The Mercury News – Gas prices: Newsom scraps profits cap on oil industry ‘price gouging,’ proposes new watchdog body

By Eliyahu Kamisher, THE MERCURY NEWS

Months after Gov. Gavin Newsom unveiled a plan to punish oil companies for reaping large profits during a California gas price surge, his office has scrapped the legislation and is instead looking to set up a new investigatory body and lengthy rule-making process to tame prices at the pump, which are once again nearing $5 a gallon.

Newsom’s original plan would have established a maximum profit margin on gasoline-producing oil refiners and issued civil penalties for excess profits. Any revenue generated would have been put into a “Price Gouging Penalty Fund” and sent back to Californians.

On Wednesday, the governor’s office said it is proposing legislation to create a watchdog body, backed by subpoena powers, within the California Energy Commission to investigate the state’s oil refinery market and gas prices. Based on findings from the watchdog entity, the commission could issue penalties at its discretion on the state’s oil refiners, according to advisers in the governor’s office.

“We feel like this is stronger from where we started,” said Dana Williamson, the governor’s chief of staff. “It is the only one of its kind in the country, and it’s really going to set up a watchdog entity that is going to watch the industry every single day.”

The proposal would need to pass both houses of the Legislature and is still subject to negotiations among lawmakers.

Newsom’s announcement comes as the governor has been on a months-long offensive against the oil industry accusing them of “lying and gouging” after California’s historically high gas prices peaked at $6.44 a gallon in June. The governor announced the penalty in December and a special legislative session to hash out the details, but the plan was met with opposition from some lawmakers and experts who said the state lacks the data to pull back the curtain on California’s opaque oil-refining market.

After dipping in December and January, California’s gas prices have surged back to an average of $4.88 a gallon.

The oil industry slammed the governor’s new proposal. In a statement, Kevin Slagle, a vice president at the Western States Petroleum Association, said the plan would “empower unelected bureaucrats to impose more taxes and increase costs.”

“At the end of the day, this proposal does not solve California’s gasoline supply problem and will likely lead to the very same unintended consequences legislators have reiterated to the Governor: less investment, less supply, and higher costs for Californians,” he said.

All sides agree that environmental regulations and higher taxes and fees are largely to blame for California’s highest-in-the-nation gasoline costs. But Severin Borenstein, a UC Berkeley energy economist, has identified a bedeviling gap in the cost of California’s gasoline compared to the national price, which is not accounted for by the state’s higher fees and environmental regulations. That gap, which Borenstein calls a “mystery surcharge,” typically is around 30 to 40 cents, but over the summer it exploded to over a dollar underscoring the state’s shaky grasp on the oil-to-gasoline supply chain.

“They’re basically withdrawing the price gouging penalty and throwing it to the CEC to decide,” said Borenstein, referring to the California Energy Commission. Borenstein supported the new proposal saying it will hopefully end the decades-long cycle of California lawmakers slamming the oil industries when gas prices surge and losing interest when gas prices return to normal.

“The reality is that the Legislature is not a place for fine-toothed regulatory design,” said Borenstein. “Once you have an office that’s actually set up to look at this, that’s what they do, and they’ll be doing it even when prices go down.”

Experts have said for years that state regulators have woefully little insight into an industry that zealously guards information on pricing and operations as confidential trade secrets. California’s gasoline supply is largely controlled by a handful of oil refiners, including Chevron, Valero, and PBF energy, which produce a special blend of fuel that complies with the state’s stricter environmental standards.

Newsom’s new plan also won the support of Consumer Watchdog, a nonprofit group that has led calls for a new penalty on oil companies. Jamie Court, the group’s president, said stronger state oversight of the industry will give the Newsom administration more clout to impose penalties.

“The governor is all for a price-gouging penalty and the governor controls the CEC,” said Court, citing Newsom’s appointment power at the energy authority. “I think that’s actually better than the Legislature who will never focus enough . . . to punt to an agency that has the will to.”

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