BILL ANALYSIS � 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
SB 448 - Leno Hearing Date: April 16, 2013
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As Amended: April 1, 2013 FISCAL B
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DESCRIPTION
Current law mandates the California Energy Commission (CEC) to
monitor gasoline pricing throughout the state and report on
price volatility under the Petroleum Industry Information
Reporting Act of 1980. (PRC ��25350-25366)
Federal law prohibits market manipulation of crude oil gasoline,
petroleum, or natural gas. (42 U.S.C. �17301; 15 U.S.C. �717c-1)
This bill establishes the Office of Price Investigation and
Manipulation Prevention (Office) within the CEC. The main duties
of this office would be to define concepts of market
manipulation, obtain data relevant to fuel markets, to perform
an analysis of those data addressing any suspected market
manipulation, and report to the Legislature recommendations to
limit price volatility. The establishment of the Office would be
contingent on funding from royalty payments from oil and gas
leases.
BACKGROUND
May and October 2012 Fuel Price Spikes - Recent spikes in
gasoline and diesel prices have renewed concerns regarding
potential market manipulation by gas companies. In 2012, two
gasoline price spikes were blamed in media reports on oil
refinery issues that occurred prior to the spikes. The BP Cherry
Point refinery had a fire on February 17, 2012. Subsequently, in
May 2012, gasoline prices rose by about 15 cents per gallon.
Another refinery fire, this time at the Chevron Richmond
facility occurred on August 6, 2012. It, along with an
electrical outage at Exxon's Torrance refinery on October 1
2012, was reportedly linked to a 50 cent per gallon price spike
in October 2012. The October spike sent gas prices to near
record levels. To alleviate costs, Governor Brown issued an
order allowing the winter-blend gasoline to be sold early in the
state.
Select Committee Hearing - On November 15, 2012, the author held
an informational hearing under the Select Committee on Bay Area
Transportation which discussed California oil refineries,
gasoline supply, market power, and gas price volatility. At the
hearing, testimony was heard from the CEC, the Western States
Petroleum Association, Severin Borenstein (Director of UC Energy
Institute), and Robert McCullough (McCullough Research).
A report by the UC Energy Institute from 2004 examined fuel
price volatility and market power.<1> The report examined the
importation, refinement, and storage of fuel and the potential
for firms to exercise market power. Results of the study showed
that the exercise of market power could be used to explain price
volatility, but that volatility was also consistent with
competitive markets. The report highlighted the difficulty in
determining if fluctuations in the market are a result of
competitive forces or market manipulation.
Another report by McCullough Research showed that the price
spikes occurred while crude oil prices were declining, and
inventories were increasing.<2> This report raised suspicions
about market manipulation by oil companies. Figure 1 shows the
trends of crude oil price per barrel (left axis) and price per
gallon of gasoline (right axis) in California, Oregon, and
Washington from February through November, 2012. The report
argues that the price spikes were not likely a result of oil
refinery fires that had occurred prior to the spikes.
Figure 1: The costs of gasoline and crude oil from February
through November, 2012. Figure reproduced from McCullough
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<1> Market Power in California's Gasoline Market, Borenstein,
Bushnell, and Lewis, 2004, UC Energy Institute,
http://www.ucei.berkeley.edu/
<2> May and October 2012 Gasoline Price Skies on the West Coast,
McCullough Research, http://www.mresearch.com/reports.html
Research Report and available at GasBuddy.com
In response to the hearing and the McCullough report, six US
Senators, including CA Senators Boxer and Feinstein issued a
letter to U.S. Attorney General Eric Holder requesting an
investigation into possible market manipulation by gas
companies.
Diversification of Fuel Markets - California has a comprehensive
program under AB 32 to reduce greenhouse-gasses (GHG)
implemented by the Air Resources Board. Included in these
mechanisms is the low-carbon fuel standard (LCFS), which
requires that the carbon intensity of the transportation fuels
in California be reduced incrementally to meet the 2020 target.
Regulated parties can earn fuel credits by diversifying
transportation fuels to include low carbon alternatives to
gasoline such as natural gas, biofuels, electricity, and
hydrogen fuel cells.
In 2015, transportation fuel distributors will be required to
participate in the Air Resources Board Cap and Trade program. By
further putting a price on carbon emission, market forces will
pressure gasoline and diesel to become more expensive. Thus,
this constitutes a further pressure to diversify transportation
fuels.
Federal Regulation - The Federal Trade Commission (FTC) monitors
and regulates oil and gas industry companies. Mergers of
companies are scrutinized in the context of market
concentration, overall composition of the market, and
distribution of market shares of competing firms. The FTC
intervened in seven cases of mergers that directly affected
markets in California since 1981.
The FTC also polices non-merger anticompetitive activities. For
example, in 2003, the FTC filed complaint against Union Oil
Company of California that claimed the company falsely
represented that its research into low emissions reformulated
gasoline was publicly available while simultaneously applying
for a patent that would charge royalties if the California Air
Resources Board used its emissions information.
COMMENTS
1. Author's Intent. According to the author this bill is
aimed at ensuring all Californians are not paying more at
the pump because of illegal price manipulation, and further
aims to ensure the state is on a longer term path to
decreased gas prices. The author argues that federal
statutes that are intended to prevent market manipulation
are insufficient, because they do not have regulatory
standards or methodologies by which to judge the acts,
practices, or courses of business, including whether
concentration of market power or price setting constitutes
an illegal practice. The Office established by this bill
would address these inadequacies.
2. A Permanent Office. The CEC is mandated to conduct much
of the analysis that is proposed in this bill. Under the
Petroleum Industry Information Reporting Act of 1980, the
CEC currently collects data on oil refinement, fuel
production and storage, and prices throughout the state.
The CEC then is required to analyze and interpret the data
in order to identify the cause of petroleum supply
shortages and significant changes in gasoline prices. The
CEC submits a report of its findings to the Governor and
Legislature with specified frequency. It appears the main
intent of this bill is already satisfied within the bounds
of current law.
One difference is that the proposed Office would attempt to
define and investigate "market manipulation" explicitly.
The committee may wish to consider amendments that would
strike the establishment of the separate Office and
incorporate the bill's call to define and investigate
market manipulation within the existing scope of statute.
As proposed the Office would be permanent within the CEC,
which implies the Office will conduct this research on an
ongoing basis. The committee may wish to include a sunset
clause to perform a review of the efficacy of the Office
and its research findings before establishing it
permanently.
The bill does not establish a frequency for the proposed
reports to the Legislature. If the intent is to monitor the
fuel markets on an ongoing basis, then it should be
clarified how frequently the reports should be made to the
Legislature. Currently, the CEC reports to the Legislature
with a summary, analysis, and interpretation of its data on
transportation fuel markets quarterly (PRC �25358). The
committee might consider an amendment that incorporates the
research findings into currently mandated reporting
requirements of the CEC.
3. Sphere of Influence? The intent of the author is to
address gasoline and diesel fuel price volatility for
motorists within California. However, the language of the
bill is not specific to gasoline or diesel except for the
reporting of strategies to reduce overall demand of such.
This leaves an open question of whether the Office is
required to investigate other fuel markets related to
airplanes, trains, and ships that do not use gasoline or
diesel fuel. It also does not address if the natural gas
market for transportation vehicles (e.g., city busses)
should be included in the investigation. Furthermore, it is
unclear whether this office will be required to monitor and
analyze new fuel markets as they develop in the future. The
committee may wish to consider an amendment that clarifies
which fuel markets will be subject to monitoring and
investigation.
4. Fuel Diversification. One of the goals of the required
report to the Legislature describes strategies for
increasing fuel diversification and reducing overall demand
of gasoline and diesel. However, California already has
strategies to encourage fuel diversification. As described
in the previous section these are the LCFS and Cap and
Trade programs. In light of the significant effort already
put forth in this area, it seems unnecessary to charge
another entity to further study the problem. The committee
may wish to consider an amendment that strikes these
requirements from the bill.
5. Prior Legislation. In 2007, SB 412 (Simitian) required
the CEC to evaluate "market features that may facilitate or
impair the functioning of California's electricity and
natural gas markets, such as the potential for withholding
capacity, exercising market power, or otherwise engaging in
market manipulation practices or monopolistic behavior." SB
412 did not pass.
6. Double Referral . Should this bill be approved by the
committee, it will be re-referred to the Senate Committee
on Transportation and Housing for its consideration.
POSITIONS
Sponsor:
Author
Support:
Consumer Action
Consumer Federation of California
Environmental Defense Fund
Sierra Club California
The Greenlining Institute
Oppose:
Western States Petroleum Association
Kyle Hiner
SB 448 Analysis
Hearing Date: April 16, 2013