BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2076 - Shelley Hearing
Date: June 27, 2000 A
As Amended: May 18, 2000 FISCAL B
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DESCRIPTION
This bill requires the California Energy Commission (CEC)
to examine the feasibility of operating a gasoline reserve
by July 1, 2001.
BACKGROUND
The subject of high California gasoline prices has been a
recurring one over the past several years. During an
October 1996 San Diego hearing of the Senate Energy,
Utilities and Communications Committee, the Committee
established that oil company supply restrictions prevented
branded franchise dealers from seeking out the least
expensive branded supply. These restrictions were
identified as the major reason why significant wholesale
price differences between Los Angeles and San Diego
persisted during a time of vigorous competition in Los
Angeles, despite the fact that the two markets are 100
miles apart. At the time, price differences of up to 15
cents per gallon were reported between San Diego and Los
Angeles, with similar disparities in prices between Los
Angeles and the San Francisco Bay Area.
An April 1999 joint hearing held by this Committee and the
Senate Transportation Committee made it clear that the late
1998 and early 1999 dramatic gasoline price hikes were
triggered by a very brief gasoline shortage and subsequent
market speculation. The testimony at the hearing indicated
that the supply of gasoline is closely matched with the
demand for gasoline and because higher prices don't reduce
the demand for gasoline substantially, any supply
disruption causes prices to rise quickly. The hearing also
noted that proposed and potential oil company mergers will
lead to increased market concentration, reduced
competition, and in all likelihood, higher gasoline prices.
In November 1999, the California Attorney General (AG)
convened a Task Force on Gas Pricing in California. The
purpose of the Task Force, which included representatives
from the oil industry industry and consumer groups, was to
exchange ideas and assess facts. In May, the Attorney
General issued a report summarizing the Task Force
proceedings and made six recommendations:
1. Increase competition.
2. Consider developing a strategic gasoline reserve.
3. Require the state to purchase imported supplies of fuel
for its own use.
4. Take aggressive steps to increase fuel economy and use
alternative fuels.
5. Free dealers to seek the best price for fuels.
6. Examine barriers to importing gas via pipeline.
Echoes of the California experience are now reverberating
in other states. While gasoline prices in California have
leveled off recently, gasoline price increases in the
Midwest have raised the per gallon price of gasoline from
about $1.40 in early May to almost $2.50 for premium in
downtown Chicago, making California's cleaner, and, on
average, slightly higher-taxed gasoline look like a
bargain. In Michigan, the average gas prices jumped over
27 cents per gallon in a week.
The high prices are being blamed on a variety factors that
will sound familiar to those who have been following the
rise and fall of California's gas prices - unplanned
pipeline and refinery shutdowns, higher crude oil prices,
price gouging, and problems in producing and distributing
clean-burning gas. California has, for a number of years,
had its own higher gasoline standard, but on June 1, new
federal regulations took effect requiring all gasoline to
meet higher standards in order to comply with federal clean
air standards. This "new" gasoline being produced to meet
the new federal standards is close to, but not identical
to, the gasoline produced to meet California's reformulated
gasoline rules.
California's gasoline prices are fairly close to the
national average, yet a number of misconceptions exist
relative to what drove the state's prices through the roof
last year. According to the CEC, in January 1999, branded
unleaded cost $1.13 per gallon while in mid-May it cost
$1.61 a gallon. Of that 48-cent difference, 39 cents is
attributable to higher crude oil costs, 4 cents comes from
increased taxes collect as a result of the higher-priced
gas, and 10 cents come from increased refinery costs and
profit margins (5 cents of which was achieved by reducing
the amount paid to retailers).
The preference of many Californian's for bigger, more
powerful vehicles is showing up in the statewide fuel
economy statistics. For the first time in many years, the
average on-road fuel economy for California vehicles as a
fleet declined . Coupled with a 1.5% annual growth in
vehicle miles traveled, the CEC forecasts that gasoline
demand will increase by 1.7% annually.
QUESTIONS
1.Should the CEC be required to examine the feasibility of
establishing a strategic fuel reserve?
2.Should such a study be expanded to look at ways to reduce
the demand for gasoline?
COMMENTS
1)Supply & Demand . The most troubling portion of the
Attorney General's report is the statement that in the
coming years, the gap between the demand for gasoline and
the supply is going to continue to widen. The demand for
gasoline is expected to continue to rise 1.7% a year
above the 14.5 billion gallons sold in 1999, while the
supply is expected to significantly diminish by the
phase-out of MTBE, which comprises about 11% of the
volume of a gallon of gas. Potential substitutes for
MTBE, such as ethanol, will make up only a fraction of
that volume initially.
If what's happening in the Midwest relative to gasoline
prices is any indication, substituting ethanol for MTBE
will likely lead to temporary production hiccups which
will surely disrupt supply, leading to another round of
speculation and soaring gas prices.
On the production side, building new refineries in
California isn't likely to happen any time soon.
Expansion of existing refineries is possible, though that
must be considered in light of Tosco's threat last week
to close its Martinez refinery if the local water quality
control board didn't provide the refinery with an
exemption from the limits on dioxin discharges.
While this measure is designed to look at one way to
increase the supply of gasoline in order to insulate
consumers from short term price increases that stem from
refinery outages and supply interruptions, the state may
be well-served by focusing on demand-side strategies,
such as conservation and support for competing
technologies to gasoline.
Some demand-side strategies have been discussed in the
context of air quality, but those same strategies now
also make sense in the context of price and supply
adequacy. Alternative-fueled vehicles, such as those
powered by electricity, natural gas, and fuel cells, as
well as high mileage hybrid vehicles, are making inroads
into the marketplace.
As such, it may be sensible, as a part of this study, to
create a state policy that supports all types of
transportation technologies - not just those based on
motor fuel. The CEC and the California Air Resources
Board (CARB) could be charged with preparing an
alternative fuels strategy. One idea would be to empower
CARB to require automakers to sell or lease a portion of
their new vehicles as high mileage or alternative fueled
vehicles, much as the agency has created the zero
emission vehicle (ZEV) standard. At a minimum, the
author and committee may wish to consider having the CEC,
in consultation with the CARB, establish a strategy for
encouraging the adoption of more alternative fuel and
high fuel economy vehicles.
2)California Refiners Export Gasoline . California refiners
export about 100,000 barrels of gasoline each day to
other states, which amount to roughly 10% of their
overall production. If California's gasoline prices get
high enough, exports could slow, ultimately resulting in
more gas staying in California. However, if gasoline
prices are higher outside of California, as they are now
in the Midwest, it could encourage refiners to ship more
gas out of state. If such a circumstance were to occur,
refiners would be able to maximize their profits and
increase pressure on California to tap its strategic fuel
reserve, should one be created, in order to cushion
California motorists against potential price hikes. It
could be argued that such an occurrence would only serve
to free up more fuel for refiners to ship out of state in
order to maximize profits, thus defeating the purpose of
establishing a reserve.
3)Federal & State Oil Reserves . The U.S. Department of
Energy maintains a strategic petroleum reserve of 570
million barrels of oil. U.S. Secretary of Energy Bill
Richardson has consistently opposed releasing the oil to
ease prices, saying the reserve should be saved for
national emergencies. This past winter, during a heating
oil shortage on the East Coast, the Secretary declined to
tap the U.S. reserve. However, 500,000 barrels of oil
were recently released to a Louisiana refinery where
normal crude oil supplies had been disrupted.
The feasibility of a creating a California petroleum
product reserve was considered by the CEC staff in 1997.
The staff concluded at that time that such a reserve
would be "marginally economic," though since that time,
gas prices have become more volatile.
4)Diesel Fuel . The 1999 gasoline price hikes also led to
increases in diesel fuel prices, which had a negative
impact on many agricultural users. For these users,
there's an additional concern relative to timing, because
a fuel shortage during harvest could ruin an entire
year's crop. As such, the author and committee may wish
to consider amending the bill to also study the value of
a strategic diesel fuel reserve.
5)Technically Speaking . Page 3, Lines 23-31 only require
the CEC to submit a report to the Legislature if it finds
that establishing a strategic gas reserve is feasible.
The author and Committee may wish to consider requiring
the CEC to report its findings to the Legislature
regardless of whether or not it finds establishing the
reserve is feasible. Furthermore, while the bill
requires the CEC to examine the feasibility of
establishing a reserve by July 1, 2001, there is no
deadline by which the CEC has to deliver its report to
the Legislature, so the author and Committee may wish to
consider imposing a deadline by which the report has to
be delivered.
6)Related Legislation . AB 2098 (Migden), which considers
the viability of constructing a motor fuel pipeline from
the Gulf Coast to California, is scheduled to be heard
today in this Committee. SB 123 (Peace), which is
designed to create a branded open supply market, passed
this Committee last year and is pending in the Assembly
Utilities and Commerce Committee.
ASSEMBLY VOTES
Assembly Transportation Committee (10-7)
Assembly Utilities & Commerce Committee(9-1)
Assembly Appropriations Committee (14-7)
Assembly Floor (47-31)
POSITIONS
Sponsor:
Attorney General
Support:
None on file.
Oppose:
None on file.
Randy Chinn
AB 2076 Analysis
Hearing Date: June 27, 2000