Gasoline Price Controls Would Likely Harm Hawaii's Consumers

Policies other than gasoline price controls provide the best options for reducing retail gasoline prices and preventing gasoline shortages in Hawaii, according to Jerry Ellig, Deputy Director of the Federal Trade Commission's Office of Policy Planning (OPP). Ellig presented testimony on behalf of FTC staff before a joint hearing co-sponsored by six different committees of the Hawaii legislature today.

Legislation enacted by the state last year established retail and wholesale price controls on regular unleaded gasoline, to be implemented on July 1, 2004, and directed the state's Department of Business, Economic Development, and Tourism (DBEDT) to assess the impact of price controls and alternative policies to reduce gasoline prices in Hawaii.

"A significant body of research and experience suggests that price controls have a poor record of improving consumer welfare in markets where competition is possible, and may in fact cause more harm than good in the long term," Ellig noted. For this reason, he said, FTC staff believes that the Hawaii Legislature acted "with great foresight" when it included in Act 77 a provision directing DBEDT to study the potential impact of such controls and other alternative polices to reduce gas prices in Hawaii. "Substantial evidence suggests that the alternatives to price controls would promote consumer welfare," Ellig testified, "and we urge legislators to consider this evidence when evaluating policies intended to affect gasoline prices."

The FTC staff testimony, which is available on the Commission's Web site as a link to this press release, makes the following main points:

• Several features of Hawaii's market tend to reduce retail supply and increase retail prices, including rent caps for stations operated by lessee-dealers and a law restricting marketers' ability to open new company-operated stations near existing dealer-operated stations.
• Price controls usually create shortages, reduce quality, and generate inconvenience for consumers when they are imposed in markets that could be competitive. If the price controls in Act 77 become effective and succeed in reducing gasoline prices, they likely will impose significant non-price costs on consumers, such as lines or reduced business hours at gasoline stations.
• The more consumer-friendly way of reducing gasoline prices in Hawaii would be through policies that reduce costs and/or promote competition. Policies that may deserve further consideration include repealing Hawaii's "anti-encroachment" law (which limits a refiner's or marketer's ability to establish new company-owned gas stations near existing dealer-operated stations), repealing the rent cap on gasoline stations (which may discourage refiners and marketers from establishing new dealer-operated stations), and ensuring that the Hawaii Attorney General's Office has adequate resources to review mergers that may impact competition in the state's gasoline market. If the ongoing study by the DBEDT and other evidence indicate that wholesale gasoline prices are not competitive, policy-makers may also want to consider initiatives to improve access to import terminals for new entrants.

The Commission vote authorizing staff to present the testimony before the Hawaii House-Senate joint hearing was 5-0. The testimony was given via phone before the Hawaii House Committee on Energy and Environmental Protection; Senate Committee on Energy and Environment; House Committee on Consumer Protection and Commerce; Senate Committee on Commerce, Consumer Protection, and Housing; House Committee on Transportation; and Senate Committee on Transportation, Military Affairs, and Government Operations.