BILL ANALYSIS                                                                                                                                                                                                              1
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                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
                                                                        
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                                      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  

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          <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>  





















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          <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