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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