California passes Gavin Newsom’s plan to penalize oil companies. What it means for drivers

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Gov. Gavin Newsom has successfully pushed a plan to penalize oil companies for alleged gas price gouging through the California Capitol.

The state Assembly voted 52-19 on Monday to approve the proposal, which would create a watchdog agency at the California Energy Commission, or CEC, that could compel oil companies to provide information about the industry and possibly set a profit cap and a penalty for those that exceed it.

Senate Bill X1-2, authored by Sen. Nancy Skinner, D-Berkeley, moved through the Legislature at lightning speed after Newsom substantially reworked the legislation and announced an agreement with leadership a week ago.

Newsom is scheduled to sign the bill into law Tuesday afternoon.

After Monday’s vote, the governor told reporters it was a “big day for consumers, a big day for Mother Nature and a big day in this country.”

“I’m very, very pleased as a taxpayer, as a Californian and as an American,” he said. “I hope this is a signal to other states.”

Here’s what you should know:

Newsom first called for a windfall profits tax on Big Oil. What changed?

In late 2022 Newsom called a special legislative session to take action against oil companies after Californians endured months of high gas prices in the summer and fall.

His initial plan proposed a windfall profits tax directly on oil companies, with proceeds to be returned to residents in the form of rebates. The special session officially kicked off in December but the initial bill language was vague and didn’t provide any information about the cap amount or which Californians would qualify for refunds.

Less than two weeks ago, Newsom announced a major revision.

The new language pushes more responsibility to the Energy Commission, which will compel oil companies to provide information and potentially set a profits cap and consequences for exceeding the limit.

This setup is more palatable for lawmakers because it doesn’t guarantee a penalty but promises more transparency about the oil industry.

“This measure doesn’t require penalties. It doesn’t require any maximum profit caps. All it requires is that we get that information,” said Assemblyman Al Muratsuchi, D-Torrance. “... The bottom line is this. if you don’t have anything to hide then you shouldn’t be worried about this bill.”

Who supports and opposes the oil penalty bill?

Newsom and most Democrats support the plan, citing a need to hold oil companies accountable for record profits while Californians struggle with high gas prices. Other lawmakers have been swayed by the need for more transparency from an opaque industry that has historically provided very little information about its practices and pricing.

The industry, represented by trade groups like the Western States Petroleum Association, is strongly against the bill. Representatives say it would not lower gas prices, which are driven by supply and demand.

Republicans also oppose the bill, saying it has been rushed through the Legislature without time to refine it or consider other policies. They also argue more regulation would only increase drivers’ costs at the pump.

“This rushed job killer bill creates a new layer of government,” said Assemblyman Vince Fong, R-Kern County. “Make no question about that. A new, untested group of political appointees will control how much Californians pay for gas and micromanage the energy production in California. California families are demanding affordable gas prices, not more red tape.”

What are the key points of the bill?

  • The CEC will be given new powers to scrutinize the gasoline market and to assess — through a potentially lengthy public hearing process — whether a cap on oil profits is the best way to address gas prices in the Golden State.

  • The CEC will create a new watchdog agency – made up of economists, industry experts and legal investigators – to monitor the state’s petroleum market and provide guidance on potential regulations related to the state’s transportation fuels market. The new division would be led by a director appointed by Newsom and subject to Senate confirmation.

  • The investigative body will have access to new information that refiners will be required to report and subpoena power to compel companies to provide other data and records. It can also refer potential violations to the Attorney General for prosecution, though experts have said that is unlikely.

  • An eight-member independent advisory committee will also be formed to advise the CEC and watchdog division. The governor will appoint six members and leaders of the state Senate and Assembly will fill the remaining two seats.

  • If the CEC decides to set a profit cap on oil refineries, any company that exceeds that cap would incur a penalty. Money collected from the penalty would be deposited into a fund that will be used to “address any consequences of price gouging on Californians,” though it’s not clear exactly what that will look like.

  • Oil refiners are required to provide a trove of new information and data to the state. This includes planned or unplanned maintenance events, which are known to disrupt the market and contribute to price spikes. Other provisions would require information about the sale of gasoline on the spot market and contracts between refiners and retail gasoline stations.

What comes next?

Once Newsom signs it, the new law will take effect in 90 days. But it could take more than a year for oil refiners to experience the full impact of the measure.

At that time, oil companies will be required to comply with the state’s data reporting requirements and the CEC will commence its public hearing process to analyze a potential profit margin and penalty system.

Lauren Sanchez, Newsom’s top climate advisor, said the CEC’s public hearing process is expected to take 6-12 months. The administration hopes to stand up the new watchdog division by the fall of 2023, so that it can assist in crafting and finalizing any potential penalty plan. If the commission establishes a maximum gross gasoline refining margin and penalty, it would take effect 60 days after the commission passes the regulation.

If that timeline stands up, a penalty and profit margin would likely not be in place until mid-2024 at the earliest. And that’s reliant on funding and hiring.

An Assembly bill analysis notes that finding the right employees to work in the new watchdog division will be difficult. “It is unclear how successful such a Division might be at recruiting and retaining such a specialized workforce within the constraints of civil service hiring, when the skillsets the employees would have would be very attractive, and likely garner higher wages, in the oil and gasoline industry,” the analysis reads.

What happens if oil companies refuse to comply?

The legislation increases by tenfold the maximum fines state regulators can issue to enforce the new policies.

Under the new bill, the CEC can levy fines of $5,000-$20,000 per day — up to a maximum of $500,000 per submission — if a company fails to provide required data. Previously, civil penalties issued by the CEC could not exceed $2,000

What if a penalty is implemented but creates negative consequences?

The CEC is prohibited from instituting a maximum profit margin and penalty on oil companies unless they find that the “likely benefits to consumers outweigh the potential costs to consumers.”

But if the CEC misjudges the benefits and costs of a penalty system, the legislation includes several backstops.

The CEC has the authority to rescind or adjust the margin and penalty system at any business meeting based on new information and data to ensure affordable and sufficient gasoline is available, according to the bill.

By March 2033, the California State Auditor must complete an audit of any profit margin and penalty system that may be enacted. If the auditor determines that the system is not meeting its intended goal of reducing gasoline price spikes and stabilizing supply, the commission would be forced to terminate it within 180 days.