BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE MARTHA M. ESCUTIA, CHAIRWOMAN SB 757 - Kehoe Hearing Date: April 5, 2005 S As Introduced: February 22, 2005 FISCAL B 7 5 7 DESCRIPTION Current law makes the California Energy Commission (CEC) responsible for monitoring transportation fuel supplies and prices in the state. Current law requires the CEC to biennially develop an integrated energy policy report that looks at issues of supply, demand, and supply reliability for transportation fuel. This bill makes numerous findings and declarations: California's growing demand for gasoline is threatened by unstable foreign oil supplies and inadequate in-state refinery capacity; Cost effective options currently exist to slow, and ultimately reverse, the growth in consumption of petroleum; Refineries pollute, are therefore a hazard to refinery workers and neighboring communities, and the refinery industry should take every feasible measure to protect those workers and communities; The Governor, Legislature, and state and local agencies should make every effort to reduce oil demand and consumption of petroleum fuels through public education, a sustained commitment to energy efficiency, public agency procurement of alternative transportation fuels, and promotion of the modernization and installation of best available technologies on California refineries; This bill establishes a policy that state agencies take every cost-effective and technologically feasible action to achieve a net zero increase in on-road petroleum consumption by 2010, and a significant reduction by 2020. State agencies should take these petroleum reduction goals into account in adopting rules and regulations. This bill authorizes the California Air Resources Board (CARB) to adopt regulations requiring public agency fleet operators to purchase alternative fuel vehicles and advanced transportation technologies where technologically feasible and cost-effective on a life cycle operating basis. This bill requires the California Environmental Protection Agency (CalEPA) to develop and adopt model rules and regulations to ensure that all petroleum refining, storage, and waste treatment facilities install, by not later than January 1, 2016, the best available control technology and pollution prevention measures so as to provide the maximum feasible and cost effective reductions in air, water, and toxic waste pollution. This bill requires the California Energy Commission (CEC) to monitor and analyze trends in oil demand growth, and to oversee and investigate market power abuses and unfair competition during periods of supply and price volatility. The CEC is authorized to impose fees to recover its costs. This bill requires the Secretary of the Business, Housing and Transportation Agency (sic) to submit recommendations by July 1, 2006 regarding alternative revenue sources to supplement or replace gasoline and diesel fuel taxes. The Secretary shall evaluate the economic feasibility of alternative financing measures, the potential to support needed levels of investment in transportation infrastructure, and the impact on social equity and mobility on low income and disadvantaged citizens. This bill requires the Secretary for Environmental Protection to submit recommendations, by January 1, 2007, regarding cost-effective and technologically feasible measures needed to achieve a net zero increase in petroleum consumption by 2010, and a significant reduction in petroleum consumption by 2020. This bill requires the Secretary for Environmental Protection to adopt, by January 1, 2007, an action plan to increase the diversity of the state's transportation energy supplies. BACKGROUND Concern over high gasoline and diesel prices has recurred for many years. California experienced gasoline and diesel price spikes in 1996 ($1.50/gal), 1999 ($1.60/gal), 2000 ($1.80/gal) and, once again, in 2004 ($2.20/gal). If current prognosticators are to be believed, there will be a recurrence this year as price spikes to something approaching $3/gal this summer, reflecting record high crude oil prices. (Current crude prices are double 2003 prices and could double again according to one recent forecast.) Each price spike results in investigations and new ideas, though no California investigation has found criminal activity. The gas price spikes in 2000 led to several new ideas and analyses. Ultimately the new ideas, which included building a pipeline to Texas and creating a state-run gasoline reserve, were found to be unworkable. Pursuant to law<1>, the CEC and CARB published a report on --------------------------- --------------------------- <1> AB 2076 (Shelley) -- Chapter 936 of the Statutes of 2000. reducing California's petroleum fuel dependence.<2> Based on an analysis of options that are currently feasible and economical, the report recommended that California adopt a policy to reduce gasoline and diesel fuel demand to 15% below 2003 demand levels by 2020, and to maintain that level thereafter. A number of options are suggested for meeting the goal, including using more fuel efficient replacement tires, improving private vehicle maintenance, doubling the fuel efficiency of light duty vehicles, using natural gas-derived fuels as blending agents in diesel fuel, and implementing fuel cell-powered vehicles. The report also recommended that the Governor and Legislature work with the California Congressional delegation and other states to double the national fuel economy standards. Lastly, the report recommended establishing a goal of increasing the use of non-petroleum fuels to 20% of on-road fuel consumption by 2020 and 30% by 2030. The CEC recently reported discouraging progress in implementing those recommendations.<3> --------------------------- <2> California Energy Commission and California Air Resources Board, Reducing California's Petroleum Dependence , August 2003, P600-03-005F. <3> California Energy Commission, 2004 Integrated Energy Policy Report Update , November 2004. The author introduced similar legislation last year. SB 1468 established a policy of reducing California gasoline and diesel consumption by 15% below 2003 levels by 2020 and required the CEC and CARB by 2010 to adopt measures to achieve that goal. That bill was approved by this committee 5-2, though the bill did not pass the Senate Floor. COMMENTS 1) No Relief in Sight -- The recurring problem of high gasoline and diesel prices has so far been impervious to state solutions. Efforts to increase the supply of gasoline have proven to be unworkable (e.g. creation of a state-run gasoline reserve and encouraging more California refinery capacity). Efforts to decrease the demand for gasoline have only had marginal success (e.g. incentives for hybrid and alternative-fueled vehicles). Despite these efforts, overall gasoline consumption in the state has continued to increase and prices have continued to rise. The author is addressing a real, but intractable, problem. 2) Big Picture - This bill deals with the problem of high gasoline prices by encouraging the use of alternative fuels and encouraging fuel efficiency. Opponents are concerned that this bill will raise gasoline taxes because they believe that is the only way to meet the net zero increase goal of the bill. That concern seems a bit overstated as this bill does not authorize a gas tax increase. Opponents also argue that the market is already encouraging energy efficiency, noting that vehicle fuel efficiency has nearly doubled in the last 25 to 30 years. Of course that doubling of fuel efficiency is due to the mandated federal fuel economy requirements, not a market response. Moreover, since 2000 vehicle fuel efficiency in California has declined. This, coupled with increasing miles traveled, has resulted in a steady increase in California gasoline consumption, by 7% from 2001 to 2004. Opponents argue that investment in refineries will dry up if California establishes a goal of reducing gasoline demand by 2020. In the event that this goal is met, one would expect less investment in new refineries, though ongoing investment to maintain existing refineries would continue. But, because one of the strategies of this bill is to encourage the use of alternative fuels, one would expect additional investment in alternative fuel production facilities. 3) Setting a Goal - The bill establishes state policy that state agencies should take every cost-effective action needed to achieve a "net zero increase in on-road petroleum consumption by 2010, and a significant reduction in petroleum demand and oil consumption by 2020." This means that by 2010 the amount of gasoline and diesel fuel consumed should not be greater than that consumed in 2006, and that beyond 2010 the absolute quantity of gasoline and diesel fuel should decline. The author and committee may wish to clarify this in the bill. This goal is less ambitious than that contained in the CEC's 2003 "Reducing California's Petroleum Independence" report, which calls for reducing demand for on-road gasoline and diesel to 15% below 2003 levels by 2020. While opponents are concerned that adoption of this goal will inevitably lead to increased gas taxes or fees, it is possible that other strategies for reducing fuel consumption will emerge. For example, this could include traffic management options to increase efficiency as well as smart growth efforts and mass transit programs which will reduce miles traveled. 4) Fleets - This bill authorizes CARB to adopt regulations requiring state and local governments to purchase alternative fueled vehicles if cost-effective. The author and committee may wish to consider adopting a technical amendment to clarify the grammar on page 4, line 36. 5) Keeping an Eye Out - This bill requires the CEC to monitor and analyze trends in world oil demand growth, and to carry out oversight and investigation of market power abuses and unfair competition during periods of supply and price volatility. This is an expansion of the CEC's current monitoring and analysis role which focusses on California supplies. The oversight and investigatory responsibilities are new powers for the CEC for which it is now ill-equipped with regard to staffing and processes. Currently those functions are a subset of the general authority of the Attorney General. The author and committee may wish to consider whether to delete these new powers and instead authorize the CEC to refer instances where it suspects market abuse or unfair competition to the Attorney General as a more economical way of accomplishing the goal of better oversight. 6) Transportation Fuel Diversity - This bill requires the CalEPA, in consultation with CARB, the CEC, and the South Coast Air Quality Management District, to submit an action plan by January 1, 2007 to increase the diversity of the state's transportation fuel supplies. By "action plan" the author intends that the designated agencies engage in a collaborative process to produce recommendations, policies, and programs for increasing the diversity of transportation fuel supplies. The author and committee may wish to consider more clearly defining the term "action plan". The CEC's 2003 petroleum demand reduction report recommends that the state establish a goal to increase the use of non-petroleum fuels to 20% of on-road fuel consumption by 2020. The author and committee may wish to consider including this goal in the bill. 7) Refinery Pollution - This bill requires CalEPA to develop rules to ensure that all petroleum refining, storage, and waste treatment and disposal facilities install best available control technology by January 1, 2016 to provide the maximum feasible and cost effective reduction in air and water pollution and toxic waste production. This is a significant tightening of the anti-pollution rules. While pollution and waste reduction may well be desirable, it will come at a cost of higher gasoline prices and temporarily reduced supply as refineries make the required changes, and may discourage increased refinery capacity in California. This issue will also be considered by the Senate Environmental Quality Committee, which will hear the bill if it is approved by this committee. 8) The Elephant in the Room - The surest was to reduce gasoline consumption is to increase the federally-established Corporate Average Fuel Economy (CAF?) standard. This was the central recommendation of the CEC's 2003 petroleum demand reduction report. The author and committee may wish to consider dealing with the CAF? standard in this bill by requiring this Administration, and the agencies under its control, to take a leadership role to increase the standard through a coordinated effort with other states and the Congress. Technical Amendment - Clarify that the bill deals with "on-road" petroleum consumption on page 3, line 37, page 3, line 38, page 4, line 28, page 6, line 7, and page 6, line 8. This bill has been double-referred to the Environmental Quality Committee. POSITIONS Sponsor: Author Support: American Lung Association of California California Thoracic Society Clean Power Campaign Heal the Bay Natural Resources Defense Council Planning and Conservation League Sierra Club Union of Concerned Scientists Oppose: Alliance of Automobile Manufacturers CA Mining Assn. CA Business Alliance CA Motor Car Dealers Assn. CA Business Roundtable CA Retailers Assn. CA Chamber of Commerce CA Taxpayer Protection Committee CA Citrus Mutual California Taxpayers' Assn. CA Farm Bureau Federation California Women in Agriculture CA Grocers Assn. Howard Jarvis Taxpayers Assn. CA Independent Oil Marketers Assn. Olive Growers Council of CA CA Independent Petroleum Assn. Western Growers Assn. CA League of Food Processors Western Plant Health Assn. CA Manufacturers & Technology Assn. Western States Petroleum Assn. Randy Chinn SB 757 Analysis Hearing Date: April 5, 2005