Exclusive In-Depth Report: California Fuel Association Takes Energy Commission To Court Over Emergency Regulations As Locals Keep Paying High Fuel Prices

As fuel prices remain the highest in California compared to other states, the California Fuels and Convenience Alliance (CFCA) and the California Energy Commission (CEC) do not see eye to eye on how to tackle the issue.

In mid-February, the CEC approved a resolution to adopt emergency rules requesting daily spot market reporting, which the state authority expects to counter price hikes. The CFCA, however, says the measures will only lead to further price hikes. Condemning the “rushed” rulemaking process, the CFCA filed a lawsuit against the CEC.

The California Energy Commission, headquartered in Sacramento, oversees state energy policy, focusing on efficiency, innovation, renewable sources, infrastructure management, and emergency preparedness. On March 27, 2023, the Legislature enacted Senate Bill (SB) X1-2, which added section 25354(l) to Chapter 4.5 of Division 15 of the Public Resources Code. The legislation included spot market reporting requirements, which the CEC deems essential for oversight functions, California’s energy policy development, and curbing fuel price hikes.

On February 14, 2024, the CEC adopted emergency regulations, which will remain in effect for two years. The CEC said these measures would increase transparency and oversight to boost the “accountability of the petroleum industry.”

Hence, Senate Bill X1-2 (SB X1-2) has become known in the state as the California Gas Price Gouging and Transparency Law. The legislation aims to address gasoline price spikes and what Californians pay at the pump. The CFCA contends that the measures will only exacerbate the situation, as the requested documentation is burdensome and, in many cases, impossible to fulfill and may ultimately result in CEC trying to push through caps on the margins refiners are allowed to collect.

“The CEC regulations are cumbersome and unnecessary. They don’t address the root cause of Californians’ higher gasoline prices at the pump,” said Elizabeth Graham, Chief Executive Officer of CFCA, when talking to the California Business Journal.

Californians’ expenditures at the pumps outdo their peers in other states. Regular gasoline costs an average of $5.3 per gallon in California at the time of penning the present article, according to AAA Gas Prices, a public service of the United States of America’s largest motoring and leisure travel membership organization. Data suggest no other US state pays over five dollars per gallon. The more expensive states include Alaska, Arizona, Hawaii, Nevada, Oregon, and Washington—all paying above four dollars per gallon. The rest of the states pay over three dollars per gallon, but less than four.

The CEC believes spot market trading is the culprit, accusing the market of gouging prices. The CFCA disagrees.

“Based on numbers reported by the CEC and US Energy Information Agency, the price paid for crude oil in California is within 4% of the national average—just 8 cents out of a $4.91 gallon of gas,” CFCA CEO Graham told CBJ. “Even if spot market trading could explain all of this gap, the amount Californians are overpaying for gasoline compared to the national average would only be reduced by 5%. The real culprit for higher gas prices in California are taxes and fees which are more than triple the national average and nearly 40% of the cost of a gallon of gasoline,” Graham added.

State taxes vary greatly in the United States. California has the highest state excise gas tax rate at 57.9 cents per gallon (cpg), according to Tax Foundation, a leading non-partisan tax policy 501(c)(3) nonprofit, citing 2023 data [xls file download], which is in line with the CEC’s official figures. Using the Tax Foundation’s data for comparison across the United States, California is followed by Washington, 49.4 cpg, and Illinois, 45.4 cpg. Pennsylvania has the lowest state excise gas tax rate, 0 cpg, followed by Florida, 4 cpg, and Alaska, 8 cpg.

However, the California market seems to have suffered from price-pumping factors beyond taxes. “In recent years, California has seen constant additional regulatory oversight and fee increases. It’s reached a point where, as a producer or manufacturer who actually has trucks, it’s hard to keep up with the red tape,” said Paul Cramer, Vice President and General Manager of Star Milling Co., an agribusiness with a half-century-long history.

“A lot of our vendors that we deal with keep tacking fuel ‘surcharges’. But not a lot of people really understand what that means—there’s a lot of confusion about why gas prices are so high,” Cramer told CBJ on the phone.

Cramer tagged the CEC’s reporting requirements as “ludicrous” and “burdensome”. The vice president believes it only creates unnecessary overhead. “At some point, some people need to ask the government: What’s the point of all this? And if there is a point to it, please, tell us because it doesn’t make any sense,” Cramer said.

CFCA and small and middle-sized businesses (SMBs) explain the burdensome nature of reporting with the nature of its daily requirements. Spot market trading data must be submitted to the CEC after 4 pm on the day until 9 am on the following day. This would mean hiring extra staff, which would only drive up SMB expenditures that would be integrated into service prices, eventually paid by Californians—leading to further price hikes. At the same time, the market says some of the data that needs reporting is just unavailable and impossible to report, which essentially means SMBs would be unwillingly violating the law.

“The reports are excessively burdensome and require multiple reports on the same transactions throughout their lifecycle. We are talking about 32 separate fields for one kind of report and 24 fields for another—and it’s not information that is automatically generated or that the parties to the transaction will necessarily have immediately available. It’s far beyond the kind of information that is normally reported to OPIS [Oil Price Information Service, providing price transparency across the global supply chain],” CFCA’s Graham said.

The CFCA is seeking justice for the California fuel market in a lawsuit, challenging the rulemaking process. The emergency regulations were passed within five days, three of which were three-day holiday weekends. The CFCA says many market players only learned about the new measures when returning to work after the long weekend, leaving no time to internalize the new rules. The CFCA requests the CEC to take a collaborative approach instead.

The CFCA’s central concern with the emergency measures is their potential to escalate fuel prices, exacerbating the challenges faced by businesses. Should these measures squeeze participants out of the state, supply would be further constricted in an already tight market, amplifying reliance on local refineries.

“California administering these new stringent rules for fuel resellers will only increase fuel costs. The rules seem overwhelmingly complex and may push many competitive small businesses to sell to larger businesses with the overhead to keep up with this compliance. We see a major challenge in complying,” said Chris Bambury, President of Bambury, Inc. / BONNEAU, a gas and food retailer, in comments emailed to CBJ.

Bambury said the primary factors influencing the certainty of maintaining a station or store and ensuring operational continuity, particularly in California, include profitability and access to necessary capital. Additionally, the challenges associated with conducting business in California, such as regulatory complexities and operational friction, significantly impact decision-making.

“More and more operators sell when it becomes too complicated to do business at their size,” Bambury added.

The CFCA shares Bambury’s sentiment. “Small businesses and consumers have no leverage in markets and will bear the greatest burdens of higher prices. If reporting mandates cause traders to sell their fuel elsewhere, supplies will be reduced in California, and prices will increase,” CFCA CEO Graham said.

The CFCA chief says big businesses can absorb these costs through their market power in a way that small businesses and consumers cannot.

“Independent gas stations and other independent sellers—particularly those that serve rural communities, farmers—are reliant on non-refiners; rules that make it likely that non-refiners will continue to abandon the California market mean that independent gas stations, which are small businesses and which serve the most vulnerable Californians, will be left high and dry,” Graham concluded.

Copyright © 2024 California Business Journal. All Rights Reserved.