The state Public Utilities Commission yesterday set the nation's first cap on the price of wholesale gasoline as part of Hawai'i's effort to bring rising prices at the pump under control.

Gas prices may rise initially when the cap takes effect Sept. 1, if wholesalers charge the maximum allowable under the cap and retailers add their usual markup. However, prices also could decline faster should Mainland prices fall.

The PUC said wholesalers may not charge more than $2.1578, or about $2.76 including taxes, in Honolulu for a gallon of regular unleaded gasoline. The commission set separate price caps for other islands. The price caps will be adjusted weekly.

The wholesale cap — which excludes any retail markup — is roughly equal to yesterday's average retail Honolulu price of $2.761 a gallon for regular gasoline. Assuming wholesalers charge the maximum allowed by the cap and retailers add an estimated 12-cent-per-gallon markup, the price consumers pay at the pump will be higher under the gas cap.

An Advertiser analysis shows that had the cap been in effect during the past 12 months, it would have resulted in more volatile pump prices, but would not have dramatically raised or reduced prices on average.

Under the price cap, the average retail price for regular on O'ahu would have been slightly higher at an estimated $2.38 between Aug. 2, 2004, and Aug. 12 of this year, versus an actual average price of about $2.36. The estimated cost is based on Advertiser calculations and assumes wholesalers charge the maximum allowed under the law and that retailers maintain the 12-cent markup before and after the caps become effective.

The wholesale cap is set by taking average prices in various Mainland markets and adding a margin to account for the costs of shipping, distributing and marking gasoline in Hawai'i. The caps are supposed to provide oil companies with acceptable profit margins.

However, the oil industry and other critics contend the caps could result in shortages, higher prices and the potential closing of one of the state's two refineries, which would result in hundreds of lost jobs.

Currently, Hawai'i's gasoline prices don't rise or fall as fast as Mainland prices, which works both for and against consumers. Under the price-cap law, Hono-lulu's prices would be forced to rise and fall in closer correlation with Mainland prices, which would exacerbate price swings.

If that's the case, the caps would accomplish their main goal, said House Majority Leader Marcus Oshiro, D-39th (Wahiawa).

"You have to have that parity with the Mainland market, so when crude oil prices go down, prices at the pump go down," he said. "We have never had that. That's the main reason that this law was brought out there, so people would get treated fairly and get the same savings as the Mainland savings."

That could have been the case in December, if the cap had been in place. Crude prices fell on easing supply concerns, but gasoline prices in Hawai'i stayed high. Under the price-cap law, the price of regular could have plunged as much as 30 cents a gallon in December.

The flip side would have occurred in May when crude prices rose on security concerns in the Middle East, but prices in Hawai'i remained relatively flat. If the price cap had been in effect in May, Honolulu retail prices might have been as much as 20 cents a gallon higher for regular than they actually were under the cap.

Democrats yesterday maintained the cap should be given at least four months to work, but acknowledged that implementation of the law now is in the hands of the PUC, which will administer the caps, and Gov. Linda Lingle, who has the power to suspend them if conditions warrant.

"Definitely everything lies in the implementation," said Hermina Morita, D-14th (Kapa'a, Hanalei). "There's so many factors that as written, the law cannot control.

"I think we have safety valves built in, but we don't have any control over implementation."

Lingle opposes price caps and predicts they will fail. Lingle, who has the power to halt the cap if it threatens public welfare or safety, said she would be watching closely to ensure that gasoline supplies to emergency agencies are not disrupted. The governor also said she would be monitoring how the caps evolve on the Neighbor Islands, which could be the first to encounter any shortages.

However, the governor said she is reluctant to be too specific about the criteria she would use in determining whether to stop the cap because she did not want to inadvertently create problems by talking about different negative scenarios.

"I hope the Legislature is right about this and I'm wrong, because I do want prices to come down," Lingle said yesterday at a luncheon for veterans. "Nobody knows what the impact is going to be, so we're going to just have to wait and let this play out."

Reach Sean Hao at shao@honoluluadvertiser.com.