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High gas prices are sparking calls for regulation

WASHINGTON—The soaring price of gasoline has rekindled debate across America over whether prices for gas should be regulated as they are for electricity and water.

On Sept. 1, Hawaii will become the first state to cap the wholesale price of gasoline paid by retailers, who pass on price hikes to consumers. Hawaii's price ceiling will be set anew each Wednesday by taking the average of spot-market prices for gas in Los Angeles, New York and the U.S. Gulf Coast.

Hawaii's effort is sure to get wide attention. Gasoline prices across the United States now average above $2.61. Nevertheless, federal investigations have turned up no evidence of price fixing, and economists caution that regulating gas prices could result in less competition and even higher prices.

Michigan, Oregon, California, New York and Connecticut all have debated the merits of regulating the price of gasoline. The clamor spread across the northern border Sunday, when the head of Canada's New Democratic Party called for it.

The call echoes broadly.

"It's very clear to us that gas prices need to be regulated. We really need to step back and recognize that like electricity, gasoline is too vital to the economy to be left in the hands of these corporations that have been gouging us," said Doug Heller, the executive director of the Foundation for Taxpayer and Consumer Rights in Los Angeles, a consumer advocacy group.

The Service Station Dealers of America agree, saying wholesalers are limiting competition and thus pushing prices higher.

"Fuel is basically a commodity, almost something that should be regulated by the public services commissions, because there is no other product out there that so many consumers depend on," said Paul Fiore, the group's executive vice president.

The American Petroleum Institute, a trade group that represents the oil and natural gas industry, thinks regulating prices would bring disaster.

"That would be the stupidest thing on Earth we could do. It would throw us back into the 1970s," said John Felmy, the institute's chief economist.

President Nixon ordered price controls on oil and gasoline in 1973. They remained until 1981. The controls interfered with market forces governing supply and demand and were blamed for volatile prices, shortages and long lines at gas pumps.

President Reagan lifted price controls, and after deregulation—and increased production by Saudi Arabia—a global oil glut emerged. Few motorists complained when crude oil prices were $10 to $15 a barrel and gas prices hovered around $1 a gallon in the `90s.

Today, however, gasoline prices are more than $3 a gallon in some cities, near the 1981 record price when adjusted for inflation.

Absent regulation, many gas station owners and consumer advocates want at least an end to "zone pricing." That's a technical term for wholesalers charging neighboring dealers different prices. Zone pricing is why the cost of brand-name gas sold by Shell, Exxon, BP and others can vary widely from the same brand sold only blocks away.

Factors that affect zone pricing include traffic patterns, the income of nearby residents, the level of competition from discount gas stations, even new entrants into the retail gasoline market such as Wal-Mart and Costco.

Wholesalers are careful to price what the market can bear, said Don Spears, the managing director of pricing systems for MPSI Systems in Tulsa, Okla., which creates data matrices for pricing.

"Dealers in different marketing environments have to give these retailers prices with which they can compete in different zones," he said. "It's really a fundamentals-driven economic issue, where you are trying to make sure those (gas station) dealers are competing effectively."

Some retailers disagree.

"The bottom line, the oil industry is able to extract a higher margin from their marketing area by segmenting their sales and the ability to price higher the same product because of demand, demographics or exclusivity," said Andre van der Valk, who owns several gas stations around Los Angeles. He sued Shell, alleging discriminatory pricing.

The Federal Trade Commission has investigated allegations of price fixing nationwide and concluded that zone pricing doesn't lead to price gouging.

"Consumers shouldn't infer that there is something particularly suspect going on if they see price variations. ... If you saw the same price at every station it might indicate competition is working perfectly, but it isn't inconsistent with competition that there's a variety of prices," said John Seesel, the FTC's associate general counsel for energy.

Economists at Virginia's George Mason University tried to replicate zone pricing in a controlled theoretical environment and concluded that eliminating the practice wouldn't result in all consumers getting a lower price.

"There are all these other unintended consequences," said Bart Wilson, who led the recent study.

The alternative to regulation, he said, is for consumers to become more active in rewarding stations with good prices. He pointed to local Web sites cropping up across the nation that arm motorists with gasoline-price data.

"People really need to go out and make gas stations compete for their business," he said.

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(c) 2005, Knight Ridder/Tribune Information Services.

PHOTOS (from KRT Photo Service, 202-383-6099): gas price

GRAPHICS (from KRT Graphics, 202-383-6064): 20050823 Gas world, 20050822 US gas prices

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