Attorney General Lockyer Issues Report on Gasoline Pricing in California; Recommendations to Protect Consumers, Businesses

(SACRAMENTO) – Attorney General Bill Lockyer today issued a "Report on Gasoline Pricing in California," finding a lack of competition and supply disruptions contributing to major price spikes that are likely to continue hitting Californians.

"The price spikes that sent pump prices soaring last year and again this year to above $2 a gallon in some parts of the state erode the competitiveness of California businesses and reduce the real income of Californians," Lockyer said. "The high gasoline prices we are seeing today have been a long time in the making. It would be unrealistic to suggest there is a quick fix or simple solution. What we need are major strides in making California's gasoline market competitive, finding ways to increase supplies and become more aggressive about fuel conservation."

The Attorney General's Task Force on Gasoline Pricing held four fact-finding meetings between January and March of this year. The task force included representatives from the oil industry, gasoline station dealers, consumers and environmentalists. The report summarizing the work of the task force covers the issues of gasoline prices, supplies, market structure and fuel taxes.

Lockyer as Attorney General has taken action in legal disputes to address gasoline pricing issues. These actions include seeking pro-consumer, pro-competitive concessions from oil companies engaged in mergers that could result in the loss of market competition, including the joining of Mobil-Exxon and BP-ARCO. Lockyer also recently joined in challenging Unocal's patent claim on a gasoline formula that could, if enforced, raise prices by a nickel a gallon. The patent issue is pending in the Federal Circuit Court of Appeal.

"If we can follow up recent divestiture requirements with further pro-competitive, pro-consumer public policy decisions, we have a chance to win long-term price protection for California," Lockyer said. "Through this report, we look to advance the debate over gasoline pricing in California and possible changes to improve competition and gasoline supplies."

Highlights of the report are attached. A copy of the report may be viewed at the Attorney General's web site.

GASOLINE REPORT AT A GLANCE

* Difference between retail gasoline prices in California and the rest of the nation narrowed in the first two months of 2000, but increased sharply again during the remainder of the first quarter of this year. Since March, the price differential between California and the rest of the nation has averaged more than 20 cents per gallon, similar to the differential during 1999 when significant price spikes resulting from refinery outages drove up pump prices.

* Comparison of average statewide gasoline prices with the rest of the nation somewhat masks large price differences within the state. Differences in wholesale prices between San Francisco and Los Angeles have stayed within 10 cents since 1994. The differences in retail prices grew to an average 20 cents higher in San Francisco than Los Angeles, which uses gasoline produced in the San Francisco Bay Area. Prior to 1990, retail prices in San Francisco, Los Angeles and San Diego were near the average US price and within a few cents of each other. The retail price spread reflects differences in what refiners charge dealers in San Francisco versus Los Angeles.

* Supply disruptions that contributed to major price spikes of 1999 are likely to continue. Supply disruptions trigger large price increases in California because (1) California refiners have little spare capacity to cover outages; (2) California refiners maintain relatively low inventory levels (down approximately 20 percent from levels in 1990s); and (3) alternative sources of supply (i.e., imports) from outside the state have not been sufficient to prevent large price increases in the state.

* California ranks second in the world as a gasoline consumer, behind only the US. California gasoline demand is projected to rise from 14.5 billion gallons in 1999 to 16.5 billion gallons in 2010. Alternative fuels and increasing fuel efficiency of vehicles would help reduce consumption. Increasing fuel economy by 20 percent for new cars and 10 percent for new light trucks in California by 2010 could result in 8 percent reduction in demand. Doubling fuel economy nationwide by 2010 could cut consumption by 32 percent. Alternative fueled vehicles, such as electric and hybrid vehicles, may provide the best potential to increase fuel economy on miles per gallon basis.

* Refiners have significant market control. Today, just six refiners control 92 percent of California's gasoline refining capacity. These same six refiners account for more than 90 percent of gasoline consumed in state. About 70 percent of California retail stations operated under station lease agreements with a major California refiner (known as "lessee-dealers" who typically work with supply agreements to purchase gasoline exclusively from their branded refiner). Approximately 15 percent of stations in California owned and operated by refiners, varying considerably from brand to brand. Remaining 15 percent of all California stations owned and operated by independent dealers (known as "open dealers" or "jobbers" who may enter into arrangements with a refiner or supplier to sell "branded" gasoline.)

* Timing of tax collections might affect the storage of gasoline inventories by independent marketers because it requires all but in-state refiners to pay sales tax at the point of distribution, thereby requiring independents to carry this tax expense as a cost of doing business until the gasoline is sold and sales tax collected. Moving the tax collection to the point when motor vehicle fuel taxes are collected from the refinery gate to the terminal rack may assist some independent marketers to buy gasoline in large bulk quantities.

Attorney General Lockyer urged consideration of reasonable steps to restore healthy and vigorous competition into the California gasoline market. The proposals to achieve a more competitive market, while causing minimal impact on legitimate profit and business interests, include:

* Create Strategic Gasoline Reserve to mitigate gasoline price spikes caused by short-term refinery problems and benefit consumers. A proposal directing the California Energy Commission to study the feasibility of a state-owned gasoline reserve is pending in the Legislature. The bill (AB 2076 by Assembly Member Kevin Shelley) is sponsored by the Attorney General.

* Use state purchasing to meet significant gasoline needs for emergency and other government vehicle needs from outside the state. Given tight supply-demand balance in the state, bringing in supplies from outside California could effectively reduce the likelihood of a supply shortage, a consequent price spike and result in cost savings to all California consumers. Legislation sponsored by the Attorney General (SB 1846 by Senator Jackie Speier) would have the Department of General Services study the potential for meeting all or part of the state's bulk gasoline requirements from out-of-state supplies.

* Consider meeting supply needs through use of pipelines. Legislation sponsored by the Attorney General (AB 2098 by Assembly Member Carole Migden) would examine the feasibility of bringing gasoline into California via pipeline.

* Consider identifying specific problems and potential solutions for refinery expansion, an issue beyond the scope of the report on gasoline pricing. Refinery closures in recent years have increased concentration in the market for wholesale gasoline. Restarting independent refineries or increasing independent refinery capacity could increase CARB gasoline supply, but environmental and community issues may need to be addressed. A task force of affected state and local government, industry and consumer groups could be convened.

* Aggressively pursue conservation and alternative fuel opportunities. Attorney General strongly supports state maintaining current Zero-Emission Vehicle Program to require automakers to produce and offer for sale up to 200,000 hyrbrid electric vehicles starting in 2003. State could develop a 2010 alternative fuel strategy designed to achieve sustained, orderly introduction of clean, non-petroleum-based fuels and technologies to state's market.

* Support branded open supply proposals to allow branded dealers currently supplied by refiners to purchase gasoline from any source selling the brand of gasoline they are required by the refiner to sell. This would increase competition in metropolitan areas that currently are the exclusive distribution territory of major-brand refiners, reducing prices to consumes. It also would reduce refiner's ability to maintain discrete pricing zones.

* Support efforts to reduce the degree of vertical integration in the California gasoline industry and increase the number and competitive influence of independent marketers. Could be accomplished through policies that require or encourage divestment of retail stations from existing refiners to independent third parties. Other steps may be warranted, depending on the effectiveness of other recommended measures.