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Newsom’s oil profit penalty plan could face tough slog in legislature

Gasoline prices are displayed at a gas station in Sacramento, Calif., Friday, Sept. 30, 2022.
Rich Pedroncelli
AP Photo
Gasoline prices are displayed at a gas station in Sacramento, Calif., Friday, Sept. 30, 2022.

A proposal from Governor Gavin Newsom to impose a “price-gouging penalty” on oil companies in response to record gas prices last year received a skeptical reception from state lawmakers during its first hearing Wednesday.

A panel of researchers and industry experts told the Senate Energy, Utilities and Communications Committee that the proposal would not fully address the reasons for last year’s price spikes or necessarily lower prices day-to-day.

California drivers have for years paid more at the pump on average than consumers in other states due to a mix of taxes and fees, environmental regulations, and an isolated market. Energy experts also point to a “mystery surcharge” that accounts to about 40 cents per gallon paid by California drivers, which appeared soon after a 2015 refinery explosion in Torrance.

UC Berkeley energy economist Severin Borenstein said the amount Californians paid in that mystery surcharge in 2022 was around $8 billion.

Newsom has accused the oil industry of “fleecing” consumers by keeping prices high and reporting record profits last year. His proposal, being pushed as a “price-gouging penalty,” would impose a profit ceiling on oil refining companies and fine them when their earnings exceed that yet-to-be-determined limit. The fines would then be refunded to taxpayers.

The bill still lacks key details and did not receive a vote, but energy researchers told state lawmakers in an informational hearing that while it could help the state recover funds paid by consumers, it would only affect refiners and not retailers, which they said also play a role in fuel pricing.

“It’s pretty clear the problem is downstream” from refiners, Borenstein said, placing blame on a “less competitive” gas station market, where name-brand gas stations often charge high prices and inflate the market.

The panel of experts instead recommended lawmakers increase oversight, transparency and investigations into oil refiners and retailers.

“The mystery surcharge has had the biggest impact over the years” for drivers, said Professor James Sweeney with the Stanford Institute for Economic Policy Research. “A windfall profits tax does nothing to address that.”

Some experts also acknowledged more market competition — including in-state production and pipelines to import oil — could lower costs, though lawmakers are unlikely to go in that direction as the state moves to transition away from fossil fuels in the coming decades.

Lawmakers including Sen. Dave Min (D—Orange County) acknowledged the proposal is “at best only a partial solution” and that lawmakers lack “a smoking gun that proves collusion” among oil refiners.

Still, most lawmakers were not sympathetic to the oil and gas industry, asking pointed questions about the record profits reported by the five major refiners doing business in the state. A representative with the Western States Petroleum Association explained away as “a function of costs.”

Min called California’s oil industry “a broken market” that is “rife for manipulation (and) coordination.”

Committee chair Sen. Steven Bradford (D-Gardena) pointedly asked representatives with the Newsom administration whether the issue was really about pricing or supply, which he acknowledged has declined as the state moves to meet its climate goals.

Other lawmakers expressed concerns the proposal could cause more harm to vulnerable Californians.

“As outraged as we all are” about high gas prices, said Sen. Bill Dodd (D—Napa), “I try to look for what the hell are the possible unintended consequences” that could further impact lower-income residents.

The Western States Petroleum Association and a group representing independent gas and convenience stores oppose the legislation, calling it an issue of supply and demand that would not lower prices. Consumer and environmental advocates testified in favor of the proposal.

In a statement, Newsom said the hearing “provided even more evidence that we need to crack down on Big Oil’s price gouging at the pump.”

He accused the industry of using “scare tactics and refus[ing] to provide answers or solutions to last year’s price spikes. We’re taking action to hold them accountable with a price gouging penalty and long-overdue transparency measures.”

A spokesperson for Newsom has said the bill will likely have additional details added and will get its first hearing in March.

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