A financial assurance fund is designed to supplement or
     provide insurance coverage for corrective action, third-
     party liability costs, or both, and may be either a full or
     partial coverage fund.  The study noted that general fund
     revenues, a gasoline tax, tank fees, and bonds could be used
     to fund the various phases of a financial assurance program.

     A cleanup fund provides the State with a pool of money from
     which to pay for cleanups when an owner or operator is
     insolvent, cannot be located, or refuses to cooperate in a
     cleanup, but does not assist tank owners and operators in
     complying with state and federal financial responsibility
     requirements.

     A reinsurance program is designed to reinsure commercial
     insurance carriers who agree to insure UST owners and
     operators, and pays insurance carriers for some portion of
     their losses under UST policies.565 

     A loan program is designed to help tank owners and operators
     meet the costs of regulatory compliance, including the costs
     of tank replacement, upgrading, and closure.

	The Department's study discussed two hypothetical loan programs to
assist small businesses in Hawaii that were similar to existing small
business loan programs in the State.  The first program would provide
direct loans for small business UST improvements.  Small business
owners are defined as any owner or operator owning only one UST
facility.  Several other states also have direct loan programs for tank
upgrade or replacements, including Rhode Island, New Jersey, Maine, and
Vermont.  Some advantages of this program is that it increases
environmental protection by assisting small businesses, and the program
would protect Hawaii's petroleum distribution network, particularly in
small areas.  However, the State would need to capitalize the program
with a large pool of funds, since default rate on loans is likely to be
high, assuming that the State would be making risky loans that a
private lender would not have made.  The State would also face an
administrative burden from evaluating loan applications.566
	
	The second hypothetical program is the small business UST improvement
loan guarantee program, under which the State guarantees a private
lender that the State will pay eighty percent of the outstanding loan
balance in the event of a loan default by the tank owner or operator. 
Other states with similar programs are Iowa, Oregon, California, and
South Dakota.  As with the first hypothetical program, the primary
beneficiary would be small businesses.  Since financing for these
businesses would be available at affordable interest rates, future
environmental protection would be increased by reducing the risk of
tank releases.  Although the State would not need to capitalize the
program with a large pool of funds as in the first hypothetical, the
State would need to capitalize a reserve fund to be used in the event
of a loan default.  In addition, depending on the funding source used,
large businesses would be effectively subsidizing small businesses to
upgrade or replace their tanks.567
	
	In 1991, the Legislature changed the proposed financial
responsibility guarantee fund to a loan program, under which the
Department of Health was to collect fees to make loans to businesses to
replace, upgrade, close, take remedial action relating to, and clean up
releases from, their underground storage tanks.  Fees were placed into
a separate account of the Hawaii capital loan revolving fund.568 
However, this program was repealed on January 1, 1994.569
	

     Lease Rent

	Lease rents in Hawaii have increased significantly since 1981.  This
increase was due to several factors.  Part of the rent increase was
attributable to adjustments in distortions introduced by federal price
and allocation controls in the 1970s. From 1973 to 1981, rents were
either frozen or constrained.570 Rental increases were also due in part
to the manner in which they were collected.  Historically, rent paid by
lessee dealers was apportioned between a percentage of the dealer tank
wagon (DTW) price and a lump sum based on the volume of gasoline sold.
However, in the 1970s, many refiners moved from volume-based to flat
rents by introducing higher lump sum payments.  In 1981, flat rents
were replaced with variable rent programs.  Miklius and LaCroix argued
that part of the increase in rents may therefore represent a reduction
in the portion of the rent formerly included in the DTW price.571
	
	Changes in rental policies also included such factors as inflation
and the desire to create volume incentives.572  In addition, the DOE
(1984) noted that changes in rental rates may have reflected a desire
to avoid prosecution under the antitrust laws:  "[B]y taking the rental
charges out of the tank wagon price and putting it into a lump sum
payment, the refiner ran less risk of running afoul of the
Robinson-Patman Act.  The latter does not apply to rents, but does
govern the retail price at which the product may be sold."573
	
	Miklius and LaCroix note that a substantial portion of increased
rentals reflects the increased value of lands in Hawaii, which have
risen beyond many people's expectations.  In addition, land values may
be exaggerated by current appraisal methods which use comparables
financed with Japanese funds during the 1989-1990 "Japanese bubble
period" in the renegotiation of land leases.  In some cases, land
values established for purposes of renegotiating leases has exceeded
the earning power of actual or potential uses of land, forcing
businesses to close.  Land lease increases have already forced the
closure of several gasoline stations, and, since many leases are up for
renegotiation in the near future, more closures are expected.574 In
addition, property owners may decide not to renew a lease because the
land can be rented for investment purposes at a rate of return that is
much higher than a gasoline station; this is often the case when the
station is located in a business district, shopping center, or downtown
area:575
	
     ... Many of Oahu's service stations were built in the
     1960s on leasehold land.  Their 25- and 30-year leases
     are coming up for renewal and renegotiation.  Lessees
     face huge lease increases. ...  In the past five years
     Chevron has closed seven stations.  Five of those were
     on Oahu and all were on leased land.

          In some cases, landlords refuse to renegotiate.
     They simply want the property back.  Last year Shell
     closed its station at Pensacola and Kapiolani because
     it lost its lease.  "The owners wanted to use the
     property for something else..." ...

          The underlying real estate is simply too valuable-
     -even when dealers or the oil companies own the land
     themselves.  For example, Unocal recently closed its
     station at Beretania and Bishop streets.  Once the site
     is cleaned up, Unocal plans to put the property on the
     market.

          ... Downtown fee simple property fetches from $500
     to $700 a square foot.  Unocal has plans to close four
     Honolulu stations that sit on land it owns.  The
     company has closed 11 stations in recent years.  In the
     past decade the company's market share in Hawaii has
     fallen from 29 percent to 13 percent.576 

	Proposals to assist independent dealers with lease rent payments may
lead other financially distressed businesses to request similar relief
from the Legislature.  Limiting such assistance to independent dealers
may also be considered unfair favoritism of only one type of small
business, since many other small businesses are faced with similar
lease rent problems. Moreover, opponents may argue that this type of
government assistance supports an increasingly inefficient form of
business, especially in view of changes in consumer preference away
from full-service gasoline stations with repair facilities in favor of
retail outlets with convenience stores.
	
	However, if legislators find that independent dealers are in greater
need of protection than other small independent businesses in Hawaii,
and that their protection is in the public interest, such assistance
may include a lease rent assistance program, in the form of a
low-interest loan fund to assist in lease payments; a property tax
reduction by rezoning certain retail facilities at a lower tax rate;
and other subsidies, including rent caps or some other form of rent
control. Alternatively, legislators may wish to provide such assistance
more broadly to all small businesses facing lease rent problems, or
only to those small businesses engaged in some form of energy
production.
	

		Endnotes	Chapter 15 Table of Contents