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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