BILL ANALYSIS
SB 123
Page 1
Date of Hearing: July 12, 1999
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Roderick Wright, Chair
SB 123 (Peace) - As Amended: May 18, 1999
SENATE VOTE : 21-15
SUBJECT : Petroleum: unfair prices.
SUMMARY : Permits a branded gasoline franchisee to purchase the
franchiser's branded petroleum product from any location in the
franchiser's network. Specifically, this bill :
1)Makes legislative findings that the current branded gasoline
market structure distorts the price of gasoline by preventing
franchise operators from seeking the least expensive branded
gasoline available.
2)Prohibits a refiner, distributor, manufacturer or transporter
of petroleum products from allowing a franchisee to purchases
branded gasoline from any location in the franchiser's
wholesale product network.
3)Prohibits a refiner, distributor, manufacturer or transporter
of petroleum products from offering different prices to
franchisee purchasers if the price differential effectively
prevents a franchisee from taking advantage of price
differences at different locations or between different
vendors.
4)Exempts jobbers and their branded franchise service station
operators.
5)Exempts contracts in force prior to January 1, 2000, unless
those contracts are emended, modified or extended after that
date.
6)Permits refines to charge different prices to wholesale
customers if the difference is not based upon the location of
the wholesale customers retail facility.
EXISTING LAW prohibits a refiner, distributor, manufacturer or
transporter of petroleum products from discriminating in price
between purchasers if the effect of the discrimination is
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harmful to competition.
FISCAL EFFECT : Unknown.
COMMENTS :
1)The recent increase in gasoline prices has been caused by
numerous factors. Some of those factors include an increase
in crude oil prices due to the OPEC agreement to reduce
production as well as unforeseen interruptions in refinery
service due to fires, shutdowns and other unpredictable
circumstances. While it is clear that these incidents
contributed to a decrease in the available supply of gasoline,
the author and proponents of this bill do not believe that the
demand outpaced supply commensurate to the level of price
increases heaped on the public in the last several months.
California Service Station and Automotive Repair Association,
a proponent of this bill, suggests that the recent price
increase is a symptom of the absence of true competition
within California fuel marketplace. This author has
introduced this bill to create a uniform pricing system aimed
at reducing the prices paid for gasoline by consumers.
2)The current supply system for gasoline requires the efficient
distribution of over 13 billion gallons of gasoline a year.
Today, wholesale customers, including most service station
dealers and distributors purchase their demand from a
predetermined location pursuant to fixed contracts and as part
of franchise agreements. This bill would mandate a branded
open supply which would allow dealers, distributors and
franchisees to purchase gasoline from their suppliers at any
location or from any vendor in the supplier's wholesale market
system.
3)Opponents fear that this bill will create chaos in the current
distribution system by forcing refiners to increase their
reserves in their terminals, to guard against running out in
at-will purchase and delivery system. In the gasoline market,
available supply has a direct impact on price. Thus, the type
of disruption experienced earlier this year resulted in higher
prices almost immediately. While this bill has as its goal
increased competition and lower gasoline prices, opponents
assert that it will case lack of predictability in the market,
leading to increased prices. Opponents argue that this bill,
which does not mandate that prices be decreased or do anything
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to increase the available supply, will have an impact on the
industry different than what the author intended.
4)Economists indicate that this bill would prohibit refiners
from offering a variety of wholesale prices and marketing
programs that allow dealers to respond to specific market
conditions. Instead each refiner would have to determine a
uniform price to charge dealers supplied from each of its
terminals. Several opponents of this bill including
independent dealers, California Manufactures Association and
numerous individual businesses fear that the uniform price
that will be set is not likely to be the lowest wholesale
price offered in the past. Several municipalities,
specifically those where prices are currently higher than in
larger regional markets such as Los Angeles support this bill
on the belief that it would lower prices paid by consumer in
their regions. The problem, however, is that in order to
decrease prices in one region without doing anything to
increase the available gas supply will lead to price increases
in other regions.
5)At a hearing of the Senate Energy, Utilities and
Communications and Transportation Committees, the committee
heard testimony on additional ways to reduce gasoline prices.
Those suggestions included the branded open supply concept
included in this bill. An additional process called
divorcement, would limit the number of stations owned by the
oil companies as a means to dismantle the vertical integration
so prevalent in the industry. Vertical integration occurs
when an oil company controls the entire process of acquiring
crude oil, converting the oil to gasoline, and selling at the
retail level. Divorcement has been implemented in a couple of
states, including Maryland and Nevada. Recent studies,
however, indicate that the impact of divorcement is not as
conclusive as promised earlier. Finally, the allowing
non-California gas into the state was discussed as an option.
Gasoline required by state regulation (CARB gasoline) is more
difficult and expensive to supply, thus obtaining additional
capacity from outside of California is not a viable,
cost-effective alternative. Furthermore, allowing gas that
does not meet the stringent air quality standards required in
California would harm California's already poor air quality.
6)Additional measures are in consideration before the
Legislation to address the high gasoline prices in California
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today. ACR 48 (Battin) request the State Air Resources Board
and the State Energy Resources Conservation and Development
Commission to report to the Legislature on or before January
1, 2000 on the costs and benefits of allowing the sale of
non-California gasoline in the state during specified time
periods. The Resolution also requests the report to provide
alternatives for addressing dramatic price increases caused by
disruptions in supply.
7)Since the price increases, Attorney General Bill Lockyer has
widened his investigation into the way gasoline prices are
determined. SB 1131 (Burton) appropriates an additional
$4,450,000 from the General Fund for purposes of continuing
that investigation. The investigation focuses on industry
practices relevant to the production, distribution and pricing
of gasoline as well as the review of pending mergers between
major oil companies. This bill may be proposing a solution
that is premature in light of the full scale investigation
underway through the Office of the Attorney General.
REGISTERED SUPPORT / OPPOSITION :
Support
Association of Bay Area Governments
AuTo-CA
California Alliance For Consumer Protection
California Service Station & Automotive Repair Association
City & County of San Francisco
City of Vacaville
County of Santa Cruz
County of Yuba
Guzman Enterprises, Inc.
San Diego County Board of Supervisors
3 individual
Opposition
BC Stocking Distributing
California Chamber of Commerce
California Independent Oil Marketers Association
California Manufacturers Association
California Teamsters Public Affairs Council
Coast Oil Company
COWAN Rental Services
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Demaria Electric Motor Services, Inc.
Environmental Resolutions, Inc.
Lee Escher Oil Co., Inc.
Madison Industries
Mission Trail Oil company
Mobil Oil Corporation
Pepper Oil Company
Western States Petroleum Association
Redman Equipment & Manufacturing Co.
San Diego County Taxpayers Association
Simi Valley Chamber of Commerce
Hundreds of California ARCO Dealers and Employees
4 individuals
Analysis Prepared by : Carolyn Veal-Hunter / U. & C. / (916)
319-2083