BILL ANALYSIS
AB 2076
Page 1
Date of Hearing: April 24, 2000
ASSEMBLY COMMITTEE ON TRANSPORTATION
Tom Torlakson, Chair
AB 2076 (Shelley) - As Amended: April 13, 2000
SUBJECT : Strategic fuel reserve
SUMMARY : Requires the State Energy Resources Conservation and
Development Commission (CEC) to establish and administer a
strategic fuel reserve. Specifically, this bill :
1)States the intent of the Legislature to establish a strategic
fuel reserve to be administered by CEC.
2)Requires CEC, no later than July 1, 2002, to establish the
California Strategic Fuel Reserve.
3)Provides that the CEC shall determine an appropriate level of
reserves of motor fuel to insulate California consumers and
businesses from substantial, short-term price increases
arising from refinery outages or other similar supply
interruptions.
4)Provides that in no event shall the reserve be less than the
amount of refined gasoline that CEC estimates could be
produced by one large California refiner over a two-week
period.
5)Requires that CEC, when determining the appropriate level of
reserve, take into account all of the following:
a) Inventories of California-quality fuels or fuel
components reasonably available to the California market.
b) Current and historic levels of fuel inventories.
c) The availability and cost of storage of fuels.
d) The potential for future supply interruptions, price
spikes, and the costs thereof to California consumers and
businesses.
6)Requires CEC to establish a mechanism allowing any customer to
contract at any time for the delivery of gasoline from the
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reserve in exchange for a promise to return an equal amount of
gasoline from a refiner outside of California within a time
period established by CEC, but no longer than six weeks.
7)Requires CEC to develop reserve storage space from existing
facilities to the extent feasible.
8)Allows CEC to make additional rules and regulations necessary
for the administration of the above provisions.
9)Requires CEC to report to the Legislature on the progress and
proposed operation of the reserve no later than July 1, 2001.
EXISTING LAW requires CEC to develop contingency plans to deal
with possible shortages of electrical energy or fuel supplies.
FISCAL EFFECT : Unknown
COMMENTS : California has experienced a number of gasoline price
spikes since 1996. Usually, these spikes are the result of
problems at California refineries. There are 12 California
refineries (owned by eight companies) producing California's
unique Air Resources Board-approved reformulated gasoline
(CaRFG). These refineries must operate at total capacity in
order to meet California's demand for gasoline. Californians use
approximately 42 million gallons of gasoline per day. If there
is even a 10% shortage in supply of gasoline, that represents a
loss in gasoline supply of 4.2 million gallons per day.
Therefore, when there is a gasoline supply problem, such as a
refinery shutdown, the price of gasoline can rise dramatically.
California refineries do not currently maintain sufficient
inventories to cover gasoline supply shortages.
When there is a supply disruption, short-term reserves become
more valuable, and bidding wars to secure these supplies ensue.
The result can be gasoline prices that are 25 cents higher in
California than in the rest of the United States. During the
last gasoline supply shortage, California imported approximately
10% of its fuel. Out-of-state CaRFG comes from refineries in the
Gulf Coast or in Europe. These supplies take approximately four
to six weeks to reach California.
Last year, Attorney General Bill Lockyer convened a task force
to discuss the high price of gasoline in California and to
develop possible approaches to solving the problem of high
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prices. This bill is a product of those discussions. The
Attorney General is the sponsor of this legislation. According
to the sponsor, "[a] state-owned reserve within California's
borders would blunt the impact of gasoline price spikes driven
by short-term operating disruptions within the
capacity-constrained California refining sector."
How big is the reserve?
The strategic reserve must be large enough to have an impact on
price and must be released quickly if there is supply
disruption. In addition, if the supply is maintained by the
state (rather than the refineries), it can be filled with supply
sources from outside of the state's existing gasoline supply.
There is concern that if the reserve were simply maintained by
the refineries, the supply of that reserve would come from
existing fuel production, thereby lowering the current supply of
gasoline and increasing the price.
Reserve levels would probably be set at somewhere between 1.5
million and 3 million barrels of gasoline, which is
approximately a one to three days' supply of gasoline. If
California lost the production of one large refinery for one
month, it would equal approximately three million barrels of
gasoline supply.
How would the reserve be stored?
The CEC would have to arrange facilities to store gasoline
because there is not currently enough storage space dedicated to
storing gasoline to accommodate the reserve. However, there is
some storage space now used for things such as fuel oil that
could be converted to store gasoline supplies. This would
provide enough capacity, and would eliminate the need to build
new storage facilities. The gasoline could be stored for
approximately six months, and there are some additives that may
be able to be added to gasoline to increase the storage
viability of gasoline, which would allow it to be stored for one
year or more. However, more study needs to be done on these
additives and their ability to increase the length of time
gasoline can be stored.
What would trigger the use of the reserves and how will the
reserve be replaced?
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The CEC will have to establish an automatic release mechanism
for the reserve. The gasoline reserve would be released
immediately when there is a supply disruption in order to
prevent large price spikes. It would be a market trigger. In
addition, CEC will need to develop some type of mechanism to
replace lost reserves. Potentially, the state could provide a
California refinery with supply from its reserve at any time.
The refinery would then have to arrange for delivery for a
refinery from out-of-state to ship CaRFG directly to the
reserve. It is the intent of the author that the reserve be
operated by an independent operator that specializes in
purchasing and storing gasoline. The author believes that the
reserve should not be operated by the state itself.
Opponents to the bill argue that this reserve will be expensive
to maintain and that it provides no assured benefit to
California's consumers. They are concerned that reserves would
not be provided to refiners in a fair manner and that refiners
would be forced to pay for reserves at a high cost and replace
the reserve at a lower cost. Opponents also argue that CaRFG
cannot be stored for long periods of time and that there could
be potential impacts on air quality if gasoline were stored for
several months. Finally, opponents are concerned that the state
is ill-equipped to enter this complex gasoline marketplace.
Related Legislation : AB 2098 (Migden) would require the CEC to
study the feasibility of financing, constructing, and
maintaining a new pipeline or expanding the capacity of existing
pipelines to transport fuel from the Gulf Coast to California.
This measure is also being heard in Assembly Transportation
Committee on April 24, 2000.
AB 2666 (Battin) would allow for the import and sale of federal
reformulated gasoline, and imposes a surcharge on this gasoline.
Double Referral : This bill is double-referred to the Assembly
Committee on Utilities and Commerce.
REGISTERED SUPPORT / OPPOSITION :
Support
Office of the Attorney General
Opposition
AB 2076
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Western States Petroleum Association
ARCO
Analysis Prepared by : Jennifer Gibson / TRANS. / (916)
319-2093