Last September, in response to significant increases of the retail price of gasoline, California Governor Gavin Newsom called for a special legislative session to consider the imposition of a price cap or “price gouging penalty” to be set by the California legislature on so-called “windfall” petroleum industry profits. The bill was intended to punish the perceived market power abuses and price gouging that the Governor implied that “Big Oil” was engaging in. 

After pushback from a number of legislators who feared such a power grab related to the industry through the state legislature’s imposition of a price cap could have unintended consequences (including from some Democrats who expressed concern that the manner and scope of the initial bill could be problematic both from a practical and a legal authority/federalism perspective), the California legislature ended up shifting its focus from such a legislative price cap to industry transparency and indirect price regulation. The net result is legislation (SBX1-2) proposed and signed by Governor Gavin Newsom on March 28th to increase transparency over gas prices in the industry under the auspices of a newly created watchdog agency, the Division of Petroleum Market Oversight, housed in the California Energy Commission (CEC). As an industry counterweight, the new law also establishes the Independent Consumer Fuels Advisory Committee made of industry experts appointed by the governor and the legislature to advise this new agency on technical market issues.

Instead of a price cap imposed directly by the legislature, SBX1-2, in a dramatic extension of regulatory power, authorizes the CEC to establish a maximum gross gasoline refining margin and a penalty for exceeding that margin if the CEC deems it necessary. However, before setting a cap and penalty, the CEC must formally determine that the benefits exceed the potential costs to consumers. The newly created industry advisory was created to assist with that analysis. 

SBX1-2 allows the CEC to judicially enforce any resulting cap and penalty in court, but enables oil companies to seek an exemption from the CEC. The new law attempts to achieve transparency by allowing unprecedented oversight by the CEC over refinery operations that might influence retail gasoline pricing. This includes the routine reporting by refineries of the net gasoline refining margin per barrel per month, notification of all maintenance plans and the anticipated reduction of inventory levels related to the work, notification at least one year in advance of any intended shutdown or sale of a refinery and daily reports of spot market transactions. The new law also gives the new watchdog division the accompanying authority to subpoena records from oil companies and can refer any failures to respond to the California Attorney General for prosecution. The CEC is also empowered to regulate the timing of routine maintenance and plant closures to minimize price spikes.

Despite the legislature’s action to scale back somewhat the very-far reaching exercise of power and because of the statute’s apparent vagueness on key aspects of its implementation, a number of interesting legal challenges to this new law are looming on the horizon:

1. How is the CEC going to manage and protect extremely confidential information from public disclosure and still carry out its legislative mandate?
2. What is the constitutionality of allowing unelected public officials to be directly involved in the maintenance, shutdown and sale of oil refineries without standards or due process?
3. How is the newly created Independent Consumer Fuels Advisory Committee going to perform any kind of representative “independent” function when all of its constituent “industry” members are hand-picked by the Governor and the legislature?
4. What standards will be used to govern subpoena overreach for industry operating information, including strategic corporate deliberations on maintenance, shutdown and sale of refinery facilities?
5. What petroleum industry expertise does the state expect to bring on and deploy to get this new agency minimally competent to perform such pervasive market-based regulatory functions?
6. To what extent does the law potentially violate the principles of federalism by infringing on the federal government’s exercise of regulatory authority over the petroleum products markets which it has done on numerous occasions (including laws like the Energy Independence and Security Act of 2007, which grants the Federal Trade Commission the authority to monitor, prevent, enforce and punish those engage in fraudulent or deceptive behavior or practices in connection with these products or engage in market-manipulative behavior)?

The law will take effect in 90 days.

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