California’s Regulators – Uninformed and Unaccountable

By Truman Angell for the California Policy Center

The California legislature has a habit of giving away its own power to regulatory agencies and ABX2-1 is another in a long line of such abdications. The new law, signed by Governor Gavin Newsom in October after he called a special legislative session, is generally understood as a law that will force oil refineries to store extra gasoline in an effort prevent price spikes when refineries shut down for maintenance.

If only the law were that simple and benign.

Like many other California laws, ABX2-1 mandates nothing specific. Instead, the law empowers the California Energy Commission (CEC) to write new regulations: how much gasoline must be stored, the method of storage, the timing, and what will happen to the recalcitrant refiner who doesn’t comply. The CEC is to be legislator, law-enforcement, judge, jury and executioner all while remaining unaccountable to the electorate.

CEC will write and enforce the law using two new regulatory bodies: the Independent Consumer Fuels Advisory Committee (ICFAC) and the Division of Petroleum Market Oversight (DPMO), were created in 2023 when Newsom signed SBX1-2 , a law also passed in a special session.

The ICFAC, has eight members (six appointed by the governor and 2 appointed by the legislature) and is charged with advising the CEC and the new Department of Petroleum Market Oversight with… the laws don’t really say. Its powers and responsibilities are not well defined.

However, it is a good guess, based on the ICFAC membership, that their advice will align with the governor’s anti-oil stance and the duties they assume will fulfill his intent. Governor Newsom took over a year to vet the ICFAC members he appointed 14 October; all are Democrats except one: Norman Rogers is an independent.
Six members appointed by the governor as follows:

(A) Neale Mahoney: Holds an academic appointment and has knowledge of economics or business operations of the transportation fuels market.

(B) Deborah “Debbie” Meeks: Representing the California petroleum fuels industry (who cannot work in the industry for 12 months).

(C) Astrid Zuniga: A member who claims to represent consumers.

(D) Norman Rogers: A member representing a labor organization with experience in refinery operations. Unlike Meeks above, Rogers does not have to abandon his job.

(E) Martha Dina Arguello: A member with expertise in community, environmental, or environmental justice issues.

(F) Michael Jorgenson: A member with expertise in antitrust law.

(2) One member appointed by the Speaker of the Assembly. Yet to be appointed.

(3) One member appointed by the Senate Committee on Rules. Yet to be appointed.

Again, given that Governor Newsom took a year to vet his six committee members, we should expect them, and the forthcoming Assembly and Senate appointees, to be solid adherents of even the most hyperbolic portions of the law which established their committee.

For instance, ABX2-1 claims:

“Indeed, during a 90-day period in 2022, refiners earned a record $63,000,000,000 in profits.”

That is $63 billion. Certainly, the writers had some formula for deriving this outrageous number, but I have a feeling they won’t be bothered to check their math. I did: California’s biggest refiners – Chevron, Marathon and PBF Energy – made less than $55 billion between them on worldwide sales of all products in 2022.

Another paragraph, less specific, but which reveals California legislators’ adversarial approach to the industry they regulate:

“(i) Fundamental change is necessary to prevent future extreme price spikes and price gouging by oil companies, which are entitled to a reasonable return but are not entitled to reap exorbitant profits at the expense of Californians, many of whom rely on gasoline as an essential commodity or who are impacted by the increased cost of goods and services that results from the gasoline price spikes, even as the state begins to transition away from dependence on the fossil fuels that are destroying our climate.”

Lowering gasoline prices might lead to additional consumption – and that seems counterproductive to the commission’s stated goal of helping the world “transition away from dependence on the fossil fuels that are destroying our climate.” Wouldn’t consumers burn more gasoline if it were cheaper?

Legislative silliness aside, the CEC will likely give the ICFAC members the responsibility to establish some sort of “fair” limit on how much a refinery is allowed to earn, and thus prevent those “exorbitant profits.”

SBX1-2, the bill passed in an extraordinary 2023 legislative session, empowered the CEC to set a per-gallon limit on the “maximum gross refining margin” which is the maximum difference between the crude oil price the refiners pay and the wholesale gasoline price the refiners receive from brokers and gas stations. The law also empowered the CEC to fine any refinery which violates the limit – whatever that limit turns out to be: the CEC has yet to set such a limit and will probably delegate that to the ICFAC, as well. Delegating these decisions to a panel of “experts” (which is what the ICFAC was originally called in an early draft of the law: the “expert committee”) further insulates the CEC from criticism and accountability. Regulatory agencies are unaccountable to the electorate and regulatory committees are doubly so. It is law-making thrice removed from the people. Proponents of such committees (and there are many in California) will always claim the members represent a cross-section of interested parties, but the state already has that, it is called the legislature. Regulatory committee members like those on the ICFAC are not even state employees. They are appointed, as we’ve seen, are beholden to no one and have every incentive to nurse their ambitions and further their personal brands (academics, labor, activism, law, etc.).

Like the ICFAC, the Division of Petroleum Market Oversight (DPMO) was also created in the same 2023 “emergency” special session of the legislature (SB1-2). From the state’s website:
DPMO was created to monitor petroleum markets and flag potential market manipulation, market power abuse, or market design flaws. Its role is also to identify irregular or illegal behavior and refer any violation of law – including industry misconduct or market manipulation – to the California Attorney General for prosecution. DMPO is the nation’s first independent watchdog agency overseeing the oil and gas industry.

To that end, Governor Newsom appointed former federal prosecutor and anti-trust expert, Tai Milder as DPMO’s first director, in August 2023. DPMO requires refineries to report just about everything weekly, monthly, and annually – up to 22 reports. The list is intimidating:

Federal and state agencies often force industries to report various operations and figures. But these new reports (and others to come) are so onerous and detailed that their true purpose is probably to find a way to produce reporting errors and then use them (the reporting errors) indict the wholesale fuels market itself. It is no accident that the DPMO’s leader is a prosecutor: From the myriad reported data, DPMO analysts can tease out all kinds of nefarious-looking facts, none of which are crimes, other than evidence that refiners have the insouciance to pursue the normal activity of price discovery.

If the DPMO does spot something suspicious, it can subpoena oil company staff to testify before them just as a court of law. From the law itself:

(b)(1) The division may subpoena witnesses, compel their attendance and testimony, administer oaths and affirmations, take evidence, and require by subpoena the production of any books, papers, records, or other items material to the performance of the divisions duties or exercise of its powers, including, but not limited to, current and historical pricing and sales data and contracts with other petroleum industry participants.

Note that the law does not state before whom the witnesses will testify, nor will the division have to provide probable cause before a judge to seize material evidence. Presumably, witnesses will testify before a panel of DPMO interrogators.

We have no reason to believe Tai Milder will refuse to use this fearsome power. Only one month after his appointment (September 2023), Milder predictably reported that oil refineries did in fact earn more money due to gasoline shortages associated with refinery shutdowns. In a letter to the governor, he wrote:

Although DPMO’s analysis is ongoing, it appears that the recent price spike is attributable to three main factors:

1. An increase in global crude oil prices.

2. Refinery maintenance events causing decreases in supply that refiners did not adequately prepare for by increasing inventories and imports, and

3. An unusual spot market transaction that has had an outsized impact on gas prices.

These three factors are common, well-known and affect every oil market around the world. Crude prices are often volatile, storage capacity is indeed limited, and we can concede that wholesalers will indeed buy and sell knowing the market will react. These are normal business activities, however frustrating they may be to consumers – except when these same factors drive prices down, of course. Using the power of subpoena, it seems, would not so much be in pursuit of a violation of law (there is no law, yet, to violate), but will more likely be used as a political tool to compel embarrassing testimony against refineries and the gasoline markets in California.

ABX2-1 is a bad law, as is any law in which a legislature delegates it law-making power to the executive. But granting another state agency subpoena powers is particularly egregious. Very few of California’s 337 agencies, boards and committees have such power. And none of them, by their actions, can affect an industry as important as California’s oil refineries. The Independent Consumer Fuels Advisory Committee and the Division of Petroleum Market Oversight now have unprecedented power over an industry which supplies, literally, the ability to move faster than an animal can walk. There is currently no check on that power and, for now, refineries will have no choice but to comply with whatever the two agencies make up in coming months.