BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2098 - Migden Hearing
Date: June 27, 2000 A
As Amended: April 13, 2000 FISCAL B
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9
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DESCRIPTION
This bill requires the California Energy Commission (CEC),
in consultation with the State Fire Marshal, to study and
assess the viability of building new or expanding existing
pipelines as a means of importing more motor fuel into
California from the Gulf Coast.
This bill also requires the study to include a discussion
about how the state can facilitate the use of a pipeline,
including the use of federal or state funds, as well as tax
credits, that could be used to build or expand a pipeline.
This bill requires the study to be completed by January 1,
2002.
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 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.While this bill appears to focus on increasing
California's supply of gasoline, should it also look at
reducing the state's demand for motor fuel?
2.Because gasoline pipelines are under construction to link
Los Angeles to Houston, is this bill necessary?
COMMENTS
1)Supply & Demand . The telling finding from the Attorney
General's report is that the demand for gasoline is going
to further outstrip the supply of fuel in the coming
years. 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.
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 studying ways to increase the supply of gasoline is
one way to address the growing imbalance between the
state's supply of gas and the consumer demand for it,
it's certainly not the only way to resolved the
imbalance. As such, the author and Committee may wish to
consider whether this study, which focuses purely on
increasing the supply of gasoline in California, should
also focus on ways to reduce the demand for gasoline in
the state.
2)Does A Pipeline To The Gulf Coast Already Exist?
Currently, there is a pipeline that transports gasoline
from refineries in Los Angeles to Phoenix and another
pipeline that transports gasoline from El Paso to
Phoenix. A third leg of the connection, which would
build a gasoline pipeline from El Paso to Houston, is
already under construction. Taken together, these three
pipelines - although they're owned by different companies
- theoretically link Los Angeles to Houston, making the
importation of gasoline from the Gulf Coast a
possibility. As such, the author and Committee may wish
to consider what new information the study proposed by
this bill will provide.
3)A Two-Way Street . California refiners currently export
about 100,000 barrels of gasoline of day to other states,
which is 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, albeit at higher prices.
However, pipelines obviously run both ways, so any
pipeline that could bring gas into the state to increase
the supply and drive down prices could also send gas out
of state to markets where it could command a higher
price. That, in turn, would simply drive California gas
prices up.
4)Technically Speaking . Some reports indicate that
gasoline containing ethanol can't be transported by
pipeline because it is too corrosive. As such, the
author and Committee may wish to consider amending the
bill to consider the transport of motor vehicle fuel or
its components.
5)Related Legislation . AB 2076 (Shelley), which considers
the viability of establishing a strategic petroleum
reserve, 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 (13-4)
Assembly Utilities & Commerce Committee(9-1)
Assembly Appropriations Committee (14-7)
Assembly Floor (54-23)
POSITIONS
Sponsor:
Attorney General
Support:
None on file.
Oppose:
None on file.
Randy Chinn
AB 2098 Analysis
Hearing Date: June 27, 2000