Gov. Newsom’s Plan to Address High Gas Prices: More Bureaucracy, No Solutions

Six months after Gov. Gavin Newsom announced that California needed to address high gas prices, details of the Governor’s plan are finally coming to light. Simply put, Newsom’s proposed “price gouging” crackdown would create new bureaucracy and punt the actual “price gouging penalty” to the brand-new agency for consideration. Meanwhile, the true reasons behind the state’s high gasoline prices – misguided policies – remain unaddressed.

Six Months Later, no “Penalty”

Newsom has argued for months that oil companies were charging excess profits and driving the price of gas up for consumers, despite pushback from nonpartisan energy experts, bipartisan state legislators, and even a District Court Judge.

Newsom first called for a windfall profit tax in September of last year and convened a special session of the state’s legislature in December to work on crafting a plan to tax the profits of the state’s refiners. During a special session, lawmakers can only consider the issues the session was convened to address. Despite this targeted focus on refiners’ profits, there was little progress on Newsom’s proposal in December and January. The Sacramento Bee reported on the mismatch between Newsom’s media statements and the actual happenings in the legislature:

“Newsom proclaimed the special session a ‘date with destiny’ for oil companies. Even so, little has happened since legislative leaders gaveled in on Dec. 5.”

With no movement during the special session on the proposed tax, in February, Newsom rebranded the proposal to a “price gouging penalty” – a tax would require a supermajority of lawmakers to pass, while a “penalty” could pass with a majority – and encouraged the legislature to enact such a measure.

Again, there was bipartisan skepticism of the proposal, and lawmakers even threw cold water on the idea during a committee hearing. Despite the consistent pushback, Newsom claimed that the hearing provided “even more evidence” of oil companies’ price gouging. CalMatters covered the glaring inconsistencies in Newsom’s claim:

Newsom’s statement bore little resemblance to what actually transpired during the hearing. Experts, including the state’s foremost authority on energy pricing, told legislators that the sharp, albeit temporary, spike in pump prices last year had little to do with refinery actions … And even Democratic legislators were openly skeptical of Newsom’s claims.” (emphasis added)

Months passed without additional clarity on the proposal from Newsom’s office. In the interim period, independent experts from California’s Legislative Analyst’s Office recommended that the legislature consider important questions like “Are price spikes driven by basic supply-demand balance in a cyclical market?” and “How can excess profits be differentiated from cyclical fluctuations in profits?” before casting blame on refiners.

Newsom Passes the Hot Potato to the CEC

Now, Newsom has revealed a scaled back version of his proposal that would create a new agency, the Division of Petroleum Market Oversight, under the California Energy Commission (CEC) to monitor the state’s petroleum market and enable the CEC to set a price gouging penalty through a public rulemaking process. On Monday, Politico reported that California legislative leaders finally expressed support for the reworked proposal, implying that legislators were happy to punt the “price gouging penalty” to the CEC and avoid the political liabilities associated with a tax hike:

“Newsom’s advisers said the updated proposal would empower the new division to investigate the market more broadly and tailor a solution. The change also could make it easier for lawmakers to avoid being accused of passing what opponents in the oil and business industries have branded a tax.”

Coverage from California publications made it clear that Newsom’s new proposal was not the slam dunk he had envisioned last fall. A Silicon Valley news outlet announced, “Newsom scraps profits cap on oil industry ‘price gouging.’” The Los Angeles Times headline covering the news took an even stronger position:

Newsom gives up call for lawmakers to cap oil industry profits” (emphasis added)

Kevin Slagle, spokesperson for the Western States Petroleum Association, criticized the proposal for using indirect, bureaucratic means to increase consumers’ energy costs, saying:

“At the end of the day, this proposal does not solve California’s gasoline supply problem and will likely lead to the very same unintended consequences legislators have reiterated to the Governor: less investment, less supply, and higher costs for Californians. This is simply just another tax wrapped in unchecked and expensive bureaucracy.” (emphasis added)

Republican state Sen. Brian Jones, the Senate Minority Leader, put it simply: “If it looks like a duck, and it quacks like a duck, then it probably is a duck.”

Legislature Directed to Identify the Root Causes of High Prices

As the legislature evaluates Newsom’s revised price gouging proposal, lawmakers should “clearly identify” the root cause of the problem they are trying to solve, as suggested by the California’s Legislative Analyst’s Office and reported by the Center Square:

“Accurately identifying the problem, the LAO says, would make it more likely that ‘the proposed policy is effective at addressing the problem’ and it ‘reduces the risk of unintended adverse effects.’”

To the outside observer, the root causes of high gasoline prices in California are fairly straightforward. California’s policies have turned it into a “gasoline island,” overwhelmingly reliant on imported oil which is more expensive than domestic crude. Due to state-specific low-emissions fuel standards, California’s refineries have to spend more money to produce a specific blend of fuel that can only be sold in select markets. Due to the specific fuel requirements and limited pipeline capacity, there are few places for California to turn when supply of refined products in the state is tight.

On top of the structural issues with California’s fuel market, California also has the highest fuel taxes and fees in the country. Due to legislation passed in 2017, these taxes are automatically set to increase by eight percent this July, putting even more pressure on drivers.

Bottom Line: After half a year of threats, promises, and splashy media headlines, Governor Newsom’s new anti-price gouging proposal is practically unrecognizable. What was initially billed as a windfall profit tax has evolved into the creation of a new agency that can consider implementing a penalty on energy companies’ profits – if, and when, it gets off the ground. In the meantime, state-level policies continue to drive up energy costs for California consumers.

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