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Panel Weighs Easing ARB'S Clean Fuel Rule To Prevent Gas Price Spikes

INSIDE CAL/EPA

An expert energy advisory panel may recommend that state regulators consider easing the air board's clean fuel standards under certain circumstances to help prevent gasoline price spikes, along with several other options including the establishment of a "strategic inventory" of California-compliant fuel.

At the same time, smaller independent oil refiners in California are urging the panel to recommend that they be exempted from the state's greenhouse gas cap-and-trade program to help prevent future supply disruptions and subsequent price spikes.

Meanwhile, representatives of major refiners are declining to participate in the panel's effort and are objecting to efforts by the panel to obtain confidential information from state regulators about their production, distribution and sales activities.

The policy options are being examined by California's Petroleum Market Advisory Committee (PMAC), which held a workshop Oct. 13 in Sacramento in part to discuss why California gas prices have been abnormally higher than the rest of the country for the past nine months.

The panel is more broadly tasked with informing the California Energy Commission (CEC) on petroleum market trends, causes and potential policy responses.

According to an Oct.13 presentation from PMAC Chairman Severin Borenstein, a professor at the Haas School of Business and Energy Institute at the University of California-Berkeley, the panel will consider several policy recommendations, including a "price pressure relief valve" allowing the sale of gasoline that
does not meet the California Air Resources Board's (ARB) reformulated gasoline (RFG) clean fuel standard while adding a special surcharge. Relevant documents are available on InsideEPA.com.  (Doc. ID: 185707)

California's RFG rules have been implemented in three phases since 1991, with different measures eliminating lead from gasoline, setting specifications for sulfur, aromatics, oxygen, benzene and other pollutants and banning oxygenates such as methyl-tertiary-butyl-ether.

Other policy options the panel is considering include requiring gasoline sellers to maintain a minimum level of supply inventory; establishing a California "state strategic ARB inventory" of fuel; requiring California "forward
purchases" of ARB-compliant gasoline to reduce the risk of import shipments that could drive up prices; building new pipeline capacity from the Gulf Coast; expanding the capacity of fuel import terminals; and increasing refining capacity in the state.

Borenstein listed these options in his slide presentation but the PMAC did not discuss them during this week's meeting though they are expected to be discussed at a future meeting, which may be held in December.

The panel was thrust into the public eye earlier this year when a group of leading Democrats in the state Legislature urged it to closely examine whether oil companies may make false claims that rises in gasoline and diesel prices are due to the first-time inclusion of transportation fuels under the cap-and-trade program.

While such claims have not come to pass, the panel spent much of the workshop exploring why California gas prices increased earlier this year when fuel prices across the rest of the country were plummeting due primarily to the rapid fall of crude oil costs.

According to Borenstein's presentation, since Feb. 18, California's gas prices have been more than 80 cents per gallon higher than the U.S. average. He said the differential in prices has been largest in southern California.

Typically, California gas prices run about 30 cents higher than the national average, due to the state's unique clean fuel standards, such as its RFG requirements to control conventional pollutants, high taxes, and more recently the regulation of transportation fuels under the state's GHG cap-and-trade program, Borenstein explained.

Additionally, past price spikes have been "much shorter" and generally the differentials have been smaller, Borenstein notes. The panel is attempting to determine in part whether the current situation represents a one-time event or an indicator of greater volatility in the future.

The panel is also trying to determine what has impeded the return this year to the normal California-U.S. differential, specifically focusing on the cause of some combination of higher demand and lower supply.

Panel members asked CEC officials and contractors during this week's meeting numerous questions about how fuel is being sold on the wholesale market, and whether retailers are uniformly raising their final sale prices to consumers at a much higher rate than in the past.

They are examining costs of importing fuel to California, recent and ongoing California refinery shutdowns and their impact on prices, and the amount of non-compliant fuel that is being produced in California refineries but exported to other western states.

But Borenstein said it may not be possible for the panel to identify the exact reason for the price spikes. "I think the reality is that we are not going to be able to with 100 percent certainty pin down the causes" of the ongoing price differential, Borenstein said during the meeting. "And I don't want to wait until we can" to consider policy options to prevent future price spikes.

The PMAC is expected to produce a report with policy recommendations in the coming months, according to a panel source, with ARB likely to review and comment on the report's findings and recommendations. However, "the report will have exactly as much weight as the government and the media choose to give it, since we have no authority whatsoever" to implement policies or rules, the source says.

The panel's efforts likely would be drawing much more attention if California gasoline prices were currently very high and a barrel of oil cost $100 rather than $40, the source adds.

During the meeting, small independent oil refiners and fuel marketers proposed several of their own policy options to limit the impact of disruptions to their segment of the fuel supply chain. For example, removing small fuel marketers from the state's GHG cap-and-trade program could bring more liquidity into the unbranded market, said Jay McKeeman, vice president of the California Independent Oil Marketers Association.

In addition, allowing "time outs" on ARB's fuel specifications or shifting to less stringent standards could increase California refining output and should be seriously considered, McKeeman said.

While there may be "some minor health consequences in such abeyances, especially if criteria pollutant controls are involved, that impact must be weighed against the higher fuel costs which likely means shifting of discretionary income away from such things as optional health care expenses," says a presentation McKeeman made to the panel. "In the case of GHG emission reductions, shifting out-of-compliance requirements for short periods should have no material effect on health consequence."

Meanwhile, attorneys for the Western States Petroleum Association (WSPA), which represents major oil refiners operating in California and nearby states, sent the PMAC an Oct. 8 letter declining to have any WSPA representatives participate in this week's panel meeting.

"In particular, you asked WSPA to address supply chain disruptions, how the market and industry respond to these disruptions, and possible solutions to this pricing behavior," states the letter signed by Michael Barr, WSPA general counsel. "While WSPA and its members have a long history of working cooperatively with the CEC --  and we hope to continue to do so --  WSPA is not in a position to respond to these issues."

Barr explains that WSPA is a "non-profit trade association representing twenty-five companies many of whom are market competitors in the petroleum industry. As such, WSPA's function is limited to public education and government advocacy regarding industry-wide issues."

Further, "WSPA has no specific information about supply chain disruptions or pricing behavior unique to specific members or market participants," the letter adds.

WSPA earlier this year objected to PMAC requests for confidential business information from oil companies that is gathered by CEC.

"This sensitive and highly confidential data is protected by the terms of the Petroleum Industry Information Reporting Act of 1980 . . . CEC's own disclosure regulations, and the California Public Records Act," WSPA said in a Feb. 24 letter to PMAC and CEC officials. "These long-settled California legal requirements are exceptionally strong and CEC may not deviate from them by providing protected data to the PMAC."

Consumer Watchdog, the public advocacy and policy arm of Consumer Reports, argued during this week's meeting that oil companies are manipulating supply to maintain high fuel prices in California, pointing to a large gap between the retail price paid at the gas pump and the wholesale price of gas traded within the oil industry.

"The lack of competition in the market is the result of four refiners controlling 78 percent of the state's supply and these companies using their market power to drive up prices and drive away competition," said Jamie Court, Consumer Watchdog president, in an Oct. 13 press release.