Senate Standing Committee on Energy, Utilities and Communications

The Senate Committee on Energy, Utilities, and Communications will come to order. Good afternoon. As we continue to take some of the precautions to manage ongoing COVID-19 risk, the Senate continues to welcome the public and has provided access to both in-person and teleconference participation for this public.

For public comments for individuals wishing to provide public comments via the teleconference service, the participant toll-free number and access code are posted on our committee website, and it will be displayed on the screen. I will announce it now. Today's participation number is 1-877-226-8163, that's 877-226-8163, and the access code is 440-0595, that's 440-0595. I will maintain decorum during the hearing as customary, and any individual who is disruptive may be removed from the remote meeting service or have their services disconnected or muted.

Some of our speakers today will be participating remotely. For our remote participants, please mute your phones or computers. This will greatly aid in eliminating any acoustic feedback, and I ask that every time you wish to be recognized, you use the raise your hand feature in the program. Each time you are recognized to speak, a pop-up window will appear and ask if you would like to unmute. Please select unmute before you begin speaking.

Our it personnel will put you back on mute when you are done. Once recognized to speak, please make sure you can be seen on your screen. State your name, and then you are ready to address the committee. For today's hearing, we will be hearing all of the panels of witnesses on the agenda prior to taking any public comment. Once we have heard all of our witnesses, we will have a public comment period for those who wish to comment on the topics on today's agenda.

Today's hearing is the first hearing of the 23-24 Senate Committee on Energy, Utilities, and Communications, and with me as chair, this is also the first hearing of the extraordinary session called by Governor Newsom. I would also like to take this opportunity to inform the public that our committee has another two informational hearings scheduled in the coming weeks.

Next Tuesday, we'll hear the annual update to the legislature from the California Public Utilities Commission, which will focus on utility bill affordability, another pricing issue that is affecting household budgets throughout the state. And the following week, March 7, we'll have an oversight hearing on the state's broadband investments and whether we are making progress on connecting the unserved. Now, let's return to today's hearing. Gasoline is necessary for much of what we do in our everyday lives.

High gasoline prices can be crippling for residents, particularly for Californians limited or on a fixed income and for those who must commute long distances to get to work or whose job necessitates sufficient driving. Sustained, skyrocketing gasoline prices can seep into everyday aspects of the economy, driving up prices for consumer goods and services. Californians are no strangers to the price volatility of gasoline fuel markets. In 1970, I should say, the energy crisis resulted in long lines at gasoline stations, shortages of gasoline, and high prices.

In 1999, high gasoline prices resulted in then-Attorney General Bill Lockyer investigating industry practices relevant to the production, distribution, and pricing of gasoline and diesel fuels. In 2012, a fire to Chevron Richmond refinery led to an outage that contributed to high gas prices as well. And in February 2015, in my district, an explosion of the ExxonMobil torrent refinery resulted in a shutdown of the facility and subsequent sudden increases in California fuel prices. Unfortunately, price volatility in California fuel market is not new.

In October of last year, Californians experienced record retail gasoline prices at six dollars and forty cents a gallon, which brings us here today. The crude oil that is used to make gasoline is sold in a global market that dictates the price per barrel and can be affected by global events such as Russia's invasion of Ukraine.

California has chosen to place a greater priority on air quality than other parts of the world, and we require the use of a special reformulated gasoline blend that is more expensive to produce in order to reduce smog-forming emissions, especially in the summer. As we will learn today, we are both self-sufficient, refining enough gasoline to supply our own needs and an isolated market vulnerable to outages on our system or other disruptions that can affect supply and pricing.

State and local policies limit instate extraction, refining, and storage capacities, which results in more petroleum being imported to meet our state's demands. For over 40 years, the state has attempted, in varying forms, to get a better handle on the complications of the gasoline market. There's been lots of finger-pointing among stakeholders, some saying it's to refineries raising prices, others saying it's to retailers. Others are blaming the state's taxes and environmental policies. I believe it's all of the above.

Governor Newsom has called a special session of the legislature to consider policies to deter excessive, I should say, prices by oil companies by proposing to impose a financial penalty on excess margins, with any penalties collected to be returned to Californians. Today, it is an important opportunity for senators and the public to hear from the Newsom Administration about the details of the governor's petroleum windfall profits penalty proposal. It is also an opportunity for the legislators to ask questions to better understand this complicated and global regional market.

We want to be sure that we have the necessary data to understand the factors affecting gasoline prices so that we can have the confidence that solutions we adopt will bring actual relief to Californians at the gas pump. In our pursuit to address gasoline prices, we must ensure that our actions we take first does no harm to consumers. Now let's hear from our presenters.

On behalf of the Newsom Administration, I welcome California Energy Commissioner, Vice Chair, Commissioner Siva Gunda, and Director of the California Department of Tax and Finance Agency, Nicolas Maduros. Thank you. Mr., whenever you're ready, you may begin.

Checking that you can hear me. Great. Good afternoon, Chair and members of the committee. I'm Siva Gunda, Vice Chair of the Energy Commission, and I'm here with my colleague Nick Maduras from the California Department of Tax and Fee Administration. Thank you for holding this important informational hearing and for the opportunity for us to be here and provide you with the details of the Governor's price-gouging penalty proposal.

Our two departments have critical roles in the Governor's proposal, and today, we hope to provide you with details on what our agencies do, the rationale behind the governor's proposal, and its details. Next slide. Slide two. I'm not sure if the slides are being...

Are the slides queued up?

So would you like us to keep going?

Continue. Members have their hands up.

Thank you. So, our two agencies currently have a number of roles relating to the petroleum industry. As the state's lead agency for energy information, the CEC gathers data and provides analysis related to historical gasoline market data that come from various sources and at different reporting cadences, and often not in real time and are not even close to real-time.

CEC data supports emergency responses related to fuels in coordination with Office of Emergency Services to help ensure an adequate supply of transportation fuels for first responders and other critical needs. Periodically, the CEC conducts an in-depth examination of significant gasoline price spikes and publishes observations and recommendations. Currently, the CEC is initiating a transportation fuel transition study to assess the market further and plan for a transition away from petroleum while ensuring adequate supply and mitigating price spikes.

I pass it on to my colleague Nick Maduros to introduce himself and his agency's work relating to the petroleum industry.

Thank you, Siva, and thank you, Mr. Chairman and members of the committee. My name is Nick Maduros. I'm the Director of the California Department of Tax and Fee Administration, or CDTFA. We at CDTFA administer 39 different tax and fee programs for the State of California and its cities and counties.

Among the programs we administer are the Motor Vehicle Fuel Tax, commonly known as the Gas Tax; the Sales and Use Tax, which applies to gasoline sales in California; the underground storage tank maintenance fee; and the Oil Spill Prevention and Administration fee.

Virtually all of the industry participants are within the purview of CDTFA on the tax and fee front, importers, refiners, terminal rack operators, position holders, suppliers, gas station operators all register and file with the Department, and I'll address more of how that comes into play a bit later in the presentation.

Thank you, Nick. Next slide, slide number three. The chart here shows the average retail gasoline prices in California in green and the US in blue. A few elements to highlight here that Senator Bradford already kind of mentioned. Prices both nationally and in California track very closely with the prices of crude oil, which are globally indexed. As the global crude oil prices rise and fall, the retail prices follow.

Gasoline prices in California have been higher on average than the rest of the United States for a few reasons, including environmental programs such as the unique fuel blend we use in California today. But the two prices track closely in how they move up and down. While historically, the difference between California and US gasoline prices has been stable since the Torrance refinery incident in 2015, the data suggests two phenomena.

One, the difference between California and US prices begins to grow, and two, there are times of price spikes in California that diverge significantly from national trends. We highlight three spikes on this chart. In 2015, we had price spike following the Torrance refinery incident. The second, highlighted in 2019, resulted in Governor Newsom asking the Energy Commission to develop a report and respond to the experts, raising the concerns of mystery surcharge.

This led to the CEC developing a methodology at looking at the prices, but report focused in the realm of retail margins and long run gasoline price issues. The Energy Commission found that the retail margins for name-brand retail outlets were much higher than the nonbrand retail outlets at that time. CEC did not look into the short-run price spikes. Finally, the third extraordinary spike happened last year, which we will delve into more in the next few slides.

Slide number four now taking a closer look at just the difference between California and the US retail prices. The line in red is the daily difference and the blue step curve in the annual average is the annual average for a specific year. As noted before, the annual difference continues to grow. In 2014 the difference was 40 cents, and in 2021, it grew to a dollar and 14 cents. We reached an all-time high difference of $2.61, much of which was driven by refinery margins -

- as we will show you shortly. Given the recurrence of these spikes and their extraordinarily high levels, it is a concern, and we present to you in the next slide a breakdown of the contributing factors. Next slide, please. Here is a breakdown of California gasoline prices in terms of components we can discern from the data we have access to, just to set you on the chart. There you're looking at the crude oil prices at the bottom.

Next comes the taxes and fees in California, and then the orange bar, which is the refinery costs and profits, which is what we call the refinery margin, and on the top is the retail margin, which is the distribution costs, marketing costs, and profits. This information is also available on the CEC website. Consistent with the CEC's approach since 2019, we break the retail prices into four key components that align with the stages of gasoline production.

As you can see, crude oil prices and taxes and fees, et cetera, remain fairly constant over the 10-week period of concern, and we don't believe contributed to the price spikes. In fact, the retail prices continue to grow as the crude oil prices decline between August and October. In addition, you see the refinery margins quadruple. Again, those in orange grow from 64 cents to $2.48 between August 29 and October 3.

You can also see abnormalities in the yellow shade or the light orange shade of the retail margins, which is also addressed by the Governor's proposal on transparency. And Mr. Maduros will further expand on it shortly. Next slide these increases in refinery margins and extraordinary gasoline prices and its impact on California families when juxtaposed with record global profits are especially concerning.

While these profits are global, they're often directionally correlated to the profits in the Western United States, and to date, we have not received any information disagreeing that the last fall was very profitable for the refining industry in California. Here, as has been in the news, are the record global profits enjoyed by these refineries. Chevron doubled its profits, Marathon has a 331% increase in Q4, Valero has almost 900% increase in profits, Phillips has a 46% increase, and the PBF has seen an 1146% increase over 2021.

None of them experienced a financial hardship correlated to the period when supply was impacted in California. The data shows quite the opposite. This is not to say that refineries should not be profitable or even enjoy healthy profits as an industry but to protect California families also, especially those that are vulnerable. Next slide. Before we introduce the components of the Governor proposal, a few contextual slides as you continue to deliberate on this important issue and take information California refinery production level and ownership continues to evolve.

This is an overview of California's production capacity for consumer gasoline compared to the start of the century when we had about 15 refineries. Today, we have 11 in total, and 98% of the gasoline refining is controlled by five refiners. This changing ecosystem could result in opportunities for market actors to exert market power.

This has not materially changed 20 years, which is to say that despite demand staying high and the prices going up, no new actors came into the market to refine to expand refining capacity or competition. Next slide, please. Today's California's instate production is enough to meeting the needs of California and also supporting the needs of the neighboring states. 88% of the instate production is used for serving Californians, and about 12% is exported to the neighboring states and other destinations via pipelines and marine vessels.

Next slide. Another fact that informs policy in this area is demonstrated by decline in demand. The CEC is still collecting 2022 data, but analysis shows that demand for gasoline continues to decline from its peak in 2017. CEC's forecasting suggests that California has likely passed its peak gasoline consumption levels. California gasoline consumption was down 10% in 2021 compared to 2019, primarily driven by electric vehicle adoption and, to a lesser extent, remote work expansion.

Nearly 24% of all light-duty vehicle sales in Q4 of 2022 were zero-emission vehicles, and we believe that this will continue to grow. Even with these declining levels, California is still the third largest consumer of oil behind US and China, and continues to be a large market opportunity for oil industry. Next slide: given the transition in the transportation sector, it is important that the state takes action to ensure that California consumers are protected, as the market is not necessarily incentivized to do so.

As the state energy data agency, we get a lot of questions from you, from the Administration, and the public to answer key questions of interest when extraordinary events happen in the market, and we currently do not possess the information to answer all questions to the levels that are asked by people of interest. There is lack of complete transparency into how the refining industry operates today.

The CEC collects data from refiners and through third-party sources, but it doesn't answer all the questions on why price spikes occur and how supply will be affected by various events. The price spike events themselves need to be understood more and ameliorated because the transition away from gasoline-based transportation is going to disrupt the market that we have been dependent on for 150 years.

As noted, the decreasing competition in the defining sector is not going to go away this long term static condition is something a transition plan and long term solution has to consider and market incentive to mitigate price spikes does not exist.

Conversations with the industry, with stakeholders during the workshops, and others show that they agree that the future price spikes will occur and do not disagree that the price spikes did result in profits last year and they have not developed a strategy that protects consumers and it is incumbent upon the state to figure out incentives to support this market. Next slide: this is what we know. We call this the heartbeat chart. The slide shows the last decade of history of refinery margin data.

The margin is the amount a refinery receives for its products minus the price of the crude oil. It's not the price consumers pay; it's a portion of the wholesale price refineries receive after deducting the price of crude on the graph; the margin is shown to correspond very well to price spikes we have correlated to refinery outages. The 2015 Torrance-related spike is here, showing that the refiner margin was up, as well as the refinery spikes in 2019 and early 2022. The late 2022 spike is quite clear.

This slide shows that while these margin spikes events are not frequent, roughly three in the last decade, they are quite large and generate significant revenue in these price and margin spike events. The data does not identify any market-based incentive for refiners to resist increasing their margins, even if it is for a short while. Next slide: The governor's proposal attempts to create the missing incentive to resist the opportunity to collect spiked margins whenever they can.

The bill would set a maximum margin for refiners and impose a price gouging penalty on margins about a maximum, with the penalty getting progressively larger. The idea is to set a maximum that allows ordinary price fluctuations but prevents only runaway margin spikes. So there would be no cap at all on normal profits. For example, if the margin were to set up at 90 cents per gallon, as illustrated here, the penalty would start there and then increase at 110 cents per gallon.

But all of that penalty would start only after refiners have been allowed to earn a healthy profit on each gallon sold, just not an extreme margin of the sort we saw last October that hurts California families. This would never force anyone to operate at a loss, and indeed, this maximum margin and penalty would provide an incentive to boost supply in the circumstances where refiners' profit might otherwise be maximized by lowering their output to artificially create scarcity.

Instead of creating scarcity to drive up prices and profits, they will boost supply to earn their normal healthy margin on more gallons of gas. The governor's proposal also gives CEC discretion to grant a refiner's request for an exemption from maximum gross gasoline refining margin upon a showing by the refiner of reasonable cause and subject to alternate margins or other conditions as the commission may set. Next slide: apart from the penalty, the Governor's proposal also includes four elements that will include transparency and planning.

They include reporting, assessments, oversight and investigation that we will expand on. Next slide, please: before I go into reporting, it is important to note that CEC, under existing authority that PIIRA grants, currently collects and reports on the aggregated information on petroleum supply.

An important point is that CEC has experience in gathering, processing and protecting confidential data and takes extreme care in handling it. Further, the legislature passed SB 1322, which was signed into law last fall, providing CEC with further information that will continue to help deconstruct gasoline pricing and answer key questions. Next slide, please: the Governor's proposal intends to provide even more transparency into refinery operations.

The CEC would benefit from getting additional information from refiners and have better insight on refinery maintenance information, including information on unplanned refinery outages, spot market transactions to give insight into supply stressors, market responses and how participants are behaving in the market inventory holdings by type of market participant so that we can see the refiner's contractual supply obligations are, and as well as traders who do not have supply obligations but can sell to those who do, especially after unplanned outages.

Overall, this data will give CEC insight into observing behavior showing who is acting to decrease upward pressure on prices and who is not. Next slide assessment. Last quarter, as I mentioned, nearly one in four vehicles sold in California was at ZEV just a decade or so ago. It was about one in 1000. CEC forecasts continued growth in the ZEV market; gasoline demand will continue to go down, but it will remain an essential commodity for a time, and we need to be prepared.

The proposal directs the CEC to conduct regular assessments to ensure adequate, reliable, and affordable fuels while the state transitions away from fossil fuels. The second challenge is the need for an assessment to find ways to ensure supply and mitigate price spikes while the state transitions to a clean transportation future. Next slide, please. Sorry, oversight... the Governor's proposal also calls for establishing an independent advisory committee of fuel market experts, consumers, and labor to provide the Governor, administration, and Legislature with independent evaluation and recommendations.

A dedicated independent advisory committee is needed to objectively and with clarity and foresight predict and develop policy to ameliorate harsh events along the road to decarbonization of the transportation sector. With that, I'll pass it on to my colleague Nick.

Thanks, Siva. Thank you, Siva. So, the governor's proposal also tasks CDTFA to work with the California Energy Commission to study the distribution and retail sale of gasoline in California. Currently, there is very little visibility into what's happening with pricing and contracts between the rack, which is where the big gasoline trucks that we see on the road fill up, and the retail gas stations in California. We have information regarding gallons distributed, but pricing and contractual relationships remain incredibly opaque.

CDTFA, with its audit experience, can assist with getting access to documents and with manpower. We have existing authority to examine books and records of virtually all of the participants involved in today's discussion, and the Governor's proposal makes clear that the authority would extend for purposes of this study.

As gasoline pricing has a clear connection ultimately to state tax revenue, CDTFA's auditors, data analysts, and computer audit specialists can assist with making sense of large volumes of data to help give a better sense of what's happening between the time when the gasoline is loaded onto the trucks and when it's pumped into consumers gas tanks. As was shown on the earlier slide.

And if it shows up again, if you put the page there in your deck, the extreme fluctuations in margin exist not only at the refiner level. Retail gasoline pricing also exhibited some unusual behavior last fall. While Commissioner Gunda focused on margins for refiners, retail margins ballooned. As you can see there in that third graph, they ballooned even as refiner margins eventually came back to earth.

So even when the price of oil dropped, and the price of the rack dropped, prices at the pump for California consumers remained extremely high in the oil and gas world. And you probably hear this throughout today's hearing. There's a saying for this behavior: gas prices go up like a rocket and come down like a feather. People say it all the time, but nobody quite knows exactly why this is.

Prices go up very quickly, sometimes due to price spikes in crude oil prices, sometimes due to refinery outages, sometimes for maintenance, and sometimes for reasons that nobody yet can quite explain. We see the prices on gas station signs skyrocket overnight. But once those supply issues are resolved, we don't see the prices of the pump fall nearly as quickly. And indeed, in some cases, as with the 2015 Torrance refinery fire, some think that prices have never really gone back to pre-outage levels.

The governor's proposal and this study would attempt to get us beyond anecdotes and theories so that we can look at hard data and provide real answers. We would look at the supply contracts and at the daily pricing both at the supplier and the retailer levels to give you and other California policymakers a clearer window into what's happening. Refinery operators and others are also suppliers to gas stations, often under long-term contracts, with prices adjusted every day.

If you turn to the next slide, some people think that the unique nature of the California distribution system may play a role. You can see from this slide that the so-called dealer tank wagon supply contracts, which are typically long-term with delivery included in the price, are much more prevalent in California than in the rest of the nation. Does that impact pricing at the pump, or does it simply reflect a desire for a guaranteed supply?

We have some visibility into rack pricing through data sources, but we have no clear view into the dealer tank wagon pricing and contractual relationships, which, as you can see here, this is the red section. In the California market, it diverges wildly from the national market. The study is intended to provide needed information to understand the market, to protect consumers, and to navigate this transition away from gasoline. Clearly, many questions remain, but all of these questions and that we're attempting to find out are knowable.

The Governor's proposal seeks to get the data in a way that does provide protection for trade secrets and confidentiality, and we would analyze that data so that we can move forward from a common set of facts to help protect California consumers. And with that, we're happy to answer any questions members of the committee may have.

Thank you for your presentation. And in the interest of time, we're going to afford Members one question and a follow up, and then we'll move to the next panel. So does any Member at this time have a question? Vice Chair Dahle?

Thank you, Chairman. So I'm looking at your graph. Actually, it's duplicated. There's a $2.48, I guess, profit. These are obviously -

It's not all profit. It includes cost and profit.

Okay, so it's a big gap in there. You can see that in October 3, 2022. But you go to the next page, and you were talking about the red.

I guess it's the DTW, which is the -

Dealer tank wagon.

Right.

So, I'm a farmer, and commodities are traded on futures, right? So, are these folks procuring? They're buying that on futures. So if there's some sort of a play in the market that can drive the price, even though there may not be a shortage, that can still change the price because they're making sure they're getting their suppliers, their fuel. So they play on, I'm assuming. I wonder, why is it different in California than it is? Is that the scenario where they're buying futures on this?

Well, this is how retailers get their fuel. So are they getting it from independent distributors who are buying it at the rack, or are they getting it from the refiners over long-term contracts that basically obligate somebody to buy only from that supplier for a period of 10 years or so? So that's the issue there.

But you're absolutely right that many of the players in the industry are hedging, including the refiners, who are using many of the same data points that the states required under SB 1322 from last year, using those same -

Would it be safe to say that if you're looking at the national, where the red is very uniform or different, and there's a big gap on the California side? But we have special blends and things that, for example, I'll use the analogy of agriculture, if there's a big storm coming and we're going to see a frost and you're delivering peaches and you might get froze, you're buying up those futures to make sure your customer, the retail person, has peaches?

Well, it would be the same in California, where we have a limited amount of that product available because it's a California blend that those wholesalers who are supplying to the retail would be making sure that they have their customer orders filled, which would drive the price up.

Correct. So this isn't a pricing; this is just a percentage of the market that is supplied by these various avenues. So the dealer tank wagon here is about 40% in California and about 6% nationally. I think that's the. This doesn't involve pricing here.

But you are right that one of the theories for the difference is that because we have basically a closed market with limited supply, that some of the end users would opt more for those contracts because they would have more of a guarantee of supply from their suppliers, not necessarily on the futures market. I don't think in that sense, but just have -

Well, the scenario is the same, though, because you have a closed market, and you have to supply your retailers with a product, and you want to guarantee that product. If you think there's going to be a shortage, you're automatically going to procure that product on some sort of a tanker or allotment to make sure you get it. That's why you could see those price spikes.

It certainly is. And there are a lot of theories around this, and I think one of the things that the Governor has made clear, and I think Commissioner Gunda discussed, is that there are a lot of anecdotes and a lot of theories, and it seems like these are knowable questions. And with 40 million Californians and so many consumers to protect that, it makes sense to try to get real hard facts, as we would from other economic sectors.

Senator, just if I may clarify on the two, between the two slides that you just mentioned, the refinery margins on the column chart that you see do not include a dealer tank wagon. So you're right. So one point of it is these are actually rack prices, and that's where you're calculating. The second pathway that Nick talked about is a further concern on the top of that, which we will look into investigating based on the Governor's proposal, and we'll come back to you with recommendations.

Senator Min.

Thank you. Chair Bradford. And I just want to say thank you for testifying here today. This is a tough scenario because we saw the oil companies make record profits during this period while gas prices were at all-time highs. There is clearly a belief out there among many people that the oil companies were profiting off the backs of Californians. At the same time, we don't really have a smoking gun, as far as I can see, that shows intentional collusion.

The oil companies have come over and claimed to us that this proposal might be counterproductive. There are only 15 refineries left here in California because of the unique, clean burning fuel standards that we have. Their argument one of the arguments they've made to us, and I'm sure they've made it to my colleagues, is that this particular proposal would cause more refineries to leave the state, thus further driving up the problem of decreased supply and potential increased costs.

So I want to give you a chance to respond to that argument and then also ask know one of the proposals that was raised because we do have kind of a unique market. It's very thin here in California. It is a Strategic Reserve, something like the Federal Government has, where we either require the oil companies to keep the Reserve themselves so we don't have these spikes in supply and demand that they are claiming were behind the price spikes.

Why not some emphasis on a Strategic Reserve, which would be a good proposal independent of the windfall profits penalty? So just wanted those two questions. I just wanted to give you a chance to respond to.

Thank you.

So, if I can take the first question. So I know that there have been concerns raised, as some in industry always would, whenever any sort of penalty is considered, that it's going know cause calamity. The design of the penalty is pretty delicately designed to meet the California challenge and allow companies, indeed, to encourage them to continue to make very healthy profits in the state of California.

If you look at the heartbeat chart that Commissioner Gunda showed that's in your packet here, it would have only been triggered three times over the last decade. And any impact on profit in those other times, it would have zero impact on supply and demand, on the profit, the maximum profit curve that they would face. Also, a couple of other brief points.

CEC would have the ability, if there were some adverse reaction, to adjust the margins or to provide some sort of escape valve if there were other unintended consequences that took place. And also, if one looks at economics, and it's sort of hard to do this without a chart, but there is this profit maximization curve. And typically, in a truly competitive market, you would see the output at sort of where price hits marginal cost or where profit hits marginal cost.

And then, if there were huge profits to be had, then you would expect supply to increase to meet that new demand, to make more money. That's not really what you see. If I've got here decades' worth of pricing data and output data from California refiners, that's not really what you see.

So either, and I know industry says that they're operating at maximum output already, and that may be true, that we're just at the maximum output, but they also then operate at maximum output at much lower pricing levels or much lower profit levels, which indicates that you're not necessarily getting a benefit from the $2.60 or margin, any more benefit in terms of supply than you'd get at a dollar. And that's sort of what the data shows. Or there is some market power out there.

There are only five participants controlling 98% of the market. And there may be the ability to restrict output. And if that's the case, then the penalty is designed to actually incentivize, provide a financial incentive for those refiners to increase output where they otherwise might not anyway. And on to your second question, I'll turn it over to Siva regarding the reserve.

Thank you, Nick. And I just want to reiterate the point that Nick mentioned about the tools that are given to the California Energy Commission in the proposed and the Governor's proposal to continue to dig into the data. And if there are reasonable reasons for the prices to be high, that there is an exemption, a pathway.

So I think with the point of setting them at a level that do not touch the profits more than twice in almost ten years, and then you're looking at providing a relief pattern. If there is a reasonable and just cause that provides both sides of it.

And Senator Min, to your question on the Strategic Reserve, we at the Energy Commission, both from the PMAC, the Petroleum Market Advisory Committee, in 2015 after the Torrance explosion, have been thinking through a variety of opportunities, and storage has come up regularly as a potential for price mitigation. But there are also some counter data. For example, when you look at the prices going up this year, the storage actually was low, meaning the inventory levels were low, meaning there is room for storage.

So I think it's an important question, and I think it's an idea we look forward to for the Legislature and Governor's office to continue.

And part of the transparency would have reporting on storage, which is currently, we currently don't have.

Thank you for your answers. And I would certainly agree this is not an ideal of a competitive market.

Thank you. Senator Caballero.

Thank you, Mr. Chair. Thank you very much for your testimony here today. I'm a big believer in transparency. I think it's good to have more information and to be comparing apples to apples and oranges to oranges. How does the current level of transparency in the oil industry compare to our transparency in, say, the natural gas and electricity sector?

Thank you, Senator, for that question. Yeah, if we look at the three broad industries. The electricity market, the natural gas, and the petroleum market. As you know, the CPUC regulates almost 80% of the market. And because of that, we have information that is very detailed in terms of contracts, operations, markets collectively between CEC, CPUC and CAISO. So, if we look at, like, one bookend, the electricity market is one of the sectors that we have incredible information on.

Also with the electricity sector, you have the CPUC doing the integrated resource planning. Which allows for further information on the natural gas. It's a slightly lower level. They're still regulated, but they do not do the integrated resource planning. So we do not have information on forward thinking in terms of natural gas industry. Compared to them, we have little visibility into the petroleum industry.

Especially in places where we would need the information to answer the difficult questions that you are raising today and have been raising over the last year.

Okay, Senator Eggman, thank you.

And thank you for your presentations. To follow up on my colleague Senator Dahle's questions on this chart that you must want us to understand. The gasoline supplier and retail pricing. You've included it, so I assume you want me to understand it better. Can you walk me through that a little bit more? Because you said it wasn't about cost, it was about sales. So is this sales activity across all these sections? And if so, can you talk more about transparency?

We've talked about the windfall tax and then transparency. But if you want me to understand this, can you walk me through this?

Sure. Let me try. And let me say it's an honor to try to help you. I'm a native of Rose street in Stockton. So I'm 50 plus years there in the neighborhood. I know. So anyway, there are various paths by which gas station operators who are traditional. In the old days, it was a much more vertically integrated industry at the retail level than it is now.

So now, while you might see gas station that's branded as Chevron or something, it may be a franchisee or some other independent relationship. And so the gas stations have different ways of getting the fuel and the rack. So here, the green in the rest of the country, which is 83.7%, would have some separation. It be sort of an independent supplier. You could think of it in between the refiner, like who? There are fuel distribution companies that provide the service.

And you can either have long term contracts. Or if you're a big operator, one of big grocery chain or something that's selling unbranded gasoline. You may buy from various people or even if you're a small person, you may. The other path here, the dealer tank wagon.

And I haven't been able to find any of the actual contracts, but you can see there's some litigation that gives a peek into some of the contracts are long term contracts that gas station operators enter into that basically bind them to typically the refiner who will deliver the gas at a price. They will have different incentives to sell.

Correct.

This is the red. They will have different incentives provided in the contract. They may also provide financing for the building of, like a car wash that may become due immediately if you try to transfer suppliers and you're basically binding yourself to one supplier at whatever price they're going to charge you for quite a while, and the prices change every night. Again, we don't have visibility into it, but it seems that also the pricing may vary, even though it's basically the price delivered.

Even if you're the same distance away and they're delivering at the same distance, you may be paying different prices to the refiners than somebody an equal distance away as they potentially are involved in either. I think some would say either in trying to make sure the market is very competitive out there. Others may say that it leads to less competition out there. So it's a different model of distribution at a higher cost that we see here.

And it could be, there could be a very innocent explanation, which is that if supplies are tight in the state, that you want to sign up with somebody to make sure that you have a guaranteed supply so that when prices do, you know, when you can make a profit, you don't have to put paper on your things that say out of gas.

So there are lots of theories about what's happening, and the governor's proposal would task us with trying to figure out what is actually happening by finally looking into the contracts and looking into the pricing, which currently we have no visibility. Does that make sense? Sort of. It's convoluted. Yes.

We're trying to work our way through it. Senator Seyarto, thank you.

There we go. Thank you very much. So my question is a little bit more broad in this approach, this windfall profits tax. Can you point to some examples, either in the United States or anywhere in the world, that we have had a windfall profits tax that has actually worked and had the desired effect that we're trying to, which is to try to go against what your energy policy has created and lower prices for gas?

Well, so there are currently, all around the world, some windfall profits tax set up differently than this proposals as the world is sort of grappling with skyrocketing energy charges. So, you're seeing it in a lot of places in Europe at the moment. The UK has it, India has been looking into it, the EU and overall.

And so those are in effect, this is slightly different in a number of respects because a, it is a penalty rather than tax, b, it's on refining, which is sort of an issue of first impression. That's the challenge that we're facing here in California, is not one of extractors in many places. It's on either the extraction of oil or on electricity generation in General, because those prices have skyrocketed throughout Europe, particularly with the war in Ukraine. So those are happening.

They are producing revenue that is going back to sort of alleviate the concerns. I mean, it's the same idea here. If there is revenue from the penalty, it would go to alleviate the impact, the burden that California consumers are feeling. They're relatively new. So it's hard to figure. I don't think we have a long term view. I know there have been concerns, I'll raise it first, that people say, well, the US tried this in the 1980s. It was a very different model that basically applied nonstop.

It was basically an excise tax on all oil drilled in the United States. That came into effect after the decontrol of oil and gas prices in the US. And this is a much different model than that. It would only impact again those extraordinary profit levels. It would not be on dollar one. It would only kick in and kick in gradually if profits are very high, above average. But we're facing a unique situation in California and it's a relatively unique proposal.

Right. Part of the unique situation is the unique situation we've created being an island of that type of consumption. And our supply is limited, being more limited, yet our demand remains the same or about the same. And when you do that, economics 101 says your price is going to go up. And if you're dependent on foreign oil for a majority of your oil, we're left at the whims of foreign oil.

Well, even if you look though, at the chart on the know there's something happening here in addition to just crude oil prices.

I understand that.

I think know I've asked my one question. Sorry, chair.

Thank you, Senator Mcguire.

Sorry, Senator. If I may just add, I think just as Nick was mentioning, Senator, we have been thinking about this in those three stages of the refinery, the crude side, the refinery side and the retail side. And as Nick mentioned, the crude oil prices is where most of the windfall, taxes have been put in or levied across the world, and we're beginning to see the results of that. This would be a very unique proposal.

One, as Nick mentioned, it's a penalty, but also it's on the refinery element. And for us, one of the things we want to observe in the data is that nothing changed over the last few years, but that particular margin has been growing so significantly during these incidents. And also the other thing around this is not necessarily trying to create a new revenue, but really as a deterrent to help reduce the margins.

Thank you, Senator McGuire.

Thank you so much. And, Mr. Chair, I just want to take a moment to say thank you for hosting this really critical hearing and for bringing us together today. Thank you. Senator Bradford would like to be able to get into the issue of transparency and the transparency measures and would like to go specifically, Commissioner, into what you are wanting the Legislature to be able to consider.

So I think that all of us talk about transparency, and you can't get any more transparent than knowing what you're going to pay per gallon in taxes. It's about $0.54 when it comes to the State of California. When it's our gas tax, we're completely transparent about it. And we're also transparent about where it goes. It goes into funding roads and public transportation across the state. But where I am challenged is where we were back last fall.

If you are a commuter in LA, you're paying $7 a gallon. If you're a commuter up in Eureka, you are paying $8 a gallon. I want to repeat what your gas tax is, state 54 cents. So there's incredible frustration on behalf of Californians and Americans on why they are paying so much when we know the fixed gas excise tax is.

Can you walk us through, Commissioner, exactly what you'd like the Legislature to consider when it comes to transparency so that we can get a better idea about where you think the CEC can go. And one last piece, Mr. Chair, is how do you see the CEC implementing this here in the coming months and walk us through the mechanism and how that would work internally.

Thank you. Thank you, Senator, for that question. I do want to recognize what you just mentioned. One of the fundamental roles of the Energy Commission is to maintain situational awareness of the energy trends and be able to answer questions that come from you, the legislature, the Governor, or the public.

And precisely as you stated, when we were going through last year here, and we were trying to answer these questions on exactly why the price spikes were happening, we were not able to answer beyond a certain level of disaggregation. And so fundamentally, what we would need is two elements, real-time data or near real-time data, and more disaggregated information so we can really understand and open up what exactly is going through those four stages.

So, to begin with, the first one on the refinery maintenance, for example, last year, one of the questions that came up was, why were the inventory levels so low? What is the current utilization rate of the refineries? And so on? And those questions we can't answer, and we can't compel the industry to provide them unless out of their goodness of heart, and sometimes they do. Some people, based on relationships with the staff, might share a little bit information.

For example, we're having another price spike right now. For those of you who are keenly observing, the margins are going up again, refinery margins, and I would not be able to answer to you that information until I process that data two or three weeks from now. So I think it's really about compelling the information in near to real-time delayed, and then refinery information would be extremely helpful. When are you shutting it down?

What are your planned maintenance schedules so we can get a sense of what the potential shortfalls in supply could look like and potentially take action as a state. So that's a big one. Second, we don't have current data on spot market interactions. We really don't know who's selling to who. Question was asked earlier on, the electric industry or the other industries. If we go to CAISO, CAISO sees every transaction on a day-ahead market basis. Those information doesn't exist with us today.

So having a little bit more information on those transactions would help us. And finally, the inventory holding levels. What we would like to do is really work with you closely to define that data and make sure that it's not burdensome for the industry to produce, and so we can use it to answer the questions you would like. And in terms of how CEC can achieve this, CEC has been doing this in other sectors.

We do very disaggregated analysis in both electricity industry as well as natural gas industry. We do not do that in gasoline because we don't have the data. So we are equipped to process the data. We have methodologies and models set up. It's about being able to receive the information so we can quickly answer the questions.

Thank you, Commissioner.

Thank you, Senator Stern.

Thank you, Mr. Chair. And welcome to this chairmanship. We know you've had the Assembly Chair before, but it's a crucial time and we appreciate having somebody of experience at the helm here. So thanks to you for holding this hearing. And I also want to appreciate the Newman Administration and particularly the Governor, for pushing us to be here today and to be wrestling with these issues.

People got hurt, and I don't think we'll ever fully understand the human toll of what happened last year and what it means to pay $7 a gallon when you're driving three or 4 hours a day to a minimum wage job from the sprawling beyonds of LA and what that does to a family's budget where you are making life or death decisions, it doesn't look like it when you drive by the gas station, but when you're trying to make a decision between feeding your family or buying prescription drugs or paying for care, and you have to make a choice.

Getting to work is one of those places where the economists call inelastic demand. But more simply put, drivers are held over a barrel in California here. And I think if the Governor hadn't stepped up, we might not be having this conversation at all. So I appreciate that. I guess I want to build on both Senator Caballero and Senator McGuire's points, the analog to the utility experience that you've sort of mentioned.

And we've touched on and acknowledge that the Chair, by having another hearing on this natural gas utility bill spike thing is crucially needed. And I appreciate that announcement.

And as furious as I am about what we saw in those gas bill utility spikes, my understanding is that under current law, both state and federal, that we will have some recourse potentially for ratepayers if there was market manipulation occurring, if there were efforts on spot markets or in contracting, either through FERC oversight or through the state CPUC, that we can get people, hopefully their money back like we did with Enron.

It took too long, but we went and got their money back is what I'm hearing. You say that we don't have that recourse right now to get people's money back for what they lost. There's no way, whereas we can do that in the natural gas sector to some extent, and electricity definitely. You're saying that the losses that working people in California took over the last year or so and before, there's no sort of equivalent recourse.

There is, and I think there is only if you could show an antitrust violation, and you'll hear, I think, from the Department of Justice in a later panel. But I think that is the only recourse, which is why I think it's also really important to even if the markets are working, which is very questionable, even if they're working, I do think the penalty provides some recourse in the future.

It doesn't get us back the $3 billion or so that was transferred last year from all Californians to five companies. But it does provide some avenue to try to recoup some of that and provide it to California consumers if this were to happen again. But I don't know. Other than the antitrust avenue, but I don't know know. I think that's a tall order to.

Appreciate that cold comfort. I would say my follow-up question would be, are there lessons we can learn or draw on from the utility side in terms of the data we're looking for? I know you talked about real-time pricing data. My understanding is even in the modest implementation of 1322, SB 1322 we passed last year, the oil industry has now petitioned the CEC and is essentially resisting the first tranche of that kind of disclosure.

Can you just talk about how the CEC is responding to that petition? No further questions beyond that. Thank you, Mr. Chair

Thank you, Senator Stern. Yes. So on 1322, we see it as a legislation that we need to enact. So as the Energy Commission, it's very clear to us what the legislature wants us to do, and we intend to get that information starting March. Yes, you are correct. The industry requested to start a rulemaking to clarify some of the terms, but we think that the legislation does not require us to do a rulemaking to define those elements. So two elements there.

One, we would expect the data to be submitted. And second, to the extent that this is an active session, the industry has an opportunity to work with all of you on any further legislation on clarity. Thank you.

Thank you, Senator Rubio.

Thank you, Mr. Chair. And I appreciate all the information you're providing here today. Clearly, we need to do better by our consumers, and so many of our families are struggling. But I want to bring you back to a comment you just made earlier today, only because we know with everything, everything's so new, and there's always unintended consequences and trying to understand it.

I believe you said that UK had already something similar that they've been implementing, but it's fairly new, so you don't have a lot of information as pertaining to whether or not it's working. Do you have any information one way or the other of concerns already unintended consequences or on the other side that it's working? Can you speak to that a little bit further? Thank you.

Let me confess, I haven't studied it in great detail, but there are concerns. I know there are some concerns there being expressed because it applies to all electricity generation as well as to oil extraction in the North Sea. One of the things they've tried to do, and I think it's possible here under the construct of the Governor's proposal, is to provide a credit for actual investment in different types of favored energy production so that they can get beyond this system.

And I think that's something that the governor's proposal contemplates that you can take into account. And this is a lesson, I think, to take away. And it was a clever way to construct it to provide some incentive for people to actually invest in the refineries, to do the maintenance, to keep them functioning, and maybe to even improve the functioning and not have that apply against these penalty caps.

Because instead I think the billions of dollars that were transferred last year probably showed up more in the profit statements than they did in terms of the maintenance budgets, is a supposition. I think we'd need to know more. But there's a way to both impose the penalty and provide an incentive to make sure that the energy-producing, the gasoline-producing assets in California remain robust. I think that's one lesson.

Yeah. Senator Rubio, just to add to that and just reelevating the opportunity for the CEC to providing exemption pathways. So once, depending on how the session goes, if there is a penalty in place as a law, CEC will have to consider a quasi-legislative process and develop guidelines and take public input on how best to structure those levels and move them around to ensure that there is no adverse effects.

Thank you for your answers. Thank you, Mr. Chair.

Thank you, Senator Durazo.

Thank you. I'm just as, if not more upset and angry as my colleague about the impact that it's had on poor and working people. Always seem to be the ones who get the worst impact. They're low-income, they're essential workers, they're highly impacted by emissions, they're highly impacted. In my district, there's five freeways that go through into these communities. So that's my starting point.

And I urge all of us to continue to make that a priority for us, no matter what proposal is in front of us. And not forget that. I want to just ask you, I don't think it would be a long answer, but I'm particularly looking at the transparency issue of the proposal. So, as I understand it, someone prepared this chart here. So in 1979, maybe as a result of the energy crisis, the Petroleum Industry Information Reporting act was established. So that was in 1980.

And then you go on, 19 years later, there's another attempt to address gas industry practices and mergers with the goal of preventing oil shock prices. And then five to nine years later, there's a gasoline price task force. And then in 2014, there is a Petroleum Market Advisory Committee, and then a report three years later is given to us. And now we're talking about the same thing.

So over 43, 44 years, there have been minimally six or seven proposals, attempts to address gas prices, gasoline prices, with the idea of we need more information. When we get more information, we'll address this, we'll solve this. What happened? What happened and what is different about what is being proposed? Because I don't want this to be another item on the chart that in 2023, we did such and such on this proposal, and 10 years later, we're in the same place.

So what will be different about this? What is different about the kind of information? What is different from every other attempt? And believe me, I'm looking for a solution here that will stop these gas prices from spiking the way that they have. But how is this different?

Thank you, Senator. I just want to recognize your statement on who gets impacted when the prices are so high, and recognize your sentiment and empathy on that issue in terms of what we have tried to do in securing more information over the years. I have immigrated to California 20 years ago, called my home, and I've been following over the last 20 years the work in California, but more so in the last five years.

One of the things that has really changed is the moment we are in. I think this is a unique moment of transition of public trust and public ask on transparency, which we have not seen before. And I think this is an opportunity for us to really weigh in with this extraordinary moment, to get the data.

At the end of the day, as a state agency that is looking to implement the laws of the state to the best of our ability, we would need that information. And we look to your leadership on helping us secure that information. So once we have that information, depending on how much more we get. That would be the real difference in us being able to articulate what's going on.

And also the second thing on the Governor's proposal is that this is the first time we have had a proposal that's concrete and comprehensive. It has both elements on figuring out what we can do immediately in the short run and how do we attempt to mitigate the price spikes in the short run, but also provides four separate elements of transparency, all the way from investigation, reporting, accounting. To really give us different venues to analyze the data. We need state employees who can look at this information.

We need academics who can look at this information, which is the Advisory Committee that we'll be looking into. We need direction and authority from the legislature to have agencies like us to work together to make sure we are putting our brains together and our elements of strengths together. So I think that's the difference.

I cannot speak to what has happened in the past, but depending on how this session goes, we are here to support you with the information you need, and we look forward to doing our best in implementing solutions.

And if I could just add, Senator, I think you will have some members on subsequent panels who were involved in PMAC. And I think even there, there was not access to a lot of the information that the Governor is now saying you need to have access to. So at CDTFA, I think we would have a very different audit program if we just relied on people voluntarily providing us information.

We're at a point where I think we need to move beyond sort of voluntary sharing of information and start using the state's authority to get the information that you all need to make informed policy decisions. I think that's one difference is really requiring a strong mandate.

Thank you. And last question. Oh, Senator Dodd.

Yes. Just for brevity, I'd like to associate my comments with Senator Durazo, but there's just one of the things I'm hearing is you said two words, concrete and something else. In terms of this proposal, as outraged as we all are about what's happened to the lowest among us in our respective districts at the same time, what I try to look for here is what the hell are the unintended consequences, the possible unintended consequences that could hurt those very people to a greater extent.

And so my question is, what if refiners decides to ship their product elsewhere to avoid any of these profits? Is that something that you guys have looked at? And what would we do if we had those kind of supply issues?

Yes, we have looked at it, and it's a very valid concern. One thing that's interesting, if you look back over decades, by pipeline, we really only have pipeline shipping access to Nevada and to Arizona. Arizona can also draw from Texas, from their refineries. They can draw from both ends of the state. With all of the price fluctuations and profitability fluctuations in California, those exports have remained a remarkably steady percentage of the California refining output. So that's one thing.

And there's also a lot of data and that California is among the most profitable markets for these entities. So if we reached a point where it actually became more profitable for them to export either to those two states or to load the refined gasoline onto ships and send it to Latin America or other places, then a, we would have the transparency into what's happening, and b, the CEC would have the ability to adjust if that were to happen.

But if you look at the pricing and output data over years, I think the chances of that happening when we're still setting the margin at an amount that allows very healthy profits, that in most years are well above what they're earning, I think it seems unlikely.

Thank you. Appreciate that.

Senator Gonzalez.

Thank you, Chair, Mr. Chair. I want to thank you as well for. Vice Chair Gunda, for your work on the CEC, having a very extensive hearing with your colleagues, even when the gas and oil industry was not in attendance.

So I really want to thank you for that, because as mentioned by many of my colleagues here, we have answers that we need to provide and clearly we do not have that obscure contract supply limitations that people don't know about, inexplicable mystery surcharges, all of the above my question, and you've sort of touched on it already, but I really want to know on the Independent Advisory Committee process that oversight that I think in addition to this Energy Committee will need to continue throughout this process should this proposal move forward, has to be clear cut.

People need to know ongoing what is happening so we do not have this spike again. So how do you foresee that? I see in know both for you and Director Maduros, the investigation piece authority to examine books and records we've talked about, but any additional items of note that we can just think about in terms of this committee and what it could potentially do.

I will begin, and maybe Nick might want to add to it. I think the, fundamentally, I think there's some other lessons we've learned in the past, Senator, about the PMAC was the data was not accessible to them. So because much of the data was confidential, we were not able to share the data with them and the PMAC members had to ask the questions and then the staff might be able to answer them based on the information.

So I think it's important for us to consider how to make sure that the PMAC members are able to actually look at the data themselves as we move forward and provide those confidentiality requirements to ensure that that data is protected. But they have an opportunity to ask independent questions and answer them. I think that's an important element, too. A number of the PMAC Members previously had very limited roles. They were doing it, the goodness of their heart.

I think there might be an opportunity for us to support them with resources to ensure that their time is used in the most valuable way. So those are the two things I would add. Thank you.

Thank you.

Great. Thank you. And I want to thank you for your presentation. I want to thank my colleagues for their great questions. But I'm still a little confused. And I'm just trying to understand what are we trying to solve for. Is it pricing or supply? And I think we'd all agree that supply will impact pricing. I think we'll all agree that we have passed legislation here in California that has encouraged leaving oil in the ground. We've encouraged the conversion of refineries and shutting down of refineries.

And we're encouraging individuals to move from fuel combustion engine cars to electric cars. Have we created a scenario that has helped create this problem through the legislative process? And my second piece is, unlike the energy crisis, we knew who those customers were who got that electric bill every month. We have no idea who drove their car during this period of time. So how would you determine who gets a refund?

Well, I can take that. I think you are right that it's really a supply issue rather than a pricing issue. I mean, I don't think that the supply drives the price, particularly when the demand is so inelastic as was mentioned. And it may be. I think clearly California's aggressive take on environmental protection and other things does impact that.

Although there are know so many lives saved and the health impacts, the health benefits of the CARB blend fuel are also enormous for Californians, particularly for many who are the most vulnerable, kids and elderly and those with health issues already. So it is all a trade-off. Those are policy questions, I think, for all of you to consider as we try and navigate this. I think that's why it's so important to, especially now as we are really at this inflection point with gasoline.

I mean, the statistics Siva mentioned, what was it a decade ago, one in a thousand cars was an EV last quarter. One in four sold in California was an EV. It's, we're at a point where you all. We'll do whatever you tell us where you all have to make some tough decisions about what direction the state goes and what that future looks like. And there are trade-offs. I think that's fair. And the other point was,

How do we determine who gets a refund?

Well, as you know from last year, it's complicated. And FTB stepped in and sent it out. There are depending, I mean, hopefully this penalty would never go into effect if money came in. I mean, there are lots of ideas either to send it out or to maybe provide some reduction, apply it to everybody's registration renewal for their cars so that you'd know. But then you only get the drivers, although they're the ones paying taxes.

But it is, I know there are concerns about those who can't even afford a car, and then they're left out. So I think the administration is open to lots of ideas to figure out how to do that. But again, we're hopeful that this isn't a tax. It's not meant to raise revenue. It's meant to change behavior.

Yeah. Senator Bradford, just to add to that point that you just elevated, I think ultimately this energy transition as we move towards the clean energy goals is going to be bumpy. I think there are going to be trade-offs in the way we approach the policy. And as Nick mentioned, we look to your leadership on both answering the questions you have for us and the direction you might want to take as you move forward. Thank you, sir.

Well, thank you again, Commissioner Gunda and Director Maduros, for your testimony and your time here today. So thank you very much. And we're going to move on to our second panel. And our second panel will consist of seven presenters. And we're going to ask them all to limit their presentation to 5 minutes. We're going to have Russ Brown, Legislative Analyst Office, followed by Michael Jorgensen, Supervising Deputy Attorney General, offices of Attorney General, and Severin Bornstein, who I know is online, who will be testifying after that.

James Sweeney, Dave Hackett and Robert McCullough. And last panel, Michael Meesh as well, Professor from USC. Those are here. We'll start in that order. And Brown, when you're ready, you may begin.

Thank you, Mr. Chair. And Members Ross Brown at the Legislative Analyst Office. Good afternoon. I'm going to be making some high level comments. I'm going to be presenting kind of off a handout that we put together. Hopefully, you all have a copy of it. It looks like this. If not, I think the sergeants have a version. There's also a few hard copies available in the audience for those who want one.

For those who are following along at home, it should be posted on the Committee's website as well as our office's website at lao.ca.gov. So in the interest of time, I'm not going to go through all of what's in there. There's some background, but I'm going to try to touch on some high points.

And really, I'm going to not focus too much on the specifics of the Governor's proposal, but really try to do some kind of high level framing around some of the discussion that you've had and probably some of the additional comments you hear throughout the rest of the day from other presenters. So if you skip to page two, actually just kind of just draw your attention to this is some information that maybe the Energy Commission presented. Apologies.

I didn't sort of see their presentation, but it really just kind of highlights a few different prices in the marketplace. Again, crude oil prices, spot gasoline prices, which is really more of kind of a wholesale price of after gasoline leaves the refinery, but before it gets to the gas station and then the top line there is retail prices. And so you can kind of, this is the longer run kind of look at over the last 10 years, those trends over time.

Page three zooms in a little bit more at over the last year how those prices have changed. And you can sort of see the volatility in some cases, crude oil volatility in other cases, it's more kind of the gasoline as it leads the refinery and the volatility there. So there are kind of different places where you see that volatility.

Next, I'd like to draw your attention to page four, which really, I think, kind of gets at kind of one of the main things that we'd like to emphasize in our comments here and for the legislature, which is really trying to encourage the legislature to be as clear as possible about its problem definition, as it kind of undertakes these efforts.

So not necessarily kind of how the Governor, you may share kind of the governor's definition of the problem, but there are a variety of kind of issues that have been highlighted both in this conversation and just as part of the public discussion. And we see some of the issues as related, but also somewhat distinct. And so we do think identifying the problem clearly is important because it can help focus policy actions towards the most kind of directly targeted at the problem.

And that makes them more likely that the proposed policy is effective at addressing that problem and reduce the risk of unintended consequences. So I'm going to highlight just three that are mostly distinct issues that kind of could be sort of potential problems that the legislature can kind of look into and look at policy solutions that have been raised as part of the discussions. One, a lot of discussion on gasoline price spikes. So those sort of spikes that you see on the previous charts, that's one.

Two, is sort of the consistently higher gasoline prices that we see in California relative to the rest of the country. And then three, is kind of this issue of excessive profits going to businesses, which we kind of see those as three somewhat distinct issues. And so if you turn to page five, we just have some brief comments on the first one on gasoline price spikes.

And really, we think sort of, to the extent this is sort of the problem definition, part of this process could include kind of identifying where in the price spikes, where in the sort of supply chain these price spikes are occurring. Is it at that crude oil level, which is, again, sort of at a global market level, wholesale prices or retail prices?

And some of the key questions you might want to think about are these price spikes driven by sort of a basic supply and demand imbalance that you would typically see in a competitive market, or are there other issues, such as market power due to limited competition, that contribute to some of these spikes and that can sort of drive what potential legal or regulatory approaches the legislature might want to pursue?

There was a mention before a lot of the discussion in previous expert reports on kind of the spikes has looked at issues around storage and Reserve requirements and those types of things. So those are often kind of the types of things that you'll kind of hear discussed on some of the price spike issues. If you turn to page six, the kind of second category, again, consistently higher prices compared to the national average, as you all are, I think are well aware California has consistently higher prices.

Part of that difference we can explain pretty easily, I think, with differences in taxes as well as certain environmental program costs. But I'm sure you'll hear again sort of later from other presenters, this issue of there is also sort of a bit of that difference that is unexplained and that has been sort of dubbed this mystery gasoline surcharge. And so key questions are what portion of that kind of price difference is the legislature most concerned about?

Clearly, for the taxes and environmental programs, those are intentional policy decisions that changes there, of course, would come with big trade-offs for some of those other public policy goals, but also sort of what factors might contributed to that unexplained difference and kind of depending on what we find there, that might kind of have different implications for what the policy solutions might be. Third, going to page seven, the issue of excessive profits.

If the legislature determines that it really is kind of a judgment call on kind of what is considered excessive profits, if a threshold exists, a resulting policy goal might be to kind of redistribute those profits. Some key questions are what level of profits are considered excessive? How can excessive profits be differentiated from cyclical fluctuations? And how does each potential policy approach ultimately affect, again, the supply of gasoline and the prices that consumers pay?

And so I really want to kind of just emphasize or wrap up my comments on kind of that final point of emphasis, that these are in some ways sort of somewhat distinct issues we see there are related also, and one policy probably isn't going to address all of them. And targeting solutions is important. And even with some targeted solutions, it's quite possible that a policy meant to address one of them might have kind of adverse impacts on another.

So, for example, taxing profits and distributing some of that income could sort of redistributing it to consumers could address sort of the issue of, if the legislature thinks the issue of kind of excessive profits is the big issue, but it could also have other implications, of course, for prices and both sort of the short term and the long term. And so important to kind of think about how the different goals and policies interact with one another.

So I will end my comments there and happy to answer any questions when the time comes.

Thank you, Mr. Brown. Next up is Michael Jorgensen.

Okay, we're on. Thank you, Chair Bradford. Good afternoon, Committee Members. My name is Mike Jorgenson. I'm a Supervising Deputy Attorney General at the California Attorney General's Office. I'm in the antitrust section. The oil industry and gasoline prices have been the focus of our antitrust section at the California AG's office for many years and the subject of numerous investigations and several lawsuits. Our principal partner has been the Federal Trade Commission, which has a dedicated team including both lawyers and economists.

The California Energy Commission is an important resource for both of us in understanding market conditions and trends. Antitrust enforcement in California is generally directed at two things, overall market consolidation, that is, mergers that can lead to monopoly pricing and anticompetitive collusion as to price or supply. Since 2000, we have investigated eight oil company mergers or acquisitions ranging from BP, Amoco, Arco, Chevron, Texaco in that same year to marathon 7-11 2 years ago.

In most cases, the merging parties were required to spin off a number of assets to competitors, bringing newcomers to California, such as, I believe, Valero and Tesoro into California markets. On the conduct side, in 2017, Attorney General Becerra went to court to block Valero's acquisition. That's a merger, not a conduct case, of the last major refined product storage and mixing facility in Northern California.

Our success in doing so was hailed within the antitrust community as a groundbreaking example of individual state enforcement of the federal merger law, made more notable because it involved a vertical acquisition rather than a merger of head to head refinery operations. During the last two decades, the section has conducted several investigations into price fixing by California refiners, most notably following price spikes after Hurricane Katrina and subsequent price spikes.

One led to an antitrust lawsuit filed in 2020 not against the refiners, but against two global trading entities, the Dutch company Vitol and Korean company SK Trading International and its domestic affiliate, SK Energy. That lawsuit concerns collusive trading practices occurring several years ago and is scheduled to go to trial in September 2023. This year, it is filed in San Francisco Superior Court. A challenge to the court's jurisdiction over SK Trading International was rebuffed first by the trial court and then again by the Court of Appeal.

The California Supreme Court has now denied that petition for review. Meanwhile, however, that case is currently active andin adversarial litigation, so my remarks about it in response to any questions about it are necessarily limited. Concerning options for possible action, gas prices will continue to be a priority area for antitrust enforcement in future years.

It is a priority shared by many other states which participate with us in a multi-state working group under the auspices of the National Association of Attorneys General Antitrust Task Force and shared also by the Federal Trade Commission. Litigation, whether it is to block a merger, such as the Valero/Plains case, or to remedy price manipulations, as in the SK/Vitol case, require a major investment of staff and money.

An active lawsuit can be expected to require at least one third of our section's staff and millions of dollars in external costs. Non-litigation options to mitigate price spikes are largely outside the jurisdiction of the AG's office. Several were discussed in hearings before the Energy Commission's Petroleum Market Advisory Committee, the PMAC. Some were also discussed in the May 2000 report prepared by a Committee formed by former AG Lockyer.

Finally, further data gathering regarding industry transactions along the lines of those gathered by the CEC regarding reporting, oversight, gathering, and processing data is beneficial for market oversight by government enforcers during California's transition to a clean transportation future. Thank you for inviting the AG's office to today's hearing. I'll turn to the next panelist for their opening remarks and look forward to any questions after the other panelists. I believe we're going to video by now.

Thank you, Mr. Jorgensen. Next up is Professor Borenstein, who is the Director of the Energy Institute at Haas Business School at UC Berkeley.

Thank you very much. And five minutes isn't nearly enough to cover this subject, so I'm going to move pretty fast. I was Chair of the Petroleum Market Advisory Committee during most of the time it existed and on it for its entire time. I've studied gasoline markets for over 30 years, and I actually was a bit of a skeptic there was a problem in California's market as recently as 2015. But since then, things have really changed.

And now I think we do have a problem that we really need to address. And this graph really shows what the problem is. Prior to 2015, if you looked at February of 2015 in the Torrance fire, if you looked at the price in California versus the rest of the country, and you have to take California out of the US average to do that, which many people don't, but when you do it correctly, what you see is that California's price was higher than the rest of the country by almost exactly on average, the higher taxes and fees, and we took those out, we were pretty much in line.

After February of 2015, that hasn't been the case. And 2022, of course, was a huge outlier. I've dubbed this the mystery gasoline surcharge, and the mystery gasoline surcharge in 2022 was well over $8 billion that Californians paid in excess of what they would have paid if California prices were in line with the rest of the country, but for the higher taxes and fees and cost of making the cleaner burning gasoline.

But what's important, and particularly for the discussion we've been having so far, is this graph, which is the spot market price. And what it shows is that big tick up in 2015 is not coming from the spot market price. The spot market price is the price for large transactions between refineries and major traders of million gallons or more, and it's just not there.

In fact, overall, if you look at the mystery gasoline surcharge since 2015, less than a third of it can be attributed to these higher wholesale prices. The other two thirds is downstream from refineries. And that means that policies intended to affect refineries are not going to get at most of the reason Californians are paying higher prices for gasoline. In fact, the spike in 2022 illustrates that.

This is from Opus, and I had to take it from a screenshot, but basically what it shows is that the wholesale price and the rack price and the spot price dropped very suddenly after the Governor moved forward winter blind gasoline. But the retail price didn't. The retail price stayed high for another two months, and that was a big source of the mystery gasoline surcharge in 2022. So the problem is not at the rack.

Once you move downstream, it's pretty clear that we have a less competitive market. Fewer stations, fewer unbranded stations, bigger branded unbranded price differentials. That is, the branded stations get a much higher margin difference above the unbranded Costco's and speedways and so forth. The exact cause of this, I don't know, and I don't think anyone here today knows. It's something that we really need to investigate, an investigation that really is primarily led by people who are experts in competition policy.

And I have huge respect for the CEC, but that is not one of their skill sets. We really need people who do the sort of investigation closer to what the Attorney General's Office does. But the Attorney General's Office, as the previous speaker said, tends to focus on enforcing antitrust laws, not broader consideration of regulation. And I'm happy to talk further about things we could who should carry out the investigation and how it should be done.

But since I only get five minutes, I'm going to move on from that. So if refining isn't most of the problem, most of these solutions, the price gouging penalty, a strategic reserve that was raised earlier, inventory requirements are not going to address it. Two thirds of this problem is downstream from that price that we're talking about. So I think that we really need to focus more on that. But people want to know what the effect of the price gouging penalty.

Mr. Maduros did a great job of pointing out if the problem is market power, then the price gouging penalty could actually be helpful and could push down prices and increase supply. But if the problem is real scarcity, and not primarily caused by market power, it will reduce supply and actually could cause less supply to go out in the market.

That doesn't mean we're going to have gas lines, necessarily, because the other fact of this is this is at the rack price, and this would be sales to retailers, and there's no reason retailers couldn't then if there's a real shortage of supply, suck that up by raising prices downstream and taking the profits that the refiners aren't getting. So I think that we have to recognize that this isn't all a refinery problem.

Importantly, I can't tell the difference easily between what's market power and what's true scarcity, and no one else here today can. This is a really difficult call in any industry, and particularly in refining, because they have many different inputs, many different outputs. They're doing complex optimization between them in order to figure out what to sell. So the penalty or tax can allow the government to claw back some profits from high prices, but it can also disrupt the market.

And for that reason, I think we have to be cautious in our use of it. There are a lot of examples I'm happy to talk about, attempts at windfall profits, taxes or price ceilings. But I'm going to run out of time, so I will stop there. Thank you.

Thank you. Next up we have James Sweeney, senior fellow from Stanford Institute of Economic Policy Research.

Thank you so much for having me here. And I want to particularly thank the presentation that my friend and colleague Severin Borenstein has given. He and I have in the past had some agreements, some disagreements, but I'd like to endorse every single word he said here because I think he's absolutely spot on in what he said, and it's important. So that saved me a little time. As I look at the issue, I think that it's important for the Senators to realize that there's two problems.

One is the mystery surcharge. The second is price spikes. I think the big cost to the consumers in California is the mystery surcharge over time. That's where there's been the cumulative biggest impact. And I think it's important to understand that the windfall profits penalty does nothing to aim at that whatsoever. It only aims at the price spikes, which I think is a smaller penalty in terms of damages to the consumers. So that's the first point. Second point is visibility.

You've heard it from multiple people. Ever since the time in Petroleum Market Advisory Committee, and I was on the Committee, I had the honor of being the first Chairman and decided that Severin Borenstein would be a better Chairman and proposed that he took over as Chairman, which he did. And ever since that time, I become very concerned that not only did we not have any transparency, but the relevant government agencies in California, particularly the California Energy Commission, did not have really the transparency it needed.

And therefore, the component of this proposal that would give them more transparency into the marketplace can be extremely important. But I stress, along with the data that Professor Borenstein gave you, that understanding the complexity of the downstream is extremely important in the data gathering. For example, those contracts from a refinery to a branded retailer are not simple contracts, and they're ones in which the prices can be set by the refinery.

And if there is a local market power surcharge that a retailer is getting, the refiner can capture that by how they price their gasoline to the retailers. So all of those things are really worth paying attention to. If you analyze the windfall profit penalty, I am quite dubious whether this would work. First distinction, if the price spikes happen because of market fundamentals, that is, if there are reductions in the supply of gasoline maintenance, there is simultaneously among the various refiners accidents.

This would have no real effect because it's not a problem of incentives. I don't know if that's the case. If it is a case of market power, you've got to realize that the way I believe it's structured is it's not a profit. The penalty will not be a function of profits. If it is, it will work in the wrong direction.

It seems to be carefully and could be carefully designed so that it means the apparent price that goes to the refinery decreases, gets lower than the actual price in the marketplace. So the apparent elasticity of demand facing the refiner goes up. That in terms of market power, if the elasticity goes up, the prices will go down and there's an incentive to produce more. But to do that, it has to reduce the price that the refinery gets.

And when they reduce prices, the incentive is to produce less. And so you've got to ask which one balances and which one dominates. Turns out if there's a little price spike, in the way I understand this, if there's a little price spike, the higher elasticity part of it will dominate and there'll be incentive to not have as much of a price spike. If there's a really big price spike, the price reduction part of it will dominate and the incentive will be to reduce supply of gasoline.

And so this would make really big price spikes would be made worse, little price spikes would be made better. That, of course, will depend upon the precise managing of the formula for this penalty and the complete ability to actually measure all of the things they have to measure. So I am actually quite dubious that even if the issue is market power, whether this can dependably solve the problem, but if it's not market power, this just gets in the way. Second is a long term consequence.

I think the reason we're having price penalties is because right now we have a dying industry. We have a dying industry that they see the handwriting on the wall, they know that the demand for gasoline is going to go down. There's been relatively little investment in new capacity. We don't have a lot of excess capacity. So when something bad happens, maintenance together, accident, we have a price spike.

Well, if we take away all the profit opportunities, or a lot of them, or a significant amount of profit opportunities, then there's less incentive for the dying industry to keep maintaining their facilities and not die as fast. The more that we have an incentive to reduce the capacity to refine gasoline, the bigger and possibly more frequent will be the price spikes we'll have in the future.

So I'm afraid that the existing policy, the policy is proposed, has a relatively low probability of making a difference, although it could, I certainly don't know.

Thank you.

But that the long run, it also has a significant probability of exacerbating problems in the future. So what can you do? As Professor Borenstein suggested on the PMAC, we looked at a lot of alternatives, and every one of them, in my judgment, I think in the Committee's judgment, the cost exceeded the benefits for all of the alternatives. The only one, it seems to me, that could begin to make a difference is somehow we can create more competition from out of state.

And to create more competition from out of state, we're probably going to have to relax the environmental rules, and those have some big, severe environmental consequences. So I think as a policy measure, the Legislature should be taking a serious look at is there ways that we can somewhat relax the restrictions in California that make it so difficult to compete from out of state?

Thank you, Mr. Speaker.

Have a little environmental damage, but have lower prices. Otherwise we live with the higher prices. Thank you.

Thank you and we'll circle back if we have more time. Next, and appreciate your presentation. Next we have Dave Hackett, who's the Chair of the Board of Stillwater Associates. So Mr. Hackett, when you're ready, you may begin. You have five minutes, please.

Thank you, Mr. Chairman, and thanks for letting me come and speak today. Stillwater Associates is a transportation energy consulting company. Our clients include the California Energy Commission, the California Department of Justice, the US Department of Energy, the Energy Information Administration, the Environmental Protection Agency, as well as trade associations and individual firms' interests in the space.

I was a member of the California Petroleum Market Advisory Committee along with Jim Sweeney and Severin Borenstein, We've recently been asked to make remarks about today's topic to the CEC and several groups of Assembly Members. When gas prices have gotten too high, reporters call many of the panelists looking for an interview on the issue. The issues include everyday high gas prices, price spikes due to refinery issues and geographic isolation, and the historic rapid transition to a different form of transportation energy.

The big issue is why are gas prices so high? What should we be doing about that? And are price controls like the windfall profits penalty effective? High prices were caused by supply issues. In 2020, Covid caused oil prices to crash as demand evaporated. Demand started to come back in 2021. Covid was largely responsible for the shutdown of a major refinery in the Bay Area. The Russia-Ukrainian war began in March of '22 and upset worldwide trade patterns, causing many commodity prices, including oil, to rise dramatically.

California gasoline production in '22 was reduced by 88,000 barrels per day versus the prior year. This is the equivalent of a mid sized refinery's output. We think this is generally another Covid hangover, but there are other factors as well. For example, gasoline imports were lower than 2021, caused by a near tripling of freight rates. This resulted in a strong inventory draw to decade record low level inventory levels. Consequently, spot prices rose as supply was tightened, pushing retail prices up in August and September.

We see this as a cautionary tale about depending on long distance imports for gasoline supply. Recommendations include the Energy Commission needs to take a serious look at the impact of local and state regulations on the viability of the oil industry, as well as review the work the Commission did in the past in this area, especially the work done 20 years ago on the strategic fuel reserve and related issues.

A component of the mystery gas surcharge is the gross profit margin that can be defined as the difference between retail price and wholesale rack price. Stillwater's analysis indicates that this is higher than the rest of the country because of a lack of competition. One factor in the lack of competition is that California has twice as many licensed drivers per station as the rest of the country. Realistic assumptions on how fast transportation alternatives can come online are imperative.

For example, according to Stillwater's analysis of ARB data, the real success story of the LCFS is renewable diesel, which makes up about 39% of diesel energy, while electric vehicles only make up about 1% of the gasoline pool. We are concerned that the fuels refineries will shutter before the transition is complete, leaving the market import dependent. We don't want the state's energy policy to export its strategic refining capacity to Asia, Pacific or Europe. Energy economist Tony Fenitza lectured on the history of price controls.

Professor Fenitza had six lessons. Getting into controls is a lot easier than getting out of controls. No matter how clever the price fixer or how big his staff or computer, distortions inevitably result. Controls beget more controls. To correct imbalances caused by price controls, more elaborate controls are needed to correct the distortions. Quality decreases with controls. Suppliers substitute inferior products to beat the controls. Price controls usually increase prices. While controls hold down prices artificially for a while, they soon start rising or soaring.

And finally, voluntary controls usually give way to mandatory controls. Thank you.

Thank you. Now we're moving towards to Robert McCullough, and he's with the McCullough Research and he's up next.

And I am waiting for the screen sharing to cease. There we go.

Thank you. Floor is yours.

Good afternoon, my name is Robert McCullough. I have been an economist studying these issues for the last decade. My testimony at the US Senate back in 2022 was the one that launched the Enron Trading Investigations. My testimony later that year at the California Senate was the first dealing with the actual manipulations of Enron. I was the primary witness in the vast antitrust case that's been waged against the California refineries. I respect everyone I've just heard from, but quite frankly, they're missing the bottom line.

The fact is that the opus index price, a poorly understood, absolutely not transparent process, is the contractual basis of what the middlemen and the gas stations face. There's no complexity to that. They actually have contracts that specify that index. That's one reason when we see a price shock, it communicates from San Diego to Seattle within the day. So why is it we haven't talked about this? Because data availability in California is minimal. The only effective litigation we've had is the SK v. Tall case.

That is a wash trade case. That is one of the Enron schemes that was identified in my 2002 testimony of the US Senate. Why do we not have that? Well, we don't have rules and regulations to bring that data to the fore. One of the senators asked, well, isn't this like electricity and other fuels? The answer is no. Every electricity contract is reported to FERC and can be looked up after a short delay on their website. We do not have that with gasoline and oil.

Senator Cantwell, U. S. Senator Cantwell, once remarked, we know more about soybeans than we know about oil and gasoline. Going to this question of the critical opus index identified at the US Congress in March and April, that the critical index, now we're talking about something like the Dow Jones industrial, did not change for a single week, and then did not change so at a slightly different price for the following week.

Reviewing the Opus materials over that period indicated that Opus had only received one trade for a two-week period. Now that had a spike in prices at California that was quite remarkable. And those are the issues we have to get down to. It's nice to speculate about long-term supply and demand. This is very much like wondering about how your new car will work. But the car we're driving is veering off the highway and we have to get down to that base data.

Now, I have some advantages. I went through the three and a half billion documents we had in the antitrust case. I have access to many more, but I would very much focus you on the fact that you need to do something now, not continue to investigate because your many investigations haven't gotten you very far. I'm going to go to the next slide since I obviously ignored my slideshow to respond to many of the other speakers. The bottom line is this.

The prices are set at the pipeline in LA. There are adjustments to go to San Francisco, Portland, and Seattle, but that is where the price is actually set. The obscure market is self-reported trades and as I noted, during two weeks of a spike, there were only one trade reported, which of course we know is preposterous. There is no official review of the spot market price. As far as I know, no federal regulatory agency subscribes to Opus.

I am not at all certain that a California agency subscribes to Opus, though that may well be. Also, spot market price bears no relationship to the cost of production. We have had unreasonably high prices and we have had unreasonably low prices. We talked a little bit about some of the spikes in the past. I've actually reviewed the Opus data on that, and the Opus data on that leads to some very serious concerns.

So bottom line on all this is you, number one, need to approach the question of equity and put a limit on price gouging. This is way overdue. Number two, this should not be the only industry that keeps secrets. We are having a discussion with some very brilliant people attached who do not have a clue of the underlying facts because they are not transparent. You have it within your powers to make a major step to make it transparent.

Imagine a world that when you went to the grocery store and wanted to buy an artichoke, you had to sign a confidentiality agreement and agree never to speak about that again. That's California. We need to actually operate the way the rest of the economy works, where there is information on operations, prices, and market power. So, having totally bounced out of my slides, let me see. We had several others. Here are the takeaways from our research.

The margin for wholesale was the highest of all the changes we saw in 2022. That sounds pretty amazing that the change in that margin dwarfed some of the other changes. The wholesale margin surged upward by 46.8%. Why did that happen again? Transparency is the key, but if we aren't going to know what happened, we certainly need to be able to recover those costs back to the consumer. I'll yield the floor.

Thank you, Mr. McCullough. And now, last but not least, we have Michael Mische, Professor of Management and Organization at USC Marshall School of Business.

Thank you, Mr. Chairman. Distinguished Senators, thank you so much for the invitation to speak with you today. It is quite an honor to be here. It really is. And it's a thrill to be with esteemed experts. And I'm sort of thinking about the one moment that, if you don't mind, I came to California as an infant off the boat because I was born in Japan.

So I stepped into California or was carried into California at Fort Mason, San Francisco. So I would think it's kind of pretty neat right now to be sitting ahead of and in front of the esteemed Senate of California Committee on Energy. So let's just get right to it. Thank you. Fantastic. Really fantastic testimony. Fantastic insights.

Let me just sort of get right to the chase of it. Today, the cost of gasoline in California, the price of gasoline in California today was $4.74 a gallon on average for regular. And in the United States generally, non adjusted for California, as Professor Bornstein would do, is $3.44, $3.49. So we have a 36% premium, and we're conditioned to paying this premium. This premium goes all the way back to the 1980s, at least in my research, which goes back 40 plus years.

So we've always had a premium in California. And even President Joe Biden noticed that and commented on it on his trip to Los Angeles over the summer. He says, well, it's always been that way. Well, it has, and there's a lot of reasons for it. Most of it has to do with our regulatory environment, our initiatives for clean energy, clean air, clean health, all of those great things that we do. Plus we have high demand.

I mean, let's face it, we're the fifth largest economy in the world right now. We're larger than Germany. Okay? So we have a lot of factors. Senator Stern, if you don't mind, one of the thoughts in one of your questions brought me to the idea of when I was actually filling up gas over the summer at a place called, well, in Pasadena, and a woman was filling up her SUV, about $120 worth. And she says, I can't afford to bring my kids to Chuck E. Cheese anymore. This is what we're facing. These are real issues.

We need to have serious discussion on it, which we're having, and we need great ideas for it. So let's get to the price gouging penalty. All right, so what is it really? Well, call it what you want to call it. Most economists will call it a windfall profit tax because it's an additional tax or penalty levied on profits that are deemed by some governing body to be excessive and above and beyond some arbitrarily determined and statutory defined threshold. Okay?

That's what it is. Now in and of itself, that's interesting. So we have some definition for it. But the question is, when is a windfall a windfall? If a refiner or a producer or any business invests significantly in technology, invests significantly in their operations and has great management acumen and improves their operating margins relative to the price, they're going to generate a higher profit. It's called competition. It's also called investing in innovation.

So simply just looking at this gross profit margin is entirely incomplete and really misspent efforts. Okay. The idea of branded versus unbranded. Yeah, we have disproportionately branded gas in California. That's what the consumer wants. They buy branded gasoline. Why? Because they have confidence in it, there's a consistency to their product, and a lot of these companies have affinity programs. So we have a lot of questions here that we have to ask is the profit increase due to capital investment, or is it associated with market factors?

And most often it's going to be associated with the dynamics of the market. But the idea that these companies, either the oil companies or the refiners, are engaging in excessive profits, that threshold has not been met. It hasn't been proven. Okay. Either in the United States or elsewhere. Now, the assistant Attorney General gave us a great recap on the last 20 years, but in fact, I've taken too much time.

But in fact, we haven't proven any cases of price gouging, nor have we proven any cases of collusion. What we have before us, though, is an extraordinarily interesting case in San Francisco that I'm going to watch very closely, because that's at the trading level. That makes sense to us. As recently as November, we had a court case in the US District Court in San Diego, 103 page reasoned judgment, tossing out the case for alleged price fixing. And this goes on and on.

We had the Federal Reserve look at it, and at least 1910, we've had difficulty proving this along with the FTC. So quite interesting. So what's the result of this? Well, the motivations for this, Senator Skinner, I fully understand and I absolutely support you. We need to bring these prices down. No question we're suffering. But here's what happened when we've tried it and we can talk about, if you have questions about Europe, I'm prepared to answer those.

The idea of this penalty tax or this windfall profit tax, is not new. It goes back to Abraham Lincoln. Lincoln actually imposed something similar to this to prevent war profiteering. We saw a greater emphasis on this in 1917 with World War I. Most recently, at least in my lifetime, was the debacle of the 1970s and the oil embargo, which began 1973. So here's what happened when we implemented it. So we implemented a variation of this. And keep in mind, there's no de facto standard.

There's all sorts of different models and variants to this. So it's not like we have a particular eight and a half by 11 piece of paper that we're working with. There's just concepts associated with it. But here's what happened when we put this together. The Congressional Research Service found in the 1980 study, one, it only generated 20% of its expected revenues. Two, we had the domestic production fall by 4.8%. Three, we increased our dependency on foreign oil by 12.7%. Four, we reduced investment in capacity.

Five, it absolutely did minimum, little meaningful reduction in retail gasoline prices at the pump. Now, this goes on in Europe. We're seeing this being implemented by countries like Belgium, the UK, Italy, Germany, France. The list goes on. But if you read deeply, deeply, and you have to go into the subtext, the application of this tax is all over. It's all over the supply chain, so there isn't any continuity to it, number one.

And number two, it's not going back to the people who paid over gouging. What they're really doing with this, and it's been carefully studied by a few law firms in Europe, is that the tax is being redistributed for sustainable energy projects. So it's really a funding vehicle for that. Great. So, bottom line, if I take one last second, sir. One last second. This is a great idea, but it won't work. There's compelling evidence that it won't work.

So I think we need to take our efforts, which are considerable, and let's place them in an area that can bring down the prices most obviously in supply. Okay, thank you.

Thank you. All right, I'm going to open it up to the Members who have questions. We have Senator Gonzalez, Senator Stern. So, Senator Gonzalez.

Thank you very much, Mr. Chair. I appreciate this presentation. However, I just have a few questions to ask of some of our panelists here. First and foremost, on Mr. Mische. We'll start with you. First, I want to get clear here on just a little bit of your background. You list one of your clients as the Saudi Arabian petrostate government, is that correct?

Yes, I did work for them several years ago.

And you also wrote a paper titled "When it Comes to Energy, the Stupidity of the Biden Administration Knows No End."

Yes, I did write that.

All right. So I didn't hear in your testimony any real answers, to be quite honest. On what I mean, aside from the environmental regulations, as everyone has been saying, we know that crystal clear that, crystal clear that it's not the environmental regulations. I don't hear an answer or a thoughtful answer on why Californians are paying such high gas prices over the last fall.

Well, that's a great question, and hopefully I can answer that for you. When we take a look at the California gas prices, as Professor Bornstein said, it's not at the refinery level. The spread between refinery cost and wholesale cost is minute, except during particular periods of stress. And if you take a look at one of our exhibits that we have for you, you can see that representation. And that would be on page or slide 13. So we can see the very, very close correlation for that. The cost is a build up. That's what I think. And I think that's what Bornstein is telling us too.

So what is the evidence to provide that answer?

It's a cumulative buildup. So if we take a look at slide number five, I'm sorry, slide number six, we see a comparison between the national average and the California average, but then just a simple disgracement where we take the national average and we take the California average, and we back out federal taxes, and we back out an assumed 10 cents a gallon at the gas station level for profit, and then we begin to take out all of the California charges.

And so we reconcile to within 96% of the national average. So what we're really looking at is a lot of regulatory overhead that gets built in and pushed and layered all the way to the end of the pump. So throughout that process, which looks like this, what Professor Bornstein and Professor Sweeney have said, and what my research indicates, is that the legislation we're considering is up here, but the spread is really thin and it's really not going to generate any significant money.

The costs, this mystery surcharge, as it's referred to, occurs downstream. It's here. It's the layering of the cost as product moves through. And ultimately, when somebody's running a gas station, Senator, they have to pay their utilities, they have to pay their rent, they have to pay their taxes, they're going to load it up.

Okay, well, I thank you for that answer. Not necessarily that I agree, or I think that's crystal clear for folks. I still feel like there's lots of questions that need to be answered. The data, the transparency needs to be done, and we certainly don't have that. So the next question I have real quickly is for Mr. Jorgensen in the AG's office. Thank you for your testimony as well. You had talked about, obviously, the antitrust issues.

You're focused on a lot of that with a multistate stakeholder group, which is fantastic. But a lot more is needed in order in terms of staffing and just resources to be able to take this on an additional oversight. So what would that look like for the AG's office, and what else can we do to provide additional oversight for Californians?

We've asked through the budget process.

Give me numbers and we want numbers. We want specifics. What does that look like?

Okay. Well, I don't have those budget change proposals in front of me, but they are as part of the spring finance letter and budget change proposal process.

Thank you.

Very clear in that.

Appreciate that. And we would hope that there is more oversight in this space that you're able to do that. So thank you. Thank you, Mr. Chair.

Thank you, Senator. Next up, Senator Stern.

Thank you, Mr. Chair. I'll just build on, I guess, the initial line of questioning from my colleague here and maybe ask it a little simpler. Just one question for the whole panel and you all can just answer, should be just a yes or no. But while we're trying to establish sort of, are these stakeholder perspectives or expert perspectives?

My understanding is this panel is supposed to be independent expert witnesses, but based on some of the client history, I guess my question is, have you ever received income or other compensation for your work from the oil industry or from foreign governments that run oil companies? So just a yes or no?

I can start. Just the state. No.

I have. But I did not do work in oil industry.

That's okay. Yes or no is fine. So, yes. Okay.

Robert McCullough. No.

Okay.

I have not since 1990, but I did back in 1990 briefly work on a case.

Yes, that's Dr. Bornstein. Thank you.

And I've been paid for litigations on either side of that, sometimes adverse, sometimes working with oil companies.

Sorry. So that's Professor Sweeney. That's a yes. You have been paid by the oil industry in the past?

My life, yes.

Okay. And lastly?

This is Dave Hackett. Stillwater has been retained by a wide range of clients because of our deep experience in this space. Clients trust us to provide thoughtful, objective analysis of market and regulatory issues. So, yes, we've been retained by the refiners, but also by the Energy Commission.

Indeed, when the PMAC was formed, it was three eminent energy economists, the Assistant Attorney General for Antitrust. And they called me and I said, well, why do you want me on the committee? And the answer was, we have to have somebody who knows what they're talking about.

I appreciate the insight. You didn't mention that you had oil industry clients at the outset of your testimony, so I was just asking. So that's a yes as well. No further question.

Thank you, Senator Ashby.

Thank you very much, Chair Bradford. And also, let me just start by adding my thanks to the Chairman. I think I'm the rookie on the Committee and the freshman, so no hazing and honored to be here, too, and to hear the testimony and sort of wade through it. I'm reading the paperwork as fast as I can, and I appreciated the background information provided. That said, this is sort of my question.

Forgive me for working my way through it to you, but we heard on the first panel, and we've heard everyone has heard over time the governor's plan. And the next group is supposed to be stakeholders, although I understand there are some stakeholders here, too, but there are also professors and members of the state team here. So it's a bit more of a mixed crowd. So we've also heard, though, from the Senators, uniformly.

In fact, I believe I'm the only one that didn't speak during the first panel, and they were sort of unanimously concerned about relief at the pump, different ways of approaching it, but they all talked about that. And while I appreciate the story of the mom, I'm a mom, have been for a really long time, who couldn't take her kiddos to a fun play day, I think we're a little bit more concerned about not being able to make it to work or the hospital or childcare.

Fair enough.

All due respect, but we've heard from the Governor and we've heard from the Senators, and we've heard from some stakeholders, and we've heard from some professors and experts in the area. And Senator Durazo really walked us through, reminded us of 40 years of discussions that have happened on this topic, and yet we still find ourselves here having the conversation again.

And she posed what I think is really the critical question, how do we make this conversation have a different outcome than the 40 years that have preceded us here? Which begs sort of the question that I would like to ask. And it's really directed less at the two state employees and more at the remainder of the panel: if not the governor's price gouging penalty and transparency plan, then what model do you propose? You are the experts.

You're going to call on people or what?

I will leave that to the Chair.

All right. Who's prepared to answer that question? Professor Sweeney, go right ahead. And, Mr. Borenstein, as quick as possible.

Yes. The only proposal that I have been able to envision that would really be successful over time is not one of these tax gimmicks, but somehow creating more competition from out of state, more ability to bring gasoline in at a moment's notice or a week's notice from other places. Unfortunately, I don't have the answer. There's a Jones Act that gets in the way. There's a lack of pipelines that sometimes gets in the way. And there's environmental regulations that make California an island.

I think that there has to be some in-between trade offs that may have only little impact on the environment and significant impact on creating competition from out of state, because I don't think we're going to solve it from just production in-state when the industries continue to die.

Thank you. Anyone else that wants to answer that? Professor Bornstein?

Yeah. I think the most important piece of this proposed legislation is what's being called transparency, but what I'd call investigation. I think that the Legislature has to put forward some real resources to do a deep investigation. Just to be clear, the PMAC was five volunteers who met quarterly and got less than one half of one person in staff support. So of course it didn't accomplish anything and had no access to data.

If you really want to get something done, I think the sorts of millions of dollars that the person from the Attorney General's Office talked about is what it's going to take to do a deep investigation that can actually look at where the problem is. And it's pretty clear the problem is downstream and come up with potential regulatory fixes. I know that legislators do not want the answer: we need more investigation. But the fact is, shooting first and then finding out if it's the right solution is likely to be just as detrimental as helpful.

Thank you. Mr. McCullough.

The reason we have street lights is they cause crime to diminish. Not a mystery. What would happen if we actually made the transactions public? Now, if you've been part of the industry for a long time, you know that the refineries have very high levels of data on each other. They have exchange agreements that allow them to buy at less-than-market prices. In some places, they have communications that are constant and ongoing. The only people who do not have that information is us.

So a good first step is simply to take the blanket off the market. There is no particular reason why the Opus transactions should not be made public. In fact, they are effectively public because any player in that market can reconstruct them from the Opus data. And once you have that, you're going to eliminate one whole scale of problems.

Thank you. Mr. Hackett.

I go back to my talk. The issues include everyday high gas prices and then price spikes due to refinery issues and geographic isolation. And then finally, and so that's what Jim and Severn are talking about. We're interested in more competition, competition at the retail level, competition at the refining level. All that's good. More competition is good. Don't discourage competition. Don't discourage building of the gas stations.

I mean, I argue that there aren't enough gas stations, and that's one of the reasons the prices are so high. Don't discourage competition. The second thing is price spikes. Going to deal with price spikes, that's a separate exercise. It's kind of a temporary one. It's not a long term one. But we hadn't talked about. And one thing that concerns me the most now is the historic, rapid transition to a different form of transportation energy.

You think things are screwy now, just wait until you have to figure out how to get all the energy that's in the pipelines today delivering transportation energy in form of gasoline and diesel fuel. How are you going to put that on the wire? So I don't yet see anybody doing that. And that's a much bigger thing than fooling around with a windfall profits penalty.

Thank you. Okay, we're moving on to Senator Min.

Thank you very much. And I just want to echo the statements that were made earlier by my colleague Senator Dodd and Senator Ashby. People are angry. Even in my district, which is a wealthier district, when you're paying over $100 at the pump, some folks aren't just missing Chuck E. Cheese. They're struggling to pay their bills. They're struggling to pay their mortgages. These are tough times for a lot of folks.

And the fact that these prices are concomitant with record high industry profits, when they see the headlines about oil industries engaging in share buybacks, massive dividends, I think that pisses a lot of people off, frankly. But at the same time, I think we've heard from a number of legislators here, we want to engage in smart policy.

And I think our three academics on this panel have all made the point today that refineries are only responsible for part of this mystery surcharge or this increased cost to consumers. And that gives me some concern because I think that to the extent that this particular proposal is targeted at refineries, at best, it's only a partial solution to what we've seen.

Now, Mr. Brown, I think you made the very astute point that we have to decide what the problem is we're trying to solve here in the Legislature. And I would say that from my perspective, while I don't love seeing the oil industry get record profits, the real concern is around making sure that my constituents are not bearing these excessive costs. And so from that perspective, let's suppose that is our priority as a Legislature, or at least my priority.

And let's also assume that some version of this windfall profits proposal will pass. What changes would you suggest at this point, from your perspective, to try to make it as good a proposal as possible, again, understanding that maybe it only addresses part of the problem, maybe we should expand it to other parts of the industry? I'm just curious what you think would make this particular proposal better. I was very interested in your testimony.

Thanks, Senator Min. I think, unfortunately, my answer might not be completely satisfying for you. We haven't done a deep dive, frankly, into kind of the governor's proposal and kind of all of the details around it. I do think I'll kind of go back to maybe some of the comments I made a little bit earlier. Depending on sort of the problem you're talking about. There are different ways to solve it.

And I heard you're sort of recognize your comment that you're concerned about sort of consumers at the pump and making sure that they're not paying too much. And one way to sort of frame that problem is something around a tax or something to sort of redistribute profits to do that. And in that case, something like a profits tax seems to be sort of the most direct approach to doing that.

I think one question about the proposal in front of you from the Governor is, is this really sort of structured like a tax and will sort of refiners and businesses treat it like a tax? Will they sort of continue to do business and pay the cost of that tax, or would it be treated more like a price cap, in which case it's a violation of state law to exceed that cap? And that has sort of other implications.

You might not get the revenue that can then be redistributed to consumers, but it has sort of other implications to the extent you're sort of limiting the price that businesses can charge. That might have an impact on lowering the price, but you could also sort of have other downstream effects on the incentive to actually supply that product and potentially get into questions around gasoline shortages. So I apologize.

I'm perhaps rambling a little bit, and I don't have, frankly, sort of a great answer for you, but I do think sort of trying to zero in on some of those questions around is the mechanism to try to provide relief to consumers through kind of redistributing profits to consumers? Is it through kind of trying to cap the price? Is it through trying some of these other changes to allow for kind of more supply out there, which then could sort of bring down the price? Those are all sort of slightly different approaches that get out a little bit differently.

I'd be interested in your follow up on that. And then as my follow up, Mr. Jorgensen, going on the mystery surcharge, you've heard a number of witnesses here say that they believe there's a mystery surcharge, that it's maybe distributed throughout the supply chain and not just concentrating their refineries, and that we need more investigation. And so I guess my question to you is, is that something you would consider doing as far as your authority under the Attorney General's Office?

Collusion cases start off as investigations. So there's never a guarantee when you conduct an investigation as to whether you will uncover collusive conduct. But it does require a lot of resources in a complex industry like this. We do not have an internal economic consulting group like the FTC does. So we have to outsource that type of work to qualified economists. Beyond that sort of, yes. The data gathering is very important to know more about price transparency.

I agree with the comments regarding the Opus price information service and would support the CEC's efforts at improving pricing data transparency in transactions at a transaction level by buyer and seller. So I agree with all those comments.

All right, Senator Skinner.

Thank you, Mr. Chair. Before my questions, a little comment. I do appreciate having our experts testify. I do also appreciate, though, when experts are careful about asserting facts. The point that was made earlier about that, well, the reason we have street lights is because they reduce crime. The actual data on that is very mixed. Over the past 30 to 40 years, that has been a well-studied question, is extremely mixed.

And it turns out that the original studies that made the correlation, which we all now believe were paid by GE, commissioned and paid by GE. This was decades ago. And as I indicated, anyone who does a literature search will find that the data is actually quite mixed. Now to my questions. These are general to the panelists on the issue of--so I don't think these would be to either the AG's office or the LAO, but to the others.

And then I do have one to the AG's office. So this is an effect really one question, but we had in the background document two figures for 2021. One is that 88% of gasoline production in California was used in-state, 12% was exported. And so in that we've been characterized as a self-sufficient gasoline fuels market. Now, given this market share, why would gas companies stop selling their product here?

Even with--yes, demand is going down somewhat, but it is a rather slow curve in terms of what I've seen. Now, second, the background doc also shows that in 2021, California was the 7th largest producer of crude oil amongst the 50 states, and we were third in crude oil refining capacity. Yet the industry claims that they'll stop refining in California. And again, yet we utilize 80%, 88% of the gasoline refined in the state. Is that realistic based on the size of the California market? So it's the two questions, why would they stop selling the product here and why would they stop refining based on those market shares?

Anyone? Mr. Sweeney, go right ahead. And Professor Bornstein afterwards.

Senator Skinner. And by the way, I've really appreciated the leadership you've had on environmental issues and energy issues over the years. So, it's an honor to be talking to you here. I'm not suggesting that they're going to want to stop selling as long as there's a market. But with the move towards electric vehicles, the demand for gasoline, I believe, has peaked in California. I believe it'll be going down over time.

And as it goes down over time, refiners don't have an interest of creating more and more spare capacity. They're going to be disinvesting over time as the demand for gasoline starts declining. And it's that fairly tight balance between supply and demand we have that, I think that created the price spikes, and that's what I think we're going to have in the future.

So just a quick follow up on that. You're absolutely correct. It is our goal to have that demand go down, and I would hope that we've already hit the peak, however, that even if we look at the projection of that demand going down, so it's only an Executive order that we would not sell gasoline powered vehicles. And by 2025, that's 12 years from now, obviously, there would still be very many gasoline powered vehicles on the road.

The average californian does not really buy a new vehicle that frequently. So we know that there'll still be a very large market share of gasoline powered vehicles of all categories still on California roads. So I can appreciate this future forecasting, and I can appreciate why perhaps there wouldn't be another refinery built in the state. But I still can't see where it would be in the oil company's interest to stop selling gasoline or producing gasoline in the State of California.

And the other commenters happily answer, or, Professor Sweeney, if you want to add anything to that.

All I'm saying is there's been announcement for three refineries closing, so there's a little evidence that it's happening. But let me turn it on to Professor Bornstein.

Yeah, I interpreted your question slightly differently, Senator Skinner, about the concern that a price ceiling or price gouging penalty might lead refiners to sell gasoline out of the state. And that, I think, is a real possibility if the high prices aren't driven by market power.

Refineries are constantly optimizing where they sell their product and which products to produce, how much jet fuel, how much diesel, how much gasoline, how much to send to Arizona, how much to send to Nevada and they get down to the last barrel of optimizing.

And if you now say we're going to take away some of the profits from selling in California, if, for instance, we have a west wide price shock, they are going to say, zero, well, then they're not going to stop selling in California, but they are going to say it makes sense to push more of it into Arizona and sell less of it in California.

Now, as I said before, if the problem is they actually are exercising market power and restricting the output already, it could actually help. But to the extent that it's real scarcity, it could make it worse. On the crude oil issue. This comes up and has come up in many discussions I've had. Crude oil production in California is completely irrelevant to this discussion, and I think all of the people on this panel will probably agree with me. I hope so.

California produces some amount of crude oil, and that crude oil becomes part of the world's crude oil market, which the oil industry constantly reminds us when the price of crude oil goes up and our gas prices go up, they say it's a world market. And that's absolutely right. But by the exact same logic, when we produce more crude oil in California, it doesn't get used in California to lower California prices.

It just becomes part of the California usage of the world market and doesn't drive down the price here any more than it drives down anywhere else, and it doesn't protect us from price spikes in any way. So there's a valid debate to have about more or less oil production in California, about the jobs it creates and the economic activity versus the pollution and our transition, but it is really not at all relevant to discussing the price of gasoline in California. Thanks.

All right. Vice Chair Dahle, I still have.

Oh, I'm sorry. I'm sorry.

Okay. So, Mr. Jorgensen, the oil companies have said that they can't answer the questions from the CEC, and supposedly that's why they didn't attend the hearing and also due to federal antitrust laws. That was one of their reasons. You're an antitrust enforcer. Is there any reason the companies can't confidentially provide the information to state regulators?

No, that's what they do now under the Petroleum Industry Reporting act. They can provide it and it can be maintained confidentially by CEC, by non CEC people who are interested in government enforcement of the antitrust laws. And the immediacy of the usefulness of that information dwindles as time passes, as sensitive, competitive information that would be useful to competitors to engage in illegal collaborative conduct with the people producing the data.

And is there additional data or transparency measures that might assist the AG's office in terms of your current work to either deter violations or facilitate enforcement of various of our laws?

Yes. We're happy to work with the CEC, who they have staff that are able to review and analyze that data. We're mostly a litigation shop, and as the legislation is currently formulated in Pyra, this is something that would just create more data transparency along the lines of what's being provided. Now, maybe industry people would disagree with some aspects of that, but yes.

Seller, buyer information, price, volume, date of transactions, time of transactions, granularity of information, identity of seller, purchaser, use of brokers, whether it's reported to pricing information services, which are private. And as a government enforcer, I think a prior testifier had mentioned there's doubt as to whether government has access to the opus data, whether they subscribe to it at all. I'll leave that question open, but that is the marketplace of information about price as the market is currently set up.

Thank you.

Thank you, Vice Chair Dahle.

Thank you, Mr. Chairman. I read all the information I could before this hearing. This is very important. And as somebody who is elected, who represents a lot of poor people who are getting really hammered in California, but my takeaway is, I wanted to say that what have I learned today from so far in this presentation? One, refiners seem to be in line with whatever the crude prices are.

We learned that downstream, and that was my original question when I was looking at the graph, to figure out what happens across the state or nation versus California. And what I learned was that graph was way out of balance. And so there's something going on downstream that I think this Committee should get some answers to. I think that's one of the problems.

The other takeaway is transparency about what's happening in that area downstream from the refiners, and then Opus, something that was brought up by one of our panelists. We actually used Opus in the county when I was there. Opus is a system where you buy your fuel for a whole year based off of a price of delivery to your county or your road Department. And it's a base price, so it gets bid on the price of Opus. So all the suppliers bid and one wins the bid.

And that bid gives you a certainty in whatever the market is. You're going to pay that transportation cost plus a profit to stabilize your supply. I think we need to focus on that. I'd like more information from the gentleman that talked about Opus. I need to learn a little bit more about that. About that.

I think those are the few things that this Committee that I learned today that's not really politically, we're focused on refiners and their ability to make profits, which is our worldwide companies. But at the end of the day, I learned that the downstream folks have a lot to play with that, and I think we need to investigate that a lot more as we move forward with this process.

Thank you, Senator Seyarto.

You're good. Okay.

Well, I just have one final question for our economists or any of our experts who choose to answer this. Are there any examples where capping profits have lowered prices for consumers? Because the only example I'm familiar with is during the energy crisis when we limited how much utilities collect and it led to one utility going bankrupt and the second one almost going bankrupt right at the doorsteps of bankruptcy. So is there any examples where cap and profits has worked and lowered prices for consumers?

I don't know of any. Going back to the 70s under Jimmy Carter, we had some wage and price controls, but the data would indicate, particularly for gasoline, that it didn't have a favorable effect on consumer prices. I think for California, what we also need to do, I mean, it's one thing to think about competition, but we're losing gas stations. We have less gas stations this year than we had the following year.

And we have moratoriums and suspensions on building, known, so very tough to get, but we can create more competition by increasing and diversifying the supply. And so there is one on page 18 of my material, some ideas, but there's one I'd like to just call your attention to. And that is ABX 13, which has been authored by Dr. Baines. And that is an idea to increase supply, encouraging California production and additional buying of domestic produced.

You know, the one thing that's going to bring prices down is more supply, the competition harder to do because hard to build a gas station.

Okay, Professor Bornstein?

Yeah. I have to completely disagree. If Professor Mische is referring to supply of crude oil, as I already explained, that is not going to bring prices down. It's a completely separate subject, and I think almost every economist who studies the energy market will agree on that. In terms of price ceilings that have worked. The price ceiling that you're referring to, Senator Bradford, was the retail price freeze. The actual wholesale price cap, which we put in place, was also not very successful.

And in a way that is illustrative here, because it was only imposed in California. And one of the concerns until the FERC finally, I think FERC finally did impose a westwide price ceiling, but much later. And the problem was that we saw a lot of power leaving the state because we had a lower price ceiling than the market price. But I actually advocated back then for a westwide price. They.

I think we could have saved a lot of money if we had gone there, because I think there was a lot of market power then, and I think in that case it would have been successful. Most of the things on my list, on my slides are unsuccessful, including Hawaii's attempt to control prices in the 20052006 which they put in place and rescinded on gas prices. This is within a couple of years.

Thank you, Professor Sweeney.

There have been several cases, not just in the energy area, that the price caps have kept prices from going up. When we had the first energy crisis we put on gas caps, gasoline prices didn't come up. Go up. That worked. Now, unfortunately, we had massive gasoline lines. We paid for it in terms of time rather than in price. So that was ineffective. We have price caps on rent control in a lot of cities. That creates shortages of housing, but it keeps the price from going up.

So it is a trade up. But what I think we've got to realize is just because we have a price spike doesn't mean that there's any market power. I'd like to share my screen very briefly to show just one other example, and this is the price of eggs. This is from the New York Times. We know the price of eggs has gone up. There's a lot of commonality between this and gasoline. We have very little supply from out of state.

We got a little supply from Mexico. Chickens don't lay more eggs, if you squeeze them harder, have a higher price. So there's very little elasticity of supply. There's very little elasticity of demand. So the Avian flu, killing out some chickens, reduced supply of eggs. And in a short period of time, we've had more than a double of the retail price of eggs.

The fact that I think the price spikes that we're seeing aren't going to be fixed any more than the price of eggs would be by some sort of price caps. Although I do think that longer term trend, the mystery surcharge, is something that actually could be market power. I don't know what it is, but that's where I would like to refocus the long term attention, because that's where I think is the big impact.

Thank you.

Mr. McCullough, two answers. The first is, I'm certainly going to agree with Severin. Back to actual markets and facts. The price of gasoline in California is based on the New York harbor price of gasoline. The index from Opus is a delta to that. So you can produce all the oil you want in California, but unless it changes the New York harbor price, it's not going to affect the world markets. On the second issue, I was a little amused at the discussion of the California crisis.

I believe it was Severin who noted that we waited a long time for West Coast price cap. We received it on June 102001. Once that went into place, almost all of the illegal activity stopped in California. Why was that? Well, facing a criminal penalty when you couldn't actually get a greater reward makes no sense. So the outages of the plants were reduced, the price never got to the price cap and the entire problem basically withered away.

And ironically, by the way, it also bankrupted Enron because they gambled so much on the continuing of the California energy crisis.

Thank you. I'm going to thank the Lao, the Attorney General's Office and our economists and experts, industry experts for your testimony here today. And much appreciated. And now we're going to move on to our stakeholders panel. And our stakeholders panel will consist of Catherine Reese Boyd, President and CEO of the Western States Petroleum Association Jamie Court, President and Chairman of the Board of Consumers Watchdogs.

John Winger, like legislative advocate for California fuels and Convenience alliance and Casey Sego, Senior Counsel for Climate Law Institute, center of Biology, diversity. So Mr. Sport, when you're ready, you may begin your testimony. And I'm reporting you guys five minutes as well.

Is that on? Oh, thank you. When it's red. I'm used to it being green. Well, good afternoon, Chair and Members of the Committee for this opportunity to speak with you today. I'm Cathy Reheis-Boyd, representing the Western States Petroleum Association, President and CEO. So, WSPA remains very concerned about our state's ability to meet its ongoing liquid fuel demand well into the future, even as the state seeks to transition away from fossil fuels and increases EV adoption.

California continues to be the third largest gasoline market in the world, only behind the United States and China. Several panel Members mentioned this. This is especially concerning given that it is estimated California will lose 16 percent of its in-state gasoline production by the end of the year.

Our industry is strongly opposed to Senate Bill X1-2 because it misguidedly focuses on profits rather than the root cause of price spikes, which is a lack of supply. The way to address prices and provide relief at the pump is to increase a reliable and safe supply. As the California Energy Commission and several attorney generals have repeatedly acknowledged, California continues to face serious supply constraints as it relates to crude oil, to gasoline, to diesel, to jet fuel.

These supply constraints, coupled with demand given by the world's fourth largest economy and 35 million internal combustion engine vehicles--again, even as we adopt more EVs--are the primary drivers of fuel costs in the state. Even demand decrease has to match the state's refining capacity. For more than 20 years, I've been through many of them. The CEC has called out supply concerns.

In 2005, their Integrated Energy Policy Report concluded that the industry will need to permit and construct a certain amount of new infrastructure to import, store, and distribute fuels. To this end, the state should work with industry and local and governments to ensure these infrastructure improvements are implemented.

In 2009, the CEC stated, 'reliance on foreign oil imports increasingly puts the state's fuel supply at risk,' not only because of security and reliability concerns, but also because the marine ports are not expanding to meet the expected growth in demand. In 2011, the CEC warned that due to infrastructure constraints, our energy security might also hinge on dependence on sources that are risky geopolitically, economically, and from other potential disruptions or supply limitations. So the CEC has got it right for a very long time.

We just haven't implemented any of the recommendations. So our refiners are thinly balanced to meet the demand. We've been denied permits to storage. We've been denied permits for infrastructure improvements. We continue heavily to rely on foreign crude oil imports, putting our energy risk security even more at risk than it ever has been. Fuel costs are driven by supply and demand, and the way to address costs are increasing supply. The build is nothing to address California's fundamental supply issues.

Price caps, taxes, tax-like penalties, do not increase supply or reduce cost, but instead could have the opposite effect. California and the West Coast are geographically isolated from refining hubs in the rest of the United States. There are no pipelines to bring crude oil or gasoline products into California. When local supplies are insufficient to meet demand, additional oil and gas must be brought in by marine vessels, which take typically 30 to 45 days to arrive.

California's vehicle emission standards are also, as we know, the most stringent in the country, and we're required to make a very unique specification of fuel called CARBOB and more expensive to make with very few refineries outside of the state that can produce it. Because of this isolated infrastructure and unique fuel blends, the state is especially sensitive to supply disruptions, for example, unplanned refinery outages. But as we've seen historically, the market corrects itself.

The proposed penalty would likely prevent this natural correction and would likely increase the duration of the cost increases related to supply disruptions. It's also important to understand that the publicly traded companies that must comply with this bill have a fiduciary responsibility to not willingly incur government penalties and fines.

So as a result of SB X1-2, it could lead to more severe shortages because it may cause refiners to reduce supplies of jet fuel, diesel, and other transportation fuels or adjust the types of product they would otherwise produce to avoid violating the statute. So the bill is unnecessary. It puts further strain on the fuel markets. It leads to severe unintended consequences which include--obviously first, the majority of jobs and contracting work done at California refineries are done with union labor.

Our industry is proud to partner with the State Building Construction Trades Council, who's also opposed to this bill, as union jobs will be reduced. Second, as I said, to comply with the bill, we'd have to avoid the penalty on gasoline. Product slates would need to be adjusted and the amount of gasoline may be reduced. Reduction in gasoline production would also lead to a potential reduction in jet fuel and diesel. Third, the bill results in reduction in property tax roll values for California refineries.

Property tax impacts would likely occur in Los Angeles, Contra Costa, Solano, Kern County, with reduced funding for schools and local government. And lastly, relying on even more imports--mostly from Asia--to meet demand would likely result in higher volatility, higher transportation costs, and increase the length of supply shortages as fuel would take longer to get to the state, let alone increase greenhouse gas emissions, which we haven't even touched on in this hearing.

So a greater reliance on imports that may or may not be available is a very risky and potentially costly gamble for California consumers. As mentioned in the last panel, let's not forget the State of Hawaii briefly imposed price caps on gasoline in 2002. Hawaii's Legislature had to quickly repeal their own law after an independent valuation found these measures generally are ineffective, risky, costly, open to manipulation, and complicated to administer.

We recognize the politicized nature of this issue, but SB X1-2 is likely to impose an immediate negative impact on gasoline prices and economic activity throughout the state. California is in the midst of an overall energy affordability and reliability crisis, not just for gasoline, but for electricity and natural gas as well. The consistent contributing factor behind all of these is there is simply not enough adequate and renewable supply.

Just last year, the state reversed its course to keep Diablo Canyon Nuclear Facility open to keep the lights on. Now we see natural gas prices skyrocketing, and for California residents, because supplies and storage cannot keep up with increased demand. Natural gas storage has been dramatically reduced, and pipeline transmission infrastructure is at capacity. So gasoline is no different when the state simply does not have enough gasoline refining capacity to meet demand.

So on this 20th anniversary of the California electricity crisis, let's not forget about what happened when we had a legislative-directed energy experiment that turned the lights off in California. Experimenting with California's fuel supply market can have similar repercussions. This is too important to get wrong. Let's work towards a better way, not a political way because I believe we're more united on this than we are divided. Thank you.

Thank you. Mr. Court.

Thanks. Let me just grab my screen here. Okay. Thank you. The real problem we have in California is we have five refiners that make 97 percent of our gasoline, and when they want to squeeze us, they can. You'll see they squeezed us hard this year. We had a $2.60 gap with U.S. gas prices, and that was really historic. We've never had anything like that. If you add environmental rules and taxes, it should be about 69 cents we pay more in California.

The last time we had a gap, it was $1.60 greater, and that was in 2015 after the Exxon Torrance Refinery blew up. When gas prices spike, the people who get hit most are the low income workers. At four dollars a gallon, a minimum wage worker will spend nine percent of their out-of-pocket after-tax income on gas. At six dollars a gallon, it's 13 percent of a minimum wage or workers--what they spend on gas.

And if you doubt that it resulted in windfall profits, it did. The big five oil refiners had in the first nine months when the real gouging went on, we had almost a quadrupling of profits, and if you take the whole year, it was a tripling of profits. But more granularly, we actually do look at the refining margins that are presented to investors by the companies themselves over the last 20 years.

This is their actual gross refining margins, the difference between the petroleum products they sell and the crude oil that goes in. And you'll see, over the last 20 years, they made a 32 cent profit per gallon, for want of a better word. But this year you'll see that profit per gallon is $1.12, $1.01, 82 cents, 78 cents. Only three times in the last 20 years have oil refiners made more than 50 cents per gallon in profit as a refining margin.

One was 2015, one was 2007, and all at the time it was Chevron. None of the other refiners eclipsed 50 cents per gallon until this year, in which all of them did it. Every refiner eclipsed that--what I would set as a windfall profit line. And if you look at the margins for the whole year for these companies, they more than doubled their margins at the refining level. 2022: they hit 66 cents per gallon in profit. Their average was 32 cents per gallon, historically.

This is a refining problem. This is a refining surcharge. There is no mystery here in what happened in 2022. It is all about the refining sector. Oil refiners made 30 percent more profit from the West Coast/California than from any of the other regions around the world. This is their own reported data, and this is another expression of it. The solid line is what they made elsewhere, and the dotted line is what they made in California.

So we looked at four of the five refiners and applied this 50 cent cap, and we found that if you did a penalty at that 50 cent line, they'd owe 1.8 billion dollars back to California consumers. We'll get to Chevron in a moment. But why a price gouging penalty? It creates price consistency. This is the thing that people have to understand about stopping a price spike. When a fill up is 20 dollars more, and that's in a matter of two weeks, people can't afford it.

A price gouging penalty creates consistency and deters the profit spikes, which is every time you have a price spike, you have a profit spike because the cost of production doesn't go up, just the ability to charge for it. So this deters profiteering. It also prevents oil refiners from using their pricing power to undermine our environmental laws, which is a lot of what we believe happened this year. Why the price was so great when there was no apparent shock to the market, no apparent shock to supply.

But prices were $2.60 greater. So the price gouging penalty has already had an impact. If you look after Governor Newsom made his announcement on October 7th of a special session, Valero's margins went right back down to their historic norms. From a high of 83, 60 cents went right back down to 36 cents. And not only that, their margins for the rest of the year were higher in California as is the pattern than in everywhere else.

But yet, after the Governor made the announcement in the fourth quarter, their margins were lower in California than anywhere else. Same pattern with PBF. PBF's margins went right down to 41 cents. Its historic margin, I think, is 39 cents. And Chevron. Chevron is in a unique case. Chevron made 85 cents per gallon profit off West Coast Refining, which is a staggering amount. The last greatest margin they had was in 2015, when they made 65 cents. This year was 85 cents, and this is just refining. This is not downstream.

If you apply the 50 cent line, they would owe 1.4 billion dollars back to the California public. All told, all five refiners would owe 3.1 billion dollars back if you drew that windfall profits line at 50 cents. Now, you asked about precedent. There is a precedent for opposing a reasonable rate of return, which is what a windfall profits line is. On the insurance industry, in 1988, we imposed a reasonable rate of return standard. They can't make more than a certain amount of money in the property casualty industry.

The insurers threatened to leave the state, and yet now we have the second most competitive auto insurance market in the world. And the cost of liability insurance has decreased by 5.7 percent in California, while nationwide it went up 58 percent. These are some of the editorials. When they sued to leave the state, they won the right to leave the state. They never left because they're making so much money here because it remains so lucrative, and neither will the refiners. One more example is the HMO profit loss ratio.

Under Obamacare, we set a 15 percent limit on profits, 20 percent limit for the individual market, and it's kept insurance rates down. Another good example. The last slide shows that there is huge public support behind this proposal. More than six in ten voters backed the proposal: 64 percent when you call it a windfall profit stat, 62 percent when you call it a price gouging rebate. This was done in October for the election.

There was another more recent poll done by Mr. Binder in January, and it showed the numbers growing 66 percent support, even though the price of gas has come down since then. I'll end there, but I will say in response to one of the other experts, when is a windfall a windfall when the profits are double what your standard profits are, when the profits are only eclipsed three times in the last 20 years? That's when a windfall is a windfall, and that's when we have to take it back as a state. Thank you.

Thank you. Next up is Mr. Wenger.

Thank you, Mr. Chair and Members. John Wenger here on behalf of the California Fuels and Convenience Alliance. Our members make up the fuel supply chain below the refinery level, so that includes fuel transport and retail gas stations, which are primarily small family and minority-owned businesses. We appreciate the opportunity to share our perspective on the legislation in front of us. Historically, California has always dealt with abnormally high gas prices due to high taxes and fees, environmental regulations, and higher than average labor and property costs.

Over the last decade, we have seen a larger gap between California prices and the rest of the nation, which has included even more volatile price spikes in the market. Our members are acutely aware of the challenges we see in the marketplace, and we strive to provide reliable fuel at a competitive price to all of our customers. From our members' perspective, nothing about the current situation is surprising.

Over the last decade, the Legislature and Administration have implemented dozens of policies that have reduced refinery capacity and strangled supply in the state. This has led to less slack in the supply system that's resulted in greater reliance on imported CARBOB gasoline, which is subject to the spot market and increased price volatility by traders. This will continue to be the case if CARB and others continue to focus on electric vehicles being the only option for reducing emissions.

We have alternative fuels that can be deployed right now that would dramatically reduce tailpipe emissions, reduce demand on gasoline, and meet the needs of all Californians. Without embracing alternative fuels, the adoption rate of EVs will continue to lag significantly, leaving demand for fuel high while supply continues to be reduced, further increasing costs. When looking at the disparity between California gas prices and the rest of the nation, it's not just the taxes and environmental programs that make up the difference.

It's also the growing costs we've seen at the retail level. It's been referred to as a mystery surcharge. Today, I don't think it's a mystery for us. Increased labor costs, PAGA lawsuits, redundant compliance costs with 42 different state and local agencies, EMV upgrades, trucking costs, and other state mandates have made it difficult to operate as a station in California, and many of our station owners are either leaving or they're choosing to shift their liabilities over to being a branded station.

And so that's increasing costs further, that's limiting competition further, and I think it's been discussed a few times that that's not good on the street level. As an industry, we believe there are solutions to addressing these unique costs to California. However, we believe SB X1-2 would move in the wrong direction as drafted, levying a tax on refiners with what is deemed as excess profits tax. We would argue that there would only be really two outcomes to that.

Either the refiner has to pay that tax and that gets passed on to the consumer or they try to stay below that threshold by limiting supply. I think either way, we're going to see either higher costs or limited supply at the retail level. We've seen that in the 70s with long lines at the pump. We saw that in the 80s with increased prices and reduced supply.

And so instead of going down the same failed road that we've been down before, we believe the Legislature should focus solutions on stabilizing supply when there are disruptions, reducing redundant and unnecessary regulations at the retail level, and embracing alternative fuels that can help drive down demand at a faster rate. So thank you again, and happy to answer any questions.

Thank you. And next up we have Kassie Siegel, Senior Counsel with the Climate Law Institute.

Thank you, and a big thank you to Governor Newsom and Senator Skinner for this urgently-needed legislation. And I want to address the oil industry's attempt to blame the state's life-saving health and safety protection laws instead of their own price gouging for high gas prices. This has been going on for years, but today's example is the dishonest effort to overturn SB 1137, which protects the more than two million Californians who live within 3,200 feet of toxic oil drilling operations.

And thank you, Senator Gonzalez, so much for your bill. The oil industry's argument against the bill is that it will drive up gas prices by decreasing in state production. And so while I agree with Severin Borenstein that in-state crude oil production levels are not actually relevant to today's gas prices, it's relevant because the oil industry just spent 20 million dollars to qualify the referendum on it with this precise argument.

So in the written materials that I've provided, you'll see on page two, there's a graph: California production of crude oil from the U.S. Energy Information Administration. You can see the long-term steady decline since 1986. That's because the easy oil and the high-quality oil is long gone, and so industry has to use more energy, more toxic chemicals, and do ever more damage to our health and climate to get an ever decreasing amount of lower quality oil.

So health and climate protections are not the cause of the long-term terminal decline of California oil production. But these protections are absolutely essential to limit the additional harm that the oil industry is going to do on its way out the door. Industry's attack on SB 1137 is a direct attack on the communities of color that are disproportionately harmed by the filthy, dangerous neighborhood oil drilling that has gone on for far too long.

And make no mistake, as the climate emergency intensifies, this industry knows its days are numbered. It's doing everything possible to maximize its profits and stick Californians with the bill, and the pain at the pump that the industry has caused, even as that demand for gasoline is declining, it's just one slice of the devastation it has intentionally inflicted. Knowing for over half a century that its product wrecks the climate, Big Oil chose to lie about the science and block the needed shift to renewable clean energy.

Decades ago, Exxon's climate models were better than NASA's at predicting today's warming, and yet, Big Oil embarked on a deception campaign that is so breathtaking in its scale and scope and so harmful that it's hard to fully wrap your head around it. And that's why I've included in your references in the handout a memo from the U.S. House of Representatives, investigation of fossil fuel industry disinformation.

It focuses not just on the lies about the science, but the ways in which industry continues to block progress through greenwashing and promoting false solutions that are designed to prolong the use of fossil fuels. The climate crisis inflicted on us by Big Oil, it's already costing billions. It's going to get far worse. It's why so many local governments in California are suing the big producers to recover some of those damages.

And the fact that this industry is price gouging on top of all the other harm it has caused is truly staggering, and it's not just the ripoff at the pump that's the problem. It's the lying, the astroturfing through the manufacture of fake groups to oppose climate policy for which WSPA is well-known. It's the vicious attacks on scientists and manufacture of fake experts.

It's the use of the windfall profits that they're getting for lawsuits, not just the industry cases against climate and health laws, which are legion, but the retaliatory lawsuits like the SLAPP suit brought by CIPA, another oil trade association against environmental justice youth advocates in Los Angeles. It's because of all this lying and obstruction that the oversight provisions of the price gouging penalty bill are so critical.

Industry has gotten away with this by not sharing key pieces of information necessary for the government to do its job to protect California consumers against this predatory behavior. The price gouging penalty will add the needed transparency and prevent more predatory price spikes by penalizing the refineries when they occur. And when you move this critical legislation forward, I urge you to give the agencies the broadest and strongest investigative authority and clear mandates and deadlines to get the job done.

We've heard some accusations today that the proposal won't work or it won't completely solve the problem, but those accusations are a lot easier to make given the secrecy this industry has enjoyed. Californians desperately need protection, and I urge you to get these important policies in place, give the agencies the ability to adjust, based on what they find and based on changing conditions. We've heard today also, how industry's record profits from peak price spikes can only be explained by extreme profiteering.

Industry's attempt to shift the blame. The life-saving health and climate regulations has to be rejected. 69 cents for environmental programs does not explain the more than two dollar differential between our prices and elsewhere. And on the other side of the ledger for that 69 cents, we get programs that protect the air we breathe, the water we drink, and a livable climate. Our health and climate laws reduce asthma attacks, lost school and work days, and premature death.

We need these laws that the oil industry is fighting against to accelerate the transition to clean, renewable energy that will free us from the harm this industry is inflicting. This is not some kind of neutral policy debate that is going on. This is really a matter of life and death. And so please do protect Californians by moving this critically important bill forward with the urgency that it deserves. Thank you.

Thank you. Now I'm going to bring it back to the Committee for questions. I appreciate all our presenters. Members have questions at this time? Senator Stern.

Yeah. Thank you, Mr. Chair. I guess I'll pick up with the question posed by the last panelist. The delta between the--the sort of known surcharges, say, the gas tax cost of, say, environmental programs, winter blend, et cetera. So just take that snapshot of, say, 69 cents versus the two dollars. I'm wondering from either of the folks from either the downstream side or the upstream side of the oil industry, how do you explain that $1.30 delta?

Yeah. Thank you, Senator, for the question, and I know John will jump in here, too. I think what's really important as we go forward and look at all of the specifics around this issue, that we also spend a little more time on the cost of doing business in California because I'm not convinced we have correctly articulated the amount of dollars associated with the cost of doing business.

I mean, on the refining side, it's two times the cost of doing business in the rest of the United States as a refiner. I know John has the list we heard about on the cost side that I don't think is reflected here. So as the onion gets peeled here, I think we are definitely looking at it, and I hope the Committee will as well.

We're going to encourage the Energy Commission, too, in its fuel transition study, which is going to be, by the way, a very important piece of this puzzle is that study they'll be undertaking. And so I think you heard today that it's certainly not refinery margins, it's downstream of the refinery, and as we begin to see what those costs are and continue to look at it going forward, hopefully that will bring some additional explanation.

So just speculation at this point? No knowledge? You don't have any knowledge running WSPA of any of the $1.30 being associated with expanded refiner profit margins?

No, and in fact, I couldn't and shouldn't for, as you know, antitrust reasons, we would have no information on that specifically, but I would say that, again, you heard today all of the components that go into that.

Yeah. No, we heard, and I heard from some industry representatives their take and from others, too, but specifically about, say, the October 7th drop that's noted in one of the charts here, from a 60 cent refining margin down to 36 cents. So basically cutting that in half immediately after the Governor announced a special session that we're currently in?

Well, actually, what happened as a result of the Governor's action on the waiver of winter to summer blend is why the market reacted the way it does because it cost less money to make winter blend, and the market took advantage of having a reduced price. Nothing to do with a press release. It had to do with a waiver that brought more supply, more affordable supply to market.

When did that supply come into the market? Later in October is my understanding. I thought, like, at the back end of October, and this drop was before that blend actually came online. So I'm just trying to put those facts together because if you're saying it's just supply and demand, it doesn't quite line up with the timing. And at the Valero, that's specifically a Valero issue, too.

The other thing I would say, Senator, is--and to the Committee--I have not heard this entire day or afternoon about the reduction in earnings from these companies in 2014 and 2015 and 2020, the billions of dollars that were lost. When you look at an annualized three-year period, five-year period, which is how anyone looks at earnings, we are well below S&P 500 companies, IT companies, communications companies, health care industry.

So I would imagine this Committee is going to be just as interested in those earnings that are well above this industry's when you take into fact it's a cycling industry and there are ups and downs, and that's how you should look at earnings. That's how you should look at return on investment. It shouldn't be snapshots of three points in time.

In other words, the profits that were derived during this last cycle, there was a pressure on the oil companies to collect those large profits to deliver shareholder dividends because they hadn't collected that price?

No, it's just basic market supply and demand. The price goes up, the price goes down. It's based on supply and demand, and that's for every commodity, any global commodity, and that's how businesses operate.

So you would assert perfect competition in this marketplace? Then it's a perfectly functioning market?

I think competition is very good in any marketplace, and I think, as another panelist mentioned, I am concerned over the state's allowance of reduced gas stations throughout the state taken by local cities and counties. This is not increased competition. This is not the direction we should be going and limiting gas stations during this period of time.

Senator Gonzalez.

Thank you very much. First, I have a question for Mr. Court on the virtual line here about--and thank you so much for your presentation--about the 50 cent cap. Have there been discussions about potentially a range in that cap?

I just leveled it off at 50 cents for the purposes of showing how extraordinary that line was that only three times in the last 20 years it was exceeded, but I think the legislation itself does taper in the penalty. And what the Governor's Office was presenting today is a little different, too. They were talking, I believe, about in a day when that refining margin goes up, as opposed to looking at it over a period of time. But the principle is the same. If you set an upper limit where there's a penalty, you keep it within a fair playing range.

Okay. Thank you very much. And can you just go over--I know that you had one slide regarding the polling about Californians and about two-thirds of Californians. Can you just go over that a bit? And then what are they attributing these excessive profits to?

Well, in the poll that we did, they believe it's price gouging. They believe it's price gouging more than environmental policy or taxes, and they believe that it's the oil companies penalizing them, and that's why they want to take that money back. And in the poll that Binder did, he broke it down a little bit more by demographics. The thing about the demographics are it is across the board, largely in almost every demographics except for white Republican men that support this penalty.

Okay. That's what I'm seeing, too. Across various generations: Latino, Asian, African American, regional, it seems to be the same. Overwhelmingly 60 percent support this.

And that's after the arguments against it as well. That was the interesting thing. We gave arguments for, we gave arguments against, and the vote after the arguments against still came out over 60 percent.

Okay. Thank you very much, and then I have a question, of course--a couple of questions--for Ms. Reheis-Boyd as well as Mr. Wenger. I think you'd mentioned, Ms. Reheis-Boyd, about your fiduciary responsibility to--

Not incur taxes and fees. So can you explain, not until violate the law. Okay.

Can you explain what, so if you have a cap in place, we cannot violate the law. And so refiners will have to make decisions onto how to make sure they have a fiduciary responsibility to comply with the law. And so, again, this policy is not one that we believe will have.

The intended result that you would all expect. And so, I think there are better ways, as we've discussed, to look at the price pressures at the pump, which is, I think what we're all here for. It's not about earnings or profits.

It's about relief at the, I think, you know, we've talked about ways to deal with that, including improved infrastructure, include permitting, include support for ccs and hydrogen and renewable diesel or renewable natural gas, all of which our companies are doing in spades, and to do things in the immediate term when price spikes happen, like waiver on winter to summer, perhaps looking at something on improved competition, as one of the economists had mentioned, from bringing carbon into the state, which is very difficult because not many produce it, it takes a long time to get here.

So there's things I think, like that to really explore as we peel the onion. But this Bill is not one of them.

And so I guess my last question to both of you is, given your fiduciary responsibility, as you claim, and knowing that over the last year, it seems pretty clear to me, $200 billion is quite a lot of money for five of the largest oil companies to be making while Californians were paying the most at the pump across the country. I mean, do you not find this excessive? And if you don't, why not?

Again, I think I answered the question previously. You look at earnings over a period of time, and our earnings are well below many, many of the S&P 500 companies.

These are historic earnings, though.

No, they're not that historic. They're in the last three annualized years. So if we haven't submitted that material to you, we will, because those graphs and data are readily available, certainly from the Federal Government and the state government. So again, I think as we look at this issue, let's really focus on relief at the pump, and it is not through a price cap as proposed in this Bill. There are other ways to deal with relief at the pump, and this is not one of them.

Mr. Wenger, would you like to respond?

Yeah, I can't speak to the five companies I represent, the 12,000 small mom and pop gas stations in the state, but I think those are results of prices going up, not the cause. The cause is very clearly lack of supply. And every time we see something happen at a refinery, unplanned maintenance, where the supply suddenly goes down, we see the spot market increase. We see traders Jack the price up.

And it's an extremely volatile market for our folks at the retail level trying to figure out how the market is going to work. One marketer told me in San Francisco, there's such little liquidity there that one trade could impact the price significantly. So it's a very difficult thing to predict at the street level.

Well, my last comment, it's not a question, it's the last comment. It is a lot of billions of dollars, 34 billion in lobbying last year, 20 million spent to overturn a law to protect health for Californians, and 20 million in signature gathering to overturn this law, along with additional $50 billion just with Exxon for stock buybacks.

I would think that those dollars, billions of dollars being spent on this could have been used to actually support Californians, to actually been used to provide competition here to transition, as we've been talking about. And I don't see that. And so this is why we, I think wholeheartedly we need to ask these questions and find out more from each and every one of you on data and the transparency that is needed for every californian.

With all due respect, Senator, we have and are investing billions of dollars in alternative renewable fuels, in hydrogen and ccs and everything this state needs to meet its climate change goals. We are not opposed to those goals. We just think there's a more affordable path to get there. And we are not involved in funding the referendum. WISpA is not involved in funding the referendum. My Members are not involved in funding the referendum. That does not mean we support setbacks.

We just support them that are based on science and facts. But we are not involved in the referendum that you're referring to, and we are not spending dollars supporting it.

Well, the SB 1137 had a slew of panelists, scientists that did, in fact, state that a setback was needed.

There are just as many scientists that have alternative views.

Thank you, Senator Ashby.

Thank you very much. And while I appreciate the previous two sets of panelists, this panel is probably just a little more my speed, really clear who you're with and what you stand for, all four of you, and passionately advocating on behalf of your organizations. So easier for me to sort of walk through. And I appreciate that. And I particularly appreciate to the balance on this particular panel, Ms. Boyd and Ms. Siegel, if you hadn't shown up today, we would have heard from nine men panelists.

And I'm glad to see you both. So thank you for being here and taking some time and bringing your expertise, both of you, all of you, to the equation. Mr. Wanger, you are not wrong. I come from local. You know, three months ago I was a vice mayor, and today I'm a Senator. And it is not easy to open a gas station in a big city in California. And I don't even know if it's possible for a small independent right now. That would be really.

There is. You make good points, all of you. And I really, actually quite enjoyed hearing the passionate display from all four panelists, including the two on Zoom. It comes across. Mr. Cortimus Siegel, in case you were wondering, you sound just as passionate across the screen as they do here in person. I do have one question, and it's really just because, actually, after all this time today, I haven't heard it addressed. And Ms. Boyd, it's probably best posed to you in the governor's proposal.

Part of what he talks about, or part of what I've heard a lot about is around when the refineries can shut down for maintenance. I understand that needs to happen. That's obvious. Also understand that there could be a variety of reasons why that needs to happen. But I've also heard part of the discussion be around if multiple refineries shut down at the same time, that creates a supply issue. I've also heard many people tell us today that this is about a supply issue.

So wouldn't there be some rationale in at least coordinating and discussing when refineries would shut down so that they didn't all do it at the same time or so that the state could plan for such an instance. To me, that seems to be a conflicting issue here. Can you help me better understand that?

Yes, that's a great question. Thank you for it. Our companies report turnaround information to the Department of Industrial Relations. Other information is reported to the Energy Commission. As you know, on the market side, often the Energy Commission calls our Members and asks these questions, and there's informal conversations and sharing of information. That is Pyra protected.

And I think the biggest issue for us is as long as, and it should be for this Commission, and I think the Energy Commission and the Attorney General would agree it should be protected under Pyra.

And so if that is some information and coordination between those two agencies that need to occur, we certainly are very open to talking about that on the transparency side, even with SB 1322 Senator Stern, with all due respect, although we didn't support the Bill, and we didn't support the Bill not because of the Bill itself, we didn't support it because it had the clarity it needed for our companies to give the data that actually would benefit the Energy Commission in some consistent manner.

And so we received letters from the Energy Commission encouraging us to request a rulemaking, which we did in a letter to them. Whisper received this letter. Every refinery received this letter. We responded in asking for a rulemaking. I was called by the Energy Commission to say that wasn't the right process. And I said, okay, to know what is the right process, you need to petition. And I go, okay, great. How do we do that? They defined it for us. We petitioned.

I did briefings with every energy Commissioner except one who's still being scheduled, and our desire to provide consistency and data from the refiner so that the Energy Commission gets the information not from seven different interpretations, but that there is some data that's provided that can be of benefit. This was all in the spirit of transparency. That petition was denied in a 12 hour period after all the briefings had taken place.

And the answer I was given was, frankly, because there's information now in this hearing we're being discussed, and so we don't think we should spend time on a rulemaking. In 1322. I was appalled. I think when we talk transparency, we're all about it, and any assertions that we're not are totally incorrect.

This will be my final sort of question on it. I hear the frustration, but I also heard in there an openness to some kind of dialogue around coordination of when the refineries do maintenance and shut down, as long as you could be assured some privacy guarantees, which could potentially be helpful in this discussion, because you can't both say that it's supply and then also say that shutting off supply at the same time doesn't create the issue. So I appreciate that. Thank you.

You bet.

Thank you, Senator. Seyarto.

Seyarto Siarto. Thank you. Not a problem. Well, this has been an interesting day. And I could summarize what I've learned today by just saying that obviously there are 1000 different opinions about the oil industry, about what's causing high gas prices, about the effect it's having on, on our people and our energy policy, essentially. And that's really what it all boils down to. I'm not going to rehash the Bill from last year, but I do have a question for Ms. Siegel. Are you there.

Ms. Siegel?

Yes, I'm here.

Oh, she's still there. Ok. You're familiar with a lot of these cities that I'm going to list here. Long Beach, Signal Hills, San Pedro, Huntington Beach, Beverly Hills, El Segundo, Baldwin Hills, Culver City. And those are, those are cities that as a battalion chief I used to get to cover. And all of those cities are cities that I don't know that I would characterize them as minority or disadvantaged communities.

And yet most of the oil wells that we were aware of, we didn't have to deal with them very much, were all located in those communities. And the communities that were there, the houses that were within the prescribed distance that were supposed to be harmful were not houses that I could afford. I'm kind of curious, which of the poor communities are you talking about that you have found these oil wells that are doing this damage to our communities? Yeah.

So over 2 million people in California live within 3200ft of a toxic oil and gas well. And so, people from all walks of life live near these wells. So that is true. Everybody is affected, but these wells are disproportionately located in low-income communities of color that already breathe some of the unhealthiest air in the nation. Los Angeles in particular. Los Angeles has the country's largest urban oil field. It's children and the elderly that are most affected. Right. And so this is dirty, dangerous stuff.

You do not want to be living next to an oil well. People who live near this stuff, they get headaches, they get nosebleeds, they get nauseous. One young woman, Nayeli Kobo, who won the Goldman prize for environmental activism this year, she grew up next to an oil well. She had to sleep sitting up in a chair so she wouldn't choke on her own blood from the nosebleeds that she got from this toxic air pollution.

And over the long term, these chemicals increase your risk of cancer, they increase the risk of death from cardiovascular disease, and they even harm babies in their mother's wombs. And so it is so critical that we protect Californians from this toxic industry. California is one of the last states in the nation that did not have a health buffer between oil wells and homes and schools until Senator Gonzalez's Bill passed last year. So that's a little bit about some of the people in the communities that.

I'm talking about, and thank you for that. But I also know those communities quite well, and the people are not packing up and fleeing for their lives, and they've been there a long time. So in the villainization of our petroleum producing world. There's a lot of other products that are byproducts of petroleum, and they include medical supplies like ivs, iv bags. When you go give blood, the blood packets, those are made with petroleum products. Furniture, windmill, solar panels, tires, road material, cooking, food.

If we got rid of the oil industry tomorrow, what's your proposal for replacing all of those?

Yeah. So here's the thing about petroleum and where we are with this. Right.

Just briefly, if you can. I'm sorry. I know it's a long subject. We could do all night on it.

Yeah, absolutely. There are plainer, healthier alternatives for oil, for energy use. You didn't hear too much about it today at this hearing, but back in November, the CEC hearing, the air did a big presentation on the electrification of the vehicle fleet. Right. One in five cars. Well, in California right now is an electric vehicle. The transition is starting to happen.

There are alternatives, but the oil industry chose for over half a century to lie about the science, to lie about harm that their products cause and to block solutions. The world would be a very different place right now with much cleaner, healthier, safer alternatives had this massive disinformation campaign not be undertaken.

So I thank you for your question, and I would commend to you the references that I have put on your handout that talk about the scale of the disinformation, the lying, the astroturfing and the lobbying that we're up against. This is the richest and most powerful industry on earth. It has inflicted almost unspeakable damage in our climate.

Thank you. I think you've answered the initial question. Basically, there is no replacement for them right now that would cause a massive problem for us. And my point is this. We're making a transition to try to be more environmentally conscious. We're trying to do things that are healthier for our communities, but you can't do them overnight. And what we are experiencing right now with our oil prices is not unpredictable.

These are things that we talked about a few years ago when they were talking about we're going to move tomorrow to do all this stuff. Well, guess what? You've just created a market that is highly sensitive to us pulling back on the things that we're used to, which is oil and gas and things like that, and making those prices spike. And we really don't have anything to replace them yet. And we make, by the way, those EV vehicles are made with petroleum products.

We don't have anything to replace it right now. We need a better energy policy that allows us to make transitions to the point that we can, because we are not ever going to be non dependent on that energy source. For me, that's what I'm getting out of this, is we need to be more cognizant of the transition that we're making and be more responsible about it, because there is way too much collateral damage.

And that collateral damage is our people out there paying $7 a gallon for gas, me paying $550 for heating, because I did get my energy rebate of $50. Otherwise, it would have been $610. And that's going on all over, and people can't afford that. We have an energy policy that's creating that. And I appreciate the oil industry, I appreciate all of the other industries trying to address this.

But at the end of the day, we really need to reexamine the direction we're going in and try to modify that so that we can be more responsible to our constituents.

Thank you, Senator Mann.

Thank you, chair Bradford. I will respectfully disagree with some of the comments my predecessors have just made. I don't think this is the result of an energy policy. I think it's the result of an economic model that is clearly flawed. And I will just say earlier, in response to my colleague, Senator Stern, I think, Ms. Boyd, you said this is a competitive market. It's working just fine. I don't know how you can make that claim, given what I understand about this market.

There are five players in the refinery industry. Five players. Now, I want to read you the definition of oligopoly. I don't have a whiteboard, but I'll just read it to you. A State of limited competition in which a market is shared by a small number of producers or sellers. Five producers, I think, fits that definition pretty well. This is a thinly traded market, as we heard before from a witness who testified that there were no trades on the spot market in two weeks.

That is a market that is rife for manipulation. It's rife for coordination. And as I expressed earlier, I do have concerns about this proposal from the Governor. I don't think there's a smoking gun at this point. That being said, I think this is a broken market. It is one in which oil companies like yours were able to issue record share buybacks. I believe last year your company authorized $2.5 billion in share buybacks while my constituents were saying seven, $8 at the pump.

I don't know what planet we can live on and say that this is a competitive market that works just fine. As for the share price back in 2013. I know you go back to 201314. I just looked this up. You were trading at $27.03 in 2013. Today you are trading at $130.67. That is a model of a broken economic model. I think we have to do something about that. I don't think this is a problem of energy policy on our end.

I think this is a problem with a broken market. We have to fix it. And I do think we need answers and accountability here because I don't know where the blame lies. I've heard a lot of testimony today, but the fact of the matter is that a number of companies were making record profits. They were deploying those profits to their shareholders, which I understand is your right to do, but they were doing that in a very oligopolic. Thank you. You get my point.

Market at a time again, when my constituents, our constituents were paying outrageous fees that were bankrupting some of them. And I think at the end of the day, we cannot say that that is a market that works. We do have to fix it. And I do think we need answers at the end of the day. So I want to thank the chair for holding this. I want to thank the Governor for introducing this policy to jumpstart a conversation about what to do next.

Because I do think we need answers. We need solutions so that my constituents, this situation never happens again. I'm sure you can understand the optics of you guys making record profits at a time when prices at the pump were ridiculously high. That's something that can't happen again. We got to fix that. So that's really not a question so much as a comment. I guess I would open it up if there's any reactions from any of the witnesses.

As Senator, thank you. I appreciate you listening today and keeping an open mind to the complexity of this issue. And thank God we have five companies because we used to have 19. And it is a difficult place to do business. And we have lost many participants in the market because of that. And so those that remain are here to supply the California market and meet demand. That's what they do every single day so that this state can continue to move and that it's not shut down.

And in 2035, we're still going to have 83% need for gasoline, 76% need for diesel. We've got a long path to go on this. So I appreciate also chair and the Committee for holding this because we've got to figure it out. Like I said at the end, I still think we're more united than we are divided at trying to make sure we find relief at the pump, which is what this is about.

Do either of the other witnesses on the panel have any thoughts on this?

We're trying to move along. So if they have a quick answer, please.

I just wanted to say I think that there is obviously a refining problem, but I also think there is a mystery surcharge problem, and I think the refining problem is easier to deal with. The mystery surcharge problem. I fully support the idea of going into those contracts between the refiners and the retailers and see what's going on. I suspect you'll find that there is actually a kickback or some type of contract that gives the refiners money back from the retailers.

But that is going to take investigation. I support that investigation. But while we have them in a year where there is huge differences, we really need to make it happen this year at the refining level and deal with the refining surcharge this year and the mystery surcharge next year.

Thank you. If you're going to answer real quick, Mr. Siege, go, please.

Yeah, it is really alarming that we can have this price gouging going on while gasoline demand is actually declining. And so I thank you for your time on this issue and this incredibly important proposal, and I urge you to move it forward as quickly as possible, because the types of price gouging and problems and disruption that we're seeing is going to continue unless the oversight is increased and the industry is subjected to the strongest possible regulation that's going to protect Californians. Thank you.

Thank you. And I'm going to thank our witnesses, because I know we have to move to public comment, but I do want to take exception to what was said, as well as painting this as communities of color, because there's not a single oil well or refinery in a community of color, with the exception of Baldwin Hills. And that's a multimillion dollar homes, and it's been known as the Black Beverly Hills for the last 50 years. And it's being gentrified every day.

So it soon will not be an African American community. But to continue to say that this is in poor and minority communities, I just take exception to that, because El Segundo is not a minority community. Torrance is not a poor minority community. And I can go on and on and on. So, anyway, I want to thank all of you. And we're going to now move. And so we're going to move on now to public comment.

I'm going to thank everybody for their testimony and the presenters, those who would like to participate in public comment, we're asking you to dial the toll free number of 877-226-8163 that's 877-226-8163 and access code is 440-0595. That's 440-0595. And now we'll move to those witnesses here inside of room 1200 who wish to participate in public comment. I would ask that you limit your comments to 1 minute, please.

I know you've set through a lot today, but we want to make sure that everybody has the opportunity to address the Committee. So you may start your comments now. And moderator, can you let us know how many folks you might have queued up on the line that will want to talk as well?

Thank you, Mr. Chair. Anyone who wishes to make a comment, please press 1 and 0 at this time. Mr. Chair, it appears that we have at least seven or eight people who signal bell wish to speak.

Okay, so we'll start now with witnesses here in person and 1200, please.

Thank you, chair and Members Melissa Romero with California environmental voters. We're here today largely because of a lack of accountability on an industry that uses their unlimited dollars to lie to the public while simultaneously convincing them that they're helping them. Meanwhile, the pay gap between oil executives and workers in the industry grows. We need legislators to have at the forefront of their minds as they legislate the fact that the oil industry spends the most on lobbying by far.

Wispa alone spent 11.7 million in lobbying last legislative session. Chevron alone spent 8.6 million. This is the same industry sitting on unused federal oil and gas leases while they pay for ads across the country asking for more. This is the same industry that buried the science that fossil fuels are causing climate change. The same industry that has shifted away from climate denialism to delay tactics and greenwashing of other fossil fuel based fuels that go by different names.

The same industry that opposes electrification and the same industry that's spending millions to undo SB 1137 to implement health and safety buffer zones between active oil drill drilling and children's daycares. It is deadly that the oil industry continues to flat out oppose every single policy effort to make progress on climate action, but the scales will continue to be tipped in their favor at all of our expense.

The Legislature has a responsibility to ensure that we're not just addressing the problem in front of us, which is to address the exploitative behaviors that the oil industry has used and the unexplainably high gas prices over the last year. But the Legislature also has a responsibility.

You're at 1 minute. I hate to cut you off, but you're at 1 minute.

Thank you.

Thank you. Thank.

Thank you, Mr. Chair Members. Mike Monaghan, on behalf of the California State Building and Construction Trades Council. The building trades represent 500,000 men and women in construction, and we are opposed. We think this legislation will result in rising gas prices. We think the legislation will cause refineries to scale back their operations and certainly will cost our Members as jobs. Thank you. Thank you. Next witness.

Hello, Senators. I'm Megan Shumway. I'm a retired nurse and public health nurse. I'm for a penalty to be levied because there were three refineries that shut down shortly before last summer's spike. I know that they knew full well it would cause a price spike in the gasoline prices. And when gasoline prices go up, the price of everything goes up.

So this is an example of plain and simple corporate greed taking profits on the backs of Californians, and it needs to have a limit on how much they can do. That 1700% profit over last year's profits is not acceptable. It just is too much. I'm really appalled that there's not more transparency. I'm hoping you can get some more transparency into this industry and do something about it. I grew up in Los Angeles and I have asthma, so this is something I know about personally.

And it's especially egregious that they're taking profits on people like they are, and it's hurting everybody because it's causing inflation. They're actually driving it with their extreme profit taking, because when the prices go up in gasoline, everything goes up. Thank you.

Thank you. Next witness.

Thank you for your time. Hi, my name is Sakira Carter with Sierra Club California. On behalf of over 500,000 Members and supporters, Sierra Club California supports SBX 12. Thank you.

Thank you. Next witness.

Good evening, Sharon. Members, Rebecca Marcus, representing the Consumer Protection Policy center at the University of San Diego School of Law. We urge the Legislature to pass the price gouging penalty to protect Californians from unjustified price hikes and stop oil companies from ripping us off in the future. While ensuring a fair and competitive marketplace, oil companies are severely overcharging Californians for gasoline and pocketing the profits. Last year, californian consumers paid a 23% price hike at the pump, while shareholders reap the rewards.

As you know, high costs at the pump translates to higher costs for Californians to do everything everyday things such as drive to work, go to school, and to buy essential items such as groceries. The price gouging penalty would establish aggressive transparency measures to hold oil companies accountable and prevent price hikes from happening again.

It will also ensure the CEC and the CDTFA have the ability to investigate and obtain more information from oil companies, helping the state to evaluate costs and profits and pricing in California's gasoline markets. These measures will make oil companies play by the same rules that other industries in California must do and protect consumers from anti competitive conduct and unfair or deceptive acts or practices in the industry. Thank you.

Thank you. Next witness.

Thank you, chair and Members, my name is Raquel Mason. I'm here with the California Environmental Justice Alliance and CEHA Action. I'm here today to share our strong support for this proposal and stress the importance of holding these oil companies accountable for their undisguised greed and at the expense of California consumers. For decades, these same companies have polluted our neighborhoods and threatened the health and safety of Low income communities like Richmond, where a refinery is based.

It is clear that the oil industry's bottom line is their investors and amassing unprecedented wealth. Implementing a windfall profits cap will put an end to these tactics and continue to signal to this industry California's intent to a healthier and regenerative future. Thank you.

Thank you. Next witness. Thank you, Senator Bradford, for having this hearing today. It's very important hearing. And Senator Skinner for introducing the Bill and for the Committee Members for listening. My name is Keith Imamoto, representing California Alliance for Retired Americans. We are in strong support of SBX 12 and reason being, I think we've, in unanimity, have heard everyone speaking that there is a problem in gas prices and we need to address it.

And for all of you Senators, when you think of, when you introduce a piece of it, what piece of legislation is going to cure every single element of that issue? So the Governor and Senator Skinner have introduced a Bill that is going to address one part of it and an important part that's going to reveal a lot of good information that's going to hopefully mitigate some of the gas prices that we have seen.

And at the same time, it is affecting every single one of the Californians and most disproportionately, those in Low income. And one footnote, the Low income people have lot less alternatives. As you may very well know, electric vehicles cost $15,000 more than or $10,000 more than average. And that's why when you pass legislation on it, you wanted to provide more incentives for Low income. And that's in the books in the State of California right now. You are providing additional incentives for Low income people.

And that's a good thing. So let's be real. We're not going to cure everything from this piece of legislation. It is definitely taking the right step forward. Thank you very much. Thank you. Next witness. Aloha, chair and Members, my name is Mitchell Bechtel. I'm representing the district council of ironworkers. So we're respectfully in opposition. We think that the gas tax doesn't have the sufficient evidence to provide relief at the pumps, which is ultimately the goal here for all of our constituents.

We also think that a disruption in the oil and gas market is going to cause layoffs for blue collar workers across the state. Thank you, guys. Thank you. Next witness. Thank you. Good afternoon. Chair and Members Brady Van Engelen with the California Chamber of Commerce. Cal Chamber is particularly concerned about the precedent that the windfall profits penalty will set for the larger business community and the message it sends to the business community.

There's genuine concern that this basically establishes a playbook that the Legislature will use to determine what's a reasonable profit to do business in California. As we heard earlier today, too, we have the benefit of history to suggest that this approach has not really garnered the meaningful results when tried in the past. It's not clear what's different this time around to suggest that there's going to be any kind of different outcome.

Further, this approach would limit the very capital that's needed to transition to cleaner energy solutions that will be needed to achieve our ambitious climate goals moving forward. For these reasons, Cal Chamber, representing of our 14,000 Members respectfully opposes the windfall profits penalty. Looks forward to continued discussions on how best to achieve affordable, reliable, lower carbon energy solutions now and in the future. Thanks. Thank you.

Peter Blocker with the California Taxpayers Association, and just wanted to add that under our analysis, under Prop 26 and subsequent legislation, what the courts have laid out, we believe this, what is referred to as a penalty is in fact a tax. And we think it will function like a tax and add costs the way taxes do. Californians currently pay the highest gas taxes in the country, and those taxes are going to go up in July again.

And so we think that should be in consideration, and we do believe that this will not provide relief at the pump. Thank you. Thank you. Next witness. Good evening. Chair Bradford. Members Dean Tally with the California Manufacturers and Technology Association, or CMTA. CMTA works to improve and enhance a strong business climate for California's 30,000 manufacturing, processing and technology based companies. At CMTA, we represent nearly 500 companies across the state and 1.3 million Californians.

We greatly appreciate the opportunity to give comment, the attention of this Committee to give to this issue and the thoughtful discussion today. CMTA testified in front of the CEC on this issue last November. The largest factor of petroleum fuel prices is the price of crude oil, which is a globally traded commodity. Other factors, including operating costs, availability of logistics, pipeline capacity, local, state and federal taxes.

It is extremely important with the ongoing demand for industry to have a reliable source of gas and diesel, limited supply options, Low inventories, a declining refining capacity, fewer sources to obtain California's unique blend of fuel. CMTA we're committed to collaborating with the California legislations on these solutions in our states. However, this proposal will increase our manufacturing costs and make our sector less competitive. This proposal will help stall future innovation and financial expansion and have an unpredictable impact on the state's economy. Thank you. Thank you.

Next witness.

Hi, my name is Elon Caslata and I'm the President of 350 Sacramento and also with Oil and Gas Action Network. You heard a lot of statistics and graphs and things today, and I just wanted to pull an excerpt from CEC data that to me best exemplifies the issue. This shows from one year, October of 2021, October of 2022, we see that the price of crude oil is about the same. We've seen that the taxes and fees are about the same.

We see that retail is about the same cost. What we see is the difference in refinery profits and costs. I doubt that their costs went up that much, but what did go up? Their profits. This is the problem. And that is a problem that this Bill is going to address. We know that refiners make 30% more in California than they do in the rest of the country. And they do this because they can. Or is it because California is trying to push leadership into this space?

Are they trying to punish us? I think that's the mystery. Surcharge is the California tax of just trying to lead the way. They use these excessive profits not just to stuff the pockets of their executives and shareholders at the expense of working California families, but also to manipulate our economic, political and democratic systems, supercharging inflation and lying to voters in order to repeal health and safety protecting laws that they don't like.

Thank you.

So, Committee Members, I implore you to support this Bill.

Thank you. Next witness. Hello, my name is Thomas W. Yates. I was born and raised in Sacramento. And like Ilanka, I would like to say that the mystery has been solved. The great mystery. The oil industry raises their prices because they can. There is not a lot of competition for oil worldwide. We have high hopes for evs and alternative power, but right now everybody around the world is dependent on oil.

The oil industry is the most powerful entity on earth because they get some of everyone's money. They are running the show. They can do what they want. Okay. It is up to our democratically elected government to stand up to this most powerful of international cartels, the oil industry. They are solely focused on growing their profits through the market. And the market has no moral rudder. Okay. My Punjabi friend who owns a gas station does not dictate the price of the oil. Okay, thank you very much.

I support this Bill. And if environmental regulations are so rough on oil, the oil industry, why are their annual profits so obscene? Thank you. There's no further witnesses here in room 112. I mean 1200. I'm sorry. We'll move now to the phone lines. Moderators, can you now prompt individuals wishing to testify and make public comment? To begin, the moderator will now ask all individuals interested in testifying to press one, then zero. And moderator, can you please give me the total number of people wanting to testify?

Mr. Chair, we have at least 20 people who have signaled that they wish to speak. Okay, thank you, moderators. So if you would please open the lines and we can start taking calls from the public on this issue. And we'll continue now. We're going to start with line 10. 4104. Your line is now open. Thank you very much to this panelist and to Senator Bradford. My name is Reverend Jonathan Mosley from Los Angeles representing the National Action Network Incorporated.

As the western regional Director, I'm here in strong support of a price gouging penalty and additional transparency on big action is needed now or else big oil will fleece Californians again this summer and fall. Current lack of regulation allowed all companies to hike the price of gas in California to $6.42 per gallon this fall, a historic $2.61 more than the national average. If we don't act now, we know Big Oil will keep doing this to Californians. Thank you very much. Thank you. Next caller, line 117.

Your line is now open. Hello, my name is Michael Sword calling on behalf of the Los Angeles Clean tech incubator, or Lacey. Lacey strongly supports this Bill which would establish a price gouging penalty on oil companies excess profits to deter excessive price increases. During q three of 2022, oil companies recorded $1.0 billion profits at the expense of hard work in California. These profits were then used for shareholder buybacks which benefit Wall street investors and executives who received multi $1.0 million raises.

It is incumbent upon the Legislature to take swift action if these oil companies are unwilling to provide a transparent explanation for last year's price spike. Lacey is in strong support of this measure. Thank you. Thank you. Next witness, line 122. Your line is now open.

Thank you. Good evening. This is Farah Khan, mayor for the City of Irvine in Orange County. I'm here in strong support of a price gouging penalty and additional transparency on big oil. It is absolutely an injustice to our residents and workers that oil companies raise their rates without any justification or oversight. In Irvine, we saw some of the highest rates this past year, almost reaching $8 per gallon, causing financial hardship for so many. We cannot let that happen again.

It is also shameful that when the California Energy Commission held a hearing, all five oil refiners rejected the invitation. We need the state to expand the authority of the CEC and the California Department of Tax and Administration to investigate big oil companies and provide transparency and accountability. We cannot live in fear of these oil industries leaving California or not providing enough fuel. But we do need our state legislators to protect California residents and workers.

I would like to let my residents know that they will no longer be taken advantage of at the pump. Thank you.

Thank you. Next caller, line 57, your line is now open.

Hello. Your line is open. We can hear you. Go right ahead. Hi, my name is Susan Pelican. I am a registered nurse and an organic farmer from Woodland, California. And I support this proposal because it's outrageous to me that the fossil fuel folks have so much money that they can decide elections, they can support candidates and spread more lies about the progressive candidates that get defeated. Also, I feel that they are in large part responsible for the climate emergency that we face altogether.

And I cannot fathom why they and what legislators in California and Washington aren't really up for important changes, but I think it's because of the money that they can raise without any limits. So I believe that to start the engine on climate emergency and on government that represents the people they propose, they get elected by that. This is the first step.

Thank you.

Very important.

Thank you. Next witness, line 99. Your line is now open.

Hi, my name is Marjorie Namoini. I'm a physician speaking on behalf of Physicians for Social Responsibility, Los Angeles and San Francisco Bay chapters in support of windfall profit cap. The oil and gas industry puts people's health at risk at every stage. From drilling to transport to processing and burning, Californians already pay a high price with their health. Fossil fuels are also by far the greatest contributor to global warming, the greatest health threat we have ever faced.

Oil refinery's third quarter profit was 30% higher in California than elsewhere in the country affecting California's ability to show up for their health care, pay for their food and medication. Oil companies have consistently used their profits for misinformation and blocking health protective measures such as SB 1137. The oil industry has engineered our dependency on fossil fuels and that is killing us. We need you to protect the public. We need you to protect the public health. Thank you.

Thank you. Next caller, line 66. Your line is now open.

Hi, my name is AMI Raval. I'm here representing the Asian Pacific Environmental Network, or Apen, which is a grassroots organization that works with Asian immigrant and refugee communities on climate and environmental justice. I want to push back on the comments that refineries are not impacting poor communities of color.

We are organizing in Richmond and Wilmington, where Chevron, Valero and Philip 66 are refining, and these are absolutely poor communities of color that are seeing the daily impacts on the fence line of these facilities, whether it's chronic air pollution, oil spills, flaring and explosions. We express our support for this penalty as a key piece towards oil industry accountability and an immediate term response. And at the same time, these price spikes are a product of uncoordinated supply and demand.

So we would like to see, we're compelled by the bill's inclusion of an interagency process to plan for the state's transition away from oil. And we hope that workers and communities most impacted by the oil industry are at the table for this planning process because we need the state to play a role in achieving a planned, coordinated and managed petroleum phase out and a future beyond oil for California.

Thank you. Next caller, line 48, your line is open. Good evening, Chairman Bradford. Thank you for convening this meeting. And I, too, believe that we're close together than apart. I am the Timothy Jeffries, the international representative of the boilermakers, representing the boilermakers in Northern California. And I believe it's been said that the issue is supply. If the issue of supply. We address the issue of supply downstream, wherever that may be.

I think the supplier spoke to it being downstream, being a downstream issue at the beginning of the meeting. It was the first action, was no harm to the consumer, and I'm just not sure that in its present form, this is it. I think you need to go back and speak to some more investigating that was mentioned earlier. That's definitely what's in line. As it is right now. This is not it. So I think it has to go back and be looked at.

Again, I want to thank the Senator Bradford, because when you made your comments regarding the communities of color, when I hear that. I always think I'm offended because that doesn't represent my community as well, too. So thank you for making those think. Originally I had a question thinking that you're at your 1 minute, so make it quick. Based upon the spike Heights, what with the refiners have been charged based upon those 21 and 22 price hikes.

If anybody want to answer that question, thank you for my time. Thank you. Don't know if anybody's here to answer that question and I didn't hear it quite clearly. Anyway, next caller, please, line 120.

Hello, this is Theo Martinez speaking on behalf of UC oil and San Diego 350. We believe we need a price gouging penalty to discourage detrimental price hikes from happening in the future and to provide much needed oversight and transparency to hold the oil and gas industry accountable. At the moment, big Oil uses the profits from polluting our communities to ensure they can continue doing so.

Last year, oil companies spent millions to crush SB 1137, a public health law that would end dirty oil drilling in operations in neighborhoods. They paid for an army of petitioners to stand outside grocery stores and gas stations across the state. Many of these paid petition signature gatherers spread lies about this public health law. The petitioners told Californians that setbacks will send gas prices soaring, but we know that overturning these vital health protections won't bring down gas prices. Price gouging penalty, however, will.

The fossil fuel industry has a history of protecting their bottom line through any means necessary, using their dirty money to undermine democracy and misinform the public to continue raking in profits. The price gouging penalty would take steps to hold them accountable for this. In fact, just the threat of the law has coincided with oil companies bringing prices down. We desperately need this price gouging penalty to make sure big oil can't Jack up prices again in the future.

We strongly urge the California Legislature to stand on the side of the people and stop big oil's greedy price gouging. Thank you.

Thank you. Next caller, line 118. It line 118, your line is open. We're going to move on to line 121. Thank you. Next call.

Hello, my name is Cesaragu. I'm a community organizer with the Central California Environmental Justice Network. I know what it's like to live in the shadow of the oil and gas companies. Just today I reported a refinery in Lamont for spewing black smoke. That refinery has a monitoring system that's supposed to be live, yet there was planned maintenance when this black smoke was spewing from the refinery. I know that refineries cannot be trusted to protect community Members and they cannot be trusted to protect our economy.

They will work at any ends to make sure that profit is their bottom line. And the California economy cannot depend on someone, an industry, that lives on corporate welfare and also causing a big discrepancy between the price of gas at a national level and here in California. The refineries need to be held accountable and we cannot trust them to do so themselves. So I support price gouging penalty to make sure that Californians are protected before refineries.

Thank you. Thank you. Next caller, line 114, your line is now open. Good evening, this is Steve Wallach on behalf of poet biofuels. Both. Poet is one of the largest world's largest producers of biofuel and global leader in sustainable bioproductics. We also share the concerns about high fuel prices in California.

We do want to urge the Committee to consider measures, in addition to the windpaw penalty to reduce gasoline prices in California as well as lower greenhouse gas emissions and cut petroleum consumption by increasing the availability and use of sustainable biofuel blends. One thing that's unique about California is that California and Montana are the only states that do not allow for the use of e 15 biofuels. Currently, ae 10 is used in California, which is 10% ethanol. E 15 would be 15% bioethanol.

It's not permitted, but with the use of e 15, we can reduce prices at the pump. Studies have shown from last year that the difference between e 10 and e 15 was gallon less. The differential on that, as well as when gas prices increase that differential also increases so that the savings by using e 15 grows as petroleum prices increase. E 50 is also more important. All right, you're at your 1 minute. Okay, thank you. Okay, thank you. Work with you. All right, we'll work.

Line 119, your line is open. Good evening, chair and Committee Members. I'm Contra Costa County Supervisor John Joya from Richmond and serve on the Bay Area Air Quality Management District Board and previously served on the Air Resources Board. I strongly support the Governor and Senator Skinner's price gouging penalty Bill. My support is based on 24 years of experience as a supervisor representing EJ communities in Contra Costa County.

The diverse communities I represent have been impacted by refinery pollution and have been heavily burdened with the increasing cost of gasoline. I regularly hear their frustration about how much more they pay in fuel costs despite record oil company profits. This is not fair or equitable. The governor's proposal will provide relief to those communities which have paid the cost of living near the facilities that refine gasoline for drivers throughout our state. This price gouging penalty Bill is long overdue for frontline impacted communities. Thank you.

And thanks to Senator Skinner, line 128, your line is now open. Thank you. Hello, I am Dr. Randy Viegas from Visalia, California. I am a Professor, an elected trustee for the Visalia Unified School District, and a resident of the Central Valley. I'm here in strong support of this price gouging penalty and increased transparency on the oil industry. Here in the Central Valley, we have some of the worst air quality and health outcomes in the nation.

Our residents have some of the highest poverty rates in the state. Higher gas prices disproportionately harm those Low income communities and communities of color. And, yes, for those few Senators in denial, those communities exist in your district and all across the state. We can no longer allow blatant profiteering which exploits some of the most vulnerable populations in California. Instead of keeping prices fair for consumers, big oil has kept their prices high so they can rake in these record profits.

And all that money and billions goes towards investors, staff, bonuses and shareholders. We need to rein in big oil and protect working class families. Committee Members, I urge you to support this Bill and put people above profit. I urge you to put families before refineries, and I ask you to prioritize all Californians instead of the complicitness of the oil industry. Thank you. Next caller, line 130, your line is now open. Good evening, chair and Committee Members.

My name is David Fink and I am with the Los Angeles Business Council and we strongly support SBX two. The Los Angeles Business Council is a business advocacy and research organization representing over 500 Members across California. As the price of gasoline reached record highs, while the oil industry simultaneously reaped record profits, the cost of conducting business for businesses of all sizes within the state has become burdensome and made California less competitive.

SBX two would bring much needed transparency necessary to analyze costs, profits and pricing in the refining, distribution and retail segments of the California gasoline market. We support SBX two, which we hope will put an end to harmful market pricing practices. The burden of high gas prices is borne by all Californians and California businesses. SBX two will establish institutional protections that protect all of us against unfairly high gas prices. For this reason, the Los Angeles Business Council is pleased to support SBX two.

We thank you for your time. Line 46, your line is now open.

Hi there. My name is Riti S. Patel. I am representing the center on race, poverty and the environment. We are an environmental justice organization based in Kern, County, California, oil companies are ripping off Californians. A price gouging penalty or windfall profits cap is sorely needed to protect Californians from greedy polluters. California already imposes a cap on profits for other energy commodities like electricity and natural gas. We can and should do this for gasoline prices to protect consumers while ensuring reliable supplies.

Governor Russo and the California Legislature must hold big oil accountable and pass a price gouging penalty.

Thank you. Next caller, line 123.

Hi, my name is Maria Montes. I'm actually calling from the County of San Bernardino, which surprisingly hadn't heard anybody. I'm calling, I do support this price gouging Bill. However, we do need to find out what is that mystery taxes that we're being taxed on? There's so many things, I've heard so many comments back and forth. Of course, we hear about all the billions of dollars that the oil farnaries did. However, they're also pushing for electric cars and whatnot. Senators, I need you to understand.

Do you know how much the electric cars cost? Can we afford them? Do they know that there is a device they have to install in the house? How much does that cost? Electricity is going to go up. There's just so much that everything is involved regarding the gas taxes, raising our food. I have to personally limit myself on what I have to do with my family of four. So I urge you Senators, to please do what we voted you in there for. To help us Californians.

We have to help San Diego. They want to tax on the mileage for those who drive for us here. I hope it doesn't come here, but we urge you, Senators, to do the right thing. Help us Californians. We need to be more informed, all the Californians of all this gouging that's happening. The mystery tax.

Line 132. Your line is now open. Hello, this is Mayor Hernandez with the City of CoachelLA in Riverside County. I'm calling in support of the governor's price gouging measure just to remind everybody of the definition of price gouging. It's the action or practice of overcharging consumers for something by sharply increasing its price, especially in order to take advantage of the sudden high demand. And if you look at the last few years, that's exactly what's been occurring.

The real world impact on our constituents that we see on the streets is pretty profound. It's constituents who can't afford no gas at all because they need to pay for prescription drugs.

Constituents who can't afford no gas at all because they need to buy food when you take it all in, its totality, the inflation that we're seeing, the prices on, the increases in gas, on housing, on natural gas as well, the impact on the common folk is very severe on the streets here in Riverside County and especially our rural agricultural community. And that's why we're in support of this measure. Thank you. Next caller. Good luck. Thank you. Line 112.

Hi, I'm Bill Allio, Director of government affairs for the environmental Working Group. I was President for most of the hearings today and had to leave impressed by a lot of the testimony and great questions from the Senators. It's interesting that the industry falls back upon it's just supply and demand to explain this huge gap that they were unwilling to sit before the hearing last fall and answer questions and say, zero, yeah, I can't reveal proprietary information.

You know, that wasn't the reason they were in the hot seat. And now they are finally coming forward just to oppose the Bill. And some would say they spent a lot of money to get SB 1137 passed, and maybe they were helping to pay for that effort by jacking up prices. But the point is there's no explanation for the gap.

The Energy Commission staff has shown that absolutely, explicitly, and they won't answer the reason why and just say it's supply and demand, when worldwide supply and demand will cause those three year fluctuations in the revenue and profit that the head of WISPA said, when the crude crude prices are suppressed by OPEC and we're going to reduce production, it affects prices in the United States and the price accrued coming from Texas and California. Thank you.

Thank you.

We hope this is a tough Bill, but let's get it done. Thank you. Next caller, line 74. Hi, my name is Brian Sherwin, calling from San Diego. I'm with SD 350 and I've worked in the utility industry for 15 years. I strongly support this price gouging Bill, and I want to emphasize to the centers how angry people are. They're very angry, and we're not going to be okay with nothing happening.

It's very galling to be lectured by the oil industry talking about how their profits aren't going up. They are. And to be lectured by people who work for the Saudi Arabian government about how government can't play any role here. This is very important for holding big oil accountable. Thank you. Thank you. Next witness. Next caller, line 136. Good afternoon or good evening. My name is Igor Tregob, and I forbid chair of the Alameda County Democratic Party. I'm also a Ukraine native. We endorsed unanimously.

This item, SBX two refinery prescheduled maintenance, is not a credible explanation for the sudden dollar, 54 cent increase in what refineries charge for every gallon of gas Californians buy. Furthermore, the nerve of the oil companies using the war in my homeland to make exorbitant profits is inhumane. The people of Ukraine would not be suffering if Europe wasn't dependent on Russian gas. The people of California wouldn't be deciding what supplies not to buy because they have to fill up their gas tanks to get to work.

For security in the world, we need energy Independence from fossil fuels.

First. We need to ensure a windfall profit cap and rebate for consumers becomes law. The Legislature must see this as a national security issue and get it done. A resolution in support of this also passed unanimously at the last California Democratic Party meeting. Thank you, Governor Newsom, and thank you to our home Senator, Nancy Skinner, and all of you for your leadership. Let's work together and get this done. Thank you. Next caller, line 138.

Hi, this is ideology with Alienta, Coachella Valley. I'm just calling in to support for SBX 112 and to thank Senator Skinner for putting this proposal forward.

Here in the Cochella Valley, our community is particularly susceptible to the cost of living that's gone up, particularly also with gasoline prices going up and being able to go about their daily lives and also participate in civic engagement and be particular advocates, especially in this area, where a lot of them are concerned about what's going on with other environmental issues, such as the salt and sea. So we are strongly in support of SPX 112, and we thank you for the opportunity to comment.