Endnotes | 
Chapter 9 
Table of Contents |
Questions (6) and (12) of the Resolution request the views of survey
participants on the following issues:
(6) The effects of encouraging the establishment of a
public bulk gasoline terminal facility, which could
make the importation of gasoline cost effective and
could also lead to a reduction in wholesale gasoline
prices;
(12) The effects of establishing a public petroleum products
storage authority with power to import, store, and
market petroleum products.
State Government
AG: With respect to question (6), the Attorney General noted that
it had recommended in its 1990 report that a unit of state government
be funded to monitor and analyze oil industry data, and that the unit
study ways to increase competition, including the establishment of a
public petroleum products storage authority.308 The Attorney General
believed that such a facility would lead to lower gasoline prices:
The Department continues to think that a public
bulk gasoline facility would tend to increase
competition and thus lead to a reduction in prices.
Moreover, a public terminal holds out the possibility
that it could be managed in such a way as to avoid
chaotic flooding of the market that anti-dumping laws
seek to prevent.309
The Attorney General also noted that it had recommended for study the
option discussed in question (12) in its 1990 report, and that question
(12) "is substantially the same as the proposal at point (6)...."310
DBEDT: With respect to question (6), the department questioned
whether the high costs in constructing such a facility would make it
cost effective:
This question seems to imply that if the government
managed a bulk gasoline terminal in Hawaii, direct
importation of gasoline would lead to reduced wholesale
and retail gasoline prices. We know of no study which
has produced evidence to support this conclusion. In
fact, as the state has pursued a ten million barrel
regional petroleum reserve to be built by the U.S.
Department of Energy, we have discovered the extremely
high cost of such a terminal. Our most recent estimate
to construct such a terminal is approximately $195
million dollars. So, we are unaware of any evidence
that would establish the cost-effectiveness of a public
bulk gasoline terminal facility.311
With respect to question (12), the department stated that it was
reasonable to expect that the authority would benefit inefficient
wholesalers and retailers at the expense of more efficient ones, and
ultimately at the expense of taxpayers:
[W]ith no detailed cost-benefit analysis, it is not
possible to determine what the true costs to the state
would be to operate such a terminal, likewise there is
no evidence that such a storage authority would
actually contribute to lower consumer prices or
increased competition. It is, however, reasonable to
expect that such a facility could buoy inefficient
wholesalers and retailers and stifle efficient ones who
might otherwise be able to operate a storage terminal
more inexpensively. This would transfer the burden of
paying for the terminal and assuming the risks inherent
in operating such a facility (e.g., environmental and
financial risks) to the owners of the public terminal,
the taxpayers.312
Gasoline Dealers
HARGD: With respect to question (6), the Association noted that such
a facility would lead to more competitive wholesale prices:
The wholesale price would become more competitive if
another wholesale supplier were able to enter the
market using a bulk gasoline terminal facility. Sales
would have to be at the wholesale level, unless an
acquisition of existing locations were secure, or open
supply were instituted circumventing [existing
contractual] prohibitions.313
However, with respect to question (12), the Association noted that
unless such an authority was established to maintain an emergency
reserve of petroleum or the private sector could not supply petroleum
products through normal distribution channels, an authority would be an
inefficient use of public funds:
The state should not be involved in placing financial
resources into the supplying of petroleum distribution,
unless the private sector is not able to supply product
through normal methods of distribution. The state has
made attempts in the past to get involved in supplying
products or services, and has not been successful. If
the state were to be involved in storage of a strategic
emergency supply of petroleum for use under emergency
circumstances, it would be acceptable. Otherwise, it
would not be an effective manner in which to spend
government resources.
The effects could range from keeping control of
petroleum industry costs based on public competition to
refineries utilizing their product for the highest
bidder, which may be export.
Another consideration to be addressed is the
differential in additives of motor fuels that is
currently being used a[s] a marketing strategy to
capture or retain market share. With public petroleum
products storage, a means of mixing and/or blending
additives would be required.314
Jobbers
HPMA: In response to question (6), the Association argued against the
building of such a facility as against free-market principles:
Government should not be in private business and the
historical facts are that government would spend more
than private industry and the taxpayers would pay for
this facility.... [T]urning the Hawaii market into a
"dumping ground" and making it totally uncompetitive
for the existing oil companies, therefore forcing their
exit, would be an error. We in the Hawaiian market
want all the players to remain here, to remain
competitive without government intervention.
If public terminal means a government operated terminal
for the purpose of keeping wholesale prices down, that
won't work either. Any commingling of product would
eliminate brands. Any averaging of prices at such a
public terminal gives no incentive for a supplier to
keep prices lower than what the market dictates.315
With respect to question (12), the Association argued that several
non-refiner marketers in the State would leave the market rather than
be encumbered by government regulation, thereby lessening competition
and hurting Hawaii's consumers in the long run:
Why should the public sector be spending taxpayers'
money to build a (public) facility without the
expertise and the private enterprise experience to
operate? Government is not profit oriented, which
usually means that they are not competitive.
Competition is what is beneficial for the consumer. If
a non-Hawaiian petroleum operator sees an opportunity
by building an additional storage facility, they have
all the right in the world to do it. HPMA believes
that government should facilitate an operator by
expediting permits and creating an environment that
would be beneficial for his entry into the market.
Potential profit is what attracts an investor.
Governments's role is not private enterprise, but
instead to facilitate private enterprise for the
benefit of the consumer. HPMA believes there is a
strong possibility that if a public petroleum storage
authority was created, that several of the non-refiner
petroleum marketers in Hawaii would leave the market
rather than being encumbered by government regulation.
This is a situation that HPMA thinks would be
disastrous long-term for the Hawaii consumer. We want
the major marketers to remain here and to do that they
must be able to make a profit without regulation.316
Aloha Petroleum: Regarding question (6), Aloha Petroleum argued that
while a privately operated fuel terminal could benefit Hawaii's
petroleum market, a fuel terminal operated by the government would only
exacerbate existing problems:
The concept of a privately operated fuel terminal which
is open to qualified buyers, could be beneficial to
Hawaii's petroleum market. Mainland petroleum jobbers
frequently "shop" privately operated fuel terminals
which are open to them for the best price available.
Such flexibility allows gasoline distributors and
jobbers the ability to purchase gasoline at the best
price available. A privately operated terminal, open
to qualified buyers would introduce competitive
wholesale pricing to the Hawaii petroleum market.
However, if the public terminal referred to in the
above question means a public terminal operated by the
government, it is our opinion that such a proposition
would not be beneficial to Hawaii's petroleum market.
Government competition with private business has not
been successful and would only exacerbate the problems
that already exist.317
In response to section (12), Aloha Petroleum again maintained that
while a privately operated facility would be beneficial, a
government-operated facility would be "anti- business":
The idea of a privately operated petroleum storage
facility open to qualified buyers would appear to be
beneficial to the State. Such a facility would enable
jobbers and distributors to shop for competitive
prices. However, a government operated petroleum
storage facility open to the public would be anti-
business and therefore not beneficial to the State.
Governmental intervention in private business has
historically not been advantageous for either party.
There are other ways in which government can support a
privately operated petroleum facility. For example,
the state could make property available to qualified
companies to construct a terminal facility if the
terminal operation would be as described above.318
Oil Companies
Shell: With respect to question (6), Shell maintained that while such
a facility might reduce the cost of importing gasoline to Hawaii, this
might not be advantageous, considering the State's adequate refining
capacity and inelastic demand for gasoline:
Depending on the level of user charges, the
availability of a public terminal facility might help
to reduce the cost of importing gasoline into Hawaii.
It is not clear that such importation would be
economically advantageous, given the presence in Hawaii
of refining capacity sufficient to serve demand and the
inelastic nature of that demand. Importation of
substantial quantities of gasoline into Hawaii might
produce such a level of excess supply that prices would
decline to a point at which the imported gasoline could
not be sold at a profit.319
With respect to question (12), in the absence of information regarding
the intended scope of the operation, Shell assumed that such an
authority would market petroleum products at the terminal by trucks and
barges and would not also participate in the retail gasoline market,
and concluded that the authority would become a financial burden to the
State's taxpayers:
Shell's assessment of the impact of such an
authority is that it would lose money from operations
and become a financial burden to the taxpayers of
Hawaii. To the extent that the demand for motor
gasoline in Hawaii is currently being met by the
State's two refineries, facilities to handle imported
gasoline would be redundant and therefore uneconomical.
If importation of gasoline into Hawaii made economic
sense, one would expect that the private sector would
be doing it. The costs of importing gasoline,
including acquiring it, transporting it, financing its
storage, managing its price risk, building and
operating sufficient terminal tankage to contain tanker
quantities and managing environmental risks, are quite
significant in relation to the small volume of business
an importer could anticipate in the face of an adequate
supply from the State's two refineries. Consequently,
it is difficult to see how the State's consumers would
benefit from such a publicly financed authority.320
BHP: BHP noted that the assumptions made in question (6) were
questionable for the following reasons:
a. All current major gasoline suppliers have the
ability to import gasoline into the State and store the
product in their own terminals constructed at a
substantial investment. These suppliers have opted to
purchase their gasoline from the two local refineries
because it is economically more attractive to do so.
Hawaii lacks the advantage of lower-cost pipeline
access available to mainland suppliers and therefore
proximity to crude sources and refined supplies.
Shipping gasoline cargoes to Hawaii requires the
supplier to incur high freight, storage and selling
costs to move their inventories in the relatively
limited Hawaii market. Recent federal and state
environmental regulations have also had a negative
impact on ability to transport petroleum on the water
and have led to a reduction in the number of vessels
and increases in freight costs.
b. Who would utilize the terminal? There would be no
incentives for current terminal owners/operators to use
this facility. All current suppliers have other
petroleum products to consider besides gasoline which
would necessitate continued operation of their own
terminals. This would likely lead to redundant
operating costs and place incumbent terminal owners at
a distinct competitive disadvantage with any new
entrants into the market. These new entrants would
have to make no major investment in the state to
participate in the market and face significantly lower
operating costs. Additionally, a public bulk gasoline
terminal facility with multiple users would raise
concerns over quality control, exposure to
environmental and product liability issues and
conflicts over scheduling and logistical difficulties.
c. On average, the Hawaii gasoline market is in
balance, with demand being adequately supplied by the
two local refineries, eliminating the need to both
import and export gasoline out of state. In general,
this balance meets the local demand for every petroleum
product, with the exception of jet fuel, which requires
importation. This delicate balance between supply and
demand provides consumers with a reliable, consistent
and efficient flow of products at a reasonable cost.
Singling out one product such as gasoline in an attempt
to lower prices could introduce distortions into the
market.... As a result the refiner is required to make
a profit over the entire barrel of crude, rather than
individual products. Any action which places a product
at a different competitive level resulting in a
reduction in profit over the entire barrel, would have
to be made up by the remaining products.
d. There are numerous other issues which need to be
addressed including:
- What would a state of the art terminal cost the
State?
- How would such a facility be funded?
- Who would operate and manage the facility?
- Would the state be willing or able to assume
liability for such a facility, including but not
limited to all demonstrations of financial
responsibility, environmental and operating costs?
- What would be the price impacts on other petroleum
products?
- Is it an efficient use of in-state energy
resources?
- Is it the State's business to enter a market and
compete directly with private enterprise, and if so
can it be done more efficiently than the current
terminaling operations?321
With respect to question (12), BHP stated that this proposal would
lessen competition, raise exposure to environmental risks, increase the
State's administrative burden of compliance (which would ultimately be
passed on to consumers), and discourage investment by the private
sector:
The State should not assume a role in an enterprise
which is already highly competitive and one which is
already being adequately addressed by the private
sector. To do so would be an unnecessary burden to the
taxpayer and force the weaker, or smaller competitors
out of business.
It is unclear where and how the state would acquire its
supply. If the state imported product from out-of-
state, environmental risk would increase from having
product on the water. It would also probably result in
an excess supply of gasoline in the state leading to
exports, again increasing the exposure to environmental
risk, and to price impact on other refined petroleum
products. If the supply were acquired locally, it
would not make economic sense for the local refineries
to store product at a state-owned facility when they
own their own facilities.
The state would be subject to the same regulatory
requirements and environmental standards governing
private industry over the importation, storage, and
distribution and marketing of petroleum products. The
state's administrative burden of compliance would be
increased which would ultimately be passed on to the
taxpayer and consumers.
In the short-term, the state may find it necessary to
increase taxes to recover capital expenditures and
operating costs, adding to the burden to taxpayers;
there is no guarantee that prices would be reduced in
the long-term instead it creates a probability that
prices would rise. The state does not have the same
level of expertise, and incentives, to be an efficient
manager and operator of business enterprises that
already resides in private industry. Finally, such
intervention by the state would discourage investment
by the private sector.322
Chevron: With respect to questions (6) and (12), Chevron argued that
taxpayers would likely pay subsidies to make up for government
inefficiencies:
The question here is one of cost versus benefit,
and whether this is a good use of taxpayer funds....
[T]here are already five major wholesalers of gasoline
in Hawaii and competition is vigorous. The
establishment of a public bulk gasoline terminal could
be expected to have a significant effect on the market
only if its operation were as efficient or more
efficient than the existing distribution systems
established by the private sector. Experience has
shown that the government usually cannot compete with
the private sector without taxpayer subsidies (either
direct or hidden) to make up for inherent
inefficiencies in the government-run enterprise.
It should be noted that while the Attorney
General's 1990 Preliminary Report on the Investigation
of Gasoline Prices recommended that the state
government study whether such a public terminal should
be established, that recommendation was not repeated in
the Attorney General's 1994 Interim Report.323
Discussion
Questions (6) and (12) of the Resolution ask for the effects of
establishing two public entities--a public bulk gasoline terminal
facility and a public petroleum products storage authority. While the
specifics of the two are not delineated in the Resolution, presumably
the former entity would provide for the actual storage of gasoline in
terminals and appurtenant equipment, while the latter would provide the
regulatory oversight, not only for storage, but also for the
importation and marketing of gasoline and other petroleum products.
Question (6) is inherently one-sided in that it suggests the intended
outcome of response, i.e., that encouraging the establishment of such a
facility "could make the importation of gasoline cost effective and ...
lead to a reduction in wholesale gasoline prices". As demonstrated by
the responses, the views of all of the participants do not coincide
with this presumption.
This section discusses two issues raised by questions (6) and
(12)--the establishment of a regional petroleum reserve and the
commerce clause implications of state participation in the marketplace.
Regional Petroleum Reserve
Question (6) raises the ancillary issue of the establishment of a
regional petroleum reserve in Hawaii for the storage of oil as a
strategic reserve against supply interruptions.324 The creation of a
central strategic petroleum reserve (SPR) and regional petroleum
reserves (RPRs) was provided under the federal Energy Policy and
Conservation Act of 1975. Section 157(c) of that Act gave
discretionary authority to the U.S. Secretary of Energy to allow for
the substitution of oil in the SPR in lieu of oil in the RPRs for
purposes of economy and efficiency and without compromising the RPRs'
objectives. Since 1975, the U.S. Department of Energy has opposed the
creation of a RPR in Hawaii, maintaining that the State's oil security
needs are adequately served by the SPR on the Gulf Coast.325
Wilson (1988), in a study prepared for the state Department of
Business and Economic Development, cited a number of factors in favor
of the establishment of a regional petroleum reserve in Hawaii,
including protecting the State's economy, ensuring the security of
citizens, and providing for the national defense. The State is
extremely dependent on petroleum, especially for transportation fuel;
however, neither the Gulf Coast nor Alaska will be able to provide
energy security for Hawaii in the 1990s, while Pacific Basin supplies
will become increasingly in tight supply. Moreover, the study noted,
the domestic tanker fleet is inadequate to meet supply disruptions.326
One of the factors cited by the Department of Energy against the
establishment of a regional petroleum reserve in Hawaii was the
comparatively high cost involved. Construction of above- ground steel
tanks in Hawaii would cost about $8 to $9 per barrel of storage
capacity, compared to underground salt dome storage capacity along the
Gulf Coast, which cost from $5 to $6 per barrel.327 The cost of
acquiring land in Hawaii was not included in the estimate "because land
exchanges between the State and the U.S. Government are considered a
viable means of obtaining a suitable site for the RPR."328 While
Wilson argued that adding a transportation penalty of $3 to $6 per
barrel to the lower capital cost of the salt dome storage capacity made
the cost of RPR capacity in Hawaii "competitive with the Gulf Coast
SPR",329 an earlier study by the state Department of Planning and
Economic Development found that "[a] State-owned contingency reserve
for all public and private petroleum needs would be too costly for the
State Government to fund."330
As noted earlier, Hawaii is particularly vulnerable to supply
disruptions, in part due to its heavy reliance on imported oil and
relative geographic isolation.331 While a public bulk gasoline
terminal facility in Hawaii would not take the place of a regional
petroleum reserve, it could nevertheless serve as an emergency backup
during a supply interruption or shortage. Although expensive, depending
on the size and location of the facility, infrastructure costs would
most likely be less than that associated with the construction of a
regional petroleum reserve. However, unless the facility is situated on
public lands, high land values would dramatically increase the cost of
such a facility.
Commerce Clause Implications
The establishment of a public petroleum products storage authority
having the power to import, store, and market petroleum products in
accordance with question (12) would unavoidably involve the State as a
participant in interstate commerce. Importation would necessarily be
from outside of Hawaii, including Alaska and possibly California.
Storage would presumably be in the State's public bulk gasoline
terminal facility, while marketing of petroleum products would probably
be aimed at local independent dealers and distributors. In this
scenario, the State itself would own its own petroleum products,
terminal, and related resources, and would be involving itself, both
directly and indirectly, in both intra- and interstate commerce.
Since the State in this case would not be acting as a market
regulator but rather as a market participant engaged in interstate
commerce, it would be permitted to favor its own citizens in certain
market transactions. In Hughs v. Alexandria Scrap Corp.,332 the United
States Supreme Court stated that "[n]othing in the purposes animating
the commerce clause prohibits a state, in the absence of congressional
action, from participating in the market and exercising the right to
favor its own citizens over others."333 The Court subsequently held in
Reeves, Inc. v. Stake334 that when a state or local government enters
the market as a participant, it is not subject to commerce clause
restraints.335 Thus, while self-imposed restrictions are usually not
economically efficient, nothing in the "dormant" commerce clause
prohibits a state from restricting its own purchases or limiting its
sales to its own citizens.336
While the commerce clause337 gives Congress exclusive powers to
regulate interstate commerce, and the supremacy clause338 gives federal
legislation enacted under the commerce clause precedence over
conflicting state laws, the courts must determine when state
legislation affecting interstate commerce is permissible under the
"dormant" commerce clause, i.e., in the absence of federal legislation
in an area in which the primary power is delegated to Congress.339 The
fact that a state acting as a marketplace participant may favor its own
citizens over citizens of other states in certain market transactions
does not violate the commerce clause; the state "is simply engaging in
a form of welfare. It may be welfare for the rich rather than for the
poor, but it is not restricted by the dormant commerce clause":
The selling of state-owned resources to local
residents at a lower price [than] the state charges to
out-of-state interests is consistent with commerce
clause principles because the state is acting as a
"market participant"--that is, the residents of the
state are bearing the cost of providing a welfare
benefit to persons within the jurisdiction. When the
state is bearing the cost of providing economic
benefits, there is little reason for the Supreme Court
to intervene, even though some inefficiency in the
marketplace might be created, because the political
process within the state should serve as an inner
political check on the state's decisions to participate
in the marketplace.340
However, "the mere fact that the state is 'participating' in the
marketplace through the use of its financial or natural resources does
not completely immunize its actions from review under the commerce
clause."341 The state does not have the power to allocate a resource
it owns in such a way as to discriminate against competition from
citizens of other states in local economic interests. When a state
regulates the use of materials that the state sells or distributes, the
judiciary must decide "whether the regulation is one which results in
the residents of the state bearing the cost for providing benefits to
various persons within the state's jurisdiction or ... whether the
regulation is an unconstitutional shifting of the cost for local
benefits to out-of-state persons or interests by improper restrictions
on competition."342
Thus, although the State's intervention in the market as a
participant in the petroleum industry through the establishment of a
public petroleum products storage authority and terminal facility may
cause inefficiencies in the petroleum products market in Hawaii, the
courts are unlikely to intervene if the State favors its own citizens,
for example, by limiting its sales of petroleum products to Hawaii
citizens. The State cannot, however, unfairly shift the cost for local
benefits to out-of- state persons by imposing improper restrictions on
competition.
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Endnotes |
Chapter 9
Table of Contents |