House Resolution No. 174, H.D. 2, contains numerous proposals to
regulate Hawaii's petroleum industry. These proposals, as discussed in
chapters 4 through 15 generally offer a regulatory approach by
considering increased government intervention, primarily in the
operation of the downstream facilities of the major oil companies doing
business in Hawaii, apparently to ensure both the viability of
independent dealers and lower gasoline prices.  As will be discussed
later in this chapter, however, accomplishing both of these goals
simultaneously may not always be feasible.
	
	This chapter explores alternatives to regulation that are not
specified in the Resolution but fall within its general subject matter.
 This chapter also examines the broader issue of whether, and under
what circumstances, the government should intervene in Hawaii's
petroleum industry.  The regulatory options specified in the Resolution
are obviously not the only possible means to resolve the problems
presented, nor should legislators feel limited to a consideration of
only those options simply because they are stated in the Resolution.
While the options presented in this chapter are by no means exhaustive,
they suggest several alternate ways to address the issues raised in the
Resolution.  Each of the choices presented requires a determination of
policy on the part of the Legislature.  This chapter, however, makes no
attempt to resolve these policy issues.  Although the survey conducted
pursuant to the Resolution has been helpful in ascertaining the views
of representatives of Hawaii's petroleum industry, the survey responses
in themselves do not form an adequate basis upon which to make any
significant policy recommendations.
	
	In particular, part I of this chapter briefly summarizes the
regulatory framework proposed by United States Supreme Court Justice
Stephen Breyer, including a discussion of justifications for regulation
and less restrictive alternatives.657  Part II reviews other factors
impacting on legislative options, including energy, equity, political,
and other policy considerations, and explores some of the options
available to Hawaii's lawmakers other than those presented in the House
Resolution in the context of the framework discussed in part I.
	

               Part I - Regulatory Framework

	Justifications for Regulation.
	
	In his framework for analyzing economic regulation, Breyer (1979 and
1982) focused on the justifications for, rather than the causes of,
regulation, assuming that regulation is justified "only if it achieves
without too great a corresponding cost policy objectives that a
consensus of reasonable observers would consider to be in the public
interest."658  In general, the justification for government
intervention in the marketplace arises out of the market's inability to
handle certain structural problems.  While "other rationales are
mentioned in political debate, and the details of any program often
reflect political force, not reasoned argument ... thoughtful
justification is still needed when programs are evaluated, whether in a
political forum or elsewhere."659  In particular, Breyer found that one
or more of the following rationales are typically given as
justifications for government intervention in the case of market
failure:
	
	(1)  Control of monopoly power.  As discussed in chapter 9, this
rationale is based on the need to control the exercise of power by a
natural monopolist:660  "Where economies of scale are so great as to
make it inefficient for more than one firm to supply a product, that
firm, if not regulated, would increase its profits by restricting
output and charging higher than competitive prices."661  While the
justification for regulating the natural monopolist is aimed primarily
at allocative efficiency, other equitable considerations come into
play, "such as the need to secure a fairer income distribution and
distrust of the social and political (as well as the economic) power of
the unregulated natural monopolist."662
	
	(2)  "Rent" control.  Sudden increases in price may let persons
holding interests in a commodity to earn windfall profits as a kind of
economic "rent".  For example, the owners of large stocks of oil earned
large rents when the price of oil was raised by OPEC in the early
1970s.  While rents are not ordinarily regulated, there is often a
demand for regulation when rents are great in amount and do not reflect
a particular talent or skill on the part of producers.  Nevertheless,
"[t]o discourage the earning of rents is undesirable, for it would
impede the search for efficiency."663
	
	(3)  Correcting for "spillovers".  Regulation is often called for
to compensate for the fact that a product's price does not reflect the
true costs to society of producing that product.  The differences
between social costs and unregulated price are spillover costs or
benefits, also known as externalities.  For example, "[i]f a train
emits sparks that occasionally burn the crops of nearby farmers, the
cost of destroyed crops is a spillover cost imposed upon the farmers by
those who ship by train--so long as the shipper need not pay the farmer
for the crop lost."664
	
	(4)  Correcting for inadequate information.  Consumers must have
sufficient information to evaluate competing products to allow
competitive markets to function well. This information is itself a
commodity, and regulation may be used to correct for inadequate
information or lower the costs to consumers of obtaining information.
"In particular, government action may be called for when suppliers seek
to mislead customers deliberately, and consumer use of current remedies
is expensive or impractical; when consumers cannot readily evaluate the
information available ...; or when the market on the supply side is
insufficiently competitive to supply all the information demanded."665
	
	(5)  Excessive competition.  This justification, which is often
advanced for the regulation of airlines, trucks, and ships, assumes
that if prices fall too low, firms will go out of business and product
prices will be too high.  The rationale for regulation may refer to the
possibility of predatory pricing; however, "[w]here predatory pricing
might exist, it can be dealt with through application of the antitrust
laws."666
	
	(6)  Other justifications.  Other possible justifications for
regulation include unequal bargaining power, rationalization, "moral
hazard", paternalism, and scarcity:
	
     (a)  Unequal bargaining power.   This justification is
     often used in support of special legislation to assist
     smaller industry participants:  "The assumption that
     the 'best' or most efficient allocation of resources is
     achieved by free-market forces rests in part upon an
     assumption that there is a 'proper' allocation of
     bargaining power among the parties affected.  Where the
     existing division of such bargaining power is
     'unequal,' it may be thought that regulation is
     justified in order to achieve a better balance."667 

     (b)  Rationalization.  Regulation is occasionally
     justified "on the ground that, without it, firms in an
     industry would remain too small or would lack
     sufficient organization to produce their product
     efficiently.  One would ordinarily expect such firms to
     grow or cooperate through agreement, and to lower unit
     costs.  But social or political factors may counteract
     this tendency.  In such circumstances, agencies have
     sought to engage in industry-wide 'planning.'"668 

     (c)  "Moral hazard" describes "a situation in which
     someone other than a buyer pays for the buyer's
     purchase.  The buyer feels no pocketbook constraint,
     and will purchase a good oblivious to the resource
     costs he imposes upon the economy.  When ethical or
     other institutional constraints or direct supervision
     by the payer fail to control purchases, government
     regulation may be demanded."669  Breyer cites rising
     medical costs as the most obvious current example of
     this situation.

     (d)  Paternalism.  The idea that "the government
     supposedly knows better than individuals what they want
     or what is good for them" may be used to justify
     government intervention on the grounds that despite the
     availability of sufficient information to enable
     marketplace decisions, consumers cannot be trusted to
     evaluate the information correctly or may make
     irrational decisions.670 

     (e)  Scarcity.  This rationale may be used to justify
     regulatory allocation due to sudden supply failures:
     "to rely on price might work too serious a hardship on
     many users who could not afford to pay the resulting
     dramatic price increases, as in the case of the Arab
     oil boycott."671  However, "[r]egulation on the basis
     of this justification reflects a deliberate decision to
     abandon the market, because shortages or scarcity
     normally can be alleviated without regulation by
     allowing prices to rise."672 


	Alternatives to Regulation.
	
	Breyer noted that nearly all regulatory activities may be grouped
into the following seven types (or combinations of these types):  (1)
cost-of-service ratemaking; (2) historically-based price setting; (3)
allocation in accordance with a public interest standard; (4)
historically-based allocation; (5) standard setting; (6) individualized
screening; and (7) disclosure requirements.673  As a policy matter,
however, Breyer argued that before using regulation, policy makers
should be certain that there are "serious defects" in the unregulated
market, and that classical regulation should be looked upon as "a
weapon of last resort"; in some instances, the problems accompanying
regulation may be deemed sufficiently serious as to justify adopting a
"least restrictive alternative" approach to regulation.674  Policy
makers should investigate the facts of each individual case, weighing
the policy alternatives and selecting those governmental interventions
or non-interventions that are best suited to that situation.675
	
	Among the types of less restrictive alternatives to regulation
discussed by Breyer are the following:676
	
	(1)  Disclosure.  As discussed in chapter 13, disclosure legislation
may be enacted for economic purposes--typically to assist buyers in
making more informed choices--as well as noneconomic ones, for example,
to help enforce certain penal laws or provide greater information to
assist policy makers in making planning decisions affecting the public
welfare.677
	
	(2)  Taxes.  While taxation, which usually seeks to raise revenue
or encourage certain conduct through special credits or deductions, has
"only rarely been used specifically to substitute for regulation", it
may nevertheless be used as a supplement to or substitute for
regulation.  "Taxation should be considered where regulation is
intended to transfer income, such as when cost-of-service ratemaking is
used to control rent or windfall profits earned by those who control
scarce, low-cost sources of oil, natural gas, or housing."678 Taxes may
also deter pollution and other forms of undesirable conduct, thereby
substituting for other forms of regulation.  However, substituting
taxes for other types of regulation nevertheless introduces problems;
for example:  "Using an excise tax instead of cost-of-service
ratemaking to capture excess profits requires the administrator to
specify the bounds of the tax.  If the upper bound is based on
production costs, then the regulator must decide which market price to
use.  Employing a tax instead of standard setting to control spillovers
requires the administrator to determine both the level of the tax and
the amount of 'taxable conduct.'"679
	
	(3)  Creation of marketable property rights.  In a system of
market-based incentives, a limited number of rights to engage in
certain conduct, such as pollution, are established; these rights are
then bought and sold in a market.  "Eventually those willing to pay the
most for the privilege of polluting, usually those for whom the cost of
avoiding or limiting the conduct would be the greatest, will buy up the
rights.  Since the number of rights is limited, the regulator knows in
advance how much pollution will be emitted."680  However, a regulator
will "not know the price at which firms will find it cheaper to install
control equipment than to buy rights to pollute, and, unlike a tax
system, a system of marketable rights does not permit estimation of the
pollution control costs imposed upon the firms."681  Breyer also noted
that the use of marketable rights as a substitute for classical
regulation was not limited to environmental regulation or spillovers,
but "may be used to allocate whenever there is a shortage, where
(perhaps because of regulation) no market presently exists, or when it
is not necessary that allocation of the rights be determined on a
public interest or other nonmonetary basis."682
	
	(4)  Changes in liability rules.  In certain areas, such as
environmental pollution and accident safety, it has been suggested that
making tort law changes may encourage the production of safer products
or greater use of pollution-free processes.  These proposals would
increase the risk of liability, as well as the cost, for those who are
best able to weigh the costs against the benefits:  "This principle is
likely to place costs upon the party best able to avoid them, or, where
this is unknown, on the party best able to induce others to act more
safely."683  Imposing strict tort liability on the most efficient
cost-avoider, however, may not be sufficient:  "The costs of using the
courts are high, and those harmed may have inadequate incentive to
bring suit.  Results are likely to vary from court to court, at least
when damages are measured.  Finally, court decisions inevitably reflect
moral and legal considerations that may conflict with the efficiency
considerations that motivated the proposal for change."684
	
	(5)  Bargaining.  As an alternative to regulation, bargaining has the
advantage of achieving consensus; difficulties arising out of
regulation's adversary mode are more often avoided.  Bargaining also
offers a greater opportunity to maximize the benefits each party can
receive, and makes it easier to adapt different rules to special needs,
minimizing enforcement by making voluntary compliance more likely.  On
the other hand, there must be some device to force parties to reach an
agreement, the intended beneficiaries may not be organized or
sufficiently strong, thereby allowing one party to unilaterally impose
its terms on the weaker group, and bargaining may injure those parties
who are not represented.685  Bargaining may work well as a substitute
or supplement to regulation "when the strength of the parties is
roughly equivalent; when decentralization, compromise, and the ranking
of priorities is important; when the effect upon nonrepresented parties
is not significant; and when agreement itself and not its precise
substantive details is of particular importance."686
	
	(6)  Unregulated markets policed by antitrust. Unregulated markets
are subject to antitrust laws, which are designed to maintain a
"workably competitive" marketplace; in particular, "antitrust laws seek
to create or maintain the conditions of a competitive marketplace
rather than replicate the results of competition or correct for the
defects of competitive markets.  In doing so, they act negatively,
through a few highly general provisions prohibiting certain forms of
private conduct."687  While Bork (1978) and other critics argue that
antitrust is a form of government regulation, "[o]nly rarely do the
antitrust enforcement agencies create the detailed web of affirmative
legal obligations that characterizes classical regulation."688 
Antitrust laws generally proscribe certain forms of conduct by private
firms, and are enforced either in court or before the Federal Trade
Commission.689  Breyer noted that antitrust is more likely to serve as
an effective substitute for regulation when the market defect is
predatory pricing, which is prohibited by antitrust laws as a form of
anticompetitive market behavior.690
	

	Matches of Regulatory Ends and Means.
	
	In considering market defects, classical forms of regulation, and
alternatives to regulation in a number of different industries, Breyer
found that regulatory failure sometimes resulted from the failure to
correctly match the appropriate regulatory tool to the perceived market
defect.  He proposed the following tentative framework of regulatory
reform that policy makers may consider in preventing mismatches:

       Problem                          Tentative solution

Natural monopoly                   Cost-of-service ratemaking;
                                   nationalization

Rent control (excess profits)      Taxes; deregulation

Spillovers                         Marketable rights; bargaining standards
                                        

Excessive competition              Deregulation; antitrust

Inadequate information             Disclosure; screening;
                                   standard setting; bargaining

Other (moral hazard, unequal       Incentive-based regulation;
bargaining power, paternalism)691  standards
 


               Part II - Application of Framework


     Justifications for Regulation.

	The framework in the preceding part may be useful as a guide to assist
state lawmakers in deciding whether or not to impose some form of
regulation on participants in the petroleum industry, or to repeal or
extend existing regulations.692  This part reviews some of the options
available to state policy makers in light of that framework, bearing in
mind that often more than one justification may be used to support
classical regulation, which should nevertheless be considered "as a
weapon of last resort" and only after reviewing less restrictive
alternatives to achieve the same objectives without the creation of
additional bureaucracy and potential loss of competition in the
marketplace.
	
	Government intervention in Hawaii's wholesale and retail gasoline
markets presupposes flaws in those markets.  With respect to Hawaii's
wholesale markets, the Attorney General has identified the following
anticompetitive defects:

          The structure of the wholesale gasoline markets in
     Hawaii is not conducive to competition.  (1)  There are
     only two refiners in the market and only five
     significant wholesalers.  (2)  The market is dominated
     by the two refiners, Chevron and BHP.  (3)  The
     product, gasoline, is fungible.  Additives and brand
     names don't really make a difference.  (4)  The demand
     is inelastic.  A relatively small addition to the daily
     supply of gasoline would drive the retail price down
     substantially.  (5)  Entry and exit barriers are
     relatively high.  The principal barrier to entry is the
     high sunk cost of new storage relative to the storage
     capacity of the incumbent oil companies.  (6)  Price
     information is not freely available.  (7)  Production
     capacity generally exceeds demand.  And, (8) storage
     capacity generally falls short of the demand.693 

	Similarly, with respect to Hawaii's retail gasoline markets, the
Attorney General found that Hawaii's high entry barriers, inelastic
demand for gasoline, and other factors, combined with the fact that
Hawaii's markets are highly concentrated oligopolies, all discourage
price competition.694  However, the Attorney General noted that "it is
not necessarily the inelasticity of demand for gasoline in Hawaii that
keeps Hawaii from being a competitive market.  The question is whether
it costs less to bring in mainland gasoline than to make it in Hawaii. 
The Department's information is that it does cost less."695  Although
the Attorney General's economist found no evidence that the incumbent
oil companies have been earning profits in excess of competitive
levels, and the Federal Trade Commission's Bureau of Competition
concluded that exchange agreements were, on balance, procompetitive,
the Attorney General nevertheless argued that the use of exchange
agreements by the incumbent oil companies keep Hawaii's gasoline
markets from being competitive.696
	
	Do the defects in Hawaii's wholesale and retail gasoline markets
necessitate government intervention, or in the case of retail
divorcement, continued regulation?  In reviewing Hawaii's markets697 in
the context of the types of market failure discussed by Breyer and
typical justifications for classical regulation, the survey
participants presented divergent views as to what types of government
intervention are required, if any, to make these markets more
competitive:

     (1)  Natural monopolies.  Chapter 9 reviewed competing views
          as to whether the oil industry is a natural monopoly,
          and questioned the need for public utility regulation.
          The fact that no state currently regulates that
          industry as a public utility, however, appears to weigh
          more strongly on the side that the industry is not
          generally considered to be a natural monopoly, or at
          least that the benefits of regulation are outweighed by
          the disadvantages of doing so at this time.

     (2)  Rent control (excess profits).  The Attorney General
          determined that through 1992, Hawaii's refineries have
          not been earning profits in excess of competitive
          levels.698  The Attorney General believes, however,
          that the absence of extraordinary profits may be for
          the purpose of protecting the investments of the
          incumbent oil companies in the State, i.e., to prevent
          the importation of inexpensive mainland gasoline into
          Hawaii, which could increase their losses and force
          them out of business.

     (3)  Spillovers.  Both negative and positive spillovers have
          been reviewed.  On the one hand, liability concerns
          with respect to leaking underground storage tanks and
          oil spills may deter entry into Hawaii's markets.  As
          noted by the Attorney General:  "[E]nvironmental
          concerns may effectively prohibit the construction of
          new service stations in many areas.  The potential
          risks of environmental liability make the purchase of
          existing stations by anyone but major oil companies
          unlikely.  And, the risk of a tanker spill, like that
          of the Exxon Valdez, and the liability of such a spill
          must not be underestimated."699  On the other hand,
          positive spillovers include substantial investments in
          Hawaii's economy and infrastructure, including the
          development of new technologies, by Hawaii's major oil
          companies.

     (4)  Inadequate information.  As discussed in chapter 13,
          while the need for Hawaii's Petroleum Industry
          Information Reporting Act of 1991 was questioned by
          some survey participants, that Act was enacted to
          provide policy makers with the information necessary to
          enable the State to "respond to possible shortages,
          oversupplies, and other market disruptions or
          impairment of competition" and "to develop and
          administer energy policies which are in the interest of
          the State's economy and the public's well-being."700
          Whether there is inadequate information in other areas
          of the industry to justify the proposal to require the
          filing of tariffs with the State listing all of the
          prices at which goods and services are offered for sale
          or lease by jobbers, manufacturers, and terminal
          operators, is a matter of debate among government and
          industry survey participants.

     (5)  Excessive competition.  Arguments were presented that
          the integrated oil companies operating in Hawaii's
          oligopolistic markets, together with the use of
          exchange agreements, the existence of high entry
          barriers, market inelasticity, and other factors,
          result in reduced competition in Hawaii's markets. The
          incumbent oil companies, on the other hand, argue that
          Hawaii's markets are in fact competitive.  No
          participant in this study, however, has argued that the
          State's gasoline markets suffer from excessive
          competition.701 

     (6)  Other justifications.  A primary justification for
          regulation appears to be that of unequal bargaining
          power.  Independent dealers generally assert this
          rationale to support special legislation, such as
          retail divorcement and open supply laws, to protect
          their viability.  The major oil companies contend that
          there are adequate safeguards in place, including the
          federal Petroleum Marketing Practices Act and federal
          and state antitrust laws, to protect independents from
          potential imbalances created by unequal bargaining
          power, and that there is no evidence of predatory
          pricing behavior on the part of the large oil
          companies.  Although the justification of scarcity was
          used in the past to enact federal allocation
          regulations, this justification has apparently been
          used with less frequency since the State is "between
          shortages" at this writing.


     Additional Factors.

	Other factors that are unique to Hawaii or which may have the effect
of skewing market expectations should also be considered in determining
whether government intervention in the State's gasoline markets is
justified.  As discussed earlier, these factors include the following:

     (1)  Geographic isolation.  Hawaii's location renders it
          uniquely vulnerable to supply problems.  Declining
          world oil reserves and potentially increased future
          dependence on unstable Middle East oil reserves will
          increase Hawaii's vulnerability.

     (2)  Dependency on oil.  As noted in chapter 3, Hawaii is
          the only state to import nearly all of its oil, making
          it "the most vulnerable state in the nation" to
          disruptions in the world oil market or rapid oil price
          increases, according to the State Energy Resources
          Coordinator.702 

     (3)  High entry barriers.  Land costs in Hawaii are among
          the nation's highest.  On average, the costs of doing
          business are also significantly higher than on the
          mainland.

     (4)  Environmental risks.  Oil shipment and handling present
          risks to the State's fragile marine habitats and
          coastal resort areas; the risk of oil spills may also
          deter entry into Hawaii's gasoline markets.  Hawaii's
          unique hydrogeology aggravates the underground storage
          tank problem.


     Energy Policy.

	Another important factor to be considered by state policy makers is
that government intervention, if deemed appropriate, be consistent with
state energy policy.  As provided in the State Constitution, that
policy has focused on energy conservation and the increased
self-sufficiency of the State.703  The Hawaii State Plan, as embodied
in chapter 226, Hawaii Revised Statutes, further identifies efficient
and dependable statewide energy systems, increased energy
self-sufficiency, and greater energy security as among the energy
planning objectives for Hawaii's facility systems, which include
transportation modes and infrastructure.704  In addition, section
226-103(f), Hawaii Revised Statutes, establishes the economic
guidelines for energy use and development that include the development
of renewable energy resources, improvement of energy conservation, and
the use of "energy conserving and cost-efficient transportation
systems."705
	
	Conservation has been described as "the cheapest, most immediate and
most effective method of reducing near term petroleum requirements."706
 While state energy policy encompasses conservation efforts with
respect to fuel oil and other petroleum products, however, the primary
focus of the House Resolution is on gasoline.707  More specifically,
this section focuses on energy conservation initiatives with respect to
vehicle transportation services, since gasoline is used in the
production of those services.708  The major user of fuel for
transportation purposes "is, of course, the automobile, which consumes
four times as much fuel per person per mile as public
transportation."709
	
	Several studies produced by state agencies in Hawaii have made a
number of proposals with respect to energy policy regarding vehicle
transportation and related areas to reduce the demand for and
consumption of gasoline, encourage energy conservation, and increase
state energy self-sufficiency.  The findings and recommendations made
in the following studies may be of assistance to state policy makers in
reviewing regulatory options:710
	
	(1)  Investigation of the Hawaii Gasoline Market (1974). This Hawaii
House of Representatives investigation called for additional energy
conservation and related measures to prepare the State for future
gasoline shortages.  These measures included the compilation and
maintenance of supply and demand data for petroleum products, the
development of alternate energy sources and greater efforts at
conservation, and the development of an efficient public transportation
system.711
	
	(2)  Managing a gasoline shortage in Hawaii (1981). Similarly, this
Hawaii Department of Planning and Economic Development study reviewed a
number of government policies and actions that may influence the demand
for gasoline.  These include measures affecting the cost of vehicle
ownership and operation, such as taxes on vehicle ownership, increased
parking charges, and increased taxes on gasoline; increasing the
availability of alternate modes of transportation such as increased bus
service, ridesharing, and facilities for bicycle and motorbike use and
parking; and measures affecting the need for private vehicle
transportation and frequency of use, such as flexible working hours and
an adjustment of school hours.712
	
	(3)  Hawaii integrated energy policy (1991).  This Hawaii Department
of Business, Economic Development, and Tourism report noted that
"Hawaiian drivers, like their mainland counterparts, are relatively
insensitive to marginal changes in the pump price of fuel.  Rather, the
demand for road fuels is influenced by the fuel characteristics of the
private vehicle fleet and by the availability of public
transportation."713  The report further found that Hawaii's cities
"cannot continue to support today's urban patterns, which require
workers to commute from their suburban homes to downtown work places. 
This problem is particularly acute in Honolulu, where there are few
alternative commuting routes and traffic congestion is rapidly
approaching critical levels."714  The final report made a number of
proposals with respect to transportation energy use, focusing on
measures to reduce the demand for petroleum-based fuels.715
	
	(4)  Telecommuting (1992).  This Legislative Reference Bureau study
found that "telecommuting", i.e., a working arrangement in which an
employee works at home, a satellite office, or telework center and
communicates electronically between that site and the employer's
principal place of business, reduces fuel consumption:  "Telecommuters
have the opportunity [of] reducing their fuel consumption by
forty-seven percent and reducing transportation costs by approximately
$100 annually. The fewer the miles driven, the bigger the saving for
the telecommuter, the bigger the reduction in fuel consumption, and the
less dependent the community is on oil imports."716
	
	Equity Considerations.
	
	State policy makers, in reviewing possible government intervention,
should also consider the issue of equity.  "The equity of market
operations ... plays an important role in decisions to regulate.  In
this context, equity refers to the distribution of rights in society
and of the income and wealth of its members."717  This issue, i.e., how
the benefits and burdens from rising energy prices should be
distributed across society, has been extremely controversial.
	
	Should government intervene to alter the impact of higher prices? 
Government intervention is often called for to define the distribution
of rights in society more precisely, or to change them or resolve
conflicts among them; to guarantee the distribution and availability of
services; and to prevent discrimination on the basis of race, gender,
national origin, or other qualities unrelated to merit.718  Government
intervention is also motivated by "the desire to assure a certain
threshold level of access to all, or to a particular subset of material
goods and services by all individuals."719  Low wage earners must
increasingly devote a larger percentage of their income towards energy
expenditures.720  On the other hand, others believe that government's
role in the marketplace should be more limited:

          Many economists, together with many political
     conservatives, believe that energy prices should be
     permitted to rise with little governmental restraint
     except perhaps for some buffering of the impact upon
     the poorest Americans.  Advocates of such governmental
     restraint believe that the nation's energy resources in
     the long run will be best allocated and achieve energy
     conservation most quickly when the consumer experiences
     such price escalation directly and swiftly.  According
     to this logic, the market reflects the true replacement
     cost of energy resources and far more clearly signals
     the consumer to conserve energy than would
     governmentally controlled prices.  Furthermore, critics
     of federal price management usually assert that
     government intervention in the energy marketplace
     brings with it new regulatory bureaucracies, costly and
     confusing masses of new regulations to interfere with
     the efficient production of energy by private
     corporations, special concessions to undeserving but
     politically powerful groups, and other social costs.721 

	What constitutes a "fair" distribution?  Conflicts over fairness raise
a number of concerns.  One area is "the extent to which energy
producers and their financial beneficiaries are imposing a justified or
unreasonable cost upon energy consumers."722  Another issue is how much
relief is appropriate for persons in different economic groups, i.e.,
"[a]t what point ... does an American individual or household qualify
as sufficiently distressed by high energy prices to merit public
assistance or other economic relief?"723  If public economic assistance
is merited, it may be further questioned how it should it be
compensated--through direct cash subsidies, tax concessions, or some
other means--and whether these strategies adequately encourage
recipients to conserve energy.  Moreover, if government decides that a
social group should receive relief from rising energy prices, that
relief implies a transfer payment from one group to another:

     [N]o matter how it may be disguised, someone has to pay
     for this economic compensation.  Proponents of energy
     transfer payments generally assert that those who
     profit unreasonably or excessively from energy price
     increases or those affluent enough to bear price rises
     comfortably should provide the revenue for such income
     transfers--in other words, energy importers, refiners
     and distributors, stockholders in energy corporations,
     other financial interests that profit from higher
     energy prices, and generally the rich.

          These economic interests are sure to argue that
     their profits are neither excessive nor unreasonable.
     In fact, many energy producers maintain that such
     profits are the necessary incentive to assure continued
     exploration and production.  And the middle- and upper-
     class citizens who might provide the tax revenues to
     underwrite a substantial portion of these transfer
     payments are likely to resist increased taxes for this
     purpose.  Indeed, many of these Americans are now
     seeking tax reductions through energy conservation. ...
     Thus, those who believe in fairness as a principle in
     energy pricing often become antagonists when allocating
     the economic cost of producing this fairness.724 

Finally, fairness is relative; it is argued that "[f]airness becomes
whatever policy settlement can be wrested from the multitude of
powerful, contentious interests zealous to shape price policy to their
own satisfaction.  In the end, fair is what government says it is."725


     Political Considerations.

	Political factors may also play a role in determining the extent of
government intervention.  Kalt (1981), for example, noted the
importance of this factor with respect to the United States Senate in
voting on petroleum industry regulation in the 1970s:

     [T]he bulk of post-embargo regulation of the petroleum
     industry has been explicitly designed, at the expense
     of allocative efficiency, as a mechanism for the
     redistribution of wealth from crude oil producers to
     crude oil refiners and refined product consumers.
     Specifically, it is found that Senate voting behavior
     is significantly related to the wealth interests of
     these constituencies and that the policymaking process
     has been captured to some degree by private interest
     groups.726 

	Those interest groups that are best able to organize and impose their
positions on lawmakers may have a strong influence on the course of
government intervention:

          [A]ny significant increase in energy prices sends
     virtually all socioeconomic sectors to government
     demanding action to buffer the impacts upon them,
     regardless of the ultimate desirability of those
     impacts. ...  The effect of this group mobilization may
     be inefficient, sometimes highly undesirable,
     distortions of energy supply and demand.  Thus,
     gasoline demand may be kept too high by government
     policies that prevent gasoline prices from increasing
     at a rate that reflects the true replacement cost of
     that fuel.  The consumer's interest may be served at
     the expense of national energy conservation.

          In summary, the political allocation of economic
     impacts from rising energy prices--the business of
     declaring what is fair--will be biased toward those
     social interests best able to mobilize and impose their
     definition of economic equity upon government
     policies.727 

	Lawmakers should also be cognizant of their own political motivations
in proposing petroleum-related regulations.  While Stone (1982)
acknowledged that "legislators do want to produce what they conceive to
be 'good' public policy.  And they do respond to the cross-pressures of
interest groups that seek ... policy outputs that will benefit or at
least minimally harm them....", he also noted that legislators may be
motivated in passing regulatory legislation for reasons that are
external to the substance the legislation seeks to address.728  For
example, a crisis may move regulatory issues to the top of the
agenda;729 interest groups may exert significant pressures; legislators
may be motivated by concerns about their own or fellow party members'
future electoral chances; and "a regulatory statute usually results in
a very small claim on the public budget, yet the political payoff to
legislators and interest groups may be substantial".730  Legislators
may also be attracted to "symbolic politics":  "Since it is virtually
costless or at least much cheaper for legislators to deal in grand
gesture and symbolic ambiguity rather than in the difficult and costly
process of accumulating data, weighing costs and benefits, and
assessing alternative means, they have a clear incentive to choose the
symbolic path."731  Lee (1991) is similarly critical of calls for
regulatory legislation in response to rising petroleum prices, arguing
that such proposals are mostly self-serving.732
	
	One means of ascertaining the concerns of Hawaii's gasoline consumers
is to increase public participation in decisionmaking regarding
proposed oil regulations.  Rosenbaum (1981) noted that while "[p]ublic
participation is no panacea for resolving all the problems that energy
decisions create for social equity" and often works to the advantage of
the best organized groups, increased public participation is
nevertheless a worthwhile goal:

          It is ... important that the development of future
     energy policies include a generous measure of public
     participation to maximize opportunities for
     consideration of the full range of likely consequences.
     It is particularly imperative that this citizen
     involvement extend not only to the processes of agenda-
     setting, policy formulation, or legitimation, but
     especially to the stage of policy implementation where
     the administrative process may otherwise obscure the
     nature and implications of energy decisions.
     Activities more suited to the administrative process-
     -such as public hearings, workshops, citizen advisory
     commissions, and community surveys--should play an
     increasingly important part in the implementation of
     new energy programs.733 


     Regulatory Options.

	If the Legislature determines that any of the rationales discussed
in part I of this chapter serve as compelling examples of clear market
failure justifying government intervention in Hawaii's gasoline
markets, House Resolution No. 174, H.D. 2, offers a number of possible
regulatory options available. Arguments for and against each of these
options have been reviewed in chapters 4 through 15.  These include the
following:

     .    Question (11) of the Resolution:  Vertical
          divorcement (divestiture)--prohibiting oil
          companies from owning, franchising, or leasing
          retail service stations to branded dealers.

     .    Question (15):  Retail divorcement--make permanent
          or extend the moratorium in section 486H-10,
          Hawaii Revised Statutes.

     .    Question (7):  Public utility regulation, either
          through the Public Utilities Commission or an
          independent petroleum regulatory commission.

     .    Question (8):  Price control regulations
          specifically focusing on petroleum products, such
          as below-cost, minimum-markup, anti-price-gouging
          laws, or strengthening Hawaii's below cost sales
          law for commodities and services generally in
          section 481-3, Hawaii Revised Statutes.

     .    Questions (1) and (2):  Open supply legislation
          permitting retail dealers to buy gasoline from
          more than one supplier.

     .    Questions (9) and (13):  Disclosure legislation
          requiring the filing of tariffs with the State
          listing all prices at which goods and services are
          offered, and assuring that the Public Utilities
          Commission carries out its statutorily prescribed
          duties in implementing chapter 486I, Hawaii
          Revised Statutes (the Petroleum Industry
          Information Reporting Act).

     .    Question (10):  Terminalling legislation
          prohibiting terminal operators with excess storage
          capacity from refusing to provide terminalling
          services.

     .    Questions (6) and (12):  Establishment of a public
          bulk gasoline terminal facility and a public
          petroleum products storage authority.

	Other proposed areas of regulation not specified in the Resolution
include uniform price legislation, which is intended to prohibit the
selective use of price discounts to assist particular outlets that are
competing with other low-priced outlets,734 and bans on self-service
dispensing and mandates of gasoline vapor recovery equipment.735 


     Alternatives to Regulation.

	If, on the other hand, the Legislature determines that the defects
in Hawaii's gasoline markets do not amount to complete market failure
but still require some form of intervention to avoid the harms produced
by an unregulated market, state policy makers should consider some of
the less restrictive forms of intervention discussed by Breyer before
resorting to classical regulation.  These include disclosure, taxes,
creation of marketable property rights, changes in liability rules,
bargaining, and an unregulated market policed by antitrust laws:
	
	(1)  Disclosure.
	
	Disclosure has already been reviewed in the discussion section of
chapter 13.  As noted by the Department of Business, Economic
Development, and Tourism, much of the supply and demand data requested
by chapter 486I, Hawaii Revised Statutes, is duplicative of that
already provided by the petroleum industry to the department under
chapter 486E, HRS.  A review of these statutes should be made to delete
the request for redundant material or otherwise consolidate the
requests for information.
	
	Moreover, if the Legislature decides that chapter 486I should be
implemented, sufficient levels of funding should be appropriated to
enable the Public Utilities Commission to effectively implement that
chapter.  Another less expensive alternative would be to consolidate
the State's data gathering efforts by transferring responsibility for
administering the law to the Department of Business, Economic
Development, and Tourism. However, even this course of action would
require additional appropriations.  Although the State is currently
experiencing a significant budget shortfall, increased funding of the
PUC--as well as the Department of Business, Economic Development, and
Tourism's energy office, the Department of the Attorney General, and
other offices as necessary to provide sufficient enforcement of state
energy and antitrust laws--may bring increased benefits in the form of
future savings from successful energy programs.736
	
	A recent report of the National Conference of State Legislatures
noted that state energy offices, especially in small states, are often
inadequately funded and understaffed. However, "[b]ecause of the
importance of maintaining accurate records and the potential benefits
that can accrue from effective energy legislation, it is proposed that
state energy offices receive funding appropriate to the potential great
future savings accruable from effective and successful energy
programs."737
	
	(2)  Taxes.
	
	This section focuses on taxes in two different contexts: first as
an incentive-based system, and second to discourage fuel consumption
and encourage energy conservation.
	
	A.  Incentive-based taxation.
	
	As discussed earlier, taxes may be used as a substitute for or
supplement to classical standard setting to address such problems as
"rent" control and excess profits.738  Breyer noted that this type of
regulatory tax has already been used in an attempt to regulate oil
prices, with mixed results.  A tax on windfall profits, implemented
following rapid increases in petroleum prices in the 1970s, was
initiated concurrently with the decontrol of domestic petroleum prices
and created complex tax formulas to produce approximately
$227,300,000,000 in new federal funds in the 1980s.739  Essentially,
domestic crude production was divided into "new" and "old" oil, and a
ceiling price was established for each based on rough estimates of
production costs.  A program was instituted that distributed
entitlements to refine old, cheap oil.740  Breyer noted that although
this system of oil regulation avoided the shortage problem, "no one
could say that it was successful.  The rents were transferred not only
to consumers but also to the sellers. And the lower price encouraged
increased importation of oil." This system avoided the problems of
classical regulation "but at the price of partial failure to achieve
the system's major objective:  the transfer of windfall profits to the
consumer."741
	
	Taxes might also be used in an incentive-based system to deal with
"spillover" problems.  Such a system could provide incentives to
encourage conduct "in a socially desirable direction, without freezing
current technology and while preserving a degree of individual
choice."742  With respect to environmental spillovers, such a system
seeks a balance between competing objectives, namely, a clean
environment and industrial production, while encouraging the
development of production processes that allow more of each.  Such a
system promotes efficiency by encouraging those who can eliminate
pollution the most cheaply to be the first to do so.  Generally, firms
operating in such a system would pay a tax multiplied by their actual
emissions, and would pay less to the extent that they curtail
emissions.  However, "without knowing the individual cost schedules,
technology, and demand facing every firm, no one can be certain in
advance to what extent firms will curtail emissions or choose to pay
the tax.  The cost ceiling is known; the future pollution level is
not."743  Also, while such a system may be considered more efficient
and flexible than classical regulation, other problems present
themselves, including problems in dealing effectively with the
relations between emission levels and pollution, as well as problems of
enforcement, administration, and political acceptability.744
	
	Such an incentive-based system, it may be argued, could be
implemented with respect to question (9) of the House Resolution, which
proposes to require manufacturers, terminal operators, and jobbers to
file tariffs with the State listing all of the prices at which they
offer goods and services for sale or lease. Assuming for the purposes
of this discussion that the Legislature adopts some form of tariff
requirement in accordance with that proposal, firms that exceed the
posted rates could be required to pay a tax based on a formula that
would increase their tax liability the more they exceeded the posted
prices.  Such a system would arguably induce those required to file
tariffs to adhere to those rates, or factor in such a tax as an
additional cost of doing business in Hawaii.
	
	The imposition of taxes (or fines) in this example, however, raises
some of the same issues discussed in using taxes to address
environmental spillovers.  First, while the upper bound of the tax, in
principle, is the free-market price of the product or service, that
bound must be fixed for purposes of calculation, while free-market
prices fluctuate.  The taxing authority must set an initial upper bound
and determine how to change that rate as prices fluctuate.745  Firms
that choose to exceed posted prices to maximize profits may also pass
on these extra costs to consumers in other areas.  Aside from problems
of enforcement and increased costs of administration, oil companies
might also argue that if the rationale for such a tax is to address the
problem of excess profits, the Attorney General's own finding--that the
incumbent oil companies are not earning profits in excess of
competitive levels--obviates the need for such a tax.
	
	B.  Taxes on fuel consumption.
	
	Taxes designed to discourage fuel consumption and encourage energy
conservation include motor fuel taxes, highway tolls and parking taxes,
and miscellaneous tax measures.
	
	Motor fuel taxes.  As noted in chapter 3, federal, state, and county
taxes already comprise a large portion of the price of gasoline at the
pump.  These taxes include a superfund (leaking underground storage
tank) tax; federal, state, and county fuel taxes; and state excise
taxes.746  Since the Honolulu market accounts for about three-quarters
of the total state market, the average county tax spread over the
entire state amounts to $0.14 or $0.15 per gallon.747  Although the
combination of these taxes may appear to be high, it has been argued
that lower gasoline prices may not necessarily be in the best long-term
interests of Hawaii's consumers, contrary to the assumptions expressed
in the House Resolution.  As discussed in chapter 6, Yamaguchi and
Isaak (1990) noted that lower fuel prices encourage overdependence on
imported oil and remove incentives to conserve energy and develop
alternative energy sources.748
	
	While consumers contend that prices have increased and are among the
highest in the nation, the fact remains that Hawaii's consumers still
pay some of the lowest prices for gasoline in the world.  Yamaguchi and
Isaak maintain that increasing or decreasing taxes may be the only
impact that state lawmakers may have on the price of oil:

          Consumers, of course, do not like higher prices,
     but the mid-80s showed how effective price-induced
     conservation can be.  Consumers are now complaining
     that prices have increased, but Hawaiian consumers
     still pay some of the lowest prices in the world.  It
     may be in the long-term interests of everyone in the
     state to increase prices (via increased taxes), rather
     than take measures to roll them back.  Unfortunately,
     this is likely to be a politically unpopular move--and,
     like most needed but politically unpopular moves in the
     United States, it is unlikely to occur.  It took years
     of steadily worsening traffic and air pollution before
     California taxpayers voted to increase gasoline taxes.
     Oil prices have a degree of political visibility that
     is unique; and, no matter which party is in office, the
     opposition parties invariably use increased prices as a
     weapon to assault the current administration....
     Raising or lowering taxes is just about the only major
     impact that government policymakers can have on oil
     prices.  Indeed, even if oil companies agreed to forego
     all of their profits on the sales of refined products,
     it would have only a minor effect on prices at the
     pump.  The driving force behind gasoline prices is
     crude prices, and ... the real price decisions are made
     on the international market, not in Honolulu.749 

	Brannon (1974) suggested that gasoline be taxed as a net revenue
source; one consequence of higher gasoline prices, as may be seen in
European countries that impose high gasoline taxes, is the trend toward
more fuel-efficient vehicles and a greater reliance on public
transportation.750  However, "[d]espite the foreign precedent, the
gasoline tax is a second-or-third-best approach to highway financing. 
It is regressive and it reflects some, but not all, of the social costs
of highway use."751 Moreover, higher gasoline taxes may have a
disproportionate impact on the poor; it has been noted that "[t]he
majority of the economically disadvantaged incur real, sometimes
calamitous, income losses from climbing energy prices. ...  There is
ample evidence that the poor generally must commit a larger share of
their income to energy purchases."752  A 1981 state Department of
Planning and Economic Development study noted that large increases in
the price of gasoline would would result in economic burdens for
consumers, businesses, and government, but that "[p]articularly hard
hit will be low-income consumers who must purchase gasoline for
transportation because alternative modes are not available.753
	
	One area that reflects some of the concerns associated with higher
motor fuel taxes is that of "pay-at-the-pump" motor vehicle insurance. 
Alarmed by surveys indicating that a large number of Hawaii's motorists
are unable or unwilling to pay the high costs of motor vehicle
insurance,754 legislators have introduced bills in recent years that
would require motorists to pay for their motor vehicle insurance at the
gasoline pump.755 Proponents of these plans contend that such a measure
would provide the necessary funding for universal motor vehicle
insurance coverage.  Others, however, contend that the additional cost
added to each gallon of gasoline756 would unfairly penalize motorists
who must commute long distances, while failing to offer incentives to
motorists to drive cautiously.757
	
	Highway tolls and parking taxes.  Proposals for highway tolls and
parking taxes seek to address issues similar to those addressed by a
gasoline tax.  Variable highway tolls, for example, attempt to reduce
commuting by automobile and increase reliance on public transportation
or car pooling by charging motorists for highway expenses.758 
Increasing the cost of parking, including raising charges in public
parking facilities759 and removing existing conservation disincentives
such as subsidized parking charges,760 also may influence consumer
demand for gasoline by deterring commuters from bringing their
automobiles into the city for the day.761
	
	Miscellaneous tax measures.  In addition to increasing the price of
gasoline and increasing the cost of operating a vehicle through the
imposition of highway tolls and parking charges, the cost of owning a
vehicle could be increased by raising the vehicle registration fee or
ownership tax.762  A tax has also been suggested for all new
automobiles having a fuel efficiency rating of twenty miles per gallon
or lower.763  However, the approach of taxing new vehicles has been
criticized as an inefficient means of reducing gasoline consumption.764
 Tax credits and deductions have also been proposed, including a
"[s]tate tax credit or incentive passes to use [a] mass transit system
and for not owning a car" and "tax credits and deductions for
home-based businesses that utilize tele-communication rather than
transportation."765
	
	(3)  Creation of marketable property rights.
	
	As mentioned earlier, one example of an incentive-based alternative
to classical regulation is to allocate pollution under a system of
marketable rights.  Under such a system, the appropriate agency would
set an absolute limit on the amount of emissions permitted in a given
area, and would then issue salable rights that total the specified
maximum amount of pollution. These rights could then be exchanged in
the marketplace, and would eventually be purchased by those who find
eliminating pollution the most expensive to do so.  Such a system would
promote efficiency by encouraging those who can curtail pollution the
most cheaply to do so first.766
	
	However, there are drawbacks to such an approach.  For example,
although the administrator knows approximately the maximum emissions
that will be produced, he or she cannot know, without detailed cost
information about each firm, how much firms will have to pay to bring
about that emissions level.  Nor can the administrator know in advance
the price that the marketable right will achieve at auction.  While the
level of pollution is known, the future cost of achieving that level is
not.  A system of marketable rights also presents enforcement problems,
including the increased difficulty of monitoring.  For example, some
firms may continue to use older technology for filtering pollutants, so
that inspectors cannot be certain whether or not the firm has violated
the law.  Another enforcement problem is that the administrator must
prevent a firm or group of firms from monopolizing the supply of
marketable rights, thereby preventing new firms from entering the
industry.  An antitrust action may be necessary to compel these firms
to sell their rights to new competitors on reasonable terms.767 
However, "[a]s a practical matter, it may be difficult for either
antitrust officials or environmental administrators to know whether
high bids for marketable rights reflect concern for the environment, a
present industrial need, the need for future expansion, a desire to
preserve the possibility for such expansion, or an effort to protect an
existing market from new competitors."768
	
	The use of marketable rights in place of regulation is not limited
to environmental regulation or spillovers, however.  Two examples of
market-based incentive systems present themselves with respect to House
Resolution No. 174, H.D. 2.  Assuming, for the purposes of this
discussion, that the Legislature seeks to establish a public bulk
gasoline terminal facility (as stated in question (6) of the
Resolution), a system of marketable rights could be used to allocate
limited tank space in such a facility. Storage space in the facility
could be reserved for new firms seeking to enter Hawaii's gasoline
markets.
	
	The second example assumes, also for the purposes of this discussion,
that the Legislature seeks to continue to place limitations on the
number of company-operated or company-owned retail service stations in
Hawaii, as evidenced by the State's retail divorcement law (section
486H-10, Hawaii Revised Statutes).  A system of marketable rights could
be implemented that establishes a limited number of company-operated
stations on each island.  The right to operate a company station could
then be auctioned; to the extent not preempted by federal law, both
incumbent and nonincumbent oil companies would compete among each other
for these rights.
	
	There are a number of problems, however, with both of these
proposals.  With respect to the public bulk gasoline terminal facility,
as noted by survey participants, the incumbent terminal owners would be
placed at a competitive disadvantage with respect to newcomers to
Hawaii's gasoline markets, the latter of whom would not be required to
invest in their own facilities and would be exposed to significantly
lower operating costs.  There are also numerous practical problems
involved, including how much terminal space is to be allocated and
problems with logistics, scheduling, quality control, and environmental
and product liability issues.
	
	With respect to both proposals, there is also the risk that the
competing firms will engage in strategic bidding behavior with
anticompetitive consequences.  If there are an insufficient number of
firms to assure competitive bidding, a few firms may tacitly collude to
keep prices low.  Alternatively, larger firms may behave in a predatory
manner by buying up unneeded rights in order to prevent smaller rivals
from entering the market.  While antitrust laws may require these firms
to give competitors a reasonable opportunity to gain access to Hawaii's
markets or storage space, as the case may be, applying the antitrust
laws may raise difficult factual issues.  For example, it may be
questioned whether a bid is predatory if it excludes a smaller
competitor, and at what point the purchase of a right from a small
competitor would substantially lessen competition.769
	
	Another problem lies in determining the initial allocation of rights.
 For example, should existing company-operated stations be
grandfathered?  This would give incumbent firms a large windfall, and
would require firms seeking to enter Hawaii's gasoline markets to make
additional large expenditures that the incumbent firms would not be
required to make.  In addition, if rights are auctioned off, firms
seeking either to purchase storage space or operate company stations
would be required to pay substantial additional amounts of money up
front, which would reduce the amount of funds available for other
needed investments.770
	
	(4)  Changes in liability rules.
	
	As noted earlier, another alternative to regulation in certain areas,
such as environmental pollution and accident safety, is to make tort
law changes to increase the risk of liability, as well as the cost, for
those who are best able to weigh the costs of the harm against the
benefits.  This approach would place the costs on the most efficient
cost-avoider, i.e., on the party who is best able to avoid the costs of
the harm or who is in the best position to induce others to act more
safely. For example, a power lawnmower may injure the purchaser or an
innocent bystander, as well as the victim's family and society at large
that may be required to pay for the victim's medical care. This
approach would make the lawnmower manufacturer strictly liable for any
accidents caused by the lawnmower if the manufacturer is in the best
position to weigh the risks, benefits, and costs involved.771
	
	As noted in chapter 14, the high cost of complying with environmental
regulations is one of the most important factors affecting gasoline
marketing in the State.  Small gasoline dealers have been overwhelmed
by the high costs of underground storage tank (UST) regulations,
cleanup costs, and other requirements.  To the extent not preempted by
federal regulations, one way to reduce the costs to small gasoline
dealers would be to specifically exempt them from environmental cleanup
costs associated with leaking USTs.
	
	Under the State's environmental response law, chapter 128D, Hawaii
Revised Statutes, certain persons are deemed strictly liable for the
costs of environmental cleanup in the event of a release of hazardous
substances, including the owner or operator of a facility or vessel and
persons who are contracted to transport the hazardous substances for
disposal or treatment.772 As defined in that law, oil and petroleum
products are deemed to be hazardous substances.773  To reduce the costs
to small dealers, the environmental response law could be amended in
two respects.  First, small dealers could be specifically exempted
under that law for the costs of removal or remedial actions resulting
from UST releases.  Second, assuming that oil refiners and UST
manufacturers are in the best position to weigh the costs, risks, and
benefits involved, that law could be amended to specify that the
refiners who supplied petroleum products to the dealer at whose
facility the UST release occurred, as well as the UST manufacturers
themselves, are strictly liable for removal or remedial actions, in
addition to the other parties who are specified as strictly liable
under current law.
	
	There are, however, several problems associated with these proposed
amendments.  Holding refiners strictly liable will not encourage them
to make safer products, since petroleum products are inherently
dangerous, it may be argued, and cannot be made more safely.  Nor does
a system in which manufacturers are required to pay for the negligence
of users encourage consumers to use petroleum products in a less
negligent way.  These amendments would also encourage refiners and UST
manufacturers to "shop around" for dealers who will take measures to
reduce the number of UST releases; however, "[i]t is highly unlikely
that there is any practical way for producers to restrict their sales
to prudent users or to encourage them to use [their products] more
safely.  Thus, some have argued that the result of a shift in liability
rules may be safer products but more accidents (as users become more
careless)."774  Such a change in liability rules would also encourage a
wider use of exclusive dealing arrangements, as discussed in chapter 4,
as refiners seek to retain those dealers known for the fewest releases
or the lowest environmental cleanup costs in a long-term contractual
relationship.  Alternatively, such a change would encourage the wider
use of company-operated stations, as refiners seek to reduce regulatory
costs.
	
	(5)  Bargaining.
	
	Another option is for state and oil industry representatives to
engage in bargaining to arrive at a consensus for possible industry
action as an alternative to additional government intervention.  
Discussions among these representatives could enable the achievement of
a consensus on issues of concern to all parties in a non-adversarial
context, allowing for voluntary compliance with agreed-upon objectives
through incentives rather than by regulatory enforcement.
	
	Industry officials representing the major oil companies, jobbers, and
dealers in Hawaii could meet with state officials and consumer groups
to consider ways to resolve the lack of price competition in the
State's gasoline markets, and seek to obtain mutually agreeable
solutions to these issues before the enactment of regulation.  The
services of a mediator or facilitator may be useful in focusing the
issues under consideration.
	
	(6)  Unregulated markets policed by antitrust.
	
	Opponents of government intervention argue that even if monopolistic
and predatory behavior are found, these types of behavior are already
subject to prosecution under existing federal and state antitrust laws,
which offer a more rational scheme for dealing with anticompetitive
practices in the petroleum industry than divorcement laws and the forms
of regulation proposed in the House Resolution.  In addition to
antitrust laws, Hawaii's fair trade laws (chapter 481, Hawaii Revised
Statutes), franchise laws (chapter 486H, Hawaii Revised Statutes, and
the federal Petroleum Marketing Practices Act), and other state and
federal measures further protect the rights of independent dealers and
consumers and ensure competition in Hawaii's gasoline markets.  Rather
than enacting new regulatory measures, they argue, there should be more
vigorous enforcement of the antitrust laws and deregulation of existing
special interest legislation, such as Hawaii's retail divorcement
statute.775
	
	On the other hand, proponents of increased regulation of the oil
industry contend that antitrust laws cannot be consistently relied upon
to ensure workable competition in Hawaii's markets, since major
antitrust cases are expensive and time-consuming to litigate and
policing is not always successful.  This section begins with a
discussion of these contrasting views of antitrust laws in the context
of their effectiveness in maintaining competition in the marketplace.
	
	Antitrust and competition.  Antitrust law776 is based on the
principle that society is better off if markets behave
competitively.777  According to Breyer, the underlying assumption of
antitrust laws is that "a workably competitive marketplace will achieve
a more efficient allocation of resources, greater efficiency in
production, and increased innovation":
	
     [Antitrust laws] seek to achieve these ends by removing
     private impediments to workable competition.  Where
     this assumption holds true, antitrust would ordinarily
     seem the appropriate form for government intervention
     to take.  Where the assumption fails, one finds the
     demand for other modes of governmental intervention,
     such as classical regulation.  Viewed in this way,
     regulation is an alternative to antitrust, necessary
     when antitrust cannot successfully maintain a workably
     competitive marketplace or when such a marketplace is
     inadequate due to some other serious defect.778 

	Critics of antitrust, however, argue that there are limitations to a
reliance on antitrust law alone.  One factor is the length and expense
of antitrust actions:  "major antitrust cases are very expensive and
time-consuming to litigate.  Thus, even effective antitrust enforcement
will never completely replace other methods of dealing with the
problems of inefficiency and inequity."779  While it has often been
noted that antitrust laws are intended to protect competition, not
competitors,780 others make the opposite assertion781 or consider such
characterizations to be mere cliches.782  It is further argued that
unsuccessful antitrust policing may lead to the imposition of less
efficient forms of government intervention783 and that antitrust policy
is "at war with itself".784
	
	Oligopolies revisited.  As noted earlier, Hawaii's gasoline markets
are highly concentrated oligopolies.  Since the focus of House
Resolution No. 174, H.D. 2, is to protect the interests of Hawaii's
gasoline consumers, one policy issue for state lawmakers to consider is
whether government should intervene in Hawaii's concentrated gasoline
markets to increase social benefits to consumers and reduce social
costs to society.785  In particular, should state lawmakers consider
enacting some form of regulation to reduce the power of these
oligopolies or rely instead on antitrust law to police unregulated
wholesale and retail gasoline markets?
	
	On the one hand, it may be argued that reliance on antitrust laws
to police unregulated markets may be misplaced.  Breyer maintained that
"[t]he antitrust laws cannot effectively deal with tacit collusion or
oligopolistic behavior--the behavior of several firms in a concentrated
industry that do not agree to certain anticompetitive behavior but over
time informally take actions with the same effect."786  Waldman (1978)
also noted that lawyers, judges, and economists often have different
goals and motivations in pursuing antitrust actions against
oligopolies. While some economists encourage challenging oligopolists
because of potentially high efficiency gains, lawyers are often
hesitant to attack oligopolistic industries, and judges may be
reluctant to take a strong stand against oligopolists in the absence of
collusion.787
	
	On the other hand, government intervention in Hawaii's gasoline
markets to reduce the power of these oligopolies may result in greater
inefficiency and higher prices for consumers. Hovenkamp (1994)
suggested that consumers may not necessarily benefit from the
restructuring of an oligopolistic industry, since the social cost of
breaking up large firms to achieve increased competition may be larger
than the cost of leaving the oligopoly industry in its current
state.788  Stone (1976) similarly believed that restructuring industry
at lower levels of oligopoly by breaking up large firms may have the
effect of increasing prices.789  Breyer also maintained that while the
temptation to regulate oligopolies (and monopolies) may be high, the
problems associated with regulation may be sufficiently great to
encourage reliance on antitrust laws instead.790
	
	"Light-handed" regulation.  Although regulation is generally
considered to be the opposite of antitrust, antitrust and regulation
may nevertheless converge to some extent:791

     Courts considering antitrust and regulatory matters
     must deal with such questions as:  To what extent
     should ordinary principles of merger law apply to
     mergers in the regulated trucking or airline
     industries?  To what extent should such industries be
     exempt from the scope of the antitrust laws?  To what
     extent should antitrust principles apply to
     competitively structured portions of industries that
     are in part naturally monopolized?  Should, for
     example, one portion of the telephone communications
     industry be regulated as a natural monopoly, while
     other portions are fully competitive and subject to
     antitrust?792 

	With respect to the last question--that of the bifurcation of an
industry into regulated and unregulated (or less regulated)
aspects--the idea of "light-handed regulation" has been proposed:

          In recent years, the concept of natural monopoly
     and the efficacy of regulation in dealing with it have
     been questioned.  Increasingly, it has been argued that
     in many presently regulated markets, actual or
     potential competition would be sufficient to protect
     customers without governmental intervention.  These
     arguments often result in proposals that conventional
     regulation be replaced either by full deregulation or
     by some "light-handed" form of less intrusive
     governmental control.  Of particular interest is the
     approach adopted by the Federal Energy Regulatory
     Commission ... of lubricating the regulatory process by
     applying conventional regulation to noncompetitive
     markets and light-handed regulation to markets subject
     to competition.793 

Thus, if some form of regulation is deemed to be necessary,
competitive considerations may be integrated into the regulatory
process by applying conventional regulation where competitive forces
are determined to be inadequate to protect the public interest, and
less restrictive forms of regulation where competition is found to be
adequate.794
	
	Antitrust and small business.  In addition to protecting Hawaii's
gasoline consumers, one of the primary concerns of the Legislature as
expressed in House Resolution 174, H.D. 2, is to protect the State's
independent dealers:  "the continued viability of independent retailers
and distributors is essential to the preservation of a fair and
competitive motor vehicle fuel market...".795  This section briefly
reviews competing theories of antitrust law and their relation to small
business.  In particular, is the protection of independent dealers (and
small businesses generally) from larger competitors an appropriate goal
of antitrust law?  Or should antitrust be concerned exclusively with
maximizing efficiency, which may be inconsistent with the protection of
small businesses?
	
	These questions reflect the underlying tension associated with
different schools of thought as to the values and objectives underlying
antitrust policy.  Essentially, the debate centers on efficiency
concerns:  "Ought courts view antitrust solely as a means for achieving
economic "efficiency," ... or ought they regard antitrust as invoking
broader policy considerations encompassing economic, social and
political values?796 Advocates of the former view, including the
Chicago School, maintain that the exclusive goal of the antitrust laws
should be economic efficiency, consisting of both productive and
allocative efficiency.797
	
	On the other hand, it has been noted (Flynn 1986; Hovenkamp 1994)
that the United States Congress, in enacting antitrust statutes, did
not view economic efficiency as the sole goal of antitrust policy;
"[i]ndeed, Congress was generally willing to tolerate a great deal of
allocative inefficiency in order to protect certain classes of people,
such as small business."798 Instead, it is argued that the antitrust
laws encompass the following four goals:  "(1) dispersion of economic
power, (2) freedom and opportunity to compete on the merits, (3)
satisfaction of consumers, and (4) protection of the competition
process as market governor."799
	
	Advocates of the position that antitrust laws should incorporate both
noneconomic as well as economic values argue that antitrust policy
should consider such goals as protecting small businesses from larger
competitors.  Hovenkamp noted that while this goal may be inconsistent
with the goal of maximizing efficiency, courts may take a balancing
approach to resolve the conflicting policies, choosing different
policies to prevail in different cases:

          There is a principled and viable position that
     antitrust policy must admit certain noneconomic values.
     At the same time, no one believes that efficiency
     concerns are irrelevant to antitrust policy.  Today the
     most important debate about basic principles in
     antitrust is between those who believe that allocative
     efficiency should be the exclusive goal of the
     antitrust laws, and those who believe that antitrust
     policy should consider certain "competing" values--that
     is, values that either cannot be accounted for within
     the economic model, or values that can be asserted only
     at the cost of a certain amount of efficiency.  These
     competing values include maximization of consumer
     wealth, protection of small businesses from larger
     competitors, protection of easy entry into business,
     concern about large accumulations of economic or
     political power, prevention of the impersonality of
     "facelessness" of giant corporations, encouragement of
     morality or "fairness" in business practice, and
     perhaps some others.

          All these alternative goals can be inconsistent
     with the economic goals of maximizing allocative and
     productive efficiency.  In addition, many are
     inconsistent with each other.  If courts adopt any
     mixture of goals, antitrust is likely to be guided by
     conflicting policies which must then be balanced
     against each other.  To be sure, this is not a unique
     phenomenon.  Constitutional law is filled with
     decisions that balance conflicting policies.  Antitrust
     could reasonably be expected to balance a policy of low
     consumer prices against a policy of protecting small
     businesses from larger competitors, and choose
     different policies to win in different cases.800 

	On the other hand, reliance on the economic efficiency approach to
antitrust law often provides simple, relatively consistent answers to
antitrust questions:

          By contrast, those who believe that antitrust
     should be concerned exclusively with efficiency can
     offer a relatively consistent policy, provided there is
     consensus about the relevant elements of the economic
     model.  If vertical integration is efficient, then the
     "efficiency only" advocate believes it should be legal,
     even if it injures small businesses, makes big
     businesses even bigger, and makes it more difficult for
     newcomers to enter a particular field.  She will not
     attempt to balance these "competing" concerns against
     economic efficiency, because she does not see them as
     competing.  They are simply ignored.801 

	Posner (1976), an advocate of the economic efficiency approach to
antitrust, maintained that antitrust enforcement is not an appropriate
method of promoting small business interests,802 and believed that
certain efforts to assist small business, such as making franchise
termination more difficult, often end up hurting the very class of
small business they were intended to help:803

     Apart from raising in acute form the question of
     whether it is socially desirable to promote small
     business at the expense of the consumer, such a policy
     would be unworkable because it would require
     comprehensive and continuing supervision of the prices
     of large firms.  There are no effective shortcuts.  For
     example, if mergers between large firms are forbidden
     because of concern that they will enable the firms to
     take advantage of economies of scale and thereby
     underprice smaller firms operating at less efficient
     scale, one (or more) of the larger firms will simply
     expand until it has achieved the most efficient scale
     of operation.  If franchise termination is made
     difficult in order to protect small dealers, the costs
     of franchising will be higher, and there will be less
     franchising, which will hurt the very class of small
     businessmen intended to be benefited.  The tools of
     antitrust enforcement are poorly designed for effective
     discrimination in favor of small firms, compared, for
     example, to the effectiveness of taxing large firms at
     higher rates.804 

	Hovenkamp also noted that from an efficiency standpoint, a policy of
maximizing the welfare of small businesses might not necessarily
benefit society as a whole:  "An antitrust policy of maximizing small
business welfare would have to be regarded as distributive, because it
would force transfer payments from one group of people (consumers or
large businesses) to another group of people (small businesses) even
though such a transfer might not make society as a whole better
off."805  He further noted that "[t]he history of American antitrust is
strewn with the corpses of small businesses who fell victim to
antitrust rules designed to protect them",806 citing as an example the
case of Standard Oil Co. of California v. United States ("Standard
Stations").807
	
	In that case, the United States Supreme Court reviewed Standard Oil's
contracts with independent retailers that required all purchases of
gasoline to be from Standard Oil.  At the time, Standard Oil was the
largest seller of gasoline in seven Western states; in 1946, its
combined sales equalled 23 percent of the total taxable gallonage sold
in that region, sales by company- owned service stations made up 6.8
percent of the total, while sales under exclusive dealing contracts
with independent service stations constituted 6.7 percent of the
total.808  At issue was whether the standards then applying to tying
agreements should be extended to exclusive dealing, i.e., whether a
showing that a substantial portion of commerce was affected was
sufficient to satisfy the requirement in Section 3 of the Clayton Act
that the effect of the arrangement "may be to substantially lessen
competition", or whether it must also be demonstrated that competitive
activity has actually diminished or probably will diminish.809
	
	In concluding that "the qualifying clause of section 3 is satisfied
by proof that competition has been foreclosed in a substantial share of
the line of commerce affected",810 the Court found that Standard Oil's
actions had violated that standard. Justice Frankfurter, writing for
the majority, found that while tying contracts "serve hardly any
purpose beyond the suppression of competition",811 requirements
contracts "may well be of economic advantage to buyers as well as to
sellers, and thus indirectly of advantage to the consuming public."812 
The Court noted that interpreting Section 3 of the Clayton Act as
requiring a demonstration that competitive activity has actually
diminished "would make its very explicitness a means of conferring
immunity upon the practices which it singles out."813  Finally, the
Court maintained that although the end result may be a greater number
of company-owned stations, which may be detrimental to the public
interest, this policy issue had not been submitted for their decision:

     Though it may be that such an alternative to the
     present system as buying out independent dealers and
     making them dependent employees of Standard Stations,
     Inc., would be a greater detriment to the public
     interest than perpetuation of the system, this is an
     issue, like the choice between greater efficiency and
     freer competition, that has not been submitted to our
     decision.  We are faced, not with a broadly phrased
     expression of general policy, but merely a broadly
     phrased qualification of an otherwise narrowly directed
     statutory problem.814 

	Writing in dissent, Justice Douglas argued against the concentration
of power in the hands of a few, maintaining that if the large oil
companies could not integrate by exclusive dealing, they would seek to
achieve the same result through outright ownership:

          Today there is vigorous competition between the
     oil companies for the market.  That competition has
     left some room for the survival of the independents.
     But when this inducement for their survival is taken
     away, we can expect that the oil companies will move in
     to supplant them with their own stations.  There will
     still be competition between the oil companies.  But
     there will be a tragic loss to the nation.  The small,
     independent business man will be supplanted by clerks.
     Competition between suppliers of accessories (which is
     involved in this case) will diminish or cease
     altogether.  The oil companies will command an
     increasingly larger share of both the wholesale and the
     retail markets.815 

	It may be argued that Standard Stations, which was decided in 1949,
reflects the mistrust of market concentration and oligopolies that was
present during the post-World War II period.816  These concerns
continued in the 1950s "in Congressional policies that were suspicious
of business expansion and even hostile toward efficiency", and in the
1960s, during which time antitrust policy was "openly hostile toward
innovation and large scale development, and a zealous protector of the
right of small business to operate independently."817  More recently,
however, these concerns have softened, and attitudes toward vertical
arrangements have "changed radically":  "While vertical arrangements
were once viewed as posing serious competitive problems, many now
consider them largely benign.  Indeed, some find it difficult to find
any anticompetitive effects at all in contractual agreements between
buyers and sellers."818 Moreover, vertical arrangements such as
exclusive dealing help to avoid transaction costs, i.e., the costs of
using the marketplace. While antitrust policy makers have historically
viewed these practices with suspicion, vertical contracting and similar
arrangements may alternatively be seen as simply helping to reduce the
costs of doing business.819
	
	Finally, Hovenkamp noted that Justice Douglas' dissent in Standard
Stations, while reflecting his strong advocacy of small business,
failed to mention that vertical integration by the large oil companies
could result in lower prices at the pump:

          The statement is one of Justice Douglas' most
     candid recognitions of the conflict between small
     business welfare and economic efficiency.  If vertical
     integration gives an oil company a "competitive
     advantage" but exclusive dealing is unlawful,
     competition may force the companies to build their own
     retail stations.  Justice Douglas was not willing to
     make a second admission, however:  the "competitive
     advantage" in this case meant lower prices for
     consumers.820 

                           CONCLUSION

	Should policy makers pursue one or more of the regulatory options
suggested in House Resolution No. 174, H.D. 2?  The stated and unstated
presumptions in the Resolution are that some form of regulation is
appropriate, of the various forms suggested.821  However, the
Resolution itself reflects the tensions in policy direction faced by
the Legislature.  For example, while the focus of the Resolution is to
protect the interests of Hawaii's gasoline consumers by ensuring the
lowest possible gasoline prices and other areas, the Resolution at the
same time seeks to preserve the continued viability of independent
dealers and proposes several regulatory measures to effectuate this
goal.  Unfortunately, as noted in this study, these goals may be at
odds with each other.  Increased regulation, it has been noted, may
increase prices at the pump as regulatory costs are passed on to
consumers.  Nor does regulation address such factors as changes in
consumer preference away from full-service gasoline stations with
repair facilities towards retail outlets with convenience stores. 
Failure to intervene, on the other hand, while potentially keeping
prices low and increasing economic efficiency and consumer choice, may
further the decline of Hawaii's independent dealers.
	
	The House Resolution posits that the long- and short-term interests
of Hawaii's gasoline consumers may be protected by ensuring the:  (1)
lowest possible gasoline prices, (2) availability of automotive
services, and (3) convenient access to retail gasoline outlets.  These
assumptions also need to be re- examined:

     (1)  Lowest possible gasoline prices.  This assumption,
          while presumably in the best short-term interests of
          consumers, is not necessarily in their best long-term
          interests.  As discussed in chapter 6, it may be more
          prudent to increase gasoline prices rather than take
          measures to decrease them, since lower fuel prices
          arguably encourage overdependence on oil and remove
          incentives to conserve energy and develop alternative
          energy sources.822 

     (2)  Availability of automotive services.  In the context of
          the House Resolution, this statement presumes that
          automotive services will continue to be provided to
          consumers at conventional dealer-operated service
          stations.  However, the trend has been away from
          obtaining repair and maintenance at these types of
          service stations in favor of obtaining these services
          from automobile dealers and other specialists, as
          stations have moved toward large-volume, self-service
          outlets in response to consumer preferences.  As noted
          in chapter 3, this trend was due in part to
          improvements in automobile technology reducing the
          frequency of required routine maintenance and allowing
          manufacturers to offer extended warranties, requiring
          specialized expertise and equipment for maintenance and
          repairs, as well as changes in consumer preference,
          including a decreased demand for automotive repair and
          maintenance services.823 

     (3)  Convenient access to retail gasoline outlets.  Access
          to urban retail outlets may entail different
          legislative responses than access to rural ones.
          Retail outlets in downtown Honolulu, for example, may
          be compelled to close due to substantial increases in
          lease rents and increasing land values.  The owners of
          outlets on high-priced land may also 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.  On the other hand, a
          retail outlet in a rural community of the Big Island,
          for example, may close because of the high costs of
          clean-up from pollution and compliance with underground
          storage tank regulations.  Alternatively, outlets may
          opt for a large-volume, self-service configuration with
          a convenience store or restaurant to remain
          competitive.824 

	This chapter sought to present the regulatory options available to
state policy makers in a broader context that considered under what
circumstances the government should intervene in Hawaii's petroleum
industry, and discussed a number of options ranging from classical
regulation to unregulated markets policed by antitrust.  The
Legislature has already opted to protect Hawaii's independent dealers
to some extent by enacting a form of retail divorcement legislation. 
Maryland's experience with retail divorcement suggests that while
arguably helping independent dealers by suppressing competition,
Maryland's consumers have faced higher gasoline prices, shorter hours
of operation, and generally reduced consumer choice in the period
following divorcement.  It is unclear whether the same effects have
occurred in Hawaii.  Legislators should nevertheless consider whether
retail divorcement, if once justified, is still necessary; i.e.,
whether there is a continuing justification for intervention and
whether the costs of reduced economic efficiency, less competition, and
higher gasoline prices outweigh the benefits of the (presumably)
increased viability of independent dealers.  Unless lawmakers find the
continued existence of serious market defects, competitive processes
should be substituted for regulation.
	
	While a determination of whether or not to further regulate Hawaii's
petroleum industry depends to a large extent on the policy choices to
be made by the Legislature, nonetheless, as suggested in this report,
the Legislature should first consider less restrictive alternatives to
regulation before intervening in Hawaii's gasoline markets.  Moreover,
most of the types of regulation proposed in the Resolution have not
been adopted in any other jurisdiction.  As noted by Yamaguchi and
Isaak (1990), "[t]he tendency all around the world through the 1980s
has been for governments to deregulate oil in the countries where it is
controlled."825  While they note that "a government could still
reasonably decide that control of oil prices and regulation of the
industry is worth the political difficulties that ensue", they maintain
that such a decision in Hawaii should be based on an understanding of
the practical difficulties involved, including those related to
staffing (the absence of persons with expertise in the oil industry in
state government and the complexity of oil industry regulation);
information (the lack of detailed data on sales volumes, prices, and
oil movements); politics (pressure from interest groups to subsidize
one type of fuel at the expense of another); and other difficulties
(e.g., the impossibility of regulating only gasoline prices without
introducing serious market distortions).826
	
	In addition, if the Legislature intends that the Petroleum Industry
Information Reporting Act of 1991 (chapter 486I, Hawaii Revised
Statutes) be implemented, the Bureau recommends the following:

     (1)  The overall administrative responsibility for
          implementing chapter 486I, HRS, should be transferred
          from the Public Utilities Commission to the Department
          of Business, Economic Development, and Tourism, in view
          of the fact that DBEDT is already statutorily required
          to undertake energy development and management for the
          State pursuant to section 26-18, HRS, and currently
          receives supply and demand data from the petroleum
          industry in accordance with chapter 486E, HRS (see
          Appendix J);

     (2)  The Legislature should work with DBEDT to review
          chapters 486I, 486E, and 125C, HRS, as well as all
          other relevant statutes, to delete or modify material
          deemed to be duplicative or otherwise unnecessary and
          to consolidate data gathering, analysis, and reporting
          requirements in the Department; and

     (3)  Sufficient resources should be appropriated annually to
          enable the Department to successfully implement chapter
          486I and all other energy-related laws within the scope
          of the Department's responsibility.

	As this chapter has also attempted to illustrate, state lawmakers must
also examine the issue of regulation in the broader context of
equitable, political, environmental, and long- term energy planning
issues.  The latter issue is of particular importance to Hawaii,
considering the State's geographic isolation and dependence on oil.  As
petroleum resources dwindle,827 lawmakers will be faced with choosing
from one of several approaches to energy management, namely,
conservation and "hard" and "soft" energy options.  Generally, a "hard"
energy path "stresses sustained growth of energy production to meet
anticipated future demand as projected from past energy
consumption."828  This strategy entails, among other things, a new
search for oil and natural gas reserves and the continued growth of
centralized systems that generate electricity.  A "soft" energy option,
on the other hand, "emphasizes more restrained production of energy
based on a deliberate effort to moderate future ... demand" and "relies
on solar and other renewable energies and favors better end use of
existing energy sources."829  A soft path also encourages the
development of small, decentralized systems.
	
	Hawaii's policymakers, whether intentionally or not, have emphasized
a predominantly hard energy path for the State.  The House Resolution,
and, to a large extent, the discussion in this report of the proposals
presented in that Resolution, both presuppose and reflect this reliance
on a hard energy option. To the extent that oil and its derivatives
continue to play a central role in a discussion of energy resources and
planning, this will necessarily be the case.  Nevertheless, considering
the State's dependence on imported oil, dwindling oil supplies, and the
other factors discussed earlier, state lawmakers should consider a
gradual conversion to a soft energy path, together with the enactment
of additional measures encouraging conservation.  Any such decision
should be made only after significant citizen participation in energy
planning.  While conversion to a soft energy path would involve "an
expensive up- front restructuring of the economy", the decision to
follow a hard path will require Hawaii's residents in the future to
face an even more painful transition than the one facing residents
today.830  Moreover, while the hard path is nonrenewable, the soft path
"can yield essentially unending energy."831  Hawaii's abundance of
renewable sources of energy, including wind and solar energy, weighs
heavily in favor of considering a soft energy path.  Without a change
in policy direction, however, gasoline and other petroleum products
will continue to remain vitally necessary for the short- and long-term
needs of the people of this State.
	
	Before enacting any new form of regulation, legislators should
evaluate the arguments presented for each proposed type of regulation
and review all relevant economic and other data to determine whether
there are serious market defects requiring intervention.  Stone (1982)
argued that "the burden of proof lies with those who advocate
regulation and that regulation should not be implemented without
convincing evidence"--and that policy makers should first take the
following questions into consideration:832

     1.  Does the unregulated market achieve a high level of
     economic and social performance?  If the market does so
     in all particulars related to performance, our
     presumption against regulation dictates that our
     inquiry is at an end. ...

     2.  Can regulation be justified?  Even the most ardent
     proponents of regulation as a public policy technique
     do not insist that it is appropriate in order to
     achieve every desirable public policy goal. ...

     3.  Will regulation lead to better performance than
     that which would prevail without government
     intervention?  Even if regulation is justified under
     certain circumstances, it still does not follow that
     economic or social performance under regulation will be
     superior to performance in an uninhibited market.  An
     unregulated market may yield results that fall short
     ... of performance goals, but in an imperfect world the
     market still may yield better performance results than
     under regulatory conditions....

     4.  Do the costs of regulation outweigh the benefits?
     ...  If the costs of regulation outweigh its benefits,
     one should be unwilling to institute or continue it,
     even though regulation might produce better performance
     goals than unrestrained competition in one particular
     area.  In other words, regulatory costs that outweigh
     regulatory benefits frequently indicate performance
     declines in other areas. ...

     5.  Is there a public policy instrument that will
     achieve the particular performance goal better than
     regulation?  Even assuming we find that regulation will
     lead to better economic and social performance than
     unrestrained competition, it still does not follow that
     regulation should be instituted, for there may be
     superior policy instruments to effect the same or
     better results.  Since the carrot is often more
     effective than the stick in getting desired results,
     subsidy policy might be a superior choice in some
     instances.  For the same reason, tax concessions and
     loan guarantees are other instruments that have been
     employed instead of regulation....833 

	Finally, lawmakers are urged to bear in mind Breyer's recommendation
that a restrained approach be adopted in considering whether to impose
regulations:

     First and foremost, modesty is desirable in one's
     approach to regulation.  It should be painfully
     apparent that whatever problems one has with an
     unregulated status quo, the regulatory alternatives
     will also prove difficult.  Before advocating the use
     of regulation, one must be quite clear that the
     unregulated market possesses serious defects for which
     regulation offers a cure.  ...

     [C]lassical regulation ought to be looked upon as a
     weapon of last resort.  The problems accompanying
     classical regulation would seem sufficiently serious to
     warrant adopting a "least restrictive alternative"
     approach to regulation.  Such an approach would view
     regulation through a procompetitive lens.  It would
     urge reliance upon an unregulated market in the absence
     of a significant market defect.  Then, when the harm
     produced by the unregulated market is serious, it would
     suggest first examining incentive-based intervention,
     such as taxes or marketable rights, or disclosure
     regulation, bargaining, or other less restrictive forms
     of interventions before turning to classical regulation
     itself.  It would urge the adoption of classical
     regulatory methods only where less restrictive methods
     will not work.834 

		Endnotes	Appendix A Table of Contents