California lawmakers on Monday approved Gov. Gavin Newsom's legislation to increase transparency in the oil industry, in the final hours of a special session he called last year to penalize excessive profits.
After months of deliberation, the final bill does not cap oil refinery profits or penalize the industry as Newsom had intended when he accused companies of intentionally driving up gas prices to boost revenue. Instead, the bill, SBX1-2, gives the California Energy Commission the power to set a cap and impose penalties through a regulatory process if it decides that oil companies are making excessive profits and that a penalty will not result in higher prices for consumers.
The legislation focuses on transparency, including requiring the industry to provide more information about maintenance and pricing decisions in order to allow state officials to better understand the market and deter companies from gouging consumers.
"Even when we are not experiencing a spike, we pay higher prices than in other states, even when we account for our taxes and environmental policies," said Assemblymember Jacqui Irwin, D-Thousand Oaks, who noted that Californians paid as much as $2.60 more per gallon than residents of other states at one point last year. "This is unacceptable."
The Democratic majority handed Newsom his bill, but support wasn't overwhelming within his own party. The proposal passed 52-19 in the Assembly, with several Democrats declining to vote, and with a stronger 30-8 vote last week in the Senate.
Democratic lawmakers hailed the bill as an improvement from the prior version. Several were careful to point out that the legislation prohibits regulators from imposing any limit on profits that could drive up gas prices, underscoring concerns about potential unintended consequences of capping the industry's earnings.
Republicans criticized Newsom and Democrats, arguing that the legislation will hurt Californians.
"This bill is a senseless attack on domestic energy production that will only harm hardworking Californians in the field by creating a hostile business climate," said Assemblymember Vince Fong, R-Bakersfield.
Will the legislation result in lower gas prices?
Supporters argue that requiring refiners to disclose more information about pricing decisions and setting up an independent watchdog agency will deter price gouging and prevent the kinds of spikes California experienced over the summer and fall.
Proponents also argue that giving the California Energy Commission the ability to set a profits penalty could motivate companies to keep prices down. The bill prohibits commissioners from setting a penalty if they find that it will have adverse consequences on Californians and increase gas prices.
The oil industry and opponents of the bill disagree.
Western States Petroleum Association argues that prices are higher in California as a result of the state's policies to limit gasoline production.
California relies on about five main oil refiners to produce gasoline, which means the state is isolated from alternative backup sources, and maintenance issues can reduce supply and cause price spikes.
The legislation will require oil companies to provide the state with more information around planned maintenance, which could make it easier to avoid having several refineries go offline at the same time, drastically reducing supply. If unplanned maintenance occurs, regulators will have more tools to investigate.
But the petroleum association argues that giving the energy commission the ability to cap profits could carry negative consequences for the industry.
Limiting profits and placing additional requirements on refiners could drive companies out of the state, reducing supply and increasing fuel costs, the oil group said. The industry had urged the state to take more time to understand the bill's potential effects on supply.
What did Newsom originally ask the Legislature to do?
In the midst of his high-profile battle with oil companies, Newsom on Sept. 30 issued a call for lawmakers to pass a "windfall tax" on the industry "that would go directly back to California taxpayers."
At the time, average gas prices in California topped $6 per gallon as companies "raked in" nearly $100 billion in the prior three months, Newsom said.
A week later, the governor expanded on his comments during a press conference and announced that he would call lawmakers into a special legislative session on Dec. 5 to pass a windfall profits tax. He said he was responding to record-breaking gas prices, which he called "outrageous and unconscionable."
The governor's office worked for the next two months to prepare an outline of a plan he shared with lawmakers on the day they returned to the state Capitol to begin the legislative session and kick off the special session. By then, he'd transitioned away from calling the proposal a "windfall profits tax" and instead had begun referring to it as a "price-gouging penalty."
The outline he proposed Dec. 5 would have required lawmakers to set and enact a "maximum gross gasoline refining margin" — or profit cap — on refineries based on a monthly calculation of the average profit per barrel.
The proposal would have also allowed the California Energy Commission to impose an administrative civil penalty for violations of the profit cap.
Why did the proposal change?
Newsom's plan changed after he hit a roadblock in the Legislature. It became clear during legislative hearings that state officials needed more information from the industry to understand the problem before setting a cap and penalty.
Lawmakers shared concerns about potential unintended consequences of Newsom's desire to cap earnings. Some experts said Newsom's idea to limit refinery profits wouldn't solve the problem of "mystery surcharges" believed to be incurred at the retail end of the supply chain.
"I know that legislators do not want the answer 'We need more investigation,' but the fact is shooting first and then finding out if it's the right solution is going to likely be just as detrimental as helpful," Severin Borenstein, director of the Energy Institute at University of California-Berkeley's Haas School of Business, told lawmakers at the time.
Borenstein and other experts agreed about the need for transparency from oil refiners on pricing, maintenance, supply contracts and inventory. Newsom's aides argued that changing the plan to focus on transparency made it stronger.
What does the final bill say about a profits penalty?
Instead of a cap approved by lawmakers, SBX1-2 allows the energy commission to establish a maximum gross gasoline refining margin and a penalty for exceeding that margin, if they deem it necessary. Before setting a cap and penalty, the commission must find that benefits of doing so outweigh potential costs to consumers.
The bill allows the commission to petition the court to prohibit a refiner from exceeding the maximum. Companies can request an exemption from the profit cap, which the commission will be required to consider.
How does the bill improve transparency?
The bill establishes the Division of Petroleum Market Oversight within the energy commission. The division will have the power to subpoena records from the oil industry and refer violations to the California attorney general for prosecution.
The bill also establishes the Independent Consumer Fuels Advisory Committee, comprising industry experts appointed by the governor and legislative leaders, to advise the energy commission and the new oversight division.
Under the bill, oil refineries would be required to report additional information to the state, including:
—The net gasoline refining margin per barrel sold in a given month.
—Notification of all maintenance plans and the reduction of inventory levels expected as a result of the work. The bill authorizes the energy commission to regulate the timing of maintenance to minimize price shocks.
—Notification at least a year in advance if a California refinery intends to shut down or sell.
—Daily reports on spot market transactions from refiners, as well as non-refiners.
The bill allows for increased civil penalties if information is not provided — up to $20,000 per day or $500,000 per submission.
Who supports the bill ?
Environmental groups and consumer advocates, such as Consumer Watchdog and the Center for Biological Diversity, have continued to support the policy despite the changes. Many argue that the legislation goes further to hold the industry accountable for pricing than existing law, even without a mandatory cap on profits.
Supporters contend that more transparency from the industry is necessary to prevent price gouging.
Who opposes it ?
Oil interests and business groups continue to oppose the plan, arguing that it won't solve pricing problems and will make matters worse. They claim it will have unintended consequences, including the potential to reduce gasoline supply and drive up costs on consumers and businesses.
The California Chamber of Commerce, Western States Petroleum Association and the State Building and Construction Trades Council are among the most high-profile groups that oppose the plan.
The petroleum association argues that merely the passage of the legislation, giving the energy commission the authority to enact a penalty, could send a shock wave through the market.
What's next?
Newsom is expected to sign the bill as early as Tuesday, and it will take effect in 90 days.
