BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 1329 - Levine Hearing
Date: June 29, 2004 A
As Amended: June 16, 2004 FISCAL B
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DESCRIPTION
The California Constitution states that private
corporations and persons that own, operate, control, or
manage a line, plant, or system for the transportation of
people or property, the transmission of telephone and
telegraph messages, or the production, generation,
transmission, or furnishing of heat, light, water, power,
storage, or wharfage directly or indirectly to or for the
public, and common carriers, are public utilities subject
to control by the Legislature. The Legislature may
prescribe that additional classes of private corporations
or other persons are public utilities.
This bill adds gasoline corporations to the list of public
utilities.
This bill defines a gasoline corporation as every
corporation or person owning, controlling, operating, or
managing any gasoline plant for compensation within this
state.
This bill defines a gasoline plant to include all property
owned, controlled, operated, or managed in connection with
or to facilitate the refining, transmission, distribution,
delivery, underground storage, sale, or furnishing of
gasoline or diesel. Gasoline plant does not include
property used for the drilling or storage of petroleum
prior to the petroleum beginning transport to a refinery.
This bill requires the California Public Utilities
Commission (CPUC) to establish policies and procedures for
cost-effective energy efficiency and conservation programs
for gasoline corporations.
Current law authorizes municipal utility districts to own
and operate public works for providing light, water, power,
heat, transportation, telephone services, and the
disposition of garbage, sewage, or refuse.
This bill also authorizes municipal utility districts to
own and operate public works for providing gasoline and
diesel fuel.
BACKGROUND
This bill makes gasoline and diesel refining, storage,
distribution, and retail sales facilities into public
utilities, covering all oil company activities subsequent
to the acquisition of the raw crude oil.
This bill completely changes the rules for providing
gasoline and diesel fuel (hereinafter referred to
collectively as gasoline) in California. Under today's
rules, gasoline producers make their own decisions about
where to invest, how much to produce, and how much to
charge. Regulation deals with the characteristics of the
products they sell and the way those products impact the
environment; it does not deal with the marketing or pricing
of service. Under the rules prescribed by this bill, the
CPUC would be charged with ensuring gasoline prices are
just and reasonable.
What Are Public Utilities? Public utilities are companies
which provide essential services, which typically covers
electricity, telephone service, natural gas, water, sewer,
and garbage collection. They tend to be natural
monopolies, where scale economies mean the bigger the
utility, the more efficiently it runs. A single public
utility provides service in a way which is more convenient
to the public (e.g. a single set of wires or cables in a
neighborhood, rather than multiple competing wires and
cables). Public utilities are established and regulated to
ensure the service is always available at rates which are
reasonable.
The Rights and Obligations of Public Utilities . Public
utilities are subject to oversight by the CPUC, which is
required to ensure all rates for public utility service are
just and reasonable. Every unjust or unreasonable charge
is unlawful, and every public utility must furnish and
maintain adequate service to promote the safety, health,
comfort, and convenience of its patrons, employees, and the
public.
In exchange for meeting these obligations, public utilities
are typically shielded from competition, increasing the
likelihood the utility will earn a fair return on its
investment. Stock markets view public utilities as stable
investments offering regular dividends, but slow growth.
The Effect of Public Utility Regulation . Public utility
regulation has many forms. Traditionally, it was
cost-of-service regulation, where a regulator determined
the actual cost of providing the service and added to that
a profit margin befitting a company operating without
competition. The criticism of this regulation is there is
little incentive to operate efficiently because costs can
be passed on to customers. Moreover, because the amount of
profit varies directly with the amount of investment,
traditional regulation encourages over-investment, better
known in some circles as "gold-plating." Finally, by
limiting profits, regulation may discourage innovation.
Over the last twenty years, other forms of regulation have
emerged. Large, incumbent local telephone companies have
some of their prices capped, while others are completely
unregulated Electric utilities have cost-of-service
regulation with performance incentives. The goal of these
new forms of regulation is to mimic the incentives of an
unregulated system, where the profit incentive encourages
firms to innovate, cut costs, and otherwise perform
efficiently, in industries where there is insufficient
competition.
This bill prescribes no particular type of regulation,
leaving that decision to the CPUC.
No other state regulates gasoline as proposed in this bill,
though more severe regulation, in the form of state-owned
oil companies, is not uncommon in other countries.
COMMENTS
1.New Bill . Prior to June 16, this bill dealt with the
rights of California's telephone users.
2.Will Regulation Bring Stability? While people may be
"mad as . . ." and may not want to "take it anymore,"
legislative attempts to deal with gasoline price spikes
over the years have not proven fruitful. While drivers
can marginally reduce their own gasoline usage through
conservation measures and through buying fuel-efficient
vehicles, gasoline usage in the aggregate is going
nowhere but up. The California Energy Commission (CEC)
and California Air Resources Board (CARB) have produced a
staff report describing how California's use of gasoline
can be moderated. The Administration has not taken any
action on that report, though the Governor did announce a
voluntary gasoline conservation program aimed at state
workers and businesses. Previously announced plans to
create a Hydrogen Highway, which would start shifting
demand for transportation fuel away from gasoline, have
not been fleshed out.
The existing unregulated market for gasoline has given
California drivers expensive gas and volatile prices.
The author hopes that by regulating the production,
distribution, and sale of gasoline, drivers will have
access to cheaper gasoline and won't have to deal with
nearly as much price volatility.
3.A Somewhat Similar Model. There is an imperfect analog
to the regulatory model prescribed by this bill in the
natural gas market. The production of natural gas is
unregulated, but its distribution and sale is fully
regulated for small customers. Retail natural gas prices
vary as the cost of the natural gas varies, but the cost
of the regulated distribution and sales operation is
relatively constant. Depending on how the CPUC would
choose to regulate gasoline if this bill were to become
law, the volatility of petroleum prices, which reflect
about 40% of the cost of gasoline, would be reflected in
changing gasoline prices. However, dealer and refiner
margins would not vary, which may lead to more stable
prices.
4.Can This Work? The biggest concern with turning the oil
industry into a public utility is how this will effect
the adequacy of gasoline supply. Traditional public
utilities are required to have adequate supplies and to
provide adequate service. This is relatively easy to
police because utilities have customers which, generally
speaking, don't leave. In the gasoline business, there
is no such customer stability. So, if ABC refinery runs
short of gas, is it because it withheld supplies or
because it attracted more customers due to a better
price?
There are also interstate commerce issues related to
supply adequacy. Can California require oil companies to
import supplies from other states? Can California
require in-state refineries to keep their supplies
in-state? If the answer to these questions is "no," then
making oil companies into public utilities may be
counter-productive because by regulating, and presumably
lowering, profit margins for California sales, the oil
companies will simply sell their gasoline elsewhere,
which will create a supply problem in California and
drive prices even higher.
5.Now What? If state regulation is not an answer and the
"free market" is not producing satisfactory results for a
product which is essential to the functioning of society,
there are precious few other options. High gasoline
prices may well be the price for adequate gasoline
supply. In an ideal world, those high prices will create
a demand for products which reduce gasoline use. That
demand will cause those products to be created, thereby
reducing demand for gasoline which will then cause prices
to drop.
6.Can I See This, Too? The bill is double referred to the
Senate Judiciary Committee.
7.Related Legislation . SCA 13 (Dunn) was similar to this
measure. That bill was assigned to this committee, but
never set for hearing.
AB 146 (Kehoe) allows gasoline retailers to buy their
gasoline from any branded wholesalers. This bill was
defeated in the Assembly Business & Professions Committee
in January 2004.
AB 1283 (Kehoe) allows gasoline retailers to buy their
gasoline from any wholesaler, regardless of brand. This
bill is pending before the Senate Judiciary Committee.
AB 1468 (Kehoe) requires the CEC and CARB to develop
strategies to reduce gasoline consumption. That bill was
approved by this committee and is pending in the Senate
Appropriations Committee.
AB 2685 (Oropeza) requires the CEC and CARB to develop a
public information campaign to encourage people to
conserve fuel. That bill was approved by this committee
and is pending in the Senate Appropriations Committee.
PRIOR VOTES
Assembly Floor (67-6)*
Assembly Utilities and Commerce Committee(11-0)*
* Votes on a prior, unrelated version of the bill.
POSITIONS
Sponsor:
Author
Support:
None on file
Oppose:
Western States Petroleum Association
Randy Chinn
AB 1329 Analysis
Hearing Date: June 29, 2004