The goal of California’s anti-gouging law is cheaper gas. But it carries risks | Opinion

California is about to embark on another first: Regulation of the oil industry with greater oversight and demand for information. The goal is to make the price at the gas pump at least more understandable, if not cheaper.

That is the purpose behind a bill that just sped through the Legislature faster than a gassed-up Ferrari. Last week the state Senate passed SB X1-2. On Monday the Assembly approved it on a mostly party-line vote, with all 19 Republican members voting no. Democrat Jasmeet Bains, of Bakersfield, also voted no and was trolled for it on Twitter Tuesday morning by the governor’s chief of staff.

Gov. Newsom was expected to sign the legislation Tuesday afternoon.

What happens next is up for debate. To Newsom and the Legislature’s Democratic leaders, nothing less than a long-overdue reality check is about to hit the oil industry. Opponents, however, see higher costs, even shortages and rationing, as possibilities.

The law, officially known as SB X1-2 but more commonly as the Oil Price Gouging Penalty, creates a new bureaucracy within the California Energy Commission — an “independent watchdog” to monitor the state’s petroleum market “on a daily basis to ensure market participants play by the rules,” said the governor’s office.

Oil producers will have to provide new information about their refining operations. The watchdog will have subpoena power to force refiners to produce needed data and records that might show misconduct or pricing irregularities. Those companies that might be violating the law can be subject to prosecution by the attorney general.

The Energy Commission is also empowered to set a price-gouging penalty. It would be a civil fine “on refiners who charge more than a maximum allowable margin for the price of gasoline.” The commission also is granted the power to set the maximum profit amount for each company; producers can make the case to be exempted. And, maintenance work planned at refineries would have to meet Energy Commission requirements.

The new rules further isolate California from the rest of the nation when it comes to gasoline. To meet air pollution requirements, California refiners already create special blends of fuel — one for winter, another for summer. That is why no pipelines from other states come into California — the fuel used in Arizona, for example, would not meet California’s standards.

California is also distinct in its pricing — the state routinely has the most expensive fuel in the nation. On Monday, the national average for a gallon of regular gas was $3.47. In California, the average was $4.82. At one point in 2022, California gas jumped to an average of $6.44 a gallon; some stations charged $8 a gallon.

Price gouging

That price disparity, plus sky-high profits recorded by oil companies last year — Chevron reported a record $36.5 billion in profits — spurred Newsom to first propose a windfall tax on the industry. But lawmakers were loath to create a new tax for fears it would be passed onto consumers, or that such a tax would lead companies to make less fuel. So Newsom and legislative leaders hammered out the price-gouging bill.

Nancy Skinner, the veteran Democrat senator from Berkeley and sponsor of the bill, succinctly summed its purpose: “It is our role to protect our residents from any practices of any business that may harm them.”

Opponents think consumers are going to be hurt nonetheless. Assembly Republican leader Jim Gallagher of Yuba City foresees high costs for the oil companies to meet the regulations, and predicts there could be fuel shortages, rationing and price spikes.

Kevin Slagle, of Western State Petroleum Association, an industry lobby group, said some companies may decide it does not make sense to continue to do business in California, despite the state representing the nation’s biggest market.

“The governor calls it (the bill) historic. We call it a dangerous experiment with the fuel market in the state,” said Slagle.

Severin Borenstein of UC Berkeley specializes in studying energy markets and has advised the Legislature on the new law. He expects it will work well, especially when it comes to uncovering one of the great unknowns of California’s gasoline — the 40 cents per gallon “mystery surcharge” built into the price that no one seems able to explain.

He added that the cost of ramping up the new office in the Energy Commission will be $10 million to $20 million. “That is about the equivalent of one day’s worth of the mystery gasoline surcharge. So I think it is money well spent.”

Risk to managing gas

There is certainly some political risk involved if the nightmare scenarios of the opponents come true.

A previous California governor, Gray Davis, got recalled in part because of the state’s ill-fated foray into electricity deregulation in 2000-01. Now, if greater oversight of the gas industry results in fewer refiners and shortages, and the shuttering of fuel stations and rationing, Newsom will be blamed by California motorists.

The new data to be gathered, however, is worth the risk. California’s gas prices have been outrageous for years, and cannot be explained away by tougher environmental standards alone.

To be successful, the Energy Commission’s new office must be thorough, timely and fair in its reviews and rule-making. And this cannot be stressed enough: The priority must be what is best for California drivers, not the bureaucracy or the industry.