Assembly Standing Committee on Utilities and Energy

We're ready.

All right.

Good afternoon. Good afternoon. We will go ahead and begin today's hearing of the Assembly Committee on Utilities and Energy. We are here today for our annual oversight hearing of the transportation fuels sector. Before we begin, I have a couple of housekeeping announcements to review. First, as is customary, I will maintain decorum throughout today's hearing.

Conduct that disrupts our proceedings will not be permitted. Any individual who is disruptive may be removed.

Second, we may also be joined by some of our colleagues, in addition to our Committee Members, some additional Members who share in oversight responsibilities of the sector or have extensive community impact or involvement in these issues, including Assembly Members Aguiar-Curry, Alvarez, Bryan, Gipson, and Wilson.

California's fuels transition plan is one of the most complicated and I believe important challenges that policymakers will need to face in the decade ahead. We do not take this challenge lightly or frivolously.

And the recent decisions by Phillips 66 and Valero to potentially shutter operations of the refineries in Wilmington and Benicia, respectively, provide a really pivotal moment in this transition and I think has raised a number of concerns from Members of the Legislature, as well as members of the public, in terms of the impact that that is going to have both on supply in the state, as well as on, potentially, prices at the pump.

While many of our ambitious environmental goals have been signal—signaling—for decades this potential decline, the state is largely without a system wide transition plan. A piecemeal approach to the transition is not the answer. We need a real plan.

And I think I began by saying that this is one of the most profound challenges we'll face in the decade ahead. This challenge is happening right now. This is happening in real time. And as we go into today's hearing, we'll be welcoming a number of panelists from agencies that have direct—direct responsibility for this area.

I've got a number of goals for today's hearing. Number one, really to articulate and lay out the challenges that we are facing, both so that Legislature and policymakers understand what we are grappling with, as well as members of the public understand the challenges that we're grappling with.

We want to get an update on the impending refinery closures and the anticipated impact of those closures, as I said, both on supply as well as potentially on gas prices. We want to get an update on in-state oil production and the outlook for that as we move forward in the next 24 months.

And lastly, we also are going to be getting an update from our state agencies on the work that they've been doing to implement legislation related to this area, including, let's see, including the oversight of agency implementation of both SB X1-2 and AB X2-1.

And lastly, and I think my most—the most important thing that I would like us to be able to take away from this hearing is really to get an understanding from our agency witnesses, who will be joining us, on what actions we need to take as the Legislature to stabilize this market and ensure that as we're planning for this transition, we can do so in a way that makes it as smooth as possible and insulates California consumers from any adverse impacts.

So, with that, I'll turn to any of my colleagues for opening remarks. Anyone?

All right. Okay. Well, then we will go ahead and jump right in. We have invited CARB Chair, Liane Randolph, CEC Vice Chair, Siva Gunda, and Division of Petroleum Market Oversight Director, Tai Milder, to join us. Welcome to our panelists. I believe you have a presentation you're going to walk through and then we'll open it up for questions.

Thank you. Vice Chair Gunda is going to start the presentation with his slides.

Good afternoon, Chair, Members of the Committee. Thank you for this opportunity to be in front of you.

And Chair, as you laid out, you're looking at getting an update on the challenges, generally, the implementation strategies that we are implementing on the legislation, SB X1-2 and AB X2-1., updates on the closure, and the broader implications on the state oil production.

So, we look forward to touching on all of them today and hopefully we can, to the extent that they are not in the slides, answer your questions completely. So, with that, I think if we open our slides. So, we have a lengthy presentation, but a lot of those slides can be revved through quickly.

So, wanted to just start with your opening statement, Chair. Just kind of a recognition that over the last decade, we have had a number of climate regulations and climate agenda that really fostered the growth of EV. So, this chart is, to go into the first slide, the first slide is to really show—slide please?

Oh, should I just use? Okay, thank you. Okay. So, the first slide is to kind of just show that, you know, in terms of the trends, the EV penetration in California market has been a success. We are now at about a quarter of all new sales in California are EVs.

And that, with that, you see the decline in the average demand in California, which is the dark pink line in that. So, just kind of noting that during COVID, we've had a disruption in terms of overall demand, but as you see, 2017 has been the highest marking point of California gasoline demand.

Building off on that—so, just noting that while our demand is going down, just to note that we are part of a broader California and Arizona and Nevada oil market, so the California refineries support the consumption of gasoline in both Arizona and Nevada. So, the blue line here just shows to you that that overall demand is also beginning to decline.

In scholarly work in academia, this is what is called a mid-transition stage in a market. As you see, the saturation of the overall demand, so the market saturation has occurred and you're beginning the downward slope, but you're still building the new paradigm in terms of the EV and electrification.

So, you really cannot optimize for either of those completely and have to think about them in a holistic frame. So, then, kind of thinking about how are we doing on the specific refinery overall throughput in California.

So, as you see here, so the top line, again the blue line, is the total demand that the California refineries serve, in terms of California and parts of Nevada and Arizona. And as you see that in the blue line, the stepwise curve is the reduction in our refining capacity in California.

So, you see that that overall refining capacity, the gap between the refining capacity and the demand, has been relatively high. In 2010, it started tightening, but then you really start the delta between them over time. And that has really—the way we have managed that is between 10% to 20% of our current California consumption comes through imports.

And so, at the high, it's 20%. On average, it's about 10%. So, another system-wide issue that we need to track here is the green line that you see there, which is the crude oil production. So, we're building it one by one.

You know, our overall gasoline demand in California, the regional demand, the refining capacity, and the crude oil extraction in California that supports our refining. I want to note here that the blue line, the refining capacity that you're seeing there, is actually only 50% of the total refining capacity. That's because that's how much goes to gasoline.

The refining capacity in California is bigger than that. So, we refine about 1.7 million barrels a day, but about, you know, 900 of that goes towards gasoline production. So, and then, building on these trends over the last 10 to 15 years, you really kind of see the impact of one of the symptoms we are beginning to observe.

So, as these markets mature and then you begin these transition moments, you know, one of the things we have observed in California is the price differential.

So, this has been part of our discussion over the last, you know, several years, especially the last couple of years. You see that the overall delta has over time increased, but the number of the differential, the high spikes in the differential has also increased.

And you can track that in the upward picture where, as the refining capacity decreases, you see those spikes more and more. So, as you move forward with more and more refining capacity potentially leaving California, that's something that we absolutely need to work on.

And given that CHED, as you noted with P66 announcement and Valero announcement, you know, this is a very important challenge we need to solve almost immediately. So, the next slide here is just kind of a little bit more detail for the record and we can refer back to this again.

The stack is giving you all the refineries and which refineries has left. The very top line in yellow is the total refining output that California and Nevada and Arizona depend on from California refineries. And then, you have California peak and under that, you have California average. So, going into just the, again, Chair, you talked about this, the complexity of the problem we are at.

We just want to kind of walk this through carefully. So, 30,000-foot level, this doesn't capture the complexity of the system. But what we're looking at here is a value stream all the way from the well to the pump.

So, when you think about crude oil need in California, it primarily comes from two places. It's either California crude or we import it. Today, we're at about 25% dependence on California crude and about 75% dependence on imports. And that's what we have today. And then, that crude then has to go into refineries to produce refining product.

And as I mentioned earlier, given the Delta we currently have, and the Delta also comes from outages, there's a number of outages that could happen, both planned and unplanned outages, and you need to make sure we are importing, at some level, a refined product to support that.

So, that's what you see there, two storage tanks, but also imports supporting that. Then, it goes to the terminal storage and then finally, to the trucks and the gas stations. So, that's the value chain, you know, in its simplistic form. There's a lot of other pieces that we need to track as well.

And each one of these could become a choke point as we move forward in terms of transitioning the system and the interconnectedness of the system is something really important as the demand declines.

And if it's a business case for the refineries to leave California, you cannot piecemeal and remove a refinery and not worry about all the infrastructure that connects that particular refinery. And I think that's the defining challenge we have right now in front of us.

So, right after we ended Special Session 2 last year, one of the things that the Legislature asked us to do is really think about the system wide implications of using any of the tools that we were given.

So, following that, there was a petroleum strategy task force that was created with every single agency that touches petroleum to de-silo the conversation and really understand that this is a big ecosystem problem and some of the points that the industry made during the Special Session about the interconnectedness and how to think about them.

We put together a task force to really dig into some of the assertions that were made by the industry during the special session and make sure we truly understand the points that were made. And, you know, just want to note that these are number of agencies. We now have a task force meeting that we regularly meet.

This is our hope on de-siloing the conversation. But also, just want to note that apart from the state agencies, you have federal regulatory agencies, regional districts, as well as cities and local governments. So, each of those touch this value chain and it's important for us to have a holistic view and a common goal towards which we go.

Obviously, we have three agencies here in front of you. You know, some of the key elements of today's conversation with California Air Resources Board and Chair Randolph.

The important intersection point here is the scoping plan, the air quality regulations, and the cap-and-trade and the carbon markets that that CARB works on has a direct implication on how to think about this whole fuel sector.

For CEC, we were started as a data collection agency and our role was to really gather information and provide transparency. With the last couple of years, we have been given more tools to collect data and some regulatory authority which is permissive to be able to use, if those are prudent to use.

And that's the evaluation we're currently doing. Finally, we have Director Milder with the Department of Petroleum Market Oversight that has this oversight and investigations, as well as economic and policy analysis. So, you'll hear from all of us. So, before I hand off to Chair Randolph, really want to build this particular notion.

I think we have a very important role here, as we always do, to really build on California's leadership. I think we have decades and decades of leadership on ensuring we have, you know, strong air quality and health and environmental regulations in California and goals.

And as we entered the mid-transition which I mentioned early on, one of the first symptoms of that, you know, transition was the price fluctuation, and that's a symptom that we needed to address. And we kind of worked on expanding those consumer protections and thinking about with more tools and transparency.

And I think now, given that we are in the midst of this transition and a defining challenge for this overall transition of the sector, we really need to think about this holistically. One of the key elements, that we will talk to at the end of this presentation, is lessons that we could learn from elsewhere, other countries.

Really the investor confidence to make sure we hold on to the assets that we that we rely on in this mature industry, while also supporting the transition we are doing, has to be balanced very carefully.

We have examples in the world where there has been a precipitous drop in refining capacity, for example in Australia, which led to a number of issues both on the workforce side and others.

And then, you look at, you know, our coal mining industry in the US and the precipitous drop in coal mining and all the bankruptcies and the job loss we've seen.

So, this is the moment we are entering, and I would say it has to be thought through holistically and we really need to work on expanding community and workforce safeguards as we move into this transition. With that, we will begin with the first block on long-standing work from CARB. Chair.

All right, thank you. I'm Liane Randolph, Chair of the California Air Resources Board. Thank you for having me here and for having the opportunity to speak about California's transportation fuel market.

So, CARB is charged with, as you know, protecting public health from the harmful effects of air pollution and developing programs and actions to fight climate change. Many of the strategies we use to address climate change are the same strategies that will drastically improve air quality and public health.

So, fossil fuel use in vehicles is the single biggest source of climate and air pollution in the state. So, as a result, CARB's regulations are designed to decrease demand for fossil fuels.

The climate work began with AB 32 which set the first statutory economy-wide GHG reductions and that—those—targets have been modified over the years, as I will cover, and the emissions reductions from—in—the scoping plan primarily come from zero emission cars, trucks, and clean fuels.

Our vehicle—clean vehicle programs—include rules to advance zero emission vehicle deployment and incentives, which are increasingly important in light of uncertainty at the federal level.

The Low Carbon Fuel Standard, or LCFS, is a critical part of the state's approach to making fuel less polluting by encouraging production of cleaner alternatives, which are needed to displace fossil fuels and reduce transportation sector emissions.

Together with CEC and DPMO and the other state agencies in Vice Chair Gunda's slide, we are engaged in ongoing collaboration, communication, and planning needed to smoothly navigate the transition away from polluting fossil fuels.

The transportation sector remains the largest source of California's man-made greenhouse gas emissions, accounting for over 50% when including industrial emissions related to fuel production and delivery. Transportation is also the dominant source of NOx emissions, which are a major component of what creates smog.

Heavy duty vehicles like trucks, buses, trains, ships, and planes account for over 60% of the state's NOx emissions, heavily impacting major transportation corridors, and this is why moving to cleaner vehicles is so important. The US EPA sets health-based air quality standards and despite ongoing challenges, we have seen major improvements.

NOx emissions have dropped nearly 70% since the 1970s, due to California's vehicle rules, which have directly resulted in in the development of major technological advances that reduce vehicle emissions. This chart shows the progress we've made in the last 20 years and how far we need to go.

CARB and the local air districts also seek to reduce risk from exposure to air toxics, which comes from refineries, smaller sources like gas stations, and mobile sources like diesel trucks.

California's Air Toxics Program began in 1983, and we have adopted numerous regulations to reduce emissions and toxic exposures, including limiting the levels of benzene in gasoline and phasing out the use of carcinogens from dry cleaners.

Today, the state's efforts continue to focus on reducing emissions of diesel particulates, which account for about 70% of total known cancer risk related to toxic air contaminants. California has been regulating gasoline to reduce air pollution since 1971, when the reality of smog and the solution to reducing it became clear.

Our standards for gasoline have been tightened several times, addressing emerging environmental concerns, such as removing lead in 1974 and phasing out MTBE in 1999. The fuel standards we use today were first established in 2000 by CARB and have provided significant reduction in ozone forming pollutants. The last revision to our California reformulated Gasoline Standard was in 2007.

California has two different blends of fuel known as summer blend and winter blend. Summer blend has a volatility limit to help limit ozone formation, which is another major component of smog. When controlling ozone formation is less critical to meeting the air quality standards, the state uses the winter blend, which is cheaper.

The use of these fuels is included in the state's federally approved plan to achieve federally mandated air quality goals, making their use required.

Despite our success reducing NOx emissions and toxic air contaminants, more than 18 million Californians still live in areas that exceed federal ozone standards, and over 5,000 premature deaths occur annually as a result of exposure to PM 2.5 pollution, which is mostly produced by mobile sources. Moreover, low-income and disadvantaged communities disproportionately bear the burden of this pollution.

I think it's important to acknowledge that CARB's work is the result of significant legislative direction. AB 32, as I mentioned before, establishes the state's first climate targets for 2020. Those were achieved six years early, in 2014. Then, the Legislature passed SB 32, setting the target for 2030.

In recent years, the Governor and the Legislature worked together to pass a suite of new climate legislation targeted at carbon neutrality and carbon dioxide removal. This legislation builds off past climate legislation and once again, demonstrates that California is a leader in climate action.

AB 32 requires CARB to create a scoping plan to lay out a cost-effective and technologically feasible path to ensure that we meet the statutory greenhouse gas reduction targets. That plan is to be updated every five years.

Once the scoping plan is approved, CARB and other state agencies review, update, or develop new regulations or programs that align with the actions in the scoping plan. CARB staff has taken the newest statutory requirements outlined on this slide and they are reflected in the most recent 2022 Scoping Plan.

These include establishing carbon neutrality as a goal in AB 1279, establishing interim clean energy targets in SB 1020, establishing a carbon capture utilization and storage program in SB 905, establishing health protective zones around oil and gas infrastructure in SB 1137, and providing direction on incorporating clean hydrogen and natural and working lands into the state's carbon neutrality efforts in SB 1075 and AB 1757, respectively.

I'm going to talk a bit about the Low Carbon Fuel Standard. That was created as an early action measure under the statutory provisions of AB 32. It is a key tool to transforming the state's fuel market, supporting the development of zero emission vehicles, and climate and air pollution from vehicles.

It establishes an annual declining carbon intensity target for transportation fuels used in California, which is shown in the chart on this slide. The lower carbon or cleaner the fuel is, the more credits it can generate.

Since the inception of the program, LCFS has provided many benefits to support our clean air and climate goals, including a 15.3% reduction in the carbon intensity of California's transportation fuels. Over 31 billion gallons of petroleum fuels have been displaced by low carbon fuels and notably, over 75% of fossil diesel has been displaced with renewable diesel.

The Program also generates $4 billion annually to support low carbon investments including transit, zero emission infrastructure, and financial assistance for state and local fleets. This slide shows how we expect the transportation mix will evolve over time.

Currently, our system relies heavily on fossil fuels, but even with a rapid transition to zero emission vehicles, given the useful life of vehicles and the fact that our clean vehicle regulatory programs phase in over time, we know that conventional internal combustion vehicles will remain on the road for some time.

In addition, some equipment types are only now in the initial stages of developing zero-emission for technology—zero-emission technology—and will require liquid fuels for the foreseeable future. So, you see on the right of the chart that we don't expect to completely replace our fossil fuel use with just electrification and hydrogen.

We know there will continue to be liquid fuel options needed in the future. Analysis from the 2022 Scoping Plan shows that altogether, these efforts will reduce air pollution associated with fossil fuel combustion by 71%, compared to 2020.

I do need to take a moment to discuss what we consider to be the illegal approval of the Congressional Review Act resolutions by the U.S. Senate last week purporting to disapprove California's Clean Air Act waivers for our clean air and truck programs.

While we are confident California will prevail in litigation, it could take years to achieve that resolution and, in the meantime, we will need to ensure that we continue to make progress.

While we don't have a specific list of ideas at this point, some options for the Legislature to consider, that are not subject to federal authority, include the Indirect Source Rule Authority for large multi-pollutant source—multi-point sources of air pollution—and additional incentives will be important to drive voluntary action to offset some expected vehicle reductions—vehicle emissions reductions—that we've lost. And finally, strategies to reduce vehicle miles traveled, like transit support and also electrification of ride sharing fleets, can help fill the gap.

While we've been discussing the air quality and climate benefits of the fuel transition, I think it's important to note that we are also subject to federal accountability for achieving Clean Air Act requirements. There are various consequences for not meeting these national ambient air quality standards, such as sanctions on stationary sources and the loss of federal highway funding.

These sanctions are not theoretical. In October of last year, we were days away from highway sanctions in the San Joaquin Valley. While this was resolved, the threat is real and that was under a friendly Administration. Much of the benefits we're discussing from the reduction in demand for fossil fuels used in cars and trucks and in California.

But we also expect that as demand for fuels declines and changes that the supply system will also shift and change, which is why it is so important to continue this interagency work that we are discussing today.

Even with cuts in gasoline and diesel demand, ongoing demand for fuels is expected from other sectors including aviation, ocean-going vessels, off road hydrogen generation, and refining co-products. Finally—okay, finally, I know there's been interest in our at berth regulation, so I want to touch on it briefly.

The 2020 at berth regulation is designed to reduce emissions from ocean-going vessels while they are docked at California's ports. It builds on a 2007 regulation that achieved an 80% reduction in criteria pollutant emissions from crews, container, and reefer tanker vessels.

The updated regulation went into effect on January 1st in the ports of Los Angeles and Long Beach, and tanker visits and fuel import volumes remain unaffected. Tanker emission reduction requirements extend statewide in 2027.

Currently, Southern California terminals have established compliant pathways for their visits, for all of their visits, including direct compliance with shore power and compliance through visit exemptions built into the regulations, like payment into a remediation fund, research exemptions, visits to low-activity terminals, and use of vessel incident events or terminal incident events.

CARB has not and cannot turn tanker vessels away. We've been monitoring the CEC's Petroleum Industry Reports, including the weekly Fuels Watch Report on refinery stock.

And while we've seen fluctuations in cargo volumes, the vessels continue to come, and we do not have evidence to indicate that the at berth regulation requirements are affecting the volume of visits or imports to California. Thank you and I am happy to answer questions at the appropriate time.

Thank you, Chair Randolph. So, going into the next slide. So, we just talked through the first—between the three broad pillars of California's leadership. We talked about the pillar around the climate and the air quality and health impacts.

And then, over the last couple of years especially, you know, just kind of coming back to this, this slide, which has been presented many times, in the Special Session, really the symptom that we were trying to solve and work through, how do we enhance the consumer protections.

So, as you see here, and I think, I want to make sure that I point you to a couple of things, especially the differential over the last six months and you see many, many, many spikes and that has happened because of the PBF Martinez being on fire, then went to Benicia, Valero Benicia was on fire briefly.

We had a torrents fire in the South. Each one of them is going to create a spike. Now that we are on the edge, in terms of in state refining capacity, our ability to absorb those supply shocks will get harder and harder and you will begin to see those kind of sparks—spikes.

And it's really important to think about how do we transition from here in a way that we both protect the consumers but also ensure, as we mentioned, the third prong of the approach, the investor confidence needed in California.

So, going to the next slide, as the authorities through SBX 1-2 and ABX 2-1, I think we can summarize them into three core buckets of tools that you've provided us.

In addition, creating a DPM and I'll defer to Director Milder to provide an update there. On the transparency is where the Energy Commission, along with the support from DPMO and other sister agencies, really spent a lot of time over the last couple of years really trying to understand the nuances of this market and making sure any steps that the Energy Commission takes do not impact the market in a negative manner.

And then we have clear ideas on how best to plan and use those regulatory tools. Second bucket of work is planning. We've adopted the fuels assessment, which we've discussed last year, and I have a quick review of that again here.

And then, the other, other part of the planning tools that we're really working on right now is the Fuels Transition Plan, along with California Air Resources Board.

It was due at the end of last year, but given the special session, some of the requirements that came out of it, and more community consultation and stakeholder consultation, we really wanted to take this approach of all the questions that were asked in the special session, how best can we answer them in this transition plan.

And kind of the regulatory package, there is resupply, and I think I would continue to discussed the liquidity issue in California and how that can help. And again, the prudency of the Legislature, all the tools that were given to the Energy Commissions were permissive with very clear guardrails that you've given us.

You've asked us to use this prudently, only if the benefits outweigh the risks.

And given that these tools came in different order, we have taken a holistic approach and really digging through the analysis to see how and if any the tools should be used to best protect the consumers and ensure that the industry and the workers are protected.

So, just in a quick, quick data collection, we've mentioned this during the Special Session. We have now enormous visibility into the industry, but again, we don't know what we don't know. And when we start, we don't even know to ask the right questions.

But thanks to the Legislature, the amount of tools we have and to really collect this information has given us a lot of visibility. In interest of time, I'm going to move forward and answer any questions on this specific element.

So, then, based on that, and then, given the problem statement of the spikes, our immediate responsibility was to say, okay, you collected the data, how can you explain the price spikes and what can we do about that? So, what you see here is what we described as the anatomy of the price spikes last year.

And the total complexity of the industry finally shows up in terms of monetary value in these four buckets. So, one, there is a futures market, which is NYMEX. It generally sets the price of refined products across different elements of the state, of the country. And then, those then will be used to benchmark the spot market prices.

And the spot market prices for us would be in LA and San Francisco. So typically, in a daily transaction, if somebody buys some refined gasoline, and if you look at the reports, it'll basically say NYMEX plus X amount of cents on the top for the gallon, for the purchase.

So, those spot market prices then flow down into the smaller rack markets and then finally at the retail markets. And this is something that we've discussed extensively over the last couple of years.

One of the key insights that we received during the time was really understanding what moves the spot market and direct correlation with the liquidity in the market. And the liquidity in the market is really defined in terms of days of supply, which is how much supply do you have that you're looking to two weeks ahead.

That includes gasoline inventories, the refinery, overall production rates including the outages, if there are any, to account for the imports, and dividing that by the demand. So, this is a chart that we've showed you.

And every single time we see a spike in the spot market, it directly holds true, which is if you're looking at the liquidity in California, and if you're looking at the spot market trades, the less days of supply we have in California, the higher the spot market rates will occur at, and those spot market prices will slowly go downstream.

That's just an observation. And what we can do and what we have to do about that is the question of the regulatory tools that you've provided us.

With that, just a quick summary of last year going into the Special Session. We've had a couple of hearings on all the options that the CEC, in collaboration with a number of agencies, put together in the fuels assessment. We talked about a variety of strategies that we can do.

The demand side strategies, supply side strategies, specifically on imports, storage, and others. We talked about regulatory models that could be really complex and maybe that's not something we want to wade into because it has both pros and a lot of cons and also railcar replacement.

So, we looked at a variety of options, we laid out pros and cons, and that has been a point of discussion over the last couple of years with the Legislature. Then, kind of moving into where we are on the transition plan—just a quick update.

We are, as I mentioned earlier, in the process of doing a lot of stakeholder meetings and beginning to synthesize all the input we have received during the Special Session conversations with the industry on P66 closure and conversion into a terminal, as well as the recent Valero Benicia announcement.

We're taking all of those things into account to really develop a plan that can have a holistic nature to that. With that, I'll pass on to Director Milder to talk about the work that DPMO is doing.

Thank you to the Vice Chair. Good afternoon, Chair Petrie-Norris, Vice Chair Patterson. It's good to be back before you today. My name is Tai Milder. I'm the Director of the Division of Petroleum Market Oversight.

I look forward to sharing some of DPMO's work and key findings in the transportation fuels space and in particular, we're going to share with you today some previews of new data-driven work by our economics team that gives additional and new insight into the California market.

This is going to be part of a forthcoming report that DPMO will be releasing soon. DPMO is an interdisciplinary team of 12 that is made up of enforcement attorneys, economists, and policy experts with a mandate to protect California's consumers. Our work falls into two broad categories. The first is independent oversight and investigations.

Our division has investigative authority, which means we can issue subpoenas and refer potential violations of the law to the Attorney General for further investigation and prosecution. Our second core function is policy analysis and that's our economics team, along with policy. We provide policymakers and the public with analysis, findings, and recommendations on transportation fuel market issues.

As Director, I identified three early priorities starting in this new division. The first was to stand up and create DPMO. We needed to have a visible, investigatory presence in California. Unfortunately, there's been a history of market manipulation in our state, so we needed to have a visible presence quickly to both deter and detect potential wrongdoing.

The second priority was to understand and mitigate retail gasoline price spikes. Since 2023, when the division was started, we've identified the root causes of price spikes, proposed market reforms, and brought much needed transparency to policymakers and to the public.

The third area, and this is new in terms of what we've addressed publicly, is trying to understand why retail gasoline prices in California are higher, even outside of price spikes. So, when you account for taxes, fees, and environmental programs, there's a residual unexplained difference in the price here in California with the rest of the United States.

And this has been identified most prominently and first by UC Berkeley Professor Severin Borenstein, who identified what he called the mystery gasoline surcharge. So, I'm going to use his nomenclature there, the mystery gasoline surcharge, or MGS.

So, we have been working in the background on this third area and I'm excited to share some of the findings from that work, as well as work that we help—that we hope—helps to explain the potential refinery exits and the risks that we are seeing there with also the persistently high prices.

I think a lot of us in California are thinking about affordability, and gasoline affordability is a very visible issue. Consumers see each time they drive down a busy street, they'll probably pass at least one gas station at a corner, so they can see those prices.

And those prices can really pinch, particularly drivers who have less fuel-efficient vehicles and drive long distances. So, there's two key affordability challenges that we're using the data to analyze. The first is the price spikes that you all have heard so much about.

And those price spikes in 2022 and 2023 may feel like somewhat distant memory, but they're pretty vivid. Those were unprecedented high prices, and those prices cost consumers billions of dollars. And that had ripple effects on goods and services throughout the economy and contributed to significant inflation. The second core affordability challenge is persistently high prices at the pump.

This is where we see the mystery gasoline surcharge. But then when we dig deeper, we see a large and growing gap between the price of branded gasoline and unbranded gasoline. Critically, for our purposes, neither of these affordability challenges can be explained by taxes, fees, and environmental programs.

So, as we show the data today, we're always controlling for those so that we have an apples-to-apples comparison. So, we're going to quickly share five key findings from the forthcoming report. And we're going to start with the mystery gasoline surcharge.

Our calculation, which validates and tracks Professor Borenstein's calculation, is that Californians have been paying 41 cents per gallon extra for every gallon of gasoline sold since 2015. If you add that up, that's over $57 billion. Here is the graph that shows the calculation of the mystery gasoline surcharge. I know it's a little distant up on those screens.

The blue line is the monthly mystery gasoline surcharge, or MGS, and the orange line is the annual average. This is computed by our in-house economics—economists, excuse me. We have three PhD economists at DPMO, and they have also checked their work with Professor Borenstein and other outside economists at Stanford and at UC Davis.

Before 2015, if you look at the chart, you can see the orange line tracks near zero, meaning California prices were in line with prices for the rest of the United States after you account for taxes and fees.

But then during price spikes, the mystery gasoline surcharge jumps not just to 40 cents, but up to a dollar or more with the highest price spike of $1.32 during the fall 2022 price spike. That got the Legislature's attention and got consumers' attention. So, the question is, what changed in 2015 that made this mystery gasoline surcharge appear?

And so, we're going to dive into the data to try and answer that question. The second finding that the data shows is that there is a elevated industry margin in California.

So, one way to think about how much money the industry is making is to subtract the cost of crude from the retail price of gasoline, and you get a gross margin. Since 2015, the gross industry margin in California has increased by 36 cents a gallon.

And our economics team thinks this is the biggest potential driver of the MGS.

Sorry to interrupt you, Director. I guess I'm a little confused. So, if California companies were raking it in, why did we just have two refineries announce their intent to close? I think we got to focus the conversation around that.

And I guess we also have to focus the fact that Vice Chair Gunda, you began the hearing by saying that we've seen a decrease in demand. If you go back to your chart, the reality is that we've seen a much more precipitous decrease in supply than we have seen in demand. Pricing is fundamentally about supply and demand.

So, what we need to do, and what we as legislators need your help to do, is help ensure that as much as possible, we are tracking the decline in supply to the decline in demand.

If we've got policies that are driving supply like this, but demand like this, we are going to see huge price spikes and a huge gap in prices between what Californians are paying at the pump and around the country.

So, I went—I'm not exactly clear how it's possible that you're asserting that they're making more money here than they are around the country. If that was true, then we wouldn't have had two refineries announced that they're closing.

So, help us, I guess, and also help us understand we gave you, as Vice Chair Gunda said, we've given you a number of permissive tools. So, the legislation that was passed authorized a margin cap, if that was found to be appropriate and if that was found to not negatively impact California's consumers.

And we also authorized you to evaluate and then implement a resupply requirement, if appropriate. So, can you maybe start with, start with, I guess, the punchline first and then give us the background?

Absolutely. So, to answer the question directly, what our data is showing is after the price spikes recede, during price spikes, all the refiners do well in California and thankfully, we haven't seen the same price spikes that we saw in 2022 and 2023.

So, when we testified before this Committee about the margins that companies saw in 2022 and 2023, that was absolutely accurate. Now that price spikes have become less common, thankfully—if this was wood, I would knock on wood here at the table.

We've now dived into the data from 2024 to say without big price spikes—there's still some price spikes, but smaller ones—without big price spikes, how are the refiners doing? And it's a story of haves and have nots.

There are some refiners that do very well even outside of price spikes and there are some refiners that are struggling, and the dynamic there is behind, as we said, that the branded versus unbranded price difference and we think the mystery gasoline surcharge. So, I'm going to ask for a little bit of patience, Chair.

We do have a slide that shows the branded versus unbranded mystery gasoline surcharge, as well as the haves and have nots, sort of the refining margins for these two types of refiners. I think it's important to think of the refiners in two buckets.

One bucket is the household names of gas stations you see where, you know, I'm going to hesitate here and sort of say brands in general that folks know and their retail stations, and those are significantly more expensive. And then you have the unbranded, more value-oriented segment of the market and those are a lot less expensive.

And so, the companies that are feeding into those higher priced brands are doing very well. And the companies that are supplying our more value-oriented segment are not doing as well. So, I think here I'm going to start being mindful of the Chair's question with the full gross gasoline industry margin since 2015.

So again, a little distant to see there. I hope you have the slides in front of you. Before 2015, industry margins in California and the rest of the United States were more or less the same and tracked very closely. Then California, which is in blue, and the rest of the U.S. which is in orange, starts to really separate after 2015. And as I mentioned, during the price spike in 2022, you saw that industry margin go up to $2.36 per gallon.

But if you trace forward to more recent times, and we have this data through the early part of 2024, we're continuing to update it, those margins have fallen considerably. So to understand why the industry margins have gone up, we're looking at market structure.

We've talked about market power before, and I'm going to try and explain this fairly briefly. The the top four companies in California control 90% of refining capacity. And those same companies have about 50% of their refiner sales through vertically integrated sales channels. So this is a slide that this committee has seen before.

The top four companies listed have 90% as about 90% of a cumulative share of of the market. And if there are additional closures in 2025, as we expect, that will actually increase to 98%. The top two companies control 55% of the market and that will increase to 61%.

A more concentrated market reduces the incentive for individual firms to resupply, which can lead to higher prices. This next slide is about vertical integration, which I think is a fancy word for thinking about a company that controls refining and retail. On the left hand side you can see what's called dealer tank wagon sales.

Dealer tank wagon is when a refinery delivers directly to a gas station and sets the delivered price themselves. And the second is company. There's also company retail outlets and then also branded rack sales. I want to focus really on the dealer tank wagon here. 39% of California refinery sales are through dealer tank wagon.

And that gives much more control over the street price. In the rest of the United States, that's 7%. So that's more than five times the ability to increase the retail price. In addition, California has company retail outlets much more than the rest of the United States.

11% from this chart compared to 2% in the rest of the United States. So again, it's five times more control over the retail price. This means that some California refiners can increase prices through their vertically integrated sales channels in a way that they simply can't do in the rest of the United States.

So as we go to our fourth data point here, the potential market power in California. The question is then, how does that potential market power in California relate to the higher prices we observe at retail? So this is where we're going to talk about the branded markups in particular.

Branded markups, the retail gasoline sold at major brands, has the highest mystery gasoline surcharge, which is $0.72 per gallon. So that's the unexplained difference at branded gasoline is higher. Before we show that though, we also want to talk about the spot market, because we've talked about the spot market quite a bit.

This is a chart of the spot market price differences between California and the rest of the United States. And what we've done is measure how big the spikes have been and compare that from before 2015 and after. And the price spikes have gotten bigger, but they then recede.

So we've seen very big price spikes in 2015, 2019, 2022, and 2023. On average, the spot market prices have gone up, but not nearly enough to explain the mystery gasoline surcharge. This is where I think in a single graph you can see the change in California pricing since 2015, and you can see how that pricing has changed in and around 2015, you can see an increase in prices in certain sales channels for refiners.

So these, this graph, and I know we're bringing a lot of graphs here, shows different sales channels and the prices of those sales channels relative to the spot market price. So we just look at spot market prices. This is how much more than spot market prices these prices are.

So let's use the top line dealer tank wagon first. Before 2015, dealer tank wagon was more expensive than spot market prices, but not that much more expensive. That changed dramatically. It went from 12 cents per gallon in 2013 above the spot, and now it's 55 cents more per gallon than the spot market price. And then if you look at branded rack prices, you also see an increase. I want to ask you to have your attention on the unbranded and the bulk prices there as well, unbranded in particular. Unbranded gasoline is the value oriented segment for Californians.

And I really want to lift up the work of the Air Resources Board and others. We have the most stringent gasoline specifications in the country. The highest quality gasoline, whether it's branded or unbranded. And those gasoline shipments are commingled in pipelines, meaning the branded gasoline and the unbranded gasoline are transmitted together. So their molecules are literally indistinguishable.

Now, proprietary additives are added to branded gasoline at the rack later in the process. But there are also detergents to clean your engine in the unbranded gasoline. So Californians have a great value proposition when it comes to unbranded gasoline, but the prices are dramatically different.

So this, Chair Norris, is the difference between branded retail prices and unbranded retail prices when you compare the major brands and we think about the mystery gasoline surcharge. So before 2015, the branded, the major brands were more expensive than unbranded, but it was a close difference and those were both tracking, you know, fairly modestly.

After 2015, the major brand prices have gone up and they've stayed up. So the mystery gasoline surcharge for major brands has averaged $0.72 per gallon since 2015, while the mystery gasoline surcharge for unbranded gasoline is $0.34 per gallon. So in other words, the MGS for major brand gas stations is more than double the unbranded gas stations.

This again is despite the fact that all gasoline sold in California has to meet our stringent standards. And if you compare this to the rest of the United States, there's a negligible difference between branded and unbranded gasoline stations. So this is the final point that we're going to address today, which is the refining sector haves and have nots. As we move to this final point, I understand this is at top of mind for fellow regulators and policymakers and for the Legislature.

So we're hoping this can help explain why some refineries are making handsome profits and some are struggling. So in previous legislative hearings, we've discussed the profitability during the price spikes of 2022 and 2023. And in the Vice Chair's presentation, you'll see that those prices in California were higher than the rest of the United States and also the rest of the world. Those price spikes were exceptionally high in California.

But now we've seen those price spikes recede, and we're seeing that some of the refiners are not as profitable, particularly if they don't have a strong branded network where they can charge higher prices. So I'm going to advance to another slide here and show that the haves and have nots. What we've done here is separate.

Instead of looking at all refiners, we've separated the refiners that are focused on brands and the refiners that are focused on serving the unbranded segment of the market. The top half is the brand focused and the bottom half is the unbranded focused focused.

Before the Torrance Fire you can see that all those refiners had similar gross refining margins. But after the fire, the branded refiners started receiving higher margins and that has accelerated over time. So again, during price spikes, both types of refiners are doing well, but outside of price spikes, they're not doing as well.

And the unbranded refiners in particular are struggling. And so if you look at the far end of the, the graph, you can see the unbrand focused refiners gross margins following to a level close to and even below what they were in 2015. And so while there still is cyclical profit, meaning there's, there's good profitability during some higher priced environments, there's also some times when these companies are not doing as well, particularly in the unbranded segment of our market. One last point here about profitability that we wanted to share.

There's been a big discussion about both gross and net refining margins. And it's been an issue that I've testified to previously and flag that one of the challenges that we're facing is that the expenses that get reported to the CEC are different than the expenses that get reported to investors.

So we wanted to show all of you how different they are. So these charts are for, it's anonymized and aggregated, but it shows refineries that operate just in California that will report to the CEC and also report to their investors. The top line is the amount of expense, operating expense that's reported to CEC.

And the bottom line, the orange line, is what's reported to investors. Part of, I think the importance of highlighting this. This is inflation adjusted. The inflation adjusted cost reported to investors is relatively stable. It does fluctuate some and there have been some upticks in recent years, but it doesn't change dramatically. And this is the data again that they are reporting to their, to their investors. The top line has more variability, but it is significantly higher, sometimes two or three times, often even more than three times higher.

Now this is a data stream we're working with CEC to improve and we really want more public transparency here and confidence to understand how could refiners be making so much profit in some quarters and struggling so much in other quarters. And why do these numbers not match up?

It's frustrating to me that these numbers don't match up because we really want to have one data set, but they're reporting different sets of numbers. And that's partially because there are different reporting requirements in the different statutes for this. I want to note that we have removed depreciation and amortization. But there are other differences between what they report and sort of how they comply with the reporting requirements. So I would like to, and hopefully in the future we can have better data to provide full transparency.

But as we wrap up here, and before I hand it back off, these are five key findings that are shown by the data. And I really want to credit the Legislature and the CEC for the new data streams and the new transparency. This is information that we didn't have the ability to bring to policymakers or to the public before SB X1-2.

And it really shows progress in understanding the different levels of the California gasoline market, how the brand focused refiners, which are also the biggest refiners in the state, are doing quite well while some of the smaller refiners that are serving our value oriented segments of the market are struggling.

At DPMO, what we're going to do is we're going to keep investigating to better understand why these brands are able to keep raising prices. We're also going to look for ways to increase competition between unbranded and branded gasoline and also between the brands to see if some of them can start offering better values. And third, we're going to support CEC in developing pathways to keep sufficient amounts of unbranded supply in the market. Thank you so much.

Thank you, Director Milder. Just picking up on the third thread of the conversation, Chad, as you laid out at the start, so kind of we look through kind of the three pronged approach here at leadership in health and aid regulations and climate regulations, moving into post-COVID and the mid transition we started to observe in the marketplace and how best to enhance consumer protections.

But really we are entering this phase now where we could go multiple different ways and we really need to think about this holistically and how best to stabilize the entire ecosystem. You've seen this before, but I just want to make sure that we spend a little bit of time here on this, on this chart one more time. So what you're seeing here are for every horizontal block there is a refinery.

Green is Southern California, blue is Northern California, and then you have three lines on there which is the average California demand, the peak demand for California, and the demand that California refineries have to meet when you account for Arizona and Nevada as well, the supply that we get.

So one thing from here, Chair, to your point is very clear that the cushion that we have in terms of supply demand is rapidly dropping. So the in-state refining capacity that we rely on for resiliency and better ability to serve California is reducing. And as you reduce that, this is something we've observed in the Elko City markets around 2020, when you have the supply almost right size to the demand and one outage happens and you're exposed to a lot of volatility.

And that's really what we are worried about, moving into this next phase of the transition and thinking holistically on how best to solve this. Another point, which I don't have a chart on, but I just will speak to as we move into the next couple of slides. And my final slide has the preliminary contours of the approach, the first holistic approach that's coming together as we talk to many stakeholders. The important point here is many of these refineries are connected through crude oil pipeline infrastructure. So the crude oil from the Kern County and other counties in California serve some of these refineries through pipelines.

And as you reduce the overall crude oil production in California, which we showed on one of the slides, that will have a direct impact on the infrastructure, which is those crude oil pipelines will not be profitable to run. And then comes the dominoes of the connectedness of the infrastructure. You have the crude oil pipeline shut down.

You will have the refineries having to procure that crude oil from elsewhere. And not all refineries are set up to receive crude oil through marine terminals, and hence it will be harder for them. So this dominoes has to be really thought through as a single value chain and an ecosystem and thoughtfully plan for the transition as we reduce the demand in California, while also really making sure the third prong of the discussion we've had, which is how do we ensure the communities that are hosting much of this critical infrastructure and the labor and the workers in these refineries are actually protected as we move forward.

And I'll share with you a couple of examples. So going to the next slide, as Director Milder mentioned, I want to really kind of make sure we share with you what we're observing is not just happening in California, but it's happening globally. What you see there are stacks of different areas in the world. Singapore, ARAs, Amsterdam, Rotterdam.

So you have the hub up in Northern Europe. You have the U.S. gulf coast, you have New York, Chicago, and Los Angeles. And it's important to note that as you go into those different years, the gross margins in California are slightly higher. There are ways to explain it. And as Director Milder said, there are some things we still have to understand well as to what contributes to that. But coming out of COVID, you have this rapid increase in gross margins across the world.

And part of that can be explained, part of it can be explained by right after COVID, you had a lot of planned and unplanned outages. And there was a supply tightness globally. And depending on where you are and how constrained you were, the price spikes happened at different rates.

But as Director Milder pointed out, as you move into 2024, there has been a precipitous drop in overall margins across the industry. And I want to point out a few things that's beginning to happen and take shape globally in 2024, the overall demand in the world has slowed down, especially because of the economy in China, there was a slowdown in the overall demand. But while that is happening, there are a lot of large scale, more efficient, potentially lower cost refining refineries coming up in the world. So you have a few of them there. You have refineries coming up in Mexico, Nigeria, Oman, and Kuwait.

And these emergence of these refineries will hit different areas differently. For example, one of the conversations that we understand is Singapore is going to be hit really hard in terms of their own in-state refining capacity because it cannot compete with these larger refineries that are coming online.

And also finally, just want to make sure, while we are trying to solve for California's process, observing that even in states like Texas, we are beginning to see refineries not able to compete in global markets. And you're beginning to see those retirements happen. And we need to make sure we have a strategy to protect that.

So I want to go into, have a last couple slides. I want to just make sure we, we at least frame this before we go into the Q and A. This transition is happening in different places in different ways. And the states, the nations are beginning to intervene in protecting those key assets for national security.

For example, right after COVID, Australia lost half of its refining capacity in a year. And it was a crisis and the state intervened. And what Australia kind of essentially came up with is a state intervention on subsidizing the refineries to make sure they don't leave. But Australia is also very close to Asia.

That means they have refining product that can come to Australia much more quickly than we can from Asia, which will take almost four to five weeks to come here. So it's not an apples to apples comparison, but that was an intervention. Similarly, U.K. kind of took over the last remaining steel plant and there was a lot of political pushback because U.K. did that for the last one and not all the steel mills. So there was a pushback from workers on how it was chosen to protect the last one but not have an overall transition plan.

And I think from that perspective we have this opportunity to lead as we're entering this mid transition phase. Norway has a completely different model. Norway has state ownership of crude oil for a long time and they have created a partnership with Equinor that both invests in clean energy transition but also continues to export crude oil as a strategy.

And as we mentioned earlier, if you look at the Midwest and you look at the coal in Appalachia, we did not have a clear transition plan away from coal. And and one of the things you've seen is a slew of bankruptcies and lack of worker protections. And also some of these companies have to leave the places without necessary remediation. And so again that's another thing that we could learn from what could happen. We could have a precipitous drop in in-state refining capacity with a lot of different consequences.

And how do we learn from all the lessons to build a strategy for California that both that does all three simultaneously? We continue to make sure we advance our climate goals. We continue to make sure we protect our consumers, especially in this transition, which you will see happen no matter what those spikes.

And finally, how do we make sure that we have investor confidence that allows for the market to protect the necessary investments as long as we need them. So it's a three prong approach we need to take. And with that I will just close with this slide. A lot of text and the reason for a lot of text on this slide is this was a lot of time and I want to thank Chair Randolph for being a part of a lot of these meetings with us.

This is the ultimate summary based on a number of conversations with different stakeholders, but also collectively in a single room trying to really understand how do we take this situation. So I think there's two consensus that we have across a broad stakeholder group.

One, what we are entering right now is not a small thing and we need to solve this. If we don't proactively solve this, this will become a crisis and we need to make sure that is clear and there is a broad acceptance across all stakeholders that this is something we need to work on. Second, there is a recognition that a number of choices we have in front of us might be difficult and there will be trade offs and the Legislature will have to look at both pros and cons of that.

To think about this as a whole package of how do we solve this. So while we have agreement on those, I also want to note that given how diverse the stakeholder groups are, there isn't a unified consensus on any single bullet point here. But what we try to do within the context of both our response to the governor, but also to the Legislature as we move forward, is to lay out collectively and holistically what we think we need to do. One, we need to make sure existing at-risk refineries have a strategy.

CEC believes that it is prudent and it's essential to that we take steps immediately to stabilize the overall ecosystem in California, especially the refineries. And we're thinking through the strategies on how best to do it. Today, we will not be able to go into a single strategy. We'll explore that through the conversation today.

But we recognize there are a number of ideas from different stakeholders on how to do that. Second, as we do this, we cannot create winners and losers in the market. And we need to make sure also we stabilize the entirety of the system. We need to have Chair Petrie-Norris, as you said at the top, we need to have a transition plan that's implementable, that has a very clear path on how we think about this holistically. So the concurrent statewide strategy, and that needs to ensure that there is investor confidence.

But it has to happen while achieving our climate goals and health protection standards. I think it's an important element that a number of stakeholders feel very, very strongly about. So the industry-wide de-risking has four broad buckets for you to consider. One is ensuring timely infrastructure.

As we move forward, there will be some reliance on imports and it'll expand. And how do you ensure that there are timely upgrades to allow for imports, refining capacity, storage and delivery of the defining products? We really have to think about how best to make sure those infrastructure improvements are done in a timely fashion.

Two, we need to stabilize the crude oil production in California. Given my earlier conversation on how crude oil has a direct impact on the ecosystem and if the crude oil production in California drops precipitously before the overall demand in California, there are parts of the ecosystem that will not be financially viable and that will have consequences.

So we need to think through how best to do that. And three, one of the things we talked about is the complexity of the regulation. Three of us are here, there are 10 other agencies that touch their state agencies. And in addition to that, we have federal, local, and city.

So we need to really think about how do we harmonize our overall efforts in a way that we are moving towards the same goal and how do we ensure that happens. Then comes the third part which is in a broader transition strategy. This is both near term and medium term actions that we really need to think about.

A holistic transition as we address some of the near term issues is how do you have a shared understanding, collaboration and development of policies across state agencies and stakeholders to meet the following and want to make sure that we think this through.

Chair Randolph mentioned earlier, some of the aid quality regulations that we have in California are not voluntary. We have to meet them to be able to be compliant with the Federal Government and the federal rules. In order to do that, California should be able to have the authority to make sure the necessary measures are implementable in California.

The first one talks to preserving an authority. The second one talks to the diversity of options we need to have to ensure that evolution. The next couple of things are really important to think about. Given the lessons from the rest of the world. If this transition happens in an uncontrolled, rapid manner without a plan, the communities that host these refineries and the labor and the workforce will have the most impact on them and the cities that host this.

So it's important for us to think about a transition strategy that ensures adequate funding for that to happen as we continue to move away from from these resources. And finally thinking about adaptive management of the strategies, really thinking through challenges and opportunities and strategies for that land.

Much of the land today that hosts the refineries are close to oceanfronts because of the marine terminals. And that development requires how to evaluate, how to remediate and how to make sure those land assets are well used. So this has been the last four to five weeks after the Valero announcement.

If we worked at a supercharged level, it has been a super supercharged level. And one thing I will leave the Legislature with. The trust in public agencies from all of you is one of the most important things that we carry as the most dear thing, and it is important for us to do that, is to ensure that you understand where we are.

And I will continue to kind of make sure that I convey the message we conveyed at the top of this conversation. The state has leadership in aid regulations, health regulations. That has been long standing work that the state has done and we need to continue to do that.

And we have a core leadership in the work that we've done recently on ensuring that we have customer consumer protection. As we move into this transition that's going to unravel in front of us very, very quickly at unveil whichever word we want to use. And we are entering the third stage. And this is the stage of mid transition that most industries will see and academia talks about. And we need to think about having a plan. So with that, we'll close. Thank you.

All right, well, thank you. Thank you all for being here. And before I open it up for questions from our committee members, I have just a couple of top line reactions. And I'll start with, if we are to ask 100 of our constituents, like, do you want clean air or cheap gas? They will say, yes, people want it all. And so it's on us to navigate this transition in a way that is balanced and I really believe in a way that keeps affordability front and center. I often talked about the three legs of this tool.

It's got to be sustainable, it's got to be reliable, and it has got to be affordable. And you opened by framing this in the context of California's climate leadership. I think it's also really, really important for us to think about what climate leadership means.

And I would say that climate leadership is not just about setting goals and shouting them from a mountaintop and listening to our own echo that the work we're doing here in California matters if we are creating models and systems, technologies that other states and nations look at and want to replicate.

If all we're doing here in California is reducing our emissions, which are like 1% of global emissions, it doesn't matter a damn. And so I would argue again that when we're thinking about climate leadership, we need to make sure that the policies that we're implementing here in California are affordable and accessible for all Californians.

And I'll say that I know that what climate leadership does not look like, and that is $10 gas. So we've got to be really, really honest with ourselves about the risks, both with these recent announcements, but also the risks that we need to navigate in the next couple of years and I think make some tough choices to ensure that as we're navigating this transition, we keep the support of Californians because we haven't been able to lead on climate because there's, you know, 120 members of the Legislature.

We've been able to lead on climate because we've had the support of Californians. And if we're not careful about this, if we're not strategic about this, we are going to squander that support and not be able to lead as we move forward. So just sort of reaction in context. Assemblymember Gipson.

Thank you very much, Madam Chair. Thank you very much for your leadership and your comments to the committee, to your testimony here today. I'm still having a hard time with the presentation and understanding it in terms of proving the point where you have made your point in terms of price manipulation, I still could not grasp that particular point in the graphs in your presentation where it clearly shows that there has been price manipulation.

So that's one point I want to make out and maybe you can again clearly, you know, see, you know, show me once again where that's at. I'm also concerned about the fact that we have, you know, these companies leaving the state, the loss of revenues that's caused by these companies no longer operating and the loss of jobs that these companies provide. We're talking about a plan when these companies leave and what happens to the land.

I'm concerned about what happened to the people and the tax dollars in which that these companies provide to the State of California what California will look like once they absolutely leave the State of California and go somewhere else. We also heard in a presentation about other countries coming online with products which indicates that we may be relying on those other countries to bring in that product.

And again, I've said this to the Vice Chair behind closed doors in meetings with the caucus, those other countries don't have our protections, human rights, civil rights, none of those kind of children rights that we have today. And for us to, you know, to rely on bringing exporting that into California and have Californians who have cars who rely on that to feel good about themselves when the atrocities that happens in those countries that we wouldn't even put up in our own country and we should feel good about that. I would beg to differ.

So what are we doing about one, the supply obviously is decreasing because we no longer will have, you know, Phillips 66 and we will no longer have Valero. So talk about what does that look like because again, the demand is going to be higher, but we won't be able to have the supply.

Can you again talk about that? And what is the plan to making sure that those who have cars who rely on these petroleum vehicles, how are we going to how are those individuals going to maintain getting to and from work with the supply and the costs?

Thank you, Assemblymember Gipson. Just wanted to say thank you for the framing, but also the questions that you always raise on this importance of the production in California versus bringing it from elsewhere and how it impacts so where we are in the midst of is we know that P66 is going to close their FCC or the refining unit later this year.

And what P66 has publicly mentioned is that they are going to resupply California of that necessary volume through a product terminal strategy. So they will be having their tanks and then they'll be bringing in imports. I'll definitely tie that to your other question. So there will be an immediate increase in the need for imports in Southern California to make sure P66 operationalizes their strategy. So then comes the other element, which is the Valero.

I'm sorry, can you talk about how is that going to be supplied to us?

Yeah, so the. I want to watch myself make sure that I am not breaking any of the pirate confidential rules. I think I won't. I'll just kind of. If there's anything vague, please excuse me and I'll bring it back to you with more clarity. So they will have to bring some of the product from refineries that they own in the Gulf Coast and, you know, bring it through the marine terminals into California.

While we have tankers, ships.

Yes. So that'll be mostly around marine terminals. So they'll bring in a lot of vessels to essentially make sure that they bring in the product and then put it back into the overall supply chain. So that's kind of what P66 is doing. And also want to make sure that we want to observe two points here on just the structures of the market.

So north and south almost operate independently, as you know, because we don't have any pipelines connecting the north and south for refined product. So given today, when you look at the demand in Southern California and the refining capacity in Southern California with P66, we're actually slightly higher in liquidity.

But as it moves away and then goes into a transition of import strategy, while we won't have the defining capacity, that market is less of a concern from the CEC's perspective, given that there is an import strategy currently laid out by a private player. But in the north, it's a different matter. We have currently three operating refineries.

And as Valero has put out their intent to leave California, and that would be a problem in terms of just managing demand and supply. So immediately what we will have to kind of think about as a strategy is how do we make sure the additional molecules that currently move from Southern California to Northern California continue to do so. Again, it's marine transport, as you mentioned.

Two, to the extent that we have P66 Rodeo, that kind of works as a product terminal today, and you have Richmond and you have the Martinez, overall, the supply in the north will be tighter as it pertains to in state refining capacity. So we really have only one choice there today which is, you know, increasing imports. Based on our work right now, that will be very tight for the north.

Increase in imports which means that you have more vessels who in what I've heard also if you increase the vessels then that means more emissions because we don't control those vessels and emissions which they bring. Is that correct?

We do have some controls on it. Chair, would you want to comment on that?

Yes, we do have the at birth regulation that requires emissions reductions or payment into a remediation fund for vessels in port. But you are correct that additional marine traffic would implicate air quality issues beyond state waters that we do not regulate.

But so going back to the to our Chair's question earlier when she interrupted you, how if these companies are making, you know, extreme profit that they're leaving the state. So again just trying to hone in on that point.

You have companies who you're saying or the allegation is that they're making money hand over fist but they're leaving the State of California where there's supposed to be all this money to be made. So and I'm still trying to have a, I'm still having a hard time in terms of the price manipulation. So can you help me with that?

Chair I'll assume I'll start it and I'll also invite Director Milder to comment on the specific information that he was providing at the time. I think what we observed today, I think it's, you know, again I want to bring it back to the sentiment of price spikes are not good for consumers.

Just, just beginning there, that doesn't answer your question and I'll kind of step into that. So as we see the price spikes, one thing that we have independently done work in a DPMO has done their work is the profit margins for different industry players is not the same.

That's a very important thing that we need to look at which is some of the industry players have much more integration vertically and that kind of protects them with these margins a lot better. But for those that are just supporting the market without any downstream kind of marketing power do not make money. So that's an issue.

So we have people who are refineries who are able to have a little bit more profits than the others. That's one. The second thing is which we are continuing to learn and this is why we are not using the tools that you that the Legislature have given us without that additional analysis.

One of the core elements to think about is the opportunity cost for some of these refineries. These refineries are generally national players, sometimes global players. And as they think about where do they want to invest money, they are going to move the money to the places where they are most profitable.

And while California has good product profits in terms of the overall revenue, the ROI might not be as high in California for some of them. And so as they think about where to put their capital on, the opportunity cost suggests that they move elsewhere. So I just wanted to put that context before I pass it to Director Milder. Milder, do you want to add anything?

Yes, thank you, Vice Chair I might bring up slide 42 if we have the clicker handy. I think it's 42 in the in the deck. As that slide is coming up, Assemblymember Gipson, I want to respond also to the question about inbound cargoes.

One way to think about emissions when you're importing finished gasoline is you are importing less crude. As the Vice Chair said, 75% of the crude oil that's being processed into gasoline comes from imports. And so if a refinery shifts to importing gasoline, there are a number of issues associated with that.

But some amount of crude is now not being imported, and that's being replaced by refined product. So you may have a sort of an offset of less crude coming in via ship, but more refined gasoline. That may not represent a huge increase in cargoes.

As we look to the slide, I wanted to share its gross gasoline industry margins and I had it. And I apologize, it looks like there's not a page number on that. I had it at about page 42. Gross gasoline industry margins, if you see that, Assemblymember. Thank you so much. Oh, I have the clicker. Perfect.

So I'm going to choose my words carefully here. I worked previously at the California Attorney General's Office, and in that office, we sued two gasoline trading firms for manipulating the California market. And that prosecution continued after I left that job and went to the United States Department of Justice. Those companies did settle and pay the State of California and consumers are getting checks as a result of that or some sort of offset as I understand it.

If you look at the Torrance refinery fire and the first big gross gasoline industry margins at the far left of the screen, the allegation there by the Attorney General's Office was that there was market manipulation. And you can see that big spike. Now for 2022, there have been no public allegations of manipulation, but you can see a similar size of spike. $2.36 is marked on the chart, meaning those industry margins went off the charts.

If you just look to the left of that, there's a spike in California and also a spike in the rest of the U.S. That's the invasion of Ukraine by Russia. So costs were going up also in the rest of the United States. So our spike was mirroring another spike in the rest of the country. Later in 2022, that wasn't the case. So we had a huge spike here in California, and there was no other corresponding price price increase. So I'm not sitting here today to allege manipulation.

What I'm saying is you can see when these price spikes happen how dramatic they can be and how different it is. And now if you trace forward on the slide to more present numbers, they're not seeing those record high profits. And so that data looking back at 2022 and 2023 is absolutely correct.

And the Vice Chair shared a slide, which we can revisit later if needed, that's reflected. California was the highest in the nation and the highest in the world. But the facts on the ground have changed. And I, for one, on behalf of consumers, are glad that we haven't had these extreme price spikes.

But now there has to be a recalibration of industry's expectation for the amount of profit that they're going to make. And as the Vice Chair said, the CEC is engaging in conversations about how you can make sure that there's an investment climate even without these price spikes to keep companies in the market. So the facts on the ground have changed significantly, I'd say in some ways very positively. But now I think companies are revisiting what kind of return on investment they want to stay in California.

Assemblymember Alvarez.

Thank you. I can start with that chart first. My reading of this chart is for the last 10 years, things have been all over the map. I mean, there have been times when there has been a gap that's significant and times when not. So I'm just curious with what we've done over the course of the last several years, what that's actually led to. I mean, we cannot, I don't think, sit here and assert that anything we've done on the regulatory authority we've given you has led to a calming of the markets, if you will.

I mean, the historical, actual data points speak for themselves. There's been times where the lines have been very close and times when the lines have been, yes, there has been some spikes, if you will, in 2022, in 2019. But I don't see anything that's sort of a smoking gun from a data set perspective.

So I'm really curious and a little bit, a little bit frustrated, I'll say, as I sat here during the special session for many hours in this committee, really listening to you all and I hope that you agree with that and asking questions and learning, as I said at that time about what was happening and supported the legislation to create, if you will, more transparency.

That was really the intent. Try and understand what's happening. Here we are more than six months after that when we were acting with urgency because price gouging and skyrocketing fuel costs. And I don't hear today any evidence that that actually occurred. Quite the contrary.

I'm hearing a very different conversation than what I thought I had heard from primarily CEC and from DPMO, which is that we have a crisis on our hand that may have been self created by the actions that perhaps have been taken by the state by regulators.

And I think it's important that we spend the time today to understand what those are. I think pretty clearly, and this is a yes or no question to Vice Chair Gunda. I think you said when you were presenting slide number six that the closures of refineries led to increase in cost of gas. Is that yes or no?

I mean, anytime you have supply demand imbalance, that will have some impact on it. Yes.

Okay. Because I also think I heard you say, quite alarmingly, and I appreciate as I told you the last time you were here, appreciate all of your just clarity and truthfulness and straightforwardness so that we can understand this very complex issue. I think I also heard you say that another closure can lead to a significant increasing cost to consumers on the price of gas.

Yes, sir.

And I think I heard you say primarily, and I think it was your last slide with the three columns, if you will, with problem with one, two, and three here listed that oil production and not having enough oil is also a future potential problem for us in terms of costs because not having oil run through pipelines, I think this is what you said, please correct it, would mean that there could be increased closures of or non operation of pipelines, which means then oil doesn't get to refineries, which means it doesn't get to the gas pump.

Yes.

Okay. And the question then is what regulatory actions or legislative actions? And you've listed in your presentation quite a few bills from the Legislature, but there have been quite a few regulatory actions by CARB, maybe by the commission. Have we analyzed in terms of what impact they have had on the situation that we stand with that we have in front of us today? Have we analyzed that?

Yeah. Thank you, Assemblymember. I want to be mindful and carefully answer this question as you mentioned. You know, I think as mentioned in my closing statements, if we break your trust because we are not being straightforward with you or honest with the information, we lose all ground in terms of public service.

So want to make sure that we honor that in all these meetings, all these oversight hearings. So I think I just want to be very mindful on articulating this and I hope that I can do justice to this argument. I think we're talking about three separate foundational work that we need to do concurrently.

I think one of the pieces that we want to make sure we talk this through. Let's assume for a minute, and I just want to use this as a potential hypothesis, let's assume we do not have as many regulatory burdens as we have today that would not necessarily obviate a profit seeking industry to close down because it's not as profitable here.

And I think as mentioned in one of the slides, that's what you're beginning to see even in places like Texas when one of the largest refineries is closing down. So to the Chair's point earlier and some of the discussion earlier, this is really around those trade offs and values of California as we think through moving forward and stitching a strategy together, how do we ensure our leadership in the climate agenda? Again, I will make sure I correct myself and add to what Chair Petrie-Norris mentioned.

Climate agenda and climate leadership means all these three blocks, which is how do we make sure we have those eight quality standards that are both are mandates but federally required. And then we think about consumer protections which will be needed as we transition away just as grocery store closing in the neighborhood will have impact.

I'm going to interrupt you. What have we done to institute consumer protections? Because there are cost benefit analysis that get done when regulation comes forward. Is there a rule that the cost benefit analysis must identify what the cost is to the consumer and whether or not that outweighs the benefit? And if it doesn't outweigh, if the cost doesn't, if the cost outweighs the benefit, which means it costs to consumer, then that regulation does not take effect.

Yeah, I will speak to just the CEC in kind of context of SB X1-2 and AB X2-1 and I'll pass it to Chair Randolph to talk about the CARB side. As you have noted during the special session, and thank you for the hours of time that you've spent with us and all the tough questions you asked. And we appreciated that because it sharpened our ideas, it sharpened our thinking. What you have directed as Legislature to us is unless the benefits of whatever this permissive tools we are giving you outweigh the risks, do not do that.

And one of the reasons we haven't implemented any of the tools as it pertains to resupply minimum inventory or penalty is to make sure we take the time to truly understand the impact of the regulation. It just so happened just as we closed the special session P66 made that announcement. We did not see that coming.

Obviously I want to at least respectfully offer this to the Legislature that P66's decision to close in LA was not something that they came up with in those two weeks or three months. But it was a long standing business strategy as they noted publicly. So we had to immediately take that into account as okay, this is happening.

We know this will happen as the decline happen. The industry will look for who exits first. Why would I lose the profits in California if there's a demand decline? And there is, the market is constantly adjusting towards, as you mentioned, that supply-demand balance to meet to be profitable.

And we knew that there are going to be exits and how to think about that. So at this point I would continue to reiterate to you, to provide you confidence that the tools that you've given us under SB X1-2 and AB X2-1, the transparency tools have incredibly helped us.

And I will say thank you to the industry for collaborating with us on on some of those transparency. It's hard discussions sometimes. We understand the marketplace better and we're learning new things, but we're also charged by you to make sure those price spikes are addressed in some shape or form. And we are drawing up strategies in collaboration and partnership both with our state agency players, but also the industry.

I would say that is the charge in the legislation that we discussed here in special session last year. But I think there's an expectation with that as well, that as you have access to information, and so far I think you've had full access to information and you haven't identified anything specifically being done by industry, then it would be the expectation, at least for me, that we are identifying what are the reasons for which perhaps California is no longer competitive, so people are choosing to leave or the industry as a whole.

I think those are all as important and we did not charge you with that. And maybe we should have go and identify what are the regulations that have come into place. And at the moment you're testifying that none of the regulations would have changed the outcome of where we stand today. I'm not so sure that's 100% accurate.

I don't know that anybody's done the analysis to do. So I asked you a question about the cost benefit analysis and you sort of said in CEC's case, you don't really do that. I'd like to ask Chair Randolph about that because in your, all of your regulatory work you produce cost studies.

And, and I'm wondering if there's, do you specifically in the work that you, that gets done to analyze that, do you identify what the cost is to the consumer and if the cost of the consumer is of some amount, some threshold, do you recommend the staff recommend to your board not to adopt that? Is that called out? How are we identifying the consumer costs to the regulations that are coming through CARB?

So pursuant to the Administrative Procedures Act and the requirements, we do do an economic analysis. That economic analysis does not identify specific costs to specific consumers, partly because that is there are a lot of variables involved in that. And so what it's a lot of the rules that we pass, we are focused on public health.

And so what we end up doing is looking at what the cost to implement the regulation would be, but we also look at what the public health savings would be as a result. So, you know, we look at things like reduction in asthma rates or reduction in cancer. All of that has a dollar cost that we can identify.

And so we are able to articulate these are the health cost savings that will happen from an overall economic standpoint. And so there may be a family that ends up with kids who have less asthma as a result, and they individually may be saving money in addition to the larger savings in the health system generally.

So you calculate important impacts to health and the decreased costs and health disparities that exist in communities like the ones I represent. But you don't identify the cost to consumers.

Correct. We don't analyze like a retail cost because we do analyze what the costs of compliance and what the entities covered by the regulation, what we anticipate their cost would be. What we don't do is take the next step to try to extrapolate how that cost would flow through to the consumer because in many instances, you know, that would be speculative.

Let me ask you also and then also to Vice Chair Gunda in his closing slide, once again, transition strategy was brought up as key. I have to say that this is something that I know fellow colleagues, legislators have said has been important, a transition strategy.

We have decisions that get made on a regular basis, whether it's regulatory or otherwise. Are we saying that we actually, are we now acknowledging that California does not have a sustainable transition strategy on our climate policies?

The way I would answer that is that we, in the scoping plan, we analyzed sort of a demand reduction amount based on the different strategies in the plan. And we made modeling assumptions about supply, what we envision would happen with supply as well as the Chair mentioned, supply has dropped faster than anticipated in the scoping plan analysis.

When we adopted the scoping plan, we specifically stated in the plan that there we were making, we were analyzing what would happen if supply and demand went down together. But there were no specific mechanisms to ensure that happened.

And it specifically called out the need for a transition plan to analyze how we can ensure that supply and demand move together. That was then incorporated into the special session legislation. And that is what we have been working on with our sister agencies to think about and with stakeholders.

We've had several public workshops, some deep discussions with community groups, with workers, with various representatives to analyze sort of what are the right steps to figure out how to map that transition. And what we are dealing with right now is the reality that that is happening very fast and we need to speed up our work.

And so Vice Chair Gunda and the rest of the state team that is working on this petroleum working group are really digging in to understand what the, the most appropriate strategies would be. And that work will culminate in some recommendations to Governor Newsom pursuant to the letter that he wrote to Vice Chair Gunda.

So the Legislature has been adopting bills over the last several years, decade or so, primarily focused on this issue, but without a reference point of a transition plan. I think that'd be an accurate statement. And it sounds like CARB has been adopting regulations for the last several years without the reference point of a transition plan.

So we've been doing lots of things to achieve some climate goals, as were mentioned, which are important and meaningful and certainly laudable, but without a plan on how to accomplish them, which is probably not how we should be acting.

I want to end with some pretty basic questions because it sounded like Vice Chair Gunda, you said there was some agreement and some disagreement. So I'd like to know from the three of you here present whether you agree or disagree with two important points that I takeaway from Vice Chair Gunda's presentation today.

One that we need to make sure that. So the first one is, do you agree or disagree that we need to ensure at all possible that our current refinery capacity is maintained in California. Vice Chair Gunda?

I apologize for making it a little bit longer. The answer would be it would be prudent to, to have the capacity we have right now the question is at what cost?

Right. All of these decisions are at a cost.

Yeah. So I think yes.

Vice Chair. I'm sorry, Chair Randolph.

I would agree with the Vice Chair as well.

Director.

I would agree as well.

Does that then mean that we need to make sure we find ways that we have oil to go through the pipelines, as Vice Chair Gunda described, to ensure that we have than the refinery amounts that are necessary to maintain that stability? Is that what we need to do? Do you agree with that?

Based on all existing analysis and consultation with other state agencies, the answer would be yes.

Chair Randolph.

I'm going to say yes, and, which is I agree with that. I think it's key that we ensure that we are meeting the statutory mandates around the health protective zones. My understanding from the analysis is that is possible to achieve both of those goals.

Thank you.

And I would agree with both and add of course, at a competitive cost because we want that crude oil to be processed into gasoline that's affordable for consumers.

And so I'm sorry, just lastly, given the emergency almost situation that we are in, I know that the governor requested some response from the commission by July. Are you hoping to act sooner than that to make sure that anything that we can address now can be addressed now or should we expect something to see something in July?

Thank you, Assemblymember. I think the what we tried to do is like give the most updated analysis we have today. So that's why you see that final sheet on the approaches. We are putting our heads down, meeting with more stakeholders next week to now translate those specific bullet points into what could be implementable strategies. Our hope is to do it as soon as possible, but the time is needed to have the conversations necessary.

Thank you. Thank you, Madam Chair.

Vice Chair Patterson.

Well, thank you very much. Appreciate the time of the committee and also of our panel here. Thank you for being here. And I think I got more questions than I came walking in, actually. And I got to say I am extremely frustrated at some things, I think because, you know, when the special sessions were called, you know, it was around the entire premise of price gouging and lowering the price of gasoline.

And I don't want to put words in my colleague's mouth, but I think, you know, at least I have a sense of frustration. First of all, I never believed that legislation was going to do any of that. I never believed for one second that the special session was going to result in one penny off of anybody's tax or gallon of gas. But, but I'm not sure that we're in a trajectory of accomplishing that. The mandate that the Legislature, at least the governor suggested in calling the special session.

And I do think there's a little bit of conflict. I feel like we've moved the goalpost a little bit from just in October when Mr. Milder said that the refineries here were, quote unquote, most profitable gasoline market in the United States to now being that it's about return on investment.

And so we are changing a little bit from them being the most profitable. And you know, there's no way that this bill is going to impact the special session, is going to impact the price of gasoline to now they're making decisions based on return on investment. So that's a major change.

And Chair Randolph, appreciate you being here today. Also, I introduced legislation this year to require the Air Resources Board to quantify how much its regulations, I believe I did in the special session as well, how much the regulations on the low carbon fuel standard would impact the per gallon price of gasoline.

I think other, some more of my colleagues have done the same thing. And my understanding is in September 2023, the initial report on the LCFS updates 175 page impact report did include some estimates on the per gallon price of gasoline, 47 cents by 2025 and 59 cents for diesel, 44 cents for fossil jet fuel.

Is that not true or is that, is that accurate?

That is accurate. The standard standardized regulatory impact assessment did include some analysis of that, but it was accompanied by many caveats indicating that the price of fuel depends on things beyond just the regulation. Crude oil, the credit prices in the regulation, geopolitical issues, as we've seen.

And so it was very clear that that was a number that was difficult if not impossible to predict with accuracy.

Yeah. Okay. So I mean it appears you have the skill set to do so based on a snapshot in time anyways, based on whatever information we have, I mean, we're able to do that. I also sit on the Health Committee here. I've been on the Health Committee for three years, minus a brief period where I wasn't.

And we CHBRP comes up, every mandate is able to analyze how much insurance bills per person is going to increase with every piece of legislation that we come up with. And that's same thing based on a piece of information and time and we're able to do it.

And I think that's really important because I think whatever CARB is coming up with in terms of this, really, in a lot of ways a social impact, reducing the cost of health care. As far as I know, I haven't seen any benefits in my insurance bills. I've never heard anybody in the Legislature and the public say that their healthcare bills have gone down as a result of regulations adopted by any agency in this state.

So I just think it's really important for us to understand because I read in picture book basis that if we're going to adopt regulations with a massive impact on the cost of gasoline, we ought to know how much that's going to be per gallon.

And I'm also concerned about, you know, frankly, the amount of time we're spending on the mystery surcharge. I hope we get to the bottom of it, whatever it is. I'm still not clear what. It's a mystery to me what the mystery is. But what I've seen identify is that branded is more expensive than unbranded.

I mean, that's true in every consumer product I have ever purchased. And if I go buy Cheetos, they're more expensive than cheese puffs. And so I just think like, what at the end of the day is going to save consumers money? And I think that that's, that's an important thing to come down to at the end of the day. I think that's, everybody's going over their favorite branded and unbranded consumer product now. But also to some extent, I'm not sure that really matters so much because I choose my gasoline, frankly.

I just bought a V8 based on the cheapest price of gasoline. And so I go to the unbranded, but that's a consumer choice and it's available and it's out there and we should have choice out there and not be doing things to restrict it.

Just a couple questions because I could drone on forever because my pages, my notes got so long, but I got to like kind of tie it down to something. But for Chair Randolph, in terms of carbon emissions, how far away do we count carbon emissions that are produced?

So for example, if we get more oil tankers, because I think the scoping plan calls for two to five times more tankers to come in, does that only start at 12 miles or is it like if something's got to come over from Saudi Arabia, are we counting all those emissions?

So we count emissions in two different contexts. One is the AB 32 inventory, which is in-state emissions, and it's specified the different sources. And we have a reporting regulation that where we get the data, we also get the data from federal sources and other sources.

So that's the AB 32 inventory for our statutory 2030 40% below 1990 levels target. We also track emissions for other purposes, including emissions in the low carbon fuel standard context where we are looking at the life cycle emissions of the fuels and the alternatives to reduce the carbon for those fuels.

And then we also track GHG emissions as part of the cap and trade program as we're looking at imported energy. So in the context of fuels we know that we do not have a current analysis of the different fuels from different geographic sources. We know that in-state crude is higher GHG content than imported fuels. But that does not include the life cycle analysis which would include the transportation emissions and the emissions at the source. So that is an area where more analysis could be done.

Just something came to mind there is if we're going to be import, and I appreciate that if we're going to be importing more gasoline potentially for whatever reason, perhaps closure of refineries, then it does kind of set up an interesting predicament of who pays for that carbon because it is no fault in many.

I would argue that California policies have caused at least partly responsible for the need for tankers to come across and it doesn't seem reasonable to charge certain parties for all that carbon. But one more so on that I think the South Coast Air Quality Management District. I miss my time being on an airborne recognized port pollution emitting more than 6 million registered vehicles in California. Do we know how that dynamic would change if we bring in more tankers to the ports?

I don't have those numbers in front of me. But you know, there, there could be an analysis done depending on sort of the, with assumptions, right. Based on, you know, what the assumption for the amount of imports, which ports they came into, what their at birth compliance strategy is so that analysis could be done.

Okay, all right, I think that's all I have. I do want to just end with, you know, I think that the regulations that are put forward, I mean number one thing in every public interest poll, I know that sometimes you're charged with maybe what might be competing on how to accomplish those goals. But the number one thing on everybody's mind is affordability.

And even when this legislation moved forward to create, you know, the margins and price spikes or to stop those and all those things, whether or not I agreed with the legislation, I think my colleagues approved it because they too want to ensure that gas prices aren't going up as a result of our policies.

And that's why I think it's really important that when new regulations are put forward that that got, that ought to be considered. I'm sorry, Madam Chair, I swear, last question. When you had made a statement, sorry, Chair, didn't mean to point at you, but you had made a statement that you believe the Senate action that was taken, Federal Senate, that that was illegal, could you help me understand why that was?

Well, I can't disclose our legal theories in this hearing. I can tell you that we are working with the Attorney General's Office on a complaint, as the governor announced last week. And so we expect that to be filed soon. The President hasn't actually signed the legislation yet, so that needs to happen before we file.

Yeah. Well, just to put forward a distinction, you know, that was passed by democratically elected members of Congress in the Senate and maybe probably will be signed by the President of the United States. Whereas the movement to get rid of gas powered cars by 2035 was done by executive order and by regulations and no democratic deliberation in this democratically elected body right here, where all I hear is we're the State of democracy. But that was done by one individual and an appointed bureaucracy. And so I think, you know, I'm confident that the legality of that of a democratically passed piece of legislation is going to hold up in court.

Thank you. Assemblymember Irwin.

Well, thank you everybody for coming today. I just want to go back a little in time to a oversight hearing that we had when gas prices were spiking. And to our frustration, of course, we realized there was no data to show actually why this was happening. Everybody was surmising that it was excess profits or reduced supply, but we didn't know.

So I am, we should still look back on what happened in SB X1 and I think really two very important things came out of that and that was the creation of the DPMO and then the requirement of what we are talking about today, a plan on how we transition.

So I'm glad that we're working on it, but I am extremely concerned with the closure of the refinery, we are potentially looking at an incredible amount of volatility because we are down to so few refineries. And as the Chair mentioned, you know, I could picture $10 gasoline and that would obviously be terrible for consumers.

So I just have. So, you know, we're in a better place than we were a few years ago because we have all that information and we're in a better place because we're looking at a plan. I don't think the plan is solid yet, but certainly we've identified some of the things that need to be done.

But just I have a few questions. The first is I think really a very important issue that I cannot emphasize enough and the Chair mentioned it too, is we have to drive down demand for gasoline. And I see a trend line here that is forecast to go down.

I'm concerned because at the federal level there are no credit. There are not going to be any more credits for EVs. I don't know if all the early adopters have already gotten into an EV. You know that one of the Legislature's big issues has been the lack of charging infrastructure. So how can we be certain that the demand is going to go down in the next few years as is shown in this chart?

I think, as I mentioned in my opening remarks, I think given the uncertainty at the federal level, I think there's a couple things we need to be thinking about as a state. We need to think about do we want to adopt any additional regulatory provisions that are within state authority and do not depend on federal action.

And you know, one of the things we did do when we, when the board adopted the low carbon fuel standard was direct some of the credits that are earned by the utilities to support zero emission medium and heavy duty vehicles.

So that's an opportunity of something that is, you know, within the state control that can help reduce the diesel particulate matter that I talked about. And you know, that is something that as we look at potential recommendations going forward, the Legislature can think about other options for other strategies that would reduce demand.

We still, you know, we are still going to continue to fight for our authority in court. And we're also thinking about what, what potential next steps could be, what any new regulatory strategies might be to continue this transition. The governor did announce with other states a partnership to elevate strategies to increase the adoption of zero emission vehicles on a multi-state level. And there's a lot of market support and NGO support that will hopefully continue to move this transition forward. So we're going to look at all the options.

But I think you've keyed on a really critical point, which is that the demand reduction that we anticipated to meet both our air quality and our climate goals is at risk. And so we need to be thinking about how we can address that risk and keep that transition moving forward.

All right. Yeah, that, that, that certainly that graph needs to move in the right direction. And then on the supply side, Vice Chair Gunda mentioned 25% of our oil is from California. I couldn't tell from the chart when, if we looked back at let's say 2010, what percent of crude of California crude was from. Of the crude of the oil we used was from California.

Back in 2010, it was close to 65% to 70%. If I'm not wrong. I have to kind of go back. But we were in 2010 around 70% and we started declining.

All right, then that again shows a supply and demand issue for some of the options. There is listed state owned refineries. Are you looking at. Because on your last slide you talked about at risk strategy one. You know, we need to maintain operations. So you have state owned refineries.

Are you looking at any other way to regulate or potentially give permits for a certain period of time? So I mean, what can you give refiners? How can you give refiners certainty so they don't leave while we're going through this transition?

Definitely, as I remember, I think the, the kind of premise on this one, you know, going back to what Director Milder mentioned, there are some refineries in California that might be more at risk of exit, but also kind of the opportunity cost of where else can they implement put that money in so it comes down to profitability in operating in California or else how fast it's going to decline where they are and such.

So what we're exploring, again being very mindful of the conversations and the necessity for confidentiality, we are exploring a suite of potential strategies that we can could work with the industry on that could include drawing upon lessons from the rest of the world, whether it is some sort of ensuring that they have profitability or have opportunity to make sure that the necessary investments needed happen in timely fashion. So we're thinking through those strategies on how best to articulate a proposal for this body. So we're still talking that through pros and cons.

And then the deadline for when will this report be out?

July 1 is the date that the governor asked a response for. And you know, we recognize the urgency of the issue and we'll try to bring the analysis and information as quickly as we have it.

All right. And then just the last question for Director Milder. It is concerning that we see the chart on refining operating expenses. You know, this looks like two completely different set of numbers. Have you talked to the industry about. I mean data is really important, but accurate data is most important. So have you talked to the industry or is it potential potential that somebody from the industry could come up on public comments and talk. Talk about why there might be such a big discrepancy in the two sets of data.

Yes we have, Assemblymember. There was the need to improve the instructions and requirements and credit to CEC staff. There was a revised version that went out to the refiners. I'll use one anecdote. And yes, we've been engaging with market participants to try and improve this.

For example, some refiners were reporting the cost of ethanol to blend with the petroleum and just adding that in addition to the crude cost, rather than, you know, subtracting because ethanol takes 10% of the fuel mix, you should volume weight the average. So they were counting both. It was like a form of double counting.

We've engaged with them on that issue. I think we're close to having an improved data set there. And you know, in a, I want to say in a more productive way. We've had challenging conversations with industry, but they've been responsive. So I do think that we're making headway and hope to have better data in the near future.

Thank you.

Assemblymember Hart.

Well, thank you, Madam Chair, for convening this hearing and thanks you all for being here. I had a question about the transparency that the special session legislation has provided you and the working relationships that you have with the industry and the information. Do you feel like you know enough now about the economics of why the two most recent refineries are planned to close and the reasons for that?

Does it have to do with the opportunity cost as you described, or is it about the land value and different development, or is it costs necessary to do the maintenance and keep the refinery operating? What are the lessons that have been learned from the transparency and the additional access to information that you've been having access to?

Thank you, Assemblymember Hart. And just want to use this opportunity to just thank the Legislature in a board special sessions granted so much authority for transparency and I think totally understand the frustration on not having full transparency yet.

But I think the amount of visibility that we have today is night and day compared to two years ago. We didn't understand what we didn't understand. And coming in front of you and you asked us what's going on with the price spike, we had no answer. We have better answers now.

Doesn't mean that we have clearly articulated solutions and a strategy to implement those strategies. So that's where we are. But to your question, specific question at hand, it's all of the about depending on who you talk to, depending on some industry players.

It's really around opportunity cost and again, as you said, that ties into the land value, that ties into profitability. So ultimately, it's about how profitable am I and the value of the land and how it appreciates, and is it better for me to monetize that and move that money elsewhere?

And I think the other element of that also is you pointed out some of these turnarounds do cost significant amount of money, and you're talking about hundreds of millions of dollars. And as you're approaching a declining demand, everybody's worried about, should I put it now? And how long will it take me to make that money back?

And do I have that kind of runway to make that money back? So I think those are the kind of conversations that are happening. And I think, overall, it's important to note as we evolve our kind of climate policies and continue to think about how best to implement a strategy, it's important for us to give a clear indication to the industry that we still rely on some of that fuel. And having that clear understanding that that is a needed commodity for a long time is important. And having our strategies really signal that.

The other thing that.

I'm sorry, if I may, just because I think it's important for people to understand real numbers as we're talking about this. So I'm just going to share some of the numbers that Valero shared publicly in relation to the closure of the Benicia or the announced closure of the Benicia facility.

So they were making a decision about whether or not to invest $300 million, $400 million. In the last 10 years, they made $75 million in California. A couple months prior to having to make that investment decision, they received a fine of $83 million. So they've been operating here for 10 years, and they lost $8 million, and they're deciding whether or not to invest $400 million. Nobody's going to do that. Nobody's going to do that.

And I think those numbers are important because people need to understand that, I think, particularly when we still have this sidebar conversation about the fact that somehow people are making a ton of money. That is an example where this company lost $8 million over the course of 10 years. So.

And that, I think, is the key to the next question, which is, and I know you can't divulge, you know, information that you have access to that we, you know, can't have because of the competitive advantage that that would present for competitors, but is it likely that there are refineries that are also facing these $400 million turnarounds that are in the next couple of years?

Yeah, I think just kind of noting as a just observation for the industry, it's between three to five years. Every refinery does hit with a major turnaround. So typically they look at investment cycles in three to five year cycles.

So you're looking very carefully at the math that the Chair just described, the profit over time, these expenses that are looming, what the prospects for these companies to stay in business. And you're talking directly with the CEOs of these companies and trying to understand their decisions, and you feel as though they're fairly honest and direct with you and are trying to share as a partner in managing this transition.

Yeah, I think I would believe so, sir. I think again, it's a good faith discussion on all fronts. You start a conversation with the understanding that we are sharing information credibly. I have no reason to believe the conversations I've had have been in bad faith.

And then just one random thought that keeps coming to my mind. When you talk about the disconnection of the refined gasoline pipelines in Northern and Southern California, that is just a historical artifact. Two different ecosystems that didn't need to be connected. And we make that connection with maritime shipping. Is there an opportunity for somebody to build a pipeline that connects those two systems and is that even economically feasible? Comparing prices.

I think it's important for us to think through, and we've been having again, in the complete notion of exploratory discussions, there could be opportunity for reusing pipes, existing pipes for other purposes. There could be opportunities to use them. And I'll leave it there for. For now. Thank you.

Thank you.

Assemblymember Davies.

Thank you. Thank you very much for being here. Just, just a couple questions and points. I think some things that, you know, I've been listening to is I'm thinking environmental concerns, economy concerns, just a lot of supply and demand.

And I think one of the first things is I know that last year when the governor and the administration came on, they really figured, nope, we're not going to have any concerns here. We're not going to lose any refineries. And then all of a sudden we did. Do you guys feel so confident that it's going to stay like that? You think we're going to lose more refineries?

I think that's an evaluation we are carefully making, Assemblymember Davies, not to not directly answer the we are looking at the profitability, we are looking at supply, demand. There's a lot of economic variables. If the economy depresses in California that would reduce demand, usually based on current health and other issues. So it's really, I would say the honest answer would be we are evaluating and we do not exactly know the way to measure the exit risk.

Don't you think, though, seeing what's happening right now, we should perhaps just assume that this could be the worst of the worst and more will start going and how do we stop, you know, how do we stop from bleeding?

Yeah. I think one observation we would just provide at this point is as you have a refinery exit, there will be a supply demand gap. That's significant. So for a certain time, the overall profitability of the industry will slightly grow. So you have that, you know, as a define exit, you lost last 10%.

Until that is kind of coming closer to the cushion, again, you will have some profitability. So I think what I would not say is we, you know, this is not an important situation to think through. You know, especially losing a refinery in the north with only three standing is very important. But I think the exit risk has other variables that we, we are kind of evaluating. And we'll come back to you with that.

Thank you. Just by listening to all of you, I'm just wondering, Mr. Milder, are you. I don't see that everyone's aligned here because I see that we're looking for excess profits. And yet, Mr. Gunda, you're talking about refineries and profitability. So how do they work together?

Yeah. Thank you, Assemblymember. I think there are two separate kind of conversations that we're talking about. One is the policy and the overall landscape on how to think about the industry exits. That's one part, and I think specific to Special Session 1 and the creation of the DPMO, and I let Director Milder comment on this is really to focus on the kind of the anatomy of those price spikes and how to protect the consumers.

And so as we evaluate the analysis, a lot of times we see the same data, but again, when we're thinking about profitability, you also need to match that with other regulatory risks that a particular refinery might have and compounded with opportunity cost. So I think those are two separate things that we need to track simultaneously.

And I would add, I think, probably bringing back up another chart and apologies wanted to bring up Chart 54 to contextualize the sort of refinery profits we've seen in California with some global trends. And the Vice Chair mentioned this, it's slide 54. The trends for global profitability are reflected in this chart.

I'm going to look first to Los Angeles and then compare Los Angeles to other parts of the US as well as parts of the world to contextualize. I think our earlier comments with special session. So if you look here, Los Angeles is at the far right and you can see 2022 and 2023.

The, the profits really do jump off the charts. And so this was not a normal set of circumstances. And so when we're talking about excessive profits, and that's a data driven sort of description, I think it's just exceptionally obvious from the data that there was excessive profits in California.

Now in 2024, if you look to the right, the darker bar in the Los Angeles column, those are much more in line with historical averages for, for California. So if you look to the bars to the left, those 2024 averages are pretty consistent.

It's also the highest 2024, although much lower than 22 and 23, it's the highest of any of those regions reporting. So it's higher than Chicago, higher than New York, higher than the Gulf coast, higher than Europe, higher than Asia.

And so the, the question has shifted, I think, from excessive profits to what is the return on investment needed for the existing refiners. I want to draw one more point on this slide on the right. You'll see increased petroleum refining capacity there with four bullets in 202223 and 24 good mega refineries opening across the world.

And this is part of a trend for bigger, more efficient refineries in other parts of the globe that are going to bring capacity online. And as a result, a large refinery in Texas closed. So it's not just California. And so there is some pressure on refineries from these global trends.

So you have older, smaller, less efficient refineries closing. And so I think the, the complexity of what the Vice Chair is talking about and dealing with in terms of, it's hard to say, like sitting here today, what, so I can say 22 and 23 are excess profits.

What's needed to keep these refineries investing in California, I think is a complex question that involves some global trends.

Thank you. I really do believe, though it's not as complicated, I think it really is about policy. It's about mandates and it's about regulations overregulating, over mandating. And I mean, we're looking at this right now. We supply and demand. We, we have people leaving. Prices are going to be continually to go up. Permits.

We started out in 2019 when Governor Newsom took office and we had 2,366 new drill permits in 2023-24 permits. 2024-25 permits. Obviously we're not helping bringing oil back here. So the permits and the amounts do make a difference here in regards to making sure we have supply and demand.

And because of that and the lack of permits and the permits usually that are going out there are the ones that are just tapping off and closing the other wells we're using. 75% of our oil is coming in from imported.

And when you look at that, it $1 if we get a barrel from the US it's four to $6 when we get a barrel imported. Right there pretty much would tell me where a lot of the cost is going and why we're paying much more for gas per gallon than any of the other states.

So the fact that we are importing 75% of our gas and if we could start opening up and having more permits so that we would have more supply here would reduce the prices, wouldn't you think?

Yes, I think the crude oil acquisition cost, based on the analysis we have, suggests that it's about $0.15 more to acquire foreign crude coming into California. That's something that we are continuing to pressure test. But I think the simple answer would be it'll be slightly low.

Okay. And then also when you were talking, or when we were. Sorry, Mr. Miller was talking, we were talking about the manipulation of price. And then you had spoken saying that it's really the importers and the brokers that are making the manipulation. I'm having a problem with that anyways, increasing the rises up and down.

But this is how we have to go through the process. Correct. We have to go through the importers and the brokers when we're dealing with outside oil, imported oil.

Assemblymember, I want to address. So there's imported oil that gets refined to gasoline. And the Vice Chair addressed the cost difference in his answer. And then there's also imported refined product like gasoline. The import of gasoline is often being sold first to local refiners or two large wholesalers.

And I think that we do have a concern that the spot market in California doesn't have as much trading liquidity as we would like to see. And Perhaps that makes it more susceptible to manipulation. So we would like to see a more active and robust trading market. We now have oversight that we never had before.

So our team scrutinizes trades that happen every day. We have a team of investigative counsel and market participants now know that if something unusual happens, they're going to get a phone call from us.

But the structural issues in the market are ones that we want to address by increasing competition, having more buyers and sellers, so that we can have confidence that it's a competitive market price.

Thank you. And then I just, you know, one thing we're very proud of here in California is being environmentally conscious and, and making sure we're doing the right thing. But with that 75% that is being imported, it's coming from the Amazon rainforest.

And due to that, what's happening now is the habitation is being destructive, it's displacing indigenous people, it's ruining the rainforest.

Don't we owe a little bit of responsibility here that we're so protective of our state and how it's handled, but we're okay with getting 75% of our oil over there and whether it's just, you know, destructing the Amazon River.

I would say two things. First, you know, I think this does speak to the importance of the demand reduction strategy that the state has been focused on. You know, fossil fuels do have impacts, full stop. And to the extent that we can move away from fossil fuels to cleaner sources of energy, we need to do that.

The second thing I would say is, you know, the question of imports versus in state production is just, it's a really important policy question because as we were discussing about the health protective zones and various requirements under CEQA and other laws, you know, California does have rigorous environmental standards and, and we want to ensure that the fuel that we are using is produced with high standards.

And you know, one of the challenges is that the, you know, California's ability to impose requirements beyond its borders. And so we know that the, you know, we want to ensure that the in state production that we have is not undercut with too many imports that don't have strong environmental standards.

So all of these things are really important. We know we're not going to be able to meet all of our fuel demand with just in state production, you know, given those numbers that we talked about, the 75%.

But it is certainly important to consider the importance of the environmental protections and the workforce that we have here in California. And we need to be thinking about that as we develop the suite of strategies.

And with your point, that's why I think it is so important that we do have more permits going and that we do have more supply here because then it would reduce what's happening over in the rainforest. Wouldn't you say that would work?

Yeah, I mean, I think the General point is that we want each barrel of fuel to be produced with strong environmental standards. But ultimately what we really need to do is reduce demand for fossil fuels.

And I think we're all on the same page. But again, as we see this, we have certain goals and we're maybe not always able to do that right now. And so with that said, I think it's important that, you know, we can't just say we have to do this right now.

We have to take care of what's happening now. Today, people can't afford to put gas in their car, and it's definitely affecting affordability.

And that is our job as legislators here to make sure that those that we represent, they can afford to live here, they can afford to work here, they can afford to put food on the table all the way down the line.

So I think again, we need to bring it back because we are in a crisis right now, especially in California. And so I think we need to look at what do we need to do to take care of those first.

And we have these goals and it doesn't mean we stop, but right now maybe we take a moment to really see, let's fix what we can fix. And I just finished up.

When you look at the economy, we talk about the deficit we have right now, and in 2023, we lost $30 billion worth of revenue from businesses leaving, from people moving out, affordability, cost of gas. And if these refineries leave, that's a lot of jobs. That's a lot of revenue that comes into our state.

This is revenue that we can't get back. It's not going to come back. So that just adds on more. So we look at the deficit and we're going to be voting on a budget. I just look at all of these things and we can fix these. I don't think they're as complicated as everyone seems to be thinking.

And so I think that we just need to go back to, you know, ABC and, and look at just the very basics we went down. You know, we cut down the permits. That's why we don't have supply. We decided we wanted to have them put storage on the side in case there's disaster.

Well, we were talking about that, and that's like telling someone that just bought grocery store market and saying, all right, you know what, we want you to take a third of all your inventory and put it over there in case there's something tragic that happens so that we know that you've got that waiting for them, who's going to pay for that?

That's exactly what we're doing right now. But if we don't even have permits to be able to open and make storage, we can't do that either. So I think what we're telling people to do things, we have to make sure those regulations are actually obtainable. So I really do. I really appreciate your time here and your expertise. Thank you.

Thank you, Assemblymember Rogers.

Thank you, Chair. And I too appreciate all of the information. I wasn't here when we had the special session, but obviously was watching it from afar and reading up on it.

And so, Mr. Vice Chair, I'm going to ask you to take this complicated topic and do something that I'm sure never happens to you when people find out that you're with the CEC and if they say to you on an elevator, why do I pay more for gas in California than in Oregon, Nevada, or even on the reservations here in California, what's your elevator answer for them, which I'm sure you've never been asked before.

Assembly Member, Thank you for that. I think, first of all, I think it's really important to note that our climate goals and our kind of tax and fees have an impact on the overall price of the gallon. At the end of the day, it's about when you take into account what the U.S.

average versus California, we pay about 90 cents higher. And I think that's just a fact of what we can observe in the data. Now the question on that 90 cents is really around what is that used for? And I don't have to share that with the Legislature that is used for implementing our climate agenda.

So then comes the kind of pieces that we can explain and the pieces that we can't explain. To Director Milder's point earlier, there are some elements that are really hard to quantify to the degree why a certain amount of price differential happened. But I think once you remove the tax and fees, there is a supply demand imbalance.

I think, you know, the notion on what's causing the supply demand imbalance, if I put it aside for a second, that supply demand imbalance creates the regular price differential that over a year averages up to a significant level. And I think those are the two things I would offer to A colleague in an elevator.

So that's a long elevator ride. Yes.

Can I just offer a slight clarification, which is that that 90 cents is both. You know, it's the environmental programs, but it's also the taxes that, you know, repair our roads and do do all the, all those projects.

And I think that's really important because anytime you're thinking about tax burden as compared to other states, you have to look at, zero well, you know, what is the tax burden that they have? You know, how do they collect the revenue in another way to do the same road projects that we're doing.

I appreciate that. So with the supply and demand imbalance, do you, and I'll ask this to all three of you, realistically, if California is going to meet its goals of phasing out oil, are we going to see an increase in the price of gasoline, Especially as people leave the market, but all of the infrastructure stays in place?

Should we as policymakers, while we're talking about affordability, while we're talking about these trade offs, just be honest and realistic that the closer we get towards those goals, the more likely we are to see those prices go up?

Yeah, I think a couple of pieces there. I think first to think about what is the marginal price at the spot, right. Is there a future where you're coming to the last kind of tail end of the transition? I don't know how many decades that will be coming to the tail end.

We will have to create some sort of a product terminal plus import strategy for the last several aspects. And if that can be, if that marginal barrel is lower than the production today or even the same, we don't have to expect the necessary price spike.

And I think that kind of points to the, the extreme importance of having the transition strategy. I think, you know, if you look at, you know, worldwide, you know, and try to take the best practices and lessons from it in Australia, kind of gives you a good example.

Right after Covid, you know, the competitiveness of the refineries there was lost, especially because they're so close to Asia and the import barrel is much cheaper coming there.

And because of that, they converted much of the refineries into product terminals and the state had to intervene and say the last couple of refineries we have, we cannot let go for national security reasons and hence we'll create a financial model to keep that long. So I think how we evolve to that is a really important question.

And we're all collectively taking that very seriously to think about what's the best strategy to then kind of also make sure we protect the workers and labor if we prematurely increase the imports that will essentially be exporting our jobs.

So how do we not prematurely increase imports but just meet that additional need and also create the necessary redundancies, whether it's storage and other pieces, by reusing and replacing, really leveraging existing infrastructure in the state.

So I'm glad you asked that question because it gives me the opportunity to clarify something I said earlier. I didn't want to leave the impression to Assemblymember Alvarez that we don't consider consumer costs at all. I mean it does go into our analysis.

We're not necessarily saying like zero here's the retail cost that you're always going to see. But we do think about and we do analyze sort of what the both cost burdens and benefits are of our various regulations.

And the reason why I wanted to clarify that in this context is because over time transportation costs economy wide have gone down as vehicles have become more efficient and other options have come to market.

Like you know, in the heavy duty space renewable diesel competing with fossil diesel and in the light duty space electric vehicles competing with gas powered vehicles, the price of driving around the state has gone down 22% in the last. I can't remember my window of time, but it has definitely gone down.

And so with our demand strategies, we're creating more choices for consumers.

And ideally if we combine sort of the strategy that Vice Chair Gunda mentioned, which is okay, we have to think about the last pieces and how do we make sure those last pieces are available, but at the same time providing choices for consumers to move away from being locked into one particular fuel, those strategies together can protect consumers as we make this transition.

Yeah, and Chair, I'm glad you brought that up because one of the things I was going to point out is that the scoping plan relies on a certain level of hydrogen being produced by 2045, where we're nowhere near having the infrastructure to do that nor the economy to be able to produce that.

So I'm glad you brought up that that as well. Director. One study that came out last year show that there was a role in the increased pricing of gas related to AI algorithms that are being used by each of the major players in this space.

Have you looked at that at all and seen if that helps explain a little bit the mystery surcharge?

Thank you for that question. Assemblymember. Can I again speak carefully here? We don't post publicly discuss our investigative steps.

I do want to give you confidence that our team is familiar with that research and we are thinking quite a bit about why retail prices in certain areas or you know, I'm sure you've pulled off at a freeway stop and you say, gosh, all these prices are so high around here, whereas the last stop was so much lower.

We're giving a lot of thought to why that might be the case and we're digging in.

I appreciate that. I think this study, if I remember correctly, showed about a 60 cent increase that it directly attributed to that. So I'd love to get some follow up information at the appropriate time around that then. Just my last comment. And again, I really appreciate all of this.

There's a lot to digest and I know all of us will have opportunities to discuss with our constituents about it. One thing that I did hear from many of my colleagues that always makes me a little bit wary is talking about free market principles in an economic system that is fundamentally not free market.

That there are broader manipulations outside of California. What we can control, what we can regulate, that do have a broad impact, as you mentioned, with Texas going in that direction as well, that I'm careful of when we make decisions.

And so one of the slides that you had cited that 90% of all the refinery refining that's done in California is done by four producers. Is that common across the United States?

And how much of that is related to California's regulations and rules making it harder for smaller unbranded to compete in the refinery market versus how much of it is related to the broader economics of gasoline? I guess is the way to put it.

A great question. Assembly Member I think in 2000, I'm going to, I'm going from memory here. I think the dates are mostly accurate. The Attorney General did a study looking at a price spike back then and found that there were six companies responsible for 90%. And so there has been consolidation in the industry.

That's a national and a global trend. So as bigger refineries get built, they're more efficient on a per unit basis and they're more expensive to build. And then smaller refineries either close or consolidate. And so you need bigger and bigger refineries to compete globally. So these trends are difficult. California does see higher market concentration.

I think the statistic we have in the chart, I won't pull it up, but I think it's about in the high 40% for the rest of the United States for the top four firms.

So we have a more significant market concentration problem when compared to the rest of the US and so when you do our economics team is looking at this.

When you do have an excess of power and a few hands, I think you do have to think about sensible regulations to make sure that they're not stacking the deck in their favor. And so it's an issue we're thinking a lot about. Great.

Thank you so much, Assemblymember Harabedian.

Thank you, Madam Chair, and thank you all for the testimony. It's always good to see you, Vice Chair Gunda, and I'm going to be quick. I think we've put you through enough and I think that you all have provided a lot of information. I do want to hear from folks sitting behind you.

I have one basic question and then I'll go to two other quick questions. But how often do you guys actually meet and talk? Not your staffs, but the three of you actually around a table talking about these issues outside of an oversight hearing?

Regularly, I think. I think depending on which two of us, it's much more common. And I think we have regular stand in meetings, meetings now on this issue and including the 13 agencies we are meeting now on a monthly basis.

That's great. On the Transportation Fuels transition plan, I know you said it's coming out in July. Will there be actual legislative recommendations within that plan? And I ask because if you talk to anyone in this space, everyone has all the right answers. Everyone's the smartest person in the room. We should do X, Y and Z.

And I do think that it would be interesting and helpful in the plan to actually have some sort of roadmap for us legislatively or from a policy standpoint to actually get us to where we need to go. Will it actually have that?

Yeah. As a Member, just want to make sure I correct myself. So the transition plan will be done a little bit later in the year. But the July 1 response is back to the Governor based on the request to think about strategies. Our hope is to be more clear than the bullet points we showed today.

And I think hopefully we'll have a table setting to have that conversation.

Okay. So when is the Transportation Fuels transition plan actually coming out? Before the end of the year is our hope. And what will that consist of?

I think one of the key core areas is looking at the different options in the fuel assessment and trying to think about how do we operationalize them and what can help in this element.

Yeah, I'll just add that I think the way we're thinking about the July 1st letter is. Okay, what are the immediate near term things we need to be thinking about right away? And the transition plan that we are in the middle of working on is going to have more of a step wise.

This is how we think about as we're looking at that carbon neutrality goal by 2045. Here's how we unpack the strategies that we were just talking about. Protecting consumers, ensuring sufficient supply as we make the transition.

So I think that will have the more midterm and longer term strategies and the July 1 will be the right away strategies.

And again within the strategies, July and then for the end of the year, will there be recommendations for us?

Yes, we hope to provide them, yes.

And are you working with industry sitting behind you who have sat here and listened all day? Do you work with them on these?

Yes. So one of the slides we mentioned earlier, it has been a lot of meetings, but more so after the Governor sent the letter. We are meeting with important constituencies, whether it's labor, Environmental justice, Enviro's, industry, all by themselves. But we're also having collective meetings with everybody in the room.

We're trying our best to harmonize a collective forward holistic approach to this.

Appreciate it. Thank you.

All right. Thank you.

So just a couple questions for me and I'm going to start by saying that consistent with what I think a number of other Members have expressed, I'm very concerned about our growing reliance on imports and what seems to be a path to an even further greater reliance on imports that is bad for our economy, it's bad for prices, it's bad for California workers, it's bad for the environment.

And I think Chair Randolph, when you were asked about the biggest relative emissions profile of in state production versus out of state or other nations and transporting it over, I don't think anyone's expecting an answer to the nth decimal degree like that is bad for the planet, period.

And so we've got to, I think, start making some of these environmental assessments also in a holistic way. I think that's a phrase that the Vice Chair used like the climate crisis is not happening within the borders of California. It's a global challenge.

And so I think we've got to acknowledge the emissions impact that we're having when we're importing from other countries with, as you acknowledged, environmental standards that are nothing, nothing like the State of California's. Okay, I have a couple of questions following up on Vice Chair Gunda.

You referenced the Transportation Fuels Assessment, which was sort of, I guess a precursor to the Transportation Fuels Transition Plan. There were a number of recommendations in that that talked about options for reducing price spikes and reducing prices. One that got a lot of attention during our special session was E15.

That is, as you may be aware, the topic of a Bill by my colleague, Assemblymember Alvarez. I guess I don't think, Chair Randolph, you were part of our special session. My understanding is that there's been a CARB evaluation of E15 that's been going on for something like seven years.

This is, if I've got my facts correct, a step that 31 states have already taken. It could save consumers between 10 to 30 cents a gallon. Why is it taking us seven years to make a decision and assessment on this?

So, as I think was discussed in the special session context, the process for a new fuel specification is very lengthy and it requires the multimedia evaluation. And there's a separate body that does analysis as well. We, we do have a budget request, informal resources to move that process forward.

And if those resources are provided, we will continue the work on assessing E15 and the technical specifications and move that forward.

I want to acknowledge that I think sometimes the Legislature, we pass these goals and then we come to you and say, zero my God, why is it costing. So why is it costing consumers so much money?

So I understand that this is not, you know, this is not easy, but gosh, we've got to be able to move more quickly than 78910 years like this is.

If this is an urgent issue, if this is an impending crisis for California, we gotta have all hands on deck to evaluate every possible policy option and ensure that we're moving down a path to take advantage of those. I do have one other question, Chair Randolph, for you, which is related. Appreciate the update on at birth.

I guess I'm a little confused by the requirement. Am I correct in understanding that the stack technology is actually not commercially available for most of those vessels?

So the development of the technology kind of varies by vessel. There are some approved technologies that are available or in the process of being very quickly available. The way the regulation is structured and you know, as I mentioned earlier, Southern California goes first, Northern California begins in 2027. And the.

The structure of the regulation is that your compliance path is moving forward to adopt technology. And if the technology is not available yet, your compliance path is a remediation fee as you are determining your exact strategy moving forward. So currently, as I mentioned, we have.

There are the BONNET systems deployed in San Diego, in Los Angeles, and as I mentioned, there are some that are currently going through the process. So it really depends on the particular vessel involved, which, what is their sort of technical compliance strategy and are they in Southern California?

At which point, if they don't have the technology yet, they have the remediation Fund, or if they're in Northern California, then they will start in 2027.

Just a couple of comments. I think as a matter of principle, I don't think it's fair or that's effectively a fine for a requirement for a technology that doesn't exist. So I think as a matter of principle, I think it's great for us to use regulation to incentivize innovation.

For us to have a regulation for a technology that doesn't exist, I think is both unreasonable and also, I would suggest, really antithetical to our goal to communicate a message to industry that California is investable and California is open for business. So that would be my 2 cents as you think about how to navigate that.

Okay, one last question for Mr. Milder and for Vice Chair Gunda. So we talked about the authority that you all have been given over the course of our multiple special sessions and SBX 1.2 and ABX 2.1. Mr.

Milder, based on your analysis and assessment, are you recommending that the CEC proceed either with a margin penalty, with a resupply requirement, or what was the other one? Minimum inventory requirement?

Yeah. Thank you, Chair. I heard the Vice Chair in his remarks use the word prudence a few times. And I think that the Assembly, I think, very consciously chose to give CEC that permissive authority.

From where I sit, I think we should at a minimum, have reporting requirements so that we can see with more clarity what the refiners are doing vis a vis resupply. I do think in light of the refinery notices that we've received, it's really important to think both about the benefits, but also the costs.