Assembly Standing Committee on Petroleum and Gasoline Supply

Good morning. Good morning, everyone. I would like to call to order this hearing of the Assembly Committee on Petroleum and Gasoline supply as part of the second extraordinary session. We are here today for an informational hearing, picking up on the conversation where we left it yesterday. Today we will discuss supply constraints.

We will discuss the administration's proposal to require refiners to maintain minimum inventories. We will also be discussing other possible solutions and policy proposals to address supply constraints. Before we begin, I have some housekeeping to go over. I will maintain decorum during the hearing, as is customary. Conduct that disrupts our proceedings will not be permitted.

Any individual who is disruptive may be removed. Our hearing yesterday laid, I believe, a good foundation, an understanding of the challenges before California at a macro level, the difficulty of transitioning our economy from a fossil fuel based economy to a clean energy economy.

And at the micro level, the difficult of transitioning the transportation fuel sector in California, particularly given the state's historic market structure and infrastructure limitations. Today is about getting to solutions to the challenges that we recognize and understanding the trade offs that those solutions pose. With that, we're going to go ahead and jump into our first panel.

We've invited the Administration to begin our discussion this morning. Vice Chair Gunda is back with us. Thank you so much. And Director Ty Mulder is also joining to provide an overview of the transportation fuels assessment as well as the division of Petroleum Market Oversight's recent market update.

We'll then turn to a panel of experts and experienced tradespeople to explain the challenges and pinch points in our existing petroleum supply chain. With that, let's go ahead and start. Vice Chair Gunda, thank you.

Good morning. Chair. Vice Chair. And the Members of the Committee, thank you again for having us today to go through and the rest of the discussion that was teed up yesterday. Going to the next slide, please. Okay.

And for Members of the Committee, we just received these slides, so we are making copies. And those will be distributed to the Members momentarily, but they should be on the screen.

Thank you. Thank you so much. So, just wanted to tee off from the conversation yesterday this morning between myself and Director Milder. We hope to both discuss further the fuels assessment that the CEC presented earlier this year. I would also discuss about market issues with that.

For the record, I'm Siva Gunda, currently serving as the Vice Chair of the Energy Commission.

Good morning, everyone. Tai Milder from DPMO. Appreciate work that is going into this special session and previous work to protect consumers.

Thank you, Director Milder. So just get a Ting of this slide, then yesterday, we kind of teed up the broad areas of work that the CEC was tasked to do under SPX 1.2. Today's focus is going to be to delve a little bit further into the transportation fuels assessment that we've provided.

Again, to just reiterate yesterday's sentiment, the first assessment was a thoughtful and a robust exercise in capturing all the different options that we have to mitigate price spikes in the state and retain reliable and affordable transition from fossil fuels.

Also, for the record, just want to resubmit that this was a publicly focused whiteboarding exercise that captured pros and cons of various options that were offered to us by the industry, EJ groups, labor, et cetera, and noted that further analysis has to be done to really implement any one of them.

And the assessment also included three fundamental sections. One is an overview of the transportation sector. Second is looking at the petroleum demand and supply. And finally, we discussed options. Given that we've discussed the overall ecosystem yesterday, we're going to just focus on the other two elements today. Next slide, please.

So again, what you will see in Chapter one of the assessment is a number of different charts that were discussed yesterday and also additional pieces. So again, this shows the overall crude flows into California and within California, all the way to the production of carbab and other products.

And we just put a line around the areas that we are focusing for this morning, which would be really looking at the demand and supply of refined gasoline in California. Next slide. Because a number of conversations today are going to be anchored around ensuring liquidity in the market.

I just want to come back to the slide over and over today, which is just looking at how is CEC analyzing the liquidity of the market. We're fundamentally looking at four variables. We're looking at gasoline inventories within California and broader pad five. We're looking at refinery production within a given timeframe.

And we also look at what marine imports are expected to come into California from outside California. And obviously, that has to be balanced with the demand in California in any given day. Moving forward. Next slide, please.

So one of the things I mentioned yesterday was, as we move forward with the transition here, the demand reduction is going to be uncertain. What we know, what we observe is 2017 was our peak, and since then we have been going down in our gasoline demand in California.

Also, as mentioned yesterday, CEC does an annual forecast of gasoline demand, primarily based on a survey of consumer behavior and consumer preferences and econometric data that we gather. But as you see here, the future could be rapid. It could be slower.

And it's important for us to consider different levels of demand destruction in California as we move forward. Next slide, please. There were a number of questions on the defining capacity, and I want to offer a few data points for us here.

In 1982, there were 40 operating refineries in California, and combined crude oil processing of 2.6 million barrels a day. That was the total amount of refining capacity we had in California. In 1982, these facilities operated. And it's an important point to kind of put that in perspective. Those 40 facilities, on an average, were run at about 60%.

So, as the number of refineries then consolidated or reduced, by 2016, the number of operating fuel producing refineries were 15, with about 1.9 million barrels a day, and the utilization went up to 85%. And today, we have 13 refineries in California that produce fuels. Nine of them produce carbob.

And the overall production capacity has been around that 85 mark and higher. And during summer months, you see some of the refineries run at 100%. Next slide, please. So, I'm just going to walk through the different aspects we've discussed in the fuels assessment. What you're looking here is the West Coast inventories over the last three years.

So, the green line that you're seeing there is last year in 2023. Red line is 2022. And this year, we are on kind of the blue line. So, just wanted to observe two kind of important aspects here.

It is a common practice by the refineries to stock up as much as they can by June July timeframe, because the peak, peak demand in California comes after that. And typically, the outages in California of the refineries also comes after that.

So, typically, by June, July, you see the maximum inventories, and those inventories are drawn down through the summer. But that draw rate varies from year to year. So if you look at 2022, that was a rapid decline where they started from and how far it went down.

In 2023, we had worse than this year, but better than 2022. And 2024, we are doing much better. The decline has not been as rapid, and that directly correlates to the prices that we see in the market. So this year, the prices are significantly lower when the price kind of up elevation started because of the higher inventories.

And then we're seeing it even going up a little slower than last year because of the maintenance of the inventories. Again, this is what the industry does on their own. And I would just acknowledge here a moment that some of the industry has been extremely collaborative with us.

And I would say the positive curves that you're seeing here is that collaborative work that we've been able to do. Next slide, please.

So the last chapter of the fuels assessment discussed a variety of options for us to consider as a state as we move forward to make sure that prices are both reliable and affordable, supply is maintained. So we talked about them in multiple sections.

We talked about demand strategies, we talked about supply strategies, we talked about complex regulatory structures to do that, and many others, and just want to provide a couple of options here.

As you look in the fuels assessment, we try to look at them at the complexity level and how fast you can deploy them, and how long it might take to deploy a particular strategy. And some of the things get really complex from a regulatory mechanism.

And I'm looking forward to your questions to discuss further about the opportunities of different ones here, but to elevate a couple, obviously, ensuring the highest level of efficiency we can achieve in terms of inventories within the constraints we have as a state would obviously have a benefit.

We also discussed about import strategies, and then finally we had strategies such as potential regulated utility model, if that's where it comes to. If a lot of gasoline refineries decide to leave the state, or even state owned, similar to what Australia is doing.

And each one of them has pros and cons that the fuels assessment raises based on the input from all the stakeholders. I have two more slides before I pass it to Director Milder. Next slide, please.

So, before we go into the market and the importance of discussing the market, it's just a good level setter to think about how the prices move in terms of price at the pump. So there are four. This is actually coming from Opus, the industry leader on this, on some of these issues.

They have a really good one on one page, and this is directly coming from that website. So it's important to note, the first thing that you think about is the Nymex prices. So this is called the New York mercantile or the futures. And this is where the bulk of the global trade coming into the.

Into United States is happening. So has a large volume of trades into the future. That sets the precedent, and that sets the anchor point on where the prices could look like. So today, if you go into Opus reports, you'll have a futures value for today, which is September, October and November.

So those NYMex prices then act as an anchor to further discussions. So then comes into the regional market of the spot, which is California specific spot market.

And what's happening here is based on any specific day, based on the trades that we talked about yesterday, if a trade is priced at, let's say, $0.60, overdose, the NYmex price, that's how they're traded. $0.60 over, $0.45 over, and $0.20 below. So that's how they are traded once the trade happens.

That is noted in the opus publicly for other trading, and that moves the overall spot market price based on everyday trades. So once that spot market trade happens, the wholesale price, which you could kind of think about as the rack price, that's where all the fuel's going and getting out immediately, one to one, translates.

So the spot market price goes up, and the whole rack price goes up immediately. And then yesterday, I think Mr Robinson kind of talked about the retail side of it. The retail side of the market captures the upward spike about three to four days in delay.

It takes about three to four days on the retail side to actually get that spike, but it takes about 35 days to come down once the spike is gone. So that's kind of how the dynamics work.

And what we are trying to think through is how does increased liquidity in the market reduce the spot market pressure on, ultimately, the prices? Next slide, please. Next slide.

So, finally, I just want to leave you here with this, and I know we're going to discuss about this particular metric a number of times later today, especially in the second session. What this is now telling us is the relation between that spot market value.

So what you're seeing on the y axis is the difference between NYMEX and California trades. So that's kind of basically specifics to California. So that number is directly correlated to the liquidity we see in the state. And when we talk about the liquidity, again, I want to point back to those four variables we are talking about.

How are we doing in production? How many refineries are out or currently working, how much inventories do we have, how many imports ships are coming in? And we have, we know that the ship is coming, it's bound to California, we know how much is coming in and what is the demand.

So when you look at that and say, if I look two weeks ahead, if you have about 15 days-worth of supply, it's not a magic number. That's how it's correlated to. It seems to appear that the industry thinks that that's liquid enough that the spot market trades are done at a low value, which is about $0.50.

So Nymex plus $0.50 is where they trade. As soon as that liquidity drops, suddenly the spikes happen because the spot market trades now are going to happen at a much, much higher price, as high as two and a half dollars. So that then immediately goes into the rack and then translates to the pump.

And the idea here would be, how do we look at this particular opportunity and reduce that high pressure on the spot market rates? So with that given DPMO has been focusing on the market, I would like to invite Director Milder to talk about specifically the market dynamics.

But before I hand it over to him, as I mentioned yesterday, DPMO and the Energy Commission have an important collaborative relationship, but we treat them as independent. They are looking at market independently. We take analysis from them. And obviously as a Commission, we will be voting on a number of different things.

And it's important for us to use the expertise that DPMO has and continue to work through that analysis. But I just incredibly happy to have Director Milder, as a colleague, past him.

Well, thank you, Vice Chair, for that introduction. And so appreciative of the work of CEC and really dispassionately presenting the data, working with industry, working with stakeholders, and bringing the information forward so policymakers can make decisions just as a quick table setting.

As we bring up the slides, I don't have to remind everyone what happened in the fall of 2022. The price spikes, the record profits, and you provided new tools to shine light on what has otherwise been a very opaque industry. And the division of Petroleum market oversight is a tangible manifestation of those new tools.

So we're here to try and surface facts for you and for the public. As prices go up, as prices go down. I think the focus obviously is more when prices go up.

I think if we're doing our job right today, I'm hoping you come away from this session with sort of two core questions with answers for your constituents. Why do price spikes happen right as you're seeing in 2022? I think a lot of people want to know, why do the price spikes happen?

And then where does that money go? When gas goes from 450 to 550 and, geez, $6, where's that money going? And so I think those two sort of core questions really animate the work that DPMO does as we try and bring this data to the public.

Going to restrict myself, as we have to by law, to publicly available information or anonymized, aggregated information coming from industry. So we're going to have hopefully a very transparent conversation, but using data that everyone can look at. So as we go to our first slide, I want to mention, zero, I'm sorry. I was speeding ahead.

This looks like it's the further ahead. So there's two different presentations today for two different. Yep. So the first deck is a seller's market, the challenges of concentration and price spikes.

And Director, maybe pull the microphone a little closer to you.

Absolutely. Thank you, chair. So, Madam Chair, as the slide is coming up, I'm going to go ahead and just provide some of the content on the first slide because it's just a quote. So I think a lot of people in this room remember that price spikes have been happening for a while.

So as we thought about the California market, actually went back to 1999. I'm going to read you a quote from the Attorney General of the State of California. In California, just six companies account for more than 90% of California's refining capacity. And those same six companies control more than 90% of gasoline sold in California.

Our concern is that high gas prices in California are the result of low competition in the market. That's 25 years ago, pointing to six refiners controlling 90% of the market. As we hopefully bring the slides up, the updated number, unfortunately, is worse than that. So, if we move ahead to the third slide.

Committee Members, you do have these slides now in front of you. Benefit of the public. We want to make sure we get it on the screen as well.

Excellent. Thank you so much. So now who controls 90% of the market? Four companies control 90% of the market. And if you compare that to the rest of the United States, market concentration of the top four companies is about 45%. So our market is double the concentration. And antitrust economists will tell you that has a compounding effect.

It's not just double the concentration, right. When you have four companies controlling the market, there's a huge impact on their profit incentives.

So as we move to the next slide, what we're going to try and do is contextualize for all of you, not just the most recent market events, but all the price spikes going back to SBX 12. So the next slide, slide four, is going to show you some data. I'm going to walk us through it.

So here we have two plotted sets of data. The top is the California retail price. You can see price spikes in 20222023 and 2024 highlighted in gray. So you can see these peaks that go up.

And one of the constant characteristics of the oil refining market globally and in the United States is crude oil as the number one input. So if crude oil goes up, refined fuel costs tend to go up in a similar magnitude. If crude oil goes down, the same thing should happen.

But when we start looking at our California price spikes in the last four years, that relationship starts to weaken and sometimes even disappear. So we see some very unusual patterns. And I want to point to that 2022 price spike.

You can see that second gray line, retail prices going up $1.17 even as crude oil prices were going down $0.61. So the question is, why is there this difference between the California market and crude oil? Well, let's compare, then, California to the rest of the United States versus the same time period.

And the idea here is to show you how market concentration changes pricing compared to a larger market that doesn't have those same constraints. So as we go to the next slide, you're going to see another line appear, which is the line for the rest of the United States.

We can go back one slide. Thank you so much. So if we look at that same 2022 price spike. So it's the second gray area on the left of the chart, you'll see national prices during our price spike, were going down as crude oil prices were going down.

And so that phenomenon, the close correlation between the cost of oil and the cost of gasoline, is present throughout this time period in the rest of the United States, but not in California. And that really illustrates with the data, not my opinion, but the data shows that California refineries are having different types of price spikes.

And as we'll discuss profit spikes than is happening in the rest of the country. So the question is, why are we bucking the national trends? So, as we go to the next slide, I want to point to some of DPMO's early work on these issues.

So, Director, can you pull that mic a little closer to you?

I need to pull myself closer to the mic. Yes. Thank you.

Thank you.

So the division of Petroleum market oversight has put out three public letters, and the idea is to inform the public, but also policymakers, and to make sure that industry participants know that we're closely monitoring the market and the trading activity. So in each of our three public letters, we've flagged three consistent problems.

First, low inventory levels during busy driving periods. Second, inadequate resupply during maintenance. And third, lack of liquidity on the spot market. So, the question is, what's driving these price spikes? We've identified these three components, and again, these would be unique to California in our concentrated market and different than the rest of the United States.

So, heard yesterday a good amount of discussion about how spot market prices change and how the market reacts to it. So we tried to put together a slide to explain the anatomy of a price spike.

So as we go to our next slide to try and walk you through how maintenance events and supply lead to a spot market price spike. So as we start at the left, the triggering event for the California price spikes we've seen that have been different than the nation is. There's some type of maintenance event.

A refiner or multiple refineries have to cut production to do maintenance. So that means production goes down. Then you see inventories reduce supply, inventories start to fall because the existing production base does not meet demand. You've got a few numbers of Refiners 12 maybe even more go down.

So then the inventory levels start to draw down, and that's all happening in publicly reported data. So then, as those inventory numbers go down, and as there's less production. Prices go up on the spot market, and there's a lack of liquidity. You'll see very few trades or even potentially no trades.

And in that environment, one or two purchases can send prices soaring. So on very little liquidity, prices go up and they go up for these specific contracts. So one or two trades a day, we're talking, as the Vice Chair explained yesterday, about 10,000 or 25,000 barrels of gasoline.

So why does that impact the whole rest of the state? Well, the wholesale prices, bulk rack, dealer, tank wagon, those all spike up on top of the spot market price. Even the unaffected refiners, the ones who are not having maintenance issues, they all sell at this new, higher price set by the spot market.

Their costs have not changed. That's why you see profit spikes when the spot market spikes the way that it does. And then finally, that passes on to retail. As you've heard, in three or four days, retail prices shoot up. That's where consumers pay and then refiners and the retailers profit.

And we're going to walk you through how the refiners and retailers profit from the price spikes. As we go to the next slide, we're going to talk about the summer 2023 price spike. And this has been work that the division has put out and credit to our economics team.

These are public presentations that are on the CEC website and move through them quite briefly here, but they're in more detail and available to you and to the public. So what we saw was a price spike that lasted 105 days, 75 days of prices going up, and then 35 days for the prices to come back down.

That's the feather floating back down. So what we want to do is show you where that money goes. So in the next slide, we're going to look at the two sort of levels of the market where the profits go. There's the refining margin, which is the profit from processing the crude and selling it at various wholesale channels.

And then there's the retail part of the market. So in orange, you'll see the refinery margins going up higher and higher through September as the prices go up. And then in October, as the prices start to come down, the retail profit jumps as well. And here it's not.

For some of our vertically integrated refiners, it's not either or. It's both. They get the profit on the refining margin as the prices go up, and then on the retail margin as the prices come back down. The problem is consumers get hurt in both of those directions.

As we go to the next slide, we're going to share an exhibit. This is a series of scenarios building in assumptions. So what if there hadn't been a price spike? How many millions of gallons of gasoline were sold at the higher prices?

Could we theoretically have avoided a quarter of that harm, or half of that harm or all of that harm? So in the various scenarios, that is between $525 million in consumer savings or over $2.19 billion in consumer savings. Again, that's the difference.

When a gallon of gasoline goes up $0.50 or a dollar, and we're selling tens of millions of gallons every day for 105 days, those numbers get big very quickly. As I conclude these remarks, I want to talk about what's been happening in the market recently.

We put out an update on Friday of last week about retail prices and spot market activity, particularly in Northern California. So as we go to the next slide, what I want to sort of focus you on is on the left side of the slide. At the sort of beginning of the price spike.

The difference between California and the rest of the United States was not that wide and particularly Northern California. But as these publicly reported refinery maintenance events have gone on, and as the public inventory data has come down, the prices have shot up. So today we stand at, sorry, not as of today, but we updated these last night.

I think as of the 17th, the spread between Northern California and the rest of the United States was $1.96. So you can see how quickly these prices go up. And this price spike, thankfully, has not been as severe as price spikes in years past. But the same maintenance issues are driving them.

So as we conclude, want to show you and the public where the money goes. The Energy Commission has a gasoline prices dashboard. So you can see week to week, or in this case, we're doing a four week comparison.

What has changed in those prices from the bottom up, the taxes and fees, they have basically not changed maybe one penny. In the last four weeks, the cost of crude oil has actually gone down $0.10, but the refining margin during these maintenance events has gone up 34 cents.

I want to say again, this is an aggregate based on the CEC's sort of public facing dashboard. These are not the refiners private numbers, but these are directionally accurate. From our perspective, the total price has gone up about 20 cents per gallon in this four week period being tracked by the CEC.

So we can see that the refining margins have gone from 56 cents a gallon to gallon in that four week period. And I'll end with a final slide. The Vice Chair ended with a days of supply metric, which is really critical to understanding when prices spike and why they spike.

Heard a lot of questions yesterday about storage capacity from the members of the Committee. How much storage capacity is there and how can we sort of think about storage? This chart shows just the inventories held by the refiners in California from the end of the Covid-19 pandemic through today.

It's a little bit busy, but you can see very clearly at the pandemic when demand was low and tanks were getting really full, it was almost 15 million barrels. You can also see in the troughs, some of which the gray highlighting are where there were price spikes. You can see the inventories falling below 11 million barrels.

So a big swing, and even seasonally, even if you look at one year, a swing between 13 million and 11 million barrels, and that's just the refiner storage. So I know these are issues that we're going to dig into this afternoon, but want to end there and look forward to any questions.

All right, thank you. And before we bring up our additional witnesses, we will open it up to questions from members. As with yesterday, we've got lots of members, which is great, lots of panelists and I know, lots of questions.

So we, we are going to be limiting the amount of time that each Member is able to ask questions. So I apologize in advance if I need to cut you off. All right. With that questions for the Administration. Mister Flora.

Thank you, Madam Chair, and good to see everybody, and good morning. Welcome back. Next few questions I am going to have is going to be from the CEC's Commission report, and I will try to reference the page number as well so we can kind of all stay on the same page here.

But on page 58, it states the policies that keep average prices Low may result in more driving and hence more pollution. This special session is focused on price spikes, not necessarily everyday higher gas prices caused by state's policies. So I'm curious, what is the state's policy currently as we speak?

Is it to reduce the cost of gasoline or is it to try to keep that artificially higher?

And thank you, assemblymember. I think the chair yesterday put it pretty well towards our closing comments. I think the broad state policy, if I may summarize, would be to optimize between all those things that we want to do, reduce pollution and increase air quality benefits, reduce prices and have an affordable transition.

So I think we are grappling with that situation of how do we optimize across all of them.

Thank you. And then on page five. It states as well that storage facility are owned by various entities, the storage facilities. Right. Can you please explain all the players in the fuel market and who else brings fuel in other than in stores? Other than the refineries?

Yes, absolutely. So majority of California's storage. You could kind of summarize this into two buckets. I have a slide for this afternoon, but at the top you have the fence line within the refinery, so that you have about 14 days worth of totality of refined and blending stocks that you could store.

On the top of that, you have commercial like transmontane would be a good example where some of the refiners actually lease space to put some of their fuel in. And on the top of that, you have a Kinder Morgan system.

I wouldn't imagine that's more of a storage, but it's like a flow through, so it has a little bit of slack, but not too much.

So you're saying. So take Chevron, for instance. Who doesn't have a lot of storage capabilities right now? They would lease storage from 76 or.

So. Are you getting to kind of like, how do we maintain minimum inventories? Is that what you're trying to ask?

Well, I'm trying to ask like, if there's facilities that do not have the ability to store their fuels that they produced, we expect them to lease with another competitor.

No, they actually do it with a commercial entity today, like a Transmontan, for example, or Olympus. They currently do that.

All right. And then also on page one, you know, obviously, California is, we've heard a number of different times, is kind of a fuel island, an energy island in a lot of different ways.

Can you kind of walk us through some of the state policies that have led to that and why it's so challenging and why we are so different than the other states in the country?

Yes, I think I would just kind of note, based on what the industry experts kind of mentioned yesterday, California is situated with in a situation where we have our unique blend. Right. So that's something that has been passed to protect us against smog. So that's about direct correlation with the health impacts.

That's something we do in terms of the structures around the defining in California, whether we are extracting crude oil from California or not. These are a multitude of layers of policy that the Legislature has passed that we work within the confines of.

No, and I can certainly appreciate that. Just got two quick questions. And I asked these questions really to kind of set up these last two, because as I represent the Central Valley and it has been my experience since the time that I've been elected.

Everything that we have done from a state policy perspective has done very little to actually reduce the cost of fuel, has actually done quite the opposite, has increased the cost of fuel, both on the consumers, increase the cost on refineries to do it, and obviously, how we even get the crude.

We're not even using the most inexpensive crude. We're buying it from the most expensive places. So on page 22 of the report, again, it says, giving that many vehicles will remain on the road and many of the owners will be from less affluent regions of the state. And a quality challenge arises.

When you think of EV deployment, is this transition for low income families going to make the cost of living more expensive?

So thank you for that question. I think that's a specific thing we tried to address in the workshops when we did the transportation fuels assessment. As Miss Connie showed yesterday talked about, the environmental justice groups were with us during that fuels assessment. You're absolutely right.

I think whatever we do, those impacts and benefits have to be equally distributed. And I do not believe when we talk about the benefits going to a specific area, whether it's EV deployment or such, we have been asked by the Legislature continuously to look at how the benefits are actually translating by geographic area.

And that's an effort we'll continue to do.

Can you give us one example of something that you've thought of, like a solution?

Yes. So the big one for us, as an Energy Commission, much of our work is around data gathering, analysis and deployment of funding, state funding.

And in terms of the deployment of the state funding, we currently have within the majority of our programs, nearly 50% of all of our investments go towards impacted communities, including the communities that you mentioned.

I'd be very curious where that funding is going, because from just a practical standpoint, we're not necessarily seeing it at the ground level, just throwing that out there. And I think one of the. And this is my last question, and thank you, chair. I just.

At the end of the day, and it's really not a question, it's more of a statement. Like, I think every single one of us on this dais and Members in this room have the desire, right, to have the cleanest environment that we can at the lowest cheap price possible.

But sometimes those issues are not, you know, they don't really coincide very well together. Right. And I do continue to be incredibly frustrated as we move forward with this. I hear a lot of conversations about data gathering. I don't know where that data goes. We just always are gathering data.

And while we're gathering data, we fund these programs to gather data, which raises the cost. But we'd never do anything with that data. And I think as we move forward for the rest of the day, we're going to continue to have those conversations that there's information that has been collected that we're doing absolutely nothing with.

And my guess is probably because we don't actually like the answers sometimes. So I appreciate your time. Thank you.

Thank you, Vice Chair Patterson.

Thank you, chair. I'm going to follow up a little bit with respect to what our other Republican Member asked. When we look at the analysis. The. Statement is pretty clear that the effort here to store and require storage, quote, could increase average prices for refiners to maintain that additional storage.

And the discussion yesterday explained that not every tank is the same, not every refinery has storage, and the finished gasoline tanks are consistently being filled and emptied. The question is, if a refiner does have, say, x numbers of days of storage, could they be forced under the Bill? We'll be looking at build more storage.

And if so, can you help us understand the cost of that storage billed to hold the 15 days worth of gasoline? And how long would that construction take?

Thank you, vice chair, for the question. So let me just kind of tackle that in a couple of buckets of thought here. I think the question that you asked around, would we need more storage to be built?

I think the implicit understanding of the Bill, and I would say explicit, is to maximize the utilization of existing storage space in California. Second, when we talk about the overall storage that you see, and I think it goes to assemblymember floor's kind of question, too.

Different refiners have different levels of storage space available and different kinds of planning. So what we would be looking at is the opportunity on a refinery by refinery basis to increase the liquidity.

And I want to go back to the point that I tried to make earlier, which is the spot market impact and the price impact based on the liquidity is undeniable.

The question is how do we maximize pre planning and active planning to reduce that price volatility that happens under an extraordinary situation like what we might be seeing right now, and that involves having a collaborative work with the industry to think through. How can they maximize their planning in terms of inventories?

Again, as I said yesterday, not everybody might have that space. Some of them might have a lot of space. And how do you utilize that?

In the CEC policy analysis, you discuss having the state build more storage capacity, but that analysis also points out that such an effort will likely lead to stranded costs. If the CEC believes that the requirement would stick the state with stranded costs, why would you force stranded costs on those refineries?

Any business would close if they believed costs would be stranded. In other words, you're going to be forced to build a whole bunch of existing costly storage. And yet, look, I mean, with all due respect, I really think the question before us here is why aren't we paying attention, quite frankly, to high school level economics?

If you force by storage to essentially hold off supply from the market? I learned that as a senior in high school, you do that with any commodity, costs are going to go up.

So the premise here, and I really think that Members need to think seriously about this whole question, that is the solution to the price to create a circumstance of shortage, because I think that's a reality.

And I will say I certainly want the Vice Chair to respond to. We are going to dive into a lot of detail around the proposal and want to have a conversation about pros, cons, unintended consequences. We're going to have an opportunity to ask those questions, not just of the Administration but of other expert witnesses.

So perhaps just give us a summary version and then let's hold the detailed line of questioning until we're able to have a full panel.

Absolutely. Thank you, chair. Thank you, vice chair, for that extended question on there. In terms of what the proposal is looking at, which we'll go into this afternoon, it's about the opportunity for CEC to conduct a rulemaking. And to your point, sir, exactly as you mentioned, there are a number of risks with any public policy.

And our job, if the Legislature were to give us that authority, would be to look at both benefits and risks and make sure that the design of any such policy will mitigate and reduce any such risks that you mentioned. And that's something we'll be looking at.

And one of the points yesterday that was brought up from the dias, what about local communities and the impacts on that? I think Assembly Member Jackson brought that yesterday.

Those are the kinds of things will be absolutely a part of the rulemaking process which will be robust, thorough, and we will be collaborating and coordinating with you on the findings of the tool making along the way.

If your rulemaking and if you're diving in, could you conceive of a scenario in which the high cost of the storage and the removal of that gasoline from the marketplace, if it did create a spike, would you then not proceed with the rulemaking?

Is there at some place where the rubber meets the road on supply and demand in the marketplace, where you're given the authority, but do you have the option of not using that authority if you find unintended consequences?

The short answer would be yes. The short answer would be if the rulemaking comes to us. And just as you're doing here, we would want to have a robust process, engaging all stakeholders to understand those risks. And if the risks outweigh the benefits, I don't think we would do that.

But our current thinking and preliminary findings are the benefits, as Director Milder mentioned, and the $2 billion potential consumer benefits is such an upside, and it's a clear threshold for us to think through what is the opportunity here? And we believe, based on the data, that there is opportunity here.

And if I may, DPMO just onboarded three PhD economists that we have on our economics branch. So the Vice Chair mentioned some economic principles. I wanted to share a couple. One is this additional supply. This additional buffer would be available when prices go up to help stabilize the market.

And the way to think about this is additional supply. Imagine a summer scenario where we don't have enough supply, but we've required now an additional amount, a buffer on top of that. That's new additional supply that's not being withheld from the market, that's new supply that's readily accessible to the market.

And the problem with this concentrated market with the four firms is they don't currently have the incentive to keep inventories high enough to protect against price spikes. And I can say that the proof is before us in the price spikes we've been experiencing.

And so there has to be a mechanism to encourage that more responsible level of storage to prevent the price spikes.

Yeah, and Chair, if I may just kind of close off that thing. So, I also want us to consider that the design of any such policy mechanism will take a lot of different shapes. So, I think the easiest one for us to really can drill down, we're talking about both minimum inventories and resupply.

And I think the resupply is very easy to understand from a policy mechanism.

If I know that I am going to be shutting down this summer, and we know the data 120 days before, four months ahead, that falls within the window of being able to order a ship and make sure that your tanks are full, are at least replenished on the way.

So if I am depleting my tanks without any resupply, then that would be a problem. So that additional resupply that is coming in, we are not going to tell don't sell, we are going to tell bring in resupply. That's a tangible way of thinking about it.

Well, again, the reality is, if you're going to be using the tankers, you're going to be using imported oil from other places that is produced much more dirty than California creates.

You're going to end up with real questions about the length of the time that that supply gets on the tanker, gets to California, gets into the refineries, all of that.

So, for me, from Central California, the problem becomes we have a lot of oil producers in regions that many of us represent in Central California, and we are hearing from our refiners that they feel a whole lot of pressure, that they feel unnecessarily attacked for essentially market based decision making.

Supply, demand, the crude being able to produce it, and all of that. So, again, I just think caution has to be the rule here, because we're entering into an area that if the CEC gets it wrong, in your own analysis, you're seeing the potential of spikes.

You're seeing the potential of cost getting to market librium on page 60 of your own report. You think that that likely emerges at a higher price level. So when I read your own report, I see several areas that I can look at and say, the very plan that you want us to pass increases cost along the way.

And the question then becomes. I'll defer to the chair. Would you?

I think we're going to pause there, and I know there's a number of other Members with questions. I'm just going to say that if you have questions about the governor's proposal, if you have questions about the minimum inventory requirement, please save those for the next conversation. If no one has other questions, that's fine. I actually do.

But I just. I really want us to be able to move through some of the other pieces of the fuels assessment, dig into that, and then we will be hearing about the proposal and have an opportunity to ask detailed questions about that in our subsequent panel with that. Okay, Mister Bennett.

Thank you, Madam Chair. I will certainly be briefer than the two people in front of us. I have a series of questions. I'm not sure they'll all fit into your category, but I will be very, very brief. First, I just want to confirm, we keep asking the question over and over again.

It doesn't seem like it's sinking yet.

We're not asking about the 15 day supply right now. That's not. We can ask about those questions later.

Then. I want to be assured that I'll have the time to do that. Thank you. Growing market concentration. The question here being presented is that growing market concentration is creating pricing power. And I want to emphasize that nobody up here says, zero, the oil companies are evil because they exercise pricing power.

They're doing exactly what a company does, they exercise pricing power. But where it's critical to the public, like low-income people in San Bernardino, we need to have the public's interest also in the decision-making process about inventory. Is that the point you were making?

Absolutely.

And if that's the case, then for the public to be involved. The question is, should the representatives of the people of California sit back and let this transition to a declining demand for gasoline, et cetera?

Should we just trust the companies to take into consideration actions that could decrease the number of price spikes, or should we intelligently get involved to protect the public? And so I just have these quick questions. In 2000, Attorney General Laquier pointed out we had this pricing power effect. That was six years before AB 32 went into effect.

So is it, in your judgment that that's further evidence that this is a pricing power issue based on concentration? Yes. Thank you. And is it true that California probably has a more concentrated industry, a refining industry, than in most other states?

Yeah, the average in the US is about 45%, and it's for the top four companies of market control. And California is 90%.

All right, so 90% in California, 45% every place else, which would increase pricing power in California. Yes. Thank you.

And when you say in your slide that they do not cover their planned maintenance replacement, you're basically saying, what Mister Gunda just was saying is that in anticipation of a planned cutback we're not getting, the companies themselves don't have the same incentive that perhaps the public would to make sure that the inventories are built up and maintained, having the ship come to replace that, et cetera, is that correct?

It is. And I want to really credit SBX 12. That's new information. Refiners didn't have to submit forms to say, hey, here's how much production we're going to lose, here's how much we're planning to replace. We now see that and can talk about it in an aggregated, anonymous way.

But now the firms have to explain what's happening, and that's what helps us see the picture so clearly.

So we now, finally, because of the action that this Legislature took in 2023, we have the information to see they are not planning for enough replacement for their plan shutdowns. Correct. A valuable piece of information and then slide seven that you have here, if you wouldn't mind putting it back up.

The important part of slide seven is something that my colleague from Northern California pointed out, that when one company's cost or whatever causes a problem, everybody's able to raise price. Right? And that's this wholesale price spike here. The fourth chart, is that the result of pricing power?

In other words, if there wasn't as much pricing power, everybody wouldn't be able to raise their price. Is that correct?

Yeah. And if I may, for 30 seconds, when you have more players who are trying to take market share from each other, one person has a problem, the others keep selling at Low prices to grab their customers.

If four companies know that there's no other options, then when the prices go up for one of them, they can all raise prices because they're not stealing each other's customers, because they know they have so much control of the market.

Two final quick questions. Voluntary reporting to opIs. Right. I was challenged about this last night, industry representatives. Right now, we have voluntary reporting to opIs, and therefore, that opens up the possibility of manipulation of the OPI pests, or at least less accurate pricing signals being sent from Opis, which then flows through your chart here, correct?

Yes, but I would add the legislation requires mandatory reporting to the CEC that's not yet public. But we at DPMO get to get the reports so we can compare what's being reported to Opus with what's being reported to the CEC. So we now have an oversight agency. But that didn't exist before.

But the problem with that is that OPIs is the one that sets a spot price. So if they don't get everything, even though the state gets it, gets reported to the state, the spot price may still go up because they didn't get that information correct. And that's. That's something that should be fixed.

And then the, you know, we talked about up like a rocket and down like a feather, just to put my hat on. Playing both sides of this in slide. 875 days up, 35 days down. Doesn't match that as much as we've said before.

Now, lots of your other data does, but I think that that's something that we may want to have explained later as we move forward. All right, but just, if you got a quick answer, great.

If not, quick answer is that those price increases went up over a sequence of days in slow motion, and the spot market prices were being reflected in retail very quickly. But that increase was going up as the maintenance was happening. And then when it shot up. It shot up quickly.

Thank you very much. And just because the assertions been made so many times, you don't have to build more storage tanks to meet the concept that you have there. Thank you very much.

All right. Thank you, Assembly Member Pellerin.

Thank you so much. And putting aside the Ukraine invasion in 2022, it seems like all the recent gasoline retail price spikes occurred when there was maintenance at refineries in California.

And I understand emergency maintenance issues where they have to go down, but is there a coordinated schedule of maintenance for the refineries, that they're all not down at the same time?

No. So let me just explain. In the all these answers, it's hard to say yes or no because of the subtlety and the nuance of this Assembly Member, but the individual refineries cannot coordinate their maintenance. It would be illegal for them to know each other's maintenance schedule. So the answer would be no, they cannot coordinate.

But what happens in kind of the practical nature of this is some of the maintenance that they do rely on extremely specialized equipment, and that specialized equipment can only be available once at a time. Right. So most of them tend to stagger it based on the market availability of both personnel resources and equipment, the specialist equipment.

But I think what happens is when you have one or two planned outages that are slightly different, and they could do it, they might overlap, and we see that in the data. What happens on the top of that is the unplanned outages.

So when they compound in the middle of the summer with planned outages, you really are in a bad situation in terms of production. Does this answer your question?

I'm curious. It's illegal. Why they coordinate.

First, I would flag the refiners have to report 120 days in advance to CEC, but generally speaking, that's just a notification requirement. So they're planning it themselves. And it's important to note that these three price spikes in the late summer, early fall, when inventories are Low, there has been planned maintenance each and every time.

So the refiners are making their own plans when to shut down, and they're making their own plans about how much to resupply. And that's entirely a decision that they get to make. There's no authority currently to change that. And then coordinated an explicit agreement to coordinate timing of output could be a criminal conspiracy under the antitrust laws.

So they can't agree with each other to do it. At the same time, there's a lot of industry knowledge about when refiners are going down because there's preparations they have to take. They may buy fuel from each other. There's some thermal imaging you can do of a refiner to see if it's reducing production, things like that.

So they cannot explicitly coordinate. One of the problems about having four firms is it makes it easier to watch everyone else and to know what's happening.

Thank you, Assemblymember Wood.

Thank you, Madam Chair. Mr. Bennett covered a fair amount of what I wanted to ask, but I do have a couple questions related to the spot market. Roughly what, I mean, I know that varies, but on any given day, what kind of a range is the spot market of the overall market?

Yeah, I think a good ballpark, Assemblymember, to think about is we use about 800 million barrels a day, roughly. Some days, if you're just looking at the opus reporting, someday it could be as little as just 10,000 and some days it could be about 100,000. But typically if you look at the average, it's around 25 to 30 thousand.

So that really in my mind, is the tail wagging the dog.

It's a fraction of that.

That tiny portion can dictate at the other end retail prices. That's hugely, hugely, hugely influential.

Sir, I just got a correction. If I use the word million, it's 800,000. Sorry, 800,000 barrels a day.

It was all relative. Yeah. Million, billion, whatever.

It's a percent. Thank you.

So, in the spot market, these are traders. They don't actually touch the commodity. They don't take control of commodity. Is it more like a paper trade? Like the guys you see in the traders on Wall Street and stuff like that, throwing paper around and all that?

It's really both. So you may have a refiner or another market participant buying to take delivery. And you may have someone speculating or doing an arbitrage opportunity to make money trading in the market. So you really have both.

Okay. Okay. Thank you.

And I know Mr. Flora asked about data and what we're doing there. I'm gonna guess, not really guess because I think I know some of the answer here. That individual data points can't be released for legal reasons, but aggregate data could be released, correct?

Yes. We currently post much of the information that we are sharing today with the numbers behind them publicly. So anything beyond aggregated information would be problematic.

Well, I just keep coming back to the fact that one refiner's misfortune, or having to go offline leads to other refiners fortunes, and by extension, consumer price volatility, and huge disadvantages for the consumer at the other end of the market.

And I just keep going back to the spot market as being the trigger here and feel like we need to get our arms around that, because it feels. I'll be honest with you, I'll use a medical thing here.

It feels a little bit like the PBMs. And, pharma and the PBMs controlling what the consumer pays for medications on the other end.

We can definitely circle back with you on just one of the things that you said.

When a refinery goes on an outage, and they have a lot of contractual obligations, and those contractual obligations, sometimes, if they're not planned ahead, for example, the 2015, when we had the Torrance event, which lasted for a very long time, they have to now go and buy a lot of times on the spot market.

And to your point, if a refinery is not well planned, and in this situation, they could lose billions of dollars. And you're absolutely right. And that's something that the PMAC noted in their discussions, the importance of planning to protect also the refiners.

If I can make two points on that. One is it's important to know that when there is a price, when there is shortage in the market, someone has to buy at the higher price, right? So there's someone who's buying and paying a higher price.

But for most of the contracts, I'm going to speak only at a very high level of generality. The wholesale and the retail contracts that they have are based on the spot market price plus. So even if you're a refiner paying a higher price, you already have locked in sales contracts that allow you to pass that price along.

So even the refiner that's buying at a higher price with this linkage to the spot market prices, is effectively guaranteed not to lose a lot of money, as long as they sell it in these contracts that are linked to spot. And I think for.

Stay tuned for this afternoon, that concern about these one or two spot market trades only happen in certain conditions. And it happens when there's not enough supply and there's maintenance. Outside of those conditions, we don't see these unusual spot market spikes. Thank you.

And then just one final point, going back to something Mister Flores said about certainly challenges in other communities that feel this disproportionately. So my district, I don't have EJ community, so to speak, as some concentrated urban areas do.

Yet in my communities, a lot of them, because all the fuel is trucked in, we see these price spikes even greater, you know, $7 a gallon, sometimes even higher in some areas because of the additional cost to bring a. Bring fuel in.

You add that as you look in the future, as we try to get more EV adoption, I've got a lot of. I have, like agriculture interests and other interests that may only use a vehicle once or twice a year for a short period of time. The cost to replace those vehicles are enormous.

And yet where the Air Resources Board is pushing regulations onto some of these folks that for literally small farms and small agricultural industry, that are going to be really, really challenging and that is going to lead to increased costs for consumers and other commodities that are problematic.

And so as we start thinking about what the, there are some guys, some folks that are really, and we don't have the infrastructure. You want to come visit my district, we're not going to have that kind of charging infrastructure and capital to be able to handle all these things.

So the glide path for these communities would be helpful. And because we are not considered EJ communities through the Enviro scan, we can't, some of these communities and business entities can't get access to some of the resources that others do.

So another piece of the puzzle, as we start looking at that decline in ICE vehicles, so to speak, just don't freeze out our smaller businesses, so to speak.

Thank you, Assemblymember Zbur.

So thank you very much.

You know, I, looking at sort of high school and college economics, one of the things that, you know, is a truism is that if you're worried about price spikes due to lack of equilibrium between supply and demand, actually doing what you can to provide additional inventories is one of the ways you address that.

And I know that's the focus of what you're doing today and what the governor's proposal. And so I think that's the purpose of what we're here to think about. That said, I think the devil in the details.

And I think the key question for me revolves around, I think what you stated as your objective, which is to maximize existing storage space and not actually have a proposal that would require new storage.

And I think the thing that I am grappling with, and it's sort of, I keep looking again, at this tankage 101 slide that was produced yesterday. And the question, you know, there's two different pictures that are being painted.

One where you have some data that sort of shows that you think there's capacity for additional inventory without doing much. Without doing very much. And then I think the story that some of the refiners and some of the labor unions are presenting, which is

Assemblymember, we are going to have some of those folks on joining the panel momentarily. So can we pause questions about inventory requirements until you're able to ask that question of those folks?

I'm happy to do that. Okay. I'm happy to do that.

Thank you.

Assemblymember Gipson.

She would be whipping that thing out there. Okay, well, I'm gonna try to make sure I stay within the guidelines before I get. Okay. Madam Chair, Mr. Director, I have a question for you. How has the volatility of the gasoline prices impacted mom-and-pop gas stations in the State of California? I'm just wondering how many have closed.

If you have a ballpark figure within a year, that's the first question. And then for our Vice Chair, I was pondering this morning. I was going to call you around 03:00 in the morning, but I didn't have your phone number.

But it was the question that it's a common theme that the Bill provides for a collaboration to go out and investigate how much space people have. If you find out, in fact, that they don't have the space or capacity, then what?

So let me go to the Director first to answer that question, and then you have one follow up question. Okay, I'm just looking at the chair. Go ahead.

Thank you.

You're on track. You're on track. Good job, Gipson.

And I've appreciated previous discussions and talking about different shipping issues as well. The good news, I think, on the retail level is also bad news for consumers. Retail gasoline, and this is a reflection, potentially, of market power. Retail gas stations have been profiting quite handsomely, and the retail margins have been going up.

And I would refer to colleagues at CDTFA who put out a report, and one of the things they've seen is actually private equity investing in gasoline station ownership in California because prices have gone up and the retail margins have gone up.

You see some great stories in the press about these generic gas station owners, unbranded generic station owners who are offering Low prices on gas, buddy and the like. And they're getting in the news because they're saying, hey, these prices don't have to be so high when we compete. It can be 399 and not 450.

Just to kind of add to Director Milder there, we have evidence that during price spikes, consumers tend to go to generic low price gas stations more, giving them the opportunity for volume sales. But we could expand on that further. On the specific part of the rulemaking,

the fundamental premise of any rulemaking, sir, would be that the benefits significantly outweigh any risks, and the risks are mitigated. And if the risks outweigh the benefits, and if the risks cannot be mitigated, we wouldn't go forward with any such rule.

So I think that is kind of what you are giving us, is a threshold level ability to have deeper conversations. We have enough information today to suggest that there is efficiencies to gain in planning. We have that evidence as we presented over and over. Specifically to any single refiner,

they might not, and maybe you might be hearing from a specific refiner who are doing really good planning, but we are talking about industry as a whole. and this rulemaking will go to refinery by refinery.

Okay, my last final question. The Federal Government, correct me if I'm wrong, It's my understanding that the Federal Government actually stockpile petroleum as well. They can release it at any moment just to calm the market. And I know in the report it also stated that it was a recommendation that California similar, do the same thing. Right.

How feasible is that?

So as somebody remember, I think you're referring to the Strategic Petroleum Reserve, which is crude oil. So it's stored to be refined. It's not refined gasoline. And many reports that have been made, I think even to the Assembly, have evaluated having a state actor do this, and there's a couple issues with that.

These tanks that we're talking about not wanting to build, the state would need to build them. You'd also have sort of a state actor in the market. From DPMO's perspective, we want a well functioning market, but with regulations that incentivize the right conduct.

And so having a state actor makes it more expensive, then you have decisions about buying and selling. And then also gasoline does eventually go stale. I think you heard very clearly from members of the industry, when industry is doing it, they do first in, first out. So they're constantly cycling through their supplies.

And there's no staleness issue, because that's 6, 12 months different estimates in the industry. So that's not an issue. But imagine if you're buying for the State of California, you build the tanks, you buy it, and then you have to decide when you're going to use it, and it goes off.

So I think there are some issues around having an industry led solution, working with industry and existing resources, and that's the direction a lot of other countries have gone. And we'll talk about that more in the second session.

Okay, one more question for the Vice Chair. What's your thoughts around at berth regulations? What does the industry have told you regarding any concerns that the, that have come up around at berth?

Thank you for that question. With the Chair's permission, we have CARB representatives here. They would be better equipped to answer that question, if you're okay with that.

I'm okay with that, but I just thought you may have an opinion in terms of what you've heard in terms of it. That's all. I can wait.

Did you want to have someone from CARB come respond?

Yeah, that's fine. I don't want to mess with your agenda. So the question is regarding the at berth regulations and what has the industry told you about concerns about the regulations? Are you concerned about the impact that is will have on the supply chain in California?

Because we know that some states, you know, there's some strikes going on outside of California, and some of that is coming to California. And so with the regulation at berth being imposed, the impact it could have on the supply chain. So if you could just elaborate briefly.

Thank you. And thank you for giving me the opportunity to respond. I know this question came up yesterday, so thanks again for the asking it today. A little bit of background - the at berth regulation has been in implementation since 2014. And so we've had over 20,000 visits that have been controlled.

There are 20 terminals that have shore power. There are two capture and control systems out there. So the regulation has been successful. What we did starting in 2017 is we added additional vessel types that was so that we could get additional reductions for those frontline communities around the ports that are highly impacted by the emissions.

Sometimes kind of surprising, but those emissions can travel far inland, up to, like, 20 miles, and impacts, you know, 3.7 million Californians are impacted by additional cancer risk from those emissions.

And so in 2017, we started working with the new vessel types, tankers and auto carriers, which I might call roros, to include them in the regulation to get additional emissions reductions to protect our communities and also help us meet our requirements for federal air quality standards. And so they've had a long lead time.

We've started working with them in 2017 with these two new vessel types. And those two new vessel types have implementation dates in Southern California in 2025 and in Northern California in 2027. So those are coming up. So there's an immediate implementation date coming up in 2025. This is a somewhat technology forcing regulation. This technology exists.

Shore power exists. The capture and control systems existed. Shore power is at a tanker terminal, T-121, and has been there since 2009, operating successfully. The issue is adapting the capture and control systems for tankers. And that is where I think a lot of this discussion has been focused on.

There are a number of companies, two companies have already designed and built those systems and are in the final stages of doing all the safety analysis, all the performance demonstration, all the safety performance evaluations needed to get them into the market.

Our regulation has safeguards that if that technology is not available come 2025, January 1, there is a provision and other safeguards that allow companies that have made a commitment to technology to pay a remediation fund into the remediation fund. That remediation fund then gets put back into the communities to get reductions.

So the reductions are achieved even if they're not achieved at the vessel. And so a long rulemaking process, 2017, to, when we took this regulation to the board in 2020 and it was approved, those are the issues that we're hearing.

Our readiness assessment indicates that the terminals that have compliance options in 2025, using this combination of the caption control systems and the remediation Fund, have viable compliance options.

So thank you. What I just heard is that if they don't meet the January 1st , 2025 they will be penalized and the money is going to go to a fund until such time that they are or do, in fact, meet standards.

It's not a penalty, it's a compliance fund. And that compliance fund goes into programs into the community that reduce those emissions reductions. So the emissions reductions get felt by the community members that are impacted by the emissions reductions. But it is a fee.

I'm sorry?

It's a fee. It's a remediation fee.

At the same time that they're trying to meet and build and pay for and to meet standards, and they don't meet the January 1st, 2025 they'll be, I keep saying a penalty because that's what it seems like. You say a fee, I say tomato, tomato, same thing. But that's what I'm hearing.

They've had since 2017 to put emissions reductions equipment in place. They've had a long lead time to do that. And so the fact that they're not in place, there might be a period of time where they're paying into the remediation fund while they're getting that equipment put in place.

Thank you.

Thank you, Assemblymember. Assemblymember Papan.

Thank you, Madam Chair. Well, it's Milder.

Yeah, Milder. Correct.

Okay, good. Well, Mr. Milder, you certainly, me being from Northern California, you certainly got my attention this morning. You know, I come from the land of the haves and the have nots. Most of the haves have EVs, most of the have nots do not.

So my question is this, and I think you for adding this last slide as it relates to, we could see in 2020, when we were at the height of the pandemic, we were up to about that 15,000 number. And so my question is this, and you may or may not know the answer, and that's okay.

But is it that we're not up to that 15 at all times to prepare, as Assemblymember Bennett has said? Is it because they refine just according to the contracts that they have at that moment in time?

Or is there some other reason as to why we're not refining all the way up to be, quote unquote "prepared" for the times when we're changing over, or we have refinery upgrades or, God forbid, an unplanned upgrade or repair? So if you can't answer that, that's fine. Do you have any idea?

I think, as the Vice Chair has indicated, each refinery has their production plan, their storage plan. They have slightly different configurations of their refineries and their storage.

And there's no one entity saying, here's how we're going to protect against price spikes and keep these levels up heading into the sort of the dangerous months. And so it's a little bit of an atomized decision by each refiner that then gets aggregated here.

So I don't have a simple answer, although I just really want to underscore the point, hear it from so many of the Assemblymembers in this hearing. and yesterday - those gas prices hurt. And they hurt the low income communities the most.

And everyone's district has folks who face difficult challenges about, can I fill my tank up all the way or halfway using Gasbuddy to look for the cheaper generic gas stations, things like that? These are critical issues, I think, to confront at different levels.

Thank you so much. So now I got a follow up question, and we have talked about potential legislation that would give the CEC the opportunity to regulate. And, Mr. Vice Chair, you seem like a very rational person, and I thank you for the Yeoman's effort that you put into all of this.

But my question is this, if you serve with other people who, I don't know, are there some potential guardrails that you could see us doing legislatively before we turn the reins over to you carte blanche, or instead of, I should say, turning the reins over to you carte blanche, to say, yeah, you're going to take into account that it may be, as Assemblymember Jackson pointed out yesterday, the spikes at the end of the year may be less than the cost of mandating this certain Reserve or whatever it might be, and that might be something more rational.

I don't know. But I'm wondering, before we let you go, are there guardrails that we perhaps should be considering in the legislation that authorizes the CEC to maybe enact some regulations down the road?

Yeah. Thank you, Assembly Member Papan and I think the current legislation, I know we're going to dive into it more this afternoon, too, but I think you've put in pretty broad guardrails already in terms of making sure that the benefits outweigh any types of risks.

I think to the extent that there are some conversations around local benefits that happened, local community impacts, I think that is on the natural something that an agency would do given the overarching guidelines that we have. But I think I would defer to you to the extent that you feel that an agency needs those guardrails.

We absolutely welcome that partnership and guardrails any day, because I think just as you in our best form, and hopefully we are in our best form every single day, we want to do this right. We don't take this lightly. I think the goal that we've all kind of articulated is to reduce those price spikes.

And I think that reducing those price spikes will be our main focus. But taking into account all those different variables, and we will do the best as we always do. But I know, I think we will welcome the Legislature to both partner and set the guardrails as you see fit. Thank you.

Thank you. Assemblymember Rubio.

Thank you. A couple comments, but first of all, in the spirit of transparency and trust, I would really appreciate it if we don't get stuck with semantics. When my colleague asked, is it a penalty? It is a penalty.

And, you know, going back and forth with the difference of vocabulary doesn't help for me anyway, the trust that we're trying to build here to, you know, figure this out, ABX, actually, SBX 1 and 2 were specifically about penalties.

And I think the policy in front of us is about penalizing, so the semantics shouldn't get in the way just for future. I really would appreciate that. But the question, and I think the conversation that we're having about alternatives and guardrails, I know I'm not as smart as my colleague from Santa Barbara,

however, I really would like to talk about this in particular, but other methods to lower gas prices or I alternatives. And also in that conversation, and I know we'll get into it later, would be, have we passed policies that have actually helped impact this problem?

And if so, is there something that other than this or in combination with this, that we can change so that we can alleviate some of the challenges that we've created? Because, you know, we've been talking about 24 refineries 20 years ago, and we have 11 today.

Well, part of that may be the consolidation, but the consolidation, in my opinion, has been because of some of the policies that we've passed. We were talking about mom and pop gas retailers. You also said that we have fewer of them. What are those reasons? Did we create some of those?

And I think if we can do all of the, have all of those conversations at once and not just focus on one, because I think this problem is not just one issue. I think it is a combination of issues.

And I think going forward, I would like, I know we'll have a conversation about that, but I think that needs to be included so that we have a big picture about, yes, we can do this or three or four other things, or maybe none, just depending on what the conversation is for. Thank you.

Did you, did you want a response? Okay. All right, Assemblymember Lee.

Thank you, Madam Chair. Just build off some of the comments from Assemblymember Papan. We all represent Northern California.

Small point is, of course, I really do appreciate all the data we have allowed from the first special session Bill to allow you to actually look at all these things. And I think that's bearing fruit as a seeing what is actually happening with the real trends.

So since September, this is clearly even showing right now, is that the price of crude and the retail price is quite divorced right now in California.

While price of crude is declining, the retail price of us, of the rest of the nation's gas is going down, but of course it's going up in California, much more so in Northern California than even Southern California.

Is there any data points that you have been able to collect that suggest why there's even a difference in behavior and pricing between two different parts of the same State?

Yes. There's two refining hubs in California, largely Southern California and Northern California. And there's actually two different spot market trading destination locations, one for Northern California and one for Southern California. So we've been seeing, thankfully, some of this has abated.

But a week ago and through last week, price spikes that were more centered on the Northern California spot market. And this is all publicly reported, there were some refinery maintenance issues reported in Northern California. So the issue was being felt more acutely in Northern California and on the spot market.

Yeah. Just to reiterate, even between the different spot markets, between different refinery activity you're seeing, the difference in behavior has contributed to the difference in price at least?

Yeah, there is some capacity to move product between northern and Southern California via barge. And so the prices often move in similar directions, but there are times when they're more localized events, one area or the other, that will drive a price spike higher.

Now, I'll also say the California average was going up as well, and Southern California was going up as well, just not as much.

I don't know if you have the analysis for this, too, but going back to the price spikes of the last years ago, did you see any differentiation of behavior like this happened between the regions back in 2022 or in 2022?

I think we'd have to go back and check the data to be very careful. I think largely speaking, they were statewide phenomenon. There's always some difference between the two prices, and sometimes it's more localized in one area or the other. I think generally those were price impacts that were felt throughout California.

Yeah. If the data is available to share later on, I would appreciate to see that as well. Thank you.

Yeah, I mean, we'll definitely share more information, but just quick kind of level set information for you. Northern California market is about a third, and the Southern California is about two thirds.

And then in terms of the refineries, we have three in the north and five in the, and then one, you have Kern in the middle, but we usually count it as North.

So if you're looking at, you know, the kind of one third, two third distribution, depending on how you, where the outages are, you will have more impact one place or the other.

Thank you very much. I think that's something for us to consider. Our conversation about the policy, too, is protect the holistic nature of the state, too. So thank you very much.

Thank you, Assemblymember Muratsuchi.

Thank you very much, Madam Chair, I know you are anxious to move on with the agenda and to help facilitate the transition to the rest of the panel.

I just wanted to emphasize and to ask all the speakers that are going to be coming up, I wanted to highlight the fact that I, I, surprise, surprise, represent three of the five refineries in my Assembly District, the Chevron and El Segundo, the PBF in Torrance and the Phillips 66 in Wilmington.

And as we go forward, I'm asking this Committee, as well as the audience, to not only address the supply issues, the impacts on consumers, but also the impacts on frontline communities. When the Torrance refinery explosion happened in 2015, I lived just a few miles from the refinery.

I know that that created a huge uproar in terms of refinery safety. I know that there are issues with this. The proposal that we're going to be discussing in the afternoon in terms of the maintenance schedule triggering these inventory checks.

And so I want to make sure that not only are we addressing supply issues, consumer issues, but also refinery safety issues. Thank you.

Thank you, Assemblymember Alvarez, do you have a question?

Thank you, Madam Chair, and thank you to the panelists. I just want to acknowledge the, I will be focusing specifically on the item which was docketed for today, and this is related to the transportation fuels assessment. My line of question is specifically to that, and I want to thank in advance those who have provided some briefings already.

And I appreciate the work that's gotten into the report as well. I think it's a really well thought out report with a lot of important information.

My line of question is really about exclusively to the work that has been done that the report says needs to be done specifically on page six at the very beginning as it relates to storage, the report states, I'm quoting, "it is unclear how operators would adjust to requirements or incentives and additional public discussion, analysis of these types of approaches is warranted" is what the quote says.

So the question then has to be asked, what has been done, what kind of public discussion and what analysis do you have to date? Because the assessment does not provide any analysis per se and only mentions something about workshops, but I'm not sure that it's related to this specific concern that you raise.

Yeah. Thank you, Assemblymember. Since the assessment has been completed, again, if you, to keep the information factual, we had comments after we put in the draft proposal out, even from the industry, that the options around minimum inventory and resupply are intriguing and should be further discussed. So we heard that. We heard from DPMO in their memo.

So I'm speaking for the Energy Commission, the opportunity with the resupply and the inventories. So because of that, we took in two workshops since then specific to that issue. And both DPMO, CEC staff and others have presented at those workshops.

And one of the things we started really looking at is the upside, the significant upside in thinking about, again, active planning to ensure that we have liquidity. So as you look at that as the problem, not necessarily.

I think the word resupply and the minimum inventory has been, I think, used in ways that kind of creates a misunderstanding, like our hope is to really improve the liquidity.

Let me just ask more specifically. You said there was workshops on page eight of the report. I do note that you said there were workshops and hearings, and it sounds like something was discussed specifically to your concerns. Raised in the report, though, did the discussion include analysis, a full analysis of the implications of this?

No. So I think we have moderate discussions. And again, being in the spirit of transparency, we've had preliminary conversations, and I think, as we mentioned this morning, it's the threshold question of do we see significant opportunity, and the language would be permissive for us to continue those discussions.

Sure. We saw that also in the section about imports, you quote at the end of page six, that this potential scenario of imports merits additional analysis. Has there been analysis done on that?

Yes. So we don't have that publicly yet, but we will put them publicly. So we have two industry consultants, ICF and Stillwater, who was helping us with much of this analysis, including a couple of economists. So we will put more analysis out on that specific issue. And as you note, so this is a complicated dynamic.

And I think the importance that, I just want to hopefully give you confidence in the work we do. We took every single comment we got from the industry, from the labor and faithfully represented in that report, and it was a whiteboarding exercise that allowed for robust participation. And I think we continue to dig down those risks.

And as we dig down those risks, we see significant upside here, which we need further analysis.

So those are two. I know you have several other options that you've presented. We'll discuss those later. But in this report you have those two.

And so just so I understand, on the issue of storage, you have not done an analysis yet on what you propose here on the issue of imports, you've begun an analysis, but that's not complete yet.

Yes. So on the, basically storage, I think what we've shown in the two workshops is as an aggregate, we have plenty of space to work with. Any specific refiner might not, but in the aggregate, we have opportunity.

And you believe that's all the analysis you need to make that determination?

No, we would need further, and that's what the rulemaking would be for.

And so what would be the timeframe and when would you conduct that analysis? That hasn't been conducted.

So we'll continue to work on this regardless of this legislation, but we would not be able to act on that without.

When would that happen?

So we'll continue to work. I mean, it's prioritizing within the resources we have. I would imagine over the next, this transportation fuels assessment is every three year report. There'll be a lot of updates in the next report, but on an ongoing basis, as more information is available, we'll put it up.

So you're planning to do your due diligence, which I think you have done to now, but do your due diligence on the storage issue at some point anyway, regardless of what the Legislature does.

We will continue to investigate that. Yes.

And I know there's many members who have questions about storage tradeoffs. Want to understand that. I think both from your perspective as well as from the perspective of other market participants, we will be doing that momentarily.

Yeah. So I'm done with my questions. It was all about the report and these analysis that haven't been done. I think, you know, the questions and answers speak for themselves in terms of the work that needs to be done ahead before we make a decision. We have to really think this through. Thank you.

Thank you. All right, and then before we jump into our next, or I guess, our continuation of this panel and our next panel, I do have a couple of questions about the market overall. So I want to take a little bit of a step back.

My first question is, you have shared with us three scenarios for gasoline consumption and demand over the next 20 years. There's a rapid scenario, fast scenario, slow scenario. Which of these are we actually using for planning purposes today? What are we considering? The base case.

So the base case would be our, I think in this it would be. The orange line would be our. Sorry, sorry. The green line. Sorry, ma'am. I'm just looking at the information here. The green line is the forecast. The CEC is forecast.

The green line is forecast. Okay.

And the other two are the scenarios that were pulled from the overall economy wide planning. So, as, as with most planning, we do scenario analysis to ensure that we're planning for the entirety of the band.

Okay? So based on our current forecasts and the plans that we are utilizing, according to this, the. If we consider today's consumption to be 100%, in 2035, we will have gone to 85%, approximately ballpark. And by 2045, we will have gone to 50%. Okay? So again, I think that's important for everyone to think about.

As we think about the next 10 years, our consumption is not going to zero in the next 10 years. Our consumption is not going to zero in the next 20 years. Our consumption by year forecast is going to 85% in the next 10 years.

I think that as we've gone through both your and I would agree, very excellent reports. Appreciate all the work that you all have done with the data that you have utilized as a result of SBX 1,2. But it does strike me that we've kind of proven two fundamental laws of economics.

So I think many of us have talked about our experience in high school economics. I think Mister Bennett and I were both economics majors many moons ago. So you've basically proven, I mean, this chart proves like the fundamental law of supply and demand, right? Like that's literally what this chart is.

And you've also proven that market concentration leads to extraordinary market power. All of which is to say, it strikes me that taking a big step back, knowing that we are going to be at 85% consumption in the next 10 years, I feel like we are extraordinarily vulnerable and we risk worsening market power dynamics if a refiner closes.

So I guess, what is the State's plan for when the next refinery closes? And are you having those conversations right now?

Yeah, I would also invite both my colleagues from CARB and DPMO to step in if they have anything. So I think 30,000 foot level, you've laid out the risk as clearly as the transportation fuel assessment does.

I think moving forward there is a lot of uncertainty band and what you required us through the legislation of SPX 12 noting that is what is our transition plan. And so we are working on that in terms of thinking through what the different options could be.

If you look at somebody like Australia, what Australia did is during COVID number of their refineries closed down. And so Australia as a country, for national security reasons, decide to have the state co-own last refinery. That's what they did.

And that's where you have that in our options table, is because every different market will have a multitude of options to have. So all the options in the assessments that we provided are looking at both reliable and affordable supply.

And how we design those policies will be where the rubber meets the road, as many of the members noted.

And I would add a slightly more hopeful note in terms of refinery closures. 2022, after the pandemic, California was still the fourth largest market in the world for gasoline, after the United States, China and Brazil. So even 85% of a very large number is still a very large number.

It's also the most profitable refining region in the United States. So large volumes and large profits. And we've seen two refineries convert to renewable diesel. And that's amazing that I think it's about half of the state's diesel is now renewable diesel. And so there is some market reaction to looking for other products as that demand changes.

And there's going to be, as you say, a lot of demand for quite a long time. So the question is, what are smart policies? Anticipating that as we talk this afternoon, the fewer refineries you have, the more important it is to have a buffer. Because if one refinery goes down, that's a larger chunk of the remaining pie.

And so having a buffer is one of the key strategies to deal with eventualities where we have fewer refiners.

Let me just ask a follow up question to Mister Alvarez's related to imports. I was somewhat surprised just in the Executive summary of this report. So page six says a strategy to bolster the State's imports of gasoline will be imperative to avoid potentially systemic undersupply problems.

Then you also paragraph later acknowledge that marine imports generally tend to have higher prices compared to in state refining. For a number of reasons.

And I guess I'm having a hard time wrapping my head around why would we want to have an import strategy front and center when that is actually more expensive and actually probably more big picture harmful for the environment.

Right. I think it's just kind of noting that the context of the assessment was all those different options, right? So we're thinking about the multitude of options we have in terms of imports currently the way the import market works is it's reactive.

There is some active planning by the industry to bring in blending components and such, but a large volume of what we see coming into the, into the market is largely reactive to a spike. So I think it kind of points to then through working with the industry collaboratively. What could we do to actively bring in the imports?

The reason why we kind of then note the importance of the other side is again this is the reason why we need rulemaking to thoroughly get through this, which is if you start bringing in imports, what would the market players do? Independent market players do? Would they bring in imports or not?

So those are the kind of questions we have both our consultants and economists working and we're going to put that out very soon and we'll be doing that regardless of.

And I know I and all of my other colleagues are very much looking forward to diving into I think, both the proposal before us as well as considering alternatives.

And I'll just say I guess as a little preview - I really want to make sure that as we're having these conversations that we're not like missing the forest for the trees is all I'll say. Because I think we've got to take that step back and look at the full picture. Okay, so with that we're at 11:54.

I think what we're going to do is just take, we're going to mix up the agenda a little bit. We're going to pause for a moment. So we're going to take a 10 minute break and regroup at 12:05. All right, thanks, everybody.

All right, thank you, everyone. We are ready to resume our hearing. Our next panel is focused on pinch points in the supply chain.

And I guess just by way of setting some context and putting a frame around this part of the conversation, I think one thing that we have heard loud and clear throughout the course of our hearings and in the preparatory documents that we read as we came into these hearings, I think one thing that we've heard loud and clear is that California is uniquely and terribly vulnerable to supply disruptions.

And so one of the things that we did want to include as part of this conversation is a bit of a dive into understanding some of those vulnerabilities, understanding some of the pinch points that exist in today's market, and then looking ahead over the course of the next five years to help us understand what other risks and vulnerabilities we need to be mindful of as we plan for this transition, we are going to mix up.

Not mix up. We're going to condense the agenda a little bit. I know there is a lot of eagerness to dive into questions around the specifics of the administration's proposal related to minimum inventory requirements. So what we are going to do is have our presenters for this next panel pinch points in the supply chain, share their presentations.

We will then invite the Administration back to the dais to present the details of their proposal. I'll invite all panelists to remain on the dAis, where then you can respond to questions either about the specifics of your presentation or as asked by Members, to share your perspective on the administration's proposal. So. Okay, that's the game plan.

We will then pause for a 15 minutes break and move into additional proposals to address supply as our final panel for the day. All right. With that, let's jump into this conversation. I believe we are. Let me. I'll introduce our panelists. We are joined by Mark Nicodem. I butchered that.

From the Western States Petroleum Association, by Norman Rogers, from United Steelworkers local 675, who is joining us remotely, by Mike Patterson, who's joining us from the International Association of Heat and Frost Insulators local five.

By Jamie Court, the President of consumer watchdog, by Alessandra McNasco, from the California Fuels and Convenience alliance, and by Severin Borenstein, who is joining us from the University of California at Berkeley, also remotely. All right, I believe we are beginning with Doctor Nechodom. The floor is yours.

So thank you, chair Petrie Norris and Members of the Committee, I want to thank you for the opportunity to come and speak to you about, as you know, a very, very serious matter, and that is California's fuel supply chain. I am Doctor Mark Neckedom.

I am the senior Director for science and technology at the Western States Petroleum Association. I'm also the former Director of the California Department of Conservation, which, as I think all of you know, oversees, among other things, the permitting and regulation of oil and gas production in the State of California.

I was appointed there by Governor Jerry Brown in 2012 and endured about 12 or four years there. Felt like 40 years, but four years. I'm here today to talk about the major study and the findings at a very high level with you that we commissioned.

Before I do that, though, having listened yesterday and this morning to an excellent discussion, I want to make one observation and offer four takeaways.

If you hear nothing else from me today, and that is the observation, and with total respect to the Committee and to our colleagues at the Energy Commission, I believe that the focus on storage is a distraction. And I'll have more to say about that in just a minute, but I believe it's a distraction.

I also want to share with you the takeaways, just as the chair was just saying, the fuel supply system in California is on the verge of being seriously broken.

And I will share with you why I think that none of the solutions that have been discussed so far, at least at the level they've been discussed, reduce costs or reduce market volatility. I'm not saying they're not available. I'm simply saying none. Yet my third takeaway is, please ask more of the right questions.

This hearing has been rewarding to listen to because many of those questions are surfacing. Be relentless, please. And finally, there are no shortcuts. There are no shortcuts here. This is a very complex issue in a very complex industry that underlies 10% of the GDP of the state. So those are my takeaways.

And then I can go into the more nerdy parts, if you don't mind, with my slide presentation. You have the slide presentation, I believe, in front of you. I'm going to skip forward a fair amount. I don't need to dwell on it. And in the interest of time, I want to focus on the real highlights.

Excuse me, you have the placemat in front of you. I believe you have the laminated copy as well. We use this placemat as an educational tool because it says on one page the complexity of the transportation energy supply chain.

We have tended to focus, especially as a former regulator, I appreciate what it is to focus on pieces of it because that's our authority and our obligation. But the industry looks across this entire landscape constantly and I would urge you to do so as well as decision makers in the public interest.

I won't dwell on the background and methodology, but I do want to point out we commissioned a study about a year ago. Turner Mason is the main contractor. And Skip York, from whom you heard yesterday, was the principal investigator. The larger study is about 109 very detailed slides.

I'm going to give you four of the major findings here. And we're going to focus on production, pipelines, ports, and ultimately the effect on refineries on page four. I apologize if we didn't get the page numbers in there. On page four with the red boxes, it's the portion of the. Sorry if I'm confusing the PowerPoint people here.

It's the, it's the portion of the placemat that we find the greatest pinch points, the greatest vulnerabilities and our greatest concerns as an industry. What I said earlier in my opening observation, we're too narrowly focused on storage. I mean, look to the left.

Look to the left on that placemat you'll see crude production, which is in serious decline. I'll talk about that in a second. You'll see ports that are complicated. Let me move to production. Our findings are that production currently is declining in the State of California. This is domestic crude production at a rate of annualized rate of 15%.

That is twice the rate of what was anticipated in the fuels assessment from the Energy Commission and 10 times the rate of what was projected in the scoping plan in 2022. And that decline in production is not because we don't have the reserves. It's because we cannot get permits. Operators cannot access the resource.

California just geographically sits on 1.5 billion barrels of proven reserves. Now, I'm not an advocate for going after every barrel. I'm simply saying the Reserve is there, the permits are not.

When the setback law SB 1137 is fully implemented, our calculations and our earlier studies on the impact show that we lose about 20% of production in the State of California pretty quickly. That's on the production side. There's a knock on effect here that I want you to be aware of. I think everybody knows.

And if you could go to the slide with the map, it's two slides forward that shows where the production is in San Joaquin County, Central Coast and La Basin, and where it has to go to be refined. That's a major pipeline system. It's multiple pipelines.

And Turner Mason's analysis found that in California's crude pipeline system, moving from where it's produced to where it's refined, on average, has a minimum throughput of 30%. If it falls below 30%, the pipeline companies may make a determination that for safety and economic reasons, they can no longer run that pipeline.

When a pipeline goes down of that magnitude, we assume it stays down. It can't come back up, not very easily.

So on this slide that I'm offering with the map is also a table, and we provide some flags, just some summary flags on the right side of the table, the northern bound pipelines from San Joaquin Valley are running currently, this is 2023 data at a rate of about 30%. It's right on the border of shutdown.

We're not predicting, we're not the CEO's, we're not the operators. I'm simply saying 30% is a pretty, pretty narrow margin, and then 44 and 40% going to the south.

My point is simply that we are running, bouncing off that margin, at which point the pipelines may need to shut in, which will have a knock on effect on the availability of crude for refineries that rely on those pipelines for their crude sources.

And there has been a presumption, I think you're all familiar with this, many of you have been part of this discussion, that somehow we can shift from domestic crude production in California to simply importing whatever we need.

We've already heard even in this committee yesterday and today that the ports are experiencing increasing congestion, increasing difficulty, whether it's vessel transit throughout the entire port system or it's dock space at birth, and transfer of material from ship that is tanker to refinery or toward storage.

And it also is the other way, because, for reasons I'm happy to talk about later, we will have to also compete for dock space to export fossil diesel when renewable diesel takes over in California. Turner Mason predicts that to happen sometime in 2026.

The knock on effect of all of this, the cumulative effect, is refinery shutdowns are looming. If you can show the next slide, the next slide, please. Thank you. This, to me, is a very scary graphic. It's one of several scary graphics in the Turner Mason report.

The lines are simply up at top, there's a green line that shows basically a kind of a. It's not business as usual, but it's basically a slow decline. We're using the CECs anticipated demand curves. This is the slow curve. And somewhere around the 2040s, we lose a refinery on the other end of this.

And they ran 16 different scenarios, varying things like crude availability at birth, other variables I won't go into. And we found that sometime in the next year or two, you can expect a refinery to go down. Now, we are not predicting, again, we're not the CEO's, we're not predicting.

This model is an optimization model that Turner Mason runs. And they find that when a refinery drops below 65% utilization rate in California, it drops out of the model. Reality is much harsher.

Reality is kind of nasty and chaotic, because in reality, it could be that multiple refiners and operators may look at the same market conditions and make a determination about their ability to continue to operate in the State of California. And that's the non modeled part of our results. So, just as a coda, if I may.

The final slide or not the final, final, the map slide. Thank you. Just a reminder that what we do here in California has real effects on our neighbors. I think we all know that 88% of Nevada's refined product supply comes from California refiners. Similarly, 45% to Arizona.

When California sneezes, hats blow off in Reno, Las Vegas and Phoenix. We do have an effect on those markets. So they are very concerned that what we are contemplating here in California may have some negative effects on their own constituents and their own markets. So I'm going to end where I started.

A special session is talking about if I can direct you back to the refinery box on your placemat, those tanks. It's a small portion of a tiny box on a great big map of operations. And I'm not saying storage is not important.

What I'm saying is everything else is probably way more important because that's the system that functions or doesn't. I'm going to simply say, once again, no shortcuts. I'm really applauding the Energy Commission for its at least stated intentions in its efforts to really engage the industry, engage those experts who are going to help think through this stuff.

But you're not going to get an answer in just a matter of a few months and three minute testimony. So I'm going to leave it there. Happy to have questions. Thank you.

Thank you Doctor Nakadum. We are now going to move to Norman Rogers, who is joining us remotely from the United Steel Workers Local 675.

Thank you. Good afternoon, madam Chairman and the rest of the Committee. As stated, I'm Norman Rogers, I'm from United Steel Workers Local 675, located in Carson, California. And our local represents over 2500 workers in extraction, logistics and the refining of petroleum products. I wasn't in on yesterday's goings on.

So I might be repeating something that was said there, but I'd like to start by giving the definition I use when I'm explaining a turnaround to someone. And so let's picture it's September 2019, and we start a car. We rev it up to 5000 rpms, and we run it straight, straight through to today.

So that's five years of operation. At that time. We shut it down and we drain all the fluids to make it safe for people to work on. And then on a 24/7 operation, we go from bumper to bumper, inspecting, repairing, and upgraded until it's determined we're good to start back up.

What I would point out from this example is something I think we've all experienced, and that's a noise or a shimmy or something that's not quite right with our car. As operators, our familiarity with our equipment is very similar to that, and we know when something isn't right.

So in the scenario mentioned, we're talking that five year range, let's say in November of 2022, you hear something that doesn't sound right, you raise your concerns. It's investigated and it's determined it will be included in the next turnaround, hopefully, and I say hopefully because it's been a longstanding battle of what gets included in a turnaround.

Issues of length of time, the unit might be down, budget issues all come into play on what gets included in a turnaround scope. Now, there's a new concern that the 14 day fuel supply mandate will be used by companies to say a unit cannot be shut down.

We have fought for decades to get regulations to a point where we have stopped work authority, and we cannot sit by silently to see that go away. If it's deemed that something needs to be shut down during a turnaround or otherwise, we need to be able to do so.

So, as mentioned, it took us years to win that regulatory language, and we cannot have that undercut. The next piece would have to do with what I call is the false distinction between workers in the community. Workers are the community.

Many of our Members live near these sites, and beyond that, many of our people work at one refinery while living near another. And I mention this before, work authority employee participation was another item we secured or thought we had in the 2017 upgrade of refinery safety link, the process safety management standard.

And I say I thought we had that because the language is under attack. Employee participation is the subject of an ongoing lawsuit along the lines of employee participation. It ends up being a factor for pinch points because we end up talking about reliability.

When the Chevron incident took place in 2012 that led us to finally getting the upgraded process safety regulations. It was known that there was thinning pipe there, but that knowledge never saw the light of day.

In 2015, when ExxonMobil had their issues at their FCC, it was known that that slide valve hadn't been looked at in six years. The employee participation language that we won in the process safety regulations puts our people in those meetings, so at least there's somebody there to say something.

Further along the lines of employee participation, we would ask that there be a worker representative on the board. As refinery workers, we are invested in this process unlike anyone else.

We are in the inside the fence line community, as well as community Members as well as consumers, and we are prepared to share our stories and take part in the process if folks are prepared to hear it. And I'll leave it there. Thank you.

Thank you, Mister Rogers. And we're now moving to Mike Patterson, who is joining us from the International Association of Heat and Frost Insulators, local five.

Thank you very much. My name is Mike Patterson. I am the business manager there. I've been a Member of that local for 50 years. I worked in the field 40 years with my hands, and I've been in the office for 10. For over 106 years, our organization has been at the forefront of.

Patterson, just bring your microphone a little bit closer. Sorry about that. Thank you.

For 106 years, our organization has been at the forefront of helping California lower its carbon footprint in and out of the refineries. We have accomplished this through rigorous safety training and first class apprenticeship programs that have taught thousands of Members the craft and science of insulation.

These are valuable opportunities that have provided a direct path to the middle class at no cost to the organization's men, women, veterans and disadvantaged workers. Collectively with our sister organization in Northern California, local 16, we employ thousands of insulators in California and work well over 1 million hour per year.

Approximately half that work directly results from work we do in the refineries. To express this in more human terms, at the end of the day, we work at the refineries, helps us, our Members provide safe shelter, put food on the table, get to and from work, maybe pay a kid's education, put Christmas presents under the tree.

As you can see, our constituents and our Members have a lot on the line here. While we understand that this Bill might have been proposed with the right intent, we firmly believe that it will lead to many problems, more problems that it solves. To begin with, we think it is wise to form a Committee.

We don't think it's wise to form a Committee that excludes valuable expertise that comes from labor and our state refining partners. The fact that this is being proposed is extremely concerning and a bad idea.

No one knows more about how shutdown should be performed than the men and women in the field who actually have to perform the work. Not having labor or someone from the industry represented is, quite frankly, offensive, dangerous and appalling. There is also an issue of inventory. How and where do you propose to store all this fuel?

I don't know about you, but the strong mass storing massive amounts of fuel doesn't sound like a prudent idea. It introduces more complexity and unnecessary risks to an already dangerous and complex system.

While there is much more I could discuss in the interest of time, I will close with this at the end of the day, my primary responsibility as a manager of my local is to protect the economic interests and personal safety of the Members I serve. But this goes beyond that.

The oil and gas industry is estimated to employ over 100,000 people in California directly. And according to the Economic Policy Institute, for every one job created by an oil refinery, over 14 jobs are created in the rest of the economy.

So on behalf of all the men and women of local five and local 16 insulators union, all of my brothers and sisters in the building trades, all the workers in the oil and gas industry that this Bill would affect, I ask all of you to partner with us for a better outcome and to please do not support this Bill.

Thank you. And we'll now hear from Jamie Court, who is the President of Consumer Watchdog.

Yeah, while you're pulling my slides up, I'll just say, I've been doing this for a while. I was on the 1999 Attorney General Bill Locker's task force representing the Assembly. Antonio Viragosa appointed me to represent the Assembly, and I've learned a bit about this industry. When the slides come up, we'll just put the first graph up, please.

One of the things I've learned is it's the same old story. When refineries go down, prices go up, profits go up, and this first slide, I think, tells this story. I'm going to challenge the WISPA representative said, you can't figure this out in a three minute presentation. I'm going to try to make this happen, make it simple.

This is the gross refining margin over the last year and a half. These were mandated numbers under SB 1322, a Ben Allen Bill that you all passed in 2022 to force the refiners to tell us how much they're making on profit on every gallon of gasoline in the state. This is California gasoline.

And you'll see there are two high points there. One in September, 2023, and one in April of 2024. That's when we know that their profits, their gross refining margin, was well over what it should be, over $1.40, $1.20, well over a dollar.

A gross refining margin is a measure reported by the refiners, and it takes out the cost of crude, environmental fees and taxes. So it is the purest measure of profitability. The only thing that's in there that is a cost that comes out is the operational cost of the refinery.

And we know what those are because we can look at the SEC filings. Those range from $17 to $0.29. So we're talking about making $1.40. That is a healthy, healthy, healthy profit on a gallon of gas. Next slide, please. So, if you look at the next slide, I've overlaid with those peaks, the days of supply.

And you'll see that on the first peak, we were down to 13 days of supply, and on the next peak, we were under 15 days of supply. The typical days of supply in California is 15 to 18 days. And when we drop below, we see a commensurate profit taking from the industry, which is really extreme.

Next slide, please. The next slide shows you what the gas prices were at those peaks. Over $5 at both of those peaks. And that was a delta of more than $1.50 with us gas prices. We should have a delta of $70 to $0.80 with us gas prices, because that's the cost of our added taxes and environmental fees.

Anything over that is profit taking. When we were at $1.50 or more, it's really a problem. So we see in this slide how there's an intersection of inventory dipping under 15 days, the price spiking, the profit spiking.

It's all right there, and it's all happened in the last year and a half, and it's happening again right now in Northern California. Next slide, please. This is a slide that shows that the oil refiners are not using their inventories. They're at 55% capacity in the western region, 55% capacity of storage. Right now.

There's a lot of room for growth. We know that they keep 20 days and upward of inventory, and that most of the year, that's what it's at. Between 15 and 20 days. They have the capacity to do it because they're doing it. They do not need to build new storage to keep 20 days of inventory.

So I think it's a bit of a red herring to say they're going to need to build inventory when what I believe the Energy Commission's getting at is asking for a minimum inventory of 20 days or 21 days, when that is what they keep. Right now, by the way, on the.

If we can go back one slide, I forgot to mention that uptick right there between July and September in 2023 cost consumers $2.1 billion. That's what the DPMo just said earlier. Consumers paid $2.1 billion more than they should have for that uptick between July and September.

So you're talking about the cost of storage, which, if you go to Australia, is a fraction of a penny to keep the extra storage to save consumers $2.1 billion. It's a good trade. Go forward to the next slide, please. The next slide shows that this has been done elsewhere in Australia.

They keep 24 days of supply on hand. The UK does it. It's done all across the world, Korea. And the point is that if we can maintain an absolute resupply commitment from the oil refiners, that will keep the spot market from going up.

If the oil refiners don't have to buy on the spot market, our gas prices will not spike. And it's exactly what happens in electricity and natural gas. When you're in electricity crisis, you want to have a supply. So you're not buying on the spot market, that real time spot market, because those prices are really high.

So we have the electric utilities, which are regulated. Utilities buy long term contracts so you don't have to buy on the spot market and pass those consumers costs. Same thing with natural gas.

We had a price spike in Southern California a couple of years ago because SoCalGas bought on the spot market because they ran out of their inventories. Aliso Canyon wasn't available. They hadn't planned. All this is about is planning, planning, resupply.

And I'll tell you this, I think you can trust the Energy Commission to get this right because I've been pushing them really hard to get a price gouging penalty as quick as possible. And they have been unbelievably deliberative about it.

I'd say too deliberative, because if we had it, we could penalize the companies for the spike we're facing now. They are very thoughtful. They will not endanger worker safety, and I don't think they can endanger worker safety under the current laws because that comes first.

They will not force upon refiners new supply capacity if existing capacity exists, and they will look at the costs, which I guarantee you are going to mitigate in favor of maintaining existing storage capacity. In any case, I hope I've made some sense of this for you. Thank you.

Thank you, Mister court. Moving to Alessandra Magnasco, joining us from California Fuels and Convenience Alliance.

Thank you. Good afternoon. Chair and Members of the Committee. My name is Alessandra Mignasco, and I represent the California Fuels and Convenience alliance, which advocates on behalf of fuel marketers, common carriers, and gas station owners across California.

I appreciate the opportunity to share how current energy policies and supply disruptions are affecting the downstream sector of our fuel supply chain. California, as we've all heard, is often referred to as a fuel island. This means that the transportation fuel supply within the state is both geographically and logistically isolated.

No other state in the contiguous Us refines the gasoline that we use, because while it's the cleanest in the world, it is also extremely expensive and difficult to produce. As a result, the fuel we use must either be refined in state or imported from foreign sources. Unfortunately, we are now down to only nine refineries.

Again, as we've heard that produce our gasoline. This leaves our supply incredibly tight and vulnerable to disruption. State policies have also played a significant role in shrinking this supply. Over the years, numerous regulations have disincentivized investment in local refining capacity, which is why we're seeing lower production and higher prices at the pump.

In addition to these policies, there's also infrastructure challenges that complicate the supply chain. The Jones act and its burdensome requirements effectively make it cost prohibitive to move fuel between southern and Northern California by barge, and we lack a pipeline that connects the two regions effectively.

This has made California not one, but two separate fuel islands, with trucking being the only option for transporting fuel between the two. Making matters worse, our heavy reliance on foreign imports makes us Beholden to external factors that are beyond our control. Geopolitical tensions or weather events in distant regions could choke off critical fuel supplies.

To be clear, importing is not a bad thing overall. In fact, our part of the supply chain does sometimes import, and this helps bring extra liquidity to the market. But if we put ourselves in a place where we are only reliant on imports because refiners leave the state, we will be putting ourselves in a dire situation.

When these disruptions occur. Drivers across California risk being stranded without fuel with no immediate solution. The fragility of our supply chain is compounded by the fact that we cannot quickly adjust to these interruptions due to our dependence on faraway foreign suppliers and the limitations on internal fuel movement.

Looking ahead, statewide policies such as the ban on internal combustion engines, a more stringent Low carbon fuel standard and cap and trade program, and a pending gross profits cap on refiners are poised to exacerbate this already challenging situation. These policies will further limit in state fuel production and shrink our tight supply even more.

15 local governments have banned new gas stations, effectively banning new competition from entering the market. That's a pretty terrible policy if you want to bring down prices. We heard yesterday that to get this right, there would be close collaboration with industry.

However, the Advisory Committee that this Bill creates that would be tasked with getting this right doesn't have a single representative from the industry.

In fact, the Bill expressly prohibits anyone that has, quote, been employed by, contracted with, or received direct compensation from a company that produces, refined, distributes trades in markets, or sells any petroleum product in the preceding 12 months. So collaboration doesn't really sound like it's off to a great start when supply tightens or regulations change.

Smaller businesses are disproportionately affected as they have less room to navigate higher wholesale prices and increase compliance costs. We are the part of the supply chain that adds competition to the market. If we get this wrong, it will be our smallest operators who won't be able to weather extended shortages, fuel rationing, and skyrocketing prices.

Australia, who this policy proposal is modeled after, is currently subsidizing their few remaining refineries to the tune of billions of dollars to keep them operational. I guess we better start making some significant room in the state budget if we're going to follow their lead.

In summary, California's fuel supply is fragile, and existing and future policies threaten to further destabilize it, pushing costs higher for consumers and creating ongoing volatility in the market. I urge you to consider the far reaching consequences of these policies and how they may further harm Californians and their access to affordable fuel. Thank you.

Thank you. All right, we're now going to turn back to the screen. We are joined by Professor Severin Borenstein from the University of California at Berkeley.

Thanks for having me, and I apologize. I had some computer problems, but I have switched computers and I think this will work. I'm Severin Bornstein. I am faculty Director of the Energy Institute at UC Berkeley's Haas School of Business.

I've studied gasoline markets since the late 1980s and written many papers on them, from crude oil to retail competition. I served on the attorney general's gasoline task force in 19992000 and I chaired the CEC's petroleum Market Advisory Committee from 2014 to 2017.

Since then, I've continued to track and post about high gas prices in California and about the differential between California and the rest of the country. Next slide, please. Prior to 2015, California had occasional price spikes, but overall, our prices were different from the rest of the country by almost exactly the taxes and environmental fees.

So when you difference those out, you get what's to the left of the red line here. That is a differential between California and the rest of the country. That's pretty close to zero on average. After 2015, that completely changed. And I have to say, I was a skeptic at first that this was really a change.

And I wrote a blog post saying, yeah, this is a spike, but it'll go back to normal. And it never did. Since 2015, California's prices have exceeded the rest of the country by a differential. After taking out the difference in taxes and environmental fees of, on average, around 40 cents a gallon.

That is about $60 billion in extra payments since 2015 that California drivers have paid. Although this started with a supply disruption, the vast majority of this differential is unrelated to any sort of physical supply shortage. Next slide, please.

And I say that because if you look at the spot market for California and compare it to the spot market for gasoline, the two major ones in the Gulf Coast, in New York, you get this. And this is the differential between an average of the New York and Gulf coast prices and the California price.

We don't see the California price at the spot market being substantially higher than the rest of the country after 2015 compared to before 2015. If anything, there's a slight downward trend. What we do see, however, is increased volatility since 2015. We've seen these very large spikes to a much greater extent than we saw prior to 2015.

And so I think there is a real concern about the volatility. But I think it's important to keep in mind that the underlying problem that Californians are month in, month out spending too much on gasoline is not related to a physical supply shortage.

In fact, if you look, it is three quarters of the price difference between California and the rest of the country that is not explained by taxes and fees occurs downstream from the spot market, that is, in the distribution, marketing and retailing sectors.

Overall, I have called this differential between California and the rest of the country the mystery gasoline surcharge, and 75% of that is occurring in these downstream sectors. So let me turn quickly to the inventory requirement. The benefits of the inventory requirement no, back to the previous slide please. Actually, back to the one further back.

The benefits of the inventory requirement that it will help smooth some of these extreme price spikes if it is designed and managed prudently. But that requires a significant amount of research and preparation. Although Mister Milder has not pointed this out, I need to say the DPMO is 10 people.

Those 10 people are already working on the margin penalty and on the retail sector. So I think it is unrealistic to expect that same group to be able to quickly design and implement an inventory requirement without substantial additional resources.

Their budget, by my calculation, must be under two or $3 million a year, and that is compared to an industry where California drivers currently spend a over $50 billion a year. So I urge the Legislature to Fund this sort of work adequately so that we can get adequate government policy. That's well informed.

We need to determine the size of the inventories, the timing and mechanism for the release, and for refill. We also need to determine the process by which release of those inventories would occur. In particular, we need to avoid political manipulation of the releases.

Once you have an inventory like this, it is going to be very tempting for whoever has political power to try to release that inventory when it is helpful to them to push down gasoline prices.

That could be during spikes or just could be during a time when somebody believes that the prices are too high and wants to artificially suppress them. The cost of this requirement is the cost of storing gasoline. My view is these are likely to be small.

I keep hearing about the need to build new tanks, but this is a minimum inventory requirement. In other words, it kicks in at the time when inventories are very Low. So there should be plenty of capacity for storing that gasoline.

Now, it might not be at exactly the right company and the right location, which is an argument for having some sort of tradable compliance mechanism, which of course will also require some careful design. Beyond that, the cost is the cost of carrying and managing inventories, although that's not nothing, it's likely to be pretty small.

That said, so I think it's unlikely to drive up prices by a significant amount.

Furthermore, yes, we will need to fill this inventory, but the fill of this inventory will occur not at times when the market is very stressed, but at times when the market has additional excess capacity and those inventories can be filled in a cost effective way. I'll just say a couple other things.

To conclude, it's been mentioned that we always get off when we talk about gasoline. People start drifting into talking about California oil production. California oil production is really unrelated to California gasoline prices. California oil production is part of the world market. I've been hearing this argument.

There's a new one here that maybe pipelines will shut down, but the same argument about California oil production has been made for years. We do need to consider the costs and benefits of California oil production, whether the value it creates is greater than the environmental and other concerns.

But I think we have to keep in mind that even the oil industry, when prices go sky high, say, you know, this isn't us. We don't set the price of crude oil, the world market does. And that's right.

But that's all by that same argument also shows us that additional California production is not going to significantly affect California prices. Lastly, I have to address the argument that these price spikes are profit spikes and that this is in some way indicative of nefarious behavior in any commodity market.

If one producer lowers production because they have some sort of production problem, other producers benefit. If there is a failure of the corn harvest in one country, the corn farmers in another country make more money. That also occurs when sellers have real market power. But it is not in itself indicative that there is a market power problem.

There still could very well be a volatility problem we want to deal with, but I think we have to carefully separate and the problem of market competition. And I do think we have a real problem with the shortage of market competition from simple volatility in the market. My view is, and the next slide, please.

Looking at this spot market graph, is that the biggest problem we have is not in physical supply. The biggest problem we have is in the organization and control of the downstream market by a few sellers who have a great deal of influence over the distribution system and through contracts over the retail system.

That is where most of the excess pricing of California gasoline is coming from. Thanks a lot.

Thank you, Professor Borenstein. And I know all of our panelists gave us a lot of great information. What we're going to do though, is bring up the Administration again. We're getting into the proposal because I know that's where questions are headed. So what we're going to do is have our panelists remain.

Maybe Mister court, if you want to shift down so that our two Administration folks can be at the end, they are going to officially walk us through the minimum inventory proposal.

And then we are going to jump into questions both about the proposal itself, as well as questions for panelists either on the proposal or on any other topic. Sorry, Mister Garcia, no we're keeping these folks up here. Yeah, we've meshed the agenda a little bit. Yeah.

We're going to pause after this for a moment, and then we're going to move into a conversation about alternative options later.

Thank you again, chair. We'll pull my slides up. Thank you. So I'm going to go through a few slides here, kind of talking through and building upon what we've discussed this morning about the opportunities to stabilize the fuel market, California's fuel market, and prices. So next slide, please.

So I just wanted to, I know we had a number of questions about this, and we wanted to include it. So we have, broadly, three buckets of storage, and two are included here. And so the first one is within the refinery gate. So you have car bob gasoline.

And the industry expert yesterday did an excellent job explaining that those tanks in the refinery gate are mini tanks. So, like, one of our industry colleagues over the last years of discussion put it in a nice way so I could put here, which is, it's like making cakes at the end.

You need a tank of baking soda, you need a tank of milk, you need a tank of butter, and you're bringing them all into a mixer where you're kind of putting the cakes out. So the same way, what you see there is refined fuel that's coming out.

Some refined fuel is stored, but a lot of blending components are kept there to be brought into mixing on a rateable basis. So we also have non carbohydrate gasoline and then also have crude oil tanks there.

So if you look at just the carbohydrate, the CARB gasoline, and the blending stocks that go into that, the overall, roughly, if you calculate that into the days of supply, meaning how many days worth of components do we have? That's about 14 days today. That's the amount that we regularly carry within the tankage that we have.

And that goes from 14 down in several months. And on the other side, you have commercial storage. So what you have in the terminal storage, it's a similar, same tankage. A number of companies operate them. Transmontane, Olympus, Shell has nuStar. And when you calculate the amount of storage they have, it's about two to three days worth.

So that's the totality of what we're working. And the third bucket, which we don't want to necessarily uplift here in this conversation, is the Kinder Morgan. So what Kinder Morgan does is also has another 14 days worth. But that's all kind of going through.

So it's a pass through, and kind of thinking of it as a storage cushion is not a good idea. And again, this is industry level. We're not talking about any specific refinery, and different refineries use them differently. Next slide, please.

I muted myself. We talked about this slide in the morning and I just wanted to bring it back up. So those ultimately, when you think about the overall stocks that we have in the west, they fluctuate over the year.

And I don't want to belabor the point other than just noting that in June July timeframe, those are maxed up and then they go down. And what we're talking about here really is about how do you maintain a certain rate of decline that would meaningfully support the spot market prices. Right?

So that's what we want to think about here. Next slide, please. Everybody likes this slide, and I want to make sure that I abundantly make it clear because we're going to talk about the proposal here. The proposal never mentions 15 days worth of supply.

So nowhere in the legislation there is 15 days worth of supply as a metric to be used. What it talks about, though, is about improving the liquidity based on this analysis that we've shown.

So what we've shown here is there is a pretty linear relationship between spot market prices up until we drop below 15 days worth of supply. Again, just going back to the morning session, just reminding you that there are four components we're looking at where this days of supply is a two week ahead forecast.

So we're looking at today and say, how much do I have in my tanks? How much production capacity do I have right now based on the outages, both planned and unplanned outages I have? And how much visibility do I have on what's coming through marine vessels? That's the supply.

And then I'm looking at and saying, how much demand do I have to meet? And that's a simple fraction. And it just phenomenally fits the data.

And when we talk to the industry, the industry might not look at the days of supply as a metric, but the way look at it is how much do I have on pad five? Pad five is 30 million. We're good. It's dropping down to 28. We're struggling. So things like that. So everybody uses a different metric.

But roughly, we are all kind of getting at the same point. So what we're then talking about is about 15 days. You begin to see that inflection.

And the entirety of the proposal is how do we look at the existing tankage that we have in California and think about is there a way to optimize and not go into all the way into those 12 s and what's the maximum we can do here by adequate planning?

And as I've shown on the previous slide, if we just go back to previous slide once, please. Thank you. That is directly what's happening. That's what industry does. And I will again noted over and over, I want to credit the industry who has been working with us collaboratively this year. Not all industry players are the same.

And I want to just acknowledge those who have been working with us very, very constructively. And I would surmise that the reason why we have those inventories are those good conversations that we have.

But the problem is not everybody wants to work in that space, and it's important for us to be able to have a way to work with all of them. Next two slides down, please. Okay, so here now I'm going to just go through the summer inventories real quick, just kind of giving you a snapshot.

What you're seeing there are in black 2223 averages. We all know that we had large price spikes during that time, and the correlation is very, very clear. So we have those overall inventories much lower. Look at 24 and how we are doing on it. 24, we're doing much better.

And as a consequence, on the spot market, there are fewer trades. And as a consequence, you have lesser price spikes. You still have it. As Director Milder talked about today, there is still upward movement, especially because of the tightness in the San Francisco market. But still, we are in a better spot.

If I look back about six weeks ago, we started just as this price has started going up. About six weeks ago, we started $0.70 below compared to 22 and 23. So once, because of those higher inventories, we were starting at a lower point. That was consumer savings and it was planned by the industry safely to be there.

And then as we started, as Director Melder noted this morning, a number of, you know, I have to kind of be mindful of the Pira statutes. I'm not going to quote specific confidential information, but as you look at the industry reports of specific decline in the actual production, you started seeing that uptick.

So let's go into the next slide that kind of feeds into the next slide. So this is the information that we are tasked with publicly disclosing. Every week we do this through our weekly update. A number of industry colleagues actually tell us it's really helpful for them because they see this information and plan accordingly.

And as you see there, as based on the public reports, what we have here is the production has declined over the last three weeks. And if not for the high inventories we're sitting on right now, that would have escalated the price spike significantly.

And that's the important piece that we need to think through, which is that those inventories that are being maintained by the industry today will have mitigated that larger spike we could have seen as compared to 22 and 23. Next slide, please. This is just a quick snapshot. The decline, as I mentioned yesterday, in demand.

We don't have actual demand data by month. We typically get it from CDTFA, a couple months behind. But in the last five years, we have declined 10% in our gasoline demand, and this year we're coming about one to 2% below last year. Next slide, please.

And I want to use this opportunity to just think about maintaining market liquidity as an important tool that we have, which the proposal is providing an opportunity to use. So what you're seeing here is let's start today putting these observations together. Let's walk through a scenario that illustrates how maintaining market liquidity can prevent price spikes.

Let me emphasize that the prices, supply and demand trends are realistic, but are hypothetical and are not based on any actual upcoming refinery production, imports, confidential or proprietary data. These are just realistic based on historical averages. In the top, you see the supply and demand conditions.

We have refinery production averaging about 720,000 barrels of carba per day, with an additional 60,000 barrels coming in. Through marine imports, demand is estimated about 800,000, as I mentioned this morning, barrels per day. In this example, let's assume on day one that the days of supply metric was 15.5. So that's where we're starting from.

This means that the available supply and upcoming trends predict there is enough fuel for supporting 15 days of California demand, which is about 12.4 million barrels at that point. Here, we estimate the spot market differential will fall between about $0.25 above NYmex because that's what the data shows.

Let's also assume this puts the retail price at about 475 per gallon. Again, we have a number of questions about why our gas prices are higher to start with, higher tax and fees, and that is not something we are debating. And that's there.

This is about price spike, meaning Californians will spend about $167 million total on gasoline each day. So that's what we are looking at on that particular day. Next goes to the next slide, please. Looking again at the top. Top right. Just kind of pointing your attention to that.

On supply and demand, conditions are out of balance, resulting, let's say, in a deficit of 20,000 barrels per day. There's an outage. There's about 20,000 barrels a day outage.

If we look back at the graph we can see after four weeks, roughly after four weeks, we have moved from our initial point of 15.5 days down to 14.8 days of supply.

And because of that 560,000 barrel drawdown of the inventories that are required to do so, at 14.8 days of supply, we would expect the spot market price differential to increase and the retail prices to bump up about 15 cents to 490.

At that point, over these four weeks, Californians would have spent an additional $78 million to purchase the same amount of fuel due to this 15 cent average. Next slide. Now let's think about what's going to continue happen. While the last scenario is not what we hope would happen, there are other factors that can make the situation worse.

Looking again at the top, let's assume that in this alternate scenario, during a four week period, the outage rates were significantly higher. If we look back at the graph, we can see that the four weeks we have moved from our initial position of 15.5 days to 13 days, and that could really happen.

That happened several times in the last couple of years. And at that point, at 13 days of supply, based on the price spike observed in 22 and 23, we would have expected the spot market differential to increase the retail prices by $1 to $5. 75 cents.

Over those four weeks, Californians would spend about $518 million in excess fuel prices. Next slide, please. Finally, let's look at the third scenario in which the refinery maintenance events or combination of events still occur. But this time industry took action to resupply by importing additional cargoes. It's really important here to just take a moment.

If the industry has a planned outage, this is the easiest case to think through. If they have a planned outage, they have visibility. They have to tell us about 220 days before. And so they have at least four months.

And as many of the industry experts point, and I agree with them, it takes about 30 to 40 days to get a ship into California. So they are in the best position, and obviously, if granted, this authority will work with them.

Best position to say, how am I going to optimize to make sure that I'm not going into the spot market to reactively buy things? And I will acknowledge right now, again, there are industry players who do that. There are industry players who are actively planning to make sure that they don't do that in the spot market.

And not everybody does that. And that's why you see those price spikes. So in this case, if there is action from the industry, the market tightness is avoided, and then we're at $1 per gallon increase, not realized.

Instead, we're back at the initial conditions in about 14.8 days of supply, and in this case, because of the resupply obligations, would avoid 440 million in additional costs. That's really what we're talking about. How do we actively plan with the industry?

I will pound it over and over to just make sure that I get it, because I have a number of industry colleagues who are reaching out and saying, hey, we are working in good faith. So I want to make that point. Not all industry players might have space, and some industry players are actively planning.

It's about how do we make the entire industry work together cohesively to ensure that the maximum amount of free supply and those active planning is done. Next slide, please. So with that, let's just go into the other additional considerations. Actual supply and demand balance requires careful planning, and I will not undermine what the industry experts yesterday mentioned.

It's a very complex function, and I want to go back to this. I'm an engineer at heart, and that's how I think my work. Every morning, a week ahead and a month ahead and a year ahead, industry is doing this complex modeling.

They're running their optimization model and saying, how do I carry these different levels of supply and the constraints they have? They use Linear programming. They mentioned that Linear programming is one of many different types of optimization problems. And what they're trying to do is saying, my objective function is to maximize revenue and nothing against that.

And we talked about this yesterday. It's about, how are you then thinking about all the different constraints you have and ensuring their profit maximization or revenue maximization.

What we would do, ideally, if the Bill were to be passed, is work with them, to have them run different scenarios and tell us under different scenarios, what would be that revenue lost, but what would be the overall benefit to the consumers?

And if that revenue lost is minimal enough with the benefit, that's something we want to consider. So again, it all points to the minimum inventory levels. And I want to just pause, just make my closing comment and pass it to my colleague here.

In essence, what we're talking about in the proposal from the Governor and the Administration is, what do we do to maximize our pre planning to avoid reactive behavior under constraints? And the threshold question then becomes, do we have enough evidence today to suggest that there is enough cushion to improve efficiency?

And I believe, yes, we have shown you that there is enough cushion. Just comparing 22 to 23 to 24, that we have planned better this year. So that's the threshold question. Can we plan like that every year? Right? And can we plan with that, like that with every industry player?

And while we have an industry player today who's working very collaboratively, can we do that with everybody in that coordinated, collaborative fashion? That's the first threshold question. Two, do we act now? And the answer is the status quo is no action, and we will see more price spikes moving forward.

And even if you were to give this authority, given how long it takes a rulemaking to be done, it'll take time for us to really take the benefits of this, but will force the conversations. It'll help us continue to work collaboratively with industry. And the third one is under what guardrails would we want us to do that?

And I think based on this morning's conversation, SMB Member Pepin asked that question. We look forward to your guidance on that. What guardrails should an agency get in thinking through this? And we would not, obviously, we'll work within those guardrails and ensure that the benefits are maximal and the risks are mitigated.

So with that, I'll pass it to Director Milder.

Thank you so much. And first, thanks to the chair for including DPMO in this conversation. Trying to use this time wisely. I want to address four points, trying to spell out a little bit DPMO's view of best practices. People have been talking about, what is this going to look like? We want to share our thoughts.

It will ultimately be a Commission decision, but share our thoughts on that. Address the guardrails issue that Assemblywoman Papan raised, talk about existing storage and talk about other countries. I think the starting point is industry needs to make profit.

And I think it's important for us to understand that the profit motive needs to be there, but that the profits we have seen over the last few years with these price spikes are not normal. And so we have to design a program that allows for profit but also takes planning for the state into consideration.

So we're going to skip, if we can bring up our slide deck here, skip ahead to a slide that says best practices for resupply, and this should be one more along. So this, in our view, is a non exhaustive list of best practices.

First, plan for the critical months when we know supply falls lowest and price spikes happen. Second, utilize existing storage. I'm going to end with the same chart I used this morning. The storage currently exists.

Professor Borenstein talked about minimum inventories, meaning operate closer to how you do the rest of the year, require greater resupply from maintenance during busy months. This is critical. Part of this legislation gives CEC new authority to say, if you're going offline, plan resupply.

So if refiners are going offline in the wintertime, for example, maybe that resupply requirement is not as high as it is in the summertime to incentivize them to do maintenance at a better time of year. Should also allow for phased inventory buildup when prices are Low. So look to build the inventories when prices are Low.

Lock it, buy Low. Have that inventory in place so that if there is an impending price spike or prices going up, inventory can sell at a profit from those inventories that they've built up. Have rules to inject liquidity during a disruption to stabilize prices. Let me be really clear.

This is intended as a buffer that is accessible to industry. And where CEC makes rules that allow and even require liquidating some of those buffer stocks as prices go up. And this would not therefore be a political decision, but rather won by economics and what's happening in the market.

Then on the replenishment side, after there's a disruption, again, allow phased in building up of inventories because we don't want to add the stress of additional purchasing during the disruption. Give some time on the back end to build the stocks up again when prices are Low. And then last, consider counting inbound cargoes to add immediate liquidity.

What that means is you have storage here in California, an event happens, you then make that inventory accessible to the market. That's instant liquidity, and you order backfill that will arrive in the coming weeks. As we go to the next slide, I want to address Assembly Member Papen's question about guardrails as a personal point.

Had the great fortune of working with Agena Papin at the Attorney General's Office, and just wanted to note that here, the proposed language in the Bill has some really important guardrails that we wanted to flag. One is it requires the CEC to do a cost benefit analysis before imposing a regulation.

It also requires findings that the regulation would increase supply and would lower prices. And then the CEC has to report back on an annual basis about whether that's working or not. I would submit these are really significant guardrails and well thought out guardrails to really hold this process to account.

I'm here in part because of a prior Bill that gave new tools to CEC to bring data to you and to bring proposed policy solutions. And I think this is part of an ongoing dialogue. One more slide here on storage. We saw this before. It's just unmistakable.

There is storage year round at higher levels, and then for business decisions or otherwise, they're allowed to dip when demand is still strong at the end of the summer. And we have price spikes. So the storage is there. And sometimes complexity can get in the way of very obvious data.

Yes, there is a difference between within fence line storage and commercial storage, but both, whatever numbers you look at, it tells the same story. We can operate at a higher baseline when price spikes are more likely, and that will prevent the price spikes. And as I conclude, I would like to really reference the International Energy Agency.

DPMO has been talking to other countries, Australia and others. And I would like to just note, this is now pretty widespread around the world. And I would say we don't. Every comparison allows for distinction, right?

The same as Australia, but we're also not the same as Switzerland or Germany, except that they all have these types of requirements to provide that needed buffer. So California needs to design a California solution, not necessarily the same numbers as Australia or elsewhere, but they're proof of concept.

And California's economy is as big as or bigger than these other nations. And so we should also think about resiliency if there's, you know, gosh forbid, another big earthquake or natural disaster.

Having more of a supply is good for protecting consumers from price spikes, but it's also good for business to have more stability and planning and resiliency for natural disasters. Thank you.

All right, thank you. We are going to go ahead and open it up now for questions. Again, either questions related to the proposal at hand, or any other question you might have for any of the other panelists. Mister Zbur, we'll begin with you.

So thank you, Mister Gunda, really appreciate the presentations from everyone today. I'm someone who, I think you've made a convincing case that we need to do something to protect price spikes. I mean, just looking at the charts, California is.

Our fuel markets are acting differently than what's happening at the national level, and they're acting differently than other states. So I'm convinced we should be doing something. And so I think the question is about, really, is this proposal the right thing that we should be doing? And so that's sort of the way I'm approaching it.

I do have some questions that may take a little more time to answer. And so I wanted to sort of, first, because I don't want to tell me when I run out of time.

Madam Chair, I'd like to at least get some of the smaller items out on the table in terms of sort of concerns that I have. You know, obviously I'm going to be more comfortable the more guardrails there are around this.

And so I just wanted to flag some areas where I thought the guardrails needed some more attention in 225354.2, where we basically set out the standard to minimize the impact of maintenance related production on fuel prices. I think there should be additional, additional part of the standard that is focused on the impacts on jobs.