BILL ANALYSIS
AB 2076
Page 1
Date of Hearing: May 15, 2000
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Roderick D. Wright, Chair
AB 2076 (Shelley) - As Amended: May 10, 2000
SUBJECT : Fuel resources.
SUMMARY : Requires the State Energy Resources Conservation and
Development Commission (CEC) to examine the feasibility of
operating a strategic gasoline reserve, and report to the
Legislature on their findings as well as to request an
appropriation, prior to establishing the reserve. Specifically,
this bill :
1)Requires CEC, no later than July 1, 2001, to examine the
feasibility, including possible costs and benefits to
consumers and impacts on gasoline prices of operating a
California Strategic Fuel Reserve (Reserve).
1)Requires CEC to consult with other state agencies, including,
but not limited to, the California Air Resources Board.
1)Provides that CEC shall examine and recommend 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.
1)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.
1)Requires 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
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spikes, and the costs thereof to California consumers and
businesses.
6)Requires CEC to evaluate a mechanism to release gasoline from
the reserve that permits any customer to contract at any time
for the delivery of gasoline from the 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 evaluate using existing facilities to the
extent feasible for reserve storage space.
8)Requires CEC to evaluate using an independent operator,
selected through competitive bid, that specializes in
purchasing and storing gasoline.
9)Requires CEC, prior to establishing the California Strategic
Fuel Reserve to report to the Legislature and request an
appropriation to provide funding for creation of the reserve.
10)Provides that the CEC may establish the reserve upon a
finding that it would be feasible to operate the reserve.
EXISTING LAW requires CEC to develop contingency plans to deal
with possible shortages of electrical energy or fuel supplies.
FISCAL EFFECT : Sponsor indicates start-up costs of $100 million
and annual expenditures of $12 million. Industry economists
indicate start-up costs may be as high as $400 million.
COMMENTS :
1)Background. California has experienced a number of gasoline
price spikes since 1996. In recent months, these spikes have
resulted from problems at California refineries. During the
spring and summer of 1999, retail gasoline prices rose more
than $0.25 per gallon in California than in the rest of the
nation. Last year, Attorney General Bill Lockyer, the sponsor
of this legislation, convened a task force to discuss the high
price of gasoline in California and to develop possible
approaches to solving the problem of high prices. The
Attorney General's Report found the following factors
contribute significantly to the difference between prices in
California and the rest of the U.S.: 1) the relative lack of
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competition within the state's gasoline refining and marketing
industry; 2) California's unique clean-burning gasoline
formulation standards; 3) the distance between California and
major refining centers outside the state; 4) higher state
taxes (approximately 5.3 cents higher in California than in
the rest of the nation).
1)Rationale for Proposal. There are 12 California refineries
(owned by eight companies) producing California's unique Air
Resources Board-approved (CARB) reformulated gasoline. The
Attorney General's Report stated that "industry inventory and
pricing practices in California likely help to keep prices
higher in the state than in the rest of the US. Inventory
levels in California and on the West Coast were more that 20%
lower in 1999 than they were in the early 1990s . . . . . At
reduced inventory levels, relatively small supply disruptions
have the potential to lead to large price increases." The
Attorney General believes that California inventories are not
sufficient to cover periods of unexpected refinery outages and
that a state-owned reserve within California's borders would
blunt the impact of gasoline spikes driven by short-term
operating disruptions.
1)History. In 1993, CEC did a study to consider the creation of
a regional petroleum product reserve. The 1993 Reserve Study
(1993 Study) explored the feasibility of constructing and
operating a state-owned five million barrel bulk storage
facility for gasoline and diesel in California. The report
concluded that the proposed facility was not economically
justifiable. Since the completion of the 1993 Study, however,
significantly different market conditions - in both the
electricity and petroleum products market - have reopened
interest in the concept of a California Petroleum product
reserve. The introduction of CARB fuels has resulted in the
wholesale or "refinery gate" price for CARB gasoline that is
an average of about $0.04 higher that conventional gasoline.
CARB gasoline is used primarily in California and is not
manufactured to any significant degree outside the state.
Out-of-state CARB gasoline comes from refineries in the Gulf
Coast or in Europe and take approximately four to six weeks to
reach California or are transported via marine tanker from the
Houston area at costs that range from $0.08 to $0.12 per
gallon. Additionally, California's electric utilities have
switched from burning residual oil to natural gas and unneeded
storage capacity is available that can be converted for
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gasoline storage with significantly less investment than
construction. The author notes that several facilities exist
around the state including Oxnard, Los Angeles and San
Francisco and cites the cost for conversion of a single
facility at less than $25 million.
1)In a 1997 Analysis of Petroleum Products Prices (1997 Staff
Report) staff in the Fuels Office of CEC indicated that a
physical reserve of products can be seen as one means of
providing price stability in the market place. The staff
concluded, however, that a product reserve would be marginally
economic at best. The conclusion was based on a 20 year
reserve life, the costs of converting existing storage tanks,
the costs of initial inventory purchases and of ongoing
storage costs. The 1997 Staff Report further noted that if
during restocking, prices increased by more than $0.02 cents
per gallon, the reserve would become uneconomic. The 1997
Staff Report also introduced an additional factor that could
negate the benefits of the reserve -- refiner behavior -
refiners could lower their own inventories and offset the
positive benefits of a reserve. This bill would give the CEC
an opportunity to revisit the feasibility of establishing a
strategic gasoline reserve.
1) The Attorney General's Taskforce Reserves Subcommittee
(Reserves Subcommittee) has also considered the possibility of
establishing and maintaining a reserve and concluded that the
state should not pursue that course. The Reserves
Subcommittee based it conclusions on the short shelf life of
CARB gasoline; the potential to reduce incentives for others
to hold their own reserves; the fact that the reserve is being
developed purely for economic reasons which could have the
effect of redistributing wealth among U.S. citizens and
corporations; and the potential for speculative storage. The
Reserves Subcommittee suggested that if the state did decide
to pursue establishing the reserves that it should start with
a limited test - storing CARB gasoline for use in the state's
own auto fleet -- to see if the economic and logistic issues
could be overcome.
1)Establishing the Reserve. This bill requires CEC to evaluate
the appropriate level of fuel reserves to insulate consumers
from substantial price increases resulting from refinery
outages or other supply interruptions. This bill further
requires that the reserve include at least the amount produced
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by one large refiner over a two-week period. Thus, the
reserves would likely be approximately 1.5 million to 3
million barrels of gasoline -- a one to three days supply. If
California lost the production of one large refinery for one
month, it would equal approximately three million barrels of
gasoline supply.
1)Storing the Reserve. CARB gasoline has a relatively short
shelf life and will not meet the CARB standard if it is not
used within a few months of production. The sponsor indicates
that several companies that specialize in manufacturing
additives to increase the shelf life of gasoline have
indicated that they were about the ability to develop
additives that would extend the shelf life of gasoline beyond
a year. The Committee questions whether the state should
establish the reserve without having a clear understanding of
the increased costs related to purchase of the additive and
the viability of such a product. California also has different
seasonal specifications (i.e. summer and winter) which may
require either storing both specifications or "turning the
tanks" periodically.
1)Releasing the Reserve. This bill requires CEC to evaluate a
mechanism to release the reserve and requires replacement
within a six week time period. The author specifies that the
reserve would be released immediately when there is a supply
disruption in order to prevent large price spikes. The
sponsor indicates that the market will serve as an independent
trigger and that marketers and traders would have the
incentive to acquire product from the reserve whenever the
spot price of gasoline rose above the price elsewhere plus the
cost of transportation. It is not clear, however, whether the
trigger should be used only during disruptions to supply or
whenever retail prices reach a certain level.
1)Replacing the Reserve. The sponsor indicates that the
replacement fuel should come from a refiner outside of
California, such as the U.S. Gulf, Caribbean or Europe. As
noted above, obtaining supplies outside of California is more
costly. The sponsor believes, however, that since the
California marketer would have already sold the product they
pulled out of the reserve, that they would have hedged their
risk at no cost.
1)Authorizing the Reserve . This bill will require CEC to make a
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finding that to state's operating the Strategic Fuel Reserve
is feasible prior to establishing the reserve. The CEC is
also required to report to the Legislature on its findings and
to request an appropriation to provide funding for creation of
the reserve through subsequent enabling legislation. Granting
the Legislature authority to review the CEC's efforts prior to
establishing a reserve is critical since prior studies have
indicated that it may not be in the state's interest to embark
on this plan. Because the CEC report to the Legislature and
request for funding is a condition precedent to establishing
the reserve, the section of the bill making that requirement
should probably included as a subsection of Section 25721 of
the bill.
1)Should the State Consider Additional Means to Increase Supply?
The State's establishing a strategic fuel reserve is not a
novel idea. As noted above, the concept has been received
with skepticism on at least three occasions, most recently by
the Attorney General's own subcommittee on Reserves. The
Committee suggests that the author and sponsor consider adding
additional means to increase supply such as: 1) providing
incentives to existing refiners to expand supply and increase
capacity; 2) provide incentives to encourage opening
refineries that have ceased operation; and 3) establishing a
state reserve for use of fleet automobiles. The Committee
believes that expanding the study would give the CEC an
opportunity to determine the most feasible option to increase
supply rather than simply reviewing the single option. If the
CEC does not find the Strategic Fuel Reserve to be feasible,
the state will not have an option to consider advancing to
address this most critical issue. The Committee also
believes that CEC should be directed to evaluate what
additional costs the State may incur to comply with the
California Environmental Quality Act (CEQA) requirements.
1)Opponents to this 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 CARB 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. Opponents are concerned that
the state is not equipped to enter this complex gasoline
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marketplace. Finally, opponents are concerned that this bill
authorizes creation of the reserve upon completion of the
study if it is found to be feasible. They do not believe that
the current amendments provide adequate protection to the
state and that it should be explicit that the CEC be required
to return to the legislature to establish the reserve through
separate legislation.
1)Related legislation : AB 2098 (Migden) requires CEC to study
the feasibility of financing, constructing and maintaining a
pipeline to the Gulf Coast to transport gasoline. AB 2666
(Battin) allows for the import and sale of federal
reformulated gasoline, and imposes a surcharge on this
gasoline, pending the outcome of a study by the University of
California. SB 1846 (Speier) makes findings and declarations
regarding factors that have caused Californians to pay higher
gasoline prices and states legislative intent to encourage
development of reliable sources of gasoline beyond those
currently supplying the state.
REGISTERED SUPPORT / OPPOSITION :
Support
Attorney General Bill Lockyer (sponsor)
Opposition
ARCO Products Company
EQUIVA
Western States Petroleum Association
Analysis Prepared by : Carolyn Veal-Hunter / U. & C. / (916)
319-2083