California’s Policymaking Strategy: Headlines First, Implementation Later

A recent string of laws from the Golden State makes California Governor Gavin Newsom’s strategy on climate and energy policy crystal-clear – rack up the headlines first and sort out the policy details later.

At a splashy press conference in March, six months after announcing that California needed to address high gas prices, Gov. Newsom signed into law an anti-price gouging measure advertised as evidence the state could “beat big oil.” The legislation that was ultimately passed significantly scaled back Newsom’s original proposal, so much so that a Los Angeles Times headline suggested the Governor had given up on his earlier pledge to enact a windfall profit tax:

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

The measure simply punted the issue over to the California Energy Commission (CEC) and the state legislature. It established a brand-new subagency, the Division of Petroleum Market Oversight, to monitor the state’s petroleum market and enabled the CEC to set a price gouging penalty through a public rulemaking process.

It also directed lawmakers to “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.’”

It turns out this directive was not as simple as it sounds. E&E News reported this week that state officials are “knee deep” in an effort to build a system that tracks California’s gasoline market in real-time and allows regulators to identify and penalize “excessive profit-making.” But the work is slow-going:

“The Newsom administration hasn’t set a deadline for full implementation of the law. A vote that would allow the price gouging penalties isn’t expected until late next year.

“In the interim, state officials must wrestle with questions both practical and philosophical — starting with the most basic: What exactly is price gouging? And how does a state set a limit on profit-making that’s fair and legally defensible?”

The thorniest issue presented by Gov. Newsom’s measure is the newly granted ability for the CEC to set a “maximum refiner profit level” that could trigger an immediate penalty. After CEC assesses the relative consumer costs and benefits of a penalty, which is a challenging undertaking in itself, the commission may use its new authorities to make the totally subjective judgement of what level of profit is too high.

Refining is generally a low-margin business but is prone to volatility due to sudden supply or demand shocks, especially in a “gasoline island” like California. As such, independent experts told E&E News that CEC’s new mandate presents several design and implementation challenges:

“James Sweeney, a Stanford University professor of management science and engineering, said the investigators face a major challenge. Indicators of market manipulation can look very similar to allowable business practices responding to market forces, he said.

“’If you look at the marketplace at times oil prices went up, it happened to be times where their inventories were low,’ he said. ‘That’s exactly when you’d expect companies to hold back supplies and in order to protect their inventory. But that also pushes up prices.’”

Industry representatives warned E&E News that an arbitrary cap on refiners’ profits could “drive them out of the state,” having the adverse effects of reducing competition, creating supply bottlenecks, and driving up fuel prices.

Nearly a year into Gov. Newsom’s anti-price-gouging misadventure, there is still no evidence of oil companies’ price manipulation, and California consumers continue to suffer the most expensive gas prices in the country. But rather than identifying the root cause of the state’s high costs, Gov. Newsom has chosen outright antagonism towards the industry and empty promises to voters.

In a similar move, earlier this fall Gov. Newsom spent the bulk of NYC Climate Week touting California Attorney General Rob Bonta’s new climate lawsuit against energy companies and the state’s corporate climate disclosure laws, which even Gov. Newsom admitted present “likely infeasible” compliance deadlines and will need to be revised next legislative session.

Bottom Line: The disastrous rollout of California’s new “anti-price-gouging” bureaucracy is par for the course for a governor who has been more interested in branding California as the energy industry’s “foe” than addressing the state’s record-high energy prices.

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