The state of California issued a new report that acknowledges potential margin regulations on retail gas dealers may make gas price spikes even more painful for consumers.  

The report, released last week by California Energy Commission (CEC) staff, assessed the feasibility of a variety of proposals to rein in gas prices under the state’s gas price gouging law (SBX 1-2) enacted by Gov. Gavin Newsom last year. The CEC specifically examined what it deemed “highly complex” policy responses permitted under SBX 1-2, including state run refineries, proposed margin ceilings, and profit reporting regulations.  

The CEC report is the latest development in Gov. Newsom’s myopic campaign to punish energy producers for high prices at the pump. In reality, evidence consistently shows that claims of price gouging are little more than a crutch used by politicians to divert attention from the fact that California’s own policies are largely responsible for its sky-high fuel costs, which top $4.62 per gallon, the highest in the nation. 

The August CEC staff report produced no evidence of price gouging but did appear to offer a few warnings about some of the more extreme proposals floated by Newsom under SBX 1-2. 

CEC Suggests Price Controls Could Push Gas Prices Higher 

While the new CEC report argued profit reporting regulations may incentivize fuel dealers to lower prices faster during periods of volatility, it also acknowledged these compliance burdens could mean prices will go up even faster during price spikes.  

CEC staff conspicuously avoided stating profit penalties themselves would increase prices. However, the report did issue a somewhat cryptic warning about the history of price controls: 

“Price caps do not have a history of effective implementation.” 

This admission is important because SBX 1-2 was amended by the California legislature with language that permits the CEC to enforce a margin penalty only if it demonstrates such actions would neither raise gas prices nor adversely affect gas supplies. The CEC does not appear very confident that’s possible.  

Industry experts, including University of California Berkeley Professor Severin Borenstein, have similarly warned profit caps under consideration in California could ultimately result in supply shortages. 

We can also look to the evidence. As previously documented on EID, the state of Hawaii abandoned a similar scheme after only one year in 2006 after price controls resulted in higher prices and gas shortages on the island.  

Since the CEC is plainly concerned about the failure of price controls elsewhere, it only stands to reason the state remains concerned about price controls triggering supply problems, and thereby higher prices. 

The CEC was even more candid before the state legislature in May, where they plainly acknowledged a profit margin ceiling may incentivize gas stations to keep prices higher overall:  

State Senator Josh Newman: “I understand through your testimony, as part of the explanation you met with California’s refineries, and if you could, did they share how they might react if we were to impose a margin cap and penalty structure?”

Siva Gunda (CEC): “[…] I think that what the industry have shared with us is if there is a penalty, they would try not to exceed it. And that’s something that we have to watch, and in not exceeding it, they offer potential other market things that could happen, such as an overall increase in the prices.” (emphasis added)

California Unsure What a Reasonable Retail Margin Would Be 

The CEC’s report mentioned other problems with potential profit margin caps, including the fact that the state, at its own admission, does not know what a “reasonable” retail margin would be:  

“It may be difficult to determine ‘reasonable’ retail margins based on varying costs of rent, land, labor at different stations or regions of CA.” 

The vast majority of California gas stations are independently operated, so any retail margin restrictions or penalties would foremost hit independent retailers already beset with the high cost of rent, land, labor, and regulatory overhead in California. As Dan Walthers of Cal Matters reports:  

“…at least some of [high CA gas prices] can be logically attributed to the relatively high costs of doing any kind of business in California – rents, electricity and other utilities, wages and regulatory overhead, for example.” 

BOTTOM LINE: California’s effort to punish energy producers for the state’s high cost of doing business is far more likely to lead to supply shortages and higher prices for consumers than any kind of relief for residents.

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