Blocked by legislators, Newsom shifts oil profits penalty plan to regulators

Gov. Gavin Newsom addresses the media during a press conference on Feb. 1, 2023. Photo by Miguel Gutierrez Jr., CalMatters

Facing public skepticism from lawmakers over his push to penalize oil companies for excessive profits, Gov. Gavin Newsom has dropped that proposal in favor of an alternative that would pursue a similar aim through regulations.

The governor’s office said late Wednesday that it plans to put forward an amended bill in the coming days that would create a watchdog division within the California Energy Commission to investigate alleged price gouging by the oil industry and authorize the commission to set through its rule-making process a threshold above which profits would be penalized.

Dana Williamson, Newsom’s chief of staff, said the shift in approach was the result of months of consultation with legislators, who broadly felt that an appropriate penalty would best be determined by industry experts.

“We feel like this is stronger from where we started,” Williamson said. “It is the only one of its kind in the country. And it’s really going to set up a watchdog entity that is going to watch the industry every single day.”

The amendments, for which language is not yet available, would establish requirements for oil refiners in California to regularly report information on factors that can contribute to massive price spikes like those the state saw last summer, such as maintenance schedules, inventory and import and export levels. 

The watchdog division within the energy commission, which would have an independent director appointed by the governor, would be granted subpoena power as it conducts investigations and could refer suspected price gouging to the attorney general’s office for prosecution.

Greater access to this data that oil companies have historically withheld as proprietary would enable experts to more deeply consider what is the right threshold for a penalty on profits, according to the governor’s office, and inform a rule-making process through the California Energy Commission.

“What we’re asking for is simple: transparency and accountability to drive the oil industry out of the shadows,” Newsom said in a statement. “Now it’s time to choose whether to stand with California families or with Big Oil in our fight to make them play by the rules.”

This announcement takes the governor even further from the concept that he urgently laid out in October, when he called for a special legislative session to pass a tax on oil company profits, punishing the industry an “inexplicable” gap between gas prices in California and the national average that had grown to more than $2.50 a gallon. Prices, and the gap, have dropped since then, along with the political momentum. 

A man walks past an oil rig during sunset in Huntington Beach on Dec. 2, 2020. Ronen Tivony/REUTERS

The idea has also faced relentless criticism from the oil industry, Republican lawmakers and some economists. Even many of Newsom’s Democratic allies in the Legislature have been reluctant to embrace it, as during a hearing last month where several state senators expressed doubt that a financial penalty would have the desired effect of driving down prices.

The governor already abandoned his tax for the more politically palatable, and easier to pass, penalty. Now, even if lawmakers approve this revised measure — his office made clear Wednesday that the plan does not represent a deal with legislative leaders — it could be years before any new regulations are adopted, if the California Energy Commission pursues a rule at all.

Kevin Slagle, spokesperson for the Western States Petroleum Association, which represents the oil industry in California, criticized the new proposal for empowering unelected bureaucrats to increase energy costs and for potentially making confidential trade information public.

“At the end of the day, this proposal does not solve California’s gasoline supply problem and will likely lead to the very same unintended consequences legislators have reiterated to the Governor: less investment, less supply, and higher costs for Californians,” Slagle said in a statement. “This is simply just another tax wrapped in unchecked and expensive bureaucracy.”

Republican leaders in both the Senate and Assembly immediately labeled the plan a tax increase, highlighting a major messaging obstacle for Newsom as he tries to shepherd the bill through a dubious Legislature.

“As Governor Newsom attempts to hide his efforts behind clever words, Californians will see this for what it really is — a gas tax increase amid record-high inflation and an economic downturn,” Senate Republican Leader Brian Jones of Santee said in a statement.

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