 Chapter 9
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Chapter 10
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343. Letter to researcher from Ted Gamble Clause, Deputy Attorney
General, Department of the Attorney General, dated July 21,
1995, at 4.
344. Letter from John Tantlinger, Ed.D., Energy Planner for the
Department of Business, Economic Development, and Tourism,
to Wendell K. Kimura, Director, Legislative Reference
Bureau, dated June 13, 1995, at 3.
345. See United States, General Accounting Office, Energy
Security and Policy: Analysis of the Pricing of Crude Oil
and Petroleum Products (Washington, DC: March 1993)
(hereinafter, "GAO (1993)") at 127-128.
346. Id. at 4.
347. Id. at 3; see Haw. Rev. Stat. chapter 486I.
348. Letter to researcher from Richard C. Botti, Executive
Director of the Hawaii Automotive & Retail Gasoline Dealers
Association, dated July 1, 1995, at 4.
349. Letter to researcher from Alec McBarnet, Jr., Vice
President, Hawaii Petroleum Marketers Association, dated
July 7, 1995, at 3.
350. Id. at 3-4.
351. Letter to researcher from Jennifer A. Aquino, Administrative
Manager, Aloha Petroleum, Ltd., dated September 21, 1995, at
5.
352. Letter to researcher from R. A. Broderick, Western Region
Business Manager, Shell Oil Products Company, dated June
30,
1995, at 6-8.
353. See text accompanying notes 45 to 53 in chapter 10 for a
discussion of equal protection.
354. Letter to Wendell K. Kimura, Director, Legislative Reference
Bureau, from Susan A. Kusunoki, Manager of State
Governmental Activities, BHP Hawaii Inc., dated July 18,
1995, at 5-8.
355. Letter from J. W. McElroy, Regional Manager, Chevron U.S.A.
Products Co., to Wendell K. Kimura, Director, Legislative
Reference Bureau, dated August 7, 1995, at 4-7 (emphasis in
original). Chevron's Exhibit 3, referred to in the text,
is
appended to this report at Appendix K. Chevron further
noted that the prices of virtually all consumer goods are
higher in Hawaii than on the U.S. mainland, and that Hawaii
is a small market with very high overheads for doing
business, citing Nancy D. Yamaguchi and David T. Isaak,
Hawaii and the World Oil Market: An Overview for Citizens
and Policymakers (Honolulu: East-West Center Energy
Program, Aug. 1990) at 52-56. Chevron also cited the
Attorney General's finding in its 1994 Interim Report that
through 1992, Hawaii's refineries have not been earning more
than a competitive return on investment. See Hawaii,
Department of the Attorney General, The Attorney General's
1994 Interim Report on the Investigation of Gasoline Prices
(Honolulu: 1994) at 13.
356. Black's Law Dictionary, 5th ed. (St. Paul, MN: West
Publishing Co., 1979) at 1108-1109; see also Charles F.
Phillips, Jr., The Regulation of Public Utilities: Theory
and Practice (Arlington, VA: Public Utilities Reports,
Inc., 1988) at 4-6.
357. Haw. Rev. Stat. §269-2(b).
358. The PUC's basic authority to regulate public utilities is
contained in chapter 269, HRS. The PUC's authority to
regulate motor carriers is contained in chapter 271, HRS,
while the authority to regulate commercial water
transportation carriers within Hawaii is found in chapter
271G, HRS. The PUC also has quasi-judicial authority to
establish and enforce administrative rules and to set
policies and standards.
359. Among the activities performed by the PUC to accomplish this
objective are prescribing tariffs, rates, charges, and fees,
and determining the allowable rate of earnings in
establishing rates; issuing orders and guidelines concerning
the general operations and management of utilities;
prescribing the service, method, and annual rates of
depreciation for utility property; and adopting rules
governing the operations, standards, and fiscal management
of utilities. See generally Hawaii, Public Utilities
Commission, Annual Reports: Fiscal Years 1991-92 and 1992-
93 (Honolulu: July, 1994); Hawaii Revised Statutes chapter
269.
360. See, e.g., Senate Bill No. 1900 and House Bill No. 1652,
Eighteenth Legislature, 1995, State of Hawaii; Senate Bill
No. 123, Senate Bill No. 559, House Bill No. 66, C.D. 1, and
House Bill No. 279, Seventeenth Legislature, 1993, State of
Hawaii.
361. In particular, the Commission noted the following:
1. We do not believe that the proposed expansion of
the Commission's jurisdiction over oil companies that
are doing business in the State should be mandated
without a thorough study of the need for the
regulation and the Commission's regulatory role with
respect to these companies. We would note here that
the Commission is unaware of any state that regulates
oil companies as public utilities.
2. The regulation of oil companies in the State will
undoubtedly increase the Commission's workload. We
are unclear at this time of its impact. However, we
suspect that the Commission's budget and staffing will
have to be increased substantially to develop
expertise in the area and to take on the regulation of
the oil companies in the State.
3. The Commission's proposed 1995-1997 budget does
not include the assumption of additional regulatory
responsibilities, such as those envisioned by this
bill. Thus, additional funding will be required to
implement this measure.
Testimony of Yuko Naito, Chairman, Public Utilities
Commission, before the Senate Committee on Consumer
Protection regarding Senate Bill No. 1900 (1995), February
13, 1995, at 1-2.
362. See Testimony of Charles Totto, Exective Director of the
Division of Consumer Advocacy, Department of Commerce and Consumer Affairs, before the Senate Committee on Consumer
Protection regarding Senate Bill No. 1900 (1995), February
13, 1995, at 1:
[S]hould this bill be passed out of Committee, we
respectfully request that a section be added allowing
sufficient funding for the purposes of properly
executing the mandates of the Consumer Advocate under
§269-52[, Hawaii Revised Statutes]. Those duties
require us to represent, advance and protect the
interests of all utility consumers. We anticipate
that participating in rate regulation and other
investigations on behalf of consumers of petroleum
products will be a monumental undertaking. As a
result, funding for staff, consultants and legal
counsel from the Department of the Attorney General
will be required.
363. For example, the Western States Petroleum Association argued
that public utility regulation of the oil industry was
unnecessary:
The oil industry, left to manage its business in a
free market environment will ultimately provide the
consumer with the best products and services at the
best value possible. In fact, competition in Hawaii
is so great, that it has allowed the industry to
improve the efficiency of their operations, upgrade
facilities, invest in new technology and offer the
consumer more convenience, reliability, and overall
quality products and services.
Testimony of Jack K. Suwa, Public Affairs Consultants-
Hawaii, before the Senate Committee on Consumer Protection
regarding Senate Bill No. 1900 (1995), February 10, 1995, at
1. Similarly, BHP argued that there was no rational
justification for regulating Hawaii's oil industry, that
regulation would replace natural market forces which could
result in artificially higher prices, and that regulation
would have a chilling effect on other firms seeking to enter
Hawaii's market. See Testimony of George T. Aoki, BHP
Hawaii, Inc., before the Senate Committee on Consumer
Protection regarding Senate Bill No. 1900 (1995), February
13, 1995, at 1; see also testimony of J. W. McElroy, Chevron
USA Products Company, before the Senate Committee on
Consumer Protection regarding Senate Bill No. 1900 (1995),
February 13, 1995.
364. Kenneth E. Train, Optimal Regulation: The Economic Theory
of Natural Monopoly (Cambridge, MA: The MIT Press, 1991) at
1-2; see also Phillips (1988) at 45; Alan Stone, Regulation
and its Alternatives (Washington, DC: Congressional
Quarterly Press, 1982) at 68-78; see generally Richard
Schmalensee, The Control of Natural Monopolies (Lexington,
MA: Lexington Books, 1979).
365. Graham Bannock, R. E. Baxter, and Evan Davis, The Penguin
Dictionary of Economics (London: Penguin Books, 1987) at
129. While it has been argued that economies of scale make
larger firms more productive than smaller ones, others
contend that economies of scale in production do not vary
significantly according to the size of a firm, and that
"[t]he continued existence of establishments of many sizes
argues that economies of scale in production are not
significant." Robert E. Breney and Ed Owens, "A Model for
Contemporary Small Business Policy Issues" in Small Business
in a Regulated Economy: Issues and Policy Implications, ed.
Richard J. Judd, William T. Greenwood, and Fred W. Becker
(New York, NY: Quorum Books, 1988) at 207 (footnote
omitted).
366. Stephen G. Breyer, Regulation and its Reform (Cambridge, MA:
Harvard University Press, 1982) at 15. For a discussion of
justifications for and against regulating natural
monopolies, see id. at 15-20.
367. Stone (1982) at 74.
368. William R. Hughes and George R. Hall, "Substituting
Competition for Regulation," 11 Energy L.J. 243, 245 (1990)
(footnote omitted).
369. Id. (footnote omitted).
370. Id. at 245 n. 9.
371. Bruce M. Owen and Ronald Braeutigam, The Regulation Game:
Strategic Use of the Administrative Process (Cambridge, MA:
Ballinger Publishing Co., 1978) at 1-2.
372. Walter Adams, "Can Regulation Curb Corporate Power?" in
Public Utility Regulation: Change and Scope, ed. Werner
Sichel and Thomas G. Gies (Lexington, MA: Lexington Books,
1975) at 15-17:
[F]irst, ... regulatory commissions tend to develop an
undue identification with the industries they are
supposed to regulate. More often than not, they seem
to protect the regulated industries from competition,
rather than the public from exploitation. Indeed, it
is not too extreme to suggest, as our experience
(especially with the ICC) indicates, that what starts
out as regulation ends up as protection. The power to
license becomes the power to exclude; the regulation
of rates, a system of price supports; the surveillance
of mergers, an instrument of concentration; the
supervision of business practices, a pretext for
harassing the weak, the unorganized, and the
politically impotent; and the assurance of a needed
public service, an excuse for public subsidies and
bailouts. Once an industry becomes the government's
chosen instrument for effectuating a public purpose,
regulation becomes, as Henry Simons saw long ago, "an
apology for governmental enforcement of minimum prices
and wages at levels higher than monopolies could
maintain without the support of law." Regulation
becomes the means of officially sanctioning and
legitimitizing the chosen instrument's performance, no
matter how deplorable such performance may be....
Once you are wedded to that kind of regulatory scheme,
the public is stuck with its chosen instrument.
The second difficulty with regulation is that, at
best, it is a negative force for right conduct. A
regulatory commission can refuse to approve a price
increase, but it cannot compel its regulatees to lower
production costs. The commission cannot compel the
scrapping of old plants or the construction of new
ones. It cannot force additional expenditures on
research and development or command greater
progressiveness in innovation and in invention. It
cannot penalize management for its incompetence, for
its lack of imagination, or for its lack of creativity
because it does not have a clear view of what
potentially attainable cost reductions are. It has no
way, therefore, of stopping the great vice of
monopoly, namely, the monopolist's tendency to lead
the quiet life and to squander society's treasure in
the form of excessive cost. Limiting the monopolist
to a fair return may be the essence of the regulatory
process, but it does not achieve society's central
objective. Put differently, regulation is often a
pass-through mechanism for the inefficiency, cost
escalation, and lethargy of pampered managements
luxuriating in an ambience of governmental
permissiveness.
Third, regulation, whatever its short-run, static
virtues, is not a substitute for but a complement to
competition. That is, it cannot function effectively
without some exogenous force to discipline the
conservative bias of both regulatees and regulators.
Experience shows, especially in transportation, but
also in communications, that even peripheral
competition plays a more significant role than
straight regulation in forcing innovations on
bureaucratic managers and their overly permissive
guardians.... It is these marginal competitors,
operating at the periphery and in the interstices of a
regulated industry, who have done so much to
demonstrate what innovations are possible, practical,
and profitable, and who, more often than not, have
suffered regulatory euthanasia for performing that
invaluable public service....
What, then, is the solution? Obviously, at least
as far as I'm concerned, I think that deregulation,
wherever possible, is the answer. That is, in
industries which are naturally competitive industries,
there really is no excuse for the government's playing
a role, because the government will only be a
protective device for vested interest. It will be a
mask for privilege, a shield for monopoly. It will
not be an agency for the public interest.
See also Schmalensee (1979) at 11-13, discussing economic,
political, and administrative conceptions of regulatory
failure.
373. Owen and Braeutigam (1978) at 10. Economic theories of
regulation include the following:
. Capture theory. The first version of the capture
(or economic) theory of regulation is that regulatory
agencies, although established to protect the public
interest, subsequently become tools of the industry
which they regulate. The second version is that these
agencies are created to serve the interests of the
industries that they regulate in response to industry
demands for cartel management. Other tools to effect
redistribution include various direct tax and
expenditure programs.
. Life-cycle theory. This theory reaches similar
conclusions to that of capture theory, i.e., that
regulation ends up favoring industry groups at the
expense of consumers. Under this theory, short-lived
coalitions of consumer interest groups are formed to
adopt regulatory legislation to benefit consumers,
which, once established, becomes captured by the
industry. As the issues wanes in political importance,
the consumer interest coalition fades, partly due to
the "myth" that the agency is protecting the interests
of consumers. The agency, once established, also
requires substantial expenditures that tend to benefit
lawyers, lawmakers, and consulting economists.
. Bureaucrats and legislators. It has been argued
that bureaucrats seek to maximize the total budget of
their bureau, and that bureaus exchange a specific
output for a specific budget. The latter implies that
bureaus hold some monopoly power, by giving the
bureau's sponsors (e.g., a legislative appropriations
committee), a take-it-or-leave-it choice. In addition,
legislators provide facilitation services to their
constituents who must deal with the bureaucracy.
. Regulation as contract. Under this theory,
regulatory agencies are viewed as analogous to long-
term contracts between parties having a continuing
economic relationship. Under these contracts,
suppliers and consumers voluntarily limit their future
options to minimize costs and uncertainty. A
regulatory agency may also be treated as if it were the
agent of a consumer group in negotiating and
administering such a contract. See id. at 11-18.
Owen and Braeutigam encourage industries to make strategic
use of the administrative process in what they view as a
"regulation game":
No industry offered the opportunity to be regulated
should decline it. Few industries have done so.
Railroads, airlines, telephone companies, radio
stations, and most other industries have warmly
embraced regulation when it was offered and have
strenuously resisted efforts to remove it....
Regulation protects such industries against
competition from outsiders and from within the
industry. It provides a degree of protection from
congressional investigation. Regulation greatly
reduces the risk of bankruptcy from causes other than
competition. And, while regulation may make very high
rates of return difficult to achieve, it does
virtually guarantee a steady stream of adequate
profits. Id. at 2.
Regulation may also be viewed as a legal way of removing
competition: "Regulated firms face the most serious
financial threats, not from their regulators, but from
potential competitors. Regulation is an excellent device
for eliminating competition within the industry and for
preventing direct entry." Id. at 8.
374. See Stone (1982) at 73; GAO (1993) at 55.
375. John E. Gray, Energy Policy: Industry Perspectives
(Cambridge, MA: Ballinger Publishing Co., 1975) at 72 (App.
C).
376. Philip E. Sorensen, An Economic Analysis of the Distributor-
Dealer Wholesale Gasoline Price Inversion of 1990: The
Effects of Different Contractual Relations (N.p., April
1991) at 31.
377. Yamaguchi and Isaak (1990) at 76-77; see also note 21 and
accompanying text in chapter 10.
378. See id. at 79-80:
Different products are consumed by different interest
groups. The tourist industry, for example, will want
to keep the cost of jet fuel low; electric utilities
will argue for lower fuel oil prices; the general
public will lobby for lower gasoline prices. When the
government sets the prices, there is constant pressure
to subsidize one fuel at the expense of another.
Furthermore, the world market changes, creating
shortages of one product and surpluses of another, but
governments often find it politically difficult to
follow the changes in the market because of public
outrage.... [M]ost governments prefer not to attempt
to regulate oil--consumers will always be angry, but
it is safer to let them vent their anger on Greedy Big
Oil than at the voting booths.
379. See text accompanying note 31 in chapter 13.
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Chapter 10
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