BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 123|
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THIRD READING
Bill No: SB 123
Author: Peace (D)
Amended: 5/18/99
Vote: 21
SENATE ENERGY, U.&C. COMMITTEE : 7-0, 5/11/99
AYES: Bowen, Alarcon, Hughes, Kelley, Peace, Solis, Speier
NOT VOTING: Baca, Brulte, Mountjoy, Vasconcellos
SUBJECT : Petroleum: unfair practices
SOURCE : Author
DIGEST : This bill makes legislative findings related to
the price of gasoline and permits a branded gasoline
franchisee to purchase the franchisor's branded petroleum
product from any location in the franchisor's wholesale
network.
ANALYSIS : The April 28 joint hearing held by the Senate
Energy, Utilities and Communications 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 focused 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
CONTINUED
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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 California's 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
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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.
This bill:
1.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.
2.Permits a branded gasoline franchisee to purchase the
franchisor's branded petroleum product from any location
in the franchisor's wholesale network.
3.Exempts jobbers and their branded service station
operators.
4.Does not effect contracts in force prior to January 1,
2000 unless those contracts are amended or extended after
that date.
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Comments
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.
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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 5/19/99)
Automotive Trade Organizations 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)
Scotts Valley Chamber of Commerce
B.C. Stocking Distributing
City of Vacaville
Association of Bay Area Governments
Board of Supervisors of the City and County of San
Francisco
OPPOSITION : (Verified 5/19/99)
Beal Properties, Fresno
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Benito, Inc., West Sacramento
Boulder Creek Texaco
Burnside Company, Los Angeles
California Chamber of Commerce
California Independent Oil Marketers Association
California Manufacturers Association
California Teamsters Public Affairs Council
The Chevron Companies
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 Bernardino
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
Plavan Commercial Fueling, Inc.
Coast Oil
Dion and Sons
ITL, Inc.
S.K.S. Inc.
Mission Trail Oil Company
Silvas Oil
Shuster Oil Company, Inc.
McNeece Brothers Oil
Self-Serve Oil
Petro America
Robinson Oil
Pilot Oil
Flying J
Leon H. Bartlett, Inc.
McValley Oil
Eel River Fuels
Cross Petroleum
R.V. Jensen
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ARGUMENTS IN SUPPORT : 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.
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.
ARGUMENTS IN OPPOSITION : 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. They are convinced this bill will hurt
the end user and the customers who only buy unbranded fuel
because it is less expensive.
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
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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.
NC:sl 5/19/99 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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