Senate Standing Committee on Energy, Utilities and Communications

The Senate Committee on Energy, Utilities and Communications will come to order. Good morning. I want to welcome you all here today for the committee's, I should say, oversight hearing on SBX 12 related to transportation fuels and the bill adopted during last year's special session called by Governor Newsom to address gasoline price spikes. As Californians know all too well, gasoline is necessary for much of what we do on our daily basis.

And the reality is it won't change anytime soon, no matter how much we do and how hard we try. High gasoline prices can be crippling for residents, particularly for Californians on limited or fixed incomes and those who must commute long distances, whether it's to work, school, or just taking care of family. Sustained, skyrocketing gasoline prices has seeped into every aspect of our economy, driving up prices for consumer goods and services. The reality is price volatility in California transportation fuels market is not new.

It has existed for a long time. The crude oil that is used to make gasoline is sold in a global market that dictates the price per barrel, a price that can be affected by international events such as what we're experiencing in Russia, invasion of the Ukraine, or the current mass destruction in the Middle East, as well as instability in other oil producing regions on the globe.

While crude oil is sold and priced in a global market, refined gasoline for California's unique air quality protective blend is nearly exclusive, exclusively supplied by in-state refineries, refineries that were a couple dozen at the time that Jerry Brown authored legislation in the late seventies, early eighties, and now there are only nine refineries that supply the state. This is a blend that is more expensive to produce in order to reduce smog forming emissions, especially in the summer.

Many experts at our informational hearing last year noted California is an island when it comes to gasoline, an isolated market vulnerable to outages on the systems and other disruptions that clearly affects supply and pricing. We have no pipelines to deliver gasoline to the state like many of our neighboring states have. State and local policies limit in-state extraction, refining and storage capacities and retail outlets, which all affect price.

For over 40 years, the state has attempted in a variety of forms to get better handle on the complex gasoline market. There's been a lot of finger pointing among stakeholders. Some stand is to refineries raising prices. Others say it's the retailers are downstream from the refineries, and others are blaming state taxes and environmental policies that we, the Legislature, pass on a daily basis.

Today is an important opportunity for Senators and the public to hear from the Newsom Administration about the implementation of SBX 12 over the past year and all of the elements. We want to hear about, whether the added visibility into the market provided by XB 1, X 2 is allowing for greater understanding about the causes that can lead to higher prices at the pump.

We're particularly interested to learn about the main provisions of SBX 12, including the authority of the CEC to establish a maximum gross refining margin and penalty, the establishment of a new division of petroleum market oversight, the establishment of an independent consumer fuels advisory committee, the expanding reporting requirements by industry participants, and the increased monitoring and understanding of the market, the CEC's ability to impose refinery maintenance and turnaround requirements, annual report on gasoline prices, the transportation fuels assessment, and the transportation fuels transition plan.

We want to have the confidence that the solutions that we bring, that will bring relief to Californians at the pump are real and not just aspirational. As I noted last year, we remain committed to ensuring that our pursuit to address gasoline prices and any action we take does not cause more harm to consumers. Far often we shoot first and ask questions later. That's why it is imperative that this administration, administering agencies, provide the data necessary and reasoning to support the actions that we take.

Now, let's hear from our first presenters on behalf of the Newsom Administration. I want to welcome our Energy California Energy Commission Vice Chair, Siva Gunda, our new California Energy Division of Petroleum Market Oversight, Ty Milder, and the California Department of Tax and Fee Administration Director, Nicholas Maduros. Please welcome. When you're ready, you may begin.

Good morning, Chair and Members of the Committee, thank you for having us today. Here to provide you with an update on the implementation of SBX 12 and some of our initial observations and recommendations and options as we move forward as a state. I would like to just name myself for the record, I'm Siva Gunda, currently serving as the vice chair of the California Energy Commission. And I'm here with my colleagues, Nick Maduros from CDTFA and Tai Milder from DPMO.

And if you would like to introduce yourself yourselves. So then, going to the first slide here. Thank you, Chair Bradford, for really setting the context of much of the problem statement that we're currently working on. So, just as a quick reminder, as we go into the contents of this presentation on where we were last year and what we're doing to address some of the issues that were laid out by you chaired in your opening comments. So, as you mentioned, we are seeing price spikes.

We have seen three price spikes over the last five years. And last year, when we were here, the Senate asked us the question on can we shed light on what was happening? And we responded by saying, we don't really have the visibility, the current data, to be able to provide you with much information outside broad strokes. And we really thank you, the Legislature, for giving us the tools to improve our transparency.

And hopefully today we'll be able to establish the case for the problem statement a little bit better. And we also noted last year, given how the market is structured today, given how hard it is for new entrants to come into the market, it is not a perfectly competitive market, and there aren't a lot of incentives for the market to readily address the price spikes.

And we also noted, Chair Bradford, you kind of talked about the difficulty in bringing the supply, just the general supply conditions in California. And as we move into more and more ZEV adoption, the EV adoption, which is at 25% today of new sales, we're going to continue to see the demand go down, and the market is going to continue to evolve, and we'll have the refinery production go down, but also the competitiveness of the market will continue to decline.

So here's kind of the three price spikes we just mentioned. I will try to go through some of these data slides quickly, but pause. In a way, we have to dig in a little bit. But this is essentially a slide that we showed you last year that really establishes how the overall California retail price compared to the US average and the difference between that in blue. And as you see there, at every spike, typically that blue differential goes up much higher.

And we were at record $2.59 difference last year. And hopefully through the presentation, we'll be able to explain to you why it is. Sorry. In 2022, it was $2.59, and in 2023, we were almost at $2.25. So what are we doing about that? This is kind of one of the first presentations of the data that we have been able to gather based on the SBX 12 and 1322 and many other data collecting authorization that CEC has.

And I would like to just establish a few points that Chair Bradford made at the top, which is kind of just stacking the price that you see at the pump. The bottom four colors, which are broadly the environmental fees, taxes, state and federal taxes. As you think about that, while that contributes to the price of the pump, it does not oscillate. It's pretty steady. So if you look since 2019, it's a pretty flat subtraction.

The last four, when you think about how they contribute to the price spikes, and then also Chair Bradford mentioned the volatility in the crude oil market that you could see, and rightfully pointed. The crude oil market is indexed to global prices. And this is something not only California, but the rest of the U.S. sees, and it's globally indexed to the production and some of the geopolitics that happens.

The focus then about what California can do really falls into the top two at this point, which is the refinery margin and the retail margin. And it's important to note the refinery margin, which oscillates, especially during supply tightness, which we'll try to expand on in the next few slides.

But I also want to point what happens to the retail margins. Once you see an overall spike in, let's say that the refinery margins here in blue, which is kind of stacking all the fees, crude oil and the refinery spikes. As soon as you see that spike, the retail spike follows. It's usually about a week later, but the wholesale prices of refined fuel then set the bar for retail prices.

But as the refinery margins drop because of the wholesale prices dropping, the retail market does not immediately react to that. So that's what we call about up like a rocket and down like a feather. It goes up, but goes down very slowly. And that also affects the overall prices at the pump. So now with that context, I'm going to go into the authorities that you've given us as the Legislature and what we have been up to.

So broadly, the requirements of SBX 12 fall into six categories of work streams for us. The number one is really around data collection and monitoring. The amount of data points that we're gathering has exponentially increased. And we'll talk about that a little bit here. We also have some refinery maintenance monitoring. We now get information about 120 days before a planned maintenance event so we can track it and look at potential spread spikes from that.

We also have the market oversight analysis, and Director Miler is going to talk about that. And specifically calling out the defining margin establishment and the penalty discrimination, which is an active work stream at the CEC right now. And the Legislature also recognizing that this problem is not going to go away, as Chair Bradford mentioned, laid two specific policy documents.

One is around the fuels assessment to provide options and recommendations for long term transition, and a joint product with California Aid Resources Board on an actual transition plan. So the timeline, I'll try to get a go through here, but, you know, we've had the bill went into law in June 2023, immediately followed with the appointment of Director Milder and the establishment of DPMO. We took a month there to really support the administrative establishment of the DPMO, which Director Milder is going to comment on.

There's a few dots without active callouts of what we've been doing, but really it's been a lot of work during those dots on data collection. In November, another important mark, CEC opened a rulemaking to begin the discussions around the gross penalty margin. And in 2024 January, as many of you probably have seen, DPMO spent a spot market reform letter to you and the Governor, which we use that as an important input for CEC in our products.

And in February we did some based on some of the insights from the DPMO letter and insights from the staff analysis, we revised our spot market data collection regulations, recognizing the importance of spot market on the retail prices. And in March we further released what is called we request for proposals and information, basically asking stakeholders how they would set a penalty and some of the frameworks. We've invited all stakeholder groups to provide information for CEC to consider.

In April, we had an important penalty workshop to further refine our thinking on the penalty. And in May we are kicking off the transition plan, which we just did last Friday. So I'm going to have like three or four slides on high level updates on these key buckets and then I'll pass it to Director Milder and Director Maduros.

So on the data collection, just to kind of give it a 30,000 foot level, the amount of visibility now we have into the market and the overall operations of the industry is night and day as compared to last year. We have about 9,600 data submissions we've automated much of this work. Wouldn't say that it went smoothly without a hitch. We had to innovate quickly on how to make this easy for the industry to work with us.

We had a number of conversations with the industry on the data streams and now we have an online submission portal that brings all the information. I also just want to report to date, since the law has passed, we think we put in about 15,000 hours of staff time collectively excluding the time with the consultants. Much of that went into data gathering, processing, and putting it out. So next one just on the refinery maintenance monitoring, very similar. It started with the data collection, with the refineries.

On understanding how maintenance are done and turnarounds are done, we consulted with the Department of Industry Relations. We now have an actual ongoing relationship where we are going to become CEC is going to become a part of regular meetings that DIR actually puts together so we can gather that information in real time. And finally, we are developing a process for CEC to approval of maintenance. But this is still in consideration of getting stakeholder input and how to move forward.

And then finally, on the defining margin establishment and penalty determination. We have based on the data which we're going to show here in a few slides, really now understand the structural issues that really creates the high level price spikes and then how those structural inefficiencies and conditions are either deliberately or not really exploited to have these high prices and how a penalty could potentially blunt those price spikes. And we're going to discuss that with you in a second here.

And finally, as the Legislation calls for, anything we do has to think about consumer benefits and unintended consequences. And so we are taking the time. The reason why it has taken nine months for us to collect the data and get to where we got is a very deliberate process with the industry and with the stakeholders to ensure we get a level of visibility that allows us to become comfortable with whatever we move forward with.

And finally, as a lead in to the Director Milder here, the market oversight analysis, you know, obviously the CEC had a role and continues to have a role in administratively supporting the division. But I will pass it to Director Milder to give an overview of that.

Thank you so much, Vice Chair Gunda. Good morning, everyone. Thank you to the Chair, to Members of the Committee, to Committee staff. My name is Tai Milder. I'm the director of the new division of Petroleum Market Oversight. We're the consumer protection entity within CEC. We're an independent division, but I'm happy to say that we have a collaborative and positive working relationship with CEC. My own background is in law enforcement and that is the perspective that I bring to this new role.

We will follow the facts wherever they lead. We are independent in our decision making and we promote transparency and seek accountability. But this is a big task. As you've heard, we've had price spikes in three of the last five years. The two years without price spikes were during the pandemic when gasoline demand fell off of a cliff. But to tell you how we're building the division. Our focus is on investigations and economic analysis. We plan to have four investigative council and three professional economists.

And of our 10 positions, we've already filled seven with five of those onboarded. Our mandate to protect consumers is in the statute itself. As the statute provides, we look for market design flaws, market power abuses, and any other anti-competitive conduct. Our mission is broad because the challenge is large. Here's how we interpret this. If we see a problem in the market, we're going to call it out. If it's a violation of the law, we'll refer it for prosecution.

If it's not a legal violation, but still a problem, we're going to surface the issue with policymakers and with the public. We're going to talk about some of DPMO's early observations from our oversight and investigation functions. Before I go into the data, I want to mention that this is a data driven approach where we follow the facts. We are aided by the transparency tools in SBX 1-2, which provide new insight and new data. We're relying on experts in the field and professional economists.

So we're going to talk about three data related slides today, but each of them focuses on the refining sector. As the Chair mentioned, there's different layers to the gasoline market. We're focusing on these large industrial scale operations which process crude oil into refined transportation fuels. In California, four companies control more than 90% of our refining capacity. That's what economists call a highly concentrated industry.

So our focus today is on the margin that the refiners earn when they sell at what is effectively like a wholesale level of the market. So our first chart, which is up on the screen, is talking about the price spikes we saw in 2022 and 2023. When we all see these price spikes, when we see the prices going up at the pump, I think we and consumers ask a simple question, where is that money going? What is causing those price spikes?

Now we all know, and this was in, I believe, slide four, that Vice Chair Gunda showed, that taxes and fees are stable from month to month. So we're going to dig into the data and figure out what changes during the price spikes. So I asked our economics team to look at the two most recent price spikes, September of 2023 and 2022. That's what's displayed on this chart. Looking at that data, one trend is immediately clear. Price spikes are profit spikes. For the oil industry.

In 2022, the refining margin in September went up over 250%. It was similar for 2023, the price spike was a margin spike for the refining sector of over 200%. This refinery margin is where the refinery profits are. It's the difference between the cost of crude oil and the sales price, again, at what is effectively the wholesale level. Any retail profit is on top of this profit. Some of our California refineries sell largely at the wholesale level, but some of our biggest refineries do sell at retail.

So this chart likely understates their profitability. In the next slide, we're going to show how we did these calculations. So this is the second chart from the economics team. I'm not going to go into all the details, but what it shows is that we are comparing the profit margins in the last two years to before 2015, when we had the first big price spike in California.

So even after adjusting for inflation, the refinery margins in 2022 and 2023 were approximately double for the whole year, what it was a decade ago. So, indulging your patience, one additional slide with data. Here we're going to talk about so what happens? Because when the refining margin goes up, what's happening at the retail margin? Again, I promise this will be the last data chart. So the top of the chart is the price of gasoline in dollars per gallon at retail.

And we all can remember this, it's very visible when you drive down the street. If you look at these orange arrows, you see prices going up from somewhere in the neighborhood of $4 a gallon to $5 a gallon and even above $6 a gallon in 2022. And then in 2023, the price spike was less severe. But you also see prices going up over $5. So we asked what's going on with refining margins when you see the prices at the pump spike like that?

So that analysis is at the bottom of the chart. That is the change in the refining profit as those price spikes happen. So when the prices go up over $5 at the pump, we are seeing refinery margins go up as well, over 200% above the benchmark I referenced earlier. This slide, like the two before it, tell the same story. When we follow the facts and analyze the data, we are seeing a clear pattern that price spikes are profit spikes for the oil industry.

That takes us to our last slide, which is DPMO's early observations for why this is happening and our policy recommendations. Here, we wanted to highlight some of DPMO's work that we've already made public. In keeping with our independent oversight function, in September 2023, we provided an interim update on the market to get to Governor Newsom and to the Legislature.

I'm not going to go into all the details here, but in summary, what we saw was a single trade on the gasoline commodities market, which is called the spot market. That single trade could spike the market up by almost 50 cents. And the way the market is structured, that one trade on the spot market, which is not where most of the gasoline is sold, pushed prices up at the wholesale and the retail level. So we wanted the public and policymakers to know what was happening.

And in that report, we identified four things. First, that spot market volatility was having an outsized impact on prices. Second, there was a lack of spot market liquidity. Third, inadequate inventories of gasoline and blend stocks were setting the conditions for the price spike. And fourth, we observed that refineries were creating conditions of undersupply during maintenance. The Governor then directed DPMO to provide policy options for reforming the California gasoline market. We made those public recommendations in January. First, we should democratize the data.

We should have a public spot market report that folks can see to increase transparency and understand why prices are moving. Second, there should be minimum inventory and resupply requirements for our refineries. I want to underscore this last point. Thanks to the new law, the refineries have to report how much substitute supply they are getting from out of state when they're planning to do their repairs.

That data shed new light on the fact that refiners were causing, excuse me, conditions of undersupply by not securing adequate replacement supply in 2023 during maintenance. We saw a similar pattern this past spring. Again, these recommendations are directed at the refining level of the market. We are also seeing persistently high prices at the retail level and high margins as well, which is not an issue of taxes and fees, as Professor Bornstein from UC Berkeley has identified and dubbed it, the mystery gasoline surcharge.

DPMO's analysis at the retail level is ongoing and has been already the focus of some important work by our colleagues at CDTFA. So I hand things over to Director Maduros.

Thanks so much for that, Director Milder. Thank you, Chair Bradford, Members of the Committee, for having me today. I'd also like to start out by thanking the team at CDTFA and at CEC for all their work on this first gas pricing report which we've issued. I'd also like to thank many in the industry for their cooperation in putting this together. Given that the report is very long, I'm just going to highlight a few high level facts and a bit different than my colleagues here.

Our goal here is just to provide policymakers with facts and data so that everybody has as much information as possible as you decide how the state should proceed to address these spikes in gas prices which you've heard about. CDTFA, as you know, administers the state's taxes on gasoline, which, between the excise and sales tax, produce just shy of $9 billion a year for the State of California. The first excise tax in gasoline dates back to 1923, when the rate was set at two cents per gallon.

That was increased to three cents per gallon in 1927. Now, coincidentally, inflation adjusted, that'd be 54 cents per gallon today, which is pretty close to the 57.9 cents per gallon that the state does have currently as a gasoline excise tax. The rate would be much lower, but for in 2010, the Legislature passed the gas tax swap, which lowered the sales tax on gasoline down to two and a quarter percent as the statewide rate rather than 7.25%. And it upped the gasoline excise tax to make up that difference.

It was meant to be revenue neutral. Also, I'd like to point out that LAO's estimated that as California shift away from gasoline will see over the next decade or so about a 65% drop in excise tax revenue. So this transition discussion that CEC is having on the fuels front also sets the stage for a transition discussion for how California will get the revenue to fund its transportation infrastructure.

In the coming years. Now, speaking of gasoline consumption in the state, the teams also looked at information from the U.S. Energy Information Administration, or EIA, on gas purchases and expenditures. As we all know, California gas prices are among the highest in the country. That's why we're all here today. At the same time, the state has by far the most electric hybrid, plug-in hybrid vehicles of any state in the country.

Almost 37 percent of all electric vehicles in the country are registered here in California, and we only have 12 percent of the U.S. population. The combination of that fuel efficiency, together with some of our population density, means that California, despite having very high gas prices, actually ranks 21st in the country in per capita spending on gasoline. In 2021, the average Californian spent about 120 dollars more per year than the average American, and about 85 dollars a year more than the average Texan, which is about seven dollars a month.

So it is certainly something, and as Chair Bradford mentioned at the outset, the high gas prices do disproportionately hit some of our most vulnerable citizens, who often typically drive older vehicles, which have poor gas mileage, and also may have to commute longer to get to and from work. If I could move on to the next slide here. Oh, that's it. So, as has been mentioned, our research has primarily focused on the retail side, given work that CEC and DPMO have been doing on the refinery and wholesale levels.

The team's been working with millions of data points. They've looked at the gasoline prices for every gas station in the State of California for every day for the past decade, as well as wholesale prices, and we've looked at legal contracts to try to get a sense of what's happening here in the market.

You can see in this slide here, which is very small--I'm hoping you can see better--but you can see some shifts that are taking place in the California retail market, particularly with the growth there at the top of the hypermarts. These are the large retailers that also sell gasoline. So this is like the Costcos.

You've seen almost a doubling in market share of the Costcos, you've seen a slight growth in the unbranded gasoline sales, and then you've seen a lot of the brands here losing a little bit of market share, but not too much over the past 12 or 15 years there. If we could look at the next slide, which shows more detailed retail margins.

So, it does show--this shows the retail range of profitability. And what you can see is that they typically move all together and their places in the price range are pretty steady over years, so you'll see brands appear to be priced in relationship to one another, which I think you'll see in more detail in this next slide.

If you look here, you can see the retail prices, retail margin, which is the difference between what the gas stations pay for the gasoline and what they sell it for, as well as the retail margin as a percentage of price across. We've highlighted a few brands here and then unbranded as well as the hypermarts. If you look from 2013 to 2023, you will see that the growth in retail margins has far outpaced the rate of inflation. A few other interesting points here: retailers for some brands have been averaging around a dollar retail margin per gallon.

These prices, which back in the day would have been seen as an extreme anomaly that would last just for a few days, are now annual averages for some of these brands. You can also see the price disparity between the highest priced gasoline and the lowest priced gasoline has almost tripled over the last ten years. One other thing that also appears to be occurring is the shift in pricing strategies.

If you look here at ARCO, for example, it was once a low-cost provider, actually cheaper than unbranded gasoline on average. In recent years, its prices and margins appear to be increasing as it moves up closer to other branded gasoline. So there is some shifting taking place in the market. But I do think what's really important to note here, and I think really important for Californians to understand, is that all of the gasoline sold in California is basically the same.

It's stored in the same tanks, it's swapped between refiners, it all meets the CARB spec. If you look online, you'll see a lot of consumers complaining about this gasoline is too watery and I don't want to buy gasoline with that brand. There's clearly a lot of misunderstanding out there, and the confusion is costing Californians a lot of money. The only difference between the brands and unbranded and hypermart is the cleaning additive that is mixed in, generally at the rack when the truck is loaded with fuel.

Now, all California gas must have a cleaning additive approved by the California Air Resources Board. Some brands also have their own proprietary blends. We found in our study that this may add less than a cent to the wholesale price of gasoline, and yet, if you look at this table, you'll see it can equal an extra $0.60 or so per gallon. So that half a cent at the retail shows up as $0.60 more for California consumers.

Now the attorney generals filed a lawsuit alleging, among other things, that the promotion of this gas as cleaner burning is deceptive, but I do think it would be useful to have more sunlight around how the baseline CARB additive standard compares to branded additives. And that's something we'll continue to look at. The next slide, just sort of to wrap up here, this was just our initial report.

It took a while to get the data due to government contracting, which is never easy, and working with industry to make sure that they could provide us what we were looking for. We were left with some questions to work on, and among them, just to highlight the volume of imported gasoline and the impact of those imports on price, and that's something that you've heard mentioned by the CEC and DPMO, the interplay between volatility and high retail prices.

Vice Chair Gunda mentioned 'up like a rocket, down like a feather.' If you look at our decade of data, that is very clear. It takes a retailer an average of five days for them to--when there's a price spike up at the wholesale level, it takes about five days for the retail price to match. When the price drops, it takes 34 days for the retailer's margin to sort of come back into baseline.

So it's really important as policymakers, I think, that you look for ways to minimize price volatility because when the prices go up, they stay up. I mentioned the shift in pricing strategies that you're seeing with ARCO and some others. The impact of local competition is something that requires more study.

Our analysis of 2022 data shows that stations with no competitors within a half mile priced their gas about 2.6 cents higher than those with a nearby branded station and almost five cents higher than those with a nearby unbranded station, and each additional station within that half-mile radius correlates with a further 0.7-cent reduction in prices. And then just a couple more brief things.

We have discovered that a lot of market participants, a lot of them are using new pricing software that automatically sets their prices to maximize profits. What is perhaps most concerning is that a lot of them are using the exact same software to automatically set their prices to maximize profits. So that's something that we'll be looking into more, and we'll also be looking into retail outlet concentration. It appears that certain refiners are getting back into the retail business through joint ventures.

We have some private equity firms that are buying up hundreds of stations around the State of California, so you're seeing an increase in concentration at the retail level, and then how all of those factors interplay with one unique aspect of the California market, which is the dealer tank wagon, where retailers are entering into very long-term ten or 15-year contracts to purchase at a delivered price.

That's something that I know that DPMO is also looking at to see how that reliance on DTW, which is an anomaly here in the State of California compared to the rest of the country, is impacting price. And with that, let me turn it back over to Vice Chair Gunda.

Thank you, Director Maduros. So I'm going to have a few slides to bring this to a close and summarize the points that have been made by both Director Milder and Director Maduros. So I just want to bring us back to one of the opening slides where we talked about these various components making up those price spikes. So we just layered them out here as a bottom three and top two. So as we mentioned, taxes and fees don't really move, environmental programs don't move.

That's a static adder that we have. And as we mentioned, crude oil prices at the very bottom, which is the 42 percent, is globally indexed and not something that's unique to California conditions. But on the top, the refinery margins and the retail margins are unique to California conditions, market conditions. And one of the key variable, as Director Milder mentioned, is the spot market prices.

So just to summarize, as the market perceives scarcity or real scarcity or perceived scarcity, the wholesale prices then are anchored to the spot market rates that happen. So you're saying the market is seeing the conditions and saying that the market is not liquid, there's not enough slack, and there are a few traits that happen at spot market prices that are really high. As soon as those spot market prices happen, the overall refinery margins jump with them, and also the retail margins jump with them.

So those are the two elements all tagged to the spot market prices, and hence, we spent a lot of time understanding the details of that and figuring out if there is a clear correlation between the smart market prices and the supply conditions. So here's a slide to just visually show that to you. There are four lines here. The green line, which is the refinery margin, the spot market prices in blue, and actual retail prices in black.

As you look at those three things, when the spikes happen, all three move. And the thing that moves is the spot market prices. If the spot market prices moves first, and then the refinery margins and the retail margins, and as Director Maduros mentioned, the secondary effect on the retail prices, it lasts very long. Even though the spikes happen five days in, they can last for 34 days after the spikes go down.

So if there's one chart we can kind of leave you with, this is one of the most important charts of the entire work that we've conducted. So what you're seeing here is what is called a mass balance. So we're looking at what are all the levers we have for the supply, and how much demand do we have, and can we understand how many days of supply do we need for the market to have visibility on, to keep the spot market prices low?

So what you're seeing on the x-axis is about the number of days of supply the market is seeing, and what you see on the y-axis is the spot market prices. So what you see there--and the takeaway here is when the supply conditions in the market, when the market, you know, different players, the traders, the refineries, everybody's looking at this data differently--different people compute this analysis differently internally, but all of them are watching the same trend.

So as the supply in the market goes below 16 days worth, right--so this is basically how much refining capacity do you have, excluding how much unplanned or planned maintenance issues I'm having? How much inventories am I carrying as a state? How many ships are coming into the state with refined fuel?

So I'm taking all that supply, and I'm looking at how much demand do I have to serve. If I can take the totality picture and say, 'I have visibility for about 16 days worth of fuel,' you see the spot market prices are really low. As soon as it drops below 16 days, it begins to go like a hockey stick.

And by the time it comes to 13, 12 days, you begin to see trades in the market that are so high that immediately affects the refinery margins and the retail margins. And hence, this is a really, really important thing, and going back to Director Milder's DPM recommendations, this is one thing that we can act on immediately.

So the two things that the CEC is planning to do this year and working on immediately to help continue to further our work on SPX1 2, is just increase the transparency on the spot market rates. As Director Milder mentioned, the current publication of this data is very opaque to us. We don't get to see the underlying assumptions with the industry data that comes out in the publications.

So we don't really understand why and how or if the totality of the spot market prices are actually reflected in these publications. So given the authority that you gave us, we are already gathering this information and by us putting it out there, we at least check other publications for accuracy and catch if there are mistakes and have a new benchmark because it has such a profound impact on the retail prices.

Two: we are working very closely with the industry, and I want to just add to what Director Maduros mentioned. The industry has been working with us closely and providing information, and we are working with them this year on thinking about targets. What can we do? Given that we have this direct correlation with supply and spot market prices, is there anything we can do to have some targets on keeping the supply at a certain level in the market?

And that's what we're exploring right now and moving forward later this year, the staff at the Energy Commission will bring forth a framework for the penalty for adoption. But we'll be observing this over the rest of the summer. And so, closing off at the last couple slides here, that's the near-term. What are we going to do long-term, given that this problem is not going to go away? So the CEC published the Transportation Fuels Assessment. We put it out as a draft.

We're waiting to get stakeholder feedback, and there are broadly in the five categories of options we lay out: one: given these extreme volatility in the supply conditions and then the spot market prices, can we just think about using existing storage, maximizing usage of that? Some of the refineries are being to convert. Is there opportunity to use some of the storage tanks to have in-state storage? Similarly, is there options to add more? So that's a storage option.

Two: fuel blends. As most of you have tracked last couple of years, we had to take an extraordinary action in moving to winter blend earlier, and that increases the volatility, that increases the liquidity in the market of fuel. Is there something we can think about regional blends along with West Coast partners, West Coast states, or regional states here to think about a blend that allows for all of us to improve the overall liquidity in the market? And some are highly complex regulatory things.

All of these, by the way, came through stakeholder process and comments, is do we want to explore a public utility model? Do we actually have a regulated market? You know, most of the industry talks about the current ROI. Is there a way to have that ROI but allow for regulatory frameworks that create a stabilization of the price of the pump? And imports. And this is really important to lay out here.

When we talk about imports as a resupply or state-managed imports, we are talking about incremental to the state refining capacity. So we have the state refining capacity. They are meeting the demand, but in cases of those moments where you have a delta, could we bring in more importance and proactively to help resupply? And finally demand strategies we never want to leave. I mean, those are opportunities in a higher transit, reduced vehicle miles traveled.

Some of the environmental justice groups have mentioned free rides during summer for vulnerable communities to be able to protect them from these price spikes. All those are policy options we laid out. And the next step is going to be discussing each one of those options in the transition plan at the California Aid Resources Board. We are going to work through with the stakeholders to think about which ones of this should be considered and lay out a detailed plan for those options.

So the next steps, we'll continue to work on our data collecting, we're going to continue to work on the market analysis. And as I mentioned, the penalty framework will be put forth later this year by the California Energy Commission staff, and the Commission is going to vote on it later this year, and then we're going to work on our policy documents, both the assessment and the transition plan. We know we threw a lot of data there and look forward to answering your questions. Thank you.

Thank you. We're going to open it up now for questions from Committee Members. Senator Newman.

Appreciate it, Mr. Chair. Thank you, gentlemen, for being here. Questions for it. I think many of them will at least start with Vice Chair Gunda. I understand through your testimony, as part of the explanation you met with California's refineries, and if you could, did they share how they might react if we were to impose a margin cap and penalty structure?

Yeah. Thank you for that question, Senator. So we have been actively communicating with the industry, and I want to respect some of the conversations given the PIIRA statute we have, but overall, I would imagine that, I think that what the industry have shared with us is if there is a penalty, they would try not to exceed it. And that's something that we have to watch, and in not exceeding it, they offer potential other market things that could happen, such as an overall increase in the prices.

And so part of that response might also be, as I understand it, to decrease supply. And so, you know, what's, what's the thinking there if, you know, there's a chance that the penalty might increase, might actually have the adverse effect that's intended?

Yeah, absolutely, Senator. I think those are really fair questions, and I think we are looking at the industry, at least at the Energy Commission's job in developing the penalty as a good faith partner to provide us some information, and those points have been made by the industry. But we're also looking to other experts, such as the economists and some of the consultants we have, and they have counter opinions, and we are trying to dig further into it.

So I would just say the current layout would be three-prong. One: if there is a penalty, the economic theory says that the refiners would maximize the production, right? Given that there is a penalty, you want to maximize to the extent that there is more room to make it.

Then second, because there's a second theory, which is if the penalty was to be as a legal hurdle to not cross, then they might, rather than getting the profits here, they might extend their profits over time by capturing the area under the curve differently. That's two. Three: the idea that some might actually cross the line, and in that case, as the legislation intended, some of those profits will be brought back to the Californians.

And finally, on the threat of potentially not refining as much--and I think this is where we are trying to begin further--based on the testimony and evidence that we have seen in other markets, this does not seem like what rational, economic actors will do, but something we'll continue to observe--

Isn't there a fifth possibility they could shift distribution supply to other markets instead of selling in California?

Yeah, I think that's a fair point. Absolutely fair point. I think what I would offer is there are market players today that bring in over ten to 15 percent of refined fuel into California. So as refiners reduce their production, other market players will pick it up. So, but the problem is, if the fuel is coming from, let's say, Malaysia or Asia or Europe, you will pay a premium. But I think the overall supply conditions will be met through other market players.

And obviously, there's some other externalities there that we're concerned about environmentally. So each of you, I think, in your remarks and in the broader assessment, sort of focused on the fact that California is a fuel island. And so, can you talk a little bit about--and I know you mentioned sort of the opportunities that might be created by a regional blend--but how are we thinking about that with respect to this specific policy framework?

And let me be clear. You know, what's the thinking in terms of solving for that problem? The fact that California is a fuel island, particularly to the extent that if there's nine refineries, and four constitute 90 percent of the market, that more than anything accounts for the opportunities to secure maximum margin, right?

Yeah. Thank you, Senator, again. So I'll start and see if my colleagues would then add. So I think you rightfully point, ultimately, this is about ensuring that there is enough supply in California. So ideally, we would like that refining capacity coming from in-state refineries. And as of today, if we look at the overall utilization of the refining capacity in California, it's about 83 percent. So we have enough refining capacity to bring in the fuel to make the fuel we need today.

So then why are we leaning on imports in today's conditions? It's because of those planned, unplanned maintenance events that happen where you create those supply shortfalls. And also, to Director Milder's point, currently there is no active planning beyond each industry player looking at how to serve their own customers. There is no real planning collectively to ensure that the inventories are at a certain level.

So when you actively plan for having certain levels of inventories as we go into a summer or other tight conditions, you would first of all create that liquidity, right? So that's one. But second, to your point, given that we can just pipeline or rail in fuel, it requires active and deliberate planning to ensure that if you have line of sight to those supply, potential disruptions, how do we resupply for California?

Right? So that is what the intent of the two recommendations we put out is working with this industry to think through. Given that we cannot just bring a pipeline, and we rely largely on marine vessels bringing in refined fuel, how can we actively plan to make sure that liquidity exists?

I guess to the extent that there was some discussion about working with the industry to voluntarily insure supply, is the state into--and so part of it is ebbs and flows, right? So you have opportunities for extracting maximum profit. You clearly have other times in the past where, especially during the Great Recession, where the industry was actually operating at a margin loss. So is the state interested in sort of offsetting the negative scenario in addition to providing or working in some voluntary with industry on a ceiling?

So we are looking at the totality of data. As you mentioned, Senator, we are gathering information, and as you rightfully pointed, there are certain times of the year. Currently, the industry reports negative margins. Those negative margins have not been independently verified by the CEC. We're continuing to work on that today.

One of the reasons why we think there might be some mischaracterization of the data--I'm not accusing, deliberate--but there's some mischaracterization, is, for example, if there is a capital investment of one billion dollars, you would ideally amortize that over a certain number of years, but putting it in a single month would create a huge distortion. So those are the kind of things we are working with them.

So I just want to note that they are negative and we're working with them to make sure the data is accurate. But to the second point, which is do we want to create a floor, I think we go to the overall profitability of the market, looking at taking into account the cyclical nature. So what we are hoping to do in our next rulemaking is to, rather than just look at the gross margins, net margins, and once we establish the net margins, we'll be able to see the overall profitability.

So creating a floor when there is still profitability is an important element we want to take into account. So if they're overall profitable, then we feel like it's something a ceiling would help with reducing that, but not necessarily a floor.

And with respect to that ceiling, I guess to net margins generally, my understanding is--and correct me if I wrong--that your assessment so far did not indicate any clear evidence of price gouging in this marketplace. Is that correct?

Yeah. I think we do not have the visibility to--I think when we say price gouging, and I think it's important to note, as Director Milder noted, is, I'm sorry to use this example, but it's like in a neighborhood store selling eggs. I have a few stores selling eggs, and a couple of stores are out of eggs, and one store could bring in more eggs and to keep the prices low or let the customers pay as much for those last few eggs.

And that's what's happening right now. So, I think, I want to just point out that none of the industry in our good faith discussions dispute that during these times, their profits go up a lot. So who's to decide how high can you go during those times? And that's what we are trying to think through is given that this is such an important public benefit, good, how do we ensure that there is a cut off?

I've got two more things. So to the extent that California is part of a larger market and we're sort of endeavoring to kind of even out the sort of absent troughs in the market, you know, there is the chance that capital flows to other markets. So has there been consideration--what would happen if the number of refineries went down as part of any framework that's imposed?

Yeah, absolutely. And I think this is, I just want to reiterate, all the points that you're just raising are extremely fair, and some of the things that we are taking into account as we think through the penalty, one of the things that the industry noted is they might move. They might put their capital somewhere else. And I think some of the options go to that, which is in--the fear is, I think there's a couple of different fears. So one: you're going to reduce our overall profitability.

So one of the options that is laid out is a utility model. So under utility model, you could ensure those revenues and allow them to be profitable and operating in California while we're protecting California. So I think that's one option. The second is if those go down, some extreme options might be on the table as a state.

For example, what Australia is doing. After Covid, a number of refineries went out of business in Australia and Australian government stepped in to subsidize and hold some of the refineries. So those are the things that might be on the table.

My last point--thank you, Mr. Chair, for indulging me--so, you know, two main points I think that you referenced: one: California is an energy island, two: our market is characterized by a high level of concentration wherein four companies basically control 90 percent of the market. And it's interesting, Vice Chair Gunda, as you stated in your opening comments, you know, the problem's not going away, but I think it's fair to ask, are we solving the right problem? Are we solving the right problem?

So if the source of volatility is market concentration and the isolation, California's market wouldn't increase competition, be part of any solution? And why has that not been considered or it's certainly articulated as part of the plan?

Yeah, I think--good question, Senator. I think the biggest thing is the barriers to entry. Can we imagine a new refiner, a new player, coming into California and investing three, four, five billion to set up a new refinery under the conditions in California with our climate goals and environmental goals? And given that this is a declining market, this market is going to continue to decline, so I don't think it's about more competition necessarily. It's about ensuring that the existing supply is fully met.

I appreciate that, but I think one answer might be to enhance sort of imports or product flow into California from other jurisdictions, part of that. To do that, I think you'd have to have a fuel blend that matches some other regions. I haven't heard that as part of the conversation so far. Good?

Just want to add, so I think that's one of the policy options laid out in the assessment, but anything you want to add?

There are refiners in Washington State and in Asia that are able to produce CARB spec fuel, and it is imported. One of the things that I think's interesting and requires further study is looking at the incentives. As Vice Chair Gunda mentioned, the refiners have an incentive to import to meet their contractual obligations, but not necessarily to maximize or keep some baseline level of liquidity in the market.

And so I think we need to think long and hard about how we provide incentives in the market for refiners or others to import fuel because we are seeing refineries in the state transition to renewable diesel, and so we're seeing increased imports from Washington State. But, you know, even Asia is economical if the price is right. And these high prices, it would appear to make more sense. And it's been the learning curve to see why we're not seeing the imports.

I appreciate that. Thank you, Mr--thank you, all of you. Thank you, Mr. Chair.

Thank you. Senator Rubio.

Thank you, Mr. Chair. Thank you, Mr. Chair. I think I had a lot of very similar questions as to Senator Newman. One of the things that I heard you say right now is that clearly we only have four that are in the majority of the market, and I think I was thinking along the lines of the competition, right?

If the market shrinks, clearly, and the prices go up, I mean, I do, it makes me sad as I'm hearing you say that we do have the ability to, to import from Washington and other states, but you know, that's the point. Like then, those are jobs that we don't have here in California. But one of the things that I was thinking, you said that if it takes, if the market or whatever, the reserve falls below 16 days, then the price goes up.

I mean, I know this sounds like a crazy idea, being Californians and trying to be environmentally friendly and conscious; I mean, wouldn't we want at some point maybe buy our own refinery so that maybe we figure out how to store our own stock so when these situations happen that we don't have control over, then we control the market versus the outside controlling the market? Can you speak to that?

Yeah, absolutely, and I want to just go to that overall options we've laid out. In the policy report that you will see in the assessments, ultimately, Senator Rubio, to your point, it's around ensuring that we have the right level of supply that's available as a demand declines, right?

So currently, the uncertainty around demand decline is pretty high, that we see a huge penetration of EVs, but we are not sure if they are going to fully capture the VMT, the vehicle miles traveled, today with the ICE vehicles. So overall, I think as the demand goes down, we have to ensure that there is enough refinery supply, right, as you pointed out.

So in the assessment and all the data gathering, we have a certain line of sight to what might happen with the refining sector in terms of retirements. And to your point, at some point, we have to put that on the table, which is in making sure we have enough liquidity to manage this transition, we can make it up with imports or we could preserve some of the refining base in California through some sort of state intervention, whether it's a cost of, it's a cost of service, utility model, or some other. Thank you.

Well, may I add to that? Well, because I'm thinking of the four, right, that control most of the market, and I'm thinking we're just, you know, one step away from even a bigger disaster if one of those refineries leaves, and I mean, there's rumors and you hear it all the time because it feels like we have very small refiners now.

And it feels--this is how I'm feeling right now as I'm hearing the information--it's like we're not partnering with them as much as we should, I feel, because you just made a comment right here, which kind of bothered me a little bit. You said, 'we have not independently verified this,' but then you went on to make a statement about them possibly manipulating their prices. So I rather you not make statements if you haven't independently verified because this is where confusion comes from.

And this is where, I think, when we start vilifying something, we don't know for a fact, and I heard you say all the time that you spent already, I think you mentioned all the hours already put into this, and I rather that this be part of the discussion versus putting it out without having any verification. But I really do think that we have to figure out a way to--at least for now, right?

I know we're transitioning, but for now, figure out how to work really closely with those refineries to ensure that we don't put so much on them that they leave, because I think at the end of the day, we're here for consumers. Everything we're saying today is about consumers. And I don't see a scenario where one of them leaves, that's going to help our consumers. And I think it was stated, and I think some of us come from very disadvantaged communities.

These are the consumers that are going to really bear the brunt of the cost hikes. You know, they can't afford these Teslas, they cannot afford these EV cars. I could speak for my own district. They're really struggling. You hardly see any EV cars in my community because of the price. And so I just, again, I feel like we have to do better in terms of working with them. I fear that if we lose one more, it's going to be disastrous.

But again, I was thinking of the supply. If we don't figure out also how to keep our own supply, maximize our supply, so when it goes below 16, we figure out a way to control it, we as Californians, we as the state, but I'll just leave it at that. Thank you.

Thank you. Senator Eggman.

Thank you. I think we're all left with the same kinds of questions, but I will poke a hole at that idea that poor people can't afford electric cars because I drive a little EV Kia, and I can guarantee you it is not a fancy car. So let's--we can dispel that a little bit. They're not all Teslas. So kind of similar to what Senator Rubio was saying, if California is an island, right, then how do we fortify ourselves, right?

And I think that's what we're trying to get at, and I think what I'm hearing from my colleagues is we want to make sure that you're looking at the whole big giant picture and not coming with some predetermined ideas about how we're going to fix it with costs and caps and that this is an incredibly volatile market and it affects the poorest of us.

Representing the Central Valley, and the need that people have for gas and to drive long distances, the poorest people are picking up the tab for our policies. Right? And so I think, for me, that really has to get at it. And I acknowledge we have the highest degrees of asthma, too, right? I mean, those things exist at the same time.

So, and again, while we know that we have the cleanest gas, how do we, how do we spread that out a little bit to make sure as this, as this economy declines at some point, right--we all acknowledge at some point it's going to go away--but it's going to be a while. It's not going to happen in my lifetime. And so how do we protect, like, those who are picking up the biggest tab in that amount of time? And are we looking at all options?

Are we looking at more refineries? Are we looking at--because my expertise is more in health, and we've done the same kinds of things. I mean, our health care costs are higher than anybody else's, right, so we're like, 'well, let's fix it.' So we put together commission. It says, okay, can only have, you know, we're going to look at like a three percent cap. You can't make more than that. And we're trying to do that same thing here, but we're not just dealing internally with California, we're dealing with the whole world.

And then, as my colleague from Bakersfield, who's not here right now, would often say, then we're bringing in gas from places where we abhor the politics and the policies. So, are we really looking at how do we control cost in California in this global market with all those difficulties at the same time without just trying to squeeze a public market? And when you say we can do that, like a utility bottle, I don't know if anybody's happy with their PG&E bill right now. So I don't know if that's the gold standard we want to hold out.

Thank you, Senator, and also to Senator Rubio, I think first, I want to just commit to taking a very holistic view. I think the fuel assessment that, that we put out, which will be updated every three years, is trying to be that objective, 30,000 foot level, holistic view on ensuring that we have safe, reliable, but also affordable fuel.

So I think in setting up those options, when we think about how do we then keep the slack of liquidity as the overall demand reduces, is a pretty difficult one. So you either have to ensure that the refineries are staying there, that the total refining capacity is staying there beyond a certain level of margin, right, where they're adding for the liquidity, and that's where the utility model comes in. The utility model, as you know, on the electricity side, we have something called the RMR, you know, within the regulatory structure, which is reliability must run.

So we allow for a certain level of caution, and we compensate for that. So that allows for the liquidity to stay in the market. But the second thing, as Senator Rubio mentioned, it's about if the refineries do go out, and if we are able to develop a predictive model on how that could happen, how do you then make sure we have enough imports planned that allows for that? But there's a fair question.

What about the jobs in California? Do we want to keep them, keep the jobs in California and--or do we allow the retirement and fuel back on the imports? These are the live discussions at the Energy Commission, and I also really thank you for raising the environmental justice and health issues. The fenceline communities have a very strong desire to have these refineries shut down or become cleaner from a health perspective.

So the Energy Commission is taking all those data points together and develop a holistic and objective framework on options to be considered. And I also want to just, if I may just kind of react to Senator Rubio's question on, I think the--and I just want to respectfully offer that the word I used was 'mischaracterized costs,' it was not 'manipulation,' because we just kind of, we observed that today that some of the costs were just mischaracterized and we're working with them to correct them. So not indicating any foul play right now. We are trying to work very carefully with them.

And if I could ask, just my curiosity, sovereign nations, tribal, and casinos with gas stations, that's California blend, right? And it is less expensive because of the lack of California and federal taxes or it's less expensive because they buy in bulk and can afford to get folks there and so reduce the rates? Sometimes it's a dollar, two dollars less.

I don't know about the blend question. There are some federal treaties and the Supreme Court allowed some Washington state enterprises to import fuel into California. And we have virtually no, we don't have any visibility into that. I don't know about the blend, but that's the tax piece.

And that's why we believe it's less expensive.

We will come back with information to you on that, Senator.

Thank you.

Great. Senator Eggman. Senator, I'm sorry, Skinner.

Thank you, Chair. Thank you, presenters. I found this very, the slides, the information, the breakdown, the work you've done to get the data to help us understand this, very, very helpful.

And I appreciate the comments of my colleagues, but I guess in listening to it, and I don't think we have to be, I guess I'm coming back to the point of any reference to, I mean, I did not hear Vice Chair Gunda, your any reference to manipulation of the market more the fact that when there is low supplies and when there are maintenance, that, you know, obviously, as the data has shown, the profit margins go way up.

Now, independent of whatever we think about oil companies, most corporate entities want their profits to go way up. I mean, that's just a norm. And while I don't like that and no consumer likes it, that is what corporations do. So I don't think there's any, you know, we don't have to hide from that. And I kind think your data shows clearly they're getting a huge benefit when their supply is low and when the prices go way up.

And the issue about their, well, they might not make good returns at a different time. Again, once you have more data, I'd love to see that averaging because I would bet over time they still, they're not losing any money. So just, again, this is a, you'll have to get the data to prove that. But that's what it would appear. Now to some of Senator Newman's points.

I could imagine, for example, that, and I'm going to blow this, but different of the things that we might try to impose could be manipulated and just result in whatever still. Okay, so maybe, maybe like a penalty where they would avoid the penalty so we could avoid the spike in price, but then they just increase the average price over the whole year so the profits to the entities would still be at least as high.

And we wouldn't, we, the California consumer, wouldn't experience this, you know, big spike, like right now when we want to go on our Memorial Day vacation, but we'd be paying more over the whole year. And I appreciate all of your comments about, you're thinking about that, you're thinking about what is it that we can do to have the least negative consequence on the consumer in terms of prices.

And I would guess what I would that our four companies that control this market have made it quite difficult for us to act in a way to protect the consumers. So I appreciate the conundrum you're facing, but I wondered if just requiring an increase in supply, because I was very struck by the various slides. For example, in the one that showed the pump and it showed what caused the price spikes.

And there's another slide that does this also where, you know, the taxes and fees, our environmental charges, the various things that California does are predictable and steady. They don't cause spikes, they're predictable and steady. What causes those spikes is when there is that, when we get down to a low supply of the refined product. So I wonder, and I really appreciate that one benefit of our bill to date has been to give us really that information.

So couldn't you talk about if we were to act purely to require an increase in inventory, stored or whatever, or before. So two things require the, you know, a steady supply, the increase in supply, even when there's going to be a planned outage and requiring coordination of the maintenance and the outages. What do you think the impact would that be? And what's your speculation? And maybe you don't want to speculate on this, how they could manipulate that.

Yeah, thank you, Senator Skinner, for both those comments and the question. So I think to your point, I think at a 30,000 foot level, anything we can do to increase the overall slack and liquidity in the market will blunt the spot market prices and will immediately have the impact on reducing the refinery margins and the retail margins. How we do that is a question that we are trying to approach with the industry very collaboratively, understanding the different levers we could pull and the unintended consequences.

But overall, the notion and a framework that sets some level of targets to maintain liquidity in the market will be only beneficial. And the negative impacts of that and the risks of that have to be well thought out with the industry and understanding what that can do in making that happen. And two, I also want to note that not all industry players are the same. Some are really small, as you noted. Some are large. Some have only retail business, sorry, only refining business.

Some have both retail and refinery contracts. So depending on the way a business is currently structured, it might vary and the size of it. But overall, the notion around increasing the supplies would only benefit. And I think to your point, again, at the end, in the end of the day, we are looking at it the same way, which is profits are profits and a competitive business.

You want to have a profit making notion, but given these extraordinary price spikes that then impact certain parts of the state, even much worse, those who have tight budgets that have to suddenly pay a significant amount to drive to their work is hard.

So if we want to blunt those price spikes, that requires the industry giving up those profits during the time and whether you do it through actions that increases supply and that reduces your overall profit margin, but not going to a loss, reduces the profit margin, or it's a penalty framework, I think that's the conundrum we are working through. And also I want to re elevate that not all businesses are the same that are working in California.

And the, so I appreciate the, it's true, the price spikes. So, you know, most of us don't have real variable income. So, you know, our income per month is the same. So when those price spikes, it hurts. The penalty. I don't know if it'll be enough to, can the penalty account for how much profit they're making? I mean, can we do such high penalties that because their motivation is profit, it just is.

And, but then if we levy that penalty, they pass it on to the consumer. So I'm not speaking against it. I'm just, I guess I'm really highlighting how much we are, how hard this is to, given the, both the lack of competition and the, yeah, it's the lack of competition that really puts us in a difficult, that island nature.

And whether those regional blends, you raised them, it wasn't just Senator Newman that raised them, but whether expanding on the type of blends that we would allow for could help that competition, which, of course, is going to also impact the industries that are right here, they're going to have to compete with that. That seems to me like it would help. But, yes, I appreciate how much you're thinking about it. I look forward to what other suggestions and, you know, I certainly would be supportive of.

So I guess the question I have is right now, do you have the authority, does either the division or the Energy Commission have the authority to require an increase in, or require a certain inventory of certain supply stocks or requiring the coordination of maintenance?

Yeah. Senator, on that question pointedly, the current tools that we have through SBX 12 are very vast as it pertains to data gathering and putting it out there, but as it predicts to inventories or resupply those. That particular legislative language doesn't really give us the full, full range of tools. But I think we are working with the industry on figuring out what are the opportunities for them to think about increasing the liquidity at this point.

Okay. Well, I would hope that we, the Legislature are open to, if you, if, on further analysis, if there needs to be appropriate tools to add to your toolbox in order to help our consumers. And of course we obviously have to evaluate whether whatever we do has an unintended consequence. But you know, I certainly think the Legislature should be open to that because we embarked on this to help our consumers. That was our quest. So appreciate your further analysis and appreciate recommendations.

Great. I have Durazo, Stern, and Wilk. Okay. And Senator Seyarto.

Thank you, Mr. Chair. I think anybody could answer this, but probably Mr. Maduros since you're the data person, right? You're the information gatherer.

I'll do my best.

Okay. Anyway, like I said, anybody. I read throughout and I heard you talking about being data driven, I heard you talking about further study, collection of information. One part of data gathering that I'm particularly concerned about, not just here today on this subject, but just overall with our climate policies, our pricing policies, is the impact that it would have on low paid communities, low income communities, communities of color. And we don't do enough to understand what that impact would be.

If there's a disparate impact, we should know. We shouldn't just sort of treat everything as if everyone was on the same level. When we came up with subsidies for zero emission vehicles, that on the face looked great. But in fact it was not at all benefiting low income communities and it was only benefiting wealthier communities, white wealthier communities. So I saw in a January Caltrans report, they released a financial impact report on road use charges.

And what they found was 42% of California's long-distance commuters, which means 3 hours or more of driving. Think about that, 3 hours or more of driving, found that 42% of California's long-distance commuters are Latinos making below average wages and particularly construction workers. So that's a piece of information that is very important for us. As an example, I introduced SCR 136 this year, and it means that our Senate policy committees will consider how energy and climate legislation that we pass impacts working Californians.

Because I think otherwise, we're just, again, we're just sort of treating the impact as if it was equal across the board. And it isn't. And it has proven not to be that. We look at energy efficient heating and cooling systems, but we don't really take into account that renters have a greater difficulty of upgrading to those kinds of systems.

So I welcome, and I think it's really important to determine for all of us to determine if we can put a cap on old company profits per gallon. But I also want to make sure that we include others. And I think you mentioned, which is why I turned to Mr. Maduros, is the state taxes and the fees per gallon. But I would like to see it done much more specifically to communities in California.

I think both the public sector, our decisions, our legislative decisions, our policy decisions, as well as the private sector have to be included. And in terms of the decisions we make, include that in our data collection, include that in analyzing whether it's going to have a disparate impact. So I would request that of you.

I don't know that you've tried or included or thought about it, but I don't want us to leave out not only the impact, but the role that we as government and our decisions are, especially with regards to the tax base.

Well, if I may just very briefly, I think you make an excellent point. And in the report we do point out, and there's some data in there about sort of the age of vehicles, because it's often those people who have the longest commutes who then are driving the oldest cars which get the worst gas mileage. So it becomes sort of multiplier effect.

The team has built an incredible model that allows us to use GIS information to look at every gas price at every gas station in the state. I don't know that we've done enough, frankly, yet. And I will take this back and have them do an overlay so we can also get the economic data by neighborhood to see at the retail level at least, how these various factors may be interacting because I think you make an excellent point.

Senator Stern.

Thank you, Mr. Chair. I want to appreciate our regulators here for your testimony, but also the objectivity and holistic nature of how you're undertaking this difficult task. Especially in the face of what I would characterize as bad faith actions by industry leading into this. Not just in lobbying against the legislation with millions of dollars to try to stop us from even giving you this authority in the first place, but in suing you after asking for the data that we asked you to go get.

I'm glad we're past that phase now and that you've reflected the more collaborative dynamic, at least when it comes to the data gathering exercise. I wish this hearing itself were set up in a way that took that same kind of objective and comprehensive and holistic approach. The fact that there are no community voices in this room, set in this hearing, there are no drivers voices, there are no consumer advocates. There's just industry perspectives.

We are sitting here with the most well heeled lobbying corps in the entire state of California in this room. Look forward to hearing to their top brass in a second and asking some questions. But I would hope that in the future, going forward, if we're going to be doing oversight here, that we get a diversity of views, and especially the drivers are being put in front and center here. The poorest people in this state are suffering under not our policies, but their profits.

That's what we've just learned. If it didn't drop like a feather, as you note, the prices, but instead resettled itself, just like utility rates do after supply spikes. We saw it in the natural gas market, a regulated industry, that we pay attention to their margins and their operational costs, and it is a regulated market. It does spike sometimes. I was very frustrated with that. People lost thousands of dollars, and then it came down and we could actually figure out what happened.

But when we have blindfolded ourselves to the behaviors in this petroleum market that is still the wild west and becoming wilder, we're fighting blind here. My questions revolve around this sort of market behavior that I know you have to. You're not done with the investigation yet, but when we're looking at that sort of, the refining margins coming down, but the retail stays up. How much are drivers actually eating that cost?

I mean, on what scale, on the whole, have we seen drivers, you know, in that sort of month of extra time that the inflated price stays there arbitrarily? How much on average? How much in total? Do you guys have a sense of what that profit margin is, the impact it's actually having on driver expenses, on people's household expenses?

Yes. I think, first of all, a great question, and I think amplifying something that Director Maduro said and many of the questions here that have been consumer-focused, I think that's where we need to start, is really looking at where this hurts members of our community. I think the point that the folks who can least afford it have the oldest cars, drive the furthest, get the lowest miles per gallon, buy the most gallons of gas.

So being frank, we have not done that analysis, and we will to see what that impact of the down like a feather for 30 days has on consumers. I think the one thing we do know is the impact it has on the profitability of companies like Chevron, who had record profits in 2022, over $30 billion. And I think keeping this focus and having voices from people who are really harmed in this process is critically important. And so, so from DPMO's perspective, that's where we start.

It's in the statute. And so we're following our mandate, and we will look for that data point and revert. Senator, thank you.

Thank you. Oh, yeah, please.

Yeah. Thank you. Senator Stern, I think we haven't done that particular math you mentioned, but just kind of thinking at a high level. If you're talking about 30 million gallons we're selling in a specific day, ascent movement would give you 3,000,000. 30 days of that would be 100 million. Right. So it's basically. Yeah, so I think, you know, it's kind of thinking on the averages, you could think about, you know, the. So sorry, you're correcting the math. Sorry.

So it would be in 300,000, and then I'm sorry, I kind of missed the data point. So you're talking about every cent translating to millions of dollars over those 30 days. So if you're talking about an elevated price of $0.05 to $0.10, you're talking about tens of millions of dollars or potentially hundreds.

Anything on that? Okay, so my question then is, is it possible, you know, we require labeling and sort of disclosures at the pump right now around these sort of taxes and environmental fees? And this is what we love to see in the facts per gallon billboards around the state and in our mailboxes and our political mailers about the terrible toll that taxes and fees and environmental programs are having on gasoline prices.

And yet we see here all that combined is less than what the margins are for refiners and retailers, and yet those margins are not posted at the pump. Is there a way to actually begin to have a more transparent look at what is actually behind your, what the true facts are of that Gallon and how to disclose to the consumers what those refiner and retail margins are at the end of this? I mean, I guess I appreciate what you're talking about with the spot market publication.

I think that's a ripe area to kind of keep pursuing. And that may have sort of market-based impacts that disclosure. But I also wonder sort of that consumer, just so it's a trust exercise and at least they can trust, hopefully us as the state to tell them the truth, because I don't know how we're going to trust the industry that's making $30 billion in profit for the truth.

But is there a way to actually get that to maybe an accuracy or a level of granularity that would be meaningfully labeled at that pump or disclosed?

It's an interesting question. I think we'd have to think more about what the tools might be. One thing that could happen immediately, and this is, I talked about this a bit in my remarks, is for people to actually buy the cheapest gasoline that's out there, because I do think there's a tremendous amount of misunderstanding in the market.

And so people are paying voluntarily $0.60 more and, you know, you hear per gallon than they need to pay, thinking that it is, that they're buying some product that is much better, when in fact it is all the exact same product.

Does the grade matter?

The grade matters, yes, but not the brands.

So like to the chart you put out where you have sort of the behavior of the annual average retail margin by brand, even those, the down like a feather parts of the spike down. You see with the hypermarts, the slope is much less, it doesn't spike as high and it doesn't drop as low over a period of time.

So if people even just understood that there's no magic to that Techron or whatever you want to brand it as, and that going to Costco is going to do you just as well or whatever. So if there's some way to sort of articulate that any of the differences between what the CARB is offering versus what the industry is doing and sort of being clear with consumers about the label and hopefully AG's efforts yield some.

But I think at the, at the pump, we'd be, I'd be curious to know if there's, if there's a very straightforward way to sort of share with consumers and drivers the results of your deep dives here. So it's not just sort of just stuck in this hearing room.

Yeah, I would add that the Energy Commission has a gasoline dashboard and is updated weekly, and it's not as public as every pump. And maybe there's a way to interface that. And so as the prices were going up in this last month, I went back and I compared, and the public can do this, the gasoline dashboard for the Energy Commission. So between late March and late April, prices went up $0.44. So you're paying at the pump, you see prices go up $0.44.

You're wondering, what's the difference? Of that 44 cents, 41 cents was the industry margin, about two cent was crude oil, and about $0.01 was sales tax. And so when you see those prices move, we have the data and that's on the gasoline dashboard. But I do think there's probably mechanisms to get that information out and make it more accessible.

Thank you. Before I move to Senator Wilk, I have to respond to a comment that my colleague made. The purpose of this hearing today is to have a one-year review of the implementations of SBX 12 by the agencies that are charged with carrying it out and understanding what pitfalls and challenges they have met and where they are today, and the industry that has to respond to it. That's the purpose.

Thanks.

There will be an opportunity for plenty public comment afterwards, but also we had a hearing last year that involved the consumer groups before this bill was implemented as it went forward. So today is a one-year review of where we are and if, in fact, the policies that we voted for are working. Senator Wilk.

Thank you, Mister Chair. Have an opening comment which you don't have to respond to. And then I do have a question about process, because I think that's why we're here today. So one of the things I appreciate about our Chairman is he's very pragmatic and balanced and uses common sense. And one of the comments he made in his opening comments is that gasoline is not going away anytime soon. I know for me, I have a plug-in hybrid.

I would never go to straight electric because everybody on this Committee knows it takes seven to 10 years just to get lines approved. So we're not going to hit our targets. And my biggest concern, I have a working-class district as well, is that we're pursuing this, and then this refinery goes away and my constituents get punished more. And that's not for you. That's really for my colleagues, not for you. But it's a big concern of mine that we need to instill common sense into this.

But my question is this. So, bill passes, supposed to be an independent Advisory Committee. The Assembly's made their appointments. The Senate's made their appointments. We still have outstanding appointments. And you all, I think, mentioned during the course of this, we've had stakeholder input. Stakeholder input. Not sure how you're having stakeholder input when we don't have all the appointments. So I guess I want to know the timeline on when those appointments are going to go, and I'd like some background on how you're having stakeholder input.

And I would never have asked this question in the past, but I'm going to ask it now. Third question, did anybody have to sign NDAs to have conversations with you?

Thank you, Senator. So just on the appointments, my understanding those will be finalized at this month is my understanding. So that's something that I do not have a direct line of communication or visibility on, but my understanding is that on specifically the process, all the stakeholders that the legislation actually identified are the people we are meeting with, whether it's environmental justice communities, whether it's the watchdog, whether it's the industry. But we are having to have those meetings separately.

And obviously, we have our public workshops where we invite the industry, the labor and environmental justice communities and watchdog and all of those. So that's one forum. Privately, we are having a lot of conversations directly. Given some of the market sensitivities with the petroleum industry, we can never meet with them collectively. We meet them one-on-one under the payer regulations and confidentiality.

So most of our conversations with them, I would estimate we have a touch point with each refiner at least two or three times a month since the start. So we have very strong communication channels with the industry and the workshops and other venues. So we do a good process today.

Senator Seyarto.

Thank you very much. I would like to start with last year when this was first proposed to us, it was proposed with profit margin caps and penalties and things like that in there. And there wasn't a lot of support in the Legislature from either side of the aisle. And so some adjustments had to be made.

And one of those adjustments is found in our report here, that the CEC is prohibited from establishing a maximum margin and penalty unless they find that the likely benefits to consumers outweigh the potential cost to consumers. And it requires them to consider, at a minimum, three of these things. And I would like an answer if we've achieved any of these.

So whether it is likely that the maximum margin and penalty will lead to a greater imbalance between supply and demand in California transportation fuels market than would exist without it. Did we arrive at a conclusion for that? Because what I've heard today is not a conclusion.

Yeah, thank you, Senator, for that question. For the specific in the supply imbalance, as we were trying to note earlier, the current overall, if you look at the perspectives from the different groups, whether it's economists or the industry, the economic theory suggests that if there is a penalty, the overall output of the defining capacities will be maximized. That is basically what our economists are saying to us. We also have two expert consultants that we are using, ICF and Stillwater associates.

Both of them have strong industry background. And one of the things both of them noted is by putting a penalty framework, again, we haven't decided, I've read that what level would not necessarily, would not reduce the supply and could have a positive impact on blunting the price spikes. But the worst case is it does not include increase the overall supply.

Okay. So the answer is maybe.

Yes, I mean, so the negativities have not been substantiated, like what we've noted.

All right. And the second one was whether it is likely that the margin penalty will lead to average higher prices at the pump on an annual basis than would exist without the maximum margin penalty. Can you answer that one for certain?

So, Senator, I would note your kind of tough line of questioning, and I would not try to avoid the answer. We are still in the process of evaluating the opinions of the experts we have. Currently, what we understand is there's a divergence of opinion on both the things that you just talked about, whether there will be supply shortfall or overall increases. So we will come back to you as we complete our analysis on that.

And I don't mean it to be tough line of questioning. That was what we passed last year.

Yeah, absolutely.

Okay. And the third thing was whether case by case, exemptions from the maximum margin will be sufficient to ensure individual refiners have an opportunity to demonstrate the need for a greater margin before they make decisions about production.

Yeah, I think all three questions are a collective. So I want to just note that all three questions are very much interlocked.

So we're not there yet.

We're not there yet.

Okay. So at this EEC workshop, because, you know, the Governor sent his directive about changing our fuel types last September, but he also gave a directive that he wanted to march forward with the rules to be able to do profit margin caps, basically. And so we've been marching down there like it seemed the goal was to get the penalty in place. Was that the goal?

I think the way we understand the language is to protect the consumers at the pump. So I think the actions that you're hearing today in totality, whether it's transparency, whether it's penalty or some targets to increase supply, all of them collectively, will yield that end goal of protecting the consumers at the pump.

So, you know, last month at the CEC workshop, you stated that this is kind of like beginning to put our foot on the gas pedal here to really move forward on making sure the penalty lands this year. It sounds like you guys are already set on a penalty. Are we already set on doing a penalty?

All the answers to the other question indicate that we haven't done all the work we needed to do to decide whether that is even a feasible thing, which is why we had such consternation last year as a whole to go down this path.

Yeah, thanks. Thank you, Senator, for that question, too. So let me kind of see if I could summarize the situation we're in right now. Ultimately, whatever tool we have in the quiver that we could deploy is all, needs to come towards increasing supply in the market. And by increasing supply in the market, we will reduce the spot market volatility and hence protect the consumers. So that is what we are intending to do. And how do we increase the supply.

So specifically to the penalty, the penalty under some economic theory will increase the supply, but in the worst case scenario will prohibit those spikes. So we think it's an essential tool to have in the quiver with the exemptions that you noted. As we have more data and we have more clarity, exactly how we implement on each refiner and what those pathways would be will be detailed out.

But at some level, at regulatory paradigm to ensure that there is increased supply, and if the supply is not increased, some way of blunting those spikes is essential.

Well, when you're talking about tools in the quiver to blunt this, and some of my colleagues had pointed that the industry hasn't acted in a way to protect our consumers. I don't think we have either. I think government hasn't acted in a way to protect our consumers. Otherwise, we wouldn't be paying $1.30 a gallon for taxes and fees and cap and trade and all of those things because that's a higher margin than the $0.40 that you guys were talking about earlier.

So the biggest margin is the government is making $1.30 a gallon on gas in California. And so, you know, I struggle when we start trying to point fingers at everybody else, we need to point fingers at ourselves.

And I think that's what part of the issue was last year when we were going through this. We made a comment about, let's get more imports from Asia, maybe, because if we can get it cheap enough, you know, how long it takes to get a ship from Asia to here? 30 to 40 days of pumping out, what? Carbon.

So how does that help in the big scheme of things? It doesn't. If you want to increase supply, then we should be using what we have here in California, increase supply. And that will help with that part of it. It all goes back to the supply and demand. And supply and demand isn't manipulated by fines. It's manipulated by what we, you know, what we produce and then what we use. Back in 2001, when the gasoline prices first went over $2 a gallon, everybody went berserk.

$2.15 a gallon. They shut it down. People stopped going on vacation, they stopped going on cruises. The demand plummeted, the supply was up. And guess what? Two months later it was 91 cents a gallon coming home from when I was working out in Lancaster, stopped up in the deserts. 91 cents a gallon. That's the supply and demand, because we had enough supply. We have not done anything to create more supply.

In fact, everything we've done the last three years is to create less supply and disincentivize any investment in doing exactly what you're talking about. So I don't know that, you know, when your solution is to get to a penalty that somehow that's going to incentivize anybody because all these other things importing instead of producing here, that's a problem. The taxes that keep increasing, they're looking at increasing cap. And I think it's cap and trade. Another, what? 17 cents a gallon? And we discourage the investment.

I mean, who's going to invest here? Who's going to build a refinery here when we're trying to shut them all down and taking steps to decrease supply faster than we take steps to decrease demand, those are what's causing the problem. This isn't rocket science. We're trying to make it into it. But all of a sudden, the words gouging and all those other negative connotation words seem to have disappeared when that was the original comments that were being made. We're going to find the gouging.

We're going to get the, you know, and guess what? To this date, how many times have we investigated high gas prices back in 2000? Before that, you know, we've done it over the last 40 years. How many times have we found gouging and collusion? Anybody? I think it's zero. It's zero. So anyway, thank you for answering those tough questions. Questions or just trying to see where we're at as far as what our directive was when we. When my colleagues passed this legislation last year.

All right, we're trying to close this out, but I see Senator Rubio has one more question.

Thank you. I just want to focus on something that I read, and I think you stated, too, I think you said that the price of gas in some of the areas where there's lack of competition is a little higher. Can you remind me of the costs? Higher than areas where there's more concentration.

So in retail. Sorry, at retail. So if there's no other station around, you can expect. If you have a nearby station that's a branded station. So like an Exxon or a Chevron or something, you would expect that that would drop the price about somewhere between two and $0.03. If you have a nearby unbranded station, you would expect to see the price drop, on average, almost five cents.

And then for every additional station in the area, you see about a 0.7 cent drop in price. So that's sort proximity.

Thank you. So the reason I want to ask is, I mean, I think what I'm hearing is, like, I'm thinking of rural communities, where I venture to say that it's the least affluent communities, and you're saying that if they don't have competition around, they pay higher gas prices. Did you find any particular reason other than lack of competition? Is it driving further? I just want to know if there's other reasons other than just that.

Increased transportation costs to get the fuel there. You know, you can actually, on our dashboard, look, there are some stations in some locations, I mean, there's a famous station up in Mendocino that has very, very high prices, but the transportation cost is not that much higher, even in some of those rural areas. I mean, it is more, but doesn't make up that full difference. But there are competition issues, although you also. There's no.

It's very hard to see a hard and fast rule in some of these things. I mean, even if you drive up and down the Central Valley, you know, some locations off I-5 have much higher gas prices than other exits off I-5. And it's confusing. That's one of the areas we want to look at the retail ownership, which is one of the things that's been very opaque as of yet, to figure out why that is.

Well, that's where I was headed with this, I think it's an era that we need to study. If, again, I don't know, but again, I imagine that that's where the least affluency is and less money, lower wages, and then they're paying higher prices. If you could look into it.

The other thing, thing that I want to just kind of highlight, and I don't know if you stated that before I walked in, is I know that we're talking about, you know, gas almost like in isolation, but I also want to consider the jobs and the economy. And I just, you know, I have memory of some of the informational hearings we had here in the past.

And I believe areas like Kern, county, it appears to me, if I remember correctly, over 70% of the communities depend on refineries to, to function. And that means the workforce, the local economy, and that's how people survive and make their money. Just I want to see if there's a particular focus on those low-income communities that would be impacted if there's change.

I know I want to talk about protecting our consumers in terms of making sure that they're getting lower costs, but also the negative consequences in terms of job loss and that kind of effect on our communities.

But I do want to clarify the record, and I know that my colleague Eggman is not here, but, you know, when I talk about the lack of or our communities, their inability to purchase EV cars, the fact is that most of our communities, and I'll speak for mine, and I know around here we've discussed it, is that most of them are not running to buy new cars. They just can't afford it. So normally they go to used car lots.

And the EV cars and the cars that are, you know, electric are not old enough to be in these lots. So most of our communities are not buying new cars. They're buying used cars and they're buying cars that are not electric. So that's where, you know, the lack of access is. And I want to go back to what my colleague said, Senator Durazo, right now that, you know, that 42% of those that commute are low-wage earners.

And then I want to also cautious us as a state, we're almost double impacting them because we give them credit for EV cars. And again, it's not the, the low-income wage earners that are buying them. But then we also say if you buy an EV car, then you get to use like, the car lane, what is it, the fast lane and all these. And again, it's the low-income earner that's driving long, 3 hours. I think I just heard her say 3 hours.

And yet they don't get the privilege of driving in these lanes. So we just keep impacting those commuters that have to go longer hours, less wages. And so we just have to figure out a way that we really are benefiting those that need it. And I keep finding that we're just not. And I think I'll say what my colleague here said, it's just not equitable. The benefits are not equitable. The impact is not equitable. But we have to just dig a little deeper.

That's all I would ask. Thank you, Mr. Chair.

Thank you. Was there response to that? Okay, Senator Seyarto. And then we're going to.

Sorry, I left this one question out. I left this question out and I don't expect you to have the numbers right in front of you. I would like to know what this effort has cost us so far and what we anticipate it's going to be yearly going forward. If you could get that at some point to my office, I'd appreciate it. Thank you.

Thank you. Stern.

Yeah, sorry, just one follow up then, to Senator Rubio's point, and I'm not going to try to correct the record on the impacts of ZEVs here, other than to say that they're now competitive in the marketplace and people are spending less at the pump. And that's the threat. And that's why we're here. And people are spending tens of millions of dollars lobbying us and we're all performing in front of them here.

But my question is how to get people back their money that went to profits during these, these periods of time. Oh, this whole hearing is a bit insulting. So we can get into that.

Mister Stern, will you stay to the issue? Because this is not a performative issue here. We're trying to drill down to facts.

I hope so. So the real facts per gallon that I'm hoping to get is in those, those periods of profit, are there any legal tools that we've got to get people back? The hundreds of millions of dollars that have gone to the oil company's profits in California? Do drivers have any recourse? We have similar recourse, like on the utility side, right. That people got their bills credited back, that there was even SoCal gas sent money back to ratepayers.

Is there any similar tool that we have in the oil sector to say, actually, we did overcharge you for that last month, say, by $100 million to the State of California? How can we, can we get that? Is that money just gone? Is it just theirs, or is there any kind of tool that exists out there, legal or otherwise, to get people back the money they sent to Chevron's shareholders?

My understanding is to defer to the CEC. The penalty is a CEC decision. BPMO will give input on that decision. My understanding is that any penalty would not be retroactive. For some of the comments, you know, talking about how we view these large increases in refinery profits, I'm hesitant to sort of use too strong of language because we're at the preliminary stages of our analysis.

But what we're trying to show in a follow-the-facts approach is that when there is a supply disruption, the refinery margins go up over 200% is one of the core items we address today. I think there's different ways you could use to describe that. I think some definitions of price gouging do talk about taking advantage of supply disruptions to raise prices above a competitive level.

So I think one of the things that we're trying to do in a deliberate and a thoughtful manner is to lay out how those refinery profits spike, how those lead to retail price spikes, and then the Commission will decide whether a penalty is appropriate moving forward. My understanding is that a penalty would not apply to profits that have already happened, but that's a CEC decision.

Thank you. Pretty much all the questions have been exhausted, but I do have two, if you don't mind. I'm curious, are we setting ourselves up for a lawsuit when we're trying to regulate a non-regulated industry without putting some safeguards and rails up that other regulated industry have in place?

Senator, I think that's a good question. We are, every action we are taking, we are seeking the legal counsel, as we do in our legal counsel that we have at CEC to this date, the usage of the tools that we have been given, we feel fairly confident in moving forward with those as it pertains to then legal lawsuits and such. I think given our authorities, we should be able to defend them.

And my second question is being the fact that there's still going to be close to 20 million cars on the road come 2035. What assurances do we have, and how does the CEC intend to address the requirements of Section Five of this bill, which specify determinations regarding the benefits to consumers of setting maximum gross gasoline refining margins?

Yeah. Thank you, Senator. Thanks again for that question. I think I just want to take this opportunity to just frame the totality of the conversation we had today. I think the approach that CEC, in consultation with DPML and CDTFA, has been taken is really trying to be as thoughtful as we can to gather the most amount of data to carefully vet the benefits and costs of everything that we are going to deploy, including the penalty.

So at this moment, it is fair to say without any intervention, what we have seen the last three years will continue to happen. So if you look at the 2019 price spike, '22 spike or '23 spike, those happened in absence of any regulatory framework, and we will continue to have them. So the question is, is this the time and place for a regulatory framework to help shape that discussion? And that is what we're trying to do. And we will do that holistically and thoughtfully.

And we'll welcome both the tough questions which help us to do our job better. So we welcome those questions and look forward to coming back to you.

I want to thank our Vice Chair, Gunda, and our directors, Milder and Maduros. I know we've held you for 2 hours now. Would you indulge us if you mind staying here in the hearing room, and if there's additional questions after our final panel with you guys minding engaging us in that. Thank you. Appreciate it. All right, so we're going to ask for our next panel to come up.

We welcome the next two panelists, and we'll hear from the industry participants who are required to provide the reporting and other elements of this legislation. I want to welcome Western States Petroleum Association President and CEO Kathy Rehouse Boyd and California Fuels and Convenience Alliance legislative advocate John Winger.

You may begin when you're ready.

Is it still morning?

Barely hanging on there, but we're here.

Good morning. Chair Bradford and Senators. Cathy Reheis-Boyd, president and CEO of the Western States Petroleum Association. I want to start off by thanking the Committee for providing the much needed oversight on implementation of SBX 12 from the special session last year. Last year, this Committee held an informational hearing on SBX 12 where you listened to experts. You heard a lot about California's gasoline supply.

Senator Dodd expressed concerns about unintended consequences of the governor's proposal, and Senator Min stated, there is no smoking gun of price gouging or collusion. And Senator Bradford, thank you for your leadership on the Committee. Greatly appreciate it. So as a result of this Committee's work, the Legislature had the wisdom to reject the governor's initial proposal to Russia refinery margin cap and penalty into law. This essentially would have been a profits tax.

But instead, the Legislature directed the Energy Commission to collect a lot of data to comprehensively understand the transportation fuel market and to do homework to consider pros and cons of a margin capability to listen to experts, advisors, and the industry who know how the market works best.

The Legislature also, obviously, as we've heard, restricted the Energy Commission's authority to impose a margin cap and penalty, provided that a cap and penalty would be allowed if and only if the Commission could prove that it would not result in increased gas prices, wouldn't negatively impact gas supply, and it would not hurt California's citizens more than it would help them. So after it was signed, we asked the Energy Commission in state of rulemaking to simply ensure everyone understood the terms and definitions to be reported.

Given the bill, as we all know, was rushed through the legislative process, signed into law with in eight days with no amendments. Unfortunately, the CEC denied our request. They also denied our request to do a rulemaking for SB 1322 that imposed additional reporting requirements. We appealed that decision and was rejected again on other rulemaking requests for SPX 12. And to that point, we submitted 20 detailed comment letters, petitions, supplementary information to the CEC on a host of topics.

So the Legislature was pretty clear, we think, with the Administration. You wanted to see the homework to confirm whether a cap and penalty would do more harm than good to Californians. The transportation fuel assessment, which was referred to earlier, was due on January 1 of '24. It's still in draft form, and it is five months late to the Legislature. This is a very important piece of work.

I participated in the Energy Commission's first panel last Friday, where we looked at the assessment report, at least the preliminary draft. And I do want to submit to the record what we call the placement, which is before you. It's just something we also submitted last Friday. It's just a simple graphic of a really complex situation, a complex energy supply chain.

And you can see we included molecules and electrons because it is the intersection of the two that's going to be really important as we plan towards the fuel transition study that's due at the end of the year. When we look at this diagram, we laminated it, because you can take a pen and kind of draw some things on it and figure out some stuff.

But I could tell you that it's become a very important tool as we look from the supply side, on the left side, all the way through bulk delivery, retail, and meeting demand the right side. And it's every piece of this puzzle that matters as we're looking at how to minimize market volatility in the California landscape. We call it the five p's, just for simplicity. So you've got crude production pipes, ports, permits, and people, all very critical to meeting consumer demand and minimizing market volatility.

And I emphasize this because technical realities embedded in this placemation, if we're not done right, can impact aspirational goals. So these are really important things that the Energy Commission is now going to embark on. And their discussion on storage, fuel blends, imports, demand reduction scenarios in the fuel assessment port. Hoping this Commission has folks come back from the education talk about these options because they're super, super critical going forward. We've already talked about the fact the Independent Consumers Fuels Advisory Committee yet to be formed.

So that's part of this bill, is to get advice from that Committee. And again, we get the sense that the CEC is still marching towards imposing a margin cap and penalty. And I guess I just can't stress enough the harm this could cause to California's fuel markets and the citizens. So we're submitting all the data to the CEC. Our members have been, I think, and I think Commissioner Gunda would agree, been more than forthcoming about submitting all the information required for SBX 12.

I've been looking, everyone has too, at the CEC, posting the data online. And one thing is very clear. The data simply shows no evidence of price gouging. Refiners are making cents on the gallon of net margin. And the data showing margins of refiners are cyclical. What the data tells us, however, is the transportation fuels market is complex. The market is driven by supply and demand. And California has a chronic gasoline supply issue.

The supply challenge is driven, as we've heard, that hamper supply in a state so isolated from the national fuels market. Experts call us a fuel island. Rather than taking steps to increase state supply of fuels, we have policies that drive fuel exploration, production, and refining out of California despite a still strong demand for liquid fuels for tens of millions of Californias. So let me give you a case in point. California used to have 30 refineries supplying gasoline to the local market. Now have 8, 9.

You hear difference between 8 and 9. California used to produce 50% of the crude oil needed to meet consumer demand. Now we only produce 25%. The rest of California's oil and gasoline is imported from foreign countries. The oil production decline is not because we don't have crude oil. We are blessed in this state with reserves of crude oil. It is because our member companies cannot get permits from the state of California to recover and process oil to get to refiners.

If you look at logistic costs, which we're supposed to look at because we are concerned about cost, getting refiners crude oil from San Joaquin Valley is about a dollar a barrel. Getting crude oil from Alaska is about four to five. Getting crude oil from foreign sources is about five to six. So one would ask, why is crude oil production not in the fuels assessment? It should be. It impacts price, it impacts cost, it impacts logistics. It impacts a refiner's ability to continue to supply the market.

Another case in point, the scoping plan calls for CARB's Coping plan calls for 85% reduction in refining capacity to meet the state's climate goals in 2045. In addition, there is an amended at berth regulation that CARB is looking at that will result in significant restrictions in marine tanker vessels starting in 2025. So again, if we're going to look to more imports, the fuels assessment study the Energy Commission is looking at will look at how do you get more vessel traffic into ports that are already congested?

And that's one of the main areas the Energy Commission is looking at. Higher prices. CARB is currently going through two rulemakings right now to make the low carbon fuel standard in the cap and trade programs meritorious, as they are not in any way discouraging the aren't meritorious programs, but making them more stringent. The Low carbon fuel standard could cost consumers as much as 47 cents a gallon. It's about $0.11 today. The economic impact from a revised cap and trade regulation could be up to thirty cents.

Consumers currently pay today more than $0.30. So we have been cautioning the Legislature that these and other potential increases are likely coming in '25 and '26. That's compounded with our pursuit of policies that shrink in state supplies and discourage capital investments to increase the cost of compliance with existing state programs. So the evidence collected by third party experts and even the CEC has been clear that the underlying market reasons for California's high gasoline prices and ongoing market volatility is traced to obstacles to market supply.

Sustained strong demand from California citizens, and a margin cap and penalty addresses none of these. It instead penalizes refiners for producing too much and exceeding a profit cap. I will note that most refiners outside of California cannot produce fuels that meet strict gasoline specifications. And even for the few that do, as a fuel line, California is not directly connected to pipeline to other domestic refining centers due to the Pacific Ocean and the Rocky Mountains. So getting these fuels supplies here is difficult.

It's expensive and it's time consuming. So because California has chosen to reduce our own in state supply and capacity of locally sourced crude and refined fuel, we're forced to get more and more importing fuels overseas. Importing fuel is slow, it's expensive, it generates more greenhouse gas emissions, and it exposes us to the certainty of the global market.

So all of this means that more product we must import across of ocean, the more expensive our gasoline becomes, and it directly contributes to higher and more prolonged price spikes. We cannot change these economic realities, nor can we change state policies that have caused consumers to become dependent on a global market that we don't control. So, in conclusion, if the CEC chooses to penalize refiners for making revenue over a certain number, that will actually incentivize less in state gasoline supply, not more refiners' investment.

Decisions are made on their national portfolio and capital flows to where certainty to generate a rate of return. Refiners would not, would not knowingly violate a margin cap imposed by the State of California. As a result, some refiners may be forced to ramp down refining in order to prevent revenues from reaching a penalty triggering a cap. If refiners do this, it would be exactly the opposite effect from what the CEC wants.

So I appreciate this Committee's willingness to hear our concerns against imposing a margin cap and penalty. Believe it would also behoove the Committee to require the CEC to come back before they present their evidence, before proceeding further and considering any margin cap or penalty. And I also would encourage the Committee to hold a follow up to this hearing on the CEC's fuel assessment work.

Again, super, super important work, evidence on the placement here that really identifies the policy options we should be looking at and considering that have the potential for affordable and safe transportation fuel in California. So I thank you for your time and look forward to questions.

Thank you. Mr. Winger, if you can limit your comments to about five minutes, we're going to try to see if we can get to the questions of the audience. Thank you.

Thanks. Yeah, I'll be as quick as I can. John Wenger here on behalf of the California Fuels and Convenience Alliance. We represent the majority of the fuel supply chain below the refinery level, including fuel marketers, haulers, all the way down to the gas stations and convenience stores, which are primarily small, minority, and family owned businesses. Appreciate the opportunity to provide our perspective on SBX 12 implementation.

I think from our organization's perspective, we have seen some process and compliance challenges with the implementation, which we think can have some unintended consequences on fuel pricing. On the current process, we have concerns about the piecemeal approach to implementation, starting with the spot market, then moving to terminal position holder reports, then marine import reports, now workshops on the profits cap. We believe this could keep the CEC from accurately assessing the market impacts causing price volatility and could distort the way the entire market is evaluated.

We also believe the current rulemaking process is extremely rushed. Our marketers do not receive materials for the workshops and proposed regulations until the last minute, which prevents meaningful dialogue on an extremely complex issue. As an example, the CEC released its materials for two related workshops happening on the same day, less than 24 hours before the workshops were scheduled to start, which didn't give our marketers very much time to prepare for those hearings. Our most significant concerns with the implementation are around the cost and compliance.

Specifically, we are worried about the excessively burdensome reporting obligations that will add even more cost to the retail price of gasoline. In some instances, the marketers and traders are being asked for multiple reports on the same transactions throughout the life of the transactions. Some of this can be 32 separate fields for one kind of report and 24 fields for another, all of which is information that is not automatically generated or immediately available.

Some of those reports are due by 9:00 a.m. the day after the transaction is complete. Much of that information is either not available by then or would require additional staff to comply, adding significant costs to our fuel delivery. As we stated during the original discussion on SBX 12, there are significant operating costs that add to the price of gasoline in California at the retail level. Higher electricity costs, significantly higher labor costs, higher transportation costs, and higher compliance costs, to name a few.

Our members are concerned that this added compliance burden and the related risk of fines for noncompliance will continue to add to the price of fuel. With the clear market signals California has sent, we are already seeing companies and market participants leaving the California market. Local gas station bans that continue to be proposed and further state regulations are going to make the market even more challenging at the retail level. The Berkeley Haas Business School recently found that lack of competition negatively impacts prices in the state.

CFCA conducted its own independent study that further solidified this point and found government imposed bans have reduced fueling options in the state, leading to less competition and rising gas prices. I recognize this discussion today is not about local gas station bans, but we believe all the actions being taken by state and local governments are making it harder to stay in operation and that all must be looked at collectively as we debate this topic.

While our fuel marketer members continue to try to comply with these new burdensome requirements, we believe supply issues will become even more of a problem as we approach the peak travel season this summer and as refiners switched over to summer blends, any new regulations and mandates, we believe, risks harm to consumers by reducing supplies available to the state. We are also concerned with the new reporting requirements on importers that could incentivize them to stop doing business in California.

If the rulemaking is unclear or if the costs of compliance are too great, importers can send their shipments to Alaska or South America or somewhere else, further reducing the supply in California. And if the reporting mandates cause traders to sell their fuel elsewhere, supplies will be reduced in California and prices will continue to go up. Big businesses can absorb these costs through their market power in a way that small businesses and consumers cannot.

Independent gas stations and other independent sellers, particularly those serving rural communities and farmers, are reliant on non-refiners. So, in summary, our marketing members continue to try to comply with all the applicable state laws and regulations. However, our entire membership has significant compliance concerns with the emergency rulemaking process, which will further add to our already significant operation costs of running a station in California. We are concerned many station owners could leave the market, further limiting competition and increasing prices.

And finally, we are concerned with the inevitable unintended consequences of new requirements placed on importers, which will particularly harm the small and rural station owners. So appreciate the opportunity to provide our perspective. Hope I went quick enough.

No, I appreciate it. Appreciate it. I'm going to open it up for questions by Members of the Committee. Senator Eggman.

Thank you. Last time I saw you was in Health Committee, Mr. Wenger. You've got a range. I'm sorry I was out of the room for a while. But one thing struck me, and I'm just, again, as we're looking at all things on the table, and I certainly acknowledge that, again, that fossil fuel industry is on its way out. But we know that we need bridges as we build our way out, if you will. And I heard Ms. Reheis-Boyd said that California produces, it's a dollar a gallon a barrel or a gallon. Other states, it's four. And globally, it's six.

Yeah, to transport per barrel, right? I mean, I am a social worker. I'm not a mathematician, but I can understand that us getting gas from other parts of the world, of course, is much more expensive. So I guess in this question, not necessarily for you, but again, as we're looking at all options, and I know my friend from the coast, well, his head might explode. And I'm not looking for anyone's head to explode.

But I'm just wondering, are we looking at everything where we could do carbon captures on ours? Just again, to do this bridge where we have our jobs, we have the cleanest. We can make it even cleaner. We can do carbon capture. There are tools that we have in our toolbox to be able to address this issue, this supply issue. Is that what you're suggesting? Or is that what you were saying? We have the supply. We are not producing it. We could, in a cleaner way.

We choose not to because of our policies that we understand are on the way out. And we want to be able to protect the pocketbooks of Californians who are feeling the squeeze every single day.

Thank you, Senator, very much. You know, I've been doing this 34 years, 40 years in the industry. The excitement, the optimism of where we are today is this: is how do we take everything we know, in an all of the bill of energy strategy, to get from how we supply it through molecules and electrons in the right pace and scale, to meet demand and not mess up the system as we're doing it, and have it most cost effective and equitable and protective of the environment.

And in my humble opinion, those are not exclusive. They are mutually beneficial together. So I get concerned when we've left, if I had a pen, I'd circle the crude oil. Circle here. I'd circle the import, I'd circle the marine terminal. Each one of these I would circle into your point on crude oil. We produce it here in the most environmentally sensitive way possible. We have adequate reserves to produce. We have well paying jobs to produce it. And yet we choose not to.

And increase the cost of getting crude oil to refiners to make gasoline, diesel, and jet fuel when we are supposed to be minimizing the cost. So this is where it doesn't. I mean I'm not great at math, but A plus B doesn't equal C here for me. So I understand there's issues with each one of these circles. I mean every energy source has issues. We can talk about all kinds of issues associated with everything on this page. But I am convinced we have the wherewithal.

We have the Energy Commission's expertise. We have ARB's expertise. We have the industry's expertise. We have the economists, the experts, the Legislature. This is not unsolvable. This is completely solvable. And when you start tacking on solar into crude oil production or carbon capture and sequestration into every piece of this to reduce carbon while we're going on the path to meet our demand differently, great. That's the conversation. That's why I'm excited.

I wish the fuels assessment plan didn't take this long to get here, but I understand the Energy Commission has been a bit busy. But this, to me, the fuel assessment plan is the foundation to figure this out to reduce market volatility, to increase supply, to increase investment in electrons and molecules, to get from supply to demand affordably and not impacting the environment. We could probably increase our desires to get to our goals quicker is the premise.

If we all quit, to the Senator's earlier point, if we quit villainizing and put that on both sides. But I was here when we ran. We rolled out three cleaning and burning gasolines together as a state in the industry. We took lead out of gasoline, we took sulfur out of diesel. And now all we do is argue and we should be doing stuff on this page.

So I don't, I strongly do not believe a margin cap and penalty is the process that we should be looking at. What I would encourage is the process that just started the Energy Commission on Friday, which is looking at 19 different policy options on how to solve this problem. That's what we should be digging into because that's the important stuff. That's the important work of this Committee, in my opinion.

So you feel hopeful about the process?

I am hopeful about that part of the process. Not the fuels, not the penalty the margin cap process, but that part of the process I am very, very encouraged about.

Senator Skinner.

Thank you. Thank you, Mister Chair. I have some questions and comments, but I was struck by the, by your search, Miss Boyd, about the. I think, did you characterize it as vilifying?

I don't think any of our California voters or consumers have received, received any materials from the Energy Commission or the new division, either web ads or mailers attacking the oil companies or indicating that while certainly the motivation of the Bill that we're discussing today, SBX 1-2, was to protect our consumers and to try to see if we can't have some ability to affect these high prices, the state or the energy Commissioner of the division is not sending out materials broadly or making such attacks on the oil companies.

However, many California voters are recipients of an active campaign by many of our companies, oil companies in California vilifying the state and asserting, and there's current web ads, current mailers vilifying the state and basically indicating that it is the state's taxes and environmental regs that are causing these price spikes.

Now, I am going to trust the data that has been presented to us today that was provided by our oil companies, that, in fact, when we look at all of this data, which fortunately we've been able to acquire as a result of SB X 12 those factors, yes, our taxes and environmental regs add to the price, but they are more or less a constant. And it is these other factors that are causing these price spikes.

So I think it's important to put that on the record, because to describe a vilification, I'm sure there are certain of us, and hey, I'll take responsibility for being one of them. I think personally that the oil companies, the four major companies that control our refinery market here, are manipulating prices. Whether there is a collusion, I cannot say, and I would not say, but certainly the factors of, for example, not pre planning before maintenance to have enough inventory, you know, there's various things that contribute.

And of course, now I will say, as I said earlier, that corporations in General, not just the oil companies, are oriented towards maximizing profit, and this allows that maximization of profit. So while I don't like it, I do understand why, but I don't like it for my consumers. But anyway, now to get to some questions, one of the issues that.

Could I respond, Senator?

Sure.

So appreciate your comments. I would say, relative to facts per gallon, it is not an education piece that says the State of California is responsible for price spikes. It's a transparency piece that says, as we talk about what goes into the price of a gallon of gasoline, let's just be transparent about it so that when we talk about it in that context, people have an understanding. Because I don't think many people do.

I don't think they know what goes into the cost of a, or the price at the pump. And so it is a transparency measure to say it's over at least a dollar, sometimes $1.30. It is, you know, taxes, fees, underground storage tank, cap and trade, low commerce, those are just facts. Not to say that, not to say that.

It's just, if you're going to talk about cost, let's also put on the table why we're not using San Joaquin Valley crude and why we're looking at, you know, Alaskan imports, because that's 14 cents a gallon that we're not even talking about.

Let's get back to that in a minute. Okay.

So first I want to get to the margin cap. The issue that there was an assertion, and I think it was that you made that assertion. But I can't remember that if we, if the division were the state, were to put in that margin cap, that it would cause the refineries to ramp down production. But however, the cap that the division and the Commission are considering that they had the hearing on is on a gallon basis and not on overall profits.

So any response to what this assertion that it would cause the ramp down of production?

If there is a, if there is a refinery margin cap and penalty that gets triggered from hitting that cap, don't know how the refiners will react. A likelihood, knowing that they will not, will not break the law. A likely outcome would be revenues never hit that cap so that the penalty is never applied. That is a likely response. That response will not deliver any benefit relative to the issue at hand.

And so again, I don't see how that avenue gets us where SBX 12 is, you know, articulated to reduce cost and impact on the consumer. I do think the elements that we are looking in the fuel assessment plan do. It's all the other things we just heard about the storage, demand reduction, places in the system that are broken. There is not enough infrastructure investment going on in the traditional fuel side, let alone in the electric and alternative fuel side. Right.

So more investment, more supply, reduced cost. The margin cap does not accomplish that. All right.

So let me get to a couple of other points that were made. So, on the crude oil issue. So U.S. is now the largest producer of crude oil in the world. And California ranks, depending again, on the day, the fifth or 7th state, you know, with the highest amount of crude oil production. So I, and we have not banned it. So I'm confused. I don't know. And I really, I'm posing this. Not so much to hear. What.

Sorry for using the word an excuse for perhaps why you're not using the crude oil that California is producing. But California is producing a substantial amount of crude oil. So whether it's not the quality of oil that our refineries like. I know there's variations in the quality of crude oil, but we are one of the. U.S. is the largest producer now in the world, and we are one of the larger producers within the state.

Yes, Texas surpasses us, but still, we're within the five or 7th largest producer in the country.

Thank you, Senator, for that question. So, relative to crude oil, we used to be the, you know, probably the fourth largest producer in the U.S., and now we're declining. Why are we declining? We are declining not because the reserves are not there. The California Air Resources Board just. Can I? Can I just? Because it's a, it's an important factual.

Declining. I wanted to hear about, you asserted that we aren't you. That you can't.

I'm trying to answer that, Senator. I'm trying to answer that. So the Air Resources Board estimated a one to 2% decline in production, kind of a normal decline of a Reserve. We are running it 14 and 15% decline right now. Why we cannot get permits from the State of California. We haven't had a new drill permit since last year. That's why production is down.

But we do have production. So can you get to the point of what you said that we're not utilizing.

Because we're not. We're not allowed to have a drill permit to get more production to give to refiners.

I'm asking. You asserted that. That our refiners could not use any California crude.

No, I didn't say any. I said we're on a decline. We're not able to.

We're on a decline of the quantity of refined gas that our consumers are purchasing also.

If we don't use California crude to make gasoline decent jet fuel, the only place it can come is marine imports. We have no pipelines to deliver it here. What is more imports? Increased cost. Our refiners are geared to use San Joaquin Valley crew.

I do appreciate that, and I do. And I can appreciate how potentially, as the decline increases, it affecting. But I'm in what I'm talking about right now. And of course, I have not gone and done all the numbers, but given the quantity that we are still producing now, which is still significant, and given the reduction in demand of refined product, which is going to increase that reduction in demand, given our move, and I appreciate that impacts the industry.

No, you know, not an illusion about that, but I'll leave that point for now. And I have another question.

Increased crude oil reduces price.

So the next question I have is.

California crude oil,

Other than questions around our taxes and regulations, which I think we're all familiar with, that, you know, you're feeling of how it contributes to the price. What are your solutions? What do you have to offer to help us reduce these price spikes?

So we are very involved in the fuels assessment policy options. But again, just presented Friday, we are diving into every one of them. We gave some initial comments at the Energy Commission Friday, but again, we're still doing our analysis. We have hired Turner Mason to dive into all of these issues, much like the Energy Commission has hired ICF and Stillwater. So we hope to be able to provide, I think the comment letter is due on the 17th of May.

So in very short order, we hope to be able to look at the policy options presented Friday and try to see which ones we feel can actually assist in reducing market volatility to California consumers. And I think the categories that the Energy Commission described earlier are the categories that we should dive in and look at. I mean, certainly demand scenarios are being looked at extensively by their resources board. Those should obviously continue to be looked at. Storage is also an issue.

I do think we've got to focus on marine imports and marine terminals. We are in a constrained marine environment. Policy options are pointing to more vessels, not less. How are we going to deal with a constrained marine environment when our policy options are looking at more, not less? And that's on the crude side and the refined product side. Right.

So I think that is a, you know, I'm hoping for the workshop where we talk about, you know, the port of LA and Long Beach and San Francisco and how the heck we're going to do all of this when we have a constrained infrastructure. So, I mean, there's probably many things in there. I hope that we'll able to have another session with this Committee as to what those options are. The pros and cons, none of them only have pros and not cons.

I mean, the Energy Commission actually put a table together of pros and cons. Every one of them has pros and cons. So now it's like digging in and say, okay, which ones will make a difference in what we're trying to do in SPX 12. And where can we suggest how to improve this picture? Now, fuels assessment's just on the gasoline side, obviously. There's the electron side obviously, and that air resources. We're doing fuels transition study. The two come together.

So the fuels assessment Energy Commission garb come together in the fuel transition study, but the one the Energy Commission doing now, in my opinion is critical.

Thank you. Senator Stern.

Thank you, Mister Chair. Question about, I guess following up on your comments, Miss Reheis-Boyd, and sort of the options you're looking at and considering, I heard in your testimony a concern for consumer impacts. You were mentioning say the low carbon fuel standard worries about $0.30 gallon impact there. I'm seeing on the CDTFA CEC data here a 96-cent per gallon retail margin from Chevron. So I hope you share the same concerns about the dollar margin that Chevron's getting versus the LCFS.

And I haven't seen that in the facts per gallon campaign or in any of the facts per gallon. That margin. So where is that margin in those facts per gallon?

The only thing that the facts per gallon points to is literally what are the costs that go into the price at the pump. So that's what that depiction is. It's what are the facts that go into the price at the pump? I'm hoping the low carbon fuel standard in cap and trade, we have many suggestions how to improve that program so that it doesn't increase costs, but it increases the investment for lower carbon fuels and it increases the ability for cap and trade to work.

That's not what we're seeing in these rulemakings. And these are, I mean, we're not suggesting to increase the cost of cap and trade and low carbon fuel standard.

I appreciate that. Yeah, I'm trying to get more at the issue less so, go off on the tangent of cap and trade LCFS more just to articulate the point that when you're laying out the facts per gallon to consumers or when the Members of your alliance, Mister Wenger, are, you're not talking about the retail margin or the refining margin in those facts per gallon. So how can we call them facts if it's not all the facts?

Well, I think it's a, again, I think it's a different purpose of what's trying to articulate what goes into the price of the pump. But the Energy Commission's job under SPX 2 is to collect all the information and report the data. I'm looking at the data.

Right.

And it's not supporting the narrative. There needs to be a cap and a penalty.

I appreciate the policy points and the concern about unintended consequences and maybe other ways to address this. I'm just trying to get clear the current. Your current campaign on this does not include in the facts per gallon the retail margin, is that correct?

No, it just states fuels, taxes, cap and trade, low carbon.

And not refined either?

No.

Right. Okay. And then. So my one other follow up question is when it comes to the clean fuels and convenience alliance, and we've been talking about sort of the Independence of the market or the dynamics of the market. You mentioned an independent study that you all had conducted. I'm trying to understand how independent it is. Does Chevron fund the alliance in any way?

They're a Member of the alliance, yeah.

They are, because I know the alliance is.

Their retail side is.

Yeah, I know the alliance doesn't list their Members online, but. So Chevron is part of the alliance and I know they've sort of been part of conferences in the past or membership fees. So there's funding coming from not just the retail side of Chevron, but Chevron is the parent company as well?

Just the retail side.

So there's a separate entity that's funding the fuels alliance within the broader Chevron family?

Yeah, they have their marketer action network.

Okay. So their market or action network is not. But is there any interface between that market or action network and, say, the refining side or the other sort of broader California Chevron strategy?

I'm not familiar with the inner dynamics of their company. We just deal with the retail side.

And so when it comes to the impact on retail and the clean fuels and Convenience alliance public studies, do you all disclose the retail margin either for Chevron or others? When you're sort of looking at the price of the pump, is any of that disclosed?

Our study was mostly looking at the impact on local gas station bans and how that impacts competition. So we weren't looking at all of that. I think it gets complicated when you look at the actual gross margin as it's compared to the net margin. We have pretty significant overhead, operations, costs, that all goes into employment, labor, electricity costs.

Understood, but fair to say no, in terms of you haven't got at that retail marginal cost in either your studies or in the public disclosures around that gas station by gas station.

We've only done a study on competition similar to the one that the Haas.

My only follow up there is. I appreciate that. My only follow up, though, is you talked about high operational costs, and my understanding is that the way that operational costs are being reported to. Not sure if it's CEC, DPMO, or CDTFA, but the reporting under SBX 12 that what the industry reports is the operational costs are different than how they report their operational costs.

Say to the SEC. That we're getting one set of numbers to the CEC and to the state agencies, that the Federal Government's getting a separate version of the numbers of what operational costs are. And that, am I right to say that the way you all report your operational costs in this California context also includes capital costs?

That you're putting capital investments into your operational cost disclosures or other things that make operational costs, say, look a bit higher to the CEC when you're reporting versus to the SEC. I'm trying to get it to the discrepancy for why the federal numbers say your operational costs are 30% lower than they are here in California. So is that because you're putting capital investment in the operational number, or it may not be. You may be Miss Reheis-Boyd, who understands this better.

But why two sets of numbers? Why a federal set and why a state set?

I don't know how to respond to two sets of numbers, but because I'm not familiar with that, I apologize. But what I do find concerning is when you have major companies writing down assets, that is a clear indication that California is not a place to invest. And that worries me a lot.

I also see on the other side, a company investing in a major merger in oil and gas production.

You know why they are made? Because two companies cannot survive. Why? Because production, to Senator Skinner's discussion, is on a decline. So the only way anyone can survive and this market is consolidation. And if we lose one more refinery, I can't. You know, I mean, some of the data that's coming out, we're looking at 26 cents a gallon.

So we've heard the thinly veiled threats here.

They're not unveiled threats.

Well, they're unveiled threats, then whatever they are.

Not veiled or unveiled.

Yeah, I don't know if there's a vail or if the veil's off here, but it's very clear the consequences and how at least the most major market actor, both at the retail side and those who are actually funding all those small mom and pops out there are a mega corporation and then this one that wants to write down assets and get into the politics of climate through the price of the pump.

My biggest concern is the lack of uniformity in the reporting, and that we don't have accurate data coming in. And so as an industry is there an effort to get more uniformity about that reporting, like to get the operational costs?

As I said in my testimony, Senator, we requested a rulemaking to do exactly that. We were denied three times. We wanted clarity from everyone in a rulemaking on what to report, how to report it, what details, so that nobody had any different interpretations. And I'll leave it to the Energy Commission to decide whether that's accurate or not.

But none of your Members. Sorry, I'll make this last question.

Let's do that.

None of your Members are stacking operational costs in sort of clustered ways that would make their negative margins appear larger because of how they're reporting that data. That's not happening right now, would you say?

I would say that our companies are reporting everything as accurately as possible.

So they're not doing that then?

I would say they are not doing that.

Thank you. Any other additional questions? Senator Newman,

I'll be quick because Miss Reheis-Boyd actually answered mine. But before I do, I want to thank you for the placement. I'm going to try to get a set of four, with crayons. But if you could elaborate just a little bit on the prospective impact of California losing one or more refineries.

I think you've made really clear, and I think it's important to note this is real, that the market signal sent and the return on capital in California might actually instigate capital flows elsewhere to the detriment of either, probably the maintenance, more than anything, of current refineries, and leading probably to the closure of one or more. So how likely is that to happen? What would the impact be?

I think if we don't. If we don't do this right, this right and every piece of it right, the likelihood of that happening is high. And that is not a good situation for the State of California in any way. As the transition is occurring, it has to be at the pace and scale to where the bottom part of the electron generation meets the top part of traditional fuels. And that can't miss, because when it misses, we are going to have supply disruption.

And environmental programs, in my experience, only survive when we have that not missing. When the economy and the environment are in line, that's when we make progress. So I don't. I think we have to avoid. Avoid unintended consequences from these actions. And again, I'm going to applaud the Energy Commission in the fuel assessment study because that is where the rubber meets the road. And we better be diving in, in every circle on this sheet in a real way.

So that we can solve the problem, not just talk about it. I mean, this is tough. This is not easy. You got to get even in one little circle with the porch. You got to get port of LA, Port of Long Beach, Marine Terminal. You got to bring all these people together, say, okay, what do we got now? What does the Energy Commission think we're going to need under all these policy options? And can we even do it?

And if we do do it, what's that going to do to the cost? That's the drill. That's what we got to do.

Well, Mr. Wenger did you have a response? Okay. In the interest of time, I want to make sure public comment is heard today. So if there are any individuals here in the Committee room that would like to make public comment, I'm going to afford you two minutes real quick each, and please form a line and state your name and your organization.

Good morning, Chair and Members. Thank you so much. Kim Stone of Stone Advocacy on behalf of Consumer Watchdog. Consumer Watchdog would have loved to have participated in a panel and in future oversight events. If there are panels that involve consumer or environmental groups, would happy to be here. They do have some data that may be of interest to the Committee about the impact of higher gasoline prices on low income families.

The biggest impacts of higher margins will be on low income individuals who cannot afford an extra $20 per fill up. When gas prices spike, low income workers feel it the most. At $4 per gallon, 9% of an annual minimum wage salary is spent on gas. At $5 per gallon, 11% of an annual minimum wage salary is spent on gas. And at $6 per gallon, 13% of an annual minimum wage salary is spent on gas.

Low income individuals and families are the principled beneficiaries of a maximum margin because of its potential to reduce price spikes that are a huge shock to their fragile budgets and destabilize prices. And Consumer Watchdog did provide like 10 page document to the CEC which I can make available to any Committee Members who are interested in it and have a tremendous amount of information. And what they noticed is that the price spikes and corresponding profit spikes match, right?

So when the prices go up, their profits go up, and those typically preceded by or coincide with a perceived shortage in supply due to either refinery shutdowns or slowdowns, limited inventory, increased exports, or a spot market trade indicating a coming shortage. Consumer Watchdog argues that the only way to discourage higher prices and the corresponding higher margins is with the deterrent of a maximum gross refining margin set high enough for a reasonable profit and yet low enough to discourage the price gouging Californians have been experiencing.

They are recommending a 70 cent per gallon cap to the CEC. Thank you for the opportunity to make public comments and thank you for the hearing.

Thank you. Next speaker.

Good afternoon, everybody in the Golden State. Direct from the Copper State, my name is Justin Wilmeth. I am a Member of the Arizona House of Representatives and I'm also the Chair of the Commerce Committee. The reason I'm here today is because these decisions affect my state as well as Nevada and some others across the U.S. West. I represent 240,000 constituents in North Phoenix and Arizona now currently has about 7.5 million residents in it. About a third of our gasoline comes from this state.

The other two thirds come from Texas. So we're right in the middle. We don't have any refineries of our own, so we are reliant on your fuel. And these decisions that you make, I'm gravely concerned by the recent developments, proposals coming out of this Executive agency around the Bill SBX 12. Number one, a potential max refining margin and penalty that I understand industry experts have opined that may actually increase retail prices for California, California, Arizona and Nevada consumers alike.

It may also ultimately cause California refineries to close prematurely. Two, potential refinery inventory requirements that would make an already illiquid commodities market even less liquid by imposing mandatory Reserve obligations upon the industry. Three, potential limitations of the timing of the refinery turnarounds and the maintenance that could negatively impact reliability and may ultimately result in prolonged periods of unplanned maintenance.

Four, potential policy solutions, as noted in a recent transportation fuels assessment that would greatly impact the fuel supply to Arizona and several of the other states in the U.S. west. Now, we all need each other. We need you for fuel. You need us for electricity, right? We all have to work together in the West. We all have limited resources. In California, you use 55% of the Hoover Dam electrical production that is on the border of Nevada and Arizona.

The Palo Verde Nuclear Plant, which has three of five generators going, is owned in part by LA Water and Power, SoCal Edison, Southern California Public Power it produces was 3.8 million kilowatts annually, and in 2021 it accounted for 34% of California's nuclear energy supply. This is what I wanted to make that mention in this Committee, because what you're dealing with is very important, and I understand that, and it's important to go about things the best way that we can to have a clean energy future.

But at the same token, these decisions will harm Arizona and they will harm Nevada. And we all need to work together, and I hope that somehow we can get together on this issue and work together in groups and find ways to make this good for all of us involved. Thank you all for your time.

Thank you.

Justin Wilmeth, Wilmeth, I'm the Commerce Chairman of the Arizona House of Representatives.

Thank you, Representative Wilmeth, for your testimony and being here today. Thank you. Appreciate it. Next witness.

Chair and Members. Dean Talley with the California Manufacturers and Technology Association. Chair, really appreciate your leadership on the issue and Members here. We wish to express our concerns regarding the potential enactment of an unprecedented margin cap and penalty on California's refineries. Such measures as this are unlikely to resolve the issue of gasoline price fluctuations, but rather would likely penalize California's consumers by exacerbating the already limited supply of in-state gasoline, implementing a system that could lead to fuel shortages that might trigger severe consequences across various industries.

The Legislature also expressed worries about potential adverse outcomes when it decided against the initial proposal at SBX 1-2 to legislate a margin cap and penalty. Instead, amendments were made to SPX 1-2, allowing the CEC the discretion to enforce a margin cap and penalty only if it could demonstrate that such actions would neither raise gas prices nor adversely affect the gasoline supply.

It is crucial for the state to tackle the existing challenges related to gasoline supply, which would include permitting hurdles, physical limitations in production and marine imports, regulatory uncertainties that deter investments, and geographical constraints. A margin cap overlooks these issues and might unjustly punish refiners for excessive profitability and production levels. By implementing a margin cap and imposing penalties on production that exceeds this gap, California risks further constricting its energy supply. This could lead to increased prices.

We are concerned that such measures may deter investment in California's refining capabilities and could even lead to the shutdown of active refineries. We continue to monitor actions by the CEC with significant concern regarding fuel pricing and the consistent availability of energy. CMTA is committed to working collaboratively with the CEC and has continued to demonstrate our willingness to do so. We urge caution and appreciate the opportunity to provide these comments. Thank you, Chair.

Thank you. Any additional public comment here in room 1200? Seeing no one wishing. I want to return back to Senator Rubio. You had a question?

Thank you, Mister Chair. I just want to see if they can answer the question. I think I heard you say that you've attempted to get rulemaking on how to uniform the transparency factor, meaning how do we report clarity on how to report it, what to report? And you've been denied three times. Can we have someone from the other side address that? Are they still here? No, I think they left anyhow.

Because what I'm hearing is that you wanted to uniform the way you report and you wanted clarity. Is that right now you don't have. Everyone's doing things differently. Can you expand on that?

I wish the Energy Commission were here to respond to you because the rulemaking, in our opinion, as we've done with the Resources Board multiple, multiple, multiple times, is the way to make sure you have clarity. And we didn't start this process with that.

We thought it would be a much better process if we did, which is why we kept asking. And so now the data is being reported the way the data is being reported. Certainly people are complying with everything that the Energy Commission has asked for, and the Energy Commission would probably have to answer that question.

Thank you, Mister Chair. I'm just, you know, we're here for transparency and reporting accurate data.

And I think that this is a missing piece here because we want to make sure that it is clear what information is needed and how it's reported by the industry. But I just wanted to give the other side an opportunity, and I'm sorry that they're not here to respond. I'll just leave it at that. I know we're running a little late, but thank you for that.

Any additional questions or concerns? Okay, I want to first thank Miss Reheis-Boyd for your testimony, Mister Wanger for your testimony as well, and all that have participated today. I want to thank all the individuals who participated in the public testimony. And if you were not able to have your testimony heard today or testify today, we ask you to submit your comments or suggestions in writing to the Senate Committee on Energy Utilities and Communications, or visit our website.

I want to thank you and I appreciate your participation. We appreciate the participation of the panelists and the public comments regarding the efforts to implement SBX 1-2. And again, that was the purpose of this hearing today, to have an update on implementation and implementation only, and what the challenges are. We're very concerned about the impacts of high gasoline prices on our residents and our businesses. We are committed to ensuring that SBX 1-2 is implemented to be effective at addressing that challenge.

However, there are still a lot that we're learning about this process, about the market and the causes of higher gasoline prices, both upstream and downstream. We must ensure the implementation. Implementing agencies, I should say, are careful, judicious, and intentional in adopting new requirements as missteps can exacerbate the market conditions that can further increase prices to consumers. We hope this is the first of many oversight hearings on this issue.

As legislators, we must remain apprised of the legislation that we are passing and implementations of these key pieces of legislation. I want to thank everyone again for your participation. This will conclude our agenda. The Senate Committee on Energy, Utilities and Communications is now adjourned.