Newsom backtracks on ‘price gouging’ penalty on oil refinery profits, proposes watchdog body

Months after Governor Gavin Newsom unveiled a plan to punish oil companies for making big profits during a California gas price spike, his office scrapped the legislation and is looking to create a new investigative body and a lengthy regulatory process. to tame prices. at the pump, which are once again approaching $5 a gallon.

Newsom’s original plan would set a maximum profit margin for oil refineries producing gasoline and issue civil penalties for excessive profits. Any revenue generated would have been put into a “Price Cracking Penalty Fund” and sent back to Californians.

On Wednesday, the governor’s office said it is proposing legislation to create a watchdog body, backed by subpoena powers, within the California Energy Commission to investigate the state’s oil refinery market and gas prices. Based on the watchdog’s findings, the commission can apply penalties at its discretion to the state’s oil refineries, according to aides in the governor’s office.

“We feel this is stronger from where we started,” said Dana Williamson, the governor’s chief of staff. “It is the only one of its kind in the country and will really create a supervisory entity that will monitor the industry every day.”

The proposal would need to go through both houses of the Legislative and is still subject to negotiations between the parliamentarians.

Newsom’s announcement comes as the governor has been on a months-long offensive against the oil industry, accusing it of “lying and defrauding” after California’s historically high gasoline prices hit $6.44 a gallon in June. The governor announced the penalty in December and a special legislative session to discuss the details, but the plan has been met with opposition from some lawmakers and experts who said the state lacks the data to pull back the curtain on the opaque U.S. oil refining market. California.

After falling in December and January, California gasoline prices rose again to average $4.88 a gallon.

The oil industry criticized the governor’s new proposal. In a statement, Kevin Slagle, vice president of the Western States Petroleum Association, said the plan “will empower unelected bureaucrats to impose more taxes and raise costs.”

“Ultimately, this proposal does not solve California’s gas supply problem and will likely lead to the same unintended consequences that lawmakers reiterated to the governor: less investment, less fueling and higher costs for Californians,” he said.

All sides agree that environmental regulations and higher taxes and fees are the main culprits for California’s higher gasoline costs. But Severin Borenstein, an energy economist at UC Berkeley, identified a dire gap in the cost of California gasoline compared to the national price, which is not accounted for by the state’s higher rates and environmental regulations. That difference, which Borenstein calls the “mystery surcharge,” is normally around 30 to 40 cents, but over the summer it exploded to more than a dollar, underscoring the state’s shaky hold on the oil-to-gas supply chain.

“They’re basically taking the price gouging penalty off and throwing it to the CEC to decide,” Borenstein said, referring to the California Energy Commission. Borenstein backed the new proposal, saying he hopes to end the decades-long cycle of California lawmakers criticizing the oil industries when gas prices soar and losing interest when gas prices return to normal.

“The reality is that the legislature is not the place for detailed regulatory design,” Borenstein said. “Once you have an office really set up to look into it, that’s what they do, and they’ll do it even when prices go down.”

Experts have said for years that state regulators have very little knowledge about an industry that jealously guards pricing and operating information as confidential trade secrets. California’s gasoline supply is largely controlled by a handful of oil refineries, including Chevron, Valero and PBF energy, which produce a special blend of fuel that meets the state’s strictest environmental standards.

Newsom’s new plan has also gained support from Consumer Watchdog, a nonprofit group that has spearheaded calls for a new penalty on oil companies. Jamie Court, chairman of the group, said stronger state oversight of the industry would give the Newsom government more power to impose penalties.

“The governor is in favor of a price gouging penalty and the governor controls the CEC,” said Court, citing Newsom’s appointment power in the energy authority. “I think that’s actually better than the Legislature, which will never focus enough. . . to bet on an agency that wants to do it.