BILL ANALYSIS 1
1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
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|SB 123 - Peace |Hearing Date:May 11, 1999 | S|
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|As Amended:May 3, 1999 |NON-FISCAL | B|
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DESCRIPTION
This bill makes legislative findings that the current
branded wholesale gasoline market structure distorts the
price of gasoline by preventing service station franchisees
from seeking out the least expensive branded gasoline
supply.
This bill permits a branded gasoline franchisee to purchase
the franchisor's branded petroleum product from any
location in the franchisor's wholesale network.
This bill exempts jobbers and their branded service station
operators.
This bill does not effect contracts in force prior to
January 1, 2000 unless those contracts are amended or
extended after that date.
BACKGROUND
The April 28 joint hearing held by this Committee and the
Senate Transportation Committee made clear that the recent
dramatic rise in gasoline prices was triggered by a very
brief gasoline shortage, subsequent market speculation, and
because. oil companies could get away with raising them.
These gas price hikes have focussed considerable attention
on developing ways to lower prices and prevent such hikes
from occurring again. 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 mergers
among oil companies will lead to increased concentration,
reduced competition, and heightened concern that
concentrated market power will lead to higher gasoline
prices.
The committees heard a number of suggestions for ways to
reduce gasoline prices. These suggestions include branded
open supply, divorcement, allowing gasoline that doesn't
meet Californias clean air requirements into the state upon
payment of a per-gallon fee, and increased safety
inspections of refineries to minimize the chances that
supply disruptions similar to what occurred earlier this
year could lead to price increases.
Branded Open Supply - Many service stations are franchisees
of the oil companies that have their gasoline delivered to
their station from the oil company. The price is set by
the oil company at whatever the market will bear. Under a
branded open supply program, the service station franchisee
would be permitted to shop for his branded gasoline from
any branded supplier in the franchisor's wholesale network.
Therefore, a Shell dealer would be permitted to shop among
any Shell wholesaler to find the best price for gasoline
and then arrange for delivery to his service station.
Divorcement - Many service stations are owned by the oil
companies, and that number is increasing according to the
author. This vertical integration, where the oil company
controls the entire process of acquiring crude oil,
converting that oil into gasoline, and then selling the
gasoline at the retail level, is thought by some to
increase the control and market power of the oil companies,
thereby causing price increases. This vertical integration
can be in part dismantled by limiting the number of service
stations owned by the oil companies, a concept known as
"divorcement." Divorcement has been implemented in a few
other states, such as Maryland and Nevada, and two
government studies on the impact of divorcement in Maryland
came to opposite conclusions as to its value.
Allowing non-California gasoline into California -
California gasoline burns cleaner than gasoline sold in
every other state. This unique gasoline requirement, which
was created to help improve California's uniquely poor air
quality, makes it more difficult to import gasoline when
supplies are tight. Consequently, when California
experiences a supply shortage, the difficulty and delay in
obtaining replacement gasoline provides an opportunity for
California refiners to raise prices. If non-California
standard gasoline could be imported upon payment of some
per gallon fee, suggested by some as 15 cents per gallon,
California gasoline prices theoretically would never be
more expensive than 15 cents or so above the gasoline
prices in other states. This proposal, offered by
Professor Severin Borenstein of the U.C. Energy Institute,
has been criticized for potentially hurting California's
already poor air quality, making California non-compliant
with federal clean air requirements, and will do nothing to
keep prices down because, as was evidenced by the recent
rise in prices, those stations/refineries that had no
outages actually led the move to raise prices.
Other potential solutions include improving consumer
information about gasoline prices so that customer's can
more easily shop for the cheapest gas, and improving the
information the state makes available about gasoline
supplies in order to reduce speculation.
COMMENTS
1)The last time gasoline prices rose quickly and
substantially was in 1996. In response the Senate
considered two bills, SB 52 (Kopp) and SB 404 (Peace).
SB 52 provided for a form of divorcement. SB 404
provided for branded open supply. Both bills
successfully passed their policy committees but were
defeated on the Senate floor. This bill is substantially
similar to SB 404, though a bit more limited in that it
doesn't affect jobbers or contracts currently in force.
2)The author believes this bill will enhance competition in
gasoline markets. By allowing branded gasoline stations
to shop for their branded gasoline, rather than
compelling them to accept gasoline delivered to the
station at a price set by the oil company as is the case
today, the author believes competition at the retail
level will be enhanced and prices will be driven down.
The author believes the vertical integration of the oil
companies gives them significant market power and the
power to control prices. This vertical integration has
been explicitly rejected in the telecommunications,
natural gas, and electricity markets, yet it continues to
operate -- and may increase as mergers take place -- in
the oil industry.
3)The Automotive Trade Organizations of California and the
California Service Station and Automotive Repair
Association support the bill because they believe that by
allowing service stations to shop for gasoline
competition increases and prices drop. The Utility
Consumer Action Network (UCAN) supports the bill because
they believe the bill will end the oil company practice
of "zone pricing", a practice where an oil company can
charge two similarly situated service stations different
prices for the same gasoline. By eliminating "zone
pricing", UCAN believes the retail gasoline market will
be more competitive.
4)The California Independent Oil Marketers Association
(CIOMA) opposes the bill, believing it does nothing to
correct the problem of high gasoline prices. It contends
the bill does not require gasoline stations to lower
their prices if they are able to purchase cheaper gas as
a result of this bill. CIOMA also believes the bill
disadvantages its members versus the franchisee gasoline
stations affected by this bill, and may even cause price
increases.
5)The Western States Petroleum Association (WSPA) opposes
the bill arguing as well that it will cause significant
disruptions to the present retail distribution system and
interferes with existing contracts. WSPA contends the
bill will actually harm many service stations because it
lessens the incentive for oil companies to support the
service stations, since the oil companies won't be able
to bind retailers to a delivered supply contract.
Finally, WSPA argues consumers will suffer because the
bill destabilizes the gasoline distribution system,
jeopardizing reliable gasoline supplies for consumers and
causing inefficiency, and thereby higher costs.
6)It should be noted that the bill states that current
contracts are not affected unless they are modified or
renewed. Further, nothing in the bill prohibits service
station dealers from voluntarily signing long-term supply
agreements.
POSITIONS
Support:
Automotive Trade Orgranizations of California
California Alliance for Consumer Protection
California Service Station and Automotive Repair
Association
Guzman Enterprises, Inc.
Hacienda Shell Service, Sotts Valley
Redlands Chevron
San Diego County Board of Supervisors
Scotts Valley Chevron
Utility Consumers' Action Network (UCAN)
Oppose:
Beal Properties, Fresno
Benito, Inc., West Sacramento
Boulder Creek Texaco
Burnside Company, Los Angeles
California Chamber of Commerce
California Independent Oil Marketers Association
Association
California Manufacturers Association
California Teamsters Public Affairs Council
Joseph L. Chiriaco, Inc., Chiriaco Summit
DeWitt Petroleum, South El Monte
Angela J. Froehlich, Redondo Beach
G&M Oil Company, Inc., Huntington Beach
KT Fuel Services, Inc., Long Beach
Lee Escher Oil Co., Inc., Coachella
New West Petroleum, Sacramento
Pepper Oil Company, National City
Poma Distributing Company, Inc., San Bernadino
River City Petroleum, West Sacramento
Abe Safleddime, 76 Station Dealer, La Palma
Faridoon "Fred" Saif, Dealer/Owner, Los Altos 76
Simi Valley Chamber of Commerce
United Oil Company, Gardena
Valley Oil Company, Mountain View
Ventura Oil Company, Oxnard
Western States Petroleum Association
Randy Chinn
SB 123 Analysis
Hearing Date: May 11, 1999