California Governor Gavin Newsom introduced proposed legislation to penalize “excessive” oil company profits in response to record high gasoline prices in California. The proposal also provides a framework for future legislation to increase regulatory oversight of refineries and for an investigation into the causes of high gasoline prices. The legislation would make California the first state to impose such a penalty on oil companies. Democratic state Senator Nancy Skinner introduced Newsom’s bill as SBX1-2, which opened a special session on December 5, 2022 to investigate the oil industry.
In his November 30, 2022 proclamation on the special session, Newsom stated that the purpose of the session was to consider legislation for new “financial penalty on excessive margins” along with increased oversight of industry “costs, profits, and pricing in the refining, distribution, and retail segments” of the California gasoline market. The opening of the special session followed the California Energy Commission’s (CEC) November 30, 2022 hearing on record gas price.
In September, Newsom called for a windfall tax on oil companies “that would go directly back to California taxpayers.” He later called for the December special legislative session “to address the greed of oil companies.” Newsom stated at the time that “[g]as prices are too high. Time to enact a windfall profits tax directly on oil companies that are ripping you off at the pump.” (see Newsom Calls Special Legislative Session to Consider Tax on Oil Companies.)
The legislative leaders convened the December 5 session only long enough to adopt rules and appoint leaders. The legislation will be considered in earnest in January, when the session reconvenes. The special session will run concurrently with the regular session and could last as long. Special sessions are designed to expedite the passage of new legislation, as bill considering during special sessions are exempt from the requirement for regular session bills that a bill cannot be acted upon until 30 days after its introduction. A law passed during a special session also goes into effect 90 days after the session adjournment. Regular session bills generally go into effect on January 1 of the following year.
Proposed Legislation
The proposed legislation would impose a maximum annual profit margin for oil refiners and penalties depending on how much a company exceeds the profit margin maximum. The margins would be adjusted annually. Revenue collected from the penalty would be collected in the Price Gouging Penalty Fund and returned to taxpayers through rebates or refunds. The proposal does not state the specific profit margins or specific fines on amounts that exceed the margin. “Either Big Oil reins in the profits and prices, or they’ll pay a penalty,” Newsom said.
The proposal refers to the fine as an “administrative civil penalty” rather than a tax, requiring only a simple majority for passage rather than the two-thirds majority needed to pass tax legislation. This change in definition could prove critical in passing any legislation, as lawmakers might be reluctant to impose such a tax without overwhelming evidence of oil company price gouging.
Additional details on the proposal follow:
Excess Profits Penalty
The bill would ament the Public Resources Code to implement a “maximum gross gasoline refining margin,” which is defined as the maximum amount of gross gasoline refining margin excluding “state program costs” as defined in the bill. The CEC would be able to adjust the maximum gross gasoline refining margin “based on market data as necessary to fulfill the intent and purposes of the section and to ensure that a full and affordable supply of gasoline is available to Californians.” The CEC must notify refiners of the new maximum gross gasoline refining margin within 15 days of an adjustment, and adjustments are effective on the first day of the calendar month at least 15 days after the CEC provides notice of the adjustment.
The CEC may petition a court to enjoin a refiner from violating the maximum gross gasoline refining margin and may impose an administrative civil penalty for a violation. The amount of the penalty would be based on the amount by which the refiner’s gross gasoline refining margin, excluding state program costs, exceeds the maximum gross gasoline refining margin. The amount would be converted from barrels to gallons and multiplied by the number of gallons sold by the refiner during the calendar month through all transactions.
Before imposing the penalty, the CEC executive director would be required to serve a complaint on the refiner, hold a hearing, adopt a decision, and require payment of the penalty. Penalties collected are to be deposited into a Price Gouging Penalty Fund and returned as refunds to residents. The CEC would assess the penalties on a quarterly basis.
The CEC would also have the discretion to grant a refiner’s request for an exemption from the maximum gross gasoline refining margin upon the refiner showing reasonable cause. The refiner would be subject to alternative maximum margins or other conditions as the commission may set.
Increased CEC Oversight
The bill states that it is the intent of the legislature to enact legislation that would increase CEC oversight of refineries by requiring the commission to conduct regular assessments of the supply and price of transportation fuels in the state and of the impacts of refinery maintenance and turnarounds on fuel supply and prices.
The legislature would also expand the CEC’s authority to investigate and obtain necessary information from market participants, including information on pricing, supply contracts, and inventory management. It would also expand the CEC’s authority to order the rescheduling of refinery maintenance and turnarounds to avoid supply shocks in the transportation fuel market.
The legislature would also require the CEC and the California Air Resources Board to plan for and monitor progress toward the state’s “reliable, safe, equitable, and affordable” transition away from petroleum fuels. The agencies would do this in consultation with the refining industry and issue periodic reports to the governor and to the legislature. Lastly, the legislature would supplement existing refinery reporting requirements with legislation requiring more detailed reports to the CEC on transportation fuel imports, inventory levels, and transactions, and on refinery maintenance and turnarounds.
Gasoline Price Investigation
The bill also states the intent of the legislature to enact legislation to direct the California Department of Tax and Fee Administration and the CEC to investigate and report on the drivers of and factors affecting the price of gasoline in the refining, distribution, and retail segments of the gasoline market. The aim of the report would be to uncover pricing irregularities in the California gasoline market and their effect on state tax revenue.