BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 304|
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THIRD READING
Bill No: SB 304
Author: Morrow (R), et al
Amended: 5/19/03
Vote: 21
SENATE ENERGY, U.&C. COMMITTEE : 5-2, 5/6/03
AYES: Bowen, Morrow, Alarcon, Dunn, Sher
NOES: McClintock, Murray
SUBJECT : Petroleum: refiners: service stations
SOURCE : Author
DIGEST : This bill prohibits refiners of motor fuels from
converting service stations owned by independent dealers to
company-operated service stations, after January 1, 2005.
The bill also prohibits refiners from engaging in various
pricing and delivery practices.
ANALYSIS : Current law finds the distribution and sale of
motor fuels affect the general economy of the state, the
public interest, and the public welfare, and competition
and freedom from unreasonable discriminatory practices are
essential to the fair and efficient functioning of a free
market economy.
Current law makes it unlawful for any refiner to
discriminate between purchasers where the effect is to
decrease competition, and provides for treble damages in
cases where a refiner is convicted of engaging in such
discriminatory practices.
CONTINUED
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Current law establishes procedures for the transfer of any
gasoline dealer franchise and limits the ability of the
franchisor to deny a franchise transfer.
This bill makes numerous findings and declarations,
including:
1. The marketing of motor fuel in California has become
highly concentrated.
2. This concentration and the use of certain marketing
practices has resulted in artificially high wholesale
and retail gasoline prices.
3. California refiners have inflated profits through higher
gasoline prices by utilizing practices that encourage
reduced production, low inventories, and the formation
of import barriers, all under the guise of meeting
California's clean burning fuel mandate.
4. This conduct is harmful to consumers and the economy of
California and should be prohibited.
This bill limits the price at which refiners can sell motor
fuels to any franchisee service station dealer. That price
is the lowest wholesale price, calculated in a specified
manner, which the refiner charges to stations which it
operates ("owned and operated" or "O&O" stations) that are
served by the same truck loading terminal.
This bill bars refiners from setting, attempting to set,
controlling, or economically influencing, either directly
or indirectly, the retail price or profit margins of motor
fuel sold at any retail service station other than O&O
stations.
This bill bars refiners from taking ownership of or
controlling any service station owned by an independent
dealer after January 1, 2005. However, refiners may
temporarily operate such stations for up to 90 days under
specified circumstances.
This bill provides if any provision is held invalid, the
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remaining of the provisions shall remain valid.
Background
Despite being home to a number of oil refineries,
Californians can't seem to shake high gasoline prices. In
1996, California gasoline prices spiked from $1.15/gal to
$1.47. In 1999, gasoline prices spiked again, rising as
much as $0.50/gal higher than the rest of the nation.
Earlier this year, gas prices spiked yet again, this time
from $1.57/gal to $2.15/gal. Each of these price spikes
prompted public outcries, legislative responses, and, in
1999, an investigation by the Attorney General.
The current concerns over gasoline prices prompted the
Governor to order an investigation by the California Energy
Commission (CEC). That investigation noted gasoline prices
climbed 36 percent from the beginning of the year through
March 17, which if sustained will cost consumers more than
$20 million per day. The cause of the price increases was
attributed to large increases in the price of oil due to
uncertainty about the U.S.-Iraq war, an oil strike in
Venezuela, and a cold winter in the eastern U.S. Refiners
also switched from a winter gas formula to a summer
formula, which is typically more expensive to produce and,
during the switchover, temporarily tightens supplies.
Additional gasoline demand in Phoenix reduced California
supplies further, as did the move to phase-out the use of
MTBE.
Current Market Structure
California has 16 refiners, six of which control 86 percent
of the refining capacity in the state. The largest
refiners are vertically integrated, owning crude oil
supplies, refining operations, and retail distributors.
About 15 percent of all California gas stations are owned
and operated by dealers who are independent from refiners,
15 percent are owned and operated (O&O) by the refiner, and
70 percent are franchisees of the refiners. All
franchisees are contractually obligated to obtain their
gasoline from the refiner at prices established by the
refiner, making the franchisee dependent on his competitor
to provide him with his product.
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Attorney General Report
In 1999, the Attorney General opened an investigation into
the activities of the refiners to determine whether they
were operating in a non-competitive manner in violation of
California and/or federal law. This investigation in
ongoing, but has yet to result in any prosecutions.
The Attorney General also convened a Task Force on gasoline
pricing. A summary of the Task Force discussion was
published in May 2000 in a report entitled "Report on
Gasoline Pricing in California." A preliminary report
provided to the Attorney General noted three contributing
factors to California's relatively high gas prices:
1. A relative lack of competition in California's gasoline
refining and marketing industry.
2. Supply constraints related to California's unique
cleaner burning gasoline requirement.
3. Somewhat higher state taxes.
In a recent update, the Attorney General suggested
considering the following proposals:
1. Creating a strategic fuel reserve.
2. Increasing fuel economy standards and encouraging
non-gasoline based technology.
3. Enabling gas dealers to shop for the best wholesale
prices.
4. Examining ways to import more fuel into the state.
Prior legislation
The lack of any finding of anti-competitive behavior
doesn't mean the state's gasoline market is truly
competitive because legal behavior may still lead to unfair
prices. For that reason, there have been many efforts to
change existing law. Two bills successfully enacted during
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the last gasoline price spike were:
1. AB 2076 (Shelly), Chapter 936, Statutes of 2000,
required the CEC to examine the feasibility of operating
a strategic gasoline reserve to buffer the state from
any temporary gasoline supply disruptions. The bill
also required the CEC to develop recommendations for
reducing California's petroleum independence. The CEC
expects to issue these reports in the next few months.
2. AB 2098 (Migden), Chapter 963, Statutes of 2000,
required the CEC to examine the feasibility of building
a pipeline from the Gulf Coast to California. The CEC
expects to issue this report in the next few months.
Related legislation
AB 146 (Kehoe) allows franchisees to shop for their
gasoline at any wholesale outlet operated by the franchisor
via a mechanism, known as "branded open supply". AB 146 is
similar to SB 123 (Peace), which was approved by the full
Senate in 1999 before dying in the Assembly Utilities and
Commerce Committee. AB 146 is pending in the Assembly
Business and Professions Committee.
California vs. the Other 49 States
Since the mid-1990's, California's gasoline has been
generally more expensive than gas found in other states and
that difference has been more pronounced during price
spikes. There are two major causes. The first is that in
1996, California switched to a unique type of gasoline that
burns cleaner than gas sold in most other states. Few
non-California refiners produce this type of gasoline,
making it difficult for additional supplies to be imported
into California. When prices in California rise, the
non-California refiners that choose not to produce
"California gas" aren't able to ship gasoline in to keep
prices down.
The second major cause is the increasing consolidation
among refiners. In 1980, there were 35 refiners operating
in California. By 1990, only 25 refiners were operating
and by 1998, that number had dwindled to 16. Accompanying
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the consolidation of refiners was an increase in vertical
integration, so now 85% of all retail service stations are
owned, operated, or controlled by refiners.
A relatively constant factor that keeps California gasoline
more expensive is gasoline taxes, which are on average five
cents higher than the other states. However, higher taxes
contribute a relatively small amount to California's price
discrepancy with other states - in fact, California's
gasoline taxes are actually lower than those in Nevada.
Oil Company Profitability
If the allegations of anti-competitive behavior and price
gouging are true, then the profitability of the oil
companies should be high. It isn't particularly useful to
examine the return on equity (ROE) for the oil companies,
since their California refining and marketing operations
are a relatively small part of their overall business. In
any event, the ROE's for the major oil companies are
unremarkable, comparable to that of the major utilities,
notwithstanding ExxonMobil's recent record first quarter
profit of $7 billion.
The only publicly available measure of profitability for
the California operations of the major oil companies is
refinery cost and profit data kept by the CEC. By
determining the average wholesale price and subtracting
from it the price of crude oil, the CEC determines how much
is left to pay for the cost of refining and to provide the
refiner with a profit, known as the refinery margin. This
is a rough calculation based on aggregated data that
doesn't incorporate all actual wholesale transactions.
2002 2001 2000 1999 1998
Refinery Margin/gal $0.40 $0.58 $0.42
$0.40 $0.32
In March 2003, the refinery margin averaged $0.63/gal and
in the first two weeks of April it was $0.68/gal. This is
an unusually high margin that many wouldn't expect to find
in a truly competitive market.
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NOTE: For a detailed discussion of some of the effects of
the bill's provisions, please refer to the Senate Energy
and Utilities Committee analysis, "Comments" section.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 5/19/03)
Automotive Repair Coalition
Automotive Trade Organizations of California, Inc.
California Service Station and Automotive Repair
Association
California Small Business Association
Oyster Petroleum, Inc.
South Bay Shell and Car Wash
The Foundation For Taxpayer and Consumer Rights
Utility Consumers' Action Network
OPPOSITION : (Verified 5/19/03)
A. Juner Chevrons
Bigge Crane and Rigging Company
California Chamber of Commerce
California Independent Oil Marketers Association
California Manufacturers and Technology Association
Chevron dealer in San Mateo County
ENTRIX, Inc.
Redman Equipment and Manufacturing
Western States Petroleum Association
NC:sl 5/21/03 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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