Key Takeaways
The California state legislature passed a suite of six bills with the hopes of reducing energy prices, but they will more likely stabilize them.
The initiatives include measures to encourage onshore oil drilling, connect California’s electric grid to its neighbors, and extend the state’s carbon trading program to 2045.
A companion bill provides a blueprint for how the state should spend its revenues from its cap-and-trade program, including guaranteeing $1 billion a year for high-speed rail.
Due to its policies, California has some of the highest energy prices in the nation. For instance, California’s gasoline price for regular grade is $4.66 per gallon, about $1.50 more than the U.S. average. The California state legislature has produced a package of six bills to help control those prices, including measures to encourage oil drilling, connect California’s electric grid to its neighbors, and extend the state’s trading program for greenhouse gases. According to Politico, few believe that energy prices will be lowered, but the policies in the bill may help to stabilize them. The bills represent a major shift for Governor Gavin Newsom, who as recently as last year was condemning oil companies and asking lawmakers to penalize them for high prices, which caused two of the state’s nine refineries to announce plans to close. Phillips 66 is shuttering its Los Angeles refinery this year and Valero announced in April that it planned to close its Bay Area refinery next year.
The bills’ measures include changing how investor-owned utilities finance transmission, with the intention of cutting the cost of building transmission lines, and other electricity-related proposals, which California politicians believe could reduce monthly electric bills by several dollars. Politico reports, however, that those bill reductions could take years to be realized or be merged with rate increases pending before the state’s energy regulators. For instance, the proposal to create a West-wide electric grid that would allow power to flow more easily across state lines, which Governor Newsom believes would deliver the most energy savings of the proposals, has many technical hoops to circumvent before it can become reality. Some supporters indicate it could cut costs for customers and steady the grid during power surges from heat waves, while supporting in-state “clean” power producers who could sell excess electricity to neighbors.
As reported by CalMatters, the measures will also give ratepayers some protection from utilities increasing rates based on the cost of wildfire-proofing their infrastructure, such as by putting power lines underground. These savings may be counteracted, however, by the fund to compensate wildfire victims, with ratepayers paying $9 billion over the next decade — half of the nearly $18 billion fund.
Furthermore, oil market experts argue that expanding oil drilling in Kern County would not lower gas prices at the pump, but may help forestall more refinery closures. Some experts estimate the refinery closures could drive gas prices up by as much as $1.21 per gallon by next August. According to Politico, Phillips 66 has claimed it plans to convert its refinery into an import terminal, which would bring higher oil prices. State officials hope to stem damage from Valero’s closure by looking to keep Valero in the Bay Area or find a buyer to take over the facility. Together, these refineries provide almost 17% of California’s refining capacity, producing the state’s “boutique fuels.” To be compliant with California’s air quality and other environmental regulations, California gasoline must be blended with specific components not required elsewhere in the United States. As a result, most of the gasoline used in California is produced in-state and any reduction cannot be easily replaced with out-of-state fuels.
Because polling in California indicates voters still want their leaders to continue to deal with climate change, California politicians have extended the state’s carbon market, the state’s cap-and-trade program, to 2045, that is, for another 15 years. The program brings in billions of dollars in annual revenues for clean transportation and air and water projects from the sale of emissions permits. Politico reported that the state also revamped an electric bill rebate funded by the program’s revenues that they hoped would ease electric bills during peak summer months. The California Chamber of Commerce opposed the renewal, however, because of the removal of some subsidies in the program for natural gas companies and customers, essentially taking credits away from gas customers and giving them to electric utilities, which would hurt families, renters, and small businesses that depend on natural gas. The bill also stripped funding from agricultural projects.
Via CalMatters, alongside reauthorization of the state’s cap-and-trade program, a companion bill, Senate Bill 840, provides a blueprint for how the state should spend its revenues, reshaping it starting in 2026 to guarantee $1 billion a year for high-speed rail and $1 billion a year for lawmakers to direct through the budget. Using the cap-and-trade dollars to improve mass transit, some opponents say, is unrealistic because Californians are not going to give up driving their cars.
Analysis
California’s energy price conundrum is a self-imposed crisis. As we’ve written previously, “California has great potential to be an energy champion through the provision of affordable crude oil to its residents and to other states and countries. Instead, political influence in Sacramento has made it extremely difficult to start any new drilling and refining operations.” By passing these bills, lawmakers are attempting to mitigate these problems. However, because California maintains its commitment to regulating energy production, such as by continuing its cap-and-trade program, it’s not clear that these actions will have the intended effect of lowering energy prices.
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